Page 29 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
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amount of interest whether or not the payment Chart C. Withholding Tax Rates ter 4 withholding applies. To qualify as portfolio
is a return of capital or the payment of income. for Purposes of Chapter 3 interest, the interest must be paid on obligations
A resident alien paying interest on a margin issued after July 18, 1984, and otherwise sub-
account maintained with a foreign brokerage Note. You must withhold tax at the following ject to Chapter 3 withholding.
firm must withhold from the interest whether the rates on payments of income unless a reduced
interest is paid directly or constructively. rate or exemption is authorized under a tax Note. The rules for determining whether in-
Interest on bonds of a U.S. corporation paid treaty. The President may apply higher tax rates terest is portfolio interest changed for obliga-
to a foreign corporation not engaged in a trade on income paid to residents or corporations of tions issued after March 18, 2012. Before
or business in the United States is subject to foreign countries that impose burdensome or March 19, 2012, portfolio interest included inter-
withholding even if the interest is guaranteed by discriminatory taxes on U.S. persons. est on certain registered and nonregistered
a foreign corporation. IF you paid the following type THEN you (bearer) bonds if the obligations meet the re-
Domestic corporations must withhold on in- of income... generally must quirements described below.
terest credited to foreign subsidiaries or foreign withhold at the For obligations issued after March 18, 2012,
parents. following rate... portfolio interest does not include interest paid
For withholding under Chapter 4 on the in- Taxable part of U.S. scholarship or on debt that is not in registered form, except for
terest payments described in this section, see fellowship grant paid to holder of interest paid on foreign-targeted registered obli-
gations issued before January 1, 2016, as de-
the definition of withholdable payments in Reg- “F,” “J,” “M,” or “Q” visa (see
ulations section 1.1473-1(a). Scholarships and Fellowship 14% scribed in Foreign-targeted registered obliga-
Grants, later)
tions, later.
Original issue discount (Income Code 30). Gross investment income from Obligations in registered form. Portfolio
Original issue discount paid on the redemption interest, dividends, rents, and interest includes interest paid on an obligation
royalties paid to a foreign private
of an obligation is subject to Chapter 3 with- foundation 4% that is in registered form, and for which you
holding and is a withholdable payment (except have received documentation that the beneficial
when paid with respect to a grandfathered obli- Pensions—part paid for personal Graduated rates in owner of the obligation is not a U.S. person.
gation). Original issue discount paid as part of services (see Pensions, Annuities, Circular A or Generally, an obligation is in registered form
and Alimony, later)
Circular E
the purchase price of an obligation sold or ex- if (i) the obligation is registered as to both princi-
changed, other than in a redemption, is not sub- Wages paid to a nonresident alien Graduated rates in pal and any stated interest with the issuer (or its
ject to Chapter 3 withholding unless the pur- employee (see Pay for Personal Circular A or agent) and any transfer of the obligation may be
chase is part of a plan the principal purpose of Services Performed, later) Circular E effected only by surrender of the old obligation
which is to avoid tax and the withholding agent Each foreign partner's share of 37% for and reissuance to the new holder, (ii) the right
has actual knowledge or reason to know of the effectively connected income of noncorporate to principal and stated interest with respect to
partners;
plan. However, such original issue discount is a the partnership (see Partnership 21% for corporate the obligation may be transferred only through a
Withholding on Effectively
withholdable payment (except when paid with Connected Income, later) partners book entry system maintained by the issuer or
respect to a grandfathered obligation). With- its agent, or (iii) the obligation is registered as to
37% for
holding is required by a person other than the Distributions of effectively noncorporate both principal and stated interest with the issuer
connected income to foreign
issuer of an obligation (or the issuer's agent). partners by publicly traded partners; or its agent and can be transferred both by sur-
The original issue discount that is subject to partnerships (see Publicly Traded 21% for corporate render and reissuance and through a book en-
Chapter 3 withholding and is a withholdable Partnerships, later) partners try system.
payment (except when paid with respect to a Dispositions of U.S. real property An obligation that would otherwise be con-
grandfathered obligation) is the taxable amount interests (see U.S. Real Property sidered to be in registered form is not consid-
of original issue discount. The taxable amount Interest, later) 15%* ered to be in registered form as of a particular
for both Chapters 3 and 4 withholding purposes Dispositions of partnership time if it can be converted at any time in the fu-
is the original issue discount that accrued while interests under section 1446(f) 10% ture into an obligation that is not in registered
the obligation was held by the foreign beneficial form, except as otherwise provided in Notice
owner up to the time the obligation was sold or Dividends paid to Puerto Rican 10% 2012-20, 2012-13 I.R.B 574, available at
corporation
exchanged or a payment was made, reduced IRS.gov/irb/ 2012-13_IRB#NOT-2012-20, as
by any original issue discount that was previ- All other income subject to described in the following section.
ously taxed. If a payment was made, the tax withholding 30%
due on the original issue discount may not ex- Dematerialized book-entry systems and
ceed the payment reduced by the tax imposed *21% in the case of certain distributions by corporations, effectively immobilized obligations. An ob-
on the part of the payment that is qualified sta- partnerships, trusts, or estates. ligation will be considered to be in registered
ted interest. form if it is issued through either a dematerial-
If you cannot determine the taxable amount, ized book entry system maintained by a clear-
you must withhold on the entire amount of origi- Reduced Rates of ing organization (or agent thereof) or a clearing
nal issue discount accrued from the date of is- Withholding on Interest system in which the obligation (including a
sue until the date of redemption (or sale or ex- Notwithstanding the exception from global obligation in bearer form) is effectively
change, if subject to Chapter 3 withholding or a ! withholding under Chapter 3 on interest immobilized. See Notice 2012-20, amplified by
withholdable payment) determined on the basis CAUTION described under this heading, with- Notice 2013-43, 2013-31 I.R.B 113, available at
of the most recently published Pub. 1212. holding may still apply under Chapter 4 when IRS.gov/irb/2013-31_IRB#NOT-2013-43.
For more information on original issue dis- the payment is a withholdable payment and an Under dematerialized book-entry systems,
count, see Pub. 550. exception from withholding under Chapter 4 bonds are required to be represented only by
book entries, and no physical certificates are is-
does not apply. sued or transferred. The bonds are transferred
only by book entries.
Certain interest is subject to a reduced rate of, An obligation will be considered to be effec-
or exemption from, withholding. tively immobilized if (1) it is represented by one
or more global securities in physical form that
Portfolio interest exempt from Chapter 3 are issued to and held by a clearing organiza-
withholding. Interest and original issue dis- tion (or by a custodian or depository acting as
count that qualifies as portfolio interest is ex- an agent of the clearing organization) for the
empt from Chapter 3 withholding. However, benefit of purchasers and under arrangements
these amounts are not exempt from withholding that prohibit transfer except to a successor
under Chapter 4 when the interest is a withhold- clearing organization subject to the same terms,
able payment, unless an exception from Chap- and (2) beneficial interest in the underlying

Publication 515 (2020) Page 27