Publication 515 (2016) WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN ENTITIES
Publication 515 (2016)
- Institutional AuthorsInternal Revenue Service
- Jurisdictions
- LanguageEnglish
Future Developments
For the latest information about developments related to Publication 515, such as legislation enacted after it was published, go to http://www.irs.gov/pub515.
Tax treaty tables. The treaty tables previously contained in this publication have been updated and moved to IRS.gov. You can locate the tables on IRS.gov by entering "Tax Treaty Table" in the search box. Click on "Tax Treaty Tables." You can also access the tables by going to http://www.irs.gov/Individuals/International-Taxpayers/Tax-Treaty-Tables.
New penalty amounts. On June 29, 2015, the Trade Preferences Extension Act of 2015 (P.L. 114-27) was enacted. This law increased the penalty amounts for failures to file information returns and furnish payee statements. Revenue Procedure 2016-11, 2016-2 I.R.B 274, available at http://www.irs.gov/irb/2016-02_IRB/ar11.html, provides inflation-adjusted amounts for the increased penalty amounts. The new amounts apply to returns and statements required to be filed after December 31, 2015. The penalty amounts on page 44 have been updated to reflect Revenue Procedure 2016-11.
Dividend equivalents. This publication is updated to reflect final and temporary regulations that were published in September 2015, which provide guidance regarding dividend equivalent payments made with respect to certain equity derivative contracts.
U.S. real property interest. The Protecting Americans From Tax Hikes Act of 2015 (P.L. 114-113) made substantial changes to the treatment of dispositions and distributions of U.S. real property interests. Some of these changes are effective for dispositions and distributions after December 17, 2015; others are effective for dispositions and distributions after February 16, 2016. These changes are covered under U.S. Real Property Interest, later.
Qualified investment entities. Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2014. The provision has been extended permanently. See Qualified investment entities under U.S. Real Property Interest, later.
Interest-related dividends and short-term capital gain dividends received from mutual funds. The exemption from withholding on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company was scheduled to expire at the end of 2014. These provisions have been extended permanently.
Deposit interest paid to certain nonresident alien individuals. Deposit interest of $10 or more paid to certain nonresident alien individuals must be reported on Form 1042-S. See Deposit interest paid to certain nonresident alien individuals.
Exemption from requirement to withhold for certain payments to qualified securities lenders. If you made U.S.-source substitute dividend payments to qualified securities lenders, you may be exempt from withholding tax on the payments. See Amounts paid to qualified securities lenders.
Electronic deposits. You must make all deposits of taxes paid with respect to Form 1042-S (including taxes withheld under either chapter 3 or chapter 4) electronically.
Substitute forms. The official Form 1042-S is the standard for substitute forms. All substitute forms must comply with the rules set out in Publication 1179. A substitute of Form 1042-S, Copy A, must be an exact copy of the official form. If it is not, the form may be rejected as incorrect and the IRS may impose penalties. The IRS provides several means of obtaining the most frequently used tax forms, including electronically. For details on the requirements of substitute forms, see Publication 1179.
Filing electronically. If you file Form 1042-S electronically, you will use the Filing Information Returns Electronically (FIRE) system. You get to the system through the Internet at fire.irs.gov.
For files submitted on the FIRE system, it is the responsibility of the filer to verify the results of the transmission within 5 business days. The IRS will not mail error reports for files that are bad. See Publication 1187 for information on the requirements for filing Form 1042-S electronically.
Requests for extensions on Form 8809 must be filed electronically. Requests on Form 8809 for an extension of time to file Form 1042-S must be made electronically if the request is for more than one payer. See Extension to file Form 1042-S with the IRS.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
This publication is for withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations. Specifically, it describes the persons responsible for withholding (withholding agents), the types of income subject to withholding, and the information return and tax return filing obligations of withholding agents. In addition to discussing the rules that apply generally to payments of U.S. source income to foreign persons, it also contains sections on the withholding that applies to the disposition of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business.
Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.
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Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.
Ordering forms and publications. Visit http://www.irs.gov/formspubs to download forms and publications. Otherwise, you can go to http://www.irs.gov/orderforms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.
Tax questions. If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.
Useful Items
You may want to see:
Publication
•
Publication 15(Circular E), Employer's Tax Guide
• Publication 15-A Employer's Supplemental Tax Guide
• Publication 15-B Employer's Tax Guide to Fringe Benefits
• Publication 51 (Circular A), Agricultural Employer's Tax Guide
• Publication 505 Tax Withholding and Estimated Tax
• Publication 519 U.S. Tax Guide for Aliens
• Publication 901 U.S. Tax Treaties
• Publication 1187 Specifications for Electronic Filing of Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding
• Publication 5124 FATCA XML v1.1 User Guide
Form (and Instructions)
•
Form SS-4Application for Employer Identification Number
• Form W-2 Wage and Tax Statement
• Form W-4 Employee's Withholding Allowance Certificate
• Form W-4P Withholding Certificate for Pension or Annuity Payments
• Form W-7 Application for IRS Individual Taxpayer Identification Number
• Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
• Form W-8BEN-E Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
• Form W-8ECI Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States
• Form W-8EXP Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting
• Form W-8IMY Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting
• Form W-8 Inst. Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY
• Form W-9 Request for Taxpayer Identification Number and Certification
• Form 941 Employer's QUARTERLY Federal Tax Return
• Form 945 Annual Return of Withheld Federal Income Tax
• Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
• Form 1042-S Foreign Person's U.S. Source Income Subject to Withholding
• Form 1042-T Annual Summary and Transmittal of Forms 1042-S
• Form 8233 Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual
• Form 8966 FATCA Report
See
How To Get Tax Helpat the end of this publication for information about getting publications and forms.
In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person.
The term "chapter 3 withholding" is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. In most cases, chapter 3 withholding describes the withholding regime that requires withholding on a payment of U.S. source income. Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to chapter 3 withholding. Withholding may also be required on a payment to the extent required under chapter 4. "Chapter 4" refers to chapter 4 of Subtitle A (sections 1471 through 1474) of the Internal Revenue Code. See Chapter 4 Withholding Requirements, later.
CAUTION: Chapter 3 withholding does not include withholding under section 1445 of the Code (see U.S. Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income, later).
A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U.S. person is not required to withhold. In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding.
If an amount subject to chapter 3 withholding is also a withholdable payment and chapter 4 withholding is applied to the payment, no withholding is required under chapter 3. See Chapter 4 Withholding Requirements, later.
Withholding Agent
Chapter 3. Withholding Requirements
You are a withholding agent if you are a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount subject to chapter 3 withholding. A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.
Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. In most cases, the U.S. person who pays an amount subject to chapter 3 withholding is the person responsible for withholding. However, other persons may be required to withhold. For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of chapter 3 withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later.
Liability for tax. As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties.
The applicable tax will be collected only once. If the foreign person satisfies its U.S. tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold.
Determination of amount to withhold. You must withhold on the gross amount subject to chapter 3 withholding. You cannot reduce the gross amount by any deductions. However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed, later, for when a deduction for a personal exemption may be allowed.
If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. In no case, however, should you withhold more than 30% of the total amount paid. You may elect to hold 30% of the payment in escrow until the earlier of the date that the amount of income from U.S. sources or the taxable amount can be determined or one year from the date the amount is placed in escrow, at which time the withholding becomes due or, to the extent that withholding is not required, the escrowed amount must be paid to the payee.
When to withhold. Withholding is required at the time you make a payment of an amount subject to withholding. A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. A payment is considered made to a person if it is paid for that person's benefit. For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. A payment also is considered made to a person if it is made to that person's agent.
A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U.S. partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income, later.
A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. To the extent a U.S. trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S.
Chapter 4. Withholding Requirements
You are a withholding agent for purposes of chapter 4 if you are a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of a withholdable payment. Similar rules for determining who is a withholding agent as those described in Chapter 3 Withholding Requirements, earlier, also apply for chapter 4. For purposes of chapter 4, a withholding agent includes a participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI to the extent such FFI makes a withholdable payment.
Under chapter 4 of the Code, a withholding agent that makes a withholdable payment on or after July 1, 2014, to a payee that is an FFI must withhold 30% on the payment unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner. A withholding agent must also withhold 30% on a withholdable payment made on or after July 1, 2014, to a payee that is a foreign entity other than an FFI (i.e., a nonfinancial foreign entity, or NFFE) that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners) unless the payment is excepted from withholding under the regulations to section 1472. A participating FFI is a withholding agent under chapter 4 and is required to withhold on a withholdable payment to the extent required under the FFI agreement, including on a payment made to an account holder that the FFI is required to treat as a recalcitrant account holder. A reporting Model 1 FFI is required to withhold under chapter 4 to the extent required in the applicable IGA. A registered deemed-compliant FFI (other than a reporting Model 1 FFI) is required to withhold under chapter 4 to the extent required under the conditions applicable to its registered deemed-compliant FFI status. See Treasury regulations section Notice 2014-33, 2014-21 I.R.B. 1033, for information on a transition period for the implementation of chapter 4.
Generally, a withholdable payment is a payment of U.S. source FDAP income and, beginning in 2019, gross proceeds from the sale or other disposition of property of a type that can produce interest or dividends that are U.S. source FDAP income. Specific exceptions to withholdable payments apply instead of the exemptions from withholding or taxation provided under chapter 3. See Income Subject to Withholding, later, for more information on payments of U.S. source FDAP income that are excepted from the definition of withholdable payment.
If a withholding agent makes a payment subject to both chapter 4 withholding and chapter 3 withholding, the withholding agent must apply the withholding provisions of chapter 4, and need not withhold on the payment under chapter 3 to the extent that it has withheld under chapter 4.
Similar rules for withholding agent liability for tax, determination of amount to withhold, and when to withhold as those described in Chapter 3 Withholding Requirements, earlier, also apply for chapter 4.
Forms 1042 and 1042-S Reporting Obligations
You are required to report payments subject to chapter 3 withholding on Form 1042-S and to file a tax return on Form 1042. (See Returns Required, later.) You are also required to report withholdable payments to which chapter 4 withholding was (or should have been) applied on Form 1042-S and to file a tax return on Form 1042 to report the payments. An exception from reporting may apply for chapter 3 purposes to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. A similar exception from reporting for chapter 4 purposes may apply to an individual making a withholdable payment outside the course of the individual's trade or business (including as an agent with respect to making or receiving such payment).
Withholding and Reporting Obligations (Other Than Forms 1042 and 1042-S Reporting)
Form 1099 reporting and backup withholding. You also may be responsible as a payer for reporting on Form 1099 payments made to a U.S. person. You must withhold 28% (backup withholding rate) from a reportable payment made to a U.S. person that is subject to Form 1099 reporting if any of the following apply.
• The U.S. person has not provided its taxpayer identification number (TIN) in the manner required.
• The IRS notifies you that the TIN furnished by the payee is incorrect.
• There has been a notified payee underreporting.
• There has been a payee certification failure.
In most cases, a TIN must be provided by a U.S. non-exempt recipient (a U.S. person subject to Form 1099 reporting) on Form W-9, Request for Taxpayer Identification Number and Certification. A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding.
You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U.S. person. For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U.S. person subject to Form 1099 reporting. However, you may not be required to report on Form 1099 if you make a payment to a participating FFI or registered deemed-compliant FFI that provides a withholding statement allocating the payment to a chapter 4 withholding rate pool of U.S. payees. See Identifying the Payee, later, for more information. Also see Section S. Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns.
TIP: Foreign persons who provide a Form W-8 (or applicable documentary evidence when permitted in lieu of a Form W-8) are exempt from backup withholding and Form 1099 reporting.
Form 8966 reporting. For chapter 4 purposes, you may be required to report on Form 8966, FATCA Report, if you make a withholdable payment to an entity you agree to treat as an owner-documented FFI or to a passive NFFE. See Returns Required, later.
Wages paid to employees. If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. See Pay for Personal Services Performed, later.
Effectively connected income by partnerships. A withholding agent that is a partnership (whether U.S. or foreign) is also responsible for withholding on its income effectively connected with a U.S. trade or business that is allocable to foreign partners. See Partnership Withholding on Effectively Connected Income, later, for more information.
U.S. real property interest. A withholding agent also may be responsible for withholding if a foreign person transfers a U.S. real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U.S. real property interest to a shareholder, partner, or beneficiary that is a foreign person. See U.S. Real Property Interest, later.
Persons Subject to Chapter 3 or Chapter 4 Withholding
Chapter 3 withholding applies only to payments made to a payee that is a foreign person. It does not apply to payments made to U.S. persons.
Usually, you determine the payee's status as a U.S. or foreign person or, if you are making a withholdable payment to an entity (or are an FFI making a payment to an account holder), the payee's chapter 4 status, based on the documentation that person provides. See Documentation, later. However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation upon which you can rely, then you must apply certain presumption rules, discussed later.
Chapter 4 withholding applies to withholdable payments made to an entity payee that is an FFI unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner. Chapter 4 withholding also applies to withholdable payments made to a passive NFFE that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners). You must establish the payee's chapter 4 status to determine if withholding applies by applying the documentation requirements of chapter 4, generally by obtaining a Form W-8 (or, under an applicable IGA, a similar agreed form) associated with the payment, or other documentation for payments made outside of the United States on offshore obligations. See Treasury regulations section • A foreign partnership (other than a withholding foreign partnership). • A foreign simple or foreign grantor trust (other than a withholding foreign trust). • If the chapter 3 payee is a disregarded entity or flow-through entity for U.S. tax purposes, but the payee is claiming treaty benefits, see Fiscally transparent entity, later.
Chapter 4 payees.
For purposes of chapter 4, however, a foreign entity that is a flow-through entity is a payee with respect to a payment (other than income effectively connected with the conduct of a U.S. trade or business) if the flow-through entity is:
• An FFI that is not a participating FFI or deemed-compliant FFI, or restricted distributor (an entity that operates as a distributor that holds debt or equity interests in a restricted fund as a nominee and meets the requirements described in Treasury regulations section
(f)(4)) receiving the payment on behalf of its owners (in such a case, the entity is a nonparticipating FFI subject to withholding under chapter 4); or• An excepted NFFE that is not acting as an agent or intermediary with respect to the payment.
If you make a withholdable payment to a flow-through entity that is not one of the types described above, you must treat the partner, beneficiary, or owner (as applicable) of the flow-through entity as the payee for chapter 4 purposes (similar to the determination of the payee for chapter 3 purposes) (looking through partners, beneficiaries, and owners that are themselves flow-through entities that are not one of the types described above).
In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation, later) on which it claims such status. You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later.
For purposes of chapter 3, you must determine whether the owners or beneficiaries of a flow-through entity are U.S. or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of chapter 3 withholding applies. For purposes of chapter 4, you must determine the chapter 4 status of the owners or beneficiaries of a flow-through entity (subject to the exceptions described above), how much of the payment relates to each owner or beneficiary, and whether withholding under chapter 4 applies. You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. See Documentation and Presumption Rules, later.
Withholding foreign partnerships and withholding foreign trusts are not flow-through entities.
Foreign partnerships. A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves flow-through entities or foreign intermediaries. However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not treated as fiscally transparent in the treaty jurisdiction and that it meets all the other requirements for claiming treaty benefits. If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees.
For purposes of chapter 4, a foreign partnership is a payee of a withholdable payment if the partnership is a withholding foreign partnership that is not acting as an agent or intermediary with respect to the payment. If the partnership is not a withholding foreign partnership, the payees are the partners (looking through any partners that are flow-through entities that are not treated as payees under the chapter 4 regulations).
Example 1. A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U.S. citizen. You make a payment of U.S. source interest to the partnership. Assume that the payment is subject to chapter 3 withholding but is not a withholdable payment. The partnership gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN-E from the foreign corporation; and Form W-9 from the U.S. citizen. The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner.
You must treat all three partners as the payees of their part of the interest payment as if the payment were made directly to them. Report the payments to the nonresident alien and the foreign corporation on Forms 1042-S. Report the payment to the U.S. citizen on Form 1099-INT. You do not need to determine the chapter 4 status of the partnership because the payment is not a withholdable payment.
Example 2. A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. The second partnership has two partners, both nonresident alien individuals. You make a payment of U.S. source interest to the first partnership. Assume that the payment is subject to chapter 3 withholding but is not a withholdable payment. The partnership gives you a valid Form W-8IMY with which it associates a Form W-8BEN-E from the foreign corporation and a Form W-8IMY from the second partnership. In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Because you can reliably associate a part of the interest payment with the Form W-8BEN-E provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. You do not need to determine the chapter 4 status of the partnership because the payment is not a withholdable payment.
Example 3. You make a payment of U.S. source dividends to a withholding foreign partnership. Assume that the payment is subject to chapter 3 withholding and is a withholdable payment. The partnership has two partners, both foreign corporations. You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. You must treat the partnership as the payee of the dividends for purposes of both chapter 3 and chapter 4, and you must determine the chapter 4 status of the partnership.
Foreign simple and grantor trust. A trust is foreign unless it meets both of the following tests.
• A court within the United States is able to exercise primary supervision over the administration of the trust.
• One or more U.S. persons have the authority to control all substantial decisions of the trust.
In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections
671through 679 of the Code.
The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. The payees of a payment made to a foreign grantor trust are the owners of the trust. However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees.
Example. A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U.S. citizen. You make a payment of U.S. source interest to the foreign trust. Assume that the payment is subject to chapter 3 withholding but is not a withholdable payment. The foreign trust gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U.S. citizen. The trust also gives you a complete withholding statement that enables you to associate the interest payment with the forms provided by each beneficiary. You must treat all three beneficiaries as the payees of their part of the interest payment as if the payment were made directly to them. Report the payment to the nonresident aliens on Forms 1042-S. Report the payment to the U.S. citizen on Form 1099-INT. You do not need to establish the chapter 4 status of the trust because the payment is not a withholdable payment.
Fiscally transparent entity. For chapter 3 purposes, a disregarded entity or flow-through entity should be treated as the payee and may claim treaty benefits under an income tax treaty with the United States if it is a resident of the treaty country and it derives the item of income. It does not need to be taxed on such item, but the item must be accounted for as the entity's income, not the interest holders' income, under the law of the treaty country whose treaty it is invoking. It must also meet any other requirements for claiming benefits, including a limitation on benefits article, if any, in the treaty. The entity should provide a Form W-8BEN-E in such circumstances. If, for chapter 3 purposes, the payee is a foreign corporation or other non-flow through entity for U.S. tax purposes, it is nonetheless not entitled to claim treaty benefits if the entity is fiscally transparent in its country of residence (i.e., foreign reverse hybrid). Instead, if an interest holder is entitled to treaty benefits under its country of residence, the payee may provide a Form W-8IMY and attach Form W-8BEN or W-8BEN-E from any interest holder that claims treaty benefits on such income.
The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc.). The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. An entity is considered to be fiscally transparent with respect to the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity.
