Amounts Subject to Reporting on Form 1042-S

Amounts subject to reporting on Form 1042-S are amounts paid to foreign persons (including persons presumed to be foreign) that are subject to withholding, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee. Amounts subject to withholding are amounts from sources within the United States that constitute (a) fixed or determinable annual or periodical (FDAP) income; (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. Amounts subject to reporting include, but are not limited to, the following U.S. source items.

• Corporate distributions. The entire amount of a corporate distribution (whether actual or deemed) must be reported, irrespective of any estimate of the portion of the distribution that represents a taxable dividend. Any distribution, however, that is treated as gain from the redemption of stock is not an amount subject to reporting.
• Interest. This includes the portion of a notional principal contract payment that is characterized as interest.
• Rents.
• Royalties.
• Compensation for independent personal services performed in the United States.
• Compensation for dependent personal services performed in the United States for which the beneficial owner is claiming treaty benefits.
• Annuities.
• Pension distributions and other deferred income.
• Most gambling winnings. However, proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting.
• Cancellation of indebtedness. Income from the cancellation of indebtedness must be reported unless the withholding agent is unrelated to the debtor and does not have knowledge of the facts that give rise to the payment.
• Effectively connected income (ECI). ECI includes amounts that are (or are presumed to be) effectively connected with the conduct of a trade or business in the United States even if no withholding certificate is required, as, for example, with income on notional principal contracts. Note that bank deposit interest, which generally is not subject to Form 1042-S reporting, is subject to Form 1042-S reporting if it is effectively connected income.
• Notional principal contract income. Income from notional principal contracts that the payor knows, or must presume, is effectively connected with the conduct of a U.S. trade or business is subject to reporting. The amount to be reported is the amount of cash paid on the contract during the calendar year. Any amount of interest determined under the provisions of Regulations section 1.446-3(g)(4) (dealing with interest in the case of a significant non-periodic payment) is reportable as interest and not as notional principal contract income.
• Students, teachers, and researchers. Amounts paid to foreign students, trainees, teachers, or researchers as scholarship or fellowship income, and compensation for personal services (whether or not exempt from tax under an income tax treaty), must be reported. However, amounts that are exempt from tax under section 117 are not subject to reporting.
• Amounts paid to foreign governments, foreign controlled banks of issue, and international organizations. These amounts are subject to reporting even if they are exempt under section 892 or 895.
• Foreign targeted registered obligations. Interest paid on registered obligations targeted to foreign markets paid to a foreign person other than a financial institution or a member of a clearing organization is an amount subject to reporting.
• Original issue discount (OID) from the redemption of an OID obligation. The amount subject to reporting is the amount of OID actually includible in the gross income of the foreign beneficial owner of the income, if known. Otherwise, the withholding agent should report the entire amount of OID as if the recipient held the instrument from the date of original issuance. To determine the amount of OID reportable, a withholding agent may rely on Pub. 1212, List of Original Issue Discount Instruments.
• Certain dispositions described under Withholding on Dispositions of U.S. Real Property Interests by Publicly Traded Trusts and Real Estate Investment Trusts (REITs) on page 5.
• Certain dispositions described under Publicly Traded Partnerships (Section 1446 Withholding Tax) on page 5.

For more details on the types of income that are subject to withholding, see Pub. 515.

Amounts That Are Not Subject to Reporting on Form 1042-S

1. Interest on deposits. Generally, no withholding (or reporting) is required on interest paid to foreign persons on deposits if such interest is not effectively connected with the conduct of a trade or business in the United States. For this purpose, the term deposits means amounts that are on deposit with a U.S. bank, savings and loan association, credit union, or similar institution, and from certain deposits with an insurance company.

   Exception for interest payments to Canadian residents who are not U.S. citizens. If you pay $10 or more of U.S. source bank deposit interest to a nonresident alien who is a resident of Canada, you generally must report the interest on Form 1042-S. This reporting requirement applies to interest on a deposit maintained at a bank's office in the United States. However, it does not include interest on certain bearer certificates of deposit if paid outside the United States. Although you only have to report payments you make to residents of Canada, you can comply by reporting bank deposit interest to all foreign persons if that is easier.

   When completing Form 1042-S, use income code 29 in box 1 and exemption code 02 in box 6.

   On the statements furnished to the Canadian recipients, you must include an information contact phone number in addition to the name and address in box 10 on Form 1042-S. You must also include a statement that the information on the form is being furnished to the United States Internal Revenue Service and may be provided to the government of Canada.

