Page 30 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
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obligation is transferable only through a Interest on such obligations is not a with- loss and the excess inclusion amount on
book-entry system maintained by the clearing holdable payment under Chapter 4, except Schedule K-1 (Form 1065). If the partnership al-
organization or its agent. when the instrument is materially modified after locates all or some part of its allocable share of
These bonds are considered to be in regis- March 18, 2012. REMIC taxable income to a foreign partner, the
tered form if the holder may only obtain a physi- partner must include the partner's allocated
cal certificate in bearer form when (1) the clear- Interest that does not qualify as portfolio amount in income as if that amount was re-
ing organization that maintains the book-entry interest. Payments to certain persons and ceived on the earlier of the following dates.
system goes out of business without a succes- payments of contingent interest do not qualify 1. The date of distribution by the partnership.
sor, (2) the issuer defaults, or (3) definitive se- as portfolio interest. You must withhold at the
curities are issued at the issuer’s request upon statutory rate on such payments unless some 2. The date the foreign partner disposed of
a change in tax law adverse to the issuer. See other exception, such as a treaty provision, ap- its indirect interest in the REMIC residual
Notice 2012-20 for more information on regis- plies and withholding under Chapter 4 does not interest.
tered form requirements. apply. 3. The last day of the partnership's tax year.
Foreign-targeted registered obligations. Contingent interest. Portfolio interest gen-
A registered bond issued after March 18, 2012, erally does not include contingent interest. Con- For purposes of item (2), the disposition
and before January 1, 2016, also will be consid- tingent interest is interest that is determined by may occur as a result of:
• A termination of the REMIC,
ered to be in registered form if it is targeted to reference to any of the following.
foreign markets, and portfolio interest treatment • Any receipts, sales, or other cash flow of • A disposition of the partnership's residual
interest in the REMIC,
may apply even when you do not receive docu- the debtor or a related person.
mentation regarding the beneficial owner of the • Income or profits of the debtor or a related • A disposition of the foreign partner's inter-
est in the partnership, or
bond. person.
If the registered obligation is not targeted to • Any change in value of any property of the • Any other reduction in the foreign partner's
foreign markets, you must receive documenta- debtor or a related person. allocable share of the partnership's part of
tion on which you may rely to treat the payee as • Any dividend, partnership distributions, or the REMIC net income or deduction.
a foreign person that is the beneficial owner of similar payments made by the debtor or a The partnership must withhold tax on the
the interest. A registered obligation is targeted related person. part of the REMIC amount that is an excess in-
to foreign markets if it is sold (or resold in con- • Any amount that is a dividend equivalent. clusion. Excess inclusion income is treated as
nection with its original issuance) only to foreign The term “related person” is defined in sec- income from sources in the United States and is
persons or to foreign branches of U.S. financial tion 871(h)(4)(B) of the Internal Revenue Code. not eligible for any reduction in withholding tax
institutions in accordance with procedures simi- (by treaty or otherwise). It also is a withholdable
lar to those provided under section 1.163-5(c) The contingent interest rule does not apply payment for Chapter 4 purposes.
(2)(i) of the regulations. However, the proce- to any interest paid or accrued on any indebted- An excess inclusion allocated to the follow-
dure that requires the obligation to be offered ness with a fixed term that was issued: ing foreign persons must be included in that
for sale (or resale) only outside the United • On or before April 7, 1993; or person's income at the same time as other in-
States does not apply if the registered obliga- • After April 7, 1993, pursuant to a written come from the entity is included in income.
tion is offered for sale through a public auction. binding contract in effect on that date and • Shareholder of a real estate investment
Also, the procedure that requires the obligation at all times thereafter before that indebted- trust (REIT).
to be delivered outside the United States does ness was issued. • Shareholder of a regulated investment
not apply if the obligation is considered regis- company (RIC).
tered because it may be transferred only 10% owners. Interest paid to a foreign per- • Participant in a common trust fund.
through a book-entry system and the obligation son that owns 10% or more of the total com- • Patron of a subchapter T cooperative or-
is offered for sale through a public auction. The bined voting power of all classes of stock of a ganization.
documentation needed depends on whether corporation, or 10% or more of the capital or The entity must withhold on the excess in-
the interest is paid to a financial institution, a profits interest in a partnership, that issued the clusion.
member of a clearing organization, or to some obligation on which the interest is paid is not For information on the taxation and reporting
other foreign person. See Notice 2012-20 and portfolio interest. To determine 10% ownership, of excess inclusion income by REITs, RICs, and
Regulations section 1.871-14(e) for more infor- see Regulations section 1.871-14(g). other pass-through entities, see Notice
mation on foreign-targeted registered obliga- 2006-97, available at IRS.gov/irb/
tions. Banks. Except in the case of interest paid
on an obligation of the United States, interest 2006-46_IRB#NOT-2006-97.
Obligations not in registered form and paid to a bank on an extension of credit made
obligations issued before March 19, 2012. pursuant to a loan agreement entered into in the Reduced rate or exemption from Chapter 3
For obligations issued before March 19, 2012, ordinary course of the bank's trade or business withholding for interest paid to controlling
interest on an obligation that is not in registered does not qualify as portfolio interest. foreign corporations (Income Code 3). A
form (bearer obligation) is portfolio interest if the treaty may permit a reduced rate or exemption
obligation is foreign targeted. A bearer obliga- Controlled foreign corporations. Interest for interest paid by a domestic corporation to a
tion is foreign targeted if: paid to a controlled foreign corporation from a controlling foreign corporation. The interest may
• There are arrangements to ensure that the person related to the controlled foreign corpora- be on any type of debt, including open or unse-
obligation will be sold, or resold in connec- tion is not portfolio interest. cured accounts payable, notes, certificates,
tion with the original issue, only to a person bonds, or other evidences of indebtedness.
who is not a U.S. person; Reduced rate or exemption from Chapter 3
• Interest on the obligation is payable only withholding for interest on real property Reduced rate or exemption from Chapter 3
outside the United States and its posses- mortgages (Income Code 2). Certain treaties withholding for interest paid by foreign cor-
permit a reduced rate or exemption for interest
sions; and porations (Income Code 4). If a foreign cor-
• The face of the obligation contains a state- paid or credited on real property mortgages. poration is engaged in a U.S. trade or business,
This is interest paid on any type of debt instru-
ment that any U.S. person who holds the any interest paid by the foreign corporation's
obligation will be subject to limits under the ment that is secured by a mortgage or deed of trade or business in the United States (branch
trust on real property located in the United
U.S. income tax laws. States, regardless of whether the mortgagor (or interest) is subject to Chapter 3 withholding as if
paid by a domestic corporation (without consid-
Documentation is not required for interest on grantor) is a U.S. citizen or a U.S. business en- ering the “payer having income from abroad”
bearer obligations to qualify as portfolio interest. tity. exception) and is a withholdable payment. As a
In some cases, however, you may need docu- result, the interest paid to foreign payees is
mentation for purposes of Form 1099 reporting REMIC excess inclusions. A domestic generally subject to Chapter 3 withholding and
and backup withholding. partnership must separately state a partner's al- withholding may apply under Chapter 4 absent
locable share of REMIC taxable income or net
Page 28 Publication 515 (2020)