The payees of a payment made to a fiscally transparent entity are the interest holders of the entity.
For chapter 4 purposes, if you are making a withholdable payment to a fiscally transparent entity, you must apply the rules of chapter 4 to determine the payee (applying the rules described earlier) and whether chapter 4 withholding applies to the payment based on the payee's chapter 4 status. Thus, chapter 4 withholding may apply to a withholdable payment made to a fiscally transparent entity based on the chapter 4 status of the entity even when the interest holders in the entity would be eligible for reduced withholding under an income tax treaty with respect to the payment. Treaty benefits may be granted to the interest holder when the payment made is not subject to chapter 4 withholding based on the chapter 4 status of both the entity and the interest holder.
Example. Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. A has two interest holders, B and C. B is a corporation organized under the laws of country Y. C is a corporation organized under the laws of country Z. Both countries Y and Z have an income tax treaty in force with the United States.
A receives royalty income from U.S. sources that is not effectively connected with the conduct of a trade or business in the United States and that is not a withholdable payment. The chapter 4 status of A does not need to be determined because the payment is not a withholdable payment.
For U.S. income tax purposes, A is treated as a partnership. Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income were realized directly from the source that paid it to A. Accordingly, A is fiscally transparent in its jurisdiction, country X.
B and C are not fiscally transparent under the laws of their respective countries of incorporation. Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income were realized directly from the source that paid it to A. Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U.S. source royalty income for purposes of the U.S.-Y income tax treaty. Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Therefore, A is not treated as fiscally transparent under the laws of country Z. Accordingly, C is not treated as deriving its share of the U.S. source royalty income for purposes of the U.S.-Z income tax treaty.
Foreign Intermediaries
In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. This rule applies for purposes of chapter 3 withholding and for Form 1099 reporting and backup withholding and chapter 4 withholding, provided the intermediary is not a nonparticipating FFI to which you make a withholdable payment to which chapter 4 withholding applies. You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold.
An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY.
For purposes of chapter 3, you must determine whether the customers or account holders of a foreign intermediary are U.S. or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of, or exemption from, chapter 3 withholding applies. For purposes of chapter 4, you must generally determine the chapter 4 status of the account holders of a foreign intermediary if the payment is a withholdable payment. The determination for chapter 3 purposes is not required when withholding applies under chapter 4 (i.e., when the chapter 4 status of the foreign intermediary is a nonparticipating FFI (including a limited branch of a participating FFI (including a reporting Model 2 FFI)) or a limited FFI (as defined in Treasury regulations section • An NFFE, unless the NFFE is a qualified intermediary that has assumed primary chapters 3 and 4 withholding responsibility; or • A participating FFI, deemed-compliant FFI, or restricted distributor, unless such entity is a QI that has assumed primary chapters 3 and 4 withholding responsibility.
If you make a withholdable payment to one of the types of entities described above, the payee is the person for whom the agent or intermediary collects the payment.
Nonqualified intermediary. A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. The payees of a payment made to an NQI for both chapter 3 and chapter 4 purposes are the customers or account holders on whose behalf the NQI is acting.
Example. You make a payment of interest to a foreign bank that is a nonqualified intermediary. Assume the payment is subject to chapter 3 withholding but is not a withholdable payment. The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U.S. person for whom the bank is collecting the payments. The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment and provides all other information required to be on the withholding statement. The account holders are the payees of the interest payment. You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U.S. person on Form 1099-INT. You do not need to establish the chapter 4 status of the NQI because the payment is not a withholdable payment.
Qualified intermediary. A qualified intermediary (QI) is a foreign intermediary described later under QI Agreement (or foreign branch of a U.S. intermediary) that has entered into a qualified intermediary agreement (discussed later) with the IRS. You may treat a QI as a payee to the extent it assumes primary chapters 3 and 4 withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. In this situation, the QI is required to withhold the tax. You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI.
A payment to a QI to the extent it does not assume primary chapters 3 and 4 withholding responsibility is considered made to the person on whose behalf the QI acts. If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U.S. person. See Qualified Intermediaries, later, for a discussion of withholding rate pools and when a QI may include a U.S. non-exempt recipient in a U.S. payee pool.
Branches of financial institutions. Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved "know-your-customer" (KYC) rules. The countries with approved KYC rules are listed at http://www.irs.gov/Businesses/International-Businesses/List-of-Approved-KYC-Rules.
QI agreement. Foreign financial institutions, foreign clearing organizations, and foreign branches of U.S. financial institutions or clearing organizations can enter into an agreement with the IRS to become a QI. To enter into a QI agreement effective for the period beginning on or after June 30, 2014, a foreign financial institution must have a chapter 4 status as:
• A participating FFI (including a reporting Model 2 FFI);
• A registered deemed-compliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemed-compliant);
• An FFI treated as a deemed-compliant FFI under an applicable Model 1 IGA that is subject to similar due diligence and reporting requirements with respect to U.S. accounts as those applicable to a registered deemed-compliant FFI (a "registered deemed-compliant Model 1 IGA FFI"); or
• For a transitional period, a limited FFI.
Certain foreign corporations that are NFFEs or foreign central banks of issue may also apply to the IRS to become QIs.
An entity may apply for QI status by completing Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number, and submitting these forms to the IRS along with any additional information and documentation requested by the IRS. These forms, and the procedures required to obtain a QI agreement are available at http://www.irs.gov/Businesses/Corporations/Qualified-Intermediaries-(QI). A QI (other than an NFFE not acting on behalf of shareholders and certain central banks) must also register through the FATCA registration website available at http://www.irs.gov/FATCA to renew its QI agreement and obtain its applicable chapter 4 status and GIIN (except for a limited FFI).
Documentation requirements. For documentation requirements applicable to payments made to QIs, see Responsibilities and Documentation, discussed later under Qualified Intermediaries.
Reporting requirements. For the reporting requirements of QIs, see Form 1042-S Reporting and Collective Refund Procedures, discussed later under Qualified Intermediaries.
U.S. branches of foreign banks and foreign insurance companies. Special rules apply to a U.S. branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Effective July 1, 2014, you must obtain a branch's chapter 4 status, if required for chapter 4 purposes. You can generally treat the branch as a U.S. person for a withholdable payment only when you document its status as a participating FFI, registered deemed-compliant FFI, or an insurance company that is an NFFE. If you make a payment of an amount subject to chapter 3 withholding or a withholdable payment to a U.S. branch of a foreign bank or insurance company that is a participating FFI, a registered deemed-compliant FFI, or an NFFE that agrees to be treated as a U.S. person, you may treat the U.S. branch as a payee that is a U.S. person, provided you receive a Form W-8IMY from the U.S. branch that you can reliably associate with the payment. If you treat the branch as a U.S. person, you are not required to withhold on an amount subject to chapter 3 withholding or a withholdable payment. Even though you agree to treat the branch as a U.S. person, you must report the payments made to the branch on Form 1042-S.
A territory financial institution is a financial institution as defined for chapter 4 purposes (except when it is an investment entity that is not also a depository institution, custodial institution, or specified insurance company) incorporated or organized under the laws of a possession of the United States. A territory financial institution that is an intermediary or flow-through entity is treated as a U.S. branch that agrees to be treated as a U.S. person. The special rules described in this section apply to a territory financial institution.
If you are paying a U.S. branch an amount that is not subject to chapter 3 withholding and is not a withholdable payment, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U.S. person for such amounts. Consequently, amounts not subject to chapter 3 withholding and that are not withholdable payments that are paid to a U.S. branch are not subject to Form 1099 reporting or backup withholding.
Alternatively, a U.S. branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. In this situation, the U.S. branch is not treated as a U.S. person, and the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. See Nonqualified Intermediaries under Documentation, later.
If you cannot reliably associate the payment with a Form W-8IMY from the U.S. branch but you have obtained an EIN for the branch, you should treat the payment as a payment to a foreign person of income that is effectively connected with the conduct of a trade or business in the United States. If you cannot reliably associate the payment with a Form W-8IMY from the U.S. branch and you have not obtained an EIN for the branch, you should treat the payment as a payment to a foreign person of income that is not effectively connected with the conduct of a trade or business in the United States.
Withholding foreign partnership and withholding foreign trust. A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP agreement with the IRS and is acting in that capacity with respect to its partners. A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT agreement with the IRS and is acting in that capacity with respect to its owners and beneficiaries. In order to enter into a WP agreement or WT agreement effective on or after June 30, 2014, with the IRS, a WP or WT that is an FFI must have a chapter 4 status as:
• A participating FFI (including a reporting Model 2 FFI);
• A registered-deemed compliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemed-compliant);
• A registered deemed-compliant Model 1 IGA FFI; or
• A retirement fund.
A WP or WT that is an NFFE may also enter into a WP or WT agreement with the IRS.
A WP or WT must act in that capacity for reportable amounts that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. A WP or WT may act in that capacity for reportable amounts that are distributed to, or included in the distributive share of, its indirect partners, beneficiaries, or owners that are not U.S. non-exempt recipients (except for a U.S. non-exempt recipient that is included in a chapter 4 withholding rate pool of U.S. payees). A WP or WT acting in that capacity must assume primary chapters 3 and 4 withholding responsibility for payments subject to withholding and must assume certain reporting requirements with respect to its U.S. partners, beneficiaries, and owners. You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts.
WP agreement and WT agreement. The WP agreement and WT agreement and the application procedures for the agreements are in Revenue Procedure 2014-47 (as may be amended). An entity applies for WP or WT status by completing Form 14345 and Form SS-4 and submitting these forms to the IRS, along with any additional information and documentation requested by the IRS. The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. A WP or WT that is an FFI (other than a retirement fund) must also register with the IRS through the FATCA registration website available at http://www.irs.gov/FATCA to renew its WP agreement or WT agreement and obtain its applicable chapter 4 status and GIIN.
Documentation. A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and provides all other information and certifications required by the form, including its WP-EIN or WT-EIN. When you make a withholdable payment to a WP or WT, the WP or WT generally may also provide a certificate of a chapter 4 status permitted of a WP or WT (and GIIN if applicable). The WP or WT, when acting in such capacity, is not required to provide a withholding statement and is not required to disclose any information regarding its direct partners, beneficiaries, or owners or any indirect partner, beneficiary, or owner for which it acts as a WP or WT that is not a U.S. non-exempt recipient (except for a U.S. non-exempt recipient included in a chapter 4 withholding rate pool of U.S. payees). A chapter 4 withholding rate pool also means a payment of a single type of income that is allocated to U.S. payees when the WP provides the certification required on Form W-8IMY for allocating payments to this pool. When a WP or WT is not acting as a WP or WT with respect to an amount distributed to, or included in the distributive share of, an indirect partner, beneficiary, or owner, it must provide you with a nonwithholding foreign partnership or nonwithholding foreign trust withholding certificate on a Form W-8IMY and documentation for its indirect partners, beneficiaries, and owners that are not included in a chapter 4 withholding rate pool.
Foreign Persons
Rules relevant to chapters 3 and 4. A payee is subject to withholding only if it is a foreign person. A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary. In most cases, the U.S. branch of a foreign corporation or partnership is treated as a foreign person.
If an amount is both a withholdable payment and an amount subject to chapter 3 withholding and the withholding agent withholds under chapter 4, it may credit this amount against any tax due under chapter 3.
Nonresident alien. A nonresident alien is an individual who is not a U.S. citizen or a resident alien. A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding.
Married to U.S. citizen or resident alien. Nonresident alien individuals married to U.S. citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. However, these individuals are still subject to the chapter 3 withholding rules that apply to nonresident aliens for all income except wages. Wages paid to these individuals are subject to graduated withholding. See Wages Paid to Employees--Graduated Withholding.
Resident alien. A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.
•
Green card test.An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because these aliens hold immigrant visas (also known as green cards).
• Substantial presence test. An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Under this test, the individual must be physically present in the United States on at least:
• 31 days during the current calendar year, and
• 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year.
In most cases, the days the alien is in the United States as a teacher, student, or trainee on an "F," "J," "M," or "Q" visa are not counted. This exception is for a limited period of time.
For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519.
Note. If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. For more information on making adjustments, see chapter 13 of Publication 15 (Circular E).
Resident of a U.S. possession. A bona fide resident of Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U.S. citizen or a U.S. national is treated as a nonresident alien for the withholding rules explained here. A bona fide resident of a possession is someone who:
• Meets the presence test,
• Does not have a tax home outside the possession, and
• Does not have a closer connection to the United States or to a foreign country than to the possession.
For more information, see
Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.
Foreign corporations. A foreign corporation is one that does not fit the definition of a domestic corporation. A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia.
Guam or Northern Mariana Islands corporations. A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if:
• At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and
• At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less).
Note.
The provisions discussed below under
U.S. Virgin Islands and American Samoa corporationswill apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession.
U.S. Virgin Islands and American Samoa corporations. A corporation created or organized in, or under the laws of, the U.S. Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if:
• At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons,
• At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U.S. Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and
• No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U.S. Virgin Islands, American Samoa, Guam, the CNMI, or the United States.
Foreign private foundations.
A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate.
Other foreign organizations, associations, and charitable institutions. An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code and chapter 4 withholding tax even if it was formed under foreign law. In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations.
Payments to these organizations, however, must be reported on Form 1042-S if the payment is subject to chapter 3 withholding, even though no tax is withheld.
You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations when the organization does not provide you a Form W-8ECI to certify that the income is effectively connected with a U.S. trade or business of the organization.
U.S. branches of foreign persons. In most cases, a payment to a U.S. branch of a foreign person is a payment made to the foreign person. However, you may treat payments to U.S. branches of certain foreign banks and foreign insurance companies (discussed earlier) that are subject to U.S. regulatory supervision as payments made to a U.S. person, if you and the U.S. branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. For this purpose, a territory financial institution acting as an intermediary or that is a flow-through entity is treated as a U.S. branch.
Additional Rules Specific to Chapter 4
A payee may be subject to chapter 4 withholding only if it is a foreign entity. A foreign entity for chapter 4 purposes means any entity that is not a U.S. person and includes a territory entity as defined in Treasury regulations section 953(d) if it is a specified insurance company and is not licensed to do business in any state. Notwithstanding the foregoing, a withholding agent should treat such entity as a U.S. person for purposes of documenting the entity's status for purposes of chapters 3 and 4.
Documentation for Chapter 3
For purposes of chapter 3, in most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following.
• The payee is a U.S. person.
• The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding under the Code or an applicable income tax treaty.
If withholding is applied under chapter 4 on a payment, no withholding will be required on such payment under chapter 3.
Documentation for Chapter 4
If you make a withholdable payment, you must determine the chapter 4 status of payees, beneficial owners, and intermediaries and flow-through entities receiving the payment to the extent required for chapter 4 purposes. You must also determine the chapter 4 status of persons that own an interest in an entity receiving a withholdable payment that you treat as an owner-documented FFI, provided you are either a U.S. financial institution, participating FFI, or reporting Model 1 FFI. To establish a chapter 4 status, you generally must obtain a valid withholding certificate or documentary evidence that you can reliably associate with the payment. If you make a payment to a passive NFFE, you must obtain either a certification that the NFFE does not have any substantial U.S. owners, or the name, address, and TIN of each substantial U.S. owner of the NFFE (or, under an applicable IGA, each controlling person that is a specified U.S. person).
You can reliably associate a payment with a Form W-8 for purposes of establishing a payee's chapter 4 status in most cases if, prior to the payment, you obtain a valid form that contains the information required for chapter 4 purposes, you can reliably determine how much of the payment relates to the form, and you have no actual knowledge or reason to know that any of the information, certifications, or statements in, or associated with, the form is unreliable or incorrect for chapter 4 purposes. See Standards of Knowledge for Chapter 4, later, for the reason to know standards that apply for chapter 4 purposes. For the requirements for documenting specific chapter 4 statuses of persons receiving withholdable payments, see Treasury regulations section 1.1471-3(d) for the extent to which a withholding agent may rely on documentary evidence (other than a Form W-8) to establish the chapter 4 status of an entity payee, including the forms of documentary evidence permitted for each specific chapter 4 status. For the requirements for documentary evidence, see Treasury regulations section Notice 2014-33, 2014-21 I.R.B. 1033. In the case of a reporting Model 1 FFI or a reporting Model 2 FFI, see the requirements of the applicable IGA for the documentation requirements that apply to preexisting accounts maintained by such an FFI.
Additional Documentation Rules Applicable to Chapters 3 and 4
In most cases, you must reliably associate the payment with valid documentation to apply reduced withholding and must get the documentation before you make the payment. The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. See Standards of Knowledge, later.
If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later to determine the rate of withholding. For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules of section 1441.
The specific types of documentation are discussed in this section. However, see Withholding on Specific Income, later, as well as the instructions to the particular forms. As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY.
Section 1446 withholding. Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. This is the same documentation that is filed for chapter 3 withholding, but may require additional information as discussed under each of the forms in this section.
Documentation rule for joint payees. If you make a payment to joint payees (such as holders of a joint account), you need to get documentation from each payee. If you make a payment to joint payees and cannot reliably associate the payment with documentation from all of the payees, you generally must presume the payment is made to an unidentified U.S. person. If the payment is a withholdable payment and any of the payees does not appear, by name or other information in the account file, to be an individual, you must treat the entire amount as a payment made to an undocumented foreign person. However, if one of the joint payees has provided you with a Form W-9, you must treat the payment as made to that payee.
Form W-9. In most cases, you can treat the payee as a U.S. person if the payee gives you a Form W-9. The Form W-9 can be used only by a U.S. person and must contain the payee's taxpayer identification number (TIN). If there is more than one owner, you may treat the total amount as paid to a U.S. person if any one of the owners gives you a Form W-9. See U.S. Taxpayer Identification Numbers, later. U.S. persons are not subject to chapter 3 withholding, but may be subject to:
• Form 1099 reporting and backup withholding under section
3406;
• Reporting as a U.S. account holder of a participating FFI or registered deemed-compliant FFI; and
• Classification as a recalcitrant account holder of a participating FFI or registered deemed-compliant FFI for chapter 4 purposes (including chapter 4 withholding) when the FFI is unable to report the information required with respect to the account holder.
Forms W-8.
In most cases, a foreign payee of the income should give you a form in the Form W-8 series.
If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. You can rely on documentary evidence in lieu of a Form W-8 for an amount paid outside the United States with respect to an offshore obligation. Refer to Offshore obligations, later, to determine whether a payment qualifies as such a payment.
Other documentation. Other documentation may be required to claim an exemption from, or a reduced rate of, chapter 3 withholding on pay for personal services. The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income.
Beneficial Owners
If all the appropriate requirements have been established on a Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you can treat the payee as a foreign beneficial owner.
Claiming treaty benefits for purposes of chapter 3. You may apply a reduced rate of chapter 3 withholding to a foreign person that provides a Form W-8 claiming a reduced rate of withholding under an income tax treaty only if the person provides a U.S. or foreign TIN and certifies that:
• It is a resident of a treaty country;
• It is the beneficial owner of the income;
• If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and
• It meets any limitation on benefits provision contained in the treaty, if applicable.