2. Interest and OID from short-term obligations. Interest and OID from any obligation payable 183 days or less from the date of original issue should not be reported on Form 1042-S.
3. Registered obligations targeted to foreign markets. Interest on a registered obligation that is targeted to foreign markets and qualifies as portfolio interest is not subject to reporting if it is paid to a registered owner that is a financial institution or member of a clearing organization and you have received the required certifications.
4. Bearer obligations targeted to foreign markets. Do not file Form 1042-S to report interest not subject to withholding on bearer obligations if a Form W-8 is not required.
5. Notional principal contract payments that are not ECI. Amounts paid on a notional principal contract that are not effectively connected with the conduct of a trade or business in the United States should not be reported on Form 1042-S.
6. Accrued interest and OID. Interest paid on obligations sold between interest payment dates and the portion of the purchase price of an OID obligation that is sold or exchanged in a transaction other than a redemption is not subject to reporting unless the sale or exchange is part of a plan, the principal purpose of which is to avoid tax, and the withholding agent has actual knowledge or reason to know of such plan.

Exception for Amounts Previously Withheld Upon.   A withholding agent should report on Form 1042-S any amounts, whether or not subject to withholding, that are paid to a foreign payee and that have been withheld upon, including backup withholding, by another withholding agent under the presumption rules.

Example.   A withholding agent (WA) makes a payment of bank deposit interest to a foreign intermediary that is a nonqualified intermediary (NQI-B). NQI-B failed to provide any information regarding the beneficial owners to whom the payment was attributable. Under the presumption rules, WA must presume that the amounts are paid to a U.S. non-exempt recipient. WA withholds 30% of the payment under the backup withholding provisions of the Code and files a Form 1099-INT reporting the interest as paid to an unknown recipient. A copy of Form 1099-INT is sent to NQI-B. The beneficial owners of the bank deposit interest are two customers of NQI-B, X and Y. Both X and Y have provided NQI-B with documentary evidence establishing that they are foreign persons and therefore not subject to backup withholding. NQI-B must file a Form 1042-S reporting the amount of bank deposit interest paid to each of X and Y and the proportionate amount of withholding that occurred.

Withholding on Dispositions of U.S. Real Property Interests by Publicly Traded Trusts and Real Estate Investment Trusts (REITs)

Regulations section 1.1445-8 provides rules for withholding required on the disposition of a U.S. real property interest by a publicly traded trust or a REIT. The special rules of Regulations section 1.1445-8 only apply to distributions by a publicly traded trust or a REIT.

In general, when a publicly traded trust or a REIT makes a distribution to a foreign person attributable to the disposition of a U.S. real property interest, it must withhold tax under section 1445. However, this withholding liability is shifted to the person who pays the distribution to a foreign person (or to the account of the foreign person) if the special notice requirement of Regulations section 1.1445-8(f) and other requirements of Regulations section 1.1445-8(b)(1) are satisfied.

The amount subject to withholding for a distribution by a publicly traded trust is determined under the large trust rules of Regulations section 1.1445-5(c)(3).

The amount subject to withholding for a distribution by a REIT generally is the amount of each share or beneficial interest designated by the REIT as a capital gains dividend, multiplied by the number of shares or certificates of beneficial interests owned by a foreign person. If the withholding liability is shifted to the payer of the distribution under Regulations section 1.1445-8(b), the payer will receive notice as described in Regulations section 1.1445-8(f) of the amount of the distribution subject to withholding.

The rate of withholding is as follows:

1. Distribution by a publicly traded trust that makes recurring sales of growing crops and timber - 10%.
2. Distribution by a publicly traded trust not described in 1 above - 35%.
3. Distribution by a REIT - 35%.

To determine whether an interest holder is a foreign person, see Regulations section 1.1445-8(e).

Use Forms 1042-S and 1042 to report and pay over the withheld amounts. All other withholding required under section 1445 is reported and paid over using Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

Publicly Traded Partnerships (Section 1446 Withholding Tax)

A publicly traded partnership is any partnership in which interests are regularly traded on an established securities market (regardless of the number of its partners). However, it does not include a publicly traded partnership treated as a corporation under the general rule of section 7704(a).

A publicly traded partnership that has effectively connected income must pay a withholding tax under section 1446 from distributions to a foreign partner and file Form 1042-S, unless an election is made to pay a withholding tax based on effectively connected taxable income allocable to foreign partners. See Pub. 515 for details.

A nonpublicly traded partnership that has effectively connected gross income allocable to foreign partners must pay a withholding tax under section 1446. These amounts are reported on Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), and Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax.

Payments by U.S. Withholding Agents

In general.   U.S. withholding agents making payments described under Amounts Subject to Reporting on Form 1042-S on page 4 must file a separate Form 1042-S for each recipient who receives the income. Furthermore, withholding agents filing paper Forms 1042-S are not permitted to use multiple income lines on Copy A filed with the IRS. These filers must use a separate Form 1042-S for information reportable on a single income line.

