Page 9 - Withholding Taxes for Foreign Entities

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
directly from the source that paid it to A. Ac- determined. See Documentation and Presump- Qualified derivatives dealers (QDDs).
cordingly, A is fiscally transparent in its jurisdic- tion Rules, later. For the definition of QDD, see Qualified deriva-
tion, country X. tives dealer (QDD), later. For QDD liability, see
B and C are not fiscally transparent under Special rule for Chapter 4. For purposes of Amounts paid to QDDs, later.
the laws of their respective countries of incorpo- Chapter 4, a foreign person acting as an inter-
ration. Country Y requires B to separately take mediary is generally not the payee if the foreign Branches of financial institutions.
into account on a current basis B's share of the person is: Branches of financial institutions are not permit-
income paid to A, and the character and source • An NFFE, unless the NFFE is a QI that has ted to operate as QIs if they are located outside
of the income to B is determined as if the in- assumed primary Chapters 3 and 4 with- of countries having approved “know-your-cus-
come were realized directly from the source holding responsibility; or tomer” (KYC) rules. The countries with ap-
that paid it to A. Accordingly, A is fiscally trans- • A participating FFI, deemed-compliant FFI, proved KYC rules are listed at IRS.gov/
parent for that income under the laws of country or restricted distributor, unless such entity Businesses/International-Businesses/List-of-
Y, and B is treated as deriving its share of the is a QI that has assumed primary Chapters Approved-KYC-Rules.
U.S. source royalty income for purposes of the 3 and 4 withholding responsibility. QI agreement. FFIs, foreign clearing or-
U.S.–Y income tax treaty. Country Z, on the If you make a withholdable payment to one ganizations, and foreign branches of U.S. finan-
other hand, treats A as a corporation and does of the types of entities described above, the cial institutions or clearing organizations can
not require C to take into account its share of payee is the person for whom the agent or inter- enter into an agreement with the IRS to become
A's income on a current basis whether or not mediary collects the payment. a QI. An eligible entity (as defined in Regula-
distributed. Therefore, A is not treated as fis- tions section 1.1441-1(e)(6)(ii)) also may enter
cally transparent under the laws of country Z. Nonqualified intermediary (NQI). An NQI is into a QI agreement for purposes of becoming a
Accordingly, C is not treated as deriving its any intermediary that is a foreign person and QDD. To enter into a QI agreement, an FFI
share of the U.S. source royalty income for pur- that is not a QI. The payees of a payment made must have a Chapter 4 status as:
poses of the U.S.–Z income tax treaty. to an NQI for both Chapter 3 and Chapter 4 pur- • A participating FFI (including a reporting
poses are the customers or account holders on Model 2 FFI);
Foreign Intermediaries whose behalf the NQI is acting. • A registered deemed-compliant FFI (in-
cluding a reporting Model 1 FFI and a non-
In most cases, if you make payments to a for- Example. You make a payment of interest reporting Model 2 FFI treated as registered
eign intermediary, the payees are the persons to a foreign bank that is an NQI. Assume the deemed-compliant); or
for whom the foreign intermediary collects the payment is subject to Chapter 3 withholding but • An FFI treated as a deemed-compliant FFI
payment, such as account holders or custom- is not a withholdable payment. The bank gives under an applicable Model 1 IGA that is
ers, not the intermediary itself. This rule applies you a Form W-8IMY, the Forms W-8BEN of two subject to similar due diligence and report-
for purposes of Chapter 3 withholding and for foreign persons, and a Form W-9 from a U.S. ing requirements with respect to U.S. ac-
Form 1099 reporting and backup withholding person for whom the bank is collecting the pay- counts as those applicable to a registered
and Chapter 4 withholding, provided the inter- ments. The bank also associates with its Form deemed-compliant FFI (a “registered
mediary is not a nonparticipating FFI to which W-8IMY a withholding statement on which it al- deemed-compliant Model 1 IGA FFI”).