If the payment you make is a withholdable payment to an entity, a requirement to withhold under chapter 4 may apply based on the chapter 4 status of the payee regardless of whether a claim of treaty benefits may apply to such payee or other person receiving the income.
If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on a Form W-8 that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to chapter 3 withholding received during a calendar year exceeds, in the aggregate, $500,000.
An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. See Fiscally transparent entity discussed earlier under Flow-Through Entities.
Limitations on benefits provisions in income tax treaties generally prohibit third country residents from obtaining treaty benefits. For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country.
The exemptions from, or reduced rates of, U.S. tax vary under each treaty. You must check the provisions of the tax treaty that apply. See Tax Treaties, later, for information on how to access tax treaties.
If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Certain withholding agents, such as financial institutions, have limited reason to know requirements for this purpose. See Treasury regulations section • Income from marketable securities (discussed next). • Unexpected payments to an individual (discussed under U.S. Taxpayer Identification Numbers).
The allowance to provide a foreign TIN (rather than a U.S. TIN) does not apply to a payment to compensate an individual for personal services.
Marketable securities. A Form W-8 provided to claim treaty benefits does not need a U.S. or foreign TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. For this purpose, income from a marketable security consists of the following items.
• Dividends and interest from stocks and debt obligations that are actively traded.
• Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund).
• Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933.
• Income related to loans of any of the above securities.
Offshore obligations.
If a payment is made outside the United States with respect to an offshore obligation, a payee may give you documentary evidence, rather than a Form W-8, to establish that the payee is a foreign person. See Treasury regulations section
(c)(1) for the requirements for documentary evidence for offshore obligations. For accounts opened on or after July 1, 2014, through December 31, 2014, you may use the rules regarding the use of documentary evidence under Treasury regulations sections (c)(1) and (c)(4) as in effect prior to the issuance of the temporary regulations.A payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited unless the other requirements of Treasury regulations section 1. A certificate of residence that: a. Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, b. States that the person has filed its most recent income tax return as a resident of that country, and c. Is issued within 3 years prior to being presented to you. 2. Documentation for an individual that: a. Includes the individual's name, address, and photograph, b. Is an official document issued by an authorized governmental body, and c. Is issued no more than 3 years prior to being presented to you. 3. Documentation for an entity that: a. Includes the name of the entity, b. Includes the address of its principal office in the treaty country, and c. Is an official document issued by an authorized governmental body.
In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. In the case of a withholdable payment made to an entity, you must also obtain the applicable documentation to establish that withholding does not apply under chapter 4.
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). This form is used by a foreign individual to:
• Establish foreign status;
• Claim that such individual is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding;
• If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty; and
• Provide a foreign TIN or date of birth when the beneficial owner holds an account at a U.S. office of a financial institution.
Note.
Form W-8BEN is now used exclusively by individuals. Entities documenting their status as a foreign person and beneficial owner for chapter 3 purposes, their chapter 4 status as a payee for chapter 4 purposes, or eligibility for making a claim of treaty benefits (if applicable) should use Form W-8BEN-E.
A withholding agent in some cases may substitute its own form for a Form W-8BEN for individuals. Solely for purposes of chapter 3, a Form W-8BEN with a revision date February 2006 provided to you by an entity before January 1, 2015 will remain valid until the form's validity expires under the applicable chapter 3 regulations. For purposes of chapter 4, a Form W-8BEN with a revision date February 2006 provided to you by an entity before such date is and will remain valid to the extent permitted under chapter 4.
Form W-8BEN also may be used to claim that the foreign individual is exempt from Form 1099 reporting and backup withholding for income that is not subject to chapter 3 withholding and is not a withholdable payment. For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding.
Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). This form is used by a foreign entity to:
• Establish foreign status;
• Establish an entity's chapter 4 status to the extent required for chapter 4 purposes;
• Claim that such entity is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and
• If applicable, claim a reduced rate of, or exemption from, chapter 3 withholding under an income tax treaty.
Form W-8BEN-E also may be used to claim that the foreign entity is exempt from Form 1099 reporting and backup withholding for income that is not subject to chapter 3 withholding and is not a withholdable payment. For example, a foreign entity may provide a Form W-8BEN-E to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding.
An entity payee also may provide a Form W-8BEN-E to establish that certain income from notional principal contracts is not effectively connected with the conduct of a U.S. trade or business. In addition, a foreign hybrid entity claiming treaty benefits on its own behalf should provide you with a Form W-8BEN-E with respect to the income for which treaty benefits are being claimed. In certain cases, a similar agreed form may be associated with the payment instead of a Form W-8BEN-E.
Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. This form is used by a foreign person to:
• Establish foreign status,
• Claim that such person is the beneficial owner of the income for which the form is being furnished, and
• Claim that the income is effectively connected with the conduct of a trade or business in the United States. (See Effectively Connected Income, later.)
Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to chapter 3 withholding or withholding under chapter 4.
If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U.S. trade or business is subject to withholding under section 1446. If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form.
CAUTION: If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN or W-8BEN-E to the partnership.
For purposes of chapter 3, a Form W-8ECI with a revision date February 2006 provided to you before January 1, 2015, will remain valid until the form's validity expires under the applicable chapter 3 regulations.
Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting. This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U.S. possession to:
• Establish foreign status,
• Establish the entity's chapter 4 status to the extent required for chapter 4 purposes,
• Claim that such person is the beneficial owner of the income for which the form is being furnished, and
• Claim an exemption from withholding under both chapter 3 and chapter 4 for such entity or that the entity is a foreign private foundation subject to the 4% tax. See section 1443 for the withholding required for a payment made to such an entity.
If the government or organization named on the form is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section
1446.
For purposes of chapter 3, a Form W-8EXP with a revision date February 2006 provided to you before January 1, 2015, will remain valid until the form's validity expires under the applicable chapter 3 regulations. For purposes of chapter 4, a Form W-8EXP with a revision date of February 2006 that is provided to you before January 1, 2015, is and will remain valid to the extent permitted under chapter 4.
See also Foreign Governments and Certain Other Foreign Organizations, later.
Foreign Intermediaries and Foreign Flow-Through Entities
Payments made to a foreign intermediary or foreign flow-through entity that is not a QI that assumes primary chapters 3 and 4 withholding responsibility, a WP, a WT, or a branch treated as a U.S. person (see U.S. branches of foreign banks and foreign insurance companies, earlier) are treated as made to the payees on whose behalf the intermediary or entity acts except when the intermediary or flow-through entity is subject to chapter 4 withholding. See Flow-through Entities and Foreign intermediaries, earlier. The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes.
Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting. This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U.S. branches, to:
• Represent that a foreign person is a qualified intermediary or nonqualified intermediary,
• Establish the entity's chapter 4 status when required for chapter 4 purposes,
• When applicable, certify that the entity is a participating FFI, a registered deemed-compliant FFI, or a qualified intermediary that may provide a withholding statement allocating a payment to a chapter 4 withholding rate pool of U.S. payees,
• Represent, if applicable, that the qualified intermediary is assuming primary chapters 3 and 4 withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility,
• Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust,
• Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust,
• Represent that the provider is a U.S. branch of a foreign bank or insurance company and either is agreeing to be treated as a U.S. person or is transmitting documentation of the persons on whose behalf it is acting for the payments,
• Represent its status as a qualified securities lender with respect to payments of U.S. source substitute dividends,
• Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. For information on qualifying as an upper-tier foreign partnership, see Regulations section
For purposes of chapter 4, an intermediary or flow-through entity that is a participating FFI or registered deemed-compliant FFI receiving a withholdable payment may, in lieu of providing documentation for each payee, provide pooled allocation information as described under
FFI withholding statement,later.
FFI withholding statement. An FFI withholding statement must be provided by a participating FFI or registered deemed-compliant FFI (including a U.S. branch of a participating FFI that is not treated as a U.S. person) that is a nonqualified intermediary, nonwithholding foreign partnership, nonwithholding foreign trust, or a QI that makes an election to be withheld on for chapter 4 purposes (i.e., a QI that does not assume chapter 3 or 4 withholding responsibility), as described later under Qualified Intermediaries.
An FFI withholding statement may include either payee-specific information or pooled information. If the withholding statement includes pooled information, the withholding statement must indicate the portion of the payment allocable to:
• A chapter 4 withholding rate pool of U.S. payees;
• Each class of recalcitrant account holders under Treasury regulations section
If the withholding statement includes payee-specific information, it must indicate both the portion of the payment allocated to each payee and each payee's chapter 4 status.
Any withholding statement provided by an FFI other than an FFI acting as a WP, WT, or QI with respect to the account must also identify each intermediary or flow-through entity that receives the payment and such entity's chapter 4 status and GIIN, when applicable.
For additional information on the requirements for FFI withholding statements, see Treasury regulations section • A territory financial institution that does not agree to be treated as a U.S. person. • A U.S. branch that is not a U.S. branch of a participating FFI. • An NFFE or certified deemed-compliant FFI that is a nonqualified intermediary, nonwithholding foreign partnership, or nonwithholding foreign trust and is not the payee.
A chapter 4 withholding statement must contain the following.
• The name, address, TIN (if any), entity type, and chapter 4 status of each payee.
• The amount allocated to each payee.
• A valid withholding certificate or other appropriate documentation sufficient to establish the chapter 4 status of each payee, and each intermediary or flow-through entity that receives the payment on behalf of the payee.
• Any other information the withholding agent reasonably requests in order to fulfill its obligations under chapter 4.
A chapter 4 withholding statement is permitted to provide pooled allocation information with respect to payees that are treated as nonparticipating FFIs.
Qualified Intermediaries
In most cases, a QI is any foreign intermediary that has entered into a QI agreement (discussed earlier) with the IRS. A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI. The intermediary can claim that it is a QI until the IRS revokes its QI-EIN.
A QI can be either an FFI or an NFFE. An FFI (other than a retirement fund) that is a QI must be a participating FFI (including a reporting Model 2 FFI), a registered deemed-compliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemed-compliant), or an FFI treated as a deemed-compliant FFI under an applicable Model 1 IGA that is subject to similar due diligence and reporting requirements with respect to its U.S. accounts as those applicable to a registered deemed-compliant FFI (including the requirement to register with the IRS) (defined in the QI agreement as a "registered deemed-compliant Model 1 IGA FFI"), or, for a transitional period, a limited FFI. Thus, you must identify the chapter 4 status of an FFI certifying its status as a QI as one of the chapter 4 statuses referenced in the preceding sentence on a Form W-8IMY when a chapter 4 status is required for chapter 4 purposes.
Responsibilities and documentation. Payments made to a QI that does not assume primary chapters 3 and 4 withholding responsibilities are treated as paid to its account holders. However, a QI is not required to provide you with documentation it obtains from its foreign account holders or from U.S. exempt recipients (U.S. persons exempt from Form 1099 reporting). Instead, it provides you with a withholding statement that contains either chapter 3 or chapter 4 withholding rate pool information. A chapter 4 withholding rate pool is a payment of a single type of income that is a withholdable payment that is allocated to payees that are nonparticipating FFIs or recalcitrant account holders (in a single pool). A chapter 4 withholding rate pool also means a payment of a single type of income that is allocated to U.S. payees when the QI provides the certification required on Form W-8IMY for allocating payments to this pool and a withholding statement. A QI may include in its chapter 4 withholding rate pools its direct account holders as well as account holders of another QI or a participating FFI or registered deemed-compliant FFI. With respect to a payment to a foreign person for which no chapter 4 withholding is required, a chapter 3 withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding and that is reported on Form 1042-S under a single chapter 4 exemption code. Payments made to U.S. exempt recipients may also be included in a chapter 3 withholding rate pool to which withholding does not apply.
A QI is required to provide you with information regarding U.S. non-exempt recipients (U.S. persons subject to Form 1099 information reporting) and to provide you withholding rate pool information separately for each such U.S. person unless it has assumed primary Form 1099 reporting and backup withholding responsibility and meets the requirements to include these recipients in a U.S. payee pool. For the alternative procedure for providing withholding rate pool information for U.S. non-exempt persons not included in a chapter 4 withholding rate pool of U.S. payees, see the Form W-8IMY instructions.
The withholding statement must:
1. Designate those accounts for which it acts as a qualified intermediary,
2. Designate those accounts for which it assumes primary chapters 3 and 4 withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility,
3. If applicable, designate the accounts for which it acts as a qualified securities lender with respect to any U.S. source substitute dividend payments,
4. Provide sufficient information for you to allocate the payment, as applicable, to chapter 3 withholding rate pools and, for payments that are withholdable payments, chapter 4 withholding rate pools of nonparticipating FFIs and recalcitrant account holders when the QI has not assumed primary chapter 3 or 4 withholding responsibility, and
5. Provide sufficient information for you to allocate payments to each U.S. non-exempt recipient or to a pool of U.S. payees to the extent described earlier under this heading.
The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI.
If a QI that is permitted to do so by the QI agreement obtains documentary evidence under the "know-your-customer" rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. A QI may rely on a Form W-8 until its validity expires under Treasury regulations section • It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust. • It is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI), an exempt beneficial owner, or an NFFE (other than a WP or WT). • It is a direct account holder of the QI. • None of its partners, beneficiaries, or owners is a flow-through entity or is acting as an intermediary for a payment made by the QI to the partnership or trust, and none of its partners, beneficiaries, or owners is a U.S. person. • None of its foreign partners, beneficiaries, or owners is subject to withholding or reporting under chapter 4. • It agrees to make available upon request to QI (or QI's auditor) records that establish it has provided the QI with documentation for purposes of chapters 3 and 4 for all of its partners, beneficiaries, or owners.
For information on these rules, see section 4.05 of the QI agreement in
Revenue Procedure 2014-39, 2014-29 I.R.B. 151(as updated).
Agency option. A QI may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the QI and to apply the provisions of the QI agreement to its partners, beneficiaries, or owners. A QI and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions.
• It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust.
• It is either a direct account holder of the QI or an indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI also applies the agency option.
• It is an FFI that is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI), an NFFE, or an exempt beneficial owner.
• None of its partners, beneficiaries, or owners is a withholding foreign trust, withholding foreign partnership, participating FFI, registered deemed-compliant FFI, registered deemed-compliant Model 1 IGA FFI, or another qualified intermediary acting as an intermediary for a payment made by the QI to the partnership or trust.
• It agrees to permit the QI to treat its direct and indirect partners, beneficiaries, or owners as direct and indirect account holders, respectively, of the QI under the QI agreement.
• It agrees to comply with the compliance procedures of the QI agreement.
For information on these rules, see section 4.06 of the QI agreement in
Revenue Procedure 2014-39, 2014-29 I.R.B. 151(as updated).
Form 1042-S reporting. A QI is generally permitted to report payments made to its foreign account holders on a pooled basis rather than reporting payments to each account holder specifically. Pooled basis reporting is not available for payments to certain account holders, such as nonqualified intermediaries, flow-through entities (discussed earlier) and certain of their account holders and owners, private arrangement intermediaries, partnerships or trusts to which the QI applies the joint account or agency option (discussed later), and, in certain circumstances, qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts. Notwithstanding these requirements, separate Forms 1042-S are not issued to account holders that the QI is permitted to include in a chapter 4 withholding rate pool.
Collective refund procedures. A QI may seek a refund of tax withheld under chapters 3 and 4 on behalf of its account holders when the QI has not issued a Form 1042-S to the account holders that received the payment that was subject to overwithholding. The account holders, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the QI. A QI may obtain a refund of tax withheld under chapter 4, however, to the extent permitted under the QI agreement.
Nonqualified Intermediaries
If you are making a payment to an NQI or U.S. branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment:
• You can allocate the payment to a valid Form W-8IMY,
• You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow-through entity, or U.S. branch with a chapter 4 withholding rate pool) (see Pooled withholding information, later), and
• You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required.
Withholding statement.
The NQI or U.S. branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. A withholding statement must be updated to keep the information accurate prior to each payment.
For chapter 4 purposes. An NQI receiving a withholdable payment must provide a withholding statement which satisfies the requirements of an FFI withholding statement or, if the NQI is not a participating FFI or registered deemed-compliant FFI, a chapter 4 withholding statement.
An FFI withholding statement may allocate the payment to chapter 4 reporting rate pools (as appropriate), including a chapter 4 withholding rate pool for nonparticipating FFIs, recalcitrant account holders (in each class of account holders as described in the chapter 4 regulations), and, for an NQI that is a participating FFI (including a reporting Model 2 FFI) or a registered deemed-compliant FFI (including a reporting Model 1 FFI), U.S. payees. However, an NQI may allocate a payment of a reportable amount (regardless of whether the payment is a withholdable payment) to a chapter 4 withholding rate pool of U.S. payees when the NQI satisfies the requirements for providing such a pool, including the requirement to certify to its status as a participating FFI, including a reporting Model 2 FFI, or registered deemed-compliant FFI, including a reporting Model 1 FFI. If the FFI withholding statement instead includes payee specific information for purposes of chapter 4, it must indicate both the portion of the payment allocated to each payee and each payee's chapter 4 status. The withholding statement must also identify each intermediary or flow-through entity that is receiving a payment (excluding any intermediary or flow-through entity that is an account holder or interest holder in another QI, WP, or WT), each such entity's chapter 4 status and GIIN (if applicable) when required for chapter 4 purposes, and the chapter 4 withholding rate pools associated with each such entity.
A chapter 4 withholding statement must contain the name, address, TIN (if any), entity type, chapter 4 status of each payee, the amount allocated to each payee, and a valid withholding certificate or other documentation sufficient to establish each payee's chapter 4 status for payees that are not included in a chapter 4 withholding rate pool of nonparticipating FFIs. The withholding statement must also identify each intermediary or flow-through entity that is receiving a payment (excluding any intermediary or flow-through entity that is an account holder or interest holder in another QI, WP, or WT), each such entity's chapter 4 status and GIIN (if applicable), and the chapter 4 withholding rate pools associated with each such entity.
For chapter 3 purposes. The withholding statement should allocate for chapter 3 purposes only the portion of the payment that was not allocated to a chapter 4 withholding rate pool or to a payee identified on a withholding statement to whom withholding was applied under chapter 4. For chapter 3 purposes, a withholding statement must include the information described below for a reportable amount.
1. The name, address, and TIN (if any, or if required) of each person for whom documentation is provided.
2. The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided, and, for a withholdable payment, that the documentation establishes the payee's chapter 4 status to the extent required for chapter 4 purposes.
3. The status of the person for whom the documentation has been provided, such as whether the person is a U.S. exempt recipient, U.S. non-exempt recipient, or a foreign person. For a foreign person, the statement must indicate whether the person is the beneficial owner or a foreign intermediary, flow-through entity, or a U.S. branch that is not included in a chapter 4 withholding rate pool or in a pool of payees under the alternative procedures (see Alternative Procedure, later).