These filers cannot use a single Form 1042-S to report income if that income is reportable under different income, recipient, or exemption codes or is subject to different rates of withholding.

A withholding agent may be permitted to use substitute payee copies of Form 1042-S (i.e., copies B, C, and D) that contain more than one income line (i.e., boxes 1 through 8). See Substitute Forms on page 2 for details.

See Payments Made to Persons Who Are Not Recipients on page 7 if the payment is made to a foreign person that is not a recipient.

Payments to Recipients

1. Payments directly to beneficial owners. If a U.S. withholding agent is making a payment directly to a beneficial owner, it must complete Form 1042-S treating the beneficial owner as the recipient. Boxes 17 through 20 should be left blank. A U.S. withholding agent should complete box 21 only if it is completing Form 1042-S as a paying agent acting pursuant to an agreement.

   Under a grace period rule, a U.S. withholding agent may, under certain circumstances, treat a payee as a foreign person while the withholding agent waits for a valid withholding certificate. A U.S. withholding agent who relies on the grace period rule to treat a payee as a foreign person must file Form 1042-S to report all payments during the period that person was presumed to be foreign even if that person is later determined to be a U.S. person based on appropriate documentation or is presumed to be a U.S. person after the grace period ends.

   In the case of foreign joint owners, you may provide a single Form 1042-S made out to the owner whose status you relied upon to determine the applicable rate of withholding (i.e., the owner subject to the highest rate of withholding). If, however, any one of the owners requests its own Form 1042-S, you must furnish a Form 1042-S to the person who requests it. If more than one Form 1042-S is issued for a single payment, the aggregate amount paid and tax withheld that is reported on all Forms 1042-S cannot exceed the total amounts paid to joint owners and the tax withheld on those payments.

2. Payments to a qualified intermediary, withholding foreign partnership, or withholding foreign trust. A U.S. withholding agent that makes payments to a QI (whether or not the QI assumes primary withholding responsibility), a withholding foreign partnership, or a withholding foreign trust should generally complete Forms 1042-S treating the QI, withholding foreign partnership, or withholding foreign trust as the recipient. However, see Payments allocated, or presumed made, to U.S. non-exempt recipients below for exceptions. The U.S. withholding agent must complete a separate Form 1042-S for each withholding rate pool of the QI, withholding foreign partnership, or withholding foreign trust. For this purpose, a withholding rate pool is a payment of a single type of income, determined in accordance with the income codes used to file Form 1042-S, that is subject to a single rate of withholding. A QI that does not assume primary withholding responsibility provides information regarding the proportions of income subject to a particular withholding rate to the withholding agent on a withholding statement associated with Form W-8IMY. A U.S. withholding agent making a payment to a QI, withholding foreign partnership, or withholding foreign trust must use recipient code 12 (qualified intermediary) or 04 (withholding foreign partnership or withholding foreign trust). A U.S. withholding agent must not use recipient code 13 (private arrangement intermediary withholding rate pool-general), 14 (private arrangement intermediary withholding rate pool-exempt organizations), 15 (qualified intermediary withholding rate pool-general), or 16 (qualified intermediary withholding rate pool-exempt organizations). Use of an inappropriate recipient code may cause a notice to be generated.

   Note:   A QI, withholding foreign partnership, or withholding foreign trust is required to act in such capacity only for designated accounts. Therefore, such an entity may also provide a Form W-8IMY in which it certifies that it is acting as an NQI or flow-through entity for other accounts. A U.S. withholding agent that receives a Form W-8IMY on which the foreign person providing the form indicates that it is not acting as a QI, withholding foreign partnership, or withholding foreign trust may not treat the foreign person as a recipient. A withholding agent must not use the EIN that a QI, withholding foreign partnership, or withholding foreign trust provides in its capacity as such to report payments that are treated as made to an entity in its capacity as an NQI or flow-through entity. In that case, use the EIN, if any, that is provided by the entity on its Form W-8IMY in which it claims that it is acting as an NQI or flow-through entity.

   Payments allocated, or presumed made, to U.S. non-exempt recipients. You may be given Forms W-9 or other information regarding U.S. non-exempt recipients from a QI together with information allocating all or a portion of the payment to U.S. non-exempt recipients. You must report income allocable to a U.S. non-exempt recipient on the appropriate Form 1099 and not on Form 1042-S, even though you are paying that income to a QI.

   You may also be required under the presumption rules to treat a payment made to a QI as made to a payee that is a U.S. non-exempt recipient from which you must withhold 30% of the payment under the backup withholding provisions of the Code. In this case, you must report the payment on the appropriate Form 1099. See General Instructions for Forms 1099, 1098, 5498, and W-2G.

