Form W-8BEN, (“Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding”) may be used by foreign persons who receive certain types of income to establish that they are non-U.S. persons, or to claim a reduced rate of (or exemption from) withholding as a resident of a foreign country with which the U.S. has a tax treaty.
This article will cover the basics of Form W-8BEN. It is not intended to convey tax or legal advice. US tax rules regarding international taxation can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters.
General Rule: Income Subject to Tax Withholding Under IRC Sections 1441, 1442 and 1446
In general, pursuant to IRC Sections 1441 and 1442, foreign persons are subject to a 30% U.S. tax rate on income received from U.S.-source income consisting of dividends, rents, annuities, royalties, compensation received (or expected) for services performed, premiums, substitute payments in a securities lending transaction, or any other fixed or determinable annual or periodical gains, profits, or income. A payment is considered to have been made to foreign persons whether such payment is made directly to the beneficial owner or indirectly through an intermediary, agent or partnership, for the benefit of the beneficial owner.
It is also important to note that, pursuant to IRC Section 1446 (Withholding Tax on Foreign Partners’ Share of Effectively Connected Income), a partnership that conducts trade or business in the United States is required to withhold tax on a foreign partner’s distributive share of the partnership’s “effectively connected income” (ECI). Note that ECI is a term of art in the area of tax withholding law with its own complex definition and important tax consequences to the partnership and its partners.
If certain types of income (such as described above) are received by an individual required to file Form W-8BEN, the form must be filed in order to demonstrate any of the following: (1) for foreign persons to establish that they are not U.S. persons, (2) to claim a reduced rate of, or exemption from, a tax withholding by reason of being a resident of a foreign country with which the United States has an income tax treaty, if applicable, (3) or in order for persons to claim that they are beneficial owners of the income for which Form W-8BEN is being provided or a partner in a partnership subject to IRC section 1446.
With respect to Section 1446, note that submitting Form W-8BEN by a foreign person that is a partner in a partnership may satisfy the requirements for all three Section 1441, 1442 and 1446; but this is not always the case. Sometimes, the documentation requirements for Section 1446 may differ from those of 1441 and 1442 (See Regulations sections 1.1446-1 through 1.1446-6). Furthermore, the owner of a disregarded entity will need to submit the appropriate Form W-8 for the purposes of Section 1446.
Form W-8BEN may also be required to be filed in order for persons to claim an exception from domestic information reporting and backup withholding for certain categories of income not subject to foreign-person withholding, including bank deposit interest, foreign source interest, dividends, rents, or royalties, broker proceeds, short-term (183 days or less) original issue discount (OID), and proceeds from a wager placed by a nonresident alien individual in various types of gambling games. Additionally, Form W-8BEN may be used to establish that income from a notional principal contract is not effectively connected income with a U.S. trade or business.
Who Must File Form W-8BEN
Foreign persons who are the beneficial owners of an amount subject to withholding must submit W-8BEN to the withholding agent or payer (and it must be given when requested by the withholding agent or payer regardless of whether a reduced rate of, or exemption from, withholding is claimed). However, Form W-8BEN should not be submitted by U.S. citizens (even if such citizens reside outside the U.S.), or by nonresident alien individuals claiming exemption from withholding on compensation for independent or dependent personal services performed in the U.S.
Contact Sherayzen Law Office for Help With US Tax Withholding Rules Regarding Payments to Foreign Persons
U.S. tax withholding rules are complex and may lead to various complications in tax compliance and tax planning for businesses and individuals. In order to avoid costly mistakes, contact the experienced Form W-8BEN tax firm of Sherayzen Law Office for help with U.S. tax withholding rules.