Page 42 - 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.
However, if a foreign organization is a for- • Exemption for certain annuities (see Pen- Note. All acceptance agents will be re-
eign private foundation, it is subject to a 4% sions, Annuities, and Alimony, earlier). quired to adhere to new quality standards es-
withholding tax on all U.S. source investment in- • Exemption based on exempt organization tablished and monitored by the IRS.
come. For a foreign tax-exempt organization to or private foundation status. A payment is unexpected if you or the bene-
claim an exemption from withholding under ficial owner could not have reasonably anticipa-
Chapter 3 or 4 because of its tax-exempt status A foreign TIN also may be required for cer- ted the payment during a time when an ITIN
under section 501(c), or to claim withholding at tain account holders (see Foreign TIN require- could be obtained. This could be due to the na-
a 4% rate, it must provide you with a Form ment for account holders, later). In addition, a ture of the payment or the circumstances in
W-8EXP. However, if a foreign organization is U.S. TIN must be on a withholding certificate which the payment is made. A payment is not
claiming an exemption from withholding under from a person claiming to be any of the follow- considered unexpected solely because the
an income tax treaty, or the income is unrelated ing. amount of the payment is not fixed.
business taxable income, the organization must • QI.
provide a Form W-8BEN-E or W-8ECI. Income • Withholding foreign partnership. Example. Mary, a citizen and resident of
paid to foreign tax-exempt organizations is sub- • Withholding foreign trust. Ireland, visits the United States and wins
ject to reporting on Form 1042-S. If the organi- • An organization claiming an exemption or $5,000 playing a slot machine in a casino. Un-
zation is a partner in a partnership carrying on a reduced rate of withholding based solely der the treaty with Ireland, the winnings are not
trade or business in the United States, the ef- on a claim of tax-exempt status under sec- subject to U.S. tax. Mary claims the treaty bene-
fectively connected income allocable to the or- tion 501(c) or private foundation status. fits by providing a Form W-8BEN to the casino
ganization is subject to withholding under sec- • U.S. branch of a foreign person treated as upon winning at the slot machine. However, she
tion 1446. a U.S. person (see Regulations section does not have an ITIN or foreign TIN. The ca-
1.1441-1(b)(2)(iv)), and a U.S. branch of sino is an acceptance agent that can request an
Foreign financial institutions. For payments an FFI acting as an intermediary that is not ITIN on an expedited basis.
made to a reporting Model 1 FFI or reporting treated as a U.S person. Situation 1. Assume that Mary won the
Model 2 FFI, see the applicable IGA for defini- • U.S. person. money on Sunday. Since the IRS does not is-
tions of entities described under this heading. sue ITINs on Sunday, the casino can pay
You generally may rely on documentation provi- Exceptions to U.S. TIN requirement. A for- $5,000 to Mary without withholding U.S. tax.
ded by such an FFI to treat an entity as descri- eign person does not have to provide a U.S. The casino must, on the following Monday, fax
bed under this heading (included under the TIN to claim a reduced rate of withholding under a completed Form W-7 for Mary, including the
class of a nonreporting IGA FFI). See the In- a tax treaty if the requirements for the following required certification, to the IRS for an expedi-
structions for Form W-8BEN-E. exceptions are met. Instead of requesting a ted ITIN.
U.S. TIN from a foreign payee, you may request Situation 2. Assume that Mary won the
a foreign TIN issued by the payee’s country of money on Monday. To pay the winnings without
U.S. or Foreign TINs residence except when the payee is a nonresi- withholding U.S. tax, the casino must apply for
dent alien individual claiming an exemption and get an ITIN for Mary because an expedited
As the withholding agent, in many cases you from withholding on Form 8233. ITIN is available from the IRS at the time of the
• Income from marketable securities (dis-
must request that the payee provide you with its cussed earlier under Beneficial Owners). payment.
U.S. TIN. You must in such a case include the • Unexpected payment to an individual in
payee's TIN on forms, statements, and other the case of a payment made by a U.S. fi- Foreign TIN requirement for account hold-
tax documents. The payee's TIN may be any of nancial institution to an account main- ers. If you are a U.S. office or branch of a de-
the following. tained at a U.S. office (discussed next). pository institution, custodial institution, invest-
• An individual may have a social security ment entity, or specified insurance company
number (SSN). If the individual does not Unexpected payment. A Form W-8BEN (each as defined in Regulations section
have and is eligible for an SSN, he or she or a Form 8233 provided by a nonresident alien 1.1471-5(e)) documenting an account holder
must use Form SS-5, Application for a So- to get treaty benefits does not need a U.S. TIN (as defined in Regulations section 1.1471-5(a)
cial Security Card, to get an SSN. The SSA if you, the withholding agent, meet all the follow- (3)) of an account that is a financial account (as
will tell the individual if he or she is eligible ing requirements. defined in Regulations section 1.1471-5(b)),
to get an SSN. • You are an acceptance agent. you must obtain the account holder’s TIN for its
• An individual may have an IRS individual • You can request an ITIN for a payee on an jurisdiction of tax residence (foreign TIN) on a
taxpayer identification number (ITIN). If the expedited basis. Form W-8 that is a beneficial owner withholding
individual does not have and is not eligible • You are required to make an unexpected certificate in order for the form to not be invalid
for an SSN, he or she must apply for an payment to the nonresident alien. for a payment of U.S. source income reportable
ITIN by using Form W-7. • You cannot get the ITIN because the IRS is on Form 1042-S, unless:
• Any person other than an individual, and not issuing ITINs at the time you make the • The account holder is a resident of a juris-
any individual who is an employer or who payment or at any earlier time after you diction that is not listed in section 3 of Rev-
is engaged in a U.S. trade or business as a know you have to make the payment. enue Procedure 2019-23 available at
sole proprietor, must have an employer • You cannot reasonably delay making the IRS.gov/irb/2019-38_IRB#REV-
identification number (EIN). Use Form unexpected payment. PROC-2019-23, which may be further up-
dated in future published guidance;
SS-4 to get an EIN. • You submit a completed Form W-7 for the • The account holder is a resident in a juris-
Under certain circumstances, a finan- payee, with a certification that you have re- diction that has been identified by the IRS
viewed the required documentation and
! cial institution may be required to get a have no actual knowledge or reason to on a list of jurisdictions that do not issue
CAUTION GIIN for purposes of Chapter 4. See know that the documentation is not com- foreign TINs. See IRS.gov/businesses/
Global Intermediary Identification Numbers, plete or accurate, to the IRS during the first corporations/list-of-jurisdictions-that-do-
later. See the Instructions for Form 8957 for in- business day after you made the payment. not-issue-foreign-tins;
formation on whether a GIIN is needed. • The account holder is a government, inter-
An acceptance agent is a person who, un- national organization, foreign central bank
A U.S. or foreign TIN (as applicable) must der a written agreement with the IRS, is author- of issue, or resident of a U.S. territory; or
be on a withholding certificate if the beneficial ized to help alien individuals and other foreign • You obtain a reasonable explanation for
owner is claiming any of the following. persons get ITINs or EINs. For information on why the account holder has not been is-
• Tax treaty benefits (see Exceptions to TIN the application procedures for becoming an ac- sued a foreign TIN.
requirement, later). ceptance agent, go to IRS.gov/Individuals/New-
A reasonable explanation that an account
• Income is effectively connected with a U.S. ITIN-Acceptance-Agent-Program-Changes. holder does not have a foreign TIN must ad-
trade or business. dress why the account holder was not issued a
foreign TIN to the extent provided in the
Page 40 Publication 515 (2020)