4. The type of recipient the person is, based on the recipient codes used on Form 1042-S.
5. Information allocating each payment, by income type, to each payee (including U.S. exempt and non-exempt recipients) for whom documentation has been provided that is not included in a chapter 4 withholding rate pool or in a pool of payees under the alternative procedures (see Alternative Procedure, later).
6. The rate of withholding that applies to each foreign person to whom a payment is allocated.
7. A foreign payee's country of residence.
8. If a reduced rate of withholding is claimed under chapter 3, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc.).
9. In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made.
10. The name, address, and TIN (if any) and, for a withholdable payment, the chapter 4 status (if required) and GIIN (if applicable) of any other NQI, flow-through entity, or U.S. branch from which the payee will directly receive a payment.
11. Any other information a withholding agent requests to fulfill its reporting and withholding obligations.
Alternative procedure.
Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U.S. exempt recipient or chapter 4 withholding rate pool by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. You must receive the withholding statement with all the required information (other than item 5) prior to making the payment.
CAUTION: The alternative procedure cannot however be used for payments to U.S. non-exempt recipients other than those recipients included in a chapter 4 withholding rate pool of U.S. payees. See Chapter 4, later. Therefore, an NQI must provide you with allocation information for any U.S. non-exempt recipients not included in a chapter 4 withholding rate pool of U.S. payees prior to a payment being made.
Pooled withholding information. If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment except as otherwise permitted for chapter 4 purposes when using this procedure.
Chapter 4. In the case of a reportable amount that is also a withholdable payment, an NQI may include amounts allocable to a chapter 4 withholding rate pool (other than a chapter 4 withholding rate pool of U.S. payees) and payees subject to chapter 4 withholding for whom the NQI will provide payee specific information in a 30-percent rate pool together with payees subject to chapter 3 withholding at the 30-percent rate. For the amount of the payment allocable to a chapter 4 withholding rate pool of U.S. payees, an NQI may include amounts allocable to the pool with other amounts exempt from withholding (and an NQI may allocate payments to this pool regardless of whether the payment is a withholdable payment) and may not otherwise apply these provisions for payments made to U.S. non-exempt recipients. The NQI must identify prior to the payment each chapter 4 withholding rate pool to be allocated a portion of the payment, in addition to each payee to be allocated the payments that is not included in such a pool. The NQI must then also allocate, by January 31 following the calendar year of the payment, the portion of the payment to each such pool in addition to allocating the payment to each payee that is not included in the pool.
Failure to provide allocation information. If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool or chapter 4 withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules. An NQI is deemed to have failed to provide specific allocation information if it does not give you such information for more than 10% of any one withholding rate pool.
However, if you receive such information by February 14, you may make the appropriate adjustments to repay any excess withholding incurred between February 1 and on or before February 14.
If the NQI fails to allocate more than 10% of the payment to a withholding rate pool by February 14 following the calendar year of payment, you must file a Form 1042-S for each account holder in the pool on a pro-rata basis (treating a chapter 4 withholding rate pool as an account holder for this purpose and excluding U.S. exempt recipients). For example, if there are four account holders in a withholding rate pool that receives a $100 payment and the NQI fails to allocate more than $10 of the payment, you must file four Forms 1042-S, one for each account holder in the pool, showing $25 of income to each. You must also check the "Pro-rata Basis Reporting" box at the top of each form. If, however, the nonqualified intermediary provides allocation information for 90% or more of the payment to a withholding rate pool, the pro-rata reporting method is not required. Instead, you must file a Form 1042-S for each account holder for whom you have allocation information and report the unallocated part of the payment on a Form 1042-S issued to "unknown recipient."
Withholding Foreign Partnerships
If you are making payments to a WP, you do not have to withhold if the WP is acting in that capacity. The WP must assume primary chapters 3 and 4 withholding responsibility for amounts that are distributed to, or included in the distributive share of, any direct partner and may assume chapters 3 and 4 withholding responsibilities for certain of its indirect partners. The WP must withhold the amount required to be withheld. A WP must provide you with a Form W-8IMY that certifies that the WP is acting in that capacity and provides all other information and certifications required by the form. The Form W-8IMY must contain the WP-EIN and GIIN (if applicable).
A WP can be either an FFI or an NFFE. An FFI (other than a retirement fund) that is a WP must be a participating FFI, a registered deemed-compliant FFI, or an FFI treated as a deemed-compliant FFI under an applicable Model 1 IGA that is subject to similar due diligence and reporting requirements with respect to its U.S. accounts as those applicable to a registered deemed-compliant FFI under Treasury regulations section Responsibilities of WP. The WP must withhold under chapter 3 or 4 on the date it makes a distribution of a withholdable payment or an amount subject to chapter 3 withholding to a direct foreign partner based on the Forms W-8 or W-9 it receives from its partners. If the partner's distributive share has not been distributed, the WP must withhold on the partner's distributive share on the earlier of the date that the partnership must mail or otherwise provide to the partner a Schedule K-1 (Form 1065) or the due date for furnishing the statement (whether or not the WP is required to furnish the statement). The WP may determine the amount of withholding based on a reasonable estimate of the partner's distributive share of income subject to withholding for the year. The WP must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the due date (including extensions) for filing the WP's Forms 1042 and 1042-S for the calendar year, the WP may withhold and report any adjustments in the following calendar year. Form 1042 filing. The WP must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WP must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments. Form 1042-S reporting. The WP can elect to report payments made to its foreign direct partners on a pooled basis for chapter 3 purposes rather than reporting payments to each direct partner in addition to reporting payments in a chapter 4 withholding rate pool to the extent the WP is permitted to do so based on its chapter 4 status. A WP can treat as its direct partners those indirect partners of the WP for which it applies joint account treatment or the agency option (described later). A WP must otherwise issue a Form 1042-S to each partner to the extent it is required to do so under the WP agreement. You may issue a single Form 1042-S for all payments you make to a WP other than payments for which the entity does not act as a WP. You may, however, have Form 1099 requirements for certain indirect partners of a WP that are U.S. non-exempt recipients. Collective refund procedures. A WP may seek a refund of tax withheld under chapters 3 and 4 on behalf of its partners when the WP has not issued a Form 1042-S to the partners that received the payment that was subject to overwithholding. The partners, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the WP. A WP may obtain a refund of tax withheld under chapter 4 to the extent permitted under the WP agreement. Reporting of U.S. partners. A WP must report its U.S. partners on Schedule K-1 to the extent required under the WP agreement. If the WP is an FFI, it is also required to report each of its U.S. accounts (or U.S. reportable accounts if a reporting Model 1 FFI) on Form 8966 consistent with its chapter 4 requirements or the requirements of an IGA. If the WP is an NFFE, WP must file Form 8966 to report any partner that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) if the NFFE is the beneficial owner of a withholdable payment received by the WP. The WP must also file a Form 8966 to report withholdable payments made to a passthrough partner for which the WP acts under the WP agreement that provides information on an account holder (or interest holder) that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) and that is the beneficial owner of the withholdable payment received by WP, unless the passthrough partner certifies to the WP that it is reporting on the account holder (or interest holder) pursuant to its U.S. account reporting requirements. The preceding sentence applies with respect to a passthrough partner to which WP applies the agency option or which has partners, beneficiaries, or owners that are indirect partners of WP. Joint account treatment. Under special procedures provided in the WP agreement, a WP may apply joint account treatment to a partnership or trust that is a direct partner of the WP. A WP that applies the joint account option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WP distributes to, or includes in the distributive share of, a foreign direct partner. These rules only apply to a partnership or trust that meets the following conditions. • It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust. • It is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI as defined in the WP agreement), an owner-documented FFI, an exempt beneficial owner, or an NFFE (other than a WP or WT). • It is a direct partner of the WP. • None of its partners, beneficiaries, or owners is a flow-through entity or intermediary. • None of the partnership's or trust's partners, beneficiaries, or owners is a U.S. person or is subject to withholding or reporting under chapter 4. • It agrees to make available upon request to the WP (or the WP's auditor) records that establish it has provided the WP with documentation for purposes of chapters 3 and 4 for all of its partners, beneficiaries, or owners. For more information on applying these rules, see section 9.01 of the WP agreement in
(as may be amended).
Agency option. A WP may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the WP and to apply the provisions of the WP agreement to its partners, beneficiaries, or owners. A WP that applies the agency option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WP distributes to, or includes in the distributive share of, a foreign direct partner. A WP and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions:
• It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust.
• It is either a direct partner of the WP or an indirect partner of the WP that is a direct partner, beneficiary, or owner of a partnership or trust to which the WP also applies the agency option.
• It is an FFI that is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI as defined in the WP agreement), an owner-documented FFI, an NFFE, or an exempt beneficial owner.
• None of its partners, beneficiaries, or owners is a WT, WP, participating FFI, registered deemed-compliant FFI, registered deemed-compliant Model 1 IGA FFI (as defined in the WP agreement), or QI acting as an intermediary for a payment made by the WP to the partnership or trust.
• The WP may not act as a withholding foreign partnership with respect to any direct or indirect partner of the partnership or trust that is a U.S. non-exempt recipient, unless the U.S. non-exempt recipient is a partner of an owner-documented FFI or passive NFFE to which the WP applies the agency option and is included in the WP's U.S. payee pool.
• It agrees to comply with the compliance procedures described in section 8.05 of the WP agreement by providing the WP with the certification described in section 8.03 of the WP agreement and providing the WP with documentation or other information for review.
• It agrees to comply with the documentation requirements of a WP in the WP agreement.
For more information on applying these rules, see section 9.02 of the WP agreement in
Revenue Procedure 2014-47, 2014-35 I.R.B. 393(as may be amended).
WP acting for indirect partners. A WP may act as a WP with respect to an indirect partner of the WP that is not a U.S. non-exempt recipient. However, a WP may act as a WP for an indirect partner that is a U.S. non-exempt recipient if the indirect partner is included in a passthrough partner's chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. A WP acting as a WP for an indirect partner is not required to forward to its withholding agent the documentation and the withholding statement of the passthrough partner and indirect partner that the WP would have otherwise been required to provide under the requirements of a nonwithholding foreign partnership. See Not acting as WP, later. However, a WP must provide the withholding agent with documentation and any other information from any passthrough partner whose direct or indirect partner, beneficiary, or owner is a U.S. non-exempt recipient unless the recipient is included in the passthrough partner's chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. If WP is making a payment that is a withholdable payment, the passthrough partner's withholding statement must meet the requirements of Treasury regulations section Revenue Procedure 2014-47, 2014-35 I.R.B. 393 (as may be amended).
Not acting as WP. A foreign partnership that is not acting as a WP is a nonwithholding foreign partnership. This occurs if a WP is not acting in that capacity for some or all of the amounts it receives from you.
You must treat payments made to a nonwithholding foreign partnership as made to the partners of the partnership. The partnership must provide you with a Form W-8IMY (with Part VIII completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the partners, and the information shown earlier under Withholding statement under Nonqualified Intermediaries.
Withholding Foreign Trusts
If you are making payments to a WT, you do not have to withhold if the WT is acting in that capacity. The WT must assume primary chapters 3 and 4 withholding responsibility for amounts that are distributed to, or included in the distributive share of, any direct beneficiary or owner and may assume primary chapters 3 and 4 withholding responsibility for certain of its indirect beneficiaries or owners. The WT must withhold the amount required to be withheld. A WT must provide you with a Form W-8IMY that certifies that the WT is acting in that capacity and provides all other information and certifications required by the form. The Form W-8IMY must contain the WT-EIN and GIIN (if applicable).
A WT can be either an FFI or an NFFE. An FFI (other than a retirement fund) that is a WT must be a participating FFI, a registered deemed-compliant FFI, or an FFI treated as a deemed-compliant FFI under an applicable Model 1 IGA that is subject to similar due diligence and reporting requirements with respect to its U.S. accounts as those applicable to a registered deemed-compliant FFI under Treasury regulations section Responsibilities of WT. The WT must withhold on the date it makes a distribution of a withholdable payment or an amount subject to chapter 3 withholding to a direct foreign beneficiary or owner. If the beneficiary's or owner's distributive share has not been distributed, the WT must withhold on the beneficiary's or owner's distributive share on the earlier of the date that the trust must mail or otherwise provide to the beneficiary or owner the statement required under section 6048(b) or the due date for furnishing the statement (whether or not the WT is required to furnish the statement). The WT may determine the amount of withholding based on a reasonable estimate of the beneficiary's or owner's distributive share of income subject to withholding for the year. The WT must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the due date (including extensions) for filing the WT's Forms 1042 and 1042-S for the calendar year, the WT may withhold and report any adjustments in the following calendar year. Form 1042 filing. The WT must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WT must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments. Form 1042-S reporting. The WT can elect to report payments made to its foreign direct beneficiaries or owners on a pooled basis for chapter 3 purposes rather than reporting payments made to each foreign direct beneficiary or owner in addition to reporting payments in a chapter 4 withholding rate pool to the extent the WT is permitted to do so based on its chapter 4 status. A WT can treat as its direct beneficiaries or owners those indirect beneficiaries or owners of the WT for which it applies joint account treatment or the agency option (described later). A WT must otherwise issue a Form 1042-S to each beneficiary or owner to the extent it is required to do so under the WT agreement. You may issue a single Form 1042-S for all payments you make to a WT other than payments for which the entity does not act as a WT. You may, however, have Form 1099 requirements for certain indirect beneficiaries or owners of a WT that are U.S. non-exempt recipients. Collective refund procedures. A WT may seek a refund of tax withheld under chapters 3 and 4 on behalf of its beneficiaries or owners when the WT has not issued a Form 1042-S to the beneficiaries or owners that received the payment that was subject to overwithholding. The beneficiaries or owners, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the WT. A WT may obtain a refund of tax withheld under chapter 4 to the extent permitted under the WT agreement. Reporting of U.S. beneficiaries or owners. If the WT is a grantor trust with U.S. owners, the WT is required to file Form 3520-A, Annual Information Return of a Foreign Trust with a U.S. Owner, and to provide statements to a U.S. owner, as well as each U.S. beneficiary who is not an owner and receives a distribution. If the WT is an FFI, it is required to report each of its U.S. accounts (or U.S. reportable accounts if a reporting Model 1 FFI) on Form 8966 consistent with its FATCA requirements or the requirements of an IGA. If the WT is an NFFE, WT must file Form 8966 to report any beneficiary or owner that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) if the NFFE is the beneficial owner of a withholdable payment received by the WT. The WT must also file a Form 8966 to report withholdable payments made to a passthrough beneficiary or owner for which the WT acts under the WT agreement that provides information on an account holder (or interest holder) that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) and that is the beneficial owner of the withholdable payment received by WT, unless the passthrough beneficiary or owner certifies to the WT that it is reporting on the account holder (or interest holder) pursuant to its U.S. account reporting requirements. The preceding sentence applies with respect to a passthrough beneficiary or owner to which WT applies the agency option or which has partners, beneficiaries, or owners that are indirect beneficiaries or owners of WT. In addition, if the WT is not a participating FFI, a registered deemed-compliant FFI, or a registered deemed-compliant Model 1 IGA FFI and is not required to report with respect to a U.S. beneficiary of WT on Form 3520-A, then the WT must report with respect to such beneficiary on Form 8966 as required in the WT agreement. A beneficiary for this purpose means a beneficiary that receives a distribution from the WT during the year or that is required to include an amount in gross income under sections 652(a) or 662(a) with respect to the WT. Joint account treatment. Under special procedures provided in the WT agreement, a WT may apply joint account treatment to a partnership or trust that is a direct beneficiary or owner of the WT. A WT that applies the joint account option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. These rules only apply to a partnership or trust that meets the following conditions: • It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust. • It is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI as defined in the WT agreement), an owner-documented FFI, an exempt beneficial owner, or an NFFE (other than a WP or WT). • It is a direct beneficiary or owner of the WT. • None of its partners, beneficiaries, or owners is a flow-through entity or intermediary. • None of the partnership's or trust's partners, beneficiaries, or owners is a U.S. person or is subject to withholding or reporting under chapter 4. • It agrees to make available upon request to the WT (or the WT's auditor) records that establish it has provided the WT with documentation for purposes of chapters 3 and 4 for all of its partners, beneficiaries, or owners. For more information on applying these rules, see section 9.01 of the WT agreement found in
(as may be amended).
Agency option. A WT may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the WT and to apply the provisions of the WT agreement to its partners, beneficiaries, or owners. A WT that applies the agency option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. A WT and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions:
• It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust.
• It is either a direct beneficiary or owner of the WT or an indirect beneficiary or owner of the WT that is a direct partner, beneficiary, or owner of a partnership or trust to which the WT also applies the agency option.
• It is an FFI that is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI as defined in the WT agreement), an owner-documented FFI, an NFFE, or an exempt beneficial owner.
• None of its partners, beneficiaries, or owners is a WT, WP, participating FFI, registered deemed-compliant FFI, registered deemed-compliant Model 1 IGA FFI (as defined in the WT agreement), or a qualified intermediary acting as an intermediary for a payment made by the WT to the partnership or trust.
• The WT may not act as a withholding foreign trust with respect to any direct or indirect beneficiary or owner of the partnership or trust that is a U.S. non-exempt recipient, unless the U.S. non-exempt recipient is a beneficiary or owner of an owner-documented FFI or passive NFFE to which the WT applies the agency option and is included in the WT's U.S. payee pool.
• It agrees to comply with the compliance procedures described in section 8.05 of the WT agreement by providing the WT with the certification described in section 8.03 of the WT agreement and providing the WT with documentation or other information for review.
• It agrees to comply with the documentation requirements of a WT in the WT agreement.
For more information on applying these rules, see section 9.02 of the WT agreement in
Revenue Procedure 2014-47, 2014-35 I.R.B. 393(as may be amended).
WT acting for indirect beneficiaries or owners. A WT may act as a WT with respect to an indirect beneficiary or owner of the WT that is not a U.S. non-exempt recipient. However, a WT may act as a WT for an indirect beneficiary or owner that is a U.S. non-exempt recipient if the indirect beneficiary or owner is included in a passthrough beneficiary's or owner's chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. A WT acting as a WT for an indirect beneficiary or owner is not required to forward to its withholding agent the documentation and the withholding statement of the passthrough beneficiary or owner and indirect beneficiary or owner that the WT would have otherwise been required to provide under the requirements of a nonwithholding foreign trust. See Not acting as WT, later. However, a WT must provide the withholding agent with documentation and any other information from any passthrough beneficiary or owner whose direct or indirect partner, beneficiary, or owner is a U.S. non-exempt recipient unless the recipient is included in the passthrough beneficiary's or owner's chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. If WT is making a payment that is a withholdable payment, the passthrough beneficiary's or owner's withholding statement must meet the requirements of Treasury regulations section Revenue Procedure 2014-47, 2014-35 I.R.B. 393 (as may be amended).
