Page 35 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
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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.
Nondegree candidate. If the person receiving deductions on the Form W-4 and the withhold- case of a recipient who also received wages
the scholarship or fellowship grant is not a can- ing tax is figured on the rest. from the same institution, a U.S. TIN on Form
didate for a degree, and is present in the United 8233, or you cannot allow the treaty exemption.
States in “F,” “J,” “M,” or “Q” nonimmigrant sta- Pay for services rendered. Pay for services A copy of a completed Form W-7, showing that
tus, you must withhold tax at 14% on the total rendered as an employee by an alien who also a TIN has been applied for, can be given to you
amount of the grant that is from U.S. sources if is the recipient of a scholarship or fellowship with a Form 8233. See Form 8233, later, under
the following requirements are met. grant usually is subject to graduated withhold- Pay for Personal Services Performed.
1. The grant must be for study, training, or re- ing under Chapter 3 according to the rules dis- Nonresident alien who becomes a resi-
cussed later in Wages Paid to Employees—
search in the United States. Graduated Withholding. This includes taxable dent alien. In most cases, only a nonresident
2. The grant must be made by: amounts an individual who is a candidate for a alien individual may use the terms of a tax treaty
to reduce or eliminate U.S. tax on income from
a. A tax-exempt organization operated degree receives for teaching, doing research, a scholarship or fellowship grant. A student (in-
and carrying out other part-time employment re-
for charitable, religious, educational, quired as a condition for receiving the scholar- cluding a trainee or business apprentice) or re-
etc. purposes; ship or fellowship grant (that is, compensatory searcher who has become a resident alien for
b. A foreign government; scholarship or fellowship income). U.S. tax purposes may not use the terms of a
tax treaty due to a provision known as a “saving
c. A federal, state, or local government Grants given to students, trainees, or re- clause.” However, an exception to the saving
agency; or searchers which require the performance of clause may permit an exemption from tax to
personal services as a necessary condition for
d. An international organization, or a bi- disbursing the grant do not qualify as scholar- continue for scholarship or fellowship grant in-
national or multinational educational ship or fellowship grants. Instead, they are com- come even after the recipient has otherwise be-
or cultural organization created or pensation for personal services considered to come a U.S. resident alien for tax purposes. In
continued by the Mutual Educational be wages. It does not matter what term is used this situation, the individual must give you a
and Cultural Exchange Act of 1961 to describe the grant (for example, stipend, Form W-9 and an attachment that includes all
(known as the Fulbright-Hays Act). scholarship, fellowship, etc.). the following information.
• The treaty country.
If the grant does not meet both (1) and (2) Withholding agents who pay grants • The treaty article addressing the income.
above, you must withhold at 30% on the ! that are in fact wages must report such • The article number (or location) in the tax
amount of the grant that is from U.S. sources. CAUTION grants on Forms 941 and W-2 and treaty that contains the saving clause and
withhold income tax on them at the graduated its exceptions.
Alternate withholding procedure. You may rates. Withholding agents may not allow tax • The type and amount of income that quali-
choose to treat the taxable part of a U.S. source treaty exemptions that apply to scholarships fies for the exemption from tax.
grant or scholarship as wages. The student or and fellowships to be applied to grants that are • Sufficient facts to justify the exemption
grantee must have been admitted into the Uni- really wages. It is the responsibility of the with- from tax under the terms of the treaty arti-
ted States on an “F,” “J,” “M,” or “Q” visa. The holding agent to determine whether a grant is cle.
student or grantee will know that you are using “wages” or a “scholarship or fellowship,” and to
this alternate withholding procedure when you report and withhold on the grant accordingly. An Example. Article 20 of the U.S.–China in-
ask for a Form W-4. alien student, trainee, or researcher may not come tax treaty allows an exemption from tax
The student or grantee must complete Form claim a scholarship or fellowship treaty exemp- for scholarship income received by a Chinese
W-4 annually following the instructions given tion against income that has been reported to student temporarily present in the United
here and forward it to you, the payer of the him or her on Form W-2 as wages. States. Under the Internal Revenue Code, a
scholarship, or your designated withholding student may become a resident alien for tax
agent. You may rely on the information on Form Per diem paid by the U.S. Government. Per purposes if his or her stay in the United States
W-4 unless you know or have reason to know it diem for subsistence paid by the U.S. Govern- exceeds 5 calendar years. However, the treaty
is incorrect. You must file a Form 1042-S (dis- ment (directly or by contract) to a nonresident allows the provisions of Article 20 to continue to
cussed later) for each student or grantee who alien engaged in a training program in the Uni- apply even after the Chinese student becomes
gives you, or your withholding agent, a Form ted States funded by the U.S. Agency for Inter- a resident alien of the United States.
W-4. national Development are not subject to 14% or
Each student or grantee who files a Form 30% withholding. This is true even if the alien is Other Grants, Prizes, and Awards
W-4 must file an annual U.S. income tax return subject to income tax on those amounts. Subject to Chapter 3 Withholding
to take the deductions claimed on that form. If
the individual is in the United States during Tax treaties. Many treaties contain exemp- Other grants, prizes, and awards made by gran-
more than 1 tax year, he or she must attach a tions from U.S. taxation for scholarships and fel- tors that reside in the United States are treated
statement to the annual Form W-4 indicating lowships. Although usually found in the student as income from sources within the United
that the individual has filed a U.S. income tax articles of the tax treaties, many of these ex- States. Those made for activities conducted
return for the previous year. If he or she has not emptions also apply to research grants re- outside the United States by a foreign person or
been in the United States long enough to have ceived by researchers who are not students. by grantors that reside outside the United
to file a return, the individual must attach a See Tax Treaties, later, for information about States are treated as income from foreign sour-
statement to the Form W-4 saying that a timely treaty benefits. The treaty provision usually ex- ces. These provisions do not apply to salaries
U.S. income tax return will be filed. empts the entire scholarship or fellowship or other pay for services.
The payer of the grant or scholarship must amount, regardless of whether the grant is a
review the Form W-4 to make sure all the nec- “qualified scholarship” under U.S. law. Grant. The purpose of a grant must be to ach-
essary and required information is provided. If An alien student, trainee, or researcher may ieve a specific objective, produce a report or
the withholding agent knows or has reason to claim a treaty exemption for a scholarship or fel- other similar product, or improve or enhance a
know that the amounts shown on the Form W-4 lowship by submitting Form W-8BEN to the literary, artistic, musical, scientific, teaching, or
may be false, the withholding agent must reject payer of the grant. However, a scholarship or other similar capacity, skill, or talent of the
the Form W-4 and withhold at the appropriate fellowship recipient who receives both wages grantee. A grant also must be an amount which
statutory rate (14% or 30%). and a scholarship or fellowship from the same does not qualify as a scholarship or fellowship.
After receipt and acceptance of the Form institution can claim treaty exemptions on both The grantor must not intend the amount to be
W-4, the payer must withhold at the graduated kinds of income on Form 8233. given to the grantee for the purpose of aiding
rates in Pub. 15-T as if the grant or scholarship the grantee to perform study, training, or re-
income were wages. The gross amount of the The scholarship or fellowship recipient who search.
income is reduced by the total amount of any is claiming a treaty exemption must provide you
with a foreign TIN on Form W-8BEN or, in the
Publication 515 (2020) Page 33