When is income from royalties considered foreign sourced?

Income from royalties is considered foreign sourced when the property generating the royalties is located outside the U.S. This is based on the principle that the source of income, particularly for royalties, depends on the location of the property that is being utilized or exploited to generate that income. If the property, such as intellectual property or physical assets, exists in a foreign country, any income derived from it is classified as foreign sourced.

Understanding this classification is vital for tax purposes, as it influences the tax obligations of individuals and entities earning foreign royalty income. For example, residents of the U.S. earning royalties from property located abroad may have different reporting requirements or eligibility for credits to mitigate double taxation based on the foreign income source.

The other options focus on attributes like who makes the payment or the form of payment, which do not determine the sourcing of royalty income. The key factor is the physical location of the property involved in generating the royalties.