Not acting as WT. A foreign trust that is not acting as a WT is a nonwithholding foreign trust. This occurs if a WT is not acting in that capacity for some or all of the amounts it receives from you.
In most cases, you must treat payments made to a nonwithholding foreign trust as made to the beneficiaries of a simple trust or the owners of a grantor trust. The trust must provide you with a Form W-8IMY (with Part VIII completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the beneficiaries or owners, and the information shown earlier under Withholding statement under Nonqualified Intermediaries.
Standards of Knowledge for Purposes of Chapter 3
You must withhold in accordance with the presumption rules (discussed later) if you know or have reason to know that a withholding certificate or documentary evidence provided by a payee is unreliable or incorrect to establish the payee's status for chapter 3 purposes. If you rely on an agent to obtain documentation, you are considered to know, or have reason to know, the facts that are within the knowledge of your agent for this purpose.
Reason To Know
In general, you are considered to have reason to know that a claim of foreign status or of a reduced rate of withholding is incorrect if statements contained in the withholding certificate or other documentation, or other relevant facts of which you have knowledge, would cause a reasonably prudent person in your position to question the claims made.
For an obligation that is not a preexisting obligation (i.e., an obligation, including an account, held by an individual that is outstanding on June 30, 2014, or an obligation, including an account, held by an entity that is opened, executed, or issued before January 1, 2015), you have reason to know that an account holder's chapter 3 claim is unreliable or incorrect if any information contained in your account opening files or other account information conflicts with the account holder's claim. For an obligation other than a preexisting obligation, you will not be considered to have reason to know that a person's chapter 3 claim is unreliable or incorrect based on documentation collected for AML purposes until 30 days after the obligation is executed, or 30 days after the account is opened for such person, whichever is applicable.
Financial institutions, insurance companies, or brokers or dealers in securities have reason to know that documentation provided by a direct account holder is unreliable or incorrect only in the circumstances discussed next. If the documentation is considered unreliable or incorrect, you must get new documentation to support the payee's claimed status or may rely on the original documentation if you receive the additional statements and/or documentation discussed later and are a withholding agent described above with respect to a direct account holder (defined in Treasury regulations section 1.1471-3(c)(5)(i).
The circumstances, discussed next, also apply to other withholding agents. However, these withholding agents are not limited to these circumstances in determining if they have reason to know that documentation is unreliable or incorrect. These withholding agents cannot base their determination on the receipt of additional statements or documents. They need to get new documentation.
Withholding Certificates
You have reason to know that a Form W-8 provided by a direct account holder that is a foreign person is unreliable or incorrect if:
• The Form W-8 is incomplete with respect to any item on the form that is relevant to the claims made by the account holder;
• The Form W-8 contains any information that is inconsistent with the account holder's claim;
• The Form W-8 lacks information necessary to establish entitlement to a reduced rate of withholding, if a reduced rate is claimed; or
• You have information not contained on the form that is inconsistent with the claims made on the form.
The rules below apply to withholding agents that are financial institutions, insurance companies, or brokers or dealers in securities.
Limits on reason to know for preexisting obligations. With respect to a preexisting obligation (i.e., an obligation, including an account, held by an individual that is outstanding on June 30, 2014, or an obligation, including an account, held by an entity that is opened, executed, or issued before January 1, 2015), if you have documented the foreign status of an account holder for purposes of chapter 3 or 61 prior to July 1, 2014, you may continue to rely on that documentation. In addition, if you make a payment to a new entity account holder that you treat as a preexisting entity account under Notice 2014-33, you may apply the standards of knowledge in Treasury Regulations sections Notice 2014-59, 2014-44 I.R.B. 747. However, if you review documentation for an individual account holder claiming foreign status that contains a U.S. place of birth or if you are notified of a change in circumstances, the obligation will be treated as having a change in circumstances as of the date you review the documentation or receive the notification, and you will then have reason to know that the documentation is unreliable or incorrect. However, if you are reviewing documentation provided by an entity before January 1, 2015, you will not be required to treat the additional U.S. indicia added to Treasury Regulations section Notice 2014-59, 2014-44 I.R.B. 747.
Establishment of foreign status by certain withholding agents. You have reason to know that a Form W-8BEN or W-8BEN-E is unreliable or incorrect to establish a direct account holder's status as a foreign person if:
1. The Form W-8 has a current permanent residence address in the United States;
2. The Form W-8 has a current mailing address in the United States;
3. You have a current residence or current mailing address as part of your account information that is an address in the United States;
4. The account holder notifies you of a new residence or mailing address in the United States;
5. You have classified the account holder as a U.S. person in your account information; or
6. You have a current telephone number for the account holder in the United States and no telephone number for the account holder outside the United States (only to the extent described in Regulations section
You may, however, rely on a Form W-8 as establishing the account holder's foreign status if any of the following apply:
1. You receive the Form W-8BEN from an individual and:
a. You possess or obtain documentary evidence (that does not contain a U.S. address) that supports the claim of foreign status, and the individual provides you with a reasonable explanation in writing supporting the claim of foreign status;
b. If you make a payment outside the U.S. with respect to an offshore obligation and you possess or obtain documentary evidence establishing foreign status that does not contain a U.S. address;
c. With respect to an offshore obligation, if you classify the individual as a resident of the country where the obligation is maintained and you are required to report payments to the individual annually to the tax authority of the country where the obligation is maintained and that country has a tax treaty or information exchange agreement in effect with the United States; or
d. You have classified the account holder as a U.S person in your account information and you possess or obtain documentary evidence evidencing citizenship in a country other than the United States.
2. You receive the Form W-8BEN-E from an entity that is not a flow-through entity and:
a. You have in your possession or obtain documentation establishing foreign status that substantiates that the entity is organized or created under foreign law, or
b. With respect to an offshore obligation, if you classify the entity as a resident of the country where the obligation is maintained and you are required to report payments to the entity annually to the tax authority of the country where the obligation is maintained and that country has a tax treaty or information exchange agreement in effect with the United States.
3. The account holder (whether an individual or an entity) has provided standing instructions to make payments with respect to an offshore obligation to an address in, or an account maintained in, the United States, unless the account holder provides a reasonable explanation in writing that supports its foreign status or provides documentary evidence supporting its foreign status.
4. If an individual account holder provides a Form W-8BEN to establish the individual's foreign status, and you have, either on accompanying documentation or as part of your account information, an unambiguous indication of a place of birth for the individual in the United States, you may not rely on the Form W-8BEN unless you possess or obtain documentary evidence evidencing citizenship in a country other than the United States and either (i) a copy of the individual's Certificate of Loss of Nationality of the United States or (ii) a reasonable written explanation for the individual's renunciation of U.S. citizenship (or, under an applicable IGA, the reason the individual does not have a Certificate of Loss of Nationality of the United States despite relinquishing its U.S. citizenship), or the reason the individual did not obtain U.S. citizenship at birth.
Claim of reduced rate of withholding under treaty by certain withholding agents.
You have reason to know that a Form W-8BEN or W-8BEN-E provided by a direct account holder to claim a reduced rate of withholding under a treaty is unreliable or incorrect for purposes of establishing the account holder's residency in a treaty country if:
• The permanent residence address on the Form W-8 is not in the treaty country or the beneficial owner notifies you of a new permanent residence address that is not in the treaty country,
• The permanent residence address on the Form W-8 is in the treaty country but the withholding certificate (or your account information) contains a mailing address that is not in the treaty country,
• You have a current mailing address in your account information outside the treaty country, or
• The account holder has standing instructions for you to pay amounts from its account to an address or an account not in the treaty country.
You may, however, rely on a Form W-8 as establishing an account holder's claim of a reduced rate of withholding under a treaty if any of the following apply.
1. The permanent residence address is not in the treaty country and:
a. The account holder provides a reasonable explanation for the permanent residence address outside the treaty country, or
b. You possess or obtain documentary evidence described in Treasury regulations section
2. The mailing address is not in the treaty country and:
a. You possess or obtain documentary evidence described in Treasury regulations section
(c)(5)(i) (that does not contain an address outside the treaty country) supporting the beneficial owner's claim of residence in the treaty country,b. You possess or obtain documentation that establishes that the beneficial owner is an entity organized in a treaty country,
c. You know that the address outside the treaty country is a branch of the account holder that is a resident of the treaty country, or
d. You obtain a written statement from the beneficial owner that reasonably establishes its entitlement to treaty benefits.
3. You have instructions to pay amounts outside the treaty country and the account holder gives you a reasonable explanation, in writing, establishing residence in the applicable treaty country or you possess or obtain documentary evidence described in Treasury regulations section
(c)(5)(i) establishing the account holder's residence in the treaty country.
Documentary Evidence
You have reason to know that documentary evidence provided by a direct account holder to support a claim of foreign status is unreliable or incorrect if:
• The documentary evidence does not reasonably establish the identity of the person presenting the documentary evidence;
• The documentary evidence contains information that is inconsistent with the account holder's claim of a reduced rate of withholding; or
• You have account information that is inconsistent with the account holder's claim of a reduced rate of withholding, or the documentary evidence lacks information necessary to establish a reduced rate of withholding. For example, the documentary evidence does not contain, or is not supplemented by, statements regarding the derivation of the income or compliance with limitations on benefits provisions in the case of an entity claiming treaty benefits.
Establishment of foreign status.
You have reason to know that documentary evidence is unreliable or incorrect to establish a direct account holder's status as a foreign person if:
• For documentary evidence received prior to January 1, 2001, if you have actual knowledge that the account holder is a U.S. person or if you have a mailing or residence address for the account holder in the United States.
• For documentary evidence received after December 31, 2000, if you do not have a permanent residence address for the account holder, if you have classified the account holder as a U.S. person in your account information, if you have a current mailing or current permanent residence address (whether or not on the documentation) for the account holder in the United States, if the account holder notifies you of a new residence or mailing address in the United States, or if you have a current telephone number for the account holder in the United States and no telephone number for the account holder outside the United States.
• If the account holder is an individual and you have, either on the documentary evidence or as part of your account information, an unambiguous place of birth for the individual in the United States.
• With respect to an offshore obligation, the account holder has standing instructions directing you to pay amounts from the account to an address or account maintained in the United States.
You may, however, rely on documentary evidence as establishing an account holder's foreign status if any of the following apply.
1. The mailing or residence address or sole telephone number is in the United States, you receive the documentary evidence from an individual, and
a. You possess or obtain additional documentary evidence (that does not contain a U.S. address) supporting the claim of foreign status and a reasonable explanation in writing supporting the account holder's foreign status,
b. You obtain a Form W-8 that contains a permanent residence address and mailing address outside the United States (or, if a mailing address is inside the United States, the account holder provides a reasonable explanation in writing supporting the account holder's foreign status), or
c. For a payment made with respect to an offshore obligation, if you classify the individual as a resident of the country where the obligation is maintained, you are required to report a payment made to the individual annually on a tax information statement filed with that country's tax authority as part of the resident reporting requirements, and that country has a tax information exchange agreement or income tax treaty in effect with the United States.
2. The mailing or residence address or sole telephone number is in the United States, you receive the documentary evidence from an entity (other than a flow-through entity) and:
a. You possess or obtain documentation to substantiate that the entity is actually organized or created under the laws of a foreign country,
b. You obtain a valid Form W-8 that contains a permanent residence address and mailing address outside the United States (or, if a mailing address is inside the United States, the account holder provides a reasonable explanation in writing supporting the account holder's foreign status), or
c. For a payment made with respect to an offshore obligation, if you classify the entity as a resident of the country where the obligation is maintained and you are required to report a payment made to the entity annually on a tax information statement filed with that country's tax authority as part of the resident reporting requirements, and that country has a tax information exchange agreement or income tax treaty in effect with the United States.
3. You have instructions to pay amounts to an address or an account in the United States and the account holder provides you with a reasonable explanation, in writing, that supports the account holder's foreign status or a valid beneficial owner withholding certificate claiming foreign status.
4. You have an unambiguous place of birth in the United States for an individual account holder and you possess or obtain documentary evidence demonstrating the individual's citizenship in a country other than the United States and a copy of the individual's Certificate of Loss of Nationality of the United States. Alternatively, you may treat such an individual as a foreign person if you obtain a valid beneficial owner withholding certificate that establishes the individual's foreign status, documentary evidence evidencing citizenship in a country other than the United States, and a reasonable explanation in writing of the individual's renunciation of U.S. citizenship (or, under an applicable IGA, the reason the individual does not have a Certificate of Loss of Nationality of the United States despite relinquishing U.S. citizenship) or the reason the individual did not obtain U.S. citizenship at birth.
Claim of reduced rate of withholding under treaty.
You have reason to know that documentary evidence provided by a direct account holder to claim a reduced rate of withholding under a treaty is unreliable or incorrect for purposes of establishing the account holder's residency in a treaty country if:
• You have a mailing or residence address for the account holder that is outside the applicable treaty country,
• You have no permanent residence for the account holder, or
• The account holder has standing instructions for you to pay amounts from its account to an address or account not in the treaty country.
You may, however, rely on documentary evidence as establishing an account holder's claim of a reduced rate of withholding under a treaty if any of the following apply.
1. The mailing or residence address is outside the treaty country and:
a. You possess or obtain additional documentary evidence supporting the account holder's claim of residence in the treaty country (and the documentary evidence does not contain an address outside the treaty country, a P.O. box, an in-care-of address, or the address of a financial institution),
b. You possess or obtain documentary evidence that establishes that the account holder is an entity organized in a treaty country, or
c. You obtain a valid Form W-8 that contains a permanent residence address and a mailing address in the applicable treaty country.
2. You have instructions to pay amounts outside the treaty country and the account holder gives you a reasonable explanation, in writing, establishing residence in the applicable treaty country or a valid beneficial owner withholding certificate that contains a permanent residence address and a mailing address in the applicable treaty country.
Indirect Account Holders' Chapter 3 Status
A withholding agent that receives documentation from a payee through an NQI, a flow-through entity, or a U.S. branch of a foreign bank or insurance company subject to U.S. or state regulatory supervision or a territory financial institution (other than a U.S. branch treated as a U.S. person) has reason to know that the documentary evidence is unreliable or incorrect for purposes of a claim of foreign status or a treaty claim if a reasonably prudent person in the withholding agent's position would question the claims made. This standard requires, but is not limited to, compliance with the following rules.
Withholding statement. You must review the withholding statement provided with Form W-8IMY and may not rely on information in the statement to the extent the information does not support the claims made for a payee. You may not treat a payee as a foreign person if a U.S. address is provided for the payee. You may not treat a person as a resident of a country with which the United States has an income tax treaty if the address for the person is outside the treaty country.
You may, however, treat a payee as a foreign person and may treat a foreign person as a resident of a treaty country if the withholding statement is accompanied by a valid withholding certificate and documentary evidence or a reasonable explanation is provided, by the nonqualified intermediary, flow-through entity, or U.S. branch supporting the payee's foreign status or residency in a treaty country.
Withholding certificate. If you receive a Form W-8 for a payee in association with a Form W-8IMY, you must review each Form W-8 and verify that the information is consistent with the information on the withholding statement. If there is a discrepancy, you may rely on the Form W-8, if valid, and instruct the NQI, flow-through entity, or U.S. branch to correct the withholding statement, or, alternatively, you may apply the presumption rules, discussed later in Presumption Rules, to the payee.
If you choose to rely on the withholding certificate, you must, in addition to instructing the NQI, flow-through entity, or U.S. branch to correct the withholding statement, instruct the NQI, flow-through entity, or U.S. branch to confirm that it does not know or have reason to know that the withholding certificate is unreliable or inaccurate.
Documentary evidence. If you receive documentary evidence for a payee in association with a Form W-8IMY, you must review the documentary evidence provided by the NQI, flow-through entity, or U.S. branch to determine that there is no obvious indication that the payee is a U.S. person subject to Form 1099 reporting or that the documentary evidence does not establish the identity of the person who provided the documentation (for example, the documentary evidence does not appear to be an identification document).
Standards of Knowledge for Purposes of Chapter 4
If you make a withholdable payment, you must withhold in accordance with the presumption rules (discussed later) if you know or have reason to know that a withholding certificate or documentary evidence provided by the payee is unreliable or incorrect to establish a payee's chapter 4 status. If you rely on an agent to obtain documentation, you are considered to know, or have reason to know, the facts that are within the knowledge of your agent for this purpose.
Notification by the IRS
If you receive notification from the IRS that a claim of status as a U.S. person, a participating FFI, a deemed-compliant FFI, or other entity entitled to a reduced rate of withholding under chapter 4 is incorrect, you are considered to have knowledge that such a claim is incorrect beginning 30 days after you receive the notice.
GIIN Verification
If you have received a Form W-8BEN-E from an entity payee that is claiming chapter 4 status as a participating FFI or registered deemed-compliant FFI, you must obtain and verify the entity's GIIN against the published IRS FFI list. The IRS FFI list can be found at http://www.irs.gov/Businesses/Corporations/FFI-List-Resources-Page. You will have reason to know that such payee is not such a financial institution if the payee's name (including a name reasonably similar to the name the withholding agent has on file for the payee) and GIIN do not appear on the most recently published IRS FFI list within 90 days of the date that the claim is made.
If you receive a Form W-8BEN-E from an entity payee and the form contains "Applied for" in the box for the GIIN, the payee must provide you its GIIN within 90 days of providing the form. A Form W-8BEN-E from such payee that does not include a GIIN, or includes a GIIN that does not appear on the published IRS FFI list, will be invalid for chapter 4 purposes 90 days after the date the form is provided.
The GIIN that you must confirm is the GIIN assigned to the FFI identifying its country of residence for tax purposes (or place of organization if the FFI has no country of residence), except as otherwise provided.
Branches and disregarded entities. If you make a withholdable payment to a branch of, or an entity that is disregarded as an entity separate from, a participating FFI or registered deemed-compliant FFI located outside of the FFI's country of residence or organization, the GIIN you must verify is the GIIN assigned to the FFI, identifying the country in which the branch or disregarded entity receiving the payment is located. You must identify a GIIN associated with a disregarded entity to the extent provided in the Instructions to Form W-8BEN-E.
Limited branches. You will have reason to know that a withholdable payment is made to a limited branch (including a disregarded entity) of a participating FFI or registered deemed-compliant FFI when you are directed to make the payment to an address in a jurisdiction other than that of the participating FFI or registered deemed-compliant FFI (or branch of, or disregarded entity wholly owned by, such FFI) that is identified as the FFI (or branch of, or disregarded entity wholly owned by, such FFI) that is supposed to receive the payment and for which the FFI's GIIN is not confirmed as described in the preceding paragraphs.
Direct reporting NFFEs. If you make a withholdable payment to a direct reporting NFFE, you must obtain and verify the direct reporting NFFE's GIIN against the published IRS FFI list.
