Table of Contents
- Withholding of Tax
- Persons Subject to NRA Withholding
- Documentation
- Income Subject to NRA Withholding
- Withholding on Specific Income
- Foreign Governments and Certain Other Foreign Organizations
- U.S. Taxpayer Identification Numbers
- Depositing Withheld Taxes
- Returns Required
- Partnership Withholding on Effectively Connected Income
- U.S. Real Property Interest
- Tax Treaty Tables
- How To Get Tax Help
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.
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.
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.
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.
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 S. 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.
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.
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.
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.
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A foreign partnership (other than a withholding foreign partnership).
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A foreign simple or foreign grantor trust (other than a withholding foreign trust).
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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.
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.
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A court within the United States is able to exercise primary supervision over the administration of the trust.
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One or more U.S. persons have the authority to control all substantial decisions of the trust.
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.
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.
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.
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.
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.
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Notice 2001-4 (I.R.B. 2001-2).
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Revenue Procedure 2003-64, Appendix 3 (I.R.B. 2003-32).
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Revenue Procedure 2004-21 (I.R.B. 2004-14).
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Revenue Procedure 2005-77 (I.R.B. 2005-51).
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Revenue Procedure 2004-21 (I.R.B. 2004-14).
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Revenue Procedure 2005-77 (I.R.B. 2005-51).
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.
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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).
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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:
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31 days during the current calendar year, and
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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.
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Meets the presence test,
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Does not have a tax home outside the possession, and
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Does not have a closer connection to the United States or to a foreign country than to the possession.
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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
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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).
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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,
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At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U.S. 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
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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 U.S. Virgin Islands, American Samoa, Guam, the CNMI, or the United States.
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.
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The payee is a U.S. person.
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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.
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.
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Establish foreign status,
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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
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If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty.
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It is a resident of a treaty country,
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It is the beneficial owner of the income,
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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
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It meets any limitation on benefits provision contained in the treaty, if applicable.
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Income from marketable securities (discussed next).
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Unexpected payments to an individual (discussed under U.S. Taxpayer Identification Numbers).
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Dividends and interest from stocks and debt obligations that are actively traded.
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Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund).
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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.
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Income related to loans of any of the above securities.
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A certificate of residence that:
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Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident,
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States that the person has filed its most recent income tax return as a resident of that country, and
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Is issued within 3 years prior to being presented to you.
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Documentation for an individual that:
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Includes the individual's name, address, and photograph,
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Is an official document issued by an authorized governmental body, and
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Is issued no more than 3 years prior to being presented to you.
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Documentation for an entity that:
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Includes the name of the entity,
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Includes the address of its principal office in the treaty country, and
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Is an official document issued by an authorized governmental body.
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Establish foreign status,
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Claim that such person is the beneficial owner of the income for which the form is being furnished, and
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Claim that the income is effectively connected with the conduct of a trade or business in the United States. (See Effectively Connected Income, later.)
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Establish foreign status,
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Claim that such person is the beneficial owner of the income for which the form is being furnished, and
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Claim a reduced rate of, or an exemption from, withholding as such an entity.
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.
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Represent that a foreign person is a qualified intermediary or nonqualified intermediary,
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Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility,
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Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust,
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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,
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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
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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.
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.
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Designate those accounts for which it acts as a qualified intermediary,
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Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and
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Provide sufficient information for you to allocate the payment to a withholding rate pool.
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.
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It is a foreign partnership or foreign simple or grantor trust.
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It is a direct account holder of the QI.
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It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
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It is a foreign partnership or foreign simple or grantor trust.
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It is either:
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A direct account holder of the QI, or
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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.
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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:
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You can allocate the payment to a valid Form W-8IMY,
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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
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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.
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The name, address, and TIN (if any, or if required) of each person for whom documentation is provided.
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The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided.
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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.
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The type of recipient the person is, based on the recipient codes used on Form 1042-S.
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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.
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The rate of withholding that applies to each foreign person to whom a payment is allocated.
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A foreign payee's country of residence.
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If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc.).
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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.
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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.
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Any other information a withholding agent requests to fulfill its reporting and withholding obligations.
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.”
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.
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It is a foreign partnership or foreign simple or grantor trust.
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It is a direct partner of the WP.
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It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
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It is a foreign partnership or foreign simple or grantor trust.
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It is either:
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A direct partner of the WP, or
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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.
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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.
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It is a foreign partnership or foreign simple or grantor trust.
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It is a direct partner, beneficiary, or owner of the WT.
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It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
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It is a foreign partnership or foreign simple or grantor trust.
