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Tax Withholding and Payments to Foreign Persons: Form W-8BEN

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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.

Form W-8BEN

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.

Subpart F Active Financing Income Exceptions and Look-Through Rule Extended

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The recent American Taxpayer Relief Act of 2012 passed by Congress and signed by the president on January 2, 2013 extended the temporary exceptions for “active financing income” from subpart F foreign personal holding company income, foreign base company services income, and insurance income. The same act also extended the subpart F look-through rule of IRC Section 954(c)(6).

This article will briefly explain the active financing exception to the subpart F rules and the look-through rule of Section 954(c)(6) and detail the extensions of such provisions provided for by the American Taxpayer Relief Act of 2012. The article is not intended to convey tax or legal advice.

IRS Subpart F rules and the IRC sections covering Controlled Foreign Corporations involve many complex tax and legal issues, so it is advisable to seek an experienced attorney in these matters. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Active Financing Income Exception to Subpart F Rules

IRC Section 954(h) provides for a special exception from IRS subpart F rules for “[I]ncome derived in the active conduct of banking, financing, or similar businesses.” In general, a controlled foreign corporation (“CFC”) will be treated as being predominately engaged in the active conduct of banking, financing, or similar businesses if more than 70% of the gross income of the CFC is derived directly from the, “[A]ctive and regular conduct of a lending or finance business from transactions with customers which are not related persons.”

The active financing exception was originally included in the Taxpayer Relief Act of 1997; the same act also modified Passive Foreign Investment Company (“PFIC”) rules to eliminate overlap between Subpart F and PFIC provisions as a special one-year exception (President Clinton vetoed this provision under the Line Item Veto Act, but it was reinstated after the US Supreme Court ruled that the Line Item Veto Act was unconstitutional). IRC Section 954(h)(3) was later amended by the American Jobs Creation Act of 2004 (Public Law 108-357) to provide for the temporary exception, and the Tax Increase Prevention and Reconciliation Act of 2005 subsequently extended the exception for tax years ending in 2007 and 2008. The Middle Class Tax Relief Act of 2010 further extended the active financing exception through 2011. Under the new American Taxpayer Relief Act of 2012, the exception was retroactively extended through the end of 2013.

Subpart F Look-Through Rule of IRC Section 954(c)(6)

IRC Section 954(c)(6)(A) (“Look-thru rule for related controlled foreign corporations “) provides that, in general, “For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States.” Treatment of other types of equivalent interest is also addressed in the section.

The Look-Through Rule was part of Tax Increase Prevention and Reconciliation Act of 2005 and originally applied to tax years beginning after December 31, 2005, and before January 1, 2009. Certain parts of the original look-through rule were subsequently modified by later acts, and the rule itself was extended through the end of 2011 by the Middle Class Tax Relief Act of 2010. Under the new American Taxpayer Relief Act of 2012, the rule now applies to foreign corporation tax years beginning after December 31, 2005, and before January 1, 2014.

Opting-Out of OVDI or OVDP: Escaping Your Accountant’s Mistakes

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The rise in the voluntary disclosures of offshore assets caught the accounting profession by surprise. The great majority of the accountants were not trained in international tax matters and learned about the existence of FinCEN Form 114 formerly known as TD F 90-22.1 (commonly known as “FBAR”) from their clients.

However, in their ignorance of the matters involved, these accountants simply treated the FBAR disclosure as a regular accounting matter and herded their clients into the IRS voluntary disclosure programs (like 2009 OVDP, 2011 OVDI and 2012 OVDP) without much consideration of complex legal issues involved, without any attempt to analyze the individual facts of each case, and, often, without the understanding of the terms of these official voluntary disclosure matters.

Unfortunately, a lot of individuals ended up paying outrageous Offshore Penalties and unnecessary legal and accounting fees in these programs. Some of these individuals were not even told by their accountants of the consequences of entering into the 2011 OVDI or 2012 OVDP. Still more participants of these programs were not even told about the modified voluntary disclosure alternative (also known as “noisy disclosure” and “reasonable cause disclosure”).