Transitional rule for sponsoring entities. If you make a withholdable payment prior to January 1, 2017, to a registered deemed-compliant FFI that is a sponsored FFI or an NFFE that is a sponsored direct reporting NFFE, the sponsored FFI or sponsored direct reporting NFFE may provide to you the GIIN of the sponsoring entity if the sponsored FFI or sponsored direct reporting NFFE has not obtained its own GIIN.
For payments on or after January 1, 2017, you must obtain the GIINs of both the sponsored FFI or sponsored direct reporting NFFE and its sponsoring entity. If you already have a withholding certificate on file from a sponsored FFI or sponsored direct reporting NFFE that includes the GIIN of the sponsoring entity, you may obtain the GIIN of the sponsored FFI or sponsored direct reporting NFFE by oral or written confirmation (including by e-mail). See Notice 2015-66, 2015-41 I.R.B. 541, available at http://www.irs.gov/irb/2015-41_IRB/ar09.html.
Sponsored, closely held investment vehicles. If you make a withholdable payment to a certified deemed-compliant FFI that is a sponsored, closely held investment vehicle, you must obtain a GIIN for the sponsoring entity and verify it against the published IRS FFI list.
Reason To Know
In general, you have reason to know that a claim of chapter 4 status is unreliable or incorrect if your knowledge of relevant facts or statements contained in the withholding certificate or other documentation is such that a reasonably prudent person would question the claim being made. For an obligation other than a preexisting obligation (i.e., an obligation other than an obligation, including an account, held by an individual that is outstanding on June 30, 2014, or an obligation, including an account, held by an entity that is opened, executed, or issued before January 1, 2015), you have reason to know that a claim of chapter 4 status is unreliable or incorrect if any information contained in the account opening files or other customer account files, including documentation collected for AML due diligence purposes, conflicts with the chapter 4 status being claimed. You will not have reason to know that a claim of chapter 4 status is unreliable or incorrect based on documentation collected for AML due diligence purposes until the date that is 30 days after the obligation is created.
If you have classified an entity as engaged in a particular type of business based on your records, such as through the use of a standardized industry coding system, you have reason to know that the chapter 4 status claimed by the entity is unreliable or incorrect if the entity's claim conflicts with the withholding agent's classification of the entity's business type.
Withholding Certificates
In general, you have reason to know that a withholding certificate from a person is unreliable or incorrect with respect to claim of chapter 4 status if:
• The withholding certificate is incomplete with respect to any item on the certificate that is relevant to the claim made by the person;
• The withholding certificate contains any information that is inconsistent with the person's claim;
• You have other account information that is inconsistent with the person's claim;
• The withholding certificate lacks information necessary to establish entitlement to an exemption from withholding for chapter 4 purposes; or
• With respect to an alternative certification under an applicable IGA included with a withholding certificate, if you know or have reason to know the certification is incorrect.
If you obtain a withholding certificate associated with a withholdable payment to a participating FFI, a registered deemed-compliant FFI, a sponsoring entity, or a sponsored FFI, you do not need to apply the standards of knowledge described earlier with respect to an account holder's claim of foreign status if you have confirmed the FFI's GIIN on the current published IRS FFI list within 90 days of receipt of the withholding certificate.
CAUTION: A withholding certificate used for chapter 4 purposes must also include the information required for chapter 3 purposes (i.e., the entity's tax classification) with regard to a payment that is a reportable amount under Treasury regulations section • The documentary evidence does not reasonably establish the identity of the person presenting the documentary evidence; • The documentary evidence contains information that is inconsistent with the person's claim as to its chapter 4 status; • You have other account information that is inconsistent with the person's chapter 4 status; or • The documentary evidence lacks information necessary to establish the person's chapter 4 status.
For standards of knowledge applicable to specific types of documentary evidence, see Treasury regulations section
.Payee Documentation from Intermediaries or Flow-Through Entities
In general. If you receive documentation for a payee of a withholdable payment through one or more intermediaries or flow-through entities, you must, in addition to determining each such entity's chapter 4 status when required for chapter 4 purposes, review all documentation obtained with respect to the payee. Under certain circumstances, you may rely on a withholding certificate that has been collected from the payee through an electronic system maintained by an account holder that is an NQI, NWP, or NWT. See http://www.irs.gov/irb/2016-06_IRB/ar09.html, for the conditions for relying on such withholding certificates. When withholding under chapter 4 is not applied based on the chapter 4 status of an intermediary or flow-through entity, you are not required to obtain documentation for a payee through an intermediary or flow-through entity that is a QI, WP, or WT or a payee that is included in a chapter 4 withholding rate pool of U.S. payees.
Withholding statement. You must review the withholding statement provided and may not rely on information in the statement to the extent the information does not support the claims made regarding the chapter 4 status of the payee. You may not treat a person as a foreign person if a U.S. address is provided, unless the withholding statement is accompanied by a valid withholding certificate and documentary evidence establishing foreign status.
Withholding certificate. You must review each withholding certificate, written statement (as permitted for chapter 4 purposes with respect to certain payments to entities), or documentary evidence, and must verify that the information is consistent with the information on the withholding statement. If there is a discrepancy, you may rely on the documentation provided such documentation is valid and the intermediary or flow-through entity does not indicate that the documentation is unreliable or incorrect, or, alternatively, you may apply the presumption rules. If you choose to rely on the documentation, you must instruct the intermediary or flow-through entity to correct the withholding statement and confirm that the intermediary or flow-through entity does not know or have reason to know that the documentation is unreliable or incorrect. See Treasury regulations section 1.1471-3(e)(4)(vii) or, if you are a reporting Model 1 FFI or a reporting Model 2 FFI, the requirements of the applicable IGA.
Presumption Rules
If you cannot reliably associate a payment with valid documentation, you must apply certain presumption rules or you may be liable for tax, interest, and penalties. If you comply with the presumption rules, you are not liable for tax, interest, and penalties even if the rate of withholding that should have been applied based on the payee's actual status is different from that presumed.
The presumption rules apply to determine the status of the person you pay as a U.S. or foreign person and other relevant characteristics, such as whether the payee is a beneficial owner or intermediary, and whether the payee is an individual, corporation, partnership, or trust. In the case of a withholdable payment you make to an entity, you must apply the presumption rules for chapter 4 purposes to treat the entity as a nonparticipating FFI when you cannot reliably associate the payment with documentation permitted for chapter 4 purposes. You are not permitted to apply a reduced rate of chapter 3 withholding based on a payee's presumed status if documentation is required to establish a reduced rate of withholding. For example, if the payee of interest is presumed to be a foreign person, you may not apply the portfolio interest exception or a reduced rate of withholding under a tax treaty since both exceptions require documentation.
If you rely on your actual knowledge about a payee's status and withhold an amount less than that required under the presumption rules or do not report a payment that is subject to reporting under the presumption rules, you may be liable for tax, interest, and penalties. You should, however, rely on your actual knowledge if doing so results in withholding an amount greater than would apply under the presumption rules or in reporting an amount that would not be subject to reporting under the presumption rules.
In the case of a participating FFI or registered deemed-compliant FFI that cannot report with respect to an individual account holder, the FFI must classify the account holder under the requirements (as applicable) of the FFI agreement, Treasury regulations section -------------------------------------------
For the
presumption See regulations
rules related to: section:
-------------------------------------------
Payee's status 1.1441-1(b)(3);
1.6049-5(d);
1.1471-3(f)
(chapter 4 payees)
-------------------------------------------
Effectively 1.1441-4(a)(2)
connected income
-------------------------------------------
Partnership and its 1.1441-5(d);
partners 1.1446-1(c)(3)
-------------------------------------------
Estate or trust and 1.1441-5(e)(6)
its beneficiaries or
owner
-------------------------------------------
Foreign 1.1441-9(b)(3)
tax-exempt
organizations
(including private
foundations)
-------------------------------------------
Presumption Rules for Chapter 4
If you determine that you are making a withholdable payment to an entity and cannot reliably associate the payment with a valid Form W-8 or other documentation that you are permitted to rely upon and that is sufficient to determine the chapter 4 status of the entity, you are required to treat the entity payee as a nonparticipating FFI such that withholding applies. For purposes of determining whether the payment is made to an individual or an entity, or to a U.S. person or a foreign person, if you cannot reliably associate a payment with a valid Form W-8 or other documentation that you are permitted to rely upon and from which you are able to determine the payee's status as an individual or entity, or U.S. or foreign status, you must apply the presumption rules of Treasury regulations section
(b)(3)(ii) to determine the payee's status as an individual or entity and Treasury regulations section (b)(3)(iii) to determine the payee's U.S. or foreign status.If you are making a withholdable payment to joint payees and cannot reliably associate the payment with valid documentation from each payee and each of the payees appears to be an individual, the payment is presumed made to an unidentified U.S. person. If any of the joint payees does not appear, by its name or other information in its account file, to be an individual, then the entire payment is treated as made to a nonparticipating FFI. However, if you receive from one of the joint payees a Form W-9, the payment shall be treated as made to that payee.
This section explains how to determine if a payment is subject to chapter 3 withholding or is a withholdable payment.
Amounts Subject to Chapter 3 Withholding
A payment is subject to chapter 3 withholding if it is from sources within the United States, and it is either:
• Fixed or determinable annual or periodical (FDAP) income, or
• Certain gains from the disposition of timber, coal, and iron ore, or from the sale or exchange of patents, copyrights, and similar intangible property.
In addition, a payment is subject to chapter 3 withholding if withholding is specifically required, even though it may not constitute U.S. source income or FDAP income. For example, corporate distributions may be subject to chapter 3 withholding even though a part of the distribution may be a return of capital or capital gain that is not FDAP income.
Amounts not subject to chapter 3 withholding. The following amounts are not subject to chapter 3 withholding.
• Portfolio interest paid on obligations that meet certain requirements. See
Interest,later.
• Bank deposit interest that is not effectively connected with the conduct of a U.S. trade or business. See Interest, later.
• Original issue discount on certain short-term obligations. See Original issue discount, later.
• Nonbusiness gambling income of a nonresident alien playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. See Gambling winnings, later.
• Amounts paid as part of the purchase price of an obligation sold between interest payment dates. See Interest, later.
• Original issue discount paid on the sale of an obligation other than a redemption. See Original issue discount, later.
• Insurance premiums paid on a contract issued by a foreign insurer.
Amounts Subject to Chapter 4 Withholding
Beginning on July 1, 2014, a withholding agent must withhold on a payment of U.S. source FDAP income that is a withholdable payment to which an exception does not apply under chapter 4.
Withholdable payment means:
• A payment of U.S. source FDAP income, and
• For sales or other dispositions occurring after December 31, 2018, gross proceeds from the sale or other disposition of property of a type that can produce interest or dividends or dividends that are U.S. source FDAP income.
U.S. source FDAP income means:
• U.S. source FDAP income under chapter 3, as modified by chapter 4, and
• Certain gains from the disposition of timber, coal, and iron ore, or from the sale or exchange of patents, copyrights, and similar intangible property.
U.S. source FDAP income for purposes of chapter 4 is similar to U.S. source FDAP income for purposes of chapter 3, but with the modifications described in
Fixed or Determinable Annual or Periodical Income (FDAP),later.
Amounts not subject to withholding under chapter 4. The following amounts are not subject to withholding under chapter 4.
• Interest or original issue discount from a short-term obligation.
• Payments of U.S. source FDAP income made prior to January 1, 2017, with respect to an offshore obligation.
• Payments made prior to January 1, 2017, by a secured party with respect to collateral that secures certain transactions under certain collateral arrangements.
• Withholdable payments made prior to July 1, 2016, with respect to a preexisting obligation for which a withholding agent does not have documentation indicating that the payee is a nonparticipating FFI.
• Payments made under a grandfathered obligation (e.g., obligations outstanding on July 1, 2014).
Source of Income
In most cases, income is from U.S. sources if it is paid by domestic corporations, U.S. citizens or resident aliens, or entities formed under the laws of the United States or a state. Income is also from U.S. sources if the property that produces the income is located in the United States or the services for which the income is paid were performed in the United States. A payment is treated as being from sources within the United States if the source of the payment cannot be determined at the time of payment, such as fees for personal services paid before the services have been performed. Other source rules are summarized in Chart B and explained in detail in the separate discussions under Withholding on Specific Income, later.
In most cases, interest on an obligation of a foreign corporation or foreign partnership is foreign-source income. If the entity is engaged in a trade or business in the United States during its tax year, interest paid by such entity is treated as from U.S. sources only if the interest is paid by a U.S. trade or business conducted by the entity or is allocable to income that is treated as effectively connected with the conduct of a U.S. trade or business. This applies to a foreign partnership only if it is predominantly engaged in the active conduct of a trade or business outside the United States.
Guarantee income. Certain amounts paid, directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are from U.S. sources. The amounts must be paid by one of the following:
1. A noncorporate U.S. resident or a U.S. corporation for the provision of a guarantee of the resident or corporation, or
2. Any foreign person for the provision of a guarantee if the payment of income is effectively connected, or treated as effectively connected, with the conduct of a U.S. trade or business.
Personal service income (for purposes of chapter 3 withholding).
If the income is for personal services performed in the United States, it is from U.S. sources. The place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer.
However, under certain circumstances, payment for personal services performed in the United States is not considered income from sources within the United States. For information on this exception, see Pay for Personal Services Performed, later.
If the income is for personal services performed partly in the United States and partly outside the United States, you must make an accurate allocation of income for services performed in the United States based on the facts and circumstances. In most cases, you make this allocation on a time basis. That is, U.S. source income is the amount that results from multiplying the total amount of pay by the following fraction:
Number of days services are performed in the
United States
--------------------------------------------
Total number of days of service for which
compensation is paid
Multi-year compensation.
Generally, the source of multi-year compensation is determined on a time basis over the period to which the compensation is attributable. Multi-year compensation is compensation that is included in the taxable income of a recipient in one tax year but that is attributable to a period that includes two or more tax years. The determination of the period to which the compensation is attributable, for purposes of determining its source, is based on the facts and circumstances of each case. For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Where determining the source of multi-level compensation on a time basis is appropriate, the amount of compensation treated as from U.S. sources is figured by multiplying the total multi-year compensation by a fraction. The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that labor or personal services were performed in the United States in connection with the project. The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that labor or personal services were performed in connection with the project.
Employees. If the services are performed partly in the United States and partly outside the United States by an employee, the allocation of pay, other than certain fringe benefits, is determined on a time basis. The following fringe benefits are sourced on a geographical basis as shown in the following list.
• Housing -- employee's main job location.
• Education -- employee's main job location.
• Local transportation -- employee's main job location.
• Tax reimbursement -- jurisdiction imposing tax.
• Hazardous or hardship duty pay -- location of pay zone.
• Moving expense reimbursement -- employee's new main job location.
For information on what is included in these benefits, see Regulations section
(b)(2)(ii)(D).An employee's main job location (principal place of work) is usually the place where the employee spends most of his or her working time. If there is no one place where most of the work time is spent, the main job location is the place where the work is centered, such as where the employee reports for work or is otherwise required to base his or her work.
An employee can use an alternative basis based on facts and circumstances, rather than the time or geographical basis. The employee, not the employer, must demonstrate that the alternative basis more properly determines the source of the pay or fringe benefits.
Territorial limits. Wages received for services rendered inside the territorial limits of the United States and wages of an alien seaman earned on a voyage along the coast of the United States are regarded as from sources in the United States. Wages or salaries for personal services performed in a mine or on an oil or gas well located or being developed on the continental shelf of the United States are treated as from sources in the United States.
Income from the performance of services directly related to the use of a vessel or aircraft is treated as derived entirely from sources in the United States if the use begins and ends in the United States. This income is subject to withholding if it is not effectively connected with a U.S. trade or business. If the use either begins or ends in the United States, see Transportation income, later.
Crew members. Income from the performance of services by a nonresident alien in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession is not income from U.S. sources.
Multi-level marketing. Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable.
Scholarships, fellowships, and grants. Scholarships, fellowships, and grants are sourced according to the residence of the payer. Those made by entities created or domiciled in the United States are generally treated as income from sources within the United States. However, see Activities outside the United States, next. Those made by entities created or domiciled in a foreign country are treated as income from foreign sources.
Activities outside the United States. A scholarship, fellowship, grant, targeted grant, or an achievement award received by a nonresident alien for activities conducted outside the United States is treated as foreign source income.
Pension payments. The source of pension payments is determined by the part of the distribution that constitutes the compensation element (employer contributions) and the part that constitutes the earnings element (the investment income).
The compensation element is sourced the same as compensation from the performance of personal services. The part attributable to services performed in the United States is U.S. source income, and the part attributable to services performed outside the United States is foreign source income.
Employer contributions to a defined benefit plan covering more than one individual are not made for the benefit of a specific participant, but are made based on the total liabilities to all participants. All funds held under the plan are available to provide benefits to any participant. If the payment is from such a plan, you can use the method in Revenue Procedure 2004-37 to allocate the payment to sources in and out of the United States. Revenue Procedure 2004-37, 2004-26 I.R.B.1099, is available at http://www.irs.gov/irb/2004-26_IRB/ar08.html.
The earnings part of a pension payment is U.S. source income if the trust is a U.S. trust.
Chart B. Summary of Source Rules for FDAP Income
----------------------------------------------------
THEN the source of that
IF you have: income is determined by:
----------------------------------------------------
Pay for personal services Where the services are
performed
----------------------------------------------------
Dividends The type of corporation
(U.S. or foreign)
----------------------------------------------------
Interest The residence of the
----------------------------------------------------
Rents Where the property is
located
----------------------------------------------------
Royalties -- Patents,
copyrights, etc. Where the property is
----------------------------------------------------
Royalties -- Natural Where the property is
resources located
----------------------------------------------------
Pensions: Distributions Where the services were
attributable to performed while a
contributions nonresident alien
----------------------------------------------------
Pensions: Investment
earnings on contributions The location of pension
----------------------------------------------------
Scholarships and In most cases, the
fellowship grants residence of payer
----------------------------------------------------
Guarantee of The residence of the
indebtedness or whether the payment
effectively connected
U.S. trade or business
----------------------------------------------------
Fixed or Determinable Annual or Periodical Income (FDAP)
FDAP income is all income except:
• Gains from the sale of property (including market discount and option premiums but not including original issue discount), and
• Items of income excluded from gross income without regard to U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income.
The following items are examples of FDAP income.
• Compensation for personal services.
• Dividends, including dividend equivalent payments.
• Interest.
• Original issue discount.
• REMIC excess inclusion income.
• Pensions and annuities.
• Alimony.
• Real property income, such as rents, other than gains from the sale of real property.
• Royalties.
• Taxable scholarships and fellowship grants.
• Other taxable grants, prizes, and awards.
• A sales commission paid or credited monthly.
• A commission paid for a single transaction.
• The distributable net income of an estate or trust that is FDAP income and must be distributed currently, or has been paid or credited during the tax year.
