Generally, 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 (NRA withholding) from the payment made to the foreign person.
The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of
the Internal Revenue Code. Generally, NRA 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
NRA withholding.
NRA 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.
Withholding Agent
You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of
any item of income of a
foreign person that is subject to 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.
Generally, the U.S.
person who pays an amount subject to NRA 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 NRA
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 may still be held liable for interest and penalties for your failure
to withhold.
Determination of amount to withhold.
You must withhold on the gross amount subject to NRA 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.
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 is also 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.
Withholding and Reporting Obligations
You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. (See
Returns Required,
later.) An exception from reporting may apply 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.
Form 1099 reporting and backup withholding.
You may also 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 (1) the U.S. person has not provided
its taxpayer
identification number (TIN) in the manner required, (2) the IRS notifies you that the TIN furnished by the payee is incorrect,
(3) there has been a
notified payee underreporting, or (4) there has been a payee certification failure. Generally, a TIN must be provided by a
U.S. non-exempt recipient
on Form W-9. A payer files a tax return on Form 945 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. See Identifying the Payee, later, for more information. Also see Section O. Special Rules for Reporting Payments Made
Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Forms 1099, 1098, 5498, and W-2G
Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from
backup withholding and
Form 1099 reporting.
Wages paid to employees.
If you are the employer of a nonresident alien, you may have to 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 may also 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 NRA Withholding
NRA 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 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 portion of a payment with
documentation, then
you must apply certain presumption rules, discussed later.
Identifying the Payee
Generally, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner
of the income. However,
there are situations in which the payee is a person other than the one to whom you actually make a payment.
U.S. agent of foreign person.
If you make a payment to a U.S. person and you have actual knowledge that the U.S. person is receiving the payment
as an agent of a foreign person,
you must treat the payment as made to the foreign person. However, if the U.S. person is a financial institution, you may
treat the institution as the
payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold.
If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must
treat the payment as made to
a U.S. person and not as a payment to a foreign person. You may be required to report the payment on Form 1099 and, if applicable,
backup withhold.
Disregarded entities.
A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from
its owner (a disregarded
entity) for federal tax purposes. The payee of a payment made to a disregarded entity is the owner of the entity.
If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner
as a beneficial owner
entitled to a reduced rate of withholding.
If the owner is a U.S. person, you do not apply NRA withholding. However, you may be required to report the payment
on Form 1099 and, if
applicable, backup withhold. You may assume that a foreign entity is not a disregarded entity unless you can reliably associate
the payment with
documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded
entity.
Flow-Through Entities
The payees of payments (other than income effectively connected with a U.S. trade or business) made to a foreign flow-through
entity are the owners
or beneficiaries of the flow-through entity. This rule applies for purposes of NRA withholding and for Form 1099 reporting
and backup withholding.
Income that is, or is deemed to be, effectively connected with the conduct of a U.S. trade or business of a flow-through entity,
is treated as paid to
the entity.
All of the following are flow-through entities.
A foreign partnership (other than a withholding foreign partnership).
A foreign simple or foreign grantor trust (other than a withholding foreign trust).
A fiscally transparent entity receiving income for which treaty benefits are claimed. See Fiscally transparent entity,
later.
Generally, 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 may also be required to treat the entity as a flow-through entity under the presumption rules, discussed
later.
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 NRA withholding 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 a flow-through entity or a foreign
intermediary. However, the
payee is the partnership itself if the partnership 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 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.
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. It gives you a Form W-8IMY with which it associates Forms W-8BEN from
the nonresident alien and
the foreign corporation and a Form W-9 from the U.S. citizen. The partnership also gives you a complete withholding statement
that enables you to
associate a portion of the interest payment to each partner.
You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Report
the payment to the
nonresident alien and the foreign corporation on Forms 1042-S. Report the payment to the U.S. citizen on Form 1099-INT.
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. It
gives you a valid Form
W-8IMY with which it associates a Form W-8BEN 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 portion of the interest payment with the Forms W-8BEN
provided by the foreign
corporation and the nonresident alien individual partners as a result of the withholding statements, you must treat them as
the payees of the
interest.
Example 3.
You make a payment of U.S. source dividends to a withholding foreign partnership. 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.
Foreign simple and grantor trust.
A trust is foreign unless it meets both 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.
Generally, 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 671 through 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: a nonresident alien individual; a foreign corporation; and a U.S. citizen.
You make a payment of
interest to the foreign trust. It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident alien
and the foreign corporation
and a Form W-9 from the U.S. citizen. The trust also gives you a complete withholding statement that enables you to associate
a portion of the
interest payment with the forms provided by each beneficiary. You must treat all three beneficiaries as the payees of the
interest payment as if the
payment were made directly to them. Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S.
Report the payment to the
U.S. citizen on Form 1099-INT.
Fiscally transparent entity.
If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity
in which the interest holder must
treat the entity as fiscally transparent. 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 for 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.
Example.
Entity A is a business organization organized under the laws of country X that has an income tax treaty in effect 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 effect 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. 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 was 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 was
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
Generally, 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 NRA withholding and for Form
1099 reporting and backup
withholding. 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. Generally, you determine whether an entity is a qualified intermediary
or a nonqualified
intermediary based on the representations the intermediary makes on Form W-8IMY.
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 NRA withholding applies. You make these determinations based on the foreign
intermediary's Form W-8IMY
and associated information and documentation. If you do not have all of the information or documentation that is required
to reliably associate a
payment with a payee, you must apply the presumption rules. See Documentation and Presumption Rules, later.
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 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. 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 to each account holder 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 portion of the interest
paid to the two
foreign persons on Forms 1042-S and the portion paid to the U.S. person on Form 1099-INT.
Qualified intermediary.
A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U.S. intermediary) that has entered
into a qualified intermediary
withholding agreement (discussed later) with the IRS. You may treat a QI as a payee to the extent the QI assumes primary 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 NRA 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.
QI withholding agreement.
Foreign financial institutions and foreign branches of U.S. financial institutions can enter into an agreement with
the IRS to be a qualified
intermediary. A QI is entitled to certain simplified withholding and reporting rules. In general, there are three major areas
whereby intermediaries
with QI status are afforded such simplified treatment.
The QI withholding agreement and procedures necessary to complete the QI application are set forth in Revenue Procedure 2000-12
found on page 387
of Internal Revenue Bulletin (I.R.B.) 2000-4 at
www.irs.gov/pub/irs-irbs/irb00-04.pdf. Also see the following items.
Documentation.
A QI is not required to forward documentation obtained from foreign account holders to the U.S. withholding agent
from whom the QI receives a
payment of U.S. source income. The QI maintains such documentation at its location and provides the U.S. withholding agent
with withholding rate
pools. A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding.
A QI is required to provide the U.S. withholding agent with information regarding U.S. persons subject to Form 1099
information reporting unless
the QI assumes the primary obligation to do Form 1099 reporting and backup withholding.
If a QI 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. This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence
that is not of the
type specified in the attachment to the agreement.
Form 1042-S reporting.
A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting
payments to each direct
account holder specifically. Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified
intermediary or a
flow-through entity (discussed earlier).
Collective refund procedures.
A QI may seek a refund on behalf of its direct account holders. The direct account holders, therefore, are not required
to file returns with the
IRS to obtain refunds, but rather may obtain them from the QI.
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. If you agree to treat the branch as a U.S. person, you may treat the branch as a U.S. payee for a
payment subject to NRA
withholding provided you receive a Form W-8IMY from the U.S. branch on which the agreement is evidenced. If you treat the
branch as a U.S. payee, you
are not required to withhold. Even though you agree to treat the branch as a U.S. person, you must report the payment on Form
1042-S.
A financial institution organized in a U.S. possession is treated as a U.S. branch. The special rules discussed in
this section apply to a
possessions financial institution.
If you are paying a U.S. branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign
person, irrespective of
any agreement to treat the branch as a U.S. person for amounts subject to NRA withholding. Consequently, amounts not subject
to NRA withholding 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 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 the U.S. branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding
as made to the foreign
person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the
United States.
Withholding foreign partnership and foreign trust.
A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement
with the IRS and is acting in
that capacity. A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding
agreement with the IRS and
is acting in that capacity.
A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to,
or included in the
distributive share of, its direct partners, beneficiaries, or owners. A WP or WT acting in that capacity must assume NRA withholding
responsibility
for these amounts. 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 and WT withholding agreements.
The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64
found on page 306 of I.R.B.
2003-32 at
www.irs.gov/pub/irs-irbs/irb03-32. Also see the following items.
Revenue Procedure 2004-21 (I.R.B. 2004-14).
Revenue Procedure 2005-77 (I.R.B. 2005-51).
Employer identification number (EIN).
A completed Form SS-4 must be submitted with the application for being a WP or WT. The WP or WT will be assigned a
WP-EIN or WT-EIN to be used only
when acting in that capacity.
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 a written
statement identifying the
amounts for which it is so acting. The statement is not required to contain withholding rate pool information or any information
relating to the
identity of a direct partner, beneficiary, or owner. The Form W-8IMY must contain the WP-EIN or WT-EIN.
Foreign Persons
A payee is subject to NRA withholding only if it is a foreign person. A foreign person includes a nonresident alien individual,
foreign
corporation, foreign partnership, foreign trust, a 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. Generally, the U.S. branch of a foreign
corporation or partnership
is treated as a foreign person.
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 NRA withholding rules that apply to nonresident aliens for all
income except wages.
Wages paid to these individuals are subject to the withholding rules that apply to U.S. citizens and resident aliens and not
the NRA withholding
rules. See Publication 15 (Circular E).
Resident alien.
A resident alien is an individual that 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 U.S. resident 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 U.S. resident 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 ⅙ the number of days of presence in the first preceding year, and only ⅙ the number of days in the second preceding
year.
Generally, 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 Section 13 of Publication 15 (Circular E).
Resident of a U.S. possession.
A bona fide resident of Puerto Rico, the 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:
Is present in the possession for at least 183 days during the tax year,
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 under Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an
implementing agreement is in effect between the United States and that possession.
Virgin Islands and American Samoa corporations.
A corporation created or organized in, or under the laws of, the 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 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 Virgin Islands, American Samoa, Guam, the CNMI, or the United States.
Foreign private foundation.
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 NRA 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 even if it was formed
under foreign law. Generally,
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, 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.
U.S. branches of foreign persons.
In general, a payment to a U.S. branch of a foreign person is a payment made to the foreign person. You may, however,
treat payments to U.S.
branches of 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 financial institution organized under the laws of a U.S. possession is treated as a U.S. branch.
Documentation
Generally, 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.
Generally, you 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. For
example, if you do not
have documentation or you cannot determine the portion of a payment that is allocable to specific documentation, you must
use the presumption rules.
The specific types of documentation are discussed in this section. You should, however, also see the discussion, Withholding on Specific
Income, as well as the instructions to the particular forms. As the withholding agent, you may also want to see the Instructions for
the
Requester of Forms W-8BEN, 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. Generally, 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 NRA withholding, but may require additional information as discussed
under each of the forms
in this section.
Joint owners.
If you make a payment to joint owners, you need to get documentation from each owner.
Form W-9.
Generally, you can treat the payee as a U.S. person if the payee gives you a Form W-9. The Form W-9 can only be used
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 NRA
withholding, but may be subject to Form 1099 reporting and backup withholding.
Form W-8.
Generally, a foreign person that is a beneficial owner of the income should give you a Form W-8. Until further notice,
you can rely upon Forms W-8
that contain a P.O. box as a permanent residence address provided you do not know, or have reason to know, that the person
providing the form is a
U.S. person and that a street address is available. You may rely on Forms W-8 for which there is a U.S. mailing address provided
you received the form
prior to December 31, 2001.
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 a payment made in a U.S. possession.
Other documentation.
Other documentation may be required to claim an exemption from, or a reduced rate of, 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-8ECI, W-8EXP or, if applicable, on documentary
evidence, you may
treat the payee as a foreign beneficial owner.
Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, 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 or a partner in a partnership
subject to
section 1446 withholding; and
If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty.
Form W-8BEN may also be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding
for income that is not
subject to NRA withholding. 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.
Claiming treaty benefits.
You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate
of withholding under an income
tax treaty only if the person provides a U.S. 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 foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner must also
certify on Form W-8BEN that it
will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA 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 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. Tables at
the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding
that apply in cases
where all conditions of the particular treaty articles are satisfied.
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.
Exceptions to TIN requirement.
A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements
for the following
exceptions are met.
Income from marketable securities (discussed next).
Unexpected payments to an individual (discussed under U.S. Taxpayer Identification Numbers).
Marketable securities.
A Form W-8BEN provided to claim treaty benefits does not need a U.S. 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 accounts.
If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence,
rather than Form W-8BEN.
Generally, 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 will usually be treated as paid at the branch
or office where the
amount is credited. An offshore account is an account maintained at an office or branch of a U.S. or foreign bank or other
financial institution at
any location outside the United States.
You may rely on documentary evidence given you by a nonqualified intermediary or a flow-through entity with its Form
W-8IMY. This rule applies even
though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Generally, the nonqualified
intermediary or
flow-through entity that gives you documentary evidence will also have to give you a withholding statement, discussed later.
Documentary evidence.
You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside
the United States to an offshore
account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. To claim treaty benefits, the documentary
evidence must be
one of the following:
A certificate of residence that:
Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident,
States that the person has filed its most recent income tax return as a resident of that country, and
Is issued within 3 years prior to being presented to you.
Documentation for an individual that:
Includes the individual's name, address, and photograph,
Is an official document issued by an authorized governmental body, and
Is issued no more than 3 years prior to being presented to you.
Documentation for an entity that:
Includes the name of the entity,
Includes the address of its principal office in the treaty country, and
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.
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, 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 NRA withholding.
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.
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 to the partnership.
Form W-8EXP,
Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding, 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,
Claim that such person is the beneficial owner of the income for which the form is being furnished, and
Claim a reduced rate of, or an exemption from, withholding as such an entity.
If the government or organization 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.
See 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 are treated as made to the payees on whose behalf the
intermediary or entity
acts. 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,
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,
Represent, if applicable, that the qualified intermediary is assuming primary NRA 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 and
that the income
is not effectively connected with the conduct of a trade or business in the United States,
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, or
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
1.1446-5.
Qualified Intermediaries
Generally, a QI is any foreign intermediary that has entered into a QI withholding 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 before
it receives a fully
executed agreement. The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. The IRS will revoke a QI-EIN
if the QI agreement is
not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for
signature.
Responsibilities.
Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders
and customers. However, a QI
is not required to provide you with documentation it obtains from its foreign account holders and customers. Instead, it provides
you with a
withholding statement that contains withholding rate pool information. A withholding rate pool is a payment of a single type
of income, determined in
accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. A qualified
intermediary is required
to provide you with information regarding U.S. persons subject to Form 1099 reporting and to provide you withholding rate
pool information separately
for each such U.S. person unless it has assumed Form 1099 reporting and backup withholding responsibility. For the alternative
procedure for providing
rate pool information for U.S. non-exempt persons, see the Form W-8IMY instructions.
The withholding statement must:
Designate those accounts for which it acts as a qualified intermediary,
Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding
responsibility, and
Provide sufficient information for you to allocate the payment to a withholding rate pool.
The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations
assumed by the QI.
Primary responsibility not assumed.
If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding
responsibility for the
payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the
portion of the payment that
relates to each withholding rate pool for foreign payees. Unless the alternative procedure applies, the qualified intermediary
must provide you with a
separate withholding rate pool for each U.S. person subject to Form 1099 reporting and/or backup withholding. The QI must
provide a Form W-9 or, in
the absence of the form, the name, address, and TIN, if available, for such person.
Primary NRA withholding responsibility assumed.
If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting
and backup withholding
responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine
the portion of the
payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the
portion of the payment
attributable to withholding rate pools for each U.S. person, unless the alternative procedure applies, subject to Form 1099
reporting and/or backup
withholding. The QI must provide a Form W-9 or, in absence of the form, the name, address, and TIN, if available, for such
person.
Primary NRA and Form 1099 responsibility assumed.
If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting
and backup withholding
responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY.
It is not necessary to
associate the payment with withholding rate pools.
Example.
You make a payment of dividends to a QI. It has five customers: two are foreign persons who have provided documentation entitling
them to a 15%
rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a
U.S. individual who provides
it with a Form W-9. Each customer is entitled to 20% of the dividend payment. The QI does not assume any primary withholding
responsibility. The QI
gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend
to a 15% withholding rate
pool, 40% to a 30% withholding rate pool, and 20% to the U.S. individual. You should report on Forms 1042-S 40% of the payment
as made to a 15% rate
dividend pool and 40% of the payment as made to a 30% rate dividend pool. The portion of the payment allocable to the U.S.
individual (20%) is
reportable on Form 1099-DIV.
Smaller partnerships and trusts.
A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or
trust meets the following
conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is a direct account holder of the QI.
It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
For information on these rules, see section 4A.01 of the QI agreement. This is found in Appendix 3 of Revenue Procedure
2003-64 (I.R.B. 2003-32).
Also see Revenue Procedure 2004-21(I.R.B. 2004-14).
Related partnerships and trusts.
A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following
conditions.
It is a foreign partnership or foreign 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 has applied
this rule.
For information on these rules, see section 4A.02 of the QI agreement. This is found in Appendix 3 of Revenue Procedure 2003-64
(I.R.B.
2003-32). Also see Revenue Procedure 2005-77 (I.R.B. 2005-51).
Nonqualified Intermediaries
If you are making a payment to a nonqualified intermediary, foreign flow-through entity, 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 portion 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 a U.S. branch), and
You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required.
The NQI, flow-through entity, 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.
Withholding statement.
Generally, a withholding statement must contain the following information.
The name, address, and TIN (if any, or if required) of each person for whom documentation is provided.
The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been
provided.
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. person
exempt from Form 1099 reporting), U.S. non-exempt recipient (U.S. person subject to Form 1099 reporting), or a foreign person.
For a foreign person,
the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a
U.S. branch.
The type of recipient the person is, based on the recipient codes used on Form 1042-S.
Information allocating each payment, by income type, to each payee (including U.S. exempt and U.S. non-exempt recipients)
for whom
documentation has been provided.
The rate of withholding that applies to each foreign person to whom a payment is allocated.
A foreign payee's country of residence.
If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest,
treaty benefit,
etc.).
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.
The name, address, and TIN (if any) of any other NQI, flow-through entity, or U.S. branch from which the payee will directly
receive a
payment.
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 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.
