Amounts Paid by Nonqualified Intermediaries and Flow-Through Entities

An NQI and a flow-through entity are withholding agents and must file Forms 1042-S for amounts paid to recipients. However, an NQI or flow-through entity is not required to file Form 1042-S if it is not required to file Form 1042-S under the Multiple Withholding Agent Rule on page 10. An NQI or flow-through entity must report payments made to recipients to the extent it has failed to provide to another withholding agent the appropriate documentation and complete withholding statement, including information allocating the payment to each recipient.

Forms 1042-S must be filed in any case where the NQI or flow-through entity is making a payment to a recipient and tax has been withheld on the payment by another withholding agent that did not report the payment on Form 1042-S to the recipient, even if the recipient should have been exempt from taxation. Failure to file Forms 1042-S may not only result in penalties for the NQI or flow-through entity, but may result in the denial of any refund claim made by a recipient.

If another withholding agent has withheld tax on an amount that should have been exempt (e.g., where the withholding agent applied the presumption rules because it did not receive proper documentation or other required information from the NQI or flow-through entity), the NQI or flow-through entity should report the correct tax rate and the actual U.S. Federal tax withheld in boxes 5 and 7 and should enter the applicable exemption code using the instructions for box 6 on page 13.

NQI or flow-through entity provides correct and complete information to another withholding agent yet the withholding agent underwithholds.   In this case, assuming that the NQI or flow-through entity knows that the withholding agent underwithheld, the NQI or flow-through entity must withhold additional amounts to bring the total withholding to the correct amount. Furthermore, the NQI or flow-through entity must complete Form 1042-S and must include in boxes 5 and 7 the correct tax rate and the combined amount of U.S. Federal tax withheld by the NQI or flow-through entity and any other withholding agent in the chain of payment that has withheld on the payment. See Example 2 below.

Example 1.   A foreign bank acts as a nonqualified intermediary (NQI) for four different foreign persons (A, B, C, and D) each of whom own securities from which they receive interest. The interest is paid by a U.S. withholding agent (WA) as custodian of the securities for NQI. A, B, C, and D each own a 25% interest in the securities. NQI has furnished WA a Form W-8IMY to which it has attached Forms W-8BEN from A and B. NQI's Form W-8IMY contains an attachment stating that 25% of the securities are allocable to each of A and B, and 50% to undocumented owners. WA pays $100 of interest during the calendar year. WA treats the $25 of interest allocable to A and the $25 of interest allocable to B as portfolio interest and completes a Form 1042-S for A and for B as the recipients. WA includes information relating to NQI in boxes 17 through 20 on the Forms 1042-S for A and B. WA subjects the remaining $50 of interest to 30% withholding under the presumption rules and reports the interest on a Form 1042-S by entering Unknown Recipient in box 13 (and recipient code 20 in box 12), 30.00 in box 5 (tax rate), and $15 as the amount withheld in box 7. WA also includes information relating to NQI in boxes 17 through 20 of the Form 1042-S and sends a copy of the form to NQI. Because NQI has not provided WA with beneficial owner information for C and D, NQI must report the interest paid to C and D on Forms 1042-S. (Note that under the multiple withholding agent rule, NQI is not required to file a Form 1042-S for A or B.) The Forms 1042-S for C and D should show $25 in box 2 (gross income) and $7.50 in box 7 (the actual U.S. Federal tax withheld). The rate of tax NQI includes on the Form 1042-S for C and D depends on the rate of withholding to which they should be subject. Thus, if C and D provided NQI with documentation prior to the payment of interest that would qualify the interest as portfolio interest, the rate entered in box 5 should be -0-. If they do not qualify for a reduced rate of withholding, NQI should enter 30.00 in box 5. In any event, NQI must also enter 99 in box 6 (exemption code) of the Forms 1042-S it prepares for C and D. See the instructions for box 6 on page 13.