• FDAP income distributed by a partnership that, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner.
• Taxes, mortgage interest, or insurance premiums paid to or for the account of, a nonresident alien landlord by a tenant under the terms of a lease.
• Publication rights.
• Prizes awarded to nonresident alien artists for pictures exhibited in the United States.
• Purses paid to nonresident alien boxers for prize fights in the United States.
• Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States.
Payments for the following purposes are examples of payments that are not withholdable payments.
• Services (including wages and other forms of employee compensation (such as stock options)).
• The use of property.
• Office and equipment leases.
• Software licenses.
• Transportation.
• Freight.
• Gambling winnings.
• Awards, prizes and scholarships.
• Interest on outstanding accounts payable arising from the acquisition of goods or services.
Installment payments.
Income can be FDAP income whether it is paid in a series of repeated payments or in a single lump sum. For example, $5,000 in royalty income would be FDAP income whether paid in 10 payments of $500 each or in one payment of $5,000.
Insurance proceeds. Income derived by an insured nonresident alien from U.S. sources upon the surrender of, or at the maturity of, a life insurance policy, is FDAP income and is subject to chapter 3 withholding and is a withholdable payment. This includes income derived under a life insurance contract issued by a foreign branch of a U.S. life insurance company. The proceeds are income to the extent they exceed the cost of the policy.
However, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual before death (accelerated death benefits) may not be subject to tax. This also applies to certain payments received for the sale or assignment of any part of the death benefit under contract to a viatical settlement provider. See Publication 525, Taxable and Nontaxable Income, for more information.
Racing purses (for purposes of chapter 3 withholding). Racing purses are FDAP income and racetrack operators must withhold 30% on any purse paid to a nonresident alien racehorse owner in the absence of definite information contained in a statement filed together with a Form W-8 that the owner has not raced, or does not intend to enter, a horse in another race in the United States during the tax year. If available information indicates that the racehorse owner has raced a horse in another race in the United States during the tax year, then the statement and Form W-8 filed for that year are ineffective. The owner may be exempt from withholding of tax at 30% on the purses if the owner gives you Form W-8ECI, which provides that the income is effectively connected with the conduct of a U.S. trade or business and that the income is includible in the owner's gross income.
Covenant not to compete. Payment received for a promise not to compete is generally FDAP income. Its source is the place where the promisor forfeited his or her right to act. Amounts paid to a nonresident alien for his or her promise not to compete in the United States are subject to chapter 3 withholding and are withholdable payments.
Withholding on Specific Income
Different kinds of income are subject to different withholding requirements.
Effectively Connected Income
In most cases, when a foreign person engages in a trade or business in the United States, all income from sources in the United States connected with the conduct of that trade or business is considered effectively connected with a U.S. business. FDAP income may or may not be effectively connected with a U.S. business. For example, effectively connected income includes rents from real property if the alien chooses to treat that income as effectively connected with a U.S. trade or business.
The factors to be considered in establishing whether FDAP income and similar amounts are effectively connected with a U.S. trade or business include:
• Whether the income is from assets used in, or held for use in, the conduct of that trade or business; or
• Whether the activities of that trade or business were a material factor in the realization of the income.
Income from securities.
There is a special rule determining whether income from securities is effectively connected with the active conduct of a U.S. banking, financing, or similar business.
If the foreign person's U.S. office actively and materially participates in soliciting, negotiating, or performing other activities required to arrange the acquisition of securities, the U.S. source interest or dividend income from the securities, gain or loss from their sale or exchange, income or gain economically equivalent to such amounts, or amounts received for providing a guarantee of indebtedness, is attributable to the U.S. office and is effectively connected income.
Withholding exemption. In most cases, you do not need to withhold tax on income for purposes of chapter 3 or 4 if you receive a Form W-8ECI on which a foreign payee represents that:
• The foreign payee is the beneficial owner of the income,
• The income is effectively connected with the conduct of a trade or business in the United States, and
• For purposes of chapter 3 withholding, the income is includible in the payee's gross income.
This withholding exemption applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation). The exemption does not apply, however, to:
1. Pay for personal services performed by an individual (for purposes of chapter 3),
2. Effectively connected taxable income of a partnership that is allocable to its foreign partners (see Partnership Withholding on Effectively Connected Income, later),
3. Income from the disposition of a U.S. real property interest (see U.S. Real Property Interest, later), or
4. Payments to a foreign corporation for personal services if all of the following apply:
a. The foreign corporation otherwise qualifies as a personal holding company for income tax purposes,
b. The foreign corporation receives amounts under a contract for personal services of an individual whom the corporation has no right to designate, and
c. 25% or more in value of the outstanding stock of the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform, or may be designated as the one to perform, the services called for under the contract.
Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding for chapter 4 purposes. You do not need to withhold tax under chapter 4 if you receive a Form W-8ECI on which a foreign payee makes the representations described in
Withholding exemptions,earlier.
Notional principal contract income. Certain payments attributable to a notional principal contract are not subject to withholding regardless of whether a Form W-8ECI is provided. However, specified notional principal contract income (described later under Dividend equivalent payments) is subject to withholding.
Income from a notional principal contract is subject to reporting on Form 1042-S if it is effectively connected with the conduct of a trade or business in the United States. You must treat the income as effectively connected with a U.S. trade or business if you pay the income to, or to the account of, a qualified business unit (a branch) of a foreign person located in the United States or a qualified business unit located outside the United States and you know, or have reason to know, the income is effectively connected with the conduct of a U.S. trade or business. You do not need to treat notional principal contract income as effectively connected if you receive a Form W-8BEN-E that represents that the income is not effectively connected with the conduct of a U.S. trade or business or if the payee provides a representation in a master agreement or in the confirmation on the particular notional principal contract transaction that the payee is a U.S. person or a non-U.S. branch of a foreign person.
Income paid to U.S. branch of foreign bank or insurance company. A payment to a U.S. branch of a foreign bank or a foreign insurance company that is subject to U.S. regulation by the Federal Reserve or state insurance authorities is presumed to be effectively connected with the conduct of a trade or business in the United States if you have an EIN for the branch, unless the branch provides a Form W-8BEN-E or Form W-8IMY for the income. If a U.S. branch of a foreign bank or insurance company receives income that the payer did not withhold upon because of the presumption that the income was effectively connected with the U.S. branch's trade or business, the U.S. branch is required to withhold on the income if it is in fact not effectively connected with the conduct of its trade or business in the United States. Withholding is required whether the payment was collected on behalf of other persons or on behalf of another branch of the same entity.
Income Not Effectively Connected
This section discusses the specific types of income that are subject to chapter 3 withholding and where withholding under chapter 4 is required. The income codes contained in this section correspond to the income codes for 2016 used on Form 1042-S (discussed later).
For purposes of chapter 3, you must withhold tax at the statutory rates shown in Chart C unless a reduced rate or exemption under a tax treaty applies. For U.S. source gross income that is not effectively connected with a U.S. trade or business, the rate is usually 30%. In most cases, you must withhold the tax at the time you pay the income to the foreign person. See When to withhold, earlier.
Interest
Interest from U.S. sources paid to foreign payees is subject to chapter 3 withholding and is a withholdable payment except when the interest is paid with respect to a grandfathered obligation or another exemption under chapter 4 applies. When making a payment on an interest bearing obligation, you must withhold on the gross amount of stated interest payable on the interest payment date, even if the payment or a part of the payment may be a return of capital rather than interest.
A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is treated the same as the interest on the transferred security. Use Income Code 33 to report these substitute payments.
Interest paid by U.S. obligors--general (Income Code 1). With specific exceptions, such as portfolio interest (for purposes of chapter 3), you must withhold on interest paid or credited on bonds, debentures, notes, open account indebtedness, governmental obligations, certain deferred payment arrangements (as provided in section 483 of the Internal Revenue Code) or other evidences of indebtedness of U.S. obligors. U.S. obligors include the U.S. Government or its agencies or instrumentalities, any U.S. citizen or resident, any U.S. corporation, and any U.S. partnership.
If, in a sale of a corporation's property, payment of the bonds or other obligations of the corporation is assumed by the buyer, that buyer, whether an individual, partnership, or corporation, must deduct and withhold the taxes that would be required to be withheld by the selling corporation as if there had been no sale or transfer. Also, if interest coupons are in default, the tax must be withheld on the gross amount of interest whether or not the payment is a return of capital or the payment of income.
A resident alien paying interest on a margin account maintained with a foreign brokerage firm must withhold from the interest whether the interest is paid directly or constructively.
Interest on bonds of a U.S. corporation paid to a foreign corporation not engaged in a trade or business in the United States is subject to withholding even if the interest is guaranteed by a foreign corporation that made payment outside the United States.
Domestic corporations must withhold on interest credited to foreign subsidiaries or foreign parents.
For withholding under chapter 4 on the interest payments described in this section, see the definition of withholdable payments in Treasury regulations section Publication 1212, Guide to Original Issue Discount (OID) Instruments.
For more information on original issue discount, see Publication 550, Investment Income and Expenses.
Chart C. Withholding Tax Rates for Purposes of Chapter 3
(Note. You must withhold tax at the rates on payments of
income unless a rate or exemption is authorized under
treaty. The President may apply higher on income paid to
residents or foreign countries that impose discriminatory
taxes on U.S. persons.
-----------------------------------------------------------
THEN you
generally must
IF you paid the following type withhold at the
of income: following rate:
-----------------------------------------------------------
Taxable part of U.S. scholarship or
fellowship grant paid to holder of
"F," "J," "M," or "Q" visa (see
Scholarships and Fellowship
Grants,
later) 14%
-----------------------------------------------------------
Gross investment income from
interest, dividends, rents, and
royalties paid to a foreign private
foundation 4%
-----------------------------------------------------------
Pensions -- part paid for personal Graduated rates in
services (see
Pensions, Annuities,
Circular A or
and Alimony,
later) Circular E
-----------------------------------------------------------
Wages paid to a nonresident alien Graduated rates in
employee (see
Pay for Personal
Circular A or
Services Performed,
later) Circular E
-----------------------------------------------------------
Each foreign partner's share of 39.6% for
effectively connected income of noncorporate
the partnership (see
Partnership
partners;
Withholding on Effectively
35% for corporate
Connected Income,
later) partners
-----------------------------------------------------------
Distributions of effectively 39.6% for
connected income to foreign noncorporate
partners by publicly traded partners;
partnerships (see
Publicly Traded
35% for corporate
Partnerships,
later) partners
-----------------------------------------------------------
Dispositions of U.S. real property 15% (10% for
interests (see
U.S. Real Property
dispositions before
Interest,
later) February 17, 2016)*
-----------------------------------------------------------
Dividends paid to Puerto Rico
corporation 10%
-----------------------------------------------------------
All other income subject to
withholding 30%
-----------------------------------------------------------
* 35% in the case of certain distributions by
partnerships, trusts, or estates.
===========================================================
Reduced Rates of Withholding on Interest
Notwithstanding the exception from withholding under chapter 3 on interest described under this heading, withholding may still apply under chapter 4 when the payment is a withholdable payment and an exception from withholding under chapter 4 does not apply.
Certain interest is subject to a reduced rate of, or exemption from, withholding.
Portfolio interest exempt from chapter 3 withholding. Interest and original issue discount that qualifies as portfolio interest is exempt from chapter 3 withholding. However, these amounts are not exempt from withholding under chapter 4 when the interest is a withholdable payment, unless an exception from chapter 4 withholding applies. To qualify as portfolio interest, the interest must be paid on obligations issued after July 18, 1984, and otherwise subject to chapter 3 withholding.
Note. The rules for determining whether interest is portfolio interest changed for obligations issued after March 18, 2012. Before March 19, 2012, portfolio interest included interest on certain registered and nonregistered (bearer) bonds if the obligations meet the requirements described below.
For obligations issued after March 18, 2012, portfolio interest does not include interest paid on debt that is not in registered form, except for interest paid on foreign-targeted registered obligations issued before January 1, 2016, as described in Foreign-targeted registered obligations, later.
Obligations in registered form. Portfolio interest includes interest paid on an obligation that is in registered form, and for which you have received documentation that the beneficial owner of the obligation is not a United States person.
Generally, an obligation is in registered form if: (i) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new holder; (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book entry system maintained by the issuer or its agent; or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be transferred both by surrender and reissuance and through a book entry system.
An obligation that would otherwise be considered to be in registered form is not considered to be in registered form as of a particular time if it can be converted at any time in the future into an obligation that is not in registered form, except as otherwise provided in Notice 2013-43, 2013-31 I.R.B. 113, as described in the following section.
Dematerialized book-entry systems and effectively immobilized obligations. An obligation will be considered to be in registered form if it is issued through either a dematerialized book entry system maintained by a clearing organization (or agent thereof) or a clearing system in which the obligation (including a global obligation in bearer form) is effectively immobilized. See Notice 2012-20, 2012-13 I.R.B. 574, amplified by Notice 2013-43, 2013-31 I.R.B. 113.
Under dematerialized book-entry systems, bonds are required to be represented only by book entries, and no physical certificates are issued or transferred. The bonds are transferred only by book entries.
An obligation will be considered to be effectively immobilized if (1) it is represented by one or more global securities in physical form that are issued to and held by a clearing organization (or by a custodian or depository acting as an agent of the clearing organization) for the benefit of purchasers and under arrangements that prohibit transfer except to a successor clearing organization subject to the same terms, and (2) beneficial interest in the underlying obligation are transferrable only through a book entry system maintained by the clearing organization or its agent.
These bonds are considered to be in registered form if the holder may only obtain a physical certificate in bearer form when: (1) the clearing organization that maintains the book-entry system goes out of business without a successor; (2) the issuer defaults; or (3) definitive securities are issued at the issuer's request upon a change in tax law adverse to the issuer. See Notice 2012-20 for more information on registered form requirements.
Foreign-targeted registered obligations. A registered bond issued after March 18, 2012, and before January 1, 2016, will also be considered to be in registered form if it is targeted to foreign markets, and portfolio interest treatment may apply even when you do not receive documentation regarding the beneficial owner of the bond.
If the registered obligation is not targeted to foreign markets, you must receive documentation on which you may rely to treat the payee as a foreign person that is the beneficial owner of the interest. A registered obligation is targeted to foreign markets if it is sold (or resold in connection with its original issuance) only to foreign persons or to foreign branches of U. S. financial institutions in accordance with procedures similar to those provided under section Notice 2012-20 and Treasury regulations section • There are arrangements to ensure that the obligation will be sold, or resold in connection with the original issue, only to a person who is not a United States person, • Interest on the obligation is payable only outside the United States and its possessions, and • The face of the obligation contains a statement that any United States person who holds the obligation will be subject to limits under the United States income tax laws.
Documentation is not required for interest on bearer obligations to qualify as portfolio interest. In some cases, however, you may need documentation for purposes of Form 1099 reporting and backup withholding.
Interest on such obligations is not a withholdable payment under chapter 4, except when the instrument is materially modified after March 18, 2012.
Interest that does not qualify as portfolio interest. Payments to certain persons and payments of contingent interest do not qualify as portfolio interest. You must withhold at the statutory rate on such payments unless some other exception, such as a treaty provision, applies and withholding under chapter 4 does not apply.
Contingent interest. Portfolio interest generally does not include contingent interest. Contingent interest is interest that is determined by reference to any of the following.
• Any receipts, sales, or other cash flow of the debtor or related person.
• Income or profits of the debtor or related person.
• Any change in value of any property of the debtor or a related person.
• Any dividend, partnership distributions, or similar payments made by the debtor or a related person.
The term "related person" is defined in section
871(h)(4)(B)of the Internal Revenue Code.
The contingent interest rule does not apply to any interest paid or accrued on any indebtedness with a fixed term that was issued:
• On or before April 7, 1993, or
• After April 7, 1993, pursuant to a written binding contract in effect on that date and at all times thereafter before that indebtedness was issued.
Ten-percent owners.
Interest paid to a foreign person that owns 10% or more of the total combined voting power of all classes of stock of a corporation, or 10% or more of the capital or profits interest in a partnership, that issued the obligation on which the interest is paid is not portfolio interest. To determine 10% ownership, see Regulations section
(g).Banks. Except in the case of interest paid on an obligation of the United States, interest paid to a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of the bank's trade or business does not qualify as portfolio interest.
Controlled foreign corporations. Interest paid to a controlled foreign corporation from a person related to the controlled foreign corporation is not portfolio interest.
Reduced rate or exemption from chapter 3 withholding for interest on real property mortgages (Income Code 2). Certain treaties permit a reduced rate or exemption for interest paid or credited on real property mortgages. This is interest paid on any type of debt instrument that is secured by a mortgage or deed of trust on real property located in the United States, regardless of whether the mortgagor (or grantor) is a U.S. citizen or a U.S. business entity.
REMIC excess inclusions. A domestic partnership must separately state a partner's allocable share of REMIC taxable income or net loss and the excess inclusion amount on Schedule K-1 (Form 1065). If the partnership allocates all or some part of its allocable share of REMIC taxable income to a foreign partner, the partner must include the partner's allocated amount in income as if that amount was received on the earlier of the following dates.
1. The date of distribution by the partnership.
2. The date the foreign partner disposed of its indirect interest in the REMIC residual interest.
3. The last day of the partnership's tax year.
For purposes of item (2), the disposition may occur as a result of:
• A termination of the REMIC,
• A disposition of the partnership's residual interest in the REMIC,
• A disposition of the foreign partner's interest in the partnership, or
• Any other reduction in the foreign partner's allocable share of the partnership's part of the REMIC net income or deduction.
The partnership must withhold tax on the part of the REMIC amount that is an excess inclusion. Excess inclusion income is treated as income from sources in the United States and is not eligible for any reduction in withholding tax (by treaty or otherwise). It is also a withholdable payment for chapter 4 purposes.
An excess inclusion allocated to the following foreign persons must be included in that person's income at the same time as other income from the entity is included in income.
• Shareholder of a real estate investment trust (REIT).
• Shareholder of a RIC.
• Participant in a common trust fund.
• Patron of a subchapter T cooperative organization.
The entity must withhold on the excess inclusion.
For information on the taxation and reporting of excess inclusion income by REITs, RICs, and other pass-through entities, see Notice 2006-97, 2006-46 I.R.B. 904, available at http://www.irs.gov/irb/2006-46_IRB/ar14.html.
Reduced rate or exemption from chapter 3 withholding for interest paid to controlled foreign corporations (Income Code 3). A treaty may permit a reduced rate or exemption for interest paid by a domestic corporation to a controlling foreign corporation. The interest may be on any type of debt, including open or unsecured accounts payable, notes, certificates, bonds, or other evidences of indebtedness.