This alternative procedure cannot be used for payments to U.S. non-exempt recipients. Therefore, an NQI must always provide
you with allocation
information for all U.S. non-exempt recipients 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. A withholding rate pool is a payment of a single type of income
(as determined by the income
categories on Form 1042-S) that is subject to a single rate of withholding. For example, an NQI that has foreign account holders
receiving royalties
and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties
and one for
dividends). 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.
Failure to provide allocation information.
If an NQI fails to provide you with the payee specific allocation information for a 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. Unless the NQI provides all the required
information,
including account holder specific allocation information, prior to any payments being made, you must treat the payees as undocumented
and apply the
presumption rules, discussed later. 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. 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
portion 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 NRA
withholding
responsibility for amounts (subject to NRA withholding) that are distributed to, or included in the distributive share of,
any direct partner. 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 a
written statement identifying the amounts for which it is so acting. The Form W-8IMY must contain the WP-EIN.
Responsibilities of WP.
The WP must withhold on the date it makes a distribution of an amount subject to NRA 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 for filing the WP's Forms 1042 and 1042-S (including extensions 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 direct partners on a pooled basis rather than reporting payments to
each direct partner. This
election must be made when the WP withholding agreement is executed. If the election was not made, the WP must file separate
Forms 1042-S for each
direct partner whose distributive share included an amount subject to NRA withholding.
Smaller partnerships and trusts.
Under a special rule, a WP that has made a pooled reporting election can treat partners of certain smaller partnerships
and beneficiaries or owners
of certain smaller trusts (Joint Account Provision) as direct partners. These rules only apply to a partnership or trust that
meets the following
conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is a direct partner of the WP.
It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
For more information on applying these rules, see section 10.01 of the WP agreement found in Revenue Procedure 2003-64 (I.R.B.
2003-32). Also
see Revenue Procedure 2004-21 (I.R.B. 2004-14).
Related partnerships and trusts.
Under a special rule, a WP that has made a pooled reporting election can treat direct partners of certain related
partnerships and direct
beneficiaries or owners of certain related trusts as direct partners. These rules only apply to a partnership or trust that
meets the following
conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is either:
A direct partner of the WP, or
An indirect partner of the WP that is a partner, beneficiary, or owner of a partnership or trust to which the WP has applied
this
rule.
For more information on applying these rules see section 10.02 of the WP agreement found in Revenue Procedure 2003-64 (I.R.B.
2003-32). Also
see Revenue Procedure 2005-77 (I.R.B. 2005-51).
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. Also, a WP generally is a nonwithholding foreign partnership for amounts
distributed to, or included
in the distributive share of, passthrough partners or indirect partners.
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 VI 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 NRA
withholding
responsibility for amounts (subject to NRA withholding) that are distributed to, or included in the distributive share of,
any direct beneficiary or
owner. 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 a written statement identifying the amounts for which it is so acting. The Form W-8IMY must contain the WT-EIN.
Responsibilities of WT.
The WT must withhold on the date it makes a distribution of an amount subject to NRA 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 a Schedule K-1 (Form 1041) 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 for filing the WT's Forms 1042 and 1042-S (including
extensions) 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.
A WT can elect to report payments made to its direct beneficiaries or owner on a pooled basis rather than reporting
payments to each direct
beneficiary or owner. This election must be made when the WT withholding agreement is executed. If the election was not made,
the WT must file
separate Forms 1042-S for each direct beneficiary or owner whose distributive share included an amount subject to NRA withholding.
Smaller partnerships and trusts.
Under a special rule, a WT that has made a pooled reporting election can treat partners of certain smaller partnerships
and beneficiaries or owners
of certain smaller trusts (Joint Account Provision) as direct beneficiaries or owners. These rules only apply to a partnership
or trust that meets the
following conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is a direct partner, beneficiary, or owner of the WT.
It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
For more information on applying these rules, see section 10.01 of the WT agreement found in Revenue Procedure 2003-64 (I.R.B.
2003-32). Also
see Revenue Procedure 2004-21 (I.R.B. 2004-14).
Related partnerships and trusts.
Under a special rule, a WT that has made a pooled reporting election can treat direct partners of certain related
partnerships and direct
beneficiaries or owners of certain related trusts as direct beneficiaries or owners. These rules only apply to a partnership
or trust that meets the
following conditions.
It is a foreign partnership or foreign 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 partner, beneficiary, or owner of a partnership or trust to which the
WP has applied
this rule.
For more information on applying these rules, see section 10.02 of the WP agreement found in Revenue Procedure 2003-64 (I.R.B.
2003-32). Also
see Revenue Procedure 2005-77 (I.R.B. 2005-51).
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. Also, a WT generally is a nonwithholding foreign trust for amounts distributed to, or
included in the
distributive share of, passthrough beneficiaries or owners or indirect beneficiaries or owners.
Generally, 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 VI 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
You must withhold in accordance with the presumption rules (discussed later) if you know or have reason to know that a Form
W-8 or documentary
evidence provided by a payee is unreliable or incorrect. 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.
Reason To Know
Generally, you are considered to have reason to know that a claim of U.S. 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.
Financial institutions (including a regulated investment company) are treated as having reason to know documentation is unreliable
or incorrect for
payments on marketable securities only in the circumstances discussed next. If the documentation is considered unreliable
or incorrect, you must get
new documentation. However, you may rely on the original documentation if you receive the additional statements and/or documentation
discussed.
The circumstances, discussed next, also apply to a withholding agent that is not a financial institution or making a payment
on marketable
securities. 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.
Establishment of foreign status.
You have reason to know that a Form W-8BEN or Form W-8EXP is unreliable or incorrect to establish a direct account
holder's status as a foreign
person if:
The Form W-8 has a permanent residence address in the United States,
The Form W-8 has a mailing address in the United States,
You have a residence or mailing address as part of your account information that is an address in the United States,
The person providing the certificate notifies you of a new residence or mailing address in the United States, or
If the Form W-8 is provided with respect to an offshore account, the account holder has standing instructions directing you
to pay amounts
from its account to an address or account maintained in the United States.
Note. Items (2) and (3) do not apply if the U.S. mailing address is provided on a Form W-8 received before December 31, 2001.
You may, however, rely on a Form W-8 as establishing the account holder's foreign status if any of the following apply:
You receive the Form W-8 from an individual and:
You possess or obtain documentary evidence (that does not contain a U.S. address) that was provided within the last three
years, was valid
when provided, supports the claim of foreign status, and the beneficial owner provides you with a reasonable explanation in
writing supporting the
account holder's foreign status, or
If the account is maintained at your office outside the United States, you are required to report annually a payment to the
account holder
on a tax information statement filed with the tax authority of the country in which your office is located and that country
has an income tax treaty
in effect with the United States.
You receive the Form W-8 from an entity that is not a flow-through entity and:
You have in your possession or obtain documentation that substantiates that the entity is organized or created under foreign
law,
or
If the account is maintained at your office outside the United States, you are required to report annually a payment to the
account holder
on a tax information statement filed with the tax authority of the country in which your office is located and that country
has an income tax treaty
in effect with the United States.
You may treat an account holder that has provided standing instructions to make payments with respect to its offshore account
to a U.S.
account or U.S. address as a foreign person if the account holder provides a reasonable explanation in writing that supports
the account holder's
foreign status.
Claim of reduced rate of withholding under treaty.
You have reason to know that a Form W-8BEN 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-8BEN 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-8BEN is in the treaty country but the withholding certificate (or your account
information)
contains a mailing address that is not in 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-8BEN as establishing an account holder's claim of a reduced rate of withholding
under a treaty if any of the
following apply.
The permanent residence address is not in the treaty country and:
The account holder provides a reasonable explanation for the permanent residence address outside the treaty country, or
You possess or obtain documentary evidence that establishes residency in a treaty country.
The mailing address is not in the treaty country and:
You possess or obtain additional documentation (that does not contain an address outside the treaty country) supporting the
beneficial
owner's claim of residence in the treaty country,
You possess or obtain documentation that establishes that the beneficial owner is an entity organized in a treaty country,
You know that the address outside the treaty country is a branch of a bank or insurance company that is a resident of the
treaty country,
or
You obtain a written statement from the beneficial owner that reasonably establishes its entitlement to treaty benefits.
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.
Documentary Evidence
You have reason to know that documentary evidence provided by a direct account holder that is a foreign person 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:
The only mailing or residence address on documentary evidence provided after December 31, 2000, is an address at a financial
institution
(unless the financial institution is the beneficial owner), an in-care-of address, or a P.O. box,
You have a mailing or residence address for the account holder in the United States or if the account holder notifies you
of a new address
in the United States, or
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.
The mailing or residence address is in the United States, you receive the documentary evidence from an individual, and
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,
You possess or 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 the Form W-8 was received before December 31, 2001), or
The account is maintained at your office outside the United States and you are required to report annually a payment to the
account holder
on a tax information statement filed with the tax authority of the country in which your office is located and that country
has an income tax treaty
in effect with the United States.
The mailing or residence address is in the United States, you receive the documentary evidence from an entity (other than
a flow-through
entity) and:
You possess or obtain documentation to substantiate that the entity is actually organized under the laws of a foreign country,
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 additional documentary evidence sufficient to establish the
account holder's foreign
status, or the Form W-8 was received before December 31, 2001), or
The account is maintained at an office outside the United States and you are required to report annually a payment to the
account holder on
a tax information statement filed with the tax authority of the country in which your office is located and that country has
an income tax treaty in
effect with the United States.
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.
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,
The only address that you have (whether in or outside the treaty country) is a P.O. box, an in-care-of address, or the address
of a
financial institution (that is not the beneficial owner of the income), 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.
Chart A. Presumption Rules in the Absence of Documentation
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.
The mailing or residence address is outside the treaty country and:
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),
You possess or obtain documentary evidence that establishes that the account holder is an entity organized in a treaty country,
or
You obtain a valid Form W-8BEN that contains a permanent residence address and a mailing address in the applicable treaty
country.
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.
Indirect Account Holders
A financial institution that receives documentation from a payee through a nonqualified intermediary, a flow-through entity,
or a U.S. branch of a
foreign bank or insurance company subject to U.S. or state regulatory supervision has reason to know that the documentary
evidence is unreliable or
incorrect if a reasonably prudent person in the financial institution'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 a reasonable explanation is
provided, in writing, by the nonqualified intermediary, flow-through entity, or U.S. branch.
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
nonqualified intermediary, flow-through entity, or U.S. branch to correct the withholding statement, or, alternatively, you
may apply the presumption
rules, discussed later, to the payee.
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
nonqualified intermediary, 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).
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. You are not
permitted to apply a reduced rate of NRA 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.
The presumption rules, in the absence of documentation, for the subject matter are discussed in the regulation section indicated
on Chart A.
Income Subject to NRA Withholding
This section explains how to determine if a payment is subject to NRA withholding.
A payment is subject to NRA 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 NRA 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 NRA withholding even though a portion of the distribution
may be a return of
capital or capital gain not otherwise subject to NRA withholding.
Amounts not subject to NRA withholding.
The following amounts are not subject to NRA withholding.
Portfolio interest on bearer obligations or foreign-targeted registered obligations if those obligations 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 obligations payable 183 days or less from the date of original issue. 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.
Source of Income
Generally, 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. In
this situation, you are required to withhold the amount necessary to assure that the tax withheld will not be less than 30%
of U.S. source income. Or,
you may make a reasonable estimate of the amount from U.S. sources and put a corresponding portion of the amount due in escrow
until the amount from
U.S. sources can be determined, at which time withholding becomes due. Other source rules are summarized in Chart B and explained
in detail in the
separate discussions under Withholding on Specific Income, later.
Generally, 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.
Chart B. Summary of Source Rules for FDAP Income
Type of Income:
Source Determined by:
Pay for personal services
Where services are performed
Dividends
Type of corporation (U.S. or foreign)
Interest
Residence of payer
Rents
Where property is located
Royalties—Patents, copyrights, etc.
Where property is used
Royalties—Natural resources
Where property is located
Pensions due to personal services performed
Where services were performed while a nonresident alien
Scholarships and fellowship grants
Generally, residence of payer
Personal service income.
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 dependent personal services under 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
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 section 1.861-4(b)(2)(ii)(D) of the regulations.
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 NRA 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.
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 portion of the distribution that constitutes the compensation
element (employer contributions)
and the portion that constitutes the earnings element (the investment income).
The compensation element is sourced the same as compensation from the performance of personal services. The portion
attributable to services
performed in the United States is U.S. source income, and the portion 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.
You can find Revenue Procedure 2004-37 on page 1099 of Internal Revenue Bulletin 2004-26 at
www.irs.gov/pub/irs-irbs/irb04-26.pdf.
The earnings portion of a pension payment is U.S. source income if the trust is a U.S. trust.
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.
Interest.
Original issue discount.
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.
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 NRA withholding. 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 portion of
the death benefit under contract to a viatical settlement provider. See Publication 525, Taxable and Nontaxable Income, for
more information.
Racing purses.
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-8BEN 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-8BEN 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 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 NRA withholding.
Withholding on Specific Income
Different kinds of income are subject to different withholding requirements.
Effectively Connected Income
Generally, 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, or,
income or gain economically equivalent to such amounts, is attributable to the U.S. office and is effectively connected income.
Withholding exemption.
Generally, you do not need to withhold tax on income 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
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:
Pay for personal services performed by an individual,
Effectively connected taxable income of a partnership that is allocable to its foreign partners (see Partnership Withholding on
Effectively Connected Income, later),
Income from the disposition of a U.S. real property interest (see U.S. Real Property Interest, later), or
Payments to a foreign corporation for personal services if all of the following apply:
The foreign corporation otherwise qualifies as a personal holding company for income tax purposes,
The foreign corporation receives amounts under a contract for personal services of an individual whom the corporation has
no right to
designate, and
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.
Notional principal contract income.
Payment of an amount attributable to a notional principal contract is not subject to NRA withholding regardless of
whether a Form W-8ECI is
provided. However, 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 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
unless the branch provides
a Form W-8BEN 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 NRA withholding. The income codes contained in this
section correspond to
the income codes used on Form 1042-S (discussed later), and in most cases, on Tables 1 and 2 found at the end of this publication.
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%. Generally, you must withhold
the tax at the time you
pay the income to the foreign person. See When to withhold, earlier.
Chart C. Withholding Tax Rates
(Note. You must withhold tax at the following rates on payments of income unless a reduced rate or exemption is authorized
under a tax treaty. The
President may apply higher tax rates on income paid to residents or corporations of foreign countries that impose burdensome
or discriminatory taxes
on U.S. persons.)
Type of Income
Rate
Taxable part of U.S. scholarship or fellowship grant paid to holder of “F”“J”“M” or “Q” visa (see
Scholarship 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 services (see Pensions, Annuities, and Alimony, later)
Graduated rates in
Circular A or Circular E
Wages paid to a nonresident alien employee (see Pay for Personal Services Performed,
later)
Graduated rates in
Circular A or Circular E
Each foreign partner's share of effectively connected income of the partnership (see Partnership
Withholding on Effectively Connected Income, later)
35%
Distributions of effectively connected income to foreign partners by publicly traded partnerships (see Publicly
Traded Partnerships, later)
35%
Dispositions of U.S. real property interests (see U.S. Real Property Interest, later)
10% (or other amount)
Dividends paid to Puerto Rico corporation
10%
All other income subject to withholding
30%
Interest
Interest from U.S. sources paid to foreign payees is subject to NRA withholding. 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 portion 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, 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 NRA
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.
Original issue discount (Income Code 30).
Original issue discount paid on the redemption of an obligation is subject to NRA withholding. Original issue discount
paid as part of the
purchase price of an obligation sold or exchanged, other than in a redemption, is not subject to NRA withholding unless the
purchase 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 the plan.
Withholding is required
by a person other than the issuer of an obligation (or the issuer's agent) only if the obligation is issued after December
31, 2000.
The original issue discount subject to NRA withholding is the taxable amount of original issue discount. The taxable
amount is the original issue
discount that accrued while the obligation was held by the foreign beneficial owner up to the time the obligation was sold
or exchanged or a payment
was made, reduced by any original issue discount that was previously taxed. If a payment was made, the tax due on the original
issue discount may not
exceed the payment reduced by the tax imposed on the portion of the payment that is qualified stated interest.
If you cannot determine the taxable amount, you must withhold on the entire amount of original issue discount accrued
from the date of issue until
the date of redemption (or sale or exchange, if subject to NRA withholding) determined on the basis of the most recently published
Publication 1212,
List of Original Issue Discount Instruments.
For more information on original issue discount, see Publication 550, Investment Income and Expenses.
Reduced Rates of Withholding on Interest
Certain interest is subject to a reduced rate of, or exemption from, withholding.
Portfolio interest.
Interest and original issue discount that qualifies as portfolio interest is not subject to NRA withholding. To qualify
as portfolio interest, the
interest must be otherwise subject to NRA withholding, must be paid on obligations issued after July 18, 1984, and must meet
certain other
requirements.
Obligations not in registered form.
Interest on an obligation that is not in registered form (bearer obligation) is portfolio interest if the obligation
is foreign-targeted. A bearer
obligation is foreign-targeted if:
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.
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.
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. The documentation required is a valid Form W-8BEN (a valid Form
W-8EXP from an entity
that completes the Form W-8EXP for other purposes is also acceptable) or, if allowable, valid documentary evidence. See Documentation,
earlier.
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
1.163-5(c)(2)(i) of the
regulations. However, the procedure that requires the obligation to be offered for sale (or resale) only outside the United
States does not apply if
the registered obligation is offered for sale through a public auction. Also, the procedure that requires the obligation to
be delivered outside the
United States does not apply if the obligation is considered registered because it may be transferred only through a book
entry system and the
obligation is offered for sale through a public auction. The documentation needed depends on whether the interest is paid
to a financial institution,
a member of a clearing organization, or to some other foreign person.
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.
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. Generally,
the constructive ownership of stock rules apply in determining if a person is a 10% shareholder of a corporation.
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.
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.
Interest on real property mortgages (Income Code 2).
Certain treaties (see Table 1) 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.
Interest paid to controlling 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.
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 NRA withholding as if paid by a domestic corporation (without considering the “payer having income from
abroad” exception). As a result, the interest paid to foreign payees is generally subject to NRA withholding. 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 at
the statutory rate of 30% on the
interest paid by a foreign corporation's U.S. trade or business.
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 must also be a qualified
resident of its country
of residence to be entitled to benefits under that country's tax treaty. 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 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 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.
The deposit interest exception does not require a Form W-8BEN. However, a Form W-8BEN may be required for purposes
of Form 1099 reporting and
backup withholding.
