Starting January 1, 2015, the new Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), where applicable, should be used by foreign (non-US) entities to prevent or reduce US withholding tax at source. Going forward, the former W-8BEN can only be used by individual taxpayers.
AG Tax analysts have prepared a brief overview of this form and its usage for non-financial entities. It is advisable that non-US entities consult a cross border tax professional should they be subject to US withholding tax.
Quick Comparison Between Form W-8BEN-E & W-8BEN
The new Form W-8BEN-E, comprises of 8 pages as compared to the 1 page for the old W-8BEN.
Luckily, for most non-financial entities, most of the form is not applicable. The new form basically reflects changes made by the Foreign Account Tax Compliance Act (FATCA), and is for use by beneficial owners of US source payments that are entities.
Purpose of the Form W-8BEN-E
Generally, when a company makes a payment of US sourced fixed or determinable annual or periodic (FDAP) income to a foreign person not associated with such person’s US trade or business, the company may have a foreign reporting requirement as well as US withholding tax responsibilities.
Effectively, the payer of US source FDAP income has become the IRS’ withholding agent. If the withholding agent does not withhold and remit the withholding tax to the Internal Revenue Service (IRS), and the foreign person does not satisfy its withholding tax obligation, the withholding agent and/or the foreign person will be held liable for the US withholding tax and any associated interest and penalties.
A properly completed Form W-8BEN-E from the recipient of FDAP income can help protect the withholding agent from exposure to such liability and serves to inform them of how much to withhold and remit to the IRS.
Legacy Form W-8BEN
An entity with an old Form W-8BEN provided to a US withholding agent by an entity before January 1, 2015 will generally remain valid until the last day of the third calendar year following the year in which the withholding certificate is signed or documentary evidence is provided to the withholding agent, or until a change in circumstances makes any information on the withholding certificate incorrect. For example, a W-8BEN for an entity signed on December 31, 2014 will generally expire on December 31, 2017.
Common Payments which result in FDAP Income
Some of the more common payments subject to US withholding are interest, royalties, compensation for personal services, rents, pensions or annuities and gains from the sale or exchange of patents, copyrights and similar intangibles.
For FDAP income paid to a foreign person to be subject to US withholding, the payment must be US sourced. The following are some general US sourcing rules for certain types of FDAP payments:
- Interest is US sourced, when the debtor is a US resident
- Royalties are US sourced when the subject property is used in the US
- Rent payments are US sourced when the rental property is located in the US, and
- If services are performed in the US by a foreign person, the payment for those services is considered US sourced.
Form W-8BEN-E Filing Process
Once confirmed that US withholding should be applicable, the withholding agent should request the foreign vendor or beneficial owner to submit the applicable W-8 form to avoid or reduce the 30% withholding on the gross payment. For entities that are paid US source FDAP income they should provide a completed Form W-8-BEN-E.
In most cases, in order for a foreign entity of US source FDAP income to complete Form W-8BEN-E, the entity should apply for an employer identification number (EIN) by submitting Form SS-4, Application for Employer Identification Number.
On completion, the Form W-8BEN-E should be forwarded to the withholding agent or requesting party, however the form is not filed or provided to the IRS until they request it.
The new Form W-8BEN-E while significantly longer than its predecessor allows a foreign recipient of U.S FDAP income an opportunity to reduce or avoid US withholding tax at source. It is pertinent that the US withholding agent keep a copy a current copy of Form W-8BEN-E on file to protect it from liability. Any changes to Form W-8BEN-E must be communicated to the withholding agent within 30 days.
It should also be understood that income tax treaties between the US and the income recipient’s country of residency can sometimes modify these rules. The applicable reduced treaty withholding rate or exemption should be present on the completed form. Absent a tax treaty, the default US withholding rate is set at 30% of the gross amount.
AG TAX LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
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- Disclosure of Foreign Assets and other information filings
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