Example 2.   A U.S. withholding agent (WA) makes a $100 dividend payment to a foreign bank (NQI) that acts as a nonqualified intermediary. NQI receives the payment on behalf of A, a resident of a treaty country who is entitled to a 15% rate of withholding, and B, a resident of a country that does not have a tax treaty with the United States and who is subject to 30% withholding. NQI provides WA with its Form W-8IMY to which it associates the Forms W-8BEN from both A and B and a complete withholding statement that allocates 50% of the dividend to A and 50% to B. A's Form W-8BEN claims a 15% treaty rate of withholding. B's Form W-8BEN does not claim a reduced rate of withholding. WA, however, mistakenly withholds only 15%, $15, from the entire $100 payment. WA completes a Form 1042-S for each A and B as the recipients, showing on each form $50 of dividends in box 2, a withholding rate of 15.00 in box 5 (tax rate), and $7.50 as the amount withheld in box 7. Under the multiple withholding agent rule, NQI is not required to file a Form 1042-S for A. However, because NQI knows (or should know) that B is subject to a 30% rate of withholding, and assuming it knows that WA only withheld 15%, the multiple withholding agent rule does not apply to the dividend paid to B and NQI must withhold an additional 15% from the payment to B. NQI must then file a Form 1042-S for B showing $50 of dividends in box 2, 30.00 in box 5 (the correct tax rate), and $15 withheld in box 7 (the combined amount withheld). NQI must also enter 00 in box 6 (exemption code). See the instructions for box 6 on page 13.

Example 3.   A withholding agent (WA) receives a Form W-8IMY from a nonqualified intermediary (NQI). NQI's Form W-8IMY relates to payments of bank deposit interest. NQI collects the bank deposit interest on behalf of A, B, C, and D, but does not associate Forms W-8, W-9, or other documentary evidence with the Form W-8IMY that NQI provides WA. A, B, and C are foreign persons for whom NQI has valid documentation establishing their foreign status. D is a U.S. person and has provided NQI with a Form W-9. Under the presumption rules, WA must treat the bank deposit interest as being paid to an unknown U.S. person and apply backup withholding at 30%. WA must complete one Form 1099 for an unknown payee showing 30% backup withholding. A copy of the form must be sent to NQI. Because NQI failed to provide the requisite documentation to WA and because the amounts have been subject to withholding, NQI must report the amounts paid to A, B, C, and D. Accordingly, NQI must file a Form 1042-S for each A, B, and C showing deposit interest (income code 29) as the type of payment in box 1; -0- in box 5 (the correct tax rate); the actual amount withheld from the payment allocable to A, B, and C in box 7; and exemption code 99 in box 6. (See the instructions for box 6 on page 13.) NQI must also file a Form 1099 for D to report the actual amounts paid and withheld.

Multiple Withholding Agent Rule

A withholding agent is not required to file Form 1042-S if a return is filed by another withholding agent reporting the same amount to the same recipient (the multiple withholding agent rule). If an NQI or flow-through entity has provided another withholding agent with the appropriate documentation and complete withholding statement, including information allocating the payment to each recipient, the NQI or flow-through entity may presume that the other withholding agent filed the required Forms 1042-S unless the NQI or flow-through entity knows, or has reason to know, that the required Form 1042-S reporting has not been done.

The multiple withholding agent rule does not relieve withholding agents from Form 1042-S reporting responsibility in the following circumstances.

• Any withholding agent making a payment to a QI, withholding foreign partnership, or withholding foreign trust must report that payment as made to the QI, withholding foreign partnership, or withholding foreign trust.
• Any U.S. withholding agent making a payment to an authorized foreign agent must report that payment to the authorized foreign agent.
• Any withholding agent making a payment to a U.S. branch treated as a U.S. person must report the payment as made to that branch.
• Any withholding agent making a payment to a flow-through entity must report the payment as made to a beneficial owner, QI, withholding foreign partnership, or withholding foreign trust that has a direct or indirect interest in that entity.
• Any withholding agent that withholds an amount from a payment under Chapter 3 of the Code must report that amount to the recipient from whom it was withheld, unless the payment is reportable on another IRS form.

Furthermore, the multiple withholding agent rule does not relieve the following from Form 1042-S reporting responsibility.

• Any QI required to report an amount to a withholding rate pool and
• An NQI or flow-through entity that has not transmitted a valid Form W-8 or other valid documentation to another withholding agent together with the required withholding statement.

Penalties

The following penalties apply to the person required to file Form 1042-S. The penalties apply to both paper filers and to magnetic media/electronic filers.