You may have to file Form 1042-S to report certain payments of interest on deposits.
Interest from foreign business arrangements.
In general, interest received from a resident alien individual or a domestic corporation is not subject to NRA withholding
if 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. 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 individual
or
corporation.
However, limits apply if the recipient is considered to be a related person (see section 861(c) of the Code). 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 NRA withholding.
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 NRA withholding 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 was issued at a discount and that is payable 183 days
or less from the date of its
original issue (without regard to the period held by the taxpayer) is not subject to NRA withholding. This exemption 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.
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 NRA 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 NRA withholding.
A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase
transaction is treated
the same as a distribution on the transferred security. Use Income Code 34 to report these substitute payments.
Dividends paid to Puerto Rico corporation.
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 Purerto Rico corporations'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.
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. However, a distributing corporation or intermediary may elect to not withhold on
the part of the
distribution that:
Represents a nontaxable distribution payable in stock or stock rights,
Represents a distribution in part or full payment in exchange for stock,
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,
Represents a capital gain dividend (use Income Code 36) or an exempt interest dividend by a regulated investment company,
or
Is subject to withholding under section 1445 of the Code (withholding 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.
The election is made by actually reducing the amount of withholding at the time the distribution is paid.
A qualified investment entity is any real estate investment trust (REIT) and any regulated investment company (RIC).
Dividends paid by a REIT.
A distribution by a REIT is treated as a dividend and is not subject to withholding under section 1445 as 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 shareholder did not own more than 5% of that stock at any time during the REIT's tax year.
If these requirements are not met, item (5) in the previous list applies to the distribution.
Dividends paid by a domestic corporation (an “80/20” company).
Generally, a percentage of any dividend paid by a domestic corporation that received at least 80% of its gross income
from the active conduct of a
foreign business for a testing period is not subject to NRA withholding. 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. The percentage is found by dividing the
corporation's foreign
gross income for the testing period by the corporation's total gross income for that period.
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.
Dividends paid by a RIC.
Subject to certain exceptions, no withholding is required on interest-related dividends and short-term capital gain
dividends paid by a RIC.
To qualify for this treatment, the RIC must designate any part of a dividend as an interest-related dividend or a
short-term capital gain dividend
in a written notice mailed to the shareholder not later than 60 days after close of the RIC's tax year. The amount designated
is subject to dollar
limitations.
The no withholding rule does not apply to interest-related dividends:
To the extent the dividend is attributable to interest on debt issued by the person (or a corporation or partnership of which
that person is
a 10% owner) who receives the dividend,
Unless documentation is received indicating that the beneficial owner is a foreign person, or
Paid to a person in a foreign country (or addressed to, or for the account of, persons in a foreign country) during a period
specified for
that country by the Commissioner.
The no withholding rule does not apply to short-term capital gain dividends paid to a nonresident alien individual
present in the United States for
183 days or more during the tax year.
For more information on these dividends, see section 871(k) of the Code and, for amounts paid to a foreign corporation,
section 881(e).
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. Generally, 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 claiming the direct dividend rate should complete line 11 of Form W-8BEN regarding special rates and conditions.
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 NRA withholding. This exception does not require
a Form W-8BEN. However, a
Form W-8BEN 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 NRA
withholding 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 NRA 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.
Gains
You generally do not need to withhold on gains 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 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 assure 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 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.
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 also may include rents for the use or lease of personal property. Under certain tax treaties,
different rates may apply to royalties for information concerning industrial, commercial, and scientific know-how.
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 13)
You must withhold tax 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 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 14)
The following rules apply to withholding on pensions, annuities, and alimony of foreign payees.
Pensions and annuities.
Generally, 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 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 portion of a distribution that arises from the
performance of services in
the United States after December 31, 1986, provided you receive Form W-8ECI and can determine the portion of the distribution
that constitutes income
effectively connected with the conduct of a trade or business in the United States.
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.
You can find Revenue Procedure 2004-37 on page 1099 of Internal Revenue Bulletin 2004-26 at
www.irs.gov/pub/irs-irbs/irb04-26.pdf.
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.
No withholding.
Do not withhold tax on an annuity payment to a nonresident alien if at the time of the first payment from the plan,
90% or more of the employees
eligible for benefits under the plan are citizens or residents of the United States and the payment is:
For the nonresident's personal services performed outside the United States, or
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 does not exceed $3,000, and the personal services are performed for:
A nonresident alien individual, foreign partnership, or foreign corporation not engaged in a trade or business in the United
States,
or
An office or place of business of a U.S. resident or citizen which is maintained outside the United States.
If the payment otherwise qualifies under these rules, but less than 90% of the employees eligible for benefits are
citizens or residents of the
United States, you still need not withhold tax on the payment if:
The recipient is a resident of a country that gives a substantially equal exclusion to U.S. citizens and residents, or
The recipient is a resident of a beneficiary developing country under the Trade Act of 1974.
The foreign person entitled to the payments must provide you with a Form W-8BEN that contains the TIN of the foreign
person.
Alimony payments.
Generally, alimony payments made by U.S. resident aliens to nonresident aliens are taxable and subject to NRA withholding
whether the recipients
are residing abroad or are temporarily present in the United States.
Many tax treaties, however, provide for an exemption from withholding for alimony payments. These treaties are shown
in Table 1, by a footnote
reference under Income Code number 14.
Alimony payments made to a nonresident alien by a U.S. ancillary administrator of a nonresident alien estate are from
foreign sources and are not
subject to withholding.
Scholarships and Fellowship Grants (Income Code 15)
A scholarship or fellowship grant is an amount given to an individual for study, training, or research, and which does not
constitute compensation
for personal services. Whether a fellowship grant from U.S. sources is subject to NRA withholding depends on the nature of
the payments and whether
the recipient is a candidate for a degree. See Scholarships, fellowships, and grants under Source of Income, earlier.
Candidate for a degree.
Do not withhold on a qualified scholarship from U.S. sources granted and paid to a candidate for a degree. A qualified
scholarship means any amount
paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant,
the amount is to be
used for the following expenses:
Tuition and fees required for enrollment or attendance at an educational organization, and
Fees, books, supplies, and equipment required for courses of instruction at the educational organization.
The payment of a qualified scholarship to a nonresident alien is not reportable and is not subject to NRA withholding.
However, the portion of a
scholarship or fellowship paid to a nonresident alien which does not constitute a qualified scholarship is reportable on Form
1042-S and is subject to
NRA withholding. For example, those portions of a scholarship devoted to travel, room, and board are subject to NRA withholding
and are reported on
Form 1042-S. The withholding rate is 14% on taxable scholarship and fellowship grants paid to nonresident aliens temporarily
present in the United
States in “F,” “J,” “M,” or “Q” nonimmigrant status. Payments made to nonresident alien individuals in any other immigration
status are subject to 30% withholding.
Nondegree candidate.
If the person receiving the scholarship or fellowship grant is not a candidate for a degree, and is present in the
United States in “F,”
“J,” “M,” or “Q” nonimmigrant status, you must withhold tax at 14% on the total amount of the grant that is from U.S. sources if the
following requirements are met.
The grant must be for study, training, or research at an educational organization in the United States.
The grant must be made by:
A tax-exempt organization operated for charitable, religious, educational, etc. purposes,
A foreign government,
A federal, state, or local government agency, or
An international organization, or a binational or multinational educational or cultural organization created or continued
by the Mutual
Educational and Cultural Exchange Act of 1961 (known as the Fulbright-Hays Act).
If the grant does not meet both (1) and (2) above, you must withhold at 30% on the amount of the grant that is from
U.S. sources.
Alternate withholding procedure.
You may choose to treat the taxable part of a U.S. source grant or scholarship as wages. The student or grantee must
have been admitted into the
United States on an “F,” “J,” “M,” or “Q” visa. The student or grantee will know that you are using this alternate withholding
procedure when you ask for a Form W-4.
The student or grantee must complete Form W-4 annually following the instructions given here and forward it to you,
the payer of the scholarship,
or your designated withholding agent. You may rely on the information on Form W-4 unless you know or have reason to know it
is incorrect. You must
file a Form 1042-S (discussed later) for each student or grantee who gives you, or your withholding agent, a Form W-4.
Each student or grantee who files a Form W-4 must file an annual U.S. income tax return to be allowed the exemptions
and deductions claimed on that
form. If the individual is in the United States during more than one tax year, he or she must attach a statement to the annual
Form W-4 indicating
that the individual has filed a U.S. income tax return for the previous year. If he or she has not been in the United States
long enough to have to
file a return, the individual must attach a statement to the Form W-4 saying that a timely U.S. income tax return will be
filed.
A prorated portion of allowable personal exemptions based on the projected number of days he or she will be in this
country is allowed. This is
figured by multiplying the daily exemption amount ($9.04 for 2006) by the number of days the student or grantee expects to
be in the United States
during the year. The prorated exemption amount should be shown on line A of the Personal Allowances Worksheet that comes with Form W-4.
Generally, zero (-0-) should be shown on line B of the worksheet. But, a student or grantee who qualifies under Article
21(2) of the United
States-India income tax treaty can enter the standard deduction if he or she does not claim away-from-home expenses or other
itemized deductions
(discussed later).
Generally, zero (-0-) should be shown on lines C and D of the worksheet. But, an additional daily exemption amount
may be allowed for the spouse
and each dependent if the student or grantee is:
A resident of Canada, Mexico, or South Korea,
A U.S. national (a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national), or
Eligible for the benefits of Article 21(2) of the United States-India income tax treaty.
These additional amounts should be entered on lines C and D, as appropriate.
As lines E, F, and G of the worksheet do not apply to nonresident aliens subject to this procedure, there should be
no entries on those lines.
The nonresident alien student or grantee may deduct away-from-home expenses (meals, lodging, and transportation) on
Form W-4 if he or she expects
to be away from his or her tax home for 1 year or less. The amount of the claimed expenses should be the anticipated actual
amount, if known. If the
amount of the expenses is not known at the time the Form W-4 is filed with you, the current per diem allowance in effect for
participants in the
Career Education Program under the Federal Travel Regulations may be claimed on Form W-4. The allowable amount is $18.00 per
day.
The actual expenses or the per diem allowance should be shown on line A of the worksheet in addition to the personal
exemption amount.
The student or grantee can claim other expenses that will be deductible on Form 1040NR, U.S. Nonresident Alien Income
Tax Return. These include
student loan interest, certain state and local income taxes, charitable contributions, casualty losses, and moving expenses.
He or she should include
these anticipated amounts on line A of the worksheet.
The student or grantee can also enter on line A of the worksheet, the part of the grant or scholarship that is tax
exempt under the statute or a
tax treaty.
Lines A through D of the Personal Allowances Worksheet are added and the total should be shown on line H.
The payer of the grant or scholarship must review the Form W-4 to make sure all the necessary and required information
is provided. If the
withholding agent knows or has reason to know that the amounts shown on the Form W-4 may be false, the withholding agent must
reject the Form W-4 and
withhold at the appropriate statutory rate (14% or 30%). However, if the only incorrect information is that the student or
grantee's stay in the
United States has extended beyond 12 months, the withholding agent may withhold under these rules, but without a deduction
for away-from-home
expenses.
After receipt and acceptance of the Form W-4, the payer must withhold at the graduated rates in Publication 15 (Circular
E) as if the grant or
scholarship income were wages. The gross amount of the income is reduced by the total amount of exemptions and deductions
on the Form W-4 and the
withholding tax is figured on the rest.
When completing Form 1042-S for the student or grantee, enter the taxable part (gross amount less qualified scholarship)
of the scholarship or
fellowship grant in box 2, enter the withholding allowance amount from line H of the Personal Allowances Worksheet of Form W-4 in box 3,
and show the net of these two amounts in box 4.
Pay for services rendered.
Pay for services rendered as an employee by an alien who also is the recipient of a scholarship or fellowship grant
usually is subject to graduated
withholding according to the rules discussed later in Wages Paid to Employees — Graduated Withholding. This includes taxable amounts
an individual who is a candidate for a degree receives for teaching, doing research, and carrying out other part-time employment
required as a
condition for receiving the scholarship or fellowship grant.
Grants given to students, trainees, or researchers which require the performance of personal services as a necessary
condition for disbursing the
grant do not qualify as scholarship or fellowship grants. Instead, they are compensation for personal services considered
to be wages. It does not
matter what term is used to describe the grant (for example, stipend, scholarship, fellowship, etc.).
Withholding agents who pay grants that are in fact wages must report such grants on Forms 941 and W-2 and withhold income
tax on them at the
graduated rates. Withholding agents may not allow tax treaty exemptions that apply to scholarships and fellowships to be applied
to grants which are
really wages. It is the responsibility of the withholding agent to determine whether a grant is “wages” or a “scholarship or fellowship,”
and to report and withhold on the grant accordingly. An alien student, trainee, or researcher may not claim a scholarship
or fellowship treaty
exemption against income which has been reported to him on Form W-2 as wages.
Per diem paid by the U.S. Government.
Per diem for subsistence paid by the U.S. Government (directly or by contract) to a nonresident alien engaged in a
training program in the United
States under the Mutual Security Act of 1954 (grants funded by the U.S. Agency for International Development) are not subject
to 14% or 30%
withholding. This is true even if the alien is subject to income tax on those amounts.
Tax treaties.
Many treaties contain exemptions from U.S. taxation for scholarships and fellowships. Although usually found in the
student articles of the tax
treaties, many of these exemptions also apply to research grants received by researchers who are not students. Table 2 of
this publication shows a
line entry entitled “Scholarship or fellowship grant” for those treaties which have such an exemption. The treaty provision usually exempts the
entire scholarship or fellowship amount, regardless of whether the grant is a “qualified scholarship” under U.S. law.
An alien student, trainee, or researcher may claim a treaty exemption for a scholarship or fellowship by submitting
Form W-8BEN to the payer of the
grant. However, a scholarship or fellowship recipient who receives both wages and a scholarship or fellowship from the same
institution can claim
treaty exemptions on both kinds of income on Form 8233.
The scholarship or fellowship recipient who is claiming a treaty exemption must provide you with his or her TIN on Form W-8BEN
or on Form 8233 or
you cannot allow the treaty exemption. A copy of a completed Form W-7, showing that a TIN has been applied for, can be given
to you with a Form 8233.
See Form 8233, later under Pay for Personal Services Performed.
Nonresident alien who becomes a resident alien.
Generally, only a nonresident alien individual may use the terms of a tax treaty to reduce or eliminate U.S. tax on
income from a scholarship or
fellowship grant. A student (including a trainee or business apprentice) or researcher who has become a resident alien for
U.S. tax purposes may be
able to claim benefits under a tax treaty that apply to reduce or eliminate U.S. tax on scholarship or fellowship grant income.
Most treaties contain
a provision known as a “saving clause.” An exception to the saving clause may permit an exemption from tax to continue for scholarship or
fellowship grant income even after the recipient has otherwise become a U.S. resident alien for tax purposes. In this situation,
the individual must
give you a Form W-9 and an attachment that includes all the following information.
The treaty country.
The treaty article addressing the income.
The article number (or location) in the tax treaty that contains the saving clause and its exceptions.
The type and amount of income that qualifies for the exemption from tax.
Sufficient facts to justify the exemption from tax under the terms of the treaty article.
Example.
Article 20 of the U.S.-China income tax treaty allows an exemption from tax for scholarship income received by a Chinese student
temporarily
present in the United States. Under the Internal Revenue Code, a student may become a resident alien for tax purposes if his
or her stay in the United
States exceeds 5 calendar years. However, the treaty allows the provisions of Article 20 to continue to apply even after the
Chinese student becomes a
resident alien of the United States.
Other Grants, Prizes, and Awards
Other grants, prizes, and awards made by grantors which reside in the United States are treated as income from sources within
the United States.
Those made for activities conducted outside the United States by a foreign person or by grantors which reside outside the
United States are treated as
income from foreign sources. These provisions do not apply to salaries or other pay for services.
Grant.
The purpose of a grant must be to achieve a specific objective, produce a report or other similar product, or improve
or enhance a literary,
artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. A grant must also be
an amount which does not
qualify as a scholarship or fellowship. The grantor must not intend the amount to be given to the grantee for the purpose
of aiding the grantee to
perform study, training, or research.
Prizes and awards.
Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic
achievement, or are received as the result of entering a contest. A prize or award is taxable to the recipient unless all
of the following conditions
are met:
The recipient was selected without any action on his or her part to enter the contest or proceeding,
The recipient is not required to render substantial future services as a condition to receive the prize or award, and
The prize or award is transferred by the payer to a governmental unit or tax-exempt charitable organization as designated
by the
recipient.
Targeted grants and achievement awards.
Targeted grants and achievement awards received by nonresident aliens for activities conducted outside the United
States are treated as income from
foreign sources. Targeted grants and achievement awards are issued by exempt organizations or by the United States (or one
of its instruments or
agencies), a state (or a political subdivision of a state), or the District of Columbia for an activity (or past activity
in the case of an
achievement award) undertaken in the public interest.
Pay for Personal Services Performed
This section explains the rules for withholding tax from pay for personal services. You generally must withhold tax at the
30% rate on compensation
you pay to a nonresident alien individual for labor or personal services performed in the United States, unless that pay is
specifically exempted from
withholding or subject to graduated withholding. This rule applies regardless of your place of residence, the place where
the contract for service was
made, or the place of payment.
Illegal aliens.
Foreign workers who are illegal aliens are subject to U.S. taxes in spite of their illegal status. U.S. employers
or payers who hire illegal aliens
may be subject to various fines, penalties, and sanctions imposed by U.S. Immigration and Customs Enforcement. If such employers
or payers choose to
hire illegal aliens, the payments made to those aliens are subject to the same tax withholding and reporting obligations that
apply to other classes
of aliens. Illegal aliens who are nonresident aliens and who receive income from performing independent personal services
are subject to 30%
withholding unless exempt under some provision of law or a tax treaty. Illegal aliens who are resident aliens and who receive
income from performing
dependent personal services are subject to the same reporting and withholding obligations which apply to U.S. citizens who
receive the same kind of
income.
Form 8233,
Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident
Alien Individual, is used by
a nonresident alien individual to claim a tax treaty exemption from withholding on some or all compensation paid for:
Independent personal services (self-employment),
Dependent personal services, or
Personal services income and noncompensatory scholarship or fellowship income from the same withholding agent.
Persons providing independent personal services can use Form 8233 to claim the personal exemption amount.
