Page 7 - 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.
documentation for payments made outside of be required to report the payment on Form described above, you must treat the partner,
the United States on offshore obligations. See 1099 and, if applicable, backup withhold. You beneficiary, or owner (as applicable) of the
Regulations section 1.1471-3(d) for details on may assume that a foreign entity is not a disre- flow-through entity as the payee for Chapter 4
these documentation requirements. Withhold- garded entity unless you can reliably associate purposes (similar to the determination of the
ing under Chapter 4 also applies to account the payment with documentation provided by payee for Chapter 3 purposes) (looking through
holders of a participating FFI or registered the owner or you have actual knowledge or rea- partners, beneficiaries, and owners that are
deemed-compliant FFI that the FFI is required son to know that the foreign entity is a disregar- themselves flow-through entities that are not
to treat as recalcitrant account holders. ded entity. one of the types described above).
This section titled Persons Subject to Chap- Special Chapter 4 rules. If you make a with- In most cases, you treat a payee as a
ter 3 or Chapter 4 Withholding applies to both holdable payment to a disregarded entity flow-through entity if it provides you with a Form
Chapters 3 and 4 except where otherwise indi- owned by an FFI, for Chapter 4 purposes you W-8IMY (see Documentation, later) on which it
cated and except where the text clearly applies must determine whether you must treat the pay- claims such status. You also may be required to
to one or the other (for example, reduced rates ment as made to a payee that is a nonpartici- treat the entity as a flow-through entity under
and exemptions under income tax treaties). pating FFI (to which Chapter 4 withholding ap- the presumption rules, discussed later.
plies) or a payee that is an FFI with another
Identifying the Payee Chapter 4 status (such as a participating FFI). If For purposes of Chapter 3, you must deter-
you make a withholdable payment to a disre- mine whether the owners or beneficiaries of a
In most cases, the payee is the person to whom garded entity that is treated as a disregarded flow-through entity are U.S. or foreign persons,
you make the payment, regardless of whether entity that is a branch of an FFI that cannot how much of the payment relates to each owner
that person is the beneficial owner of the in- comply with the requirements of an applicable or beneficiary, and, if the owner or beneficiary is
come. However, there are situations in which IGA or the regulations under Chapter 4, you foreign, whether a reduced rate of Chapter 3
the payee is a person other than the one to must treat the payment as made to a nonpartici- withholding applies. For purposes of Chapter 4,
whom you actually make a payment. pating FFI and withhold 30% of the payment. you must determine the Chapter 4 status of the
See the Instructions for Form W-8BEN-E for owners or beneficiaries of a flow-through entity
U.S. agent of foreign person. For purposes more information on payments to disregarded (subject to the exceptions described above),
of Chapter 3, if you make a payment to a U.S. entities. how much of the payment relates to each owner
person and you have actual knowledge that the or beneficiary, and whether withholding under
U.S. person is receiving the payment as an Flow-Through Entities Chapter 4 applies. You make these determina-
agent of a foreign person, you must treat the tions based on the documentation and other in-
payment as made to the foreign person. How- Chapter 3 payees. The payees of payments formation (contained in a withholding state-
ever, if the U.S. person is a financial institution, (other than income effectively connected with a ment) that is associated with the flow-through
you may treat the institution as the payee provi- U.S. trade or business) made to a foreign entity's Form W-8IMY. If you do not have all of
ded you have no reason to believe that the insti- flow-through entity are the owners or beneficia- the information that is required to reliably asso-
tution will not comply with its own obligation to ries of the flow-through entity. This rule applies ciate a payment with a specific payee, you must
withhold under Chapter 3. for purposes of Chapter 3 withholding and for apply the presumption rules. See Documenta-
For Chapter 4 purposes, if you make a with- Form 1099 reporting and backup withholding. tion and Presumption Rules, later.
holdable payment to a U.S. person and you Income that is, or is deemed to be, effectively
have actual knowledge that the U.S. person is connected with the conduct of a U.S. trade or Withholding foreign partnerships and with-
receiving the payment as an intermediary or business of a flow-through entity is treated as holding foreign trusts are not flow-through enti-
agent of a foreign person, you must treat the paid to the entity. ties.
foreign person as the payee. However, if you The following are flow-through entities.
make a withholdable payment to a U.S. finan- • A foreign partnership (other than a with- Foreign partnerships. A foreign partnership
cial institution or a U.S. insurance broker (to the holding foreign partnership). is any partnership (including an entity classified
extent the withholdable payment is a payment • A foreign simple or foreign grantor trust as a partnership) that is not organized under the
of an insurance premium) that is receiving the (other than a withholding foreign trust). laws of any state of the United States or the Dis-
payment as an intermediary or agent, you may trict of Columbia or any partnership that is trea-
treat the financial institution or insurance broker If the Chapter 3 payee is a disregarded en- ted as foreign under the income tax regulations.
as the payee if you do not have reason to know tity or flow-through entity for U.S. tax purposes, If a foreign partnership is not a withholding for-
that the financial institution or insurance broker but the payee is claiming treaty benefits, see eign partnership, the payees of income are the
will not comply with its obligations to withhold Fiscally transparent entities claiming treaty ben- partners of the partnership, provided the part-
under Chapter 4. See Definitions, later, for the efits, later. ners are not themselves flow-through entities or
definition of financial institution. Chapter 4 payees. For purposes of Chapter 4, foreign intermediaries. However, the payee is
If the payment is not subject to Chapter 3 however, a foreign entity that is a flow-through the partnership itself if the partnership is claim-
withholding and is not a withholdable payment, entity is a payee with respect to a payment ing treaty benefits on the basis that it is not trea-
you must treat the payment as made to a U.S. (other than income effectively connected with ted as fiscally transparent in the treaty jurisdic-
person and not as a payment to a foreign per- the conduct of a U.S. trade or business) if the tion and that it meets all the other requirements
son. You may be required to report the payment flow-through entity is: for claiming treaty benefits. If a partner is a for-
on Form 1099 and, if applicable, backup with- • An FFI that is not a participating FFI or eign flow-through entity or a foreign intermedi-
hold. deemed-compliant FFI, or restricted dis- ary, you apply the payee determination rules to
Disregarded entities. In general, a business tributor (an entity that operates as a distrib- that partner to determine the payees.
For purposes of Chapter 4, a foreign part-
utor that holds debt or equity interests in a
entity that is not a corporation and that has a restricted fund as a nominee and meets nership is a payee of a withholdable payment if
single owner may be disregarded as an entity the requirements described in Regulations the partnership is a withholding foreign partner-
separate from its owner (a disregarded entity) section 1.1471-5(f)(4)) receiving the pay- ship that is not acting as an agent or intermedi-
for federal tax purposes. The payee of a pay- ment on behalf of its owners (in such a ary with respect to the payment. If the partner-
ment made to a disregarded entity is the owner case, the entity is a nonparticipating FFI ship is not a withholding foreign partnership, the
of the entity. subject to withholding under Chapter 4); or payees are the partners (looking through any
If the owner of the entity is a foreign person, • An excepted NFFE that is not acting as an partners that are flow-through entities that are
you must apply Chapter 3 withholding unless agent or intermediary with respect to the not treated as payees under the Chapter 4 reg-
you can treat the foreign owner as a beneficial payment. ulations).
owner entitled to a reduced rate of withholding.
If the owner is a U.S. person, you do not ap- If you make a withholdable payment to a Example 1. A nonwithholding foreign part-
ply Chapter 3 withholding. However, you may flow-through entity that is not one of the types nership has three partners: a nonresident alien
Publication 515 (2020) Page 5