1. Late filing of correct Form 1042-S. A penalty may be imposed for failure to file each correct and complete Form 1042-S when due (including extensions), unless you can show that the failure was due to reasonable cause and not willful neglect. The penalty, based on when you file a correct Form 1042-S, is:

• $15 per Form 1042-S if you correctly file within 30 days; maximum penalty $75,000 per year ($25,000 for a small business). A small business, for this purpose, is defined as having average annual gross receipts of $5 million or less for the 3 most recent tax years (or for the period of its existence, if shorter) ending before the calendar year in which the Forms 1042-S are due.
• $30 per Form 1042-S if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000 for a small business).
• $50 per Form 1042-S if you file after August 1 or you do not file correct Forms 1042-S; maximum penalty $250,000 per year ($100,000 for a small business).

If you intentionally disregard the requirement to report correct information, the penalty per Form 1042-S is increased to $100 or, if greater, 10% of the total amount of items required to be reported, with no maximum penalty.

2. Failure to furnish correct Form 1042-S to recipient. If you fail to provide correct statements to recipients and cannot show reasonable cause, a penalty of $50 may be imposed for each failure to furnish Form 1042-S to the recipient when due. The penalty may also be imposed for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $100,000 for all failures to furnish correct recipient statements during a calendar year. If you intentionally disregard the requirement to report correct information, each $50 penalty is increased to $100 or, if greater, 10% of the total amount of items required to be reported, and the $100,000 maximum does not apply.

3. Failure to file on magnetic media. If you are required to file on magnetic media but fail to do so, and you do not have an approved waiver on record, you may be subject to a $50 penalty per return for failure to file information returns on magnetic media unless you establish reasonable cause. The penalty applies separately to original returns and corrected returns.

Avoid Common Errors

To ensure that your Forms 1042-S can be correctly processed, be sure that you:

• Carefully read the information provided in Pub. 515 and these instructions.
• If you are a magnetic media or electronic filer, comply with the requirements in Pub. 1187.
• Complete all required fields. At a minimum, you must enter information in boxes 1, 2, 5, 6, 7, 9, 10, 12, 13, 15, and 16. Other boxes must be completed if the nature of the payment requires it. Note:   You may leave box 6 blank if you are applying backup withholding to the payment being reported.
• Use only income, recipient, exemption, and country codes specifically listed in these instructions.
• Use only tax rates that are allowed by statute, regulation, or treaty. Do not attempt to blend rates. Instead, if necessary, submit multiple Forms 1042-S to show changes in tax rate.

All information you enter when reporting the payment must correctly reflect the intent of statute and regulations. Generally, you should rely on the withholding documentation you have collected (Form W-8 series, Form 8233, etc.) to complete your Form 1042-S submissions.

Also note the following:

• The gross income you report in box 2 cannot be zero.
• The income code you report in box 1 must correctly reflect the type of income you pay to the recipient.
• The withholding agent's name, address, and EIN or QI-EIN must be reported in boxes 9 and 10 in all cases.
• The recipient's name, address, and TIN, if any, must be reported in boxes 13 and 14. You must generally report a foreign address in box 13. See the instructions for box 13 on page 14.
• The recipient code you report in box 12 must correctly identify the recipient's status. Use recipient code 20 only if you do not know who the recipient is.
  Note:   If you cannot identify the recipient, the tax withheld must be 30%.
• The recipient's country of residence for tax purposes that you report in box 15 must be present and correctly coded and cannot be US. Additionally, do not use OC or UC except as specifically allowed in these instructions.
• The exemption code you report in box 6 must correctly identify the proper tax status for the type of income you pay to the recipient.
  Note:   If you use exemption code 04 (exempt under tax treaty), the recipient's country of residence for tax purposes that you report in box 15 must be a valid treaty country. Countries with which the United States has a tax treaty are shown in bold italics in the Country Code list beginning on page 15.

You, the withholding agent, are liable for the tax if you know, or should have known, that underwithholding on a payment has occurred.

Specific Instructions for Withholding Agents

Note:   All amounts must be reported in U.S. dollars.

Rounding Off to Whole Dollars

To round off amounts to the nearest whole dollar, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding and only round off the total.

VOID and CORRECTED Boxes at Top of Form

See Correcting Paper Forms 1042-S beginning on page 14.

PRO-RATA BASIS REPORTING Box

Withholding agents must check this box to notify the IRS that an NQI that used the alternative procedures of Regulations section 1.1441-1(e)(3)(iv)(D) failed to properly comply with those procedures. See Pro-rata reporting on page 7 for additional information and examples.

