Page 6 - Withholding Taxes for Foreign Entities

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Forms 1042 and 1042-S
Chapter 4 Fileid: … tions/P515/2020/A/XML/Cycle10/source Foreign persons who provide a Form
Withholding Requirements Reporting Obligations TIP W-8 (or applicable documentary evi-
dence when permitted in lieu of a Form
You are a withholding agent for purposes of You are required to report payments subject to W-8) are exempt from backup withholding and
Chapter 4 if you are a U.S. or foreign person, in Chapter 3 withholding on Form 1042-S and to Form 1099 reporting.
whatever capacity acting, that has control, re- file a tax return on Form 1042. (See Returns
ceipt, custody, disposal, or payment of a with- Required, later.) You also are required to report Form 8966 reporting. For Chapter 4 purpo-
holdable payment. Similar rules for determining withholdable payments to which Chapter 4 with- ses, you may be required to report on Form
who is a withholding agent as those described holding was (or should have been) applied on 8966, FATCA Report, if you make a withholda-
in Chapter 3 Withholding Requirements, earlier, Form 1042-S and to file a tax return on Form ble payment to an entity you agree to treat as
also apply for Chapter 4. For purposes of Chap- 1042 to report the payments. An exception from an owner-documented FFI or to a passive
ter 4, a withholding agent includes a participat- reporting may apply for Chapter 3 purposes to NFFE. See Returns Required, later.
ing foreign financial institution (FFI) (including a individuals who are not required to withhold
reporting Model 2 FFI) or registered from a payment and who do not make the pay- Wages paid to employees. If you are the em-
deemed-compliant FFI to the extent such FFI ment in the course of their trade or business. A ployer of a nonresident alien, you generally
makes a withholdable payment. similar exception from reporting for Chapter 4 must withhold taxes at graduated rates. See
purposes may apply to an individual making a Pay for Personal Services Performed, later.
Under Chapter 4 of the Code, a withholding withholdable payment outside the course of the
agent that makes a withholdable payment to a individual’s trade or business (including as an Effectively connected income by partner-
payee that is an FFI must withhold 30% on the agent with respect to making or receiving such ships. A withholding agent that is a partnership
payment unless the withholding agent is able to payment). (whether U.S. or foreign) also is responsible for
treat the FFI as a participating FFI, withholding on its income effectively connected
deemed-compliant FFI, or exempt beneficial with a U.S. trade or business that is allocable to
owner. A withholding agent also must withhold Withholding and foreign partners. See Partnership Withholding
30% on a withholdable payment made to a Reporting Obligations on Effectively Connected Income, later, for
payee that is a foreign entity other than an FFI (Other Than Forms 1042 more information.
(that is, a nonfinancial foreign entity, or NFFE) and 1042-S Reporting)
that fails to identify its substantial U.S. owners U.S. real property interest. A withholding
(or certify that it does not have any substantial agent also may be responsible for withholding if
U.S. owners) unless the payment is excepted Form 1099 reporting and backup withhold- a foreign person transfers a U.S. real property
from withholding under the regulations to sec- ing. You also may be responsible as a payer interest to the agent, or if it is a corporation,
tion 1472. A participating FFI is a withholding for reporting payments to a U.S. person, gener- partnership, trust, or estate that distributes a
agent under Chapter 4 and is required to with- ally on Form 1099. You must withhold 24% U.S. real property interest to a shareholder,
hold on a withholdable payment to the extent (backup withholding rate) from certain reporta- partner, or beneficiary that is a foreign person.
required under the FFI agreement, including on ble payments made to a U.S. person that is See U.S. Real Property Interest, later.
a payment made to an account holder that the subject to Form 1099 reporting if any of the fol-
FFI is required to treat as a recalcitrant account lowing apply.
holder. A reporting Model 1 FFI is required to • The U.S. person has not provided its tax- Persons Subject
withhold under Chapter 4 to the extent required payer identification number (TIN) in the to Chapter 3 or
in the applicable Intergovernmental Agreement manner required.
(IGA). A registered deemed-compliant FFI • The IRS notifies you that the TIN furnished Chapter 4 Withholding
(other than a reporting Model 1 FFI) is required by the payee is incorrect.
to withhold under Chapter 4 to the extent re- • There has been a notified payee underre-
quired under the conditions applicable to its porting. Chapter 3 withholding applies only to payments
registered deemed-compliant FFI status. See • There has been a payee certification fail- made to a payee that is a foreign person. It
Regulations section 1.1471-5(f)(1) for a de- ure. does not apply to payments made to U.S. per-
scription of the types of registered In most cases, a TIN must be provided by a sons.
deemed-compliant FFIs that may have with- U.S. nonexempt recipient (a U.S. person sub- Usually, you determine the payee's status
holding requirements. ject to Form 1099 reporting) on Form W-9. as a U.S. or foreign person or, if you are making
A payer files a tax return on Form 945 to re- a withholdable payment to an entity (or are an
Generally, a withholdable payment is a pay- port backup withholding. FFI making a payment to an account holder),
ment of U.S. source fixed or determinable an- the payee's Chapter 4 status, based on the doc-
nual or periodical (FDAP) income. Specific ex- You may be required to file Form 1099 and, if umentation that person provides. See Docu-
ceptions to withholdable payments apply appropriate, backup withhold, even if you do mentation, later. However, if you have received
instead of the exemptions from withholding or not make the payments directly to that U.S. per- no documentation or you cannot reliably asso-
taxation provided under Chapter 3. See Income son. For example, you are required to report in- ciate all or a part of a payment with documenta-
Subject to Withholding, later, for more informa- come paid to a foreign intermediary or tion upon which you can rely, then you must ap-
tion on payments of U.S. source FDAP income flow-through entity that collects for a U.S. per- ply certain presumption rules, discussed later.
that are excepted from the definition of with- son subject to Form 1099 reporting. However,
holdable payment. you may not be required to report on Form 1099 Chapter 4 withholding applies to withholda-
if you make a payment to a participating FFI or ble payments made to an entity payee that is an
If a withholding agent makes a payment registered deemed-compliant FFI that provides FFI unless the withholding agent is able to treat
subject to both Chapter 4 withholding and a withholding statement allocating the payment the FFI as a participating FFI, deemed-compli-
Chapter 3 withholding, the withholding agent to a Chapter 4 withholding rate pool of U.S. ant FFI, or exempt beneficial owner. Chapter 4
must apply the withholding provisions of Chap- payees. See Identifying the Payee, later, for withholding also applies to withholdable pay-
ter 4, and need not withhold on the payment un- more information. Also see Section S. Special ments made to a passive NFFE that fails to
der Chapter 3 to the extent that it has withheld Rules for Reporting Payments Made Through identify its substantial U.S. owners (or certify
under Chapter 4. Foreign Intermediaries and Foreign that it does not have any substantial U.S. own-
Flow-Through Entities on Form 1099 in the ers). You must establish the payee’s Chapter 4
Similar rules for withholding agent liability for General Instructions for Certain Information Re- status to determine if withholding applies by ap-
tax, determination of amount to withhold, and turns. plying the documentation requirements of
when to withhold as those described in Chap- Chapter 4, generally by obtaining a Form W-8
ter 3 Withholding Requirements, earlier, also (or, under an applicable IGA, a similar agreed
apply for Chapter 4. form) associated with the payment, or other
Page 4 Publication 515 (2020)