Reduced rate or exemption from chapter 3 withholding for interest paid by foreign corporations (Income Code 4). If a foreign corporation is engaged in a U.S. trade or business, any interest paid by the foreign corporation's trade or business in the United States (branch interest) is subject to chapter 3 withholding as if paid by a domestic corporation (without considering the "payer having income from abroad" exception) and is a withholdable payment. As a result, the interest paid to foreign payees is generally subject to chapter 3 withholding and withholding may apply under chapter 4 absent an applicable withholding exception. In addition, if "allocable interest" exceeds the branch interest paid, the excess interest is also subject to tax and reported on the foreign corporation's income tax return, Form 1120-F. See Instructions for Form 1120-F for more information.
If there is no treaty provision that reduces the rate of withholding on branch interest, you must withhold tax under chapter 3 at the statutory rate of 30% on the interest paid by a foreign corporation's U.S. trade or business and you must withhold under chapter 4 when otherwise applicable and without regard to a treaty provision.
In general, payees of interest from a U.S. trade or business of a foreign corporation are entitled to reduced rates of, or exemption from, tax under a treaty in the same manner and subject to the same conditions as if they had received the interest from a domestic corporation. However, a foreign corporation that receives interest paid by a U.S. trade or business of a foreign corporation also must be a qualified resident of its country of residence to be entitled to benefits under that country's tax treaty. If the payee foreign corporation is a resident of a country that has entered into an income tax treaty since 1987 that contains a limitation on benefits article, the foreign corporation need only satisfy the limitation on benefits article in that treaty to qualify for a reduced rate of tax.
Alternatively, a payee may be entitled to treaty benefits under the payer's treaty if there is a provision in that treaty that applies specifically to interest paid by the payer foreign corporation. This provision may exempt all or a part of this interest. Some treaties provide for an exemption regardless of the payee's residence or citizenship, while others provide for an exemption according to the payee's status as a resident or citizen of the payer's country.
A foreign corporation that pays interest must be a qualified resident (under section 884 of the Internal Revenue Code) of its country of residence for the payer's treaty to exempt payments from tax by the foreign corporation. However, if the foreign corporation is a resident of a country that has entered into an income tax treaty since 1987 that contains a limitation on benefits article, the foreign corporation need only satisfy the limitation on benefits article in that treaty to qualify for the exemption.
Interest on deposits (Income Code 29). Foreign persons are not subject to chapter 3 withholding on interest that is not connected with a U.S. trade or business if it is from:
• Deposits with persons carrying on the banking business,
• Deposits or withdrawable accounts with savings institutions chartered and supervised under federal or state law as savings and loan or similar associations, such as credit unions, if the interest is or would be deductible by the institutions, or
• Amounts left with an insurance company under an agreement to pay interest on them.
Deposits include certificates of deposit, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements.
You may have to file Form 1042-S to report certain payments of interest on deposits. See Deposit interest paid to certain nonresident alien individuals under Returns Required, later. You may also have to file Form 1042-S when the deposit interest is a withholdable payment to which withholding applies (or was applied) under chapter 4.
Interest from foreign business arrangements. In certain cases, interest received from a domestic payer most of whose gross income is active foreign business income is not subject to chapter 3 withholding and is not a withholdable payment.
Active foreign business income is gross income which is:
• Derived from sources outside the United States, and
• Attributable to the active conduct of a trade or business in a foreign country or possession of the United States by the domestic payer.
Obligations issued before August 10, 2010.
Interest received from a resident alien individual or a domestic corporation is not subject to chapter 3 withholding and is not a withholdable payment if the interest meets all of the following requirements.
• At least 80% of the payer's gross income from all sources has been from active foreign business for the 3 tax years of the payer before the year in which the interest is paid, or for the applicable part of those 3 years.
• The recipient is not a related person. Use rules similar to those in section 954(d)(3) of the Internal Revenue Code to determine if the recipient is a related person.
• The interest is paid on an obligation issued before August 10, 2010.
• The obligation has not been significantly modified since August 10, 2010.
Corporations existing on January 1, 2011.
Certain interest received from a domestic corporation that is an existing 80/20 company is not subject to withholding. An existing 80/20 company must meet all of the following requirements.
• It was in existence on January 1, 2011.
• For the 3 tax years beginning before January 1, 2011 (or for its years of existence if the corporation was in existence for less than 3 tax years), at least 80% of its gross income from all sources was active foreign business income.
• It continues to meet the 80-percent test for every tax year beginning after December 31, 2010.
• It has not added a substantial line of business after August 10, 2010.
Transitional rule for active foreign business income.
In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes one or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.
A foreign beneficial owner does not need to provide a Form W-8 or documentary evidence for this exception. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
Sales of bonds between interest dates. Amounts paid as part of the purchase price of an obligation sold or exchanged between interest payment dates is not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. This does not apply if the sale or exchange is part of a plan the principal purpose of which is to avoid tax and you have actual knowledge or reason to know of the plan. The exemption from chapter 3 withholding and from withholdable payments applies even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
Short-term obligations. Interest and original issue discount paid on an obligation that is payable 183 days or less from the date of its original issue (without regard to the period held by the taxpayer) that satisfy other requirements intended to ensure that the debt is not held by a U.S. non-exempt person is not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. These exemptions apply even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.
Income from U.S. Savings Bonds of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Interest from a Series E, Series EE, Series H, or Series HH U.S. Savings Bond is not subject to chapter 3 withholding if the nonresident alien individual acquired the bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.
Dividends
The following types of dividends paid to foreign payees are generally subject to chapter 3 withholding and are generally withholdable payments such that withholding under chapter 4 applies absent an exception available under chapter 4.
Dividends paid by U.S. corporations -- general (Income Code 6). This category includes all distributions of domestic corporations (other than dividends qualifying for direct dividend rate--Income Code 7).
A corporation making a distribution with respect to its stock or any intermediary making a payment of such a distribution, is required to withhold on the entire amount of the distribution at the rate applicable under chapter 3 when withholding under chapter 4 does not apply. However, a distributing corporation or intermediary may elect to not withhold on the part of the distribution that:
1. Represents a nontaxable distribution payable in stock or stock rights,
2. Represents a distribution in part or full payment in exchange for stock,
3. Is not paid out of current or accumulated earnings and profits, based on a reasonable estimate of the anticipated amount of earnings and profits for the tax year of the distribution made at a time reasonably close to the date of the distribution,
4. Represents a capital gain dividend (use Income Code 36) or an exempt interest dividend by a regulated investment company, or
5. Is subject to withholding under section 1445 of the Code (withholding of tax on dispositions of U.S. real property interests) and the distributing corporation is a U.S. real property holding corporation or a qualified investment entity (QIE).
The election is made by actually reducing the amount of withholding at the time the distribution is paid.
A QIE is:
1. Any REIT, or
2. Any RIC that is a U.S. real property holding corporation.
Dividends paid by a QIE.
A distribution by a QIE to a nonresident alien or a foreign corporation is treated as a dividend and is not subject to withholding under section
1445as a gain from the sale or exchange of a U.S. real property interest if:
• The distribution is on stock regularly traded on a securities market in the United States, and
• The individual or corporation did not own more than 10% of such stock in the case of a REIT (5% for dispositions before December 18, 2015) or 5% of such stock in case of a RIC at any time during the 1-year period ending on the date of distribution.
Certain distributions by a REIT may be treated as a dividend and are not subject to withholding under section
1445as a gain from the sale or exchange of a U.S. real property interest. See
Qualified investment entitiesunder
U.S. Real Property Interest,later.
Dividends paid by a domestic corporation (an existing "80/20" company). The active foreign business percentage of any dividend paid by a domestic corporation that is an existing 80/20 company is not subject to withholding. A domestic corporation is an existing 80/20 company if it satisfies all of the following.
1. It was in existence on January 1, 2011.
2. For the 3 tax years beginning before January 1, 2011 (or for all years of existence if it was in existence for less than 3 tax years), at least 80% of its gross income from all sources was active foreign business income. Active foreign business income is gross income that is:
a. Derived from sources outside the United States, and
b. Attributable to the active conduct of a trade or business in a foreign country or possession of the United States by the corporation.
3. It continues to meet the 80-percent test for every tax year beginning after December 31, 2010.
4. It has not added a substantial line of business after August 10, 2010.
Transitional rule for item (2).
In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes one or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.
The active foreign business percentage is found by dividing the corporation's active foreign business income for the testing period by the corporation's total gross income for that period. The testing period is the 3 tax years before the year in which the dividends are declared (or shorter period if the corporation was not in existence for 3 years). If the corporation has no gross income for that 3-year period, the testing period is the tax year in which the dividend is paid.
Consent dividends. If you receive a Form 972, Consent of Shareholder To Include Specific Amount in Gross Income, from a nonresident alien individual or other foreign shareholder who agrees to treat the amount as a taxable dividend, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend had been actually paid.
Interest-related dividends and short-term capital gain dividends received from mutual funds. Certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company are exempt from chapter 3 withholding.
Dividends qualifying for direct dividend rate (Income Code 7). A treaty may reduce the rate of withholding on dividends from that which generally applies under the treaty if the shareholder owns a certain percentage of the voting stock of the corporation when withholding under chapter 4 does not apply. In most cases, this preferential rate applies only if the shareholder directly owns the required percentage, although some treaties permit the percentage to be met by direct or indirect ownership. The preferential rate may apply to the payment of a deemed dividend under section 304(a)(1) of the Code. Under some treaties, the preferential rate for dividends qualifying for the direct dividend rate applies only if no more than a certain percentage of the paying corporation's gross income for a certain period consists of dividends and interest other than dividends and interest from subsidiaries or from the active conduct of a banking, financing, or insurance business. A foreign person should claim the direct dividend rate by filing the appropriate Form W-8.
Consent dividends. If you receive a Form 972 from a foreign shareholder qualifying for the direct dividend rate, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend had been actually paid.
Dividends paid by foreign corporations (Income Code 8). Dividends paid by a foreign corporation are generally not subject to chapter 3 withholding and are not withholdable payments. This exception does not require a Form W-8. However, a Form W-8 may be required for purposes of Form 1099 reporting and backup withholding.
The payment to a foreign corporation by a foreign corporation of a deemed dividend under section 304(a)(1) of the Code is subject to chapter 3 withholding and may be a withholdable payment except to the extent it can be clearly determined to be from foreign sources.
Corporation subject to branch profits tax. If a foreign corporation is subject to branch profits tax for any tax year, withholding is not required on any dividends paid by the corporation out of its earnings and profits for that tax year. Dividends may be subject to withholding if they are attributable to any earnings and profits when the branch profits tax is prohibited by a tax treaty.
A foreign person may claim a treaty benefit on dividends paid by a foreign corporation to the extent the dividends are paid out of earnings and profits in a year in which the foreign corporation was not subject to the branch profits tax. However, you may apply a reduced rate of withholding under an income tax treaty only under rules similar to the rules that apply to treaty benefits claimed on branch interest paid by a foreign corporation. You should check the specific treaty provision.
Dividends paid to Puerto Rico corporation. For chapter 3 purposes, the tax rate on dividends paid to a corporation created or organized in, or under the law of, the Commonwealth of Puerto Rico is 10%, rather than 30%, if:
• At all times during the tax year less than 25% in value of the Puerto Rico corporation's stock is owned, directly or indirectly, by foreign persons,
• At least 65% of the Puerto Rico corporation's gross income is effectively connected with the conduct of a trade or business in Puerto Rico or the United States for the 3-year period ending with the close of the tax year of that corporation (or the period the corporation or any predecessor has been in existence, if less), and
• No substantial part of the income of the Puerto Rico corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of Puerto Rico or the United States.
No special rules apply to Puerto Rico corporations for chapter 4 purposes, but special withholding rules do apply for withholdable payments made to territory financial institutions and nonfinancial entities. See the chapter 4 regulations for information on these special requirements.
Dividend equivalent payments. Dividend equivalent payments are treated as U.S. source dividends such that withholding under chapter 3 may apply. Use Income Code 34 or 40 to report dividend equivalent payments. Dividend equivalent payments are withholdable payments except when an exception applies for chapter 4 purposes. For example, withholdable payments exclude certain offshore payments made before January 1, 2017.
A dividend equivalent is a payment that, directly or indirectly, is contingent on, or determined by reference to, the payment of a dividend from U.S. sources. Dividend equivalent payments include the following payments.
1. A substitute dividend made under a securities lending or sale-repurchase transaction involving a U.S. stock,
2. A payment made under a specified notional principal contract, and
3. Any payment determined by regulations to be substantially similar to a payment in (1) or (2) above.
Substitute dividend (Income Code 34).
A substitute dividend is any payment made in a securities lending or sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources in the United States.
Specified notional principal contract (SNPC) (Income Code 40). For payments made before January 1, 2017, a specified notional principal contract is any notional principal contract that satisfies one or more of the following.
• In connection with entering into the contract, any long party to the contract transfers the underlying security to any short party to the contract.
• In connection with the termination of the contract, any short party to the contract transfers the underlying security to any long party to the contract.
• The underlying security is not readily tradeable on an established securities market.
• In connection with entering into the contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract.
Dividend equivalents with respect to specified notional principal contracts and specified equity-linked instruments beginning on or after January 1, 2017 (Income Code 40).
Payments made on or after January 1, 2017, with respect to specified notional principal contracts and specified equity-linked instruments will be dividend equivalents. A notional principal contract is a specified notional principal contract when it is a simple contract that has a delta of 0.8 or greater with respect to an underlying security at the time the contract was issued. Similarly, an equity-linked instrument is a specified equity-linked instrument when it is a simple contract that has a delta of 0.8 or greater with respect to an underlying security at the time the contract was issued. For complex contracts, a contract will be a specified notional principal contract or specified equity-linked instrument if it meets the substantial equivalence test described in Treasury regulation section
(h).Amounts paid to qualified securities lenders. A withholding agent that makes payments of substitute dividends to a qualified securities lender (QSL) should treat the QSL as the recipient. The withholding agent is not required to withhold under chapter 3 or 4 on a substitute dividend payment if it receives, at least annually, a certificate from the QSL that includes a statement with the following information.
• The recipient of the substitute dividend is a QSL, and
• With respect to the substitute dividend it receives from the withholding agent, the QSL states that it will withhold and remit the proper amount of U.S. gross-basis tax.
For more information, see
Notice 2010-46, 2010-24 I.R.B. 757, available at
http://www.irs.gov/irb/2010-24_IRB/ar09.html.CAUTION: The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. You can view this regulation at http://www.irs.gov/irb/2013-52_IRB/ar08.html.
Gains
You generally do not need to withhold under chapter 3 or 4 on any gain from the sale of real or personal property because it is not FDAP income. However, see U.S. Real Property Interest, later.
Capital gains (Income Code 9). You must withhold at 30%, or if applicable, a reduced treaty rate, on the gross amount of the following items:
• Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest, unless an election is made to treat those gains as income effectively connected with a U.S. trade or business,
• Gains on contingent payments received from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property,
• Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966, and
• Certain gains from the sale or exchange of original issue discount obligations issued after March 31, 1972. For more on withholding on original issue discount obligations, see Interest, earlier.
If you do not know the amount of the gain, you must withhold an amount necessary to ensure that the tax withheld will not be less than 30% of the recognized gain. The amount to be withheld, however, must not be more than 30% of the amount payable because of the transaction.
Unless you have reason to believe otherwise, you may rely upon the written statement of the person entitled to the income as to the amount of gain. The Form W-8 or documentary evidence must show the beneficial owner's basis in the property giving rise to the gain.
Tax treaties. Many tax treaties exempt certain types of gains from U.S. income tax. Be sure to carefully check the provision of the treaty that applies before allowing an exemption from withholding.
Royalties
In general, you must withhold tax under chapter 3 on the payment of royalties from sources in the United States. However, certain types of royalties are given reduced rates or exemptions under some tax treaties. Accordingly, these different types of royalties are treated as separate categories for withholding purposes. For chapter 4 purposes, royalties are nonfinancial payments and are therefore excluded as withholdable payments.
CAUTION: Most treaties have more than one withholding rate on royalties, which varies by the classification of the payment in that treaty. Be sure to check your particular treaty for the specific rate that applies to you.
Industrial royalties (Income Code 10). This category of income includes royalties for the use of, or the right to use, patents, trademarks, secret processes and formulas, goodwill, franchises, "know-how," and similar rights. It may also include payments for the use of, or right to use, industrial, commercial, and scientific equipment, when this is included in the treaty definition of royalties.
Motion picture or television copyright royalties (Income Code 11). This category refers to royalties paid for the use of motion picture and television copyrights.
Other royalties (for example, copyright, recording, publishing) (Income Code 12). This category refers to the royalties paid for the use of copyrights on books, periodicals, articles, etc., except motion picture and television copyrights.
Real Property Income and Natural Resources Royalties (Income Code 14)
You must withhold tax under chapter 3 on income (such as rents and royalties) from real property located in the United States and held for the production of income, unless the foreign payee elects to treat this income as effectively connected with a U.S. trade or business. If the foreign payee chooses to treat this income as effectively connected, the payee must give you Form W-8ECI (discussed earlier). This real property income includes royalties from mines, wells, or other natural deposits, as well as ordinary rents for the use of real property. For chapter 4 purposes, income from real property is either a nonfinancial payment (and therefore not a withholdable payment) or is excluded as a withholdable payment because it is effectively connected income. For withholding that applies to the disposition of U.S. real property interests, see U.S. Real Property Interest, later.
Pensions, Annuities, and Alimony (Income Code 15)
The following rules apply to withholding on pensions, annuities, and alimony of foreign payees.
Pensions and annuities. In most cases, you must withhold tax on the gross amount of pensions and annuities that you pay that are from sources within the United States. This includes amounts paid under an annuity contract issued by a foreign branch of a U.S. life insurance company. However, most tax treaties provide that private pensions and annuities are exempt from chapter 3 withholding.
For purposes of chapter 3 withholding, in the absence of a treaty exemption, you must withhold at the statutory rate of 30% on the entire distribution that is from sources within the United States. You may, however, apply withholding at graduated rates to the part of a distribution that arises from the performance of services in the United States after December 31, 1986.
Employer contributions to a defined benefit plan covering more than one individual are not made for the benefit of a specific participant, but are made based on the total liabilities to all participants. All funds held under the plan are available to provide benefits to any participant. If the distribution is from such a plan, you can use the method in Revenue Procedure 2004-37 to allocate the distribution to sources in the United States.
The withholding rules that apply to payments to foreign persons generally take precedence over any other withholding rules that would apply to distributions from qualified plans and other qualified retirement arrangements.
Foreign pension plans are exempt from applying withholding under chapter 4 when they are exempt beneficial owners under Treasury regulations section 1. For the nonresident's personal services performed outside the United States; or 2. For personal services by a nonresident individual present in the United States for 90 days or less during each tax year, whose pay for those services did not exceed $3,000, and the personal services were performed for: a. A nonresident alien individual, foreign partnership, or foreign corporation not engaged in a trade or business in the United States; or b. An office or place of business of a U.S. resident or citizen which was maintained outside the United States.