Page 28 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Effectively Fileid: … tions/P515/2020/A/XML/Cycle10/source receives income that the payer did not withhold
4. Payments to a foreign corporation for per-
Connected Income sonal services if all of the following apply. upon because of the presumption that the in-
a. The foreign corporation otherwise come was effectively connected with the U.S.
branch's trade or business, the U.S. branch is
In most cases, when a foreign person engages qualifies as a personal holding com- required to withhold on the income if it is in fact
in a trade or business in the United States, all pany for income tax purposes; not effectively connected with the conduct of its
income from sources in the United States con- b. The foreign corporation receives trade or business in the United States. With-
nected with the conduct of that trade or busi- amounts under a contract for personal holding is required whether the payment was
ness is considered effectively connected with a services of an individual whom the collected on behalf of other persons or on be-
U.S. business. FDAP income may or may not corporation has no right to designate; half of another branch of the same entity.
be effectively connected with a U.S. business.
For example, effectively connected income in- c. 25% or more in value of the outstand-
cludes rents from real property if the alien choo- ing stock of the foreign corporation at Income Not
ses to treat that income as effectively connec- some time during the tax year is Effectively Connected
ted with a U.S. trade or business. owned, directly or indirectly, by or for
an individual who has performed, is to This section discusses the specific types of in-
The factors to be considered in establishing perform, or may be designated as the come that are subject to Chapter 3 withholding
whether FDAP income and similar amounts are one to perform, the services called for and where withholding under Chapter 4 is re-
effectively connected with a U.S. trade or busi- under the contract. quired. The income codes contained in this sec-
ness include: tion correspond to the income codes used on
• Whether the income is from assets used Withholding exemption for purposes of the 2020 Form 1042-S (discussed later).
in, or held for use in, the conduct of that Chapter 4. Income effectively connected with
trade or business; or the conduct of a trade or business in the United For purposes of Chapter 3, you must with-
• Whether the activities of that trade or busi- States is not a withholdable payment under hold tax at the statutory rates shown in Chart C
ness were a material factor in the realiza- Chapter 4 and thus is not subject to withholding unless a reduced rate or exemption under a tax
tion of the income. for Chapter 4 purposes. You do not need to treaty applies. For U.S. source gross income
withhold tax under Chapter 4 if you receive a that is not effectively connected with a U.S.
Income from securities. There is a special Form W-8ECI on which a foreign payee makes trade or business, the rate is usually 30%. In
rule determining whether income from securi- the representations described in Withholding most cases, you must withhold the tax at the
ties is effectively connected with the active con- exemptions, earlier. time you pay the income to the foreign person.
duct of a U.S. banking, financing, or similar See When to withhold, earlier.
business. Notional principal contract income. Certain
If the foreign person's U.S. office actively payments attributable to a notional principal Interest
and materially participates in soliciting, negoti- contract are not subject to withholding regard-
ating, or performing other activities required to less of whether a Form W-8ECI is provided. Interest from U.S. sources paid to foreign pay-
arrange the acquisition of securities, the U.S. However, payments of dividend equivalents ees is subject to Chapter 3 withholding and is a
source interest or dividend income from the se- that are not effectively connected with the con- withholdable payment (except when the interest
curities, gain or loss from their sale or ex- duct of a trade or business in the United States, is paid with respect to a grandfathered obliga-
change, income or gain economically equiva- pursuant to a specified notional principal con- tion or another exemption under Chapter 4 ap-
lent to such amounts, or amounts received for tract (described later under Dividend equivalent plies). When making a payment on an inter-
providing a guarantee of indebtedness, is attrib- payments) are subject to withholding. est-bearing obligation, you must withhold on the
utable to the U.S. office and is effectively con- Income from a notional principal contract is gross amount of stated interest payable on the
nected income. subject to reporting on Form 1042-S if it is ef- interest payment date, even if the payment or a
fectively connected with the conduct of a trade part of the payment may be a return of capital
Withholding exemption. In most cases, you or business in the United States. You must treat rather than interest.
do not need to withhold tax on income for pur- the income as effectively connected with a U.S.
poses of Chapter 3 or 4 if you receive a Form trade or business if you pay the income to, or to A substitute interest payment made to the
W-8ECI on which a foreign payee represents the account of, a qualified business unit (a transferor of a security in a securities lending
that: branch) of a foreign person located in the Uni- transaction or a sale-repurchase transaction is
• The foreign payee is the beneficial owner ted States or a qualified business unit located treated the same as the interest on the transfer-
of the income; outside the United States and you know, or red security. Use Income Code 33 to report
• The income is effectively connected with have reason to know, the income is effectively these substitute payments.
the conduct of a trade or business in the connected with the conduct of a U.S. trade or
United States; and business. You do not need to treat notional prin- Interest paid by U.S. obligors—general (In-
• For purposes of Chapter 3 withholding, the cipal contract income as effectively connected if come Code 1). With specific exceptions, such
income is includible in the payee's gross you receive a Form W-8BEN-E that represents as portfolio interest (for purposes of Chapter 3),
income. that the income is not effectively connected with you must withhold on interest paid or credited
This withholding exemption applies to in- the conduct of a U.S. trade or business or if the on bonds, debentures, notes, open account in-
debtedness, governmental obligations, certain
come for services performed by a foreign part- payee provides a representation in a master deferred payment arrangements (as provided in
nership or foreign corporation (unless item (4) agreement or in the confirmation on the particu- section 483 of the Internal Revenue Code), or
below applies to the corporation). The exemp- lar notional principal contract transaction that other evidences of indebtedness of U.S. obli-
tion does not apply, however, to: the payee is a U.S. person or a non-U.S. branch gors. U.S. obligors include the U.S. Govern-
of a foreign person.
1. Pay for personal services performed by an ment or its agencies or instrumentalities, any
individual for purposes of Chapter 3 (see Income paid to U.S. branch of foreign bank U.S. citizen or resident, any U.S. corporation,
Pay for Personal Services Performed, or insurance company. A payment to a U.S. and any U.S. partnership.
later), branch of a foreign bank or a foreign insurance If, in a sale of a corporation's property, pay-
2. Effectively connected taxable income of a company that is subject to U.S. regulation by ment of the bonds or other obligations of the
corporation is assumed by the buyer, that
the Federal Reserve or state insurance authori-
partnership that is allocable to its foreign
partners (see Partnership Withholding on ties is presumed to be effectively connected buyer, whether an individual, partnership, or
corporation, must deduct and withhold the
with the conduct of a trade or business in the
Effectively Connected Income, later), United States if you have an EIN for the branch, taxes that would be required to be withheld by
3. Income from the disposition of a U.S. real unless the branch provides a Form W-8BEN-E the selling corporation as if there had been no
property interest (see U.S. Real Property or Form W-8IMY for the income. If a U.S. sale or transfer. Also, if interest coupons are in
Interest, later), or branch of a foreign bank or insurance company default, the tax must be withheld on the gross
Page 26 Publication 515 (2020)