   Example 1. WA, a U.S. withholding agent, makes a payment of U.S. source dividends to QI, a qualified intermediary. QI provides WA with a valid Form W-8IMY with which it associates a withholding statement that allocates 95% of the payment to a 15% withholding rate pool and 5% of the payment to C, a U.S. individual. QI provides WA with C's Form W-9. WA must complete a Form 1042-S, showing QI as the recipient in box 13 and recipient code 12 (qualified intermediary) in box 12, for the dividends allocated to the 15% withholding rate pool. WA must also complete a Form 1099-DIV reporting the portion of the dividend allocated to C.

   Example 2. WA, a withholding agent, makes a payment of U.S. source dividends to QI, a qualified intermediary. QI provides WA with a valid Form W-8IMY with which it associates a withholding statement that allocates 40% of the payment to a 15% withholding rate pool and 40% to a 30% withholding rate pool. QI does not provide any withholding rate pool information regarding the remaining 20% of the payment. WA must apply the presumption rules to the portion of the payment (20%) that has not been allocated. Under the presumption rules, that portion of the payment is treated as paid to an unknown foreign payee. WA must complete three Forms 1042-S: one for dividends subject to 15% withholding, showing QI as the recipient in box 13 and recipient code 12 (qualified intermediary) in box 12; one for dividends subject to 30% withholding, showing QI as the recipient in box 13 and recipient code 12 (qualified intermediary) in box 12; and one for dividends subject to 30% withholding, showing QI as the recipient in box 13 and recipient code 20 (unknown recipient) in box 12.

3. Amounts paid to certain U.S. branches. A U.S. withholding agent making a payment to a U.S. branch treated as a U.S. person (defined on page 3) completes Form 1042-S as follows:
   • If a withholding agent makes a payment to a U.S. branch that has provided the withholding agent with a Form W-8IMY that evidences its agreement with the withholding agent to be treated as a U.S. person, the U.S. withholding agent treats the U.S. branch as the recipient.
   • If a withholding agent makes a payment to a U.S. branch that has provided a Form W-8IMY to transmit information regarding recipients, the U.S. withholding agent must complete a separate Form 1042-S for each recipient whose documentation is associated with the U.S. branch's Form W-8IMY. If a payment cannot be reliably associated with recipient documentation, the U.S. withholding agent must complete Form 1042-S in accordance with the presumption rules.
   • If a withholding agent cannot reliably associate a payment with a Form W-8IMY from a U.S. branch, the payment must be reported on a single Form 1042-S treating the U.S. branch as the recipient and reporting the income as effectively connected income.

     Note:   The rules above apply only to U.S. branches treated as U.S. persons (defined on page 3). In all other cases, payments to a U.S. branch of a foreign person are treated as payments to the foreign person.

4. Amounts paid to authorized foreign agents. If a withholding agent makes a payment to an authorized foreign agent, the withholding agent files Forms 1042-S for each type of income (determined by reference to the income codes used to complete Form 1042-S) treating the authorized foreign agent as the recipient, provided that the authorized foreign agent reports the payments on Forms 1042-S to each recipient to which it makes payments. If the authorized foreign agent fails to report the amounts paid on Forms 1042-S for each recipient, the U.S. withholding agent remains responsible for such reporting.

   Use recipient code 17 in box 12 if you make a payment to an authorized foreign agent.

5. Amounts paid to an estate or complex trust. If a U.S. withholding agent makes a payment to a foreign complex trust or a foreign estate, a Form 1042-S must be completed showing the complex trust or estate as the recipient. Use recipient code 05 (trust) or 10 (estate). See Payments Made to Persons Who Are Not Recipients on page 7 for the treatment of payments made to foreign simple trusts and foreign grantor trusts.
6. Dual claims. A withholding agent may make a payment to a foreign entity (e.g., a hybrid entity) that is simultaneously claiming a reduced rate of tax on its own behalf for a portion of the payment and a reduced rate on behalf of persons in their capacity as interest holders in that entity on the remaining portion. If the claims are consistent and the withholding agent has accepted the multiple claims, a separate Form 1042-S must be filed for the entity for those payments for which the entity is treated as claiming a reduced rate of withholding and separate Forms 1042-S must be filed for each of the interest holders for those payments for which the interest holders are claiming a reduced rate of withholding. If the claims are consistent but the withholding agent has not chosen to accept the multiple claims, or if the claims are inconsistent, a separate Form 1042-S must be filed for the person(s) being treated as the recipient(s).
7. Special instructions for U.S. trusts and estates. Report the entire amount of income subject to reporting, irrespective of estimates of distributable net income.

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