A U.S. TIN must be shown on Form 8233. An individual with a visa that is valid for employment should first apply for
a social security number (SSN)
with the Social Security Administration (SSA). An individual that does not have, and is not eligible for, an SSN must apply
for an ITIN by using Form
W-7. The individual must provide proof that he or she applied for an SSN and was rejected by the SSA and include a copy of
a completed Form 8233 with
the Form W-7.
Form W-4,
Employee's Withholding Allowance Certificate, is used by a person providing dependent personal services to claim
the personal exemption amount,
but not a tax treaty exemption. Nonresident alien individuals are subject to special instructions for completing the Form
W-4. See the discussion
under Wages Paid to Employees—Graduated Withholding, later.
Pay for independent personal services (Income Code 16).
Independent personal services (a term commonly used in tax treaties) are personal services performed by an independent
nonresident alien
contractor as contrasted with those performed by an employee. This category of pay includes payments for professional services,
such as fees of an
attorney, physician, or accountant made directly to the person performing the services. It also includes honoraria paid by
colleges and universities
to visiting teachers, lecturers, and researchers.
Pay for independent personal services is subject to NRA withholding and reporting as follows.
30% rate.
You must withhold at the statutory rate of 30% on all payments unless the alien enters into a withholding agreement
or receives a final payment
exemption (discussed later).
The amount of pay subject to 30% withholding may be reduced by the personal exemption amount ($3,300 for 2006) if
the alien gives you a properly
completed Form 8233. A nonresident alien is allowed only one personal exemption. However, individuals who are residents of
Canada, Mexico, or South
Korea, or are U.S. nationals (defined below) are generally entitled to the same exemptions as U.S. citizens.
Students and business apprentices covered by Article 21(2) of the United States-India income tax treaty may claim
an additional exemption for their
spouse if a joint return is not filed, and if the spouse has no gross income for the year and is not the dependent of another
taxpayer. They may also
claim additional exemptions for children who reside with them in the United States at any time during the year, but only if
the dependents are U.S.
citizens or nationals or residents of the United States, Canada, or Mexico. They may not claim exemptions for dependents who
are admitted to the
United States on “F-2,” “J-2,” or “M-2” visas unless such dependents have become resident aliens.
Each allowable exemption must be prorated according to the number of days during the tax year during which the alien
performs services in the
United States. Multiply the number of these days by $9.04 (the daily exemption amount for 2006) to figure the prorated amount.
Residents of South
Korea must make a further proration of their additional exemptions based on their gross income effectively connected with
a U.S. trade or business.
The rules for this proration are discussed in detail in Publication 519.
A U.S. national
is an individual who owes his sole allegiance to the United States, but who is not a U.S. citizen. Such an
individual is usually a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national.
Example 1.
Hans Schmidt, who is a resident of Germany, worked (not as an employee) for a U.S. company in the United States for
100 days during 2006 before
returning to his country. He earned $6,000 for the services performed (not considered wages) in the United States. Hans is
married and has three
dependent children. His wife did not work and had no income subject to U.S. tax. Hans is allowed $904 as a deduction against
the payments for his
personal services performed in the United States (100 days × $9.04). Tax must be withheld at 30% on the rest of his earnings,
$5,096 ($6,000
- $904).
Example 2.
If, in Example 1, Hans were a resident of Canada or Mexico or a national of the United States, working under contract with a domestic
corporation, $4,520 (100 days × $9.04 per day for each of five exemptions) would be allowed against the payments for personal
services performed
in the United States. Tax must be withheld at 30% on the rest of his earnings, $1,480 ($6,000 - $4,520).
Withholding agreements.
Pay for personal services of a nonresident alien who is engaged during the tax year in the conduct of a U.S. trade
or business may be wholly or
partially exempted from withholding at the statutory rate if an agreement has been reached between the Commissioner or his
delegate and the alien as
to the amount of withholding required. This agreement will be effective for payments covered by the agreement that are made
after the agreement is
executed by all parties. The alien must agree to timely file an income tax return for the current tax year.
Final payment exemption.
The final payment of compensation for independent personal services may be wholly or partially exempt from withholding
at the statutory rate. This
exemption does not apply to wages paid to an employee. The nonresident alien must have been engaged during the tax year in
the conduct of a U.S. trade
or business. This exemption is available only once during an alien's tax year. It applies to the last payment of compensation,
other than wages, for
personal services rendered in the United States that the alien expects to receive from any withholding agent during the tax
year.
To obtain the final payment exemption, the alien, or the alien's agent, must file the forms and provide the information
required by the
Commissioner or his delegate. This information includes, but is not limited to, the following items.
A statement by each withholding agent from whom amounts of gross income effectively connected with the conduct of a U.S. trade
or business
have been received by the alien during the tax year. It must show the amount of income paid and the amount of tax withheld.
The withholding agent must
sign the statement and include a declaration that it is made under penalties of perjury.
A statement by the withholding agent from whom the final payment of compensation for personal services will be received showing
the amount
of final payment and the amount that would be withheld if a final payment exemption is not granted. The withholding agent
must sign the statement and
include a declaration that it is made under penalties of perjury.
A statement by the alien that he or she does not intend to receive any other amounts of gross income effectively connected
with the conduct
of a U.S. trade or business during the current tax year.
The amount of tax that has been withheld (or paid) under any other provision of the Code or regulations for any income effectively
connected
with the conduct of a U.S. trade or business during the current tax year.
The amount of any outstanding tax liabilities, including any interest and penalties, from the current tax year or prior tax
periods.
The provision of any income tax treaty under which a partial or complete exemption from withholding may be claimed, the country
of the
alien's residence, and a statement of sufficient facts to justify an exemption under that treaty.
The alien must give a statement, signed and verified by a declaration that it is made under the penalties of perjury, that
all the information
provided is true, and that to his or her knowledge no relevant information has been omitted.
If satisfied with the information provided, the Commissioner or his delegate will determine the amount of the alien's
tentative income tax for the
tax year on gross income effectively connected with the conduct of a U.S. trade or business. Ordinary and necessary business
expenses may be taken
into account if proved to the satisfaction of the Commissioner or his delegate.
The Commissioner or his delegate will provide the alien with a letter to you, the withholding agent, stating the amount
of the final payment of
compensation for personal services that is exempt from withholding, and the amount that would otherwise be withheld that may
be paid to the alien due
to the exemption. The amount of pay exempt from withholding cannot be more than $5,000. The alien must give two copies of
the letter to you and must
also attach a copy of the letter to his or her income tax return for the tax year for which the exemption is effective.
Travel expenses.
If you pay or reimburse the travel expenses of a nonresident alien, the payments are not reportable to the IRS and
are not subject to NRA
withholding if the payments are made under an accountable plan as described in section 1.62-2 of the regulations. This treatment
applies only to that
portion of a payment that represents the payment of travel and lodging expenses and not to that portion that represents compensation
for independent
personal services.
Tax treaties.
Under most tax treaties, pay for independent personal services performed in the United States is exempt from U.S.
income tax only if the
independent nonresident alien contractor performs the services during a period of temporary presence in the United States
(usually not more than 183
days) and is a resident of the treaty country.
Independent nonresident alien contractors use Form 8233 to claim an exemption from withholding under a tax treaty.
For more information, see
Form 8233, earlier.
Often, you must withhold under the statutory rules on payments made to a treaty country resident contractor for services
performed in the United
States. This is because the factors on which the treaty exemption is based may not be determinable until after the close of
the tax year. The
contractor must then file a U.S. income tax return (Form 1040NR) to recover any overwithheld tax by providing the IRS with
proof that he or she is
entitled to a treaty exemption.
Wages Paid to Employees— Graduated Withholding
Salaries, wages, bonuses, or any other pay for personal services (referred to collectively as wages) paid to nonresident alien
employees are
subject to graduated withholding in the same way as for U.S. citizens and residents if the wages are effectively connected
with the conduct of a U.S.
trade or business. Any wages paid to a nonresident alien for personal services performed as an employee for an employer are
generally exempt from the
30% withholding if the wages are subject to graduated withholding.
Also exempt from the 30% withholding is pay for personal services performed as an employee for an employer if it is effectively
connected with the
conduct of a U.S. trade or business and is specifically excepted from wages. See Pay that is not wages, later.
Employer-employee relationship.
For pay for personal services to qualify as wages, there must be an employer-employee relationship.
Under the common law rules, every individual who performs services subject to the will and control of an employer,
both as to what shall be done
and how it shall be done, is an employee. It does not matter that the employer allows the employee considerable discretion
and freedom of action, as
long as the employer has the legal right to control both the method and the result of the services.
If an employer-employee relationship exists, it does not matter what the parties call the relationship. It does not
matter if the employee is
called a partner, coadventurer, agent, or independent contractor. It does not matter how the pay is measured, how the individual
is paid, or what the
payments are called. Nor does it matter whether the individual works full-time or part-time.
The existence of the employer-employee relationship under the usual common law rules will be determined, in doubtful
cases, by an examination of
the facts of each case.
Employee.
An employee generally includes any individual who performs services if the relationship between the individual and
the person for whom the services
are performed is the legal relationship of employer and employee. This includes an individual who receives a supplemental
unemployment pay benefit
that is treated as wages.
No distinction is made between classes of employees.
Superintendents, managers, and other supervisory personnel are employees. Generally, an officer of a corporation is
an employee, but a director
acting in this capacity is not. An officer who does not perform any services, or only minor services, and neither receives
nor is entitled to receive
any pay is not considered an employee.
Employer.
An employer is any person or organization for whom an individual performs or has performed any service, of whatever
nature, as an employee. The
term “employer” includes not only individuals and organizations in a trade or business, but organizations exempt from income tax, such as
religious and charitable organizations, educational institutions, clubs, social organizations, and societies. It also includes
the governments of the
United States, the states, Puerto Rico, and the District of Columbia, as well as their agencies, instrumentalities, and political
subdivisions.
Two special definitions of employer that may have considerable application to nonresident aliens are:
An employer includes any person paying wages for a nonresident alien individual, foreign partnership, or foreign corporation
not engaged in
trade or business in the United States (including Puerto Rico as if a part of the United States), and
An employer includes any person who has control of the payment of wages for services that are performed for another person
who does not have
that control.
For example, if a trust pays wages, such as certain types of pensions, supplemental unemployment pay, or retired pay,
and the person for whom the
services were performed has no legal control over the payment of the wages, the trust is the employer.
These special definitions have no effect upon the relationship between an alien employee and the actual employer when
determining whether the pay
received is considered to be wages.
If an employer-employee relationship exists, the employer ordinarily must withhold the income tax from wage payments by using
the percentage method
or wage bracket tables as shown in Publication 15 (Circular E).
Pay that is not wages.
Employment for which the pay is not considered wages (for graduated income tax withholding) includes, but is not limited
to, the following items.
Agricultural labor if the total cash wages paid to an individual worker during the year is less than $150 and the total paid
to all workers
during the year is less than $2,500. But even if the total amount paid to all workers is $2,500 or more, wages of less than
$150 per year paid to a
worker are not subject to income tax withholding if certain conditions are met. For these conditions, see Publication 51 (Circular
A).
Services of a household nature performed in or about the private home of an employer, or in or about the clubrooms or house
of a local
college club, fraternity, or sorority. A local college club, fraternity, or sorority does not include an alumni club or chapter
and may not be
operated primarily as a business enterprise. Examples of these services include those performed as a cook, janitor, housekeeper,
governess, gardener,
or houseparent.
Certain services performed outside the course of the employer's trade or business for which cash payment is less than $50
for the calendar
quarter.
Services performed as an employee of a foreign government, without regard to citizenship, residence, or where services are
performed. These
include services performed by ambassadors, other diplomatic and consular officers and employees, and nondiplomatic representatives.
They do not
include services for a U.S. or Puerto Rican corporation owned by a foreign government.
Services performed within or outside the United States by an employee or officer (regardless of citizenship or residence)
of an
international organization designated under the International Organizations Immunities Act.
Services performed by a duly ordained, commissioned, or licensed minister of a church, but only if performed in the exercise
of the ministry
and not as an employee of the United States, a U.S. possession, or a foreign government, or any of their political subdivisions.
These also include
services performed by a member of a religious order in carrying out duties required by that order.
Tips paid to an employee if they are paid in any medium other than cash or, if in cash, they amount to less than $20 in any
calendar month
in the course of employment.
Services performed outside the United States.
Compensation paid to a nonresident alien (other than a resident of Puerto Rico, discussed later) for services performed
outside the United States
is not considered wages and is not subject to withholding.
Withholding exemptions.
The amount of wages subject to graduated withholding may be reduced by the personal exemption amount ($3,300 for 2006).
The personal exemptions
allowed in figuring wages subject to graduated withholding are the same as those discussed earlier under Pay for independent personal services,
except that an employee must claim them on Form W-4.
Special instructions for Form W-4.
A nonresident alien subject to wage withholding must give the employer a completed Form W-4 to enable the employer
to figure how much income tax to
withhold.
A nonresident alien cannot claim exemption from withholding on Form W-4. Use Form 8233 to claim a tax treaty exemption from
withholding. See
Form 8233, earlier.
In completing Form W-4, nonresident aliens should use the following instructions instead of the instructions on Form
W-4.
Check “Single” on line 3 (regardless of actual marital status).
Claim only one withholding allowance on line 5, unless a resident of Canada, Mexico, or South Korea, or a U.S. national.
Write “Nonresident Alien” or “NRA” above the dotted line on line 6.
Nonresident alien employees are no longer required to request an additional withholding amount, but they can choose to have
an additional amount
withheld on line 6.
Students and business apprentices from India.
Students and business apprentices who are eligible for the benefits of Article 21(2) of the United States-India income
tax treaty can claim
additional withholding allowances on line 5 for their spouses. In addition, they can claim an additional withholding allowance
for each dependent who
has become a resident alien.
Determining amount to withhold.
Beginning January 1, 2006, employers are required to add an amount to the wages of a nonresident alien employee solely
for the purpose of
calculating income tax withholding. The specific amount depends on the payroll period. This adjustment does not apply to students
and business
apprentices from India. For 2006 this amount is:
Payroll period—
Add
Weekly
$ 51
Biweekly
$ 102
Semimontly
$ 110
Monthly
$ 221
Quarterly
$ 663
Semiannually
$ 1,325
Annually
$ 2,650
Daily or Miscellaneous (each day of the payroll period)
$ 10.20
Do not include the additional amount on the employee's Form W-2, Wage and Tax Statement.
Reporting requirements for wages and withheld taxes paid to nonresident aliens.
The employer must report the amount of wages and deposits of withheld income and social security and Medicare taxes
by filing Form 941. Household
employers should see Publication 926, Household Employer's Tax Guide, for information on reporting and paying employment taxes
on wages paid to
household employees.
Form W-2.
The employer must also report on Form W-2 the wages subject to NRA withholding and the withheld taxes. You must give
copies of this form to the
employee. Wages exempt from tax under a tax treaty are reported on Form 1042-S and not in block 1 of Form W-2. Wages exempt
under a tax treaty may
still be reported in the state and local wages blocks of Form W-2 if such wages are subject to state and local taxation. For
more information, see the
instructions for these forms.
Trust fund recovery penalty.
If you are a person responsible for withholding, accounting for, or depositing or paying employment taxes, and willfully
fail to do so, you can be
held liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this
purpose can be an
officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority
over the funds of
the business can also be held responsible for the penalty.
“Willfully” in this case means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the
business
instead of the withholding taxes.
Federal unemployment tax (FUTA).
The employer must pay FUTA and file Form 940 or 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return.
Only the employer pays this tax;
it is not deducted from the employee's wages. In certain cases, wages paid to students and railroad and agricultural workers
are exempt from FUTA tax.
For more information, see the instructions for these forms.
Wages paid to nonresident alien students, teachers, researchers, trainees, and other nonresident aliens in “F-1,” “J-1,” “M-1,” or
“Q” nonimmigrant status are not subject to FUTA tax.
Pay for dependent personal services (Income Code 17).
Dependent personal services are personal services performed in the United States by a nonresident alien individual
as an employee rather than as
an independent contractor.
Pay for dependent personal services is subject to NRA withholding and reporting as follows.
Graduated rates.
Ordinarily, you must withhold on pay (wages) for dependent personal services using graduated rates. The nonresident
alien must complete Form W-4 as
discussed earlier under Special instructions for Form W-4, and you must report wages and income tax withheld on Form W-2. However, you do
not have to withhold if any of the following four exceptions applies.
Exception 1.
Compensation paid for labor or personal services performed in the United States is deemed not to be income from sources
within the United States
and is exempt from U.S. income tax if:
The labor or services are performed by a nonresident alien temporarily present in the United States for a period or periods
not exceeding a
total of 90 days during the tax year,
The total pay does not exceed $3,000, and
The pay is for labor or services performed as an employee of, or under a contract with:
A nonresident alien individual, foreign partnership, or foreign corporation that is not engaged in a trade or business in
the United States,
or
A U.S. citizen or resident alien individual, a domestic partnership, or a domestic corporation, if the labor or services are
performed for
an office or place of business maintained in a foreign country or in a possession of the United States by this individual,
partnership, or
corporation.
If the total pay is more than $3,000, the entire amount is income from sources in the United States and is subject
to U.S. tax.
Also, compensation paid for labor or services performed in the United States 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 sources within the United States.
Exception 2.
Compensation paid by a foreign employer to a nonresident alien for the period the alien is temporarily present in
the United States on an “F,”
“J,” or “Q” visa is exempt from U.S. income tax. For this purpose, a foreign employer means:
A nonresident alien individual, foreign partnership, or foreign corporation, or
An office or place of business maintained in a foreign country or in a U.S. possession by a domestic corporation, a domestic
partnership, or
an individual U.S. citizen or resident.
You can exempt the payment from withholding if you can reliably associate the payment with a Form W-8BEN containing the taxpayer
identification
number of the payee.
Exception 3.
Compensation paid to certain residents of Canada or Mexico who enter or leave the United States at frequent intervals
is not subject to
withholding. These aliens must either:
Perform duties in transportation services (such as a railroad, bus, truck, ferry, steamboat, aircraft, or other type) between
the United
States and Canada or Mexico, or
Perform duties connected with an international project, relating to the construction, maintenance, or operation of a waterway,
viaduct, dam,
or bridge crossed by, or crossing, the boundary between the United States and Canada or the boundary between the United States
and Mexico.
To qualify for the exemption from withholding during a tax year, a Canadian or Mexican resident must give the employer
a statement with name,
address, and identification number, and certifying that the resident:
Is not a U.S. citizen or resident,
Is a resident of Canada or Mexico, whichever applies, and
Expects to perform the described duties during the tax year in question.