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It is either:
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A direct beneficiary or owner of the WT, or
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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.
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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.
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 docu- mentation 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.
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:
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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,
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The Form W-8 contains any information that is inconsistent with the account holder's claim,
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The Form W-8 lacks information necessary to establish entitlement to a reduced rate of withholding, if a reduced rate is claimed, or
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You have information not contained on the form that is inconsistent with the claims made on the form.
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The Form W-8 has a permanent residence address in the United States,
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The Form W-8 has a mailing address in the United States,
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You have a residence or mailing address as part of your account information that is an address in the United States,
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The person providing the certificate notifies you of a new residence or mailing address in the United States, or
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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.
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You receive the Form W-8 from an individual and:
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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
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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.
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You receive the Form W-8 from an entity that is not a flow-through entity and:
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You have in your possession or obtain documentation that substantiates that the entity is organized or created under foreign law, or
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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.
-
-
The account holder has provided standing instructions to make payments with respect to its offshore account to a U.S. account or U.S. address if the account holder provides a reasonable explanation in writing that supports the account holder's foreign status.
-
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.
-
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.
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.
-
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.
-
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.
-
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
For the presumption rules related to— | See regulation section— |
Payee's status | 1.1441-1(b)(3); 1.6049-5(d) |
Effectively connected income | 1.1441-4(a)(2) |
Partnership and its partners | 1.1441-5(d); 1.1446-1(c)(3) |
Estate or trust and its beneficiaries or owner | 1.1441-5(e)(6) |
Foreign tax-exempt organizations
(including private foundations) |
1.1441-9(b)(3) |
-
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.
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.
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.
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.
-
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.
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. 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.
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 |
Number of days services are performed in the United States |
Total number of days of service for which compensation is paid |
-
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.
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.
-
REMIC excess inclusion income.
-
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.
Different kinds of income are subject to different withholding requirements.
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.
-
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.
-
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.
-
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.
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.
(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% * |
Dividends paid to Puerto Rico corporation | 10% |
All other income subject to withholding | 30% |
*35% in the case of certain distributions by corporations, partnerships, trusts, or estates. |
Certain interest is subject to a reduced rate of, or exemption from, withholding.
-
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.
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.
-
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 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.
-
The date of distribution by the partnership.
-
The date the foreign partner disposed of its indirect interest in the REMIC residual interest.
-
The last day of the partnership's tax year.
-
A termination of the REMIC,
-
A disposition of the partnership's residual interest in the REMIC,
-
A disposition of the foreign partner's interest in the partnership, or
-
Any other reduction in the foreign partner's allocable share of the partnership's portion of the REMIC net income or deduction.
-
Shareholder of a real estate investment trust.
-
Shareholder of a regulated investment trust.
-
Participant in a common trust fund.
-
Patron of a subchapter T cooperative organization.
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.
-
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.
-
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.
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.
-
At all times during the tax year less than 25% in value of the Puerto Rico corporation'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.
-
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 distribution is on stock regularly traded on a securities market in the United States, and
-
The individual or corporation did not own more than 5% of that stock at any time during the 1-year period ending on the date of distribution.
-
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.
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.
-
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.
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.
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.
The following rules apply to withholding on pensions, annuities, and alimony of foreign payees.
-
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.
-
-
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.
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.
-
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 grant must be for study, training, or research 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).
-
-
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.
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.
-
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 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.
-
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.
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.
-
Independent personal services (self-employment),
-
Dependent personal services, or
-
Personal services income and noncompensatory scholarship or fellowship income from the same withholding agent.
-
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.
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.
-
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.
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).
-
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.
-
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.
Payroll period— | Add |
Weekly | $ 51 |
Biweekly | $ 102 |
Semimonthly | $ 110 |
Monthly | $ 221 |
Quarterly | $ 663 |
Semiannually | $ 1,325 |
Annually | $ 2,650 |
Daily or Miscellaneous (each day of the payroll period) | $ 10.20 |
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
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).
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.
-
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.
Central Withholding Agreement Program
Internal Revenue Service
SE:S:C:CP:IIC MS 0175
1220 SW 3rd Ave.
Portland, OR 97204
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.
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.
The following types of income received by a foreign government are subject to NRA withholding.
-
Income (including investment income) received from the conduct of a commercial activity or from sources other than those stated above.
-
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.
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 controlled commercial activity and is subject to withholding under section 1446.
-
Gain derived from the disposition of a U.S. real property interest. Withholding on these gains is discussed later under U.S. Real Property Interest.
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.
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.
