Page 11 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
Page 9 of 55
Fileid: … tions/P515/2020/A/XML/Cycle10/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
2. 183 days during the current year and the 2 foreign corporation for the purposes of with- Additional Rules
preceding years, counting all the days of holding tax for the tax year if: Specific to Chapter 4
physical presence in the current year, but • At all times during the tax year less than
only 1 /3 the number of days of presence in 25% in value of the corporation's stock is A payee may be subject to Chapter 4 withhold-
the first preceding year, and only 1 /6 the owned, directly or indirectly, by foreign per- ing only if it is a foreign entity. A foreign entity
number of days in the second preceding sons; for Chapter 4 purposes means any entity that is
year. • At least 65% of the corporation's gross in- not a U.S. person and includes a territory entity
come is effectively connected with the con- as defined in Regulations section 1.1471-1(b)
In most cases, the days the alien is in the duct of a trade or business in the U.S. Vir- (129).
United States as a teacher, student, or trainee gin Islands, American Samoa, Guam, the
on an “F,” “J,” “M,” or “Q” visa are not counted. CNMI, or the United States for the 3-year A foreign entity is subject to Chapter 4 with-
This exception is for a limited period of time. period ending with the close of the tax year holding if it is a nonparticipating FFI or a pas-
For more information on resident and non- of the corporation (or the period the corpo- sive NFFE that does not provide the appropri-
resident status, the tests for residence, and the ration or any predecessor has been in ex- ate certification regarding its substantial U.S.
exceptions to them, see Pub. 519. istence, if less); and owners. A nonparticipating FFI is an FFI other
Note. If your employee is late in notifying • No substantial part of the income of the than a participating FFI, deemed-compliant FFI,
you that his or her status changed from nonresi- corporation is used, directly or indirectly, to or exempt beneficial owner. See Definitions,
dent alien to resident alien, you may have to satisfy obligations to a person who is not a later, for the definitions of these terms. A pas-
make an adjustment to Form 941 if that em- bona fide resident of the U.S. Virgin Is- sive NFFE is an NFFE other than a publicly tra-
ployee was exempt from withholding of social lands, American Samoa, Guam, the CNMI, ded corporation, certain affiliated entities rela-
security and Medicare taxes as a nonresident or the United States. ted to a publicly traded corporation, certain
alien. For more information on making adjust- territory entities, active NFFEs, and excluded
ments, see chapter 13 of Pub. 15 (Circular E). Foreign private foundations. A private foun- FFIs.
dation that was created or organized under the
Resident of a U.S. possession. A bona laws of a foreign country is a foreign private For Chapter 4 purposes, a U.S. person does
fide resident of Puerto Rico, the U.S. Virgin Is- foundation. Gross investment income from not include a foreign insurance company that
lands, Guam, the Commonwealth of the North- sources within the United States paid to a quali- has made an election under section 953(d) if it
ern Mariana Islands (CNMI), or American Sa- fied foreign private foundation is subject to with- is a specified insurance company and is not li-
moa who is not a U.S. citizen or a U.S. national holding at a 4% rate (unless exempted by a censed to do business in any state. Notwith-
is treated as a nonresident alien for the with- treaty) rather than the ordinary statutory 30% standing the foregoing, a withholding agent
holding rules explained here. A bona fide resi- rate. should treat such entity as a U.S. person for
dent of a possession is someone who: purposes of documenting the entity’s status for
• Meets the presence test, Other foreign organizations, associations, purposes of Chapters 3 and 4.
• Does not have a tax home outside the pos- and charitable institutions. An organization
session, and may be exempt from income tax under section
• Does not have a closer connection to the 501(a) of the Internal Revenue Code and Chap- Documentation
United States or to a foreign country than ter 4 withholding tax even if it was formed under
to the possession. foreign law. In most cases, you do not have to
For more information, see Pub. 570. withhold tax on payments of income to these Documentation for Chapter 3
foreign tax-exempt organizations unless the
Foreign corporations. A foreign corporation IRS has determined that they are foreign private For purposes of Chapter 3, in most cases, you
foundations.
is one that does not fit the definition of a domes- must withhold 30% from the gross amount paid
tic corporation. A domestic corporation is one Payments to these organizations, however, to a foreign payee unless you can reliably asso-
that was created or organized in the United must be reported on Form 1042-S if the pay- ciate the payment with valid documentation that
States or under the laws of the United States, ment is subject to Chapter 3 withholding, even establishes either of the following.
any of its states, or the District of Columbia. though no tax is withheld. • The payee is a U.S. person.
You must withhold tax on the unrelated busi-
Guam or Northern Mariana Islands cor- ness income (as described in Pub. 598) of for- • The payee is a foreign person that is the
beneficial owner of the income and is enti-
porations. A corporation created or organized eign tax-exempt organizations in the same way tled to a reduced rate of withholding under
in, or under the laws of, Guam or the CNMI is that you would withhold tax on similar income of the Code or an applicable income tax
not considered a foreign corporation for the pur- nonexempt organizations when the organiza- treaty.
pose of withholding tax for the tax year if: tion does not provide you a Form W-8ECI to
• At all times during the tax year less than certify that the income is effectively connected For rules related to when a withholding
25% in value of the corporation's stock is with a U.S. trade or business of the organiza- agent may rely on an otherwise valid withhold-
owned, directly or indirectly, by foreign per- tion. ing certificate received electronically from a
sons; and third-party repository, see Regulations section
• At least 20% of the corporation's gross in- U.S. branches of foreign persons. In most 1.1441-1(e)(4)(iv)(E).
come is derived from sources within Guam cases, a payment to a U.S. branch of a foreign
or the CNMI for the 3-year period ending person is a payment made to the foreign per- If withholding is applied under Chapter 4 on
with the close of the preceding tax year of son. However, you may treat payments to U.S. a payment, no withholding will be required on
the corporation (or the period the corpora- branches of foreign banks and foreign insur- such payment under Chapter 3.
tion has been in existence, if less). ance companies (discussed earlier) that are
Note. The provisions discussed below un- subject to U.S. regulatory supervision as pay- Documentation for Chapter 4
ments made to a U.S. person, if you and the
der U.S. Virgin Islands and American Samoa U.S. branch have agreed to do so, and if their
corporations will apply to Guam or CNMI corpo- agreement is evidenced by a withholding certifi- If you make a withholdable payment, you must
rations when an implementing agreement is in cate, Form W-8IMY. For this purpose, a territory determine the Chapter 4 status of payees, ben-
effect between the United States and that pos- financial institution acting as an intermediary or eficial owners, and intermediaries and
session. that is a flow-through entity is treated as a U.S. flow-through entities receiving the payment to
the extent required for Chapter 4 purposes. You
U.S. Virgin Islands and American Samoa branch. also must determine the Chapter 4 status of
corporations. A corporation created or organ- persons that own an interest in an entity receiv-
ized in, or under the laws of, the U.S. Virgin Is- ing a withholdable payment that you treat as an
lands or American Samoa is not considered a owner-documented FFI, provided you are either
a U.S. financial institution, participating FFI, or
Publication 515 (2020) Page 9