The statement can be in any form, but it must be dated and signed by the employee, and must include a written declaration
that it is made under
penalties of perjury.
Canadian and Mexican residents employed entirely within the United States.
Neither the transportation service exception nor the international projects exception applies to the pay of a resident
of Canada or Mexico who is
employed entirely within the United States and who commutes from a home in Canada or Mexico to work in the United States.
If an individual works at a
fixed point or points in the United States (such as a factory, store, office, or designated area or areas), the wages for
services performed as an
employee for an employer are subject to graduated withholding.
Exception 4.
Compensation paid for services performed in Puerto Rico by a nonresident alien who is a resident of Puerto Rico for
an employer (other than the
United States or one of its agencies) is not subject to withholding.
Compensation paid for either of the following types of services is not subject to withholding if the alien does not
expect to be a resident of
Puerto Rico during the entire tax year.
Services performed outside the United States but not in Puerto Rico by a nonresident alien who is a resident of Puerto Rico
for an employer
other than the United States or one of its agencies, or
Services performed outside the United States by a nonresident alien who is a resident of Puerto Rico, as an employee of the
United States or
any of its agencies.
To qualify for the exemption from withholding for any tax year, the employee must give the employer a statement showing
the employee's name and
address and certifying that the employee:
Is not a citizen or resident of the United States, and
Is a resident of Puerto Rico who does not expect to be a resident for that entire tax year.
The statement must be signed and dated by the employee and contain a written declaration that it is made under penalties of
perjury.
Tax treaties.
Pay for dependent personal services under some tax treaties is exempt from U.S. income tax only if both the employer
and the employee are treaty
country residents and the nonresident alien employee performs the services while temporarily living in the United States (usually
for not more than
183 days). Other treaties provide for exemption from U.S. tax on pay for dependent personal services if the employer is any
foreign resident and the
employee is a treaty country resident and the nonresident alien employee performs the services while temporarily in the United
States.
Pay for teaching (Income Code 18).
This category is given a separate income code number because some tax treaties provide at least partial exemption
from withholding and from U.S.
tax. Pay for teaching means payments to a nonresident alien professor, teacher, or researcher by a U.S. university or other
accredited educational
institution for teaching or research work at the institution.
Graduated rates.
Graduated withholding of income tax usually applies to all wages, salaries, and other pay for teaching and research
paid by a U.S. educational
institution during the period the nonresident alien is teaching or performing research at the institution.
A nonresident alien temporarily in the United States on an “F-1,” “J-1,” “M-1,” or “Q-1” visa is not subject to social security
and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States.
Social security and
Medicare taxes should not be withheld or paid on this amount. However, if an alien is considered a resident alien, as discussed
earlier, that pay is
subject to social security and Medicare taxes even though the alien is still in one of the nonimmigrant statuses mentioned
above. This rule also
applies to FUTA (unemployment) taxes paid by the employer. Teachers, researchers, and other employees temporarily present
in the United States on
other nonimmigrant visas or in refugee, or asylee immigration status are fully liable for social security and Medicare taxes
unless an exemption
applies from one of the totalization agreements in force between the United States and several other nations.
The Social Security Administration publishes the complete texts and explanatory pamphlets of the totalization agreements which
are available by
calling 1-800-772-1213 or by visiting the Social Security Administration web site at:
www.socialsecurity.gov/international.
Tax treaties.
Under most tax treaties, pay for teaching or research is exempt from U.S. income tax and from withholding for a specified
period of time when paid
to a professor, teacher, or researcher, who was a resident of the treaty country immediately prior to entry into the United
States and who is not a
citizen of the United States (see Table 2). The U.S. educational institution paying the compensation must report the amount
of compensation paid each
year which is exempt from tax under a tax treaty on Form 1042-S. The employer should also report the compensation in the state
and local wages blocks
of Form W-2 if the wages are subject to state and local taxes, or in the social security and Medicare wages blocks of Form
W-2 if the wages are
subject to social security and Medicare taxes.
Claimants must give you either Form W-8BEN or 8233, as applicable, to obtain these treaty benefits.
Pay during studying and training (Income Code 19).
This category refers to pay (as contrasted with remittances, allowances, or other forms of scholarships or fellowship
grants—see
Scholarships and Fellowship Grants, earlier) for personal services performed while a nonresident alien is temporarily in the United States
as a student, trainee, or apprentice, or while acquiring technical, professional, or business experience.
Graduated rates.
Wages, salaries, or other compensation paid to a nonresident alien student, trainee, or apprentice for labor or personal
services performed in the
United States are subject to graduated withholding.
A nonresident alien temporarily in the United States on an “F-1,” “J-1,” “M-1,” or “Q-1” visa is not subject to social security
and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States.
Social security and
Medicare taxes should not be withheld or paid on this amount. This exemption from social security and Medicare taxes also
applies to employment
performed under Curricular Practical Training and Optional Practical Training, on or off campus, by foreign students in “F-1,” “J-1,”
“M-1,” or “Q” status as long as the employment is authorized by the U.S. Citizenship and Immigration Services. However, if an alien is
considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the
alien is still in one of
the nonimmigrant statuses mentioned above. This rule also applies to FUTA (unemployment) taxes paid by the employer.
Any student who is enrolled and regularly attending classes at a school may be exempt from social security, Medicare, and
FUTA taxes on pay for
services performed for that school. See Publication 15 (Circular E).
Tax treaties.
Many tax treaties provide an exemption from U.S. income tax and from withholding on compensation paid to nonresident
alien students or trainees
during training in the United States for a limited period. In addition, some treaties provide an exemption from tax and withholding
for compensation
paid by the U.S. Government or its contractor to a nonresident alien student or trainee who is temporarily present in the
United States as a
participant in a program sponsored by the U.S. Government (see Table 2). However, a withholding agent who is a U.S. resident,
a U.S. Government
agency, or its contractor must report the amount of pay on Form 1042-S.
Claimants must give you either Form W-8BEN or 8233, as applicable, to obtain these treaty benefits.
Artists and Athletes (Income Code 20)
Because many tax treaties contain a provision for pay to artists and athletes, a separate category is assigned these payments
for withholding
purposes. This category includes payments made for performances by public entertainers (such as theater, motion picture, radio,
or television artists,
or musicians) or athletes.
Withholding rate.
You must withhold tax at a 30% rate on payments to artists and athletes for services performed as independent contractors.
See Pay for
independent personal services, earlier, for more information. You must withhold tax at graduated rates on payments to artists and athletes for
services performed as employees. See Pay for dependent personal services, earlier, for more information. However, in any situation where
the nature of the relationship between the payer of the income and the artist or athlete is not ascertainable, you should
withhold at a rate of 30%.
Central withholding agreements.
Nonresident alien entertainers or athletes performing or participating in athletic events in the United States may
be able to enter into a
withholding agreement with the IRS for reduced withholding provided certain requirements are met. Under no circumstances will
a withholding agreement
reduce taxes withheld to less than the alien's anticipated income tax liability.
Nonresident alien entertainers or athletes requesting a central withholding agreement must provide the following information.
A list of the names and addresses of the nonresident aliens to be covered by the agreement.
Copies of all contracts that the aliens or their agents and representatives have entered into regarding the time period and
performances or
events to be covered by the agreement including, but not limited to, contracts with:
Employers, agents, and promoters,
Exhibition halls,
Persons providing lodging, transportation, and advertising, and
Accompanying personnel, such as band members or trainers.
An itinerary of dates and locations of all events or performances scheduled during the period to be covered by the agreement.
A proposed budget containing itemized estimates of all gross income and expenses for the period covered by the agreement,
including any
documents to support these estimates.
The name, address, and telephone number of the person the IRS should contact if additional information or documentation is
needed.
The name, address, and employer identification number of the agent or agents who will be the central withholding agents for
the aliens and
who will enter into a contract with the IRS. A central withholding agent ordinarily receives contract payments, keeps books
of account for the aliens
covered by the agreement, and pays expenses (including tax liabilities) for the aliens during the period covered by the agreement.
When the IRS approves the request, the Associate Chief Counsel (International) will prepare a withholding agreement.
The agreement must be signed
by each withholding agent, each nonresident alien covered by the agreement, and the Commissioner or his delegate.
Generally, each withholding agent must agree to withhold income tax from payments made to the nonresident alien; to
pay over the withheld tax to
the U.S. Treasury on the dates and in the amounts specified in the agreement; and to have the IRS apply the payments of withheld
tax to the
withholding agent's Form 1042 account. Each withholding agent will have to file Form 1042 and Form 1042-S for each tax year
in which income is paid to
a nonresident alien covered by the withholding agreement. The IRS will credit the withheld tax payments, posted to the withholding
agent's Form 1042
account, in accordance with the Form 1042-S. Each nonresident alien covered by the withholding agreement must agree to file
Form 1040NR or, if he or
she qualifies, Form 1040NR-EZ.
A request for a central withholding agreement should be sent to the following address at least 90 days before the agreement
is to take effect:
Chief, Special Programs (International)
Internal Revenue Service S:SE:CLD:SL:HQ:SP
1111 Constitution Ave. NW
NCFB C2-233
Washington, DC 20224.
Tax treaties.
Under many tax treaties, compensation paid to public entertainers or athletes for services performed in the United
States is exempt from U.S.
income tax only when the alien is present for a limited period of time and the pay is within limits provided in the tax treaty
(see Table 2).
Employees and independent contractors may claim an exemption from withholding under a tax treaty by filing Form 8233.
Often, however, you will have
to withhold at the statutory rates on the total payments to the entertainer or athlete. This is because the exemption may
be based upon factors that
cannot be determined until after the end of the year.
Other Income
For the discussion of Income Codes 24, 25, and 26, see U.S. Real Property Interest, later. For the discussion of Income Code 27, see
Publicly Traded Partnerships, later.
Gambling winnings (Income Code 28).
In general, nonresident aliens are subject to NRA withholding at 30% on the gross proceeds from gambling won in the
United States if that income is
not effectively connected with a U.S. trade or business and is not exempted by treaty. The tax withheld and winnings are reportable
on Forms 1042 and
1042-S.
No tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette,
or big-6 wheel in the
United States. A Form W-8BEN is not required to obtain the exemption from withholding, but a Form W-8BEN may be required for
purposes of Form 1099
reporting and backup withholding. Gambling income that is not subject to NRA withholding is not subject to reporting on Form
1042-S.
Nonresident aliens are taxed at graduated rates on net gambling income won in the U.S. that is effectively connected
with a U.S. trade or business.
Tax treaties.
Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United
States: Austria, Czech
Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russian
Federation, Slovak
Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.
Claimants must give you a Form W-8BEN (with a TIN) to claim treaty benefits on gambling income that is not effectively
connected with a U.S. trade
or business. See U.S. Taxpayer Identification Numbers, later, for when you can accept a Form W-8BEN without a TIN.
Transportation income.
U.S. source gross transportation income is generally not subject to NRA withholding.
Transportation income is income from the use of a vessel or aircraft, whether owned, hired, or leased, or from the
performance of services directly
related to the use of a vessel or aircraft. U.S. source gross transportation income includes 50% of all transportation income
from transportation that
either begins or ends in the United States. For personal service income other than income derived from, or in connection with,
a vessel, the use must
be between the United States and a U.S. possession.
The recipient of U.S. source gross transportation income must pay tax at the rate of 4% unless the income is effectively
connected with the conduct
of a U.S. trade or business. If the income is effectively connected with a U.S. trade or business, it is taxed on a net basis
at a graduated rate of
tax.
Other income (Income Code 50).
Use this category to report U.S. source FDAP income that is not reportable under any of the other income categories.
Examples of income that may
be reportable under this category are commissions, insurance proceeds, patronage distributions, prizes, and racing purses.
As discussed earlier under Income Subject to NRA Withholding, every kind of FDAP income from U.S. sources that is not effectively
connected with a U.S. trade or business is subject to NRA withholding unless the income is specifically exempt under the Code
or a tax treaty. You
generally must withhold at the 30% rate on this income.
Foreign Governments and Certain Other Foreign Organizations
Investment income earned by a foreign government is not included in the gross income of the foreign government and is not
subject to U.S.
withholding tax. Investment income means income from investments in the United States in stocks, bonds, or other domestic
securities, financial
instruments held in the execution of governmental financial or monetary policy, and interest on money deposited by a foreign
government in banks in
the United States. A foreign government must provide a Form W-8EXP or, in the case of a payment made outside the United States
to an offshore account,
documentary evidence to obtain this exemption. Investment income paid to a foreign government is subject to reporting on Form
1042-S.
Income (including investment income) received by a foreign government from the conduct of a commercial activity or from sources
other than those
stated above, is subject to NRA withholding. In addition, income received from a controlled commercial entity (including gain
from the disposition of
any interest in a controlled commercial entity) and income received by a controlled commercial entity is subject to NRA withholding.
If the foreign government is a partner in a partnership carrying on a trade or business in the United States, the effectively
connected income
allocable to the foreign government is considered derived from a commercial activity and is subject to withholding under section
1446.
A government of a U.S. possession is exempt from U.S. tax on all U.S. source income. This income is not subject to NRA withholding.
These
governments should use Form W-8EXP to get this exemption.
International organizations.
International organizations are exempt from U.S. tax on all U.S. source income. This income is not subject to withholding.
International
organizations are not required to provide a Form W-8 or documentary evidence to receive the exemption if the name of the payee
is one that is
designated as an international organization by executive order.
Foreign tax-exempt organizations.
A foreign organization that is a tax exempt organization under section 501(c) of the Internal Revenue Code is not
subject to a withholding tax on
amounts that are not income includible under section 512 of the Internal Revenue Code as unrelated business taxable income.
However, if a foreign
organization is a foreign private foundation, it is subject to a 4% withholding tax on all U.S. source investment income.
For a foreign tax-exempt
organization to claim an exemption from withholding because of its tax exempt status under section 501(c), or to claim withholding
at a 4% rate, it
must provide you with a Form W-8EXP. However, if a foreign organization is claiming an exemption from withholding under an
income tax treaty, or the
income is unrelated business taxable income, the organization must provide a Form W-8BEN or W-8ECI. Income paid to foreign
tax-exempt organizations is
subject to reporting on Form 1042-S. If the organization is a partner in a partnership carrying on a trade or business in
the United States, the
effectively connected income allocable to the organization is subject to withholding under section 1446.
U.S. Taxpayer Identification Numbers
As the withholding agent, you must generally request that the payee provide you with its U.S. taxpayer identification number
(TIN). You must
include the payee's TIN on forms, statements, and other tax documents. The payee's TIN may be any of the following.
An individual may have a social security number (SSN). If the individual does not have, and is eligible for, an SSN, he or
she must use Form
SS-5 to get an SSN. The Social Security Administration will tell the individual if he or she is eligible to get an SSN.
An individual may have an IRS individual taxpayer identification number (ITIN). If the individual does not have, and is not
eligible for, an
SSN, he or she must apply for an ITIN by using Form W-7.
Any person other than an individual, and any individual who is an employer or who is engaged in a U.S. trade or business as
a sole
proprietor, must have an employer identification number (EIN). Use Form SS-4 to get an EIN.
A TIN must be on a withholding certificate if the beneficial owner is claiming any of the following.
Tax treaty benefits (see Exceptions to TIN requirement, later).
Income is effectively connected with a U.S. trade or business.
Exemption for certain annuities (see Pensions, Annuities, and Alimony, earlier).
Exemption based on exempt organization or private foundation status.
In addition, a TIN must be on a withholding certificate from a person claiming to be any of the following.
Qualified intermediary.
Withholding foreign partnership.
Withholding foreign trust.
Foreign grantor trust with no more than 5 grantors.
Exempt organization.
U.S. branch of a foreign person treated as a U.S. person (see section 1.1441-1(b)(2)(iv) of the regulations).
U.S. person.
Exceptions to TIN requirement.
A foreign person does not have to provide a U.S. TIN to claim a reduced rate of withholding under a tax treaty if
the requirements for the
following exceptions are met.
Income from marketable securities (discussed earlier under Form W-8BEN).
Unexpected payment to an individual (discussed next).
Unexpected payment.
A Form W-8BEN or a Form 8233 provided by a nonresident alien to get treaty benefits does not need a U.S. TIN if you,
the withholding agent, meet
all the following requirements.
You are an acceptance agent.
You can request an ITIN for a payee on an expedited basis.
You are required to make an unexpected payment to the nonresident alien.
You cannot get the ITIN because the IRS is not issuing ITINs at the time you make the payment or at any earlier time after
you know you have
to make the payment.
You cannot reasonably delay making the unexpected payment.
You submit a completed Form W-7 for the payee, with a certification that you have reviewed the required documentation and
have no actual
knowledge or reason to know that the documentation is not complete or accurate, to the IRS during the first business day after
you made the
payment.
An acceptance agent
is a person who, under a written agreement with the IRS, is authorized to assist alien individuals and other
foreign persons get ITINs or EINs. For information on the application procedures for becoming an acceptance agent, see Revenue
Procedure 2006-10 on
page 293 of Internal Revenue Bulletin 2006-2 at
www.irs.gov/pub/irs-irbs/irb06-02.pdf.
A payment is unexpected if you or the beneficial owner could not have reasonably anticipated the payment during a
time when an ITIN could be
obtained. This could be due to the nature of the payment or the circumstances in which the payment is made. A payment is not
considered unexpected
solely because the amount of the payment is not fixed.
Example.
Mary, a citizen and resident of Ireland, visits the United States and wins $5,000 playing a slot machine in a casino. Under
the treaty with
Ireland, the winnings are not subject to U.S. tax. Mary claims the treaty benefits by providing a Form W-8BEN to the casino
upon winning at the slot
machine. However, she does not have an ITIN. The casino is an acceptance agent that can request an ITIN on an expedited basis.
Situation 1. Assume that Mary won the money on Sunday. Since the IRS does not issue ITINs on Sunday, the casino can pay $5,000
to Mary without
withholding U.S. tax. The casino must, on the following Monday, fax a completed Form W-7 for Mary, including the required
certification, to the IRS
for an expedited ITIN.
Situation 2. Assume that Mary won the money on Monday. To pay the winnings without withholding U.S. tax, the casino must apply
for and get an ITIN
for Mary because an expedited ITIN is available from the IRS at the time of the payment.
Depositing Withheld Taxes
This section discusses the rules for depositing income tax withheld on FDAP income. The deposit rules discussed here do not
apply to the following
items.
Taxes on pay subject to graduated withholding as discussed earlier. (See Form 941 for the deposit rules.)
Tax withheld on pensions and annuities subject to graduated withholding or the 10% tax on nonperiodic distributions. (See
Form 945 for the
deposit rules.)
