Page 31 - 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.
an applicable withholding exception. In addi- Deposits include certificates of deposit, the testing period includes 1 or more tax years
tion, if “allocable interest” exceeds the branch open account time deposits, Eurodollar certifi- beginning before January 1, 2011, the corpora-
interest paid, the excess interest also is subject cates of deposit, and other deposit tion can use only its gross income for any tax
to tax and reported on the foreign corporation's arrangements. year beginning before January 1, 2011, and will
income tax return, Form 1120-F. See the In- You may have to file Form 1042-S to report meet the 80% test if the weighted average per-
structions for Form 1120-F for more information. certain payments of interest on deposits. See centage of active foreign business income is
If there is no treaty provision that reduces Deposit interest paid to certain nonresident more than 80%.
the rate of withholding on branch interest, you alien individuals under Returns Required, later. A foreign beneficial owner does not need to
must withhold tax under Chapter 3 at the statu- You also may have to file Form 1042-S when provide a Form W-8 or documentary evidence
tory rate of 30% on the interest paid by a foreign the deposit interest is a withholdable payment for this exception. However, documentation
corporation's U.S. trade or business and you to which withholding applies (or was applied) to may be required for purposes of Form 1099 re-
must withhold under Chapter 4 when otherwise Chapter 4. porting and backup withholding.
applicable and without regard to a treaty provi-
sion. Obligations issued before August 10, 2010. Sales of bonds between interest dates.
Interest received from a resident alien individual Amounts paid as part of the purchase price of
In general, payees of interest from a U.S. or a domestic corporation is not subject to an obligation sold or exchanged between inter-
trade or business of a foreign corporation are Chapter 3 withholding and is not a withholdable est payment dates is not subject to Chapter 3
entitled to reduced rates of, or exemption from, payment if the interest meets all of the following withholding. In addition, such a payment is not a
tax under a treaty in the same manner and sub- requirements. withholdable payment. This does not apply if
ject to the same conditions as if they had re- • At least 80% of the payer’s gross income the sale or exchange is part of a plan the princi-
ceived the interest from a domestic corporation. from all sources has been from active for- pal purpose of which is to avoid tax and you
However, a foreign corporation that receives in- eign business for the 3 tax years of the have actual knowledge or reason to know of the
terest paid by a U.S. trade or business of a for- payer before the year in which the interest plan. The exemption from Chapter 3 withhold-
eign corporation also must be a qualified resi- is paid, or for the applicable part of those 3 ing and from withholdable payments applies
dent of its country of residence to be entitled to years. even if you do not have any documentation
benefits under that country's tax treaty. If the • The recipient is not a related person. Use from the payee. However, documentation may
payee foreign corporation is a resident of a rules similar to those in section 954(d)(3) be required for purposes of Form 1099 report-
country that has entered into an income tax of the Internal Revenue Code to determine ing and backup withholding.
treaty since 1987 that contains a limitation on if the recipient is a related person.
benefits article, the foreign corporation need • The interest is paid on an obligation issued Short-term obligations. Interest and original
only satisfy the limitation on benefits article in before August 10, 2010. issue discount paid on an obligation that is pay-
that treaty to qualify for a reduced rate of tax. • The obligation has not been significantly able 183 days or less from the date of its origi-
modified since August 10, 2010. nal issue (without regard to the period held by
Alternatively, a payee may be entitled to the taxpayer) that satisfy other requirements in-
treaty benefits under the payer's treaty if there Interest from foreign business arrange- tended to ensure that the debt is not held by a
is a provision in that treaty that applies specifi- ments. In certain cases, interest received from U.S. nonexempt person are not subject to
cally to interest paid by the payer foreign corpo- a domestic payer most of whose gross income Chapter 3 withholding. In addition, such a pay-
ration. This provision may exempt all or a part of is active foreign business income is not subject ment is not a withholdable payment. These ex-
this interest. Some treaties provide for an ex- to Chapter 3 withholding and is not a withholda- emptions apply even if you do not have any
emption regardless of the payee's residence or ble payment. documentation from the payee. However, docu-
citizenship, while others provide for an exemp- Active foreign business income is gross in- mentation may be required for purposes of
tion according to the payee's status as a resi- come which is: Form 1099 reporting and backup withholding.
dent or citizen of the payer's country. • Derived from sources outside the United
States, and Income from U.S. Savings Bonds of resi-
A foreign corporation that pays interest must • Attributable to the active conduct of a trade dents of the Ryukyu Islands or the Trust
be a qualified resident (under section 884 of the or business in a foreign country or posses- Territory of the Pacific Islands. Interest from
Internal Revenue Code) of its country of resi- sion of the United States by the domestic a Series E, Series EE, Series H, or Series HH
dence for the payer's treaty to exempt pay- payer. U.S. Savings Bond is not subject to Chapter 3
ments from tax by the foreign corporation. How- withholding if the nonresident alien individual
ever, if the foreign corporation is a resident of a Corporations existing on January 1, 2011. acquired the bond while a resident of the Ryu-
country that has entered into an income tax Certain interest received from a domestic cor- kyu Islands or the Trust Territory of the Pacific
treaty since 1987 that contains a limitation on poration that is an existing 80/20 company is Islands.
benefits article, the foreign corporation need not subject to withholding. An existing 80/20
only satisfy the limitation on benefits article in company must meet all of the following require- Dividends
that treaty to qualify for the exemption. ments.
• It was in existence on January 1, 2011. The following types of dividends paid to foreign
Interest on deposits (Income Code 29). For- • For the 3 tax years beginning before Janu- payees generally are subject to Chapter 3 with-
eign persons are not subject to Chapter 3 with- ary 1, 2011 (or for its years of existence if holding and generally are withholdable pay-
holding on interest that is not connected with a the corporation was in existence for less ments such that withholding Chapter 4 applies
U.S. trade or business if it is from: than 3 tax years), at least 80% of its gross absent an exception available under Chapter 4.
• Deposits with persons carrying on the income from all sources was active foreign
banking business; business income. Dividends paid by U.S. corporations—gen-
• Deposits or withdrawable accounts with • It continues to meet the 80% test for every eral (Income Code 6). This category includes
savings institutions chartered and super- tax year beginning after December 31, all distributions of domestic corporations (other
vised under federal or state law as savings 2010. than dividends qualifying for direct dividend
and loan or similar associations, such as • It has not added a substantial line of busi- rate—Income Code 7).
credit unions, if the interest is or would be ness after August 10, 2010. A corporation making a distribution with re-
deductible by the institutions; or spect to its stock, or any intermediary making a
• Amounts left with an insurance company Transitional rule for active foreign business payment of such a distribution, is required to
under an agreement to pay interest on income. In most cases, the domestic corpora- withhold on the entire amount of the distribution
them. tion determines its active foreign business in- at the rate applicable under Chapter 3 when
come by combining its income and the income
of any subsidiary in which it owns, directly or in- withholding under Chapter 4 does not apply.
directly, 50% or more of the stock. However, if

Publication 515 (2020) Page 29