Page 41 - Withholding Taxes for Foreign Entities

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Canadian corporations are subject to Chapter 3 foreign corporation's guarantee of indebtedness controlled commercial activity and is sub-
withholding on rental payments for the use of owed to the foreign bank by the foreign corpo- ject to withholding under section 1446.
such equipment in the United States and may ration's domestic subsidiary, where the cost of 3. Gain derived from the disposition of a U.S.
claim an exemption on Form W8-BEN-E. the guarantee fee is passed on to the domestic real property interest. Withholding on
Foreign freight charges or rental of subsidiary through additional interest charged these gains is discussed later under U.S.
on the indebtedness.
equipment used outside the United States. The amounts described above for a guaran- Real Property Interest.
Payments for transportation of property, tee of indebtedness are withholdable pay- For Chapter 4 purposes, payments to a for-
whether by ship, air, or truck, solely between ments, such that Chapter 4 withholding may ap- eign government (other than earnings inuring to
points outside the United States or rental of tan- ply absent an exclusion from withholding under the benefit of a private person) are not pay-
gible property in connection with transportation Chapter 4. ments to which Chapter 4 withholding applies
solely for use between points outside the United unless the payment is made to a controlled en-
States is not U.S. source income and not sub- Other income (Income Code 23). Use this tity of the foreign government that is engaged in
ject to Chapter 3 withholding. category to report U.S. source FDAP income a commercial financial activity. See Regulations
Payments to certain expatriates. Certain that is not reportable under any of the other in- section 1.1471-6(h) for a description of a com-
come categories. Examples of income that may
mercial financial activity. See Regulations sec-
payments to nonresident aliens who are cov- be reportable under this category are commis-
ered expatriates under section 877A(g)(1) are sions, insurance proceeds, patronage distribu- tion 1.1471-3(d)(9) for the documentation re-
quired to establish an entity’s Chapter 4 status
subject to withholding at 30%. In general, non- tions, prizes, and racing purses.
resident aliens are covered expatriates if they as a foreign government. Similar rules apply for
Chapter 4 purposes to a payment to a foreign
were U.S. citizens or long-term residents who As discussed earlier under Amounts Subject
renounced their citizenship or ceased to be to Chapter 3 Withholding, every kind of FDAP central bank of issue.
long-term residents for U.S. tax purposes after income from U.S. sources that is not effectively A government of a U.S. possession is ex-
June 16, 2008, and satisfied other tests for connected with a U.S. trade or business is sub- empt from U.S. tax on all U.S. source income.
average annual net income tax or net worth. For ject to Chapter 3 withholding unless the income This income is not subject to Chapter 3 with-
more information on the definition of covered is specifically exempt under the Code or a tax holding, and Chapter 4 withholding does not
expatriates, see the Instructions for Form 8854. treaty. You generally must withhold at the 30% apply to income paid to a government of a U.S.
rate on this income. As a payment of U.S.
A covered expatriate should have provided possession. See Regulations section
you with Form W-8CE notifying you of their cov- source FDAP generally is a withholdable pay- 1.1471-3(d)(9) for the documentation required
ment, you should review Regulations section
ered expatriate status and the fact that they 1.1473-1(a) (definition of withholdable pay- to establish an entity’s Chapter 4 status as a
may be subject to special tax rules with respect ment) to determine if the payment is excluded government of a U.S. possession. These gov-
to certain items. For more information, see the from the definition of a withholdable payment. ernments should use Form W-8EXP to claim
Instructions for Form W-8CE. this exemption for both Chapters 3 and 4 purpo-
ses (as required).
Eligible deferred compensation items
(Income Code 38). In general, you must with- Foreign Governments International organizations. International or-
hold tax at a 30% rate on any payment of an eli- and Certain Other ganizations are exempt from U.S. tax on all U.S.
gible deferred compensation item paid to a cov- source income. Income paid to an international
ered expatriate. The amount subject to tax is Foreign Organizations organization (within the meaning of section
the amount of the payment that would have 7701(a)(18) of the Code) is not subject to Chap-
been included in the nonresident alien's U.S. Investment income earned by a foreign govern- ter 3 withholding. International organizations
gross income if he had continued to be taxed as ment is not included in the gross income of the are not required to provide a Form W-8 or docu-
a U.S. citizen or resident. foreign government and is not subject to Chap- mentary evidence to receive the exemption if
Distributions from a nongrantor trust ter 3 withholding. Investment income means in- the name of the payee is one that is designated
as an international organization by executive or-
(Income Code 39). In general, you must with- come from investments in the United States in der.
hold tax at a 30% rate on any direct or indirect stocks, bonds, or other domestic securities, fi-
Payments made to an international organi-
distribution from a nongrantor trust. The amount nancial instruments held in the execution of zation, as defined for Chapter 4 purposes, are
subject to tax is the part of the distribution that governmental financial or monetary policy, and
would have been included in the nonresident interest on money deposited by a foreign gov- not payments to which Chapter 4 withholding
applies. An international organization for purpo-
alien's U.S. gross income if he had continued to ernment in banks in the United States. A foreign
be taxed as a U.S. citizen or resident. If the non- government must provide a Form W-8EXP or, ses of Chapter 4 means any entity described in
section 7701(a)(18) of the Code. The term also
resident alien was not a beneficiary of the non- in the case of a payment made outside the Uni-
grantor trust on the day before he gave up his ted States to an offshore account, documentary includes any intergovernmental or suprana-
tional organization that is comprised primarily of
U.S. citizenship or long-term residence, you do evidence to obtain this exemption. Investment
not have to withhold tax. See section 7 of No- income paid to a foreign government is subject foreign governments, that is recognized as an
intergovernmental or supranational organization
tice 2009-85, available at IRS.gov/irb/ to reporting on Form 1042-S.
2009-45_IRB#NOT-2009-85. The following types of income received by a under certain foreign laws, or that has in effect a
headquarters agreement with a foreign govern-
Guarantee of indebtedness (Income Code foreign government are subject to Chapter 3 ment, and whose income does not inure to the
41). An amount paid to a foreign payee for the withholding. benefit of private persons. See Regulations
provision of a guarantee of indebtedness is- 1. Income (including investment income) re- section 1.1471-3(d)(9) for the documentation
sued after September 27, 2010, may be subject ceived from the conduct of a commercial required to establish an entity’s Chapter 4 sta-
to Chapter 3 withholding. The amounts must be activity or from sources other than those tus as an international organization.
paid by one of the following. stated above. Foreign tax-exempt organizations. A for-
1. A noncorporate U.S. resident. 2. Income received from a controlled com- eign organization that is a tax-exempt organiza-
2. A domestic corporation. mercial entity (including gain from the dis- tion under section 501(c) of the Internal Reve-
nue Code is not subject to a withholding tax on
position of any interest in a controlled
3. Any foreign person if the amount paid is commercial entity) and income received amounts that are not income includible under
connected with income that is effectively by a controlled commercial entity. section 512 of the Internal Revenue Code as
connected, or treated as effectively con- If the foreign government is a partner in unrelated business taxable income. In addition,
nected, with a U.S. trade or business. a partnership carrying on a trade or busi- withholdable payments made to a tax-exempt
ness in the United States, the effectively organization under section 501(c) of the Internal
An indirect payment includes a payment by connected income allocable to the foreign Revenue Code are not payments to which
a foreign bank to a foreign corporation for the government is considered derived from a Chapter 4 withholding applies.
Publication 515 (2020) Page 39