Tax withheld on a foreign partner's share of effectively connected income of a partnership. See Partnership Withholding on Effectively
Connected Income, later.
Tax withheld on dispositions of U.S. real property interests by foreign persons. See U.S. Real Property Interest, later.
Taxes on household employee. See Schedule H (Form 1040), Household Employment Taxes, to report social security and Medicare
taxes, and any
income tax withheld, on wages paid to a nonresident alien household employee.
When Deposits Are Required
A deposit required for any period occurring in one calendar year must be made separately from a deposit for any period occurring
in another
calendar year. A deposit of this tax must be made separately from a deposit of any other type of tax.
The amount of tax you are required to withhold determines the frequency of your deposits. The following rules show how often
deposits must be made.
If at the end of a calendar year the total amount of undeposited taxes is less than $200, you may either pay the taxes with
your Form 1042
or deposit the entire amount by the due date of your Form 1042.
If at the end of any month the total amount of undeposited taxes is $200 or more but less than $2,000, you must deposit the
taxes within 15
days after the end of the month. If you made a deposit of $2,000 or more during the month (except December) under rule 3 below,
carry over any end of
the month balance of less than $2,000 to the next month. If you made a deposit of $2,000 or more during December, any end
of December balance of less
than $2,000 should be remitted with your Form 1042 by the due date.
If at the end of any quarter-monthly period the total amount of undeposited taxes is $2,000 or more, you must deposit the
taxes within 3
banking days after the end of the quarter-monthly period. (A quarter-monthly period ends on the 7th, 15th, 22nd, and last
day of the month.) In
figuring banking days, exclude any local holidays observed by authorized financial institutions, as well as Saturdays, Sundays,
and legal holidays.
You are considered to meet the deposit requirements in (3) if:
You deposit at least 90% of the actual tax liability for the deposit period, and
You deposit any underpayment with the first deposit that you must make after the 15th day of the following month, if the quarter-monthly
period is in a month other than December. You must deposit any underpayment of $200 or more for a quarter-monthly period that
occurs during December
by January 31.
Electronic deposit requirement.
You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities
you incur after 2005,
if you meet either of the following conditions.
You had to make electronic deposits in 2005.
You deposited more than $200,000 in federal depository taxes in 2004.
If you do not meet these conditions, you may choose to make electronic deposits.
To participate in EFTPS, you must first enroll. To receive an enrollment form, call 1-800-316-6591 (individual), 1-800-555-4477
(business), or you
can enroll online at www.eftps.gov. Get Publication 966, The Secure Way to Pay Your Federal Taxes, for more information.
Qualified business taxpayers that request an EIN will automatically be enrolled in EFTPS. They will receive information on
how to activate their
account or get federal deposit coupons, discussed next.
Federal tax deposit coupons.
If you do not make electronic deposits, you must deposit the income tax withheld on fixed or determinable annual or
periodic income using Form
8109, Federal Tax Deposit Coupon, according to the instructions provided with the form. If you do not have your coupons when
a deposit is due, call
1-800-829-4933 or contact your local IRS office.
To eliminate any penalty for failure to make deposits on time, be prepared to show that the deposit was mailed by
the second day before the due
date.
Deposits made by foreign corporations. If you use a Form 8109, show the “Amount of Deposit” in U.S. dollars. Send the completed
coupon with a bank draft in U.S. dollars to:
Financial Agent
Federal Tax Deposit Processing
P.O. Box 970030
St. Louis, MO 63197
U.S.A.
Obtaining coupon book.
A preinscribed book of Federal Tax Deposit Coupons (Form 8109) automatically will be sent to you after you apply for
an employer identification
number (EIN). Apply by completing Form SS-4, available from the IRS. If you have not received the coupon book, call 1-800-829-4933.
If you are a qualified business taxpayer, you will automatically be enrolled in EFTPS (discussed earlier) when you apply for
your EIN. You will
receive information on how to get your coupons.
Record of deposit. Before making a deposit, enter the amount of payment on the coupon and in your records. The coupon will not be
returned to you, but will be used to credit your tax account as identified by your employer identification number.
Penalty for failure to make deposits on time.
If you fail to make a required deposit within the time prescribed, a penalty is imposed on the underpayment (the excess
of the required deposit
over any actual timely deposit for a period). You can avoid the penalty if you can show that the failure to deposit was for
reasonable cause and not
because of willful neglect. Also, the IRS may waive the penalty if certain requirements are met.
Penalty rate.
If the deposit is:
1 to 5 days late, the penalty is 2% of the underpayment,
6 to 15 days late, the penalty is 5%, or
16 or more days late, the penalty is 10%.
However, if the deposit is not made within 10 days after the IRS issues the first notice demanding payment, the penalty is
15%.
If you owe a penalty for failing to deposit tax for more than one deposit period, and you make a deposit, your deposit is
applied to the most
recent period to which the deposit relates unless you designate the deposit period or periods to which your deposit is to
be applied. You can make
this designation only during a 90 day period that begins on the date of the penalty notice. The notice contains instructions
on how to make this
designation.
Adjustment for Overwithholding
What to do if you overwithheld tax depends on when you discover the overwithholding.
Overwithholding discovered by March 15 of following calendar year.
If you discover that you overwithheld tax by March 15 of the following calendar year, you may use the undeposited
amount of tax to make any
necessary adjustments between you and the recipient of the income. However, if the undeposited amount is not enough to make
any adjustments, or if you
discover the overwithholding after the entire amount of tax has been deposited, you can use either the reimbursement or the
set-off procedure to
adjust the overwithholding.
If March 15 is a Saturday, Sunday, or legal holiday, the next business day is the final date for these actions.
Reimbursement procedure.
Under the reimbursement procedure, you repay the beneficial owner or payee the amount overwithheld. You use your own
funds for this repayment. You
must make the repayment by March 15 of the year after the calendar year in which the amount was overwithheld. For example,
if you overwithheld tax in
2006, you must repay the beneficial owner by March 15, 2007. You must keep a receipt showing the date and amount of the repayment
and provide a copy
of the receipt to the beneficial owner.
You may reimburse yourself by reducing any subsequent deposits you make before the end of the year after the calendar
year in which the amount was
overwithheld. The reduction cannot be more than the amount you actually repaid.
If you will reduce a deposit due in that later year, you must show the total tax withheld and the amount actually
repaid on a timely filed (not
including extensions) Form 1042-S for the calendar year in which the amount was overwithheld. You must state on a timely filed
(not including
extensions) Form 1042 that you are claiming a credit.
Example.
James Smith is a resident of the United Kingdom. In December 2006, domestic corporation M paid a dividend of $100
to James, at which time M
Corporation withheld $30 and paid the balance of $70 to him. In February 2007, James gave M Corporation a valid Form W-8BEN.
He advises M Corporation
that under the income tax convention with the United Kingdom, only $15 tax should have been withheld from the dividend and
requests repayment of the
$15 overwithheld. Although M Corporation had already deposited the $30, the corporation repaid James $15 before the end of
February.
During 2006, M Corporation made no other payments from which tax had to be withheld. On its timely filed 2006 Form
1042, M Corporation reports $15
as its total tax liability and $30 as its total deposits. M Corporation requests that the $15 overpayment be credited to its
2007 Form 1042 rather
than refunded.
The Form 1042-S that M Corporation files for the dividend paid to James in 2006 must show a tax withheld of $30 in
box 7 and $15 as an amount
repaid in box 8.
In June 2007, M Corporation made payments from which it withheld tax of $200. On July 16, 2007, M Corporation deposited
$185, that is, $200 less
the $15 credit claimed on its Form 1042 for 2006. M Corporation timely filed its Form 1042 for 2007, showing tax liability
of $200, $185 deposited,
and $15 credit from 2006.
Set-off procedure.
Under the set-off procedure, you repay the beneficial owner or payee the amount overwithheld by reducing the amount
you would have been required to
withhold on later payments you make to that person. These later payments must be made before the earlier of:
The date you actually file Form 1042-S for the calendar year in which the amount was overwithheld, or
March 15 of the year after the calendar year in which the amount was overwithheld.
On Form 1042 and Form 1042-S for the calendar year in which the amount was overwithheld, show the reduced amount as
the amount required to be
withheld.
Overwithholding discovered at a later date.
If you discover after March 15 of the following calendar year that you overwithheld tax for the prior year, do not
adjust the amount of tax
reported on Forms 1042-S (and Form 1042) or on any deposit or payment for that prior year. Do not repay the beneficial owner
or payee the amount
overwithheld.
In this situation, the recipient will have to file a U.S. income tax return (Form 1040NR or Form 1040NR-EZ or Form
1120-F) or, if a tax return has
already been filed, a claim for refund (Form 1040X or amended Form 1120-F) to recover the amount overwithheld.
Returns Required
Every withholding agent, whether U.S. or foreign, must file Forms 1042 and 1042-S to report payments of amounts subject to
NRA withholding unless
an exception applies. Do not use Forms 1042 and 1042-S to report tax withheld on the following:
Wages or salaries subject to graduated income tax withholding (see Wages Paid to Employees—Graduated Withholding, earlier
under Pay for Personal Services Performed),
Any portion of a U.S. or foreign partnership's (other than a publicly traded partnership) effectively connected taxable income
allocable to
a foreign partner (see Partnership Withholding on Effectively Connected Income, later),
Dispositions of U.S. real property interests by foreign persons (see U.S. Real Property Interest, later),
Pensions, annuities, and certain other deferred income reported on Form 945, and
Income, social security, and Medicare taxes on wages paid to a household employee reported on Schedule H (Form 1040).
The Forms 1042 and 1042-S must be filed by March 15 of the year following the calendar year in which the income subject to
reporting was paid. If
March 15 falls on a Saturday, Sunday, or legal holiday, the due date is the next business day.
Form 1042.
Every U.S. and foreign withholding agent that is required to file a Form 1042-S must also file an annual return on
Form 1042. You must file Form
1042 even if you were not required to withhold any income tax.
You must file Form 1042 with the:
Internal Revenue Service Center
Philadelphia, PA 19255-0607.
Form 1042-S.
Every U.S. and foreign withholding agent must file a Form 1042-S for amounts subject to NRA withholding unless an
exception applies. The form can
be filed electronically, magnetically, or on paper. A separate Form 1042-S is required for each recipient of income to whom
you made payments during
the preceding calendar year regardless of whether you withheld or were required to withhold tax. You must use a separate Form
1042-S for each type of
income that you paid to the same recipient. See Statements to recipients, later.
You must furnish a Form 1042-S for each recipient even if you did not withhold tax because you repaid the tax withheld
to the recipient or because
the income payment was exempt from tax under the Internal Revenue Code or under a U.S. income tax treaty.
You must get prior annual approval to use a substitute Form 1042-S unless it meets the requirements listed in Publication
1179, General Rules and
Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. Get Publication 1179 for more information.
Joint owners.
If all the owners provide documentation that permits them to receive the same reduced rate of withholding (for example,
under an income tax treaty)
you should apply the reduced rate of withholding. You are required, however, to report the payment on one Form 1042-S to the
person whose status you
rely upon to determine the withholding rate. If, however, any one of the owners requests its own Form 1042-S, you must furnish
Form 1042-S to the
person who requests it. If more than one Form 1042-S is issued for a single payment, the total amount paid and tax withheld
reported on all Forms
1042-S cannot exceed the total amounts paid to joint owners.
Electronic/magnetic media reporting.
Withholding agents or their agents generally must use electronic or magnetic media to file 250 or more Forms 1042-S
with the IRS. You are
encouraged to file electronically or magnetically even if you are not required to.
A completed Form 4419, Application for Filing Information Returns Electronically/Magnetically, should be filed at
least 30 days before the due date
of the return. Returns may not be filed electronically or magnetically until the application has been approved by the IRS.
For information and instructions on filing Forms 1042-S on electronic/magnetic media, get Publication 1187, Specifications
for Filing Form 1042-S,
Foreign Person's U.S. Source Income Subject to Withholding, Electronically or Magnetically. If you file electronically, you
will use the Filing
Information Returns Electronically (FIRE) system. You get to the system through the Internet at
fire.irs.gov.
Form 1042-T.
If Form 1042-S is filed on paper, it must be filed with Form 1042-T. You may need to file more than one Form 1042-T.
See the instructions for that
form for more information.
Deposit interest paid to alien individuals who are residents of Canada.
If you pay deposit interest of $10 or more to a nonresident alien individual who resides in Canada and is not a U.S.
citizen, you may have to
report it on Form 1042-S. This reporting requirement generally applies to interest that (a) is on a deposit maintained at
a bank's office in the
United States, and (b) is not effectively connected with a trade or business within the United States. However, this reporting
requirement does not
apply to interest paid on certain bearer certificates of deposit as described in section 1.6049-8(b) of the regulations if
you pay that interest
outside the United States.
How to report.
Although you only have to report on Form 1042-S the deposit interest paid to residents of Canada who are not U.S.
citizens, you can comply by
reporting payments to all foreign persons receiving bank deposit interest, if that way is easier for you.
Determining residency.
You determine whether a payee is a Canadian resident based on the permanent residence address required to be provided
on the Form W-8BEN. If you
have actual knowledge that the payee is a U.S. person, you must report the payment on Form 1099-INT.
Statements to recipients.
You must furnish a statement to each recipient for whom you are filing a Form 1042-S (or electronic/magnetic media
report) by the due date for
filing Forms 1042 and 1042-S with the IRS. You may use a copy of the official Form 1042-S for this purpose. Or, you may provide
recipients with the
information together with, or on, other (commercial) statements or notices. These statements must clearly identify the type
of income (as described on
the official form), the amount of tax withheld, the withholding rate (including 00.00 if exempt), and the country involved.
You may include more than
one type of income on the copies of the Form 1042-S that you provide to the recipient of the income. You may not, however,
include more than one
income line on the copy of the form filed with the IRS.
Extension of time to file.
You may request an extension of time to file Form 1042 by filing Form 2758, Application for Extension of Time To File
Certain Excise, Income,
Information, and Other Returns. You should send Form 2758 far enough in advance of the due date of Form 1042 to allow the
IRS time to consider your
application and to reply before the due date of the return.
You can get an automatic 30-day extension of time to file Form 1042-S by filing Form 8809, Application for Extension
of Time To File Information
Returns. You should request an extension as soon as you are aware that an extension is necessary, but no later than the due
date for filing Form
1042-S. You may request one additional extension of 30 days by submitting a second Form 8809 before the end of the first extension
period. Requests
for an additional extension are not automatically granted. Approval or denial is based on administrative criteria and guidelines.
The IRS will send
you a letter of explanation approving or denying your request.
The automatic and any approved additional request only extend the due date for filing the returns with the IRS. It does not
extend the due date for
furnishing statements to recipients.
Penalties.
The penalty for not filing Form 1042 when due (including extensions) is usually 5% of the unpaid tax for each month
or part of a month the return
is late, but not more than 25% of the unpaid tax.
A penalty may be imposed for failure to file Form 1042-S when due (including extensions) or for failure to provide
complete and correct
information. The amount of the penalty depends on when you file a correct Form 1042-S. The penalty for each Form 1042-S is:
$15 if you file a correct form within 30 days, with a maximum penalty of $75,000 per year ($25,000 for a small business),
$30 if you file after 30 days but before August 2, with a maximum penalty of $150,000 ($50,000 for a small business), or
$50 if you file after August 1 or do not file a correct form, with a maximum penalty of $250,000 per year ($100,000 for a
small business).
A small business is a business that has average annual gross receipts of not more than $5 million for the most recent
3 tax years (or for the
period of its existence, if shorter) ending before the calendar year in which the Forms 1042-S are due.
If you fail to provide a complete and correct statement to each recipient, a penalty of $50 for each failure may be
imposed. The maximum penalty is
$100,000 per year. If you intentionally disregard the requirement to report correct information, the penalty for each Form
1042-S (or statement to
recipient) is the greater of $100 or 10% of the total amount of the items that must be reported, with no maximum penalty.
Failure to file electronically or on magnetic media.
If you are required to file Form 1042-S electronically or on magnetic media but you fail to do so, and you do not
have an approved waiver, you may
be subject to a penalty of $50 per form unless you show reasonable cause. The penalty applies separately to original and amended
returns.
Partnership Withholding on Effectively Connected Income
Under section 1446, a partnership (foreign or domestic) that has income effectively connected with a U.S. trade or business
(or income treated as
effectively connected) must pay a withholding tax on the effectively connected taxable income that is allocable to its foreign
partners. A publicly
traded partnership must withhold tax on actual distributions of effectively connected income. See Publicly Traded Partnerships, later.
This withholding tax does not apply to income that is not effectively connected with the partnership's U.S. trade or business.
That income is
subject to NRA withholding tax, as discussed earlier in this publication.
Who Must Withhold
The partnership, or a withholding agent for the partnership, must pay the withholding tax. A partnership that must pay the
withholding tax but
fails to do so, may be liable for the payment of the tax and any penalties and interest.
The partnership must determine whether a partner is a foreign partner. A foreign partner can be a nonresident alien individual,
foreign
corporation, foreign partnership, or foreign estate or trust.
U.S. partner.
A partner that is a U.S. person should provide Form W-9 to the partnership.
A partnership may rely on a partner's certification of nonforeign status and assume that a partner is not a foreign
partner unless the form:
Does not give the partner's name, U.S. taxpayer identification number, and address, or
Is not signed under penalties of perjury and dated.
The partnership must keep the certification for as long as it may be relevant to the partnership's liability for section
1446 tax.
The partnership may not rely on the certification if it has actual knowledge or has reason to know that any information
on the form is incorrect or
unreliable.
If a partnership does not receive a Form W-9 (or similar documentation) the partnership must presume that the partner
is a foreign person.
Foreign Partner
A partner that is a foreign person should provide the appropriate Form W-8 (as shown in Chart D) to the partnership.
Partners who have otherwise provided Form W-8 to a partnership for purposes of section 1441 or 1442, as discussed earlier,
can use the same form
for purposes of section 1446 if they meet the requirements discussed earlier under Documentation. However, a foreign simple trust that has
provided documentation for its beneficiaries for purposes of section 1441 must provide a Form W-8 on its own behalf for purposes
of section 1446.
The partnership may not rely on the certification if it has actual knowledge or has reason to know that any information on
the form is incorrect or
unreliable.
The partnership must keep the certification for as long as it may be relevant to the partnership's liability for section 1446
tax.
* A partnership may substitute its own form for the official version of Form W-8 to ascertain the identity of its
partners.