For the individuals who are currently in the 2011 OVDI and 2012 OVDP programs and who have not signed the Closing Agreements, there is still a chance to see if they can escape the unnecessary penalties.

The escape route is known as the “opt-out” of the program. This route should only be taken after you consulted with an experienced international tax attorney who thoroughly analyzed your case; do NOT try to do it on your own, because there is no turning back – once you are out of the OVDI or OVDP, you cannot re-enter the program later.

Contact Sherayzen Law Office to Discuss Your Opt-Out of OVDI/OVDP Options

This article is intended for educational purposes only and does not constitute legal advice. Make sure that you discuss your opt-out options with an experienced international tax attorney before taking any action.

If you are currently in the OVDI or OVDP programs and you would like to understand the consequences of opting-out of the OVDI or OVDP, contact Sherayzen Law Office NOW.

Our experienced international tax firm will thoroughly analyze your case and describe to you the potential consequences of the opt-out of the OVDI or OVDP.

Call or email our experienced voluntary disclosure team!

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

FATCA, Form 8938 and TD F 90-22.1 Disclosure: Making Informed Decisions

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The past decade brought on a wave of new international tax legislation as well as unprecedented enforcement of older tax laws. From FinCEN Form 114 (formerly Form TD F 90-22.1) (commonly known as “FBAR”) to new FATCA legislation that led to the creation of Form 8938, the current US tax regime with respect to international obligations of US persons has become so complex that it is almost impossible to navigate it for most taxpayers without the professional help of international tax lawyers.

Increasing Complexity of US Tax Laws Requires International Tax Attorney Involvement

With increased complexity of the international tax landscape, the chance of running afoul some US tax rule has become very, very high. Since international tax laws are usually associated with high non-compliance penalties, the taxpayers need to make an informed decision on how to deal with their prior tax non-compliance.

Nowhere is the urgency and necessity of making informed decisions is so high as when it comes to FBARs and Form 8938, primarily because of draconian penalties associated with failure to file these forms Form 114 (formerly TD F 90-22.1). The ability to analyze the fact pattern, spot all the issues and identify available options based on experience are crucial in this esoteric area of law and the international tax attorneys experienced in voluntary disclosures should be handling such cases.

Choosing the Right Attorney is a Challenge

Unfortunately, it is precisely in this area that there is a serious obstacle to getting the necessary information to make an informed decision. The obstacle is that there is a tremendously small number of international tax attorneys who practice in this area of law and these professionals are shielded by a mass of inexperienced and unqualified attorneys and especially accountants.

It is virtually impossible for taxpayers to state with certainty who is the right lawyer for their case. A lot of taxpayers immediately fall into the trap of going to their accountants to do a voluntary disclosure. In a prior article, I already explained why this could be present a huge problem for the taxpayers.

Other taxpayers correctly realized that they need a tax attorney to get help with their voluntary disclosure. However, some of these taxpayers often make a mistake of hiring a tax lawyer who is not practicing international tax law.

Some taxpayers fall into the “local” trap where they choose an attorney because he or she is in their state or town, not because the attorney is an international tax attorney or experienced in the area of voluntary disclosures.

You Should Choose an International Tax Lawyer Experienced in Form 8938 (FATCA) and FBAR Voluntary Disclosure

In order to make an informed decision, the taxpayers who have undisclosed foreign assets should contact an international tax attorney who is experienced in the are of voluntary disclosures.

Sherayzen Law Office is an international tax law firm that is highly experienced in the area of voluntary disclosures involving FBARs and Forms 8938. Owner Eugene Sherayzen is an experienced international tax attorney who will thoroughly analyze your case, identify all relevant issues, provide accurate estimates of your FBAR and Form 8938 liability, and propose creative legal voluntary disclosure options.

Contact Sherayzen Law Office for help with FBARs and Form 8938.