Box 1, Income Code

All filers must enter the appropriate 2-digit income code from the list on page 12. Use the income code that is the most specific. For example, if you are paying bank deposit interest, you should use code 29 (deposit interest), not code 01 (interest paid by U.S. obligors-general). If you paid more than one type of income to or on behalf of the same recipient, you must complete a separate Form 1042-S for each income type.

Note:   Although income codes are provided for deposit interest, short-term OID, and notional principal contract income, those items are not always subject to reporting on Form 1042-S. For example, bank deposit interest is reportable if it is effectively connected with the conduct of a U.S. trade or business or is paid to a resident of Canada. Short-term OID or bank deposit interest may need to be reported by an NQI or flow-through entity if those amounts are paid to foreign persons and another withholding agent backup withheld on those amounts under the presumption rules. (See Example 3 on page 10.) Notional principal contract income is reportable if it is effectively connected with the conduct of a trade or business in the United States. For more information, see the regulations under Chapter 3 of the Code and Pub. 515.

Income Codes, Exemption Codes, and Recipient Codes

Box 1. Enter the appropriate income code.		Box 6. If the tax rate entered in box 5 is 0%, you must generally enter the appropriate exemption code from the list below (but see the Caution below).
Code	Interest Income	Code	Authority for Exemption
01	Interest paid by U.S. obligors - general	01	Income effectively connected with a U.S. trade or business
02	Interest paid on real property mortgages	02	Exempt under an Internal Revenue Code section (income other than portfolio interest)
03	Interest paid to controlling foreign corporations	03	Income is not from U.S. sources 4
04	Interest paid by foreign corporations	04	Exempt under tax treaty
05	Interest on tax-free covenant bonds	05	Portfolio interest exempt under an Internal Revenue Code section
29	Deposit interest	06	Qualified intermediary that assumes primary withholding responsibility
30	Original issue discount (OID)	07	Withholding foreign partnership or withholding foreign trust
31	Short-term OID	08	U.S. branch treated as a U.S. person
Code	Dividend Income	09	Qualified intermediary represents income is exempt
06	Dividends paid by U.S. corporations - general	Caution: See the instructions for box 6 on page 13 for information on additional codes (00 and 99) that may be required.
07	Dividends qualifying for direct dividend rate	Box 12. Enter the appropriate recipient code.
08	Dividends paid by foreign corporations	Code	Type of Recipient
Code	Other Income	01	Individual 2
09	Capital gains	02	Corporation 2
10	Industrial royalties	03	Partnership other than a withholding foreign partnership 2
11	Motion picture or television copyright royalties	04	Withholding foreign partnership or withholding foreign trust
12	Other royalties (e.g., copyright, recording, publishing)	05	Trust
13	Real property income and natural resources royalties	06	Government or international organization
14	Pensions, annuities, alimony, and/or insurance premiums	07	Tax-exempt organization (IRC section 501(a))
15	Scholarship or fellowship grants	08	Private foundation
16	Compensation for independent personal services 1	09	Artist or athlete 2
17	Compensation for dependent personal services 1	10	Estate
18	Compensation for teaching 1	11	U.S. branch treated as U.S. person
19	Compensation during studying and training 1	12	Qualified intermediary
20	Earnings as an artist or athlete 2	13	Private arrangement intermediary withholding rate pool - general 5
24	Real estate investment trust (REIT) distributions of capital gains	14	Private arrangement intermediary withholding rate pool - exempt organizations 5
25	Trust distributions subject to IRC section 1445	15	Qualified intermediary withholding rate pool - general 5
26	Unsevered growing crops and timber distributions by a trust subject to IRC section 1445	16	Qualified intermediary withholding rate pool - exempt organizations 5
27	Publicly traded partnership distributions subject to IRC section 1446	17	Authorized foreign agent
28	Gambling winnings	20	Unknown recipient
32	Notional principal contract income 3
50	Other income
1 If compensation that otherwise would be covered under Income Codes 16-19 is directly attributable to the recipient's occupation as an artist or athlete, use Income Code 20 instead.
2 If Income Code 20 is used, Recipient Code 09 (artist or athlete) should be used instead of Recipient Code 01 (individual), 02 (corporation), or 03 (partnership other than withholding foreign partnership).
3 Use appropriate Interest Income Code for embedded interest in a notional principal contract.
4 Non-U.S. source income paid to a nonresident alien is not subject to U.S. tax. Use Exemption Code 03 when entering an amount for information reporting purposes only.
5 May be used only by a qualified intermediary.

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