-
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.
-
Income from marketable securities (discussed earlier under Form W-8BEN).
-
Unexpected payment to an individual (discussed next).
-
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.
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.
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.
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.
-
You had to make electronic deposits in 2007.
-
You deposited more than $200,000 in federal depository taxes in 2006.
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.
If you prefer, you may mail your coupon and payment to:
Financial Agent
Federal Tax Deposit Processing
P.O. Box 970030
St. Louis, MO 63197
U.S.A.
Make your check or money order payable to “Financial Agent.”
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.
-
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%.
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.
What to do if you overwithheld tax depends on when you discover the overwithholding.
-
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.
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, salaries, or other compensation reported on Form W-2 (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 1099, 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.
You must file Form 1042 with the:
Ogden Service Center P.O. Box 409101 Ogden, UT 84409 |
-
$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 by August 1, 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).
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.
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.
-
Does not give the partner's name, U.S. taxpayer identification number, and address, or
-
Is not signed under penalties of perjury and dated.
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.
Chart D. Documentation for Foreign Partners*
Nonresident aliens | W-8BEN |
Foreign corporations | W-8BEN |
Foreign partnerships | W-8IMY |
Foreign governments | W-8EXP |
Foreign grantor trusts** | W-8IMY |
Certain foreign trusts and foreign estates | W-8BEN |
Foreign tax-exempt organizations
(including private foundations) |
W-8EXP |
Nominees | W-8 used by beneficial owner |
* 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. |
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.
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, discussed later.
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.
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.
-
$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 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.
-
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.
-
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).
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.
-
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.
-
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.
-
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).
-
Disposes of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that would have been treated by the shareholder as gain from the sale or exchange of a U.S. real property interest, and
-
Acquires, or enters into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period.
-
The shareholder actually receives the distribution from the domestically controlled QIE on either the interest disposed of, or acquired, in the transaction, or
-
The shareholder disposes of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if the shareholder did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution.
After 2007, the applicable wash sale transaction rules will apply to a RIC only if the distribution by the RIC is attributable to a distribution received by the RIC from a REIT.
-
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 is an interest in a domestic corporation if any class of stock of the corporation is regularly traded on an established securities market. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded corporations.
-
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 Ogden Service Center, P.O. Box 409101, Stop 6731/6732, Ogden, UT 84409.
-
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 is of an interest in a publicly traded partnership or trust. However, this exception does not apply to certain dispositions of substantial amounts of non-publicly traded interests in publicly traded partnerships or trusts.
-
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.
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 QIEs 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.
Publicly traded trusts must use Forms 1042 and 1042-S to report and pay over tax withheld on distributions from dispositions of U.S. real property interests.
QIEs must use Forms 1042 and 1042-S for a distribution to a nonresident alien or foreign corporation that is treated as a dividend as discussed earlier under Qualified investment entities.
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.
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.
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:
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A determination by the IRS that reduced withholding is appropriate because either:
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The amount that must be withheld would be more than the transferor's maximum tax liability, or
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Withholding of the reduced amount would not jeopardize collection of the tax,
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The exemption from U.S. tax of all gain realized by the transferor, or
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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:
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Applications based on a claim that the transfer is entitled to nonrecognition treatment or is exempt from tax,
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Applications based solely on a calculation of the transferor's maximum tax liability,
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Applications under special installment sale rules,
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Applications based on an agreement for the payment of tax with conforming security,
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Applications for blanket withholding certificates, and
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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.
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Information on the application category:
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State which category (4, 5, or 6) describes the application,
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If a category (4) application:
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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
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State whether the proposed agreement and security instrument conform to the standard formats.
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Information on the transferee or transferor:
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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),
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State whether that person is the transferee or transferor, and
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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.
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Information on the U.S. real property interest for which the withholding certificate is sought, state the:
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Type of interest (such as interest in real property, in associated personal property, or in a domestic U.S. real property holding corporation),
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Contract price,
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Date of transfer,
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Location and general description (if an interest in real property),
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Class or type and amount of the interest in a U.S. real property holding corporation, and
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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.
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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.
Ogden Service Center P.O. Box 409101, Stop 6731/6732 Ogden, UT 84409 |
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Information establishing the transferor's maximum tax liability, or the amount that otherwise has to be withheld,
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A signed copy of the agreement proposed by the applicant, and
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A copy of the security instrument proposed by the applicant.
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A detailed description of the rights and obligations of each, and
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A security instrument or other form of security acceptable to the Commissioner or his delegate.
