Page 5 - Withholding Taxes for Foreign Entities

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Organization for United States Tax “Chapter 4” refers to Chapter 4 of Subtitle A liability of the foreign person to whom the pay-
Withholding and Reporting (sections 1471 through 1474) of the Internal ment is made. If you fail to withhold and the for-
W-8IMY W-8IMY Certificate of Foreign Revenue Code. See Chapter 4 Withholding Re- eign payee fails to satisfy its U.S. tax liability,
quirements, later.
then both you and the foreign person are liable
Intermediary, Foreign Flow-Through
Entity, or Certain U.S. Branches for Chapter 3 withholding does not include for tax, as well as interest and any applicable
penalties.
United States Tax Withholding and ! withholding under section 1445 of the
The applicable tax will be collected only
Reporting CAUTION Code (see U.S. Real Property Interest, once. If the foreign person satisfies its U.S. tax
W-8 Inst. W-8 Inst. Instructions for the Requester of later) or under section 1446 of the Code (see liability, you are not liable for the tax but remain
Forms W-8BEN, W-8BEN-E, Partnership Withholding on Effectively Connec- liable for any interest and penalties for failure to
W-8ECI, W-8EXP, and W-8IMY ted Income, later). withhold.
W-9 W-9 Request for Taxpayer Identification A withholding agent (defined next) is the
Number and Certification person responsible for withholding on payments Determination of amount to withhold. You
must withhold on the gross amount subject to
W-9 Inst. W-9 Inst. Instructions for the Requester of made to a foreign person. However, a withhold- Chapter 3 withholding. You cannot reduce the
Form W-9 ing agent that can reliably associate the pay- gross amount by any deductions.
941 941 Employer's QUARTERLY Federal ment with documentation (discussed later) from If the determination of the source of the in-
a U.S. person is not required to withhold. In ad-
Tax Return dition, a withholding agent may apply a reduced come or the amount subject to tax depends on
facts that are not known at the time of payment,
945 945 Annual Return of Withheld Federal rate of withholding (including an exemption you must withhold an amount sufficient to en-
Income Tax from withholding) if it can reliably associate the sure that at least 30% of the amount subse-
1042 1042 Annual Withholding Tax Return for payment with documentation from a beneficial quently determined to be subject to withholding
owner that is a foreign person entitled to a re-
U.S. Source Income of Foreign duced rate of withholding. is withheld. In no case, however, should you
Persons withhold more than 30% of the total amount
1042-S 1042-S Foreign Person's U.S. Source If an amount subject to Chapter 3 withhold- paid. You may elect to hold 30% of the payment
in escrow until the earlier of the date that the
Income Subject to Withholding ing also is a withholdable payment and Chap- amount of income from U.S. sources or the tax-
ter 4 withholding is applied to the payment, no
1042-T 1042-T Annual Summary and Transmittal withholding is required under Chapter 3. See able amount can be determined or 1 year from
of Forms 1042-S Chapter 4 Withholding Requirements, later. the date the amount is placed in escrow, at
8233 8233 Exemption From Withholding on which time the withholding becomes due, or, to
the extent that withholding is not required, the
Compensation for Independent (and Withholding Agent escrowed amount must be paid to the payee.
Certain Dependent) Personal
Services of a Nonresident Alien Chapter 3 When to withhold. Withholding is required at
Individual Withholding Requirements the time you make a payment of an amount
8288 8288 U.S. Withholding Tax Return for subject to withholding. A payment is made to a
Disposition by Foreign Persons of You are a withholding agent if you are a U.S. or person if that person realizes income, whether
U.S. Real Property Interests foreign person, in whatever capacity acting, that or not there is an actual transfer of cash or other
8288-A 8288-A Statement of Withholding on has control, receipt, custody, disposal, or pay- property. A payment is considered made to a
person if it is paid for that person's benefit. For
ment of an amount subject to Chapter 3 with-
Dispositions by Foreign Persons of holding. A withholding agent may be an individ- example, a payment made to a creditor of a
U.S. Real Property Interests ual, corporation, partnership, trust, association, person in satisfaction of that person's debt to
8966 8966 FATCA Report nominee (under section 1446 of the Code), or the creditor is considered made to the person.
A payment also is considered made to a person
See How To Get Tax Help at the end of this any other entity, including any foreign interme- if it is made to that person's agent.
diary, foreign partnership, or U.S. branch of cer-
publication for information about getting publi- tain foreign banks and insurance companies. A U.S. partnership should withhold when
cations and forms. You may be a withholding agent even if there is any distributions that include amounts subject
no requirement to withhold from a payment or to withholding are made. However, if a foreign
Withholding of Tax even if another person has withheld the re- partner's distributive share of income subject to
withholding is not actually distributed, the U.S.
quired amount from the payment.
partnership must withhold on the foreign part-
In most cases, a foreign person is subject to Although several persons may be withhold- ner's distributive share of the income on the
U.S. tax on its U.S. source income. Most types ing agents for a single payment, the full tax is earlier of the date that a Schedule K-1 (Form
of U.S. source income received by a foreign required to be withheld only once. In most ca- 1065) is provided or mailed to the partner or the
person are subject to U.S. tax of 30%. A re- ses, the U.S. person who pays an amount sub- due date for furnishing that schedule. If the dis-
duced rate, including exemption, may apply if ject to Chapter 3 withholding is the person re- tributable amount consists of effectively con-
there is a tax treaty between the foreign per- sponsible for withholding. However, other nected income, see Partnership Withholding on
son's country of residence and the United persons may be required to withhold. For exam- Effectively Connected Income, later.
States. The tax is generally withheld (Chapter 3 ple, a payment made by a flow-through entity or
withholding) from the payment made to the for- nonqualified intermediary (NQI) that knows, or A U.S. trust is required to withhold on the
eign person. has reason to know, that the full amount of amount includible in the gross income of a for-
The term “Chapter 3 withholding” is used in Chapter 3 withholding was not done by the per- eign beneficiary to the extent the trust's distrib-
utable net income consists of an amount sub-
this publication descriptively to refer to with- son from which it receives a payment is re- ject to withholding. To the extent a U.S. trust is
holding required under sections 1441, 1442, quired to do the appropriate withholding since it required to distribute an amount subject to with-
and 1443 of the Internal Revenue Code. In most also falls within the definition of a withholding holding but does not actually distribute the
cases, Chapter 3 withholding describes the agent. In addition, withholding must be done by amount, it must withhold on the foreign benefi-
withholding regime that requires withholding on any QI, withholding foreign partnership, or with- ciary's allocable share at the time the income is
a payment of U.S. source income. Payments to holding foreign trust in accordance with the required to be reported on Form 1042-S.
foreign persons, including nonresident alien in- terms of its withholding agreement, discussed
dividuals, foreign entities, and governments, later.
may be subject to Chapter 3 withholding. Liability for tax. As a withholding agent, you
Withholding also may be required on a pay- are personally liable for any tax required to be
ment to the extent required under Chapter 4. withheld. This liability is independent of the tax
Publication 515 (2020) Page 3