you make a withholdable payment to which locates the interest payment and provides all Certain foreign corporations that are NFFEs
Chapter 4 withholding applies. You may, how- other information required to be on the with- acting on behalf of persons other than share-
ever, treat a QI that has assumed primary with- holding statement. The account holders are the holders or foreign central banks of issue also
holding responsibility for a payment as the payees of the interest payment. You should re- may apply to the IRS to become QIs.
payee, and you are not required to withhold. port the part of the interest paid to the two for- See Revenue Procedure 2017-15, available
eign persons on Forms 1042-S and the part at IRS.gov/irb/2017-03_IRB#RP-2017-15, for
An intermediary is a custodian, broker, nom- paid to the U.S. person on Form 1099-INT. You more information on becoming a QI.
inee, or any other person that acts as an agent do not need to establish the Chapter 4 status of An entity may apply for QI status at IRS.gov/
for another person. A foreign intermediary is ei- the NQI because the payment is not a withhold- Businesses/Corporations/Qualified-
ther a QI or an NQI. In most cases, you deter- able payment. Intermediary-System.
mine whether an entity is a QI or an NQI based
on the representations the intermediary makes Qualified intermediary (QI). A QI generally is Note. A QI (other than an NFFE acting on
on Form W-8IMY. a foreign intermediary (or foreign branch of a behalf of persons other than shareholders and
U.S. intermediary) that has entered into a QI certain central banks) also must register at
For purposes of Chapter 3, you must deter- agreement (discussed later) with the IRS. Cer- IRS.gov/FATCA to obtain its applicable Chap-
mine whether the customers or account holders tain entities also may act as QIs even when they ter 4 status and global intermediary identifica-
of a foreign intermediary are U.S. or foreign per- are not intermediaries. You may treat a QI as a tion number (GIIN).
sons and, if the account holder or customer is payee to the extent it assumes primary Chap-
foreign, whether a reduced rate of, or exemp- ters 3 and 4 withholding responsibility or pri- Documentation requirements. For docu-
tion from, Chapter 3 withholding applies. For mary Form 1099 reporting and backup with- mentation requirements applicable to payments
purposes of Chapter 4, you must generally de- holding responsibility for a payment. In this made to QIs, see Responsibilities and Docu-
termine the Chapter 4 status of the account situation, the QI is required to withhold the tax. mentation, discussed later under Qualified In-
holders of a foreign intermediary if the payment You can determine whether a QI has assumed termediary (QI).
is a withholdable payment. The determination responsibility from the Form W-8IMY provided Reporting requirements. For the report-
for Chapter 3 purposes is not required when by the QI. ing requirements of QIs, see Form 1042-S re-
withholding applies under Chapter 4 (that is, A payment to a QI to the extent it does not porting and Collective refund procedures, dis-
when the Chapter 4 status of the foreign inter- assume primary Chapters 3 and 4 withholding cussed later under Qualified Intermediary (QI).
mediary is a nonparticipating FFI or an entity or responsibility is considered made to the person
branch treated as a nonparticipating FFI under on whose behalf the QI acts. If a QI does not U.S. branches of foreign banks and foreign
an applicable IGA). You make these determina- assume Form 1099 reporting and backup with- insurance companies. Special rules apply to
tions based on the foreign intermediary's Form holding responsibility, you must report on Form a U.S. branch of a foreign bank subject to Fed-
W-8IMY and associated information and docu- 1099 and, if applicable, backup withhold as if eral Reserve Board supervision or a foreign in-
mentation. If you do not have all of the informa- you were making the payment directly to the surance company subject to state regulatory
tion or documentation that is required to reliably U.S. person. See Qualified Intermediary (QI), supervision. If you make a payment of an
associate a payment with a payee, you must later, for a discussion of withholding rate pools amount subject to Chapter 3 withholding or a
apply the presumption rules of Chapter 3, and and when a QI may include a U.S. nonexempt withholdable payment to a U.S. branch of a for-
must apply the presumption rules of Chapter 4 recipient in a U.S. payee pool. eign bank or insurance company that agrees to
to the foreign intermediary if the Chapter 4 sta- be treated as a U.S. person, you may treat the
tus of the entity (when required) cannot be
Publication 515 (2020) Page 7