**A domestic grantor trust must provide a statement as shown in section 1.1446-1(c)(2)(ii)(e) and documentation
for its grantor.
Amount of Withholding Tax
The amount a partnership must withhold is based on its effectively connected taxable income that is allocable to its foreign
partners for the
partnership's tax year. However, see Publicly Traded Partnerships, later.
The foreign partner's share of the partnership's gross effectively connected income is reduced by:
The partner's share of partnership deductions connected to that income for the year,
The partner's tax treaty benefits related to that income, and
The partner's allowable prior years' deductions and losses that the partnership takes into consideration.
For purposes of item (3), the partner must provide a certification of the information to the partnership. For information
on this
certification, see section 1.1446-6T of the regulations.
If a nonresident alien partner's investment in the partnership is the only activity producing effectively connected income
and the section 1446 tax
is less than $1,000, the partnership is not required to withhold. For information on the certification in this situation,
see section
1.1446-6T(c)(1)(iv) of the regulations.
Tax rate.
The withholding tax rate on a partner's share of effectively connected income is 35%. However, the partnership may
withhold at the highest rate
applicable to a particular type of income allocated to a noncorporate partner provided the partnership received the appropriate
documentation. See
section 1.1446-3(a)(2)(ii) of the regulations.
Installment payments.
A partnership must make installment payments of withholding tax on its foreign partners' share of effectively connected
taxable income whether or
not distributions are made during the partnership's tax year. The amount of a partnership's installment payment is the sum
of the installment payments
for each of its foreign partners. The amount of each installment payment can be figured by using Form 8804-W.
Date payments are due. Payments of withholding tax must be made during the partnership's tax year in which the effectively connected
taxable income is derived. A partnership must pay the IRS a portion of the annual withholding tax for its foreign partners
by the 15th day of the 4th,
6th, 9th, and 12th months of its tax year for U.S. income tax purposes. Any additional amounts due are to be paid with Form
8804, the annual
partnership withholding tax return.
A foreign partner's share of withholding tax paid by a partnership is treated as distributed to the partner on the earliest
of:
The day on which the tax was paid by the partnership,
The last day of the partnership's tax year for which the tax was paid, or
The last day on which the partner owned an interest in the partnership during that year.
The amount treated as distributed to the partner is generally treated as an advance or draw under section 1.731-1(a)(1)(ii)
of the regulations
to the extent of the partner's share of income for the partnership year.
Notification to partners.
Generally, a partnership must notify each foreign partner of the tax withheld on its behalf within 10 days of the
installment payment date. No
particular form is required for this notification. For more information on the substance of the notification and exceptions,
see section
1.1446-3(d)(1)(i) of the regulations.
Real property gains.
If a domestic partnership disposes of a U.S. real property interest, the gain is treated as effectively connected
income and the partnership or
withholding agent must withhold following the rules discussed here. A domestic partnership's compliance with these rules satisfies
the requirements
for withholding on the disposition of U.S. real property interests (discussed later).
Reporting and Paying the Tax
Three forms are required for reporting and paying over tax withheld on effectively connected income allocable to foreign partners.
This does not
apply to publicly traded partnerships, discussed later.
Form 8804,
Annual Return for Partnership Withholding Tax (Section 1446). The withholding tax liability of the partnership for
its tax year is reported on Form
8804. Form 8804 is also a transmittal form for Forms 8805.
Any additional withholding tax owed for the partnership's tax year is paid (in U.S. currency) with Form 8804. A Form
8805 for each foreign partner
must be attached to Form 8804, whether or not any withholding tax was paid.
File Form 8804 by the 15th day of the 4th month after the close of the partnership's tax year. However, a partnership that
keeps its books and
records outside the United States and Puerto Rico has until the 15th day of the 6th month after the close of the partnership's
tax year to file. If
you need more time to file Form 8804, you may file Form 7004 to request an extension. Form 7004 does not extend the time to
pay the tax.
Form 8805,
Foreign Partner's Information Statement of Section 1446 Withholding Tax. Form 8805 is used to show the amount of effectively
connected taxable
income and any withholding tax payments allocable to a foreign partner for the partnership's tax year. At the end of the partnership's
tax year, Form
8805 must be sent to each foreign partner whether or not any withholding tax is paid. It must be delivered to the foreign
partner by the due date of
the partnership return (including extensions). A copy of Form 8805 for each foreign partner must also be attached to Form
8804 when it is filed.
A copy of Form 8805 must be attached to the foreign partner's U.S. income tax return to take a credit on its Form
1040NR or Form 1120-F.
Form 8813,
Partnership Withholding Tax Payment Voucher (Section 1446). This form is used to make payments of withheld tax to
the United States Treasury.
Payments must be made in U.S. currency by the payment dates (see Date payments are due, earlier).
Penalties.
A penalty may be imposed for failure to file Form 8804 when due (including extensions). It is the same as the penalty
for not filing Form 1042
discussed earlier under Returns Required.
A penalty may be imposed for failure to file Form 8805 when due (including extensions) or for failure to provide complete
and correct information.
The amount of the penalty depends on when you file a correct Form 8805. The penalty for each Form 8805 is:
$15 if you file a correct form within 30 days, with a maximum penalty of $75,000 per year ($25,000 for a small business),
or
$50 if you file after 30 days or do not file a correct form, with a maximum penalty of $250,000 per year ($100,000 for a small
business).
A small business is a business that has average annual gross receipts of not more than $5 million for the most recent
3 tax years (or for the
period of its existence, if shorter) ending before the calendar year in which the Forms 8805 are due.
If you fail to provide a complete and correct Form 8805 to each partner, a penalty of $50 for each failure may be
imposed. The maximum penalty is
$100,000 per year.
If you intentionally disregard the requirement to report correct information, the penalty for each Form 8805 is the
greater of $100 or 10% of the
total amount of the items that must be reported, with no maximum penalty.
Identification numbers.
A partnership that has not been assigned a U.S. TIN must obtain one. If a number has not been assigned by the due
date of the first withholding tax
payment, the partnership should enter the date the number was applied for on Form 8813 when making its payment. As soon as
the partnership receives
its TIN, it must immediately provide that number to the IRS.
To ensure proper crediting of the withholding tax when reporting to the IRS, the partnership must include each partner's
U.S. TIN on Form 8805. If
there are partners in the partnership without identification numbers, the partnership should inform them of the need to get
a number. See U.S.
Taxpayer Identification Numbers, earlier.
Publicly Traded Partnerships
A publicly traded partnership (PTP) that has effectively connected income, gain, or loss must pay withholding tax on any distributions
of that
income made to its foreign partners. A PTP must use Forms 1042 and 1042-S (Income Code 27) to report withholding from distributions.
The rate of
withholding is 35%.
A PTP is any partnership an interest in which is regularly traded on an established securities market or is readily tradable
on a secondary market.
These rules do not apply to a PTP treated as a corporation under section 7704 of the Code.
Foreign partner.
The partnership determines whether a partner is a foreign partner using the rules discussed earlier under Foreign Partner.
Nominee.
The withholding agent under this section can be the PTP or a nominee. For this purpose, a nominee is a domestic person
that holds an interest in a
PTP on behalf of a foreign person. The nominee is treated as the withholding agent only to the extent of the amount specified
in the qualified notice
given to the nominee by the PTP. If a nominee is designated as the withholding agent, the obligation to withhold is imposed
solely on the nominee. The
nominee must report the distributions and withheld amounts on Forms 1042 and 1042-S. For more information, see section 1.1446-4(b)
and (d) of the
regulations.
Distributions subject to withholding.
The partnership or nominee must withhold tax on any actual distributions of money or property to foreign partners.
The amount of the distribution
includes the amount of any section 1446 tax required to be withheld. In the case of a partnership that receives a partnership
distribution from
another partnership (a tiered partnership), the distribution also includes the tax withheld from that distribution.
If the distribution is in property other than money, the partnership cannot release the property until it has enough
funds to pay over the
withholding tax.
A publicly traded partnership that complies with these withholding requirements satisfies the requirements discussed
later under U.S. Real
Property Interest. Distributions subject to withholding include:
Amounts subject to withholding under section 1445(e)(1) of the Code on distributions pursuant to an election under section
1.1445-5(c)(3) of
the regulations, and
Amounts not subject to withholding under section 1445 of the Code because the distributee is a partnership or is a foreign
corporation that
has made an election to be treated as a domestic corporation.
Excluded amounts.
Partnership distributions are first considered to be paid out of the following types of income in the order listed.
Amounts of noneffectively connected income distributed by the partnership and subject to NRA withholding under section 1441
or 1442, as
discussed earlier.
Amounts of effectively connected income not subject to withholding under section 1446 (for example, amounts exempt by treaty).
Amounts subject to withholding under these rules.
Amounts not listed in (1) through (3).
U.S. Real Property Interest
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to income tax withholding.
If you are the
tranferee, you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to
withhold, you may be held
liable for the tax.
Foreign person.
A foreign person is a nonresident alien individual, foreign corporation that has not made an election under section
897(i) of the Internal Revenue
Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a
resident alien individual.
Transferor.
A transferor is any foreign person that disposes of a U.S. real property interest by sale, exchange, gift, or any
other transfer. A transfer
includes distributions to shareholders of a corporation and beneficiaries of a trust or estate.
The owner of a disregarded entity is treated as the transferor of the property, not the entity.
Transferee.
A transferee is any person, foreign or domestic, that acquires a U.S. real property interest by purchase, exchange,
gift, or any other transfer.
U.S. real property interest.
A U.S. real property interest is an interest, other than as a creditor, in real property (including an interest in
a mine, well, or other natural
deposit) located in the United States or the Virgin Islands, as well as certain personal property that is associated with
the use of real property
(such as farming machinery). It also means any interest, other than as a creditor, in any domestic corporation unless it is
established that the
corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest
was held, or the 5-year
period ending on the date of disposition. If on the date of disposition, the corporation did not hold any U.S. real property
interests, and all the
interests held at any time during the shorter of the applicable periods were disposed of in transactions in which the full
amount of any gain was
recognized, then an interest in the corporation is not a U.S. real property interest.
The sale of an interest in a domestically controlled qualified investment entity (real estate investment trust (REIT)
or regulated investment
company (RIC)) is not the sale of a U.S. real property interest. The entity is domestically controlled if at all times during
the testing period less
than 50% in value of its stock was held, directly or indirectly, by foreign persons. The testing period is the shorter of
(a) the 5-year period ending
on the date of the disposition, or (b) the period during which the entity was in existence.
Amount to withhold.
The transferee must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized by the foreign
person on the disposition
(for example, 10% of the purchase price).
The amount realized is the sum of:
The cash paid, or to be paid (principal only),
The fair market value of other property transferred, or to be transferred, and
The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the
transfer.
If the property transferred was owned jointly by U.S. and foreign persons, the amount realized is allocated between the transferors
based on
the capital contribution of each transferor.
Foreign corporations.
A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain
it recognizes on the distribution
to its shareholders.
Domestic corporations.
A domestic corporation must withhold a tax equal to 10% of the fair market value of the property distributed to a
foreign shareholder if:
The shareholder's interest in the corporation is a U.S. real property interest, and
The property distributed is either in redemption of stock or in liquidation of the corporation.
U.S. real property holding corporations.
A distribution from a domestic corporation that is a U.S. real property holding corporation (USRPHC) is generally
subject to NRA withholding and
withholding under the U.S. real property interest provisions. This also applies to a corporation that was a USRPHC at any
time during the shorter of
the period during which the U.S. real property interest was held, or the 5-year period ending on the date of disposition.
A USRPHC can satisfy both
withholding provisions if it withholds under one of the following procedures.
Apply NRA withholding on the full amount of the distribution, whether or not any portion of the distribution represents a
return of basis or
capital gain. If a reduced tax rate applies under an income tax treaty, then the rate of withholding must not be less than
10%, unless the treaty
specifies a lower rate for distributions from a USRPHC.
Apply NRA withholding to the portion of the distribution that the USRPHC estimates is a dividend. Then, withhold 10% on the
remainder of the
distribution (or on a smaller amount if a withholding certificate is obtained and the amount of the distribution that is a
return of capital is
established).
The same procedure must be used for all distributions made during the year. A different procedure may be used each year.
Partnerships.
If a partnership disposes of a U.S. real property interest at a gain, the gain is treated as effectively connected
income and is subject to the
rules explained earlier under Partnership Withholding on Effectively Connected Income.
Trusts and estates.
You are a withholding agent if you are a trustee, fiduciary, or executor of a trust or estate having one or more foreign
beneficiaries. You must
establish a U.S. real property interest account. You enter in the account all gains and losses realized during the taxable
year of the trust or estate
from dispositions of U.S. real property interests. You must withhold 35% on any distribution to a foreign beneficiary that
is attributable to the
balance in the real property interest account on the day of the distribution. A distribution from a trust or estate to a beneficiary
(foreign or
domestic) will be treated as attributable first to any balance in the U.S. real property interest account and then to other
amounts.
A trust with more than 100 beneficiaries may elect to withhold from each distribution 35% of the amount attributable
to the foreign beneficiary's
proportionate share of the current balance of the trust's real property interest account. This election does not apply to
publicly traded trusts or
real estate investment trusts (REITs). For more information about this election, see section 1.1445-5(c) of the regulations.
Publicly traded trusts and REITs must withhold on distributions of U.S. real property interests to foreign persons.
The withholding rate is 35%.
For more information, see section 1.1445-8 of the regulations.
Generally, any distribution from a qualified investment entity attributable to gain from the sale or exchange of a
U.S. real property interest is
treated as such gain by the nonresident alien individual or foreign corporation receiving the distribution. A distribution
by a REIT on stock
regularly traded on a securities market in the United States is not treated as gain from the sale or exchange of a U. S. real
property interest if the
shareholder did not own more than 5% of that stock at any time during the REIT's tax year. These distributions are included
in the shareholder's gross
income as a dividend from the REIT, not as long-term capital gain.
Additional information.
For additional information on the withholding rules that apply to corporations, trusts, estates, and qualified investment
entities, see section
1445 of the Internal Revenue Code and the related regulations. For additional information on the withholding rules that apply
to partnerships, see the
previous discussion.
You may also write to the:
Director, Philadelphia Service Center
FIRPTA Unit
P.O. Box 21086
Philadelphia, PA 19114-0586.
Exceptions.
You do not have to withhold if any of the following apply.
You (the transferee) acquire the property for use as a home and the amount realized (sales price) is not more than $300,000.
You or a member
of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used
by any person during
each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used,
do not count the days
the property will be vacant. For this exception, the transferee must be an individual.
The property disposed of (other than certain dispositions of nonpublicly traded interests) is an interest in a domestic corporation
if any
class of stock of the corporation is regularly traded on an established securities market. However, if the class of stock
had been held by a foreign
person who beneficially owned more than 5% of the fair market value of that class at any time during the previous 5-year period,
then that interest is
a U.S. real property interest if the corporation qualifies as a USRPHC, and you must withhold on it.
The disposition is of an interest in a domestic corporation and that corporation furnishes you a certification stating, under
penalties of
perjury, that the interest is not a U.S. real property interest. Generally, the corporation can make this certification only
if the corporation was
not a USRPHC during the previous 5 years (or, if shorter, the period the interest was held by its present owner), or as of
the date of disposition,
the interest in the corporation is not a U.S. real property interest by reason of section 897(c)(1)(B) of the Code. The certification
must be dated
not more than 30 days before the date of transfer.
The transferor gives you a certification stating, under penalties of perjury, that the transferor is not a foreign person
and containing the
transferor's name, U.S. taxpayer identification number, and home address (or office address, in the case of an entity).
You receive a withholding certificate from the Internal Revenue Service that excuses withholding. See Withholding Certificates,
later.
The transferor gives you written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition
provision in the Internal Revenue Code or a provision in a U.S. tax treaty. You must file a copy of the notice by the 20th
day after the date of
transfer with the Director, Philadelphia Service Center, FIRPTA Unit, P.O. Box 21086, Philadelphia, PA 19114-0586.
The amount the transferor realizes on the transfer of a U.S. real property interest is zero.
The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
The grantor realizes an amount on the grant or lapse of an option to acquire a U.S. real property interest. However, you must
withhold on
the sale, exchange, or exercise of that option.
The disposition (other than certain dispositions of nonpublicly traded interests) is of publicly traded partnerships or trusts.
However, if
an interest in a publicly traded partnership or trust was owned by a foreign person with a greater than 5% interest at any
time during the previous
5-year period, then that interest is a U.S. real property interest if the partnership or trust would otherwise qualify as
a USRPHC if it were a
corporation, and you must withhold on it.
Certifications.
The certifications in items (3) and (4) are not effective if you have actual knowledge, or receive a notice from an
agent, that they are false. If
you are required by regulations to furnish a copy of the certification to the IRS and you fail to do so in the time and manner
prescribed, the
certifications are not effective.
Liability of agents.
If you receive either of the certifications discussed in item (3) or (4) and the transferor's agent or your agent
(the transferee's agent) has
actual knowledge that the certification is false, or in the case of (3), that the corporation is a foreign corporation, the
agent must notify you, or
the agent will be held liable for the tax. The agent's liability is limited to the amount of compensation the agent gets from
the transaction.
An agent is any person who represents the transferor or transferee in any negotiation with another person (or another
person's agent) relating to
the transaction, or in settling the transaction. A person is not treated as an agent if the person only performs one or more
of the following acts
related to the transaction:
Receipt and disbursement of any part of the consideration,
Recording of any document,
Typing, copying, and other clerical tasks,
Obtaining title insurance reports and reports concerning the condition of the property, or
Transmitting documents between the parties.
Reporting and Paying the Tax
Transferees must use Forms 8288 and 8288-A to report and pay over any tax withheld on the acquisition of U.S. real property
interests. These forms
must also be used by corporations, estates, and trusts that must withhold tax on distributions and other transactions involving
U.S. real property
interests. You must include the U.S. TIN of both the transferor and the transferee on the forms.
For partnerships disposing of U.S. real property interests, the manner of reporting and paying over the tax withheld is the
same as discussed
earlier under Partnership Withholding on Effectively Connected Income.
For publicly traded trusts and real estate investment trusts, you must use Forms 1042 and 1042-S for reporting and paying
over tax withheld on
distributions from dispositions of U.S. real property interests. Use Income Codes 24, 25, and 26 on Form 1042-S for transactions
involving these
entities.
Form 8288,
U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. The tax withheld
on the acquisition of a U.S. real
property interest from a foreign person is reported and paid over using Form 8288. Form 8288 also serves as the transmittal
form for copies A and B of
Form 8288-A.