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Bond with surety or guarantor,
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Bond with collateral,
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Letter of credit, and
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Guarantee (corporate transferors).
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The information required for Category (4) applications, discussed earlier,
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A description of the nonconforming security proposed by the applicant, and
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A memorandum of law and facts establishing that the proposed security is valid and enforceable and that it adequately protects the government's interest.
An applicant for a withholding certificate may amend an otherwise complete application by sending an amending statement to the address shown earlier. There is no particular form required, but the amending statement must provide the following information:
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The name, address, and TIN of the person providing the amending statement specifying whether that person is the transferee or transferor,
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The date of the original application for a withholding certificate that is being amended,
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A brief description of the real property interest for which the original application for a withholding certificate was provided, and
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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, but has not been mailed to the applicant, the IRS will have a 90-day extension of time in which to act.
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.
Country |
Official Text
Symbol 1 |
General
Effective Date |
Citation |
Applicable Treasury Explanations
or Treasury Decision (T.D.) |
Australia | 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 | ||
Bangladesh | TIAS | Jan. 1, 2007 | ||
Barbados | TIAS 11090 | Jan. 1, 1984 | 1991-2 C.B. 436 | 1991-2 C.B. 466 |
Protocol | TIAS | Jan. 1, 2005 | ||
Belgium | TIAS | Jan. 1, 2008 | ||
Canada 2 | 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 3 | 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 | ||
Protocol | TIAS | Jan. 1, 2008 | ||
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 | ||
Protocol | TIAS | Jan. 1, 2008 | ||
France | TIAS | Jan. 1, 1996 | ||
Protocol | TIAS | Jan. 1, 2007 | ||
Germany | TIAS | Jan. 1, 1990 | ||
Protocol | TIAS | Jan. 1, 2008 | ||
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 |
Country |
Official Text
Symbol 1 |
General
Effective Date |
Citation |
Applicable Treasury Explanations
or Treasury Decision (T.D.) |
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 | ||
Protocol | TIAS | Jan. 1, 2007 | ||
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 | TIAS | Jan. 1, 2004 | ||
Venezuela | TIAS | Jan. 1, 2000 |
1(TIAS) — Treaties and Other International Act Series. |
2Information on the treaty can be found in Publication 597, Information on the United States-Canada Income Tax Treaty. |
3The U.S.-U.S.S.R. income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. |
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.
www.improveirs.org.
Internet. You can access the IRS website at www.irs.gov 24 hours a day, 7 days a week to:
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E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
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Check the status of your 2007 refund. Click on Where's My Refund. Wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your 2007 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.
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Download forms, instructions, and publications.
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Order IRS products online.
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Research your tax questions online.
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Search publications online by topic or keyword.
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View Internal Revenue Bulletins (IRBs) published in the last few years.
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Figure your withholding allowances using the withholding calculator online at
www.irs.gov/individuals. -
Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant.
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Sign up to receive local and national tax news by email.
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Get information on starting and operating a small business.
Phone. Many services are available by phone.
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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.
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Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
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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.
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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.
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TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
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Refund information. To check the status of your 2007 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 2007 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 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 listen in on or record random 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.
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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 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.
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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. You should receive a response within 10 days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD/DVD for tax products. You can order Publication 1796, IRS Tax Products CD/DVD, and obtain:
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Current-year forms, instructions, and publications.
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Prior-year forms, instructions, and publications.
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Bonus: Historical Tax Products DVD - Ships with the final release.
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Tax Map: an electronic research tool and finding aid.
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Tax law frequently asked questions.
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Tax Topics from the IRS telephone response system.
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Fill-in, print, and save features for most tax forms.
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Internal Revenue Bulletins.
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Toll-free and email technical support.
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The CD which is released twice during the year.
- The first release will ship the beginning of January 2008.
- The final release will ship the beginning of March 2008.
Purchase the CD/DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $35 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD/DVD for $35 (plus a $5 handling fee). Price is subject to change.
CD for small businesses. Publication 3207, The Small Business Resource Guide CD for 2007, is a must for every small business owner or any taxpayer about to start a business. This year's CD includes:
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Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
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All the business tax forms, instructions, and publications needed to successfully manage a business.
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Tax law changes for 2007.
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Tax Map: an electronic research tool and finding aid.
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Web links to various government agencies, business associations, and IRS organizations.
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“Rate the Product” survey—your opportunity to suggest changes for future editions.
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A site map of the CD to help you navigate the pages of the CD with ease.
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An interactive “Teens in Biz” module that gives practical tips for teens about starting their own business, creating a business plan, and filing taxes.
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.
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