Generally, you must file Form 8288 by the 20th day after the date of the transfer.
If an application for a withholding certificate (discussed later) is submitted to the IRS before or on the date of a transfer
and the application
is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to
be reported and paid over
immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid over within 20 days
following the day on which
a copy of the withholding certificate or notice of denial is mailed by the IRS.
If the principal purpose of applying for a withholding certificate is to delay paying over the withheld tax, the transferee
will be subject to
interest and penalties. The interest and penalties will be assessed for the period beginning on the 21st day after the date
of transfer and ending on
the day the payment is made.
Form 8288-A,
Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The withholding agent
must prepare a Form 8288-A for
each person from whom tax has been withheld. Attach copies A and B of Form 8288-A to Form 8288. Keep Copy C for your records.
IRS will stamp Copy B and send it to the person subject to withholding. That person must file a U.S. income tax return
and attach the stamped Form
8288-A to receive credit for any tax withheld.
A stamped copy of Form 8288-A will not be provided to the transferor if the transferor's TIN is not included on that form.
In this case, to get
credit for the withheld amount, the transferor must attach to its U.S. income tax return substantial evidence of withholding
(for example, closing
documents) and a statement that contains all the required information shown on Forms 8288 and 8288-A including the transferor's
TIN.
Form 1099-S,
Proceeds From Real Estate Transactions. Generally, the real estate broker or other person responsible for closing
the transaction must report the
sale of the property to the IRS using Form 1099-S. For more information about Form 1099-S, see the Instructions for Form 1099-S
and the General
Instructions for Forms 1099, 1098, 5498, and W-2G.
Withholding Certificates
The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted by a withholding certificate
issued by the
IRS. The transferee, the transferee's agent, or the transferor may request a withholding certificate. The IRS will generally
act on these requests
within 90 days after receipt of a complete application including the TINs of all the parties to the transaction. A transferor
that applies for a
withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the
day prior to the
transfer.
A withholding certificate may be issued due to:
A determination by the IRS that reduced withholding is appropriate because either:
The amount that must be withheld would be more than the transferor's maximum tax liability, or
Withholding of the reduced amount would not jeopardize collection of the tax,
The exemption from U.S. tax of all gain realized by the transferor, or
An agreement for the payment of tax providing security for the tax liability, entered into by the transferee or transferor.
Applications for withholding certificates are divided into six basic categories. This categorizing provides for specific information
that is needed
to process the applications. The six categories are:
Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,
Applications based solely on a calculation of the transferor's maximum tax liability,
Applications under special installment sale rules,
Applications based on an agreement for the payment of tax with conforming security,
Applications for blanket withholding certificates, and
Applications on any other basis.
The applicant must make available to the IRS, within the time prescribed, all information required to verify that representations
relied upon in
accepting the agreement are accurate, and that the obligations assumed by the applicant will be performed pursuant to the
agreement. Failure to
provide requested information promptly will usually result in rejection of the application, unless the IRS grants an extension
of the target date.
Categories (1), (2), and (3).
Use Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property
Interests, to apply for a
withholding certificate. Follow the instructions for the form.
Categories (4), (5), and (6).
Do not use Form 8288-B for applications under categories (4), (5), and (6). For these categories follow the instructions
given here and under the
specific category.
All applications for withholding certificates must use the following format. The information must be provided in paragraphs
labeled to correspond
with the numbers and letters set forth below. If the information requested does not apply, place “N/A” in the relevant space.
Information on the application category:
State which category (4, 5, or 6) describes the application,
If a category (4) application:
State whether the proposed agreement secures (A) the transferor's maximum tax liability, or (B) the amount that would otherwise
have to be
withheld, and
State whether the proposed agreement and security instrument conform to the standard formats.
Information on the transferee or transferor:
State the name, address, and TIN of the person applying for the withholding certificate (if this person does not have a TIN
and is eligible
for an ITIN, he or she can apply for the ITIN by attaching the application to a completed Form W-7 and forwarding the package
to the address given in
the Form W-7 instructions),
State whether that person is the transferee or transferor, and
State the name, address, and TIN of all other transferees and transferors of the U.S. real property interest for which the
withholding
certificate is sought.
Information on the U.S. real property interest for which the withholding certificate is sought, state the:
Type of interest (such as interest in real property, in associated personal property, or in a domestic U.S. real property
holding
corporation),
Contract price,
Date of transfer,
Location and general description (if an interest in real property),
Class or type and amount of the interest in a U.S. real property holding corporation, and
Whether in the 3 preceding tax years: (1) U.S. income tax returns were filed relating to the U.S. real property interest,
and if so, when
and where those returns were filed, and if not, why returns were not filed, and (2) U.S. income taxes were paid relating to
the U.S. real property
interest, and if so, the amount of tax paid.
Provide full information concerning the basis for the issuance of the withholding certificate. Although the information to
be included in
this section of the application will vary from case to case, the rules shown under the specific category provide general guidelines
for the inclusion
of appropriate information for that category.
The application must be signed by the individual, or a duly authorized agent (with a copy of the power of attorney,
such as Form 2848, attached), a
responsible officer in the case of a corporation, a general partner in the case of a partnership, or a trustee, executor,
or equivalent fiduciary in
the case of a trust or estate. The person signing the application must verify under penalties of perjury that all representations
are true, correct,
and complete to that person's knowledge and belief. If the application is based in whole or in part on information provided
by another party to the
transaction, that information must be supported by a written verification signed under penalties of perjury by that party
and attached to the
application.
You may also write to the:
Director, Philadelphia Service Center
FIRPTA Unit
P.O. Box 21086
Philadelphia, PA 19114-0586.
Category (4) applications.
If the application is based on an agreement for the payment of tax, the application must include:
Information establishing the transferor's maximum tax liability, or the amount that otherwise has to be withheld,
A signed copy of the agreement proposed by the applicant, and
A copy of the security instrument proposed by the applicant.
Either the transferee or the transferor may enter into an agreement for the payment of tax. The agreement is a contract between
the IRS and
any other person and consists of two necessary elements. Those elements are:
A detailed description of the rights and obligations of each, and
A security instrument or other form of security acceptable to the Commissioner or his delegate.
For more information on the agreement for the payment of tax, including a sample agreement, see section 5 of Revenue
Procedure 2000-35. Revenue
Procedure 2000-35 is in Cumulative Bulletin 2000-2, or it can be found on page 211 of Internal Revenue Bulletin 2000-35 at
www.irs.gov/pub/irs-irbs/irb00-35.pdf.
There are four major types of security acceptable to the IRS. They are:
Bond with surety or guarantor,
Bond with collateral,
Letter of credit, and
Guarantee (corporate transferors).
The IRS may, in unusual circumstances and at its discretion, accept any additional form of security that it finds to be adequate.
For more information on acceptable security instruments, including sample forms of these instruments, see section
6 of Revenue Procedure 2000-35.
Category (5) applications.
A blanket withholding certificate may be issued if the transferor holding the U.S. real property interests provides
an irrevocable letter of credit
or a guarantee and enters into a tax payment and security agreement with the IRS. A blanket withholding certificate excuses
withholding concerning
multiple dispositions of those property interests by the transferor or the transferor's legal representative during a period
of no more than 12
months.
For more information, see section 9 of Revenue Procedure 2000-35.
Category (6) applications.
These are nonstandard applications and may be of the following types.
Agreement for payment of tax with nonconforming security.
An applicant seeking to enter into an agreement for the payment of tax but wanting to provide a nonconforming type
of security must include the
following in the application:
The information required for Category (4) applications, discussed earlier,
A description of the nonconforming security proposed by the applicant, and
A memorandum of law and facts establishing that the proposed security is valid and enforceable and that it adequately protects
the
government's interest.
Other nonstandard applications.
An application for a withholding certificate not previously described must explain in detail the proposed basis for
the issuance of the certificate
and set forth the reasons justifying the issuance of a certificate on that basis.
Amendments to Applications
An applicant for a withholding certificate may amend an otherwise complete application by sending an amending statement to
the Director,
Philadelphia Service Center, at the address shown earlier. There is no particular form required, but the amending statement
must provide the following
information:
The name, address, and TIN of the person providing the amending statement specifying whether that person is the transferee
or
transferor,
The date of the original application for a withholding certificate that is being amended,
A brief description of the real property interest for which the original application for a withholding certificate was provided,
and
The basis for the amendment including any change in the facts supporting the original application for a withholding certificate
and any
change in the terms of the withholding certificate.
The statement must be signed and accompanied by a penalties of perjury statement.
If an amending statement is provided, the time in which the IRS must act upon the application is extended by 30 days. If the
amending statement
substantially changes the original application, the time for acting upon the application is extended by 60 days. If an amending
statement is received
after the withholding certificate has been signed by the Director, Philadelphia Service Center, but has not been mailed to
the applicant, the IRS will
have a 90-day extension of time in which to act.
Tax Treaty Tables
The United States has income tax treaties (or conventions) with a number of foreign countries under which residents (sometimes
limited to citizens)
of those countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain income received from within
the United States.
Income that is exempt under a treaty is not subject to withholding at source under the statutory rules discussed in this publication.
Three tables follow:
Table 1
lists the withholding rates on income other than personal service income.
Table 2
lists the different types of personal service income that are entitled to an exemption from, or reduction in, withholding.
Table 3
shows where the full text of each treaty and protocol may be found in the Cumulative Bulletins if it has been published.
These tables are not meant to be a complete guide to all provisions of every income tax treaty. For detailed information,
you must consult the
provisions of the tax treaty that apply to the country of the nonresident alien to whom you are making payment.
You can obtain the full text of these treaties on the Internet at www.irs.gov.
Table 3. List of Tax Treaties (Updated through December 31, 2004)
Country
Official Text
Symbol
1
General
Effective Date
Citation
Applicable Treasury Explanations
or Treasury Decision (T.D.)
Australia
2
TIAS 10773
Dec. 1, 1983
1986-2 C.B. 220
1986-2 C.B. 246
Protocol
TIAS
Jan. 1, 2004
Austria
TIAS
Jan. 1, 1999
Barbados
TIAS 11090
Jan. 1, 1984
1991-2 C.B. 436
1991-2 C.B. 466
Protocol
TIAS
Jan. 1, 2005
Belgium
TIAS 7463
Jan. 1, 1971
1973-1 C.B. 619
Protocol
TIAS 11254
Jan. 1, 1988
Canada
3
TIAS 11087
Jan. 1, 1985
1986-2 C.B. 258
1987-2 C.B. 298
Protocol
TIAS
Jan. 1, 1996
China, People's Republic of
TIAS 12065
Jan. 1, 1987
1988-1 C.B. 414
1988-1 C.B. 447
Commonwealth of Independent States
4
TIAS 8225
Jan. 1, 1976
1976-2 C.B. 463
1976-2 C.B. 475
Cyprus
TIAS 10965
Jan. 1, 1986
1989-2 C.B. 280
1989-2 C.B. 314
Czech Republic
TIAS
Jan. 1, 1993
Denmark
TIAS
Jan. 1, 2001
Egypt
TIAS 10149
Jan. 1, 1982
1982-1 C.B. 219
1982-1 C.B. 243
Estonia
TIAS
Jan. 1, 2000
Finland
TIAS 12101
Jan. 1, 1991
France
5
TIAS
Jan. 1, 1996
Germany
TIAS
Jan. 1, 1990
Greece
TIAS 2902
Jan. 1, 1953
1958-2 C.B. 1054
T.D. 6109, 1954-2 C.B. 638
Hungary
TIAS 9560
Jan. 1, 1980
1980-1 C.B. 333
1980-1 C.B. 354
Iceland
TIAS 8151
Jan. 1, 1976
1976-1 C.B. 442
1976-1 C.B. 456
India
TIAS
Jan. 1, 1991
Indonesia
TIAS 11593
Jan. 1, 1990
Ireland
TIAS
Jan. 1, 1998
Israel
TIAS
Jan. 1, 1995
Italy
TIAS 11064
Jan. 1, 1985
1992-1 C.B. 442
1992-1 C.B. 473
Jamaica
TIAS 10207
Jan. 1, 1982
1982-1 C.B. 257
1982-1 C.B. 291
Japan
TIAS
Jan. 1, 2005
Kazakstan
TIAS
Jan. 1, 1996
Korea, Republic of
TIAS 9506
Jan. 1, 1980
1979-2 C.B. 435
1979-2 C.B. 458
Latvia
TIAS
Jan. 1, 2000
Lithuania
TIAS
Jan. 1, 2000
Luxembourg
TIAS
Jan. 1, 2001
Mexico
TIAS
Jan. 1,1994
Protocol
TIAS
Jan. 1, 2004
Morocco
TIAS 10195
Jan. 1, 1981
1982-2 C.B. 405
1982-2 C.B. 427
Netherlands
TIAS
Jan. 1, 1994
Protocol
TIAS
Jan. 1, 2005
New Zealand
TIAS 10772
Nov. 2, 1983
1990-2 C.B. 274
1990-2 C.B. 303
Norway
TIAS 7474
Jan. 1, 1971
1973-1 C.B. 669
1973-1 C.B. 693
Protocol
TIAS 10205
Jan. 1, 1982
1982-2 C.B. 440
1982-2 C.B. 454
Pakistan
TIAS 4232
Jan. 1, 1959
1960-2 C.B. 646
T.D. 6431, 1960-1 C.B. 755
Philippines
TIAS 10417
Jan. 1, 1983
1984-2 C.B. 384
1984-2 C.B. 412
Poland
TIAS 8486
Jan. 1, 1974
1977-1 C.B. 416
1977-1 C.B. 427
Portugal
TIAS
Jan. 1, 1996
Romania
TIAS 8228
Jan. 1, 1974
1976-2 C.B. 492
1976-2 C.B. 504
Russia
TIAS
Jan. 1, 1994
Slovak Republic
TIAS
Jan. 1, 1993
Slovenia
TIAS
Jan. 1, 2002
South Africa
TIAS
Jan. 1, 1998
Spain
TIAS
Jan. 1, 1991
Sri Lanka
TIAS
Jan. 1, 2004
Sweden
TIAS
Jan. 1, 1996
Switzerland
TIAS
Jan. 1, 1998
Thailand
TIAS
Jan. 1, 1998
Trinidad and Tobago
TIAS 7047
Jan. 1, 1970
1971-2 C.B. 479
Tunisia
TIAS
Jan. 1, 1990
Turkey
TIAS
Jan. 1, 1998
Ukraine
TIAS
Jan. 1, 2001
United Kingdom
6
TIAS
Jan. 1, 2004
Venezuela
TIAS
Jan. 1, 2000
1(TIAS) — Treaties and Other International Act Series.
2The U.S.-Australia income tax treaty covers Ashmore and Cartier Islands, Christmas Island (Indian Ocean), the Cocos (Keeling)
Islands, the Coral Sea Islands Territory, and Norfolk Island.
3Information on the treaty can be found in Publication 597, Information on the United States-Canada Income Tax
Treaty.
4The U.S.-U.S.S.R. income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova,
Tajikistan, Turkmenistan, and Uzbekistan.
5The U.S.-France income tax treaty covers French Guiana, Guadaloupe, Martinique, and Reunion.
6The U.S.-U.K. income tax treaty covers Northern Ireland.
How To Get Tax Help
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from
the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights
and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision,
they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
Call the Taxpayer Advocate toll free at
1-877-777-4778.
Call, write, or fax the Taxpayer Advocate office in your area.
For more information, see Publication 1546, How To Get Help With Unresolved Tax Problems (now available in Chinese,
Korean, Russian, and
Vietnamese, in addition to English and Spanish).
Free tax services.
To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains a list of
free tax publications and an
index of tax topics. It also describes other free tax information services, including tax education and assistance programs
and a list of TeleTax
topics.
Internet. You can access the IRS website 24 hours a day, 7 days a week, at
www.irs.gov to:
E-file your return. Find out about commercial tax preparation and e-file services available free to eligible
taxpayers.
Check the status of your 2005 refund. Click on Where's My Refund. Be sure to wait at least 6 weeks from the date you filed your
return (3 weeks if you filed electronically). Have your 2005 tax return available because you will need to know your social
security number, your
filing status, and the exact whole dollar amount of your refund.
Download forms, instructions, and publications.
Order IRS products online.
Research your tax questions online.
Search publications online by topic or keyword.
View Internal Revenue Bulletins (IRBs) published in the last few years.
Figure your withholding allowances using our Form W-4 calculator.
Sign up to receive local and national tax news by email.
Get information on starting and operating a small business.
Phone. Many services are available by phone.
Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications
and prior-year forms and instructions. You should receive your order within 10 days.
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local
Taxpayer Assistance Center
for an appointment. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and
publications.
TeleTax topics. Call 1-800-829-4477 and press 2 to listen to pre-recorded messages covering various tax topics.
Refund information. If you would like to check the status of your 2005 refund, call 1-800-829-4477 and press 1 for automated
refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if
you filed electronically).
Have your 2005 tax return available because you will need to know your social security number, your filing status, and the
exact whole dollar amount
of your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to
sometimes listen in on or
record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions,
and office supply stores
have a collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices
and libraries have the
Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An
employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need
to resolve a tax problem,
have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone
in person, visit your
local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No
appointment is necessary,
but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue.
A representative will
call you back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to
www.irs.gov/localcontacts or
look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below and receive a response within 10 business
days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD-ROM for tax products. You can order Publication 1796, IRS Tax Products CD-ROM, and obtain:
A CD that is released twice so you have the latest products. The first release ships in late December and the final release
ships in late
February.
Current-year forms, instructions, and publications.
Prior-year forms, instructions, and publications.
Tax Map: an electronic research tool and finding aid.
Tax law frequently asked questions (FAQs).
Tax Topics from the IRS telephone response system.
Fill-in, print, and save features for most tax forms.
Internal Revenue Bulletins.
Toll-free and email technical support.
Buy the CD-ROM from National Technical Information Service (NTIS) at
www.irs.gov/cdorders for $25 (no handling fee) or call 1-877-233-6767 toll free to buy the CD-ROM for $25 (plus a $5 handling fee).
CD-ROM for small businesses. Publication 3207, The Small Business Resource Guide CD-ROM for 2005, has a new look and enhanced navigation
features. This year's CD includes:
Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
All the business tax forms, instructions, and publications needed to successfully manage a business.
Tax law changes for 2005.
IRS Tax Map to help you find forms, instructions, and publications by searching on a keyword or topic.
Web links to various government agencies, business associations, and IRS organizations.
“Rate the Product” survey—your opportunity to suggest changes for future editions.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or
by visiting
www.irs.gov/smallbiz.
