W 8

NEWSLETTER
RE: FORM W-8 TAX WITHHOLDING
Form W-8: Summary

Under IRC §§1441 and 1442, a Tax Withholding Agent must
withhold 30% of any payment of an amount subject to tax
withholding made to a Payee that is a Foreign Person unless the
Withholding Agent obtains valid documentation that the Payee is
either a U.S. Payee or a Beneficial Owner.
A U.S. Payee is any person required to furnish Form W-9. A
Beneficial Owner is any person or entity that is required to furnish:
1. Form W-8 BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding, [i.e., the
Beneficiary is exempt from tax under a treaty]);
2. Form W-8 ECI (Certificate of Foreign Persons Claiming that
Income is Effectively Connected with the Conduct of the
Trade of Business in the United States, [i.e., the effectively
connected income will be declared in the United States by
the Beneficiary filing a U.S. Income Tax Return]); or
3. Form W-8 EXP (Certificate of Foreign Government or Other
Foreign Organization for United States Tax Withholding, [i.e.,
any Foreign Government, International Organization,
Foreign Central Bank of Issue, Foreign Tax-Exempt
Organization, Foreign Private Foundation or Government of
a U.S Possession]).
Under Form W-8 EXP, the Payee claims an exemption for
withholding under IRC §115(2), IRC §501(C), IRC §892, IRC §895,
or claims a reduced rate of withholding under IRC §1443(b).
Tax Withholding Agents

Tax Withholding on Payments to Foreign Taxpayer
Non-Resident Aliens and Foreign Corporations are generally
subject to a flat 30% tax on U.S. Source Income that is not effectively
GSW/Memos/W-8
connected with the conduct of a U.S. trade or business. To insure
collection and payment of the tax, a Tax Withholding Agent must
withhold 30% of the gross amount paid to a Foreign Taxpayer which
is subject to tax (IRC §§1441 and 1442).
A lower tax withholding rate may apply to scholarship or
fellowship grants, gross investment income, and dispositions of U.S.
real property interests. In addition, a tax treaty may also reduce the
rate of tax withholding.
Only income of a Foreign Taxpayer is subject to tax withholding
rules. A Foreign Taxpayer includes any Non-Resident Alien,
(including a bona fide Resident of Puerto Rico) or an Alien Resident
of Guam, the Northern Mariana Islands, the U.S. Virgin Islands and
American Samoa (Treas. Reg. 1.1441-1(c)).
A Non-Resident Alien who elects resident status for income tax
purposes will still be considered a Foreign Taxpayer for withholding
purposes. A Foreign Taxpayer includes Foreign Corporations,
Partnerships, Estates, Trusts (and the Foreign Branch of U.S.
Financial Institutions in certain circumstances).
Income Subject to Tax Withholding
Income is subject to tax withholding requirements if it is from
sources within the United States and is:
1. Fixed or determinable annual or periodical income (“FDAP”
Income, e.g., interest, dividends, rents, royalties and
compensation). FDAP Income does not include most gains
from the sale of property.
2. Certain gains for the disposal of timber, coal, or domestic
iron ore.
3. Gains relating to the contingent payment received from the
sale or exchange of patents, copyrights, and similar
intangible property.
Income payable for personal services performed in the United
States will be treated as from sources who are within the United
States, regardless of where the location of the contract, place of
payment or residence of Payor.
Effectively Connected Income (“ECI”) with the conduct of a U.S.
trade or business is not subject to the withholding requirement
GSW/Memos/W-8
(including income received as wages). ECI is subject to the tax and
withholding rules, as if the Foreign Taxpayer were a U.S. Citizen
Resident, or Domestic Entity.
Under IRC §1446, special rules apply to the effectively
connected income of a Partnership (Foreign or Domestic) that is
allocable to its Foreign Partners.
Withholding Agent
A Withholding Agent is the Person or Entity required to deduct,
withhold and pay any tax on income paid to a Foreign Taxpayer
(Treas. Reg. 1.1441-7). This duty is imposed on all persons that
have the control, receive, custody, disposal, or payment of any items
of income which are subject to withholding.
The Withholding Agent may be an Individual, Corporation,
Partnership, Trust, or other entity (including a Foreign Intermediary
or Partnership). A Withholding Agent may designate an Authorized
Agent on its behalf.
The Tax Withholding Agent is personally liable for any tax
required to be withheld, except in the case of certain conduit
financing arrangements (IRC §1461). This liability is independent of
the tax liability of the Foreign Taxpayer for whom any income is paid.
Even if the Foreign Taxpayer pays the tax, the Withholding Agent
may still be liable for any interest, penalties, or additions for failure to
withhold (IRC §1463).
No Withholding
A Withholding Agent will not be required to withhold any amount
if it has received documentation that confirms:
1. The Payee is a U.S. Person.
2. The Payee is a Beneficial Owner (i.e., a Foreign Person
entitled to a reduced rate of withholding or a withholding
exemption. Treas. Reg. 1.1441-1).
The Withholding Agent must obtain valid documentation from
the Payee that it is either a U.S. Payee or Beneficial Owner. A U.S.
Payee is any person required to furnish Form W-9. The U.S. Payee
who furnishes Form W-9 may be subject to Form 1099 tax reporting
and tax withholding requirements.
A Beneficial Owner is any person or entity who is required to
GSW/Memos/W-8
furnish Form W-8 BEN, Form W-8 ECI, or Form W-8 EXP.
Payments to an intermediary (whether qualified or not), flow-
through entity, or U.S. branch of Foreign Entity, may be treated as a
U.S. Payee if valid documentation is provided on the Form W-8 IMY.
Withholding Agent Annual Returns
Every Withholding Agent must file an annual information return
on Form 1042-S to report income paid to a Foreign Taxpayer during
the tax year that is subject to withholding unless an exception applies
(Treas. Reg. 1.1461-1, 1.6302-2).
A separate Form 1042-S must be filed for each recipient, as
well as for each type of income that is paid to the same recipient.
Form 1042 is used by the Withholding Agent to report and pay the
withholding taxes.
Form 1042, Form 1042-S, must be filed regardless of whether
or not taxes were required to be withheld. Forms 1042 and 1042-S
must be filed by March 15th of the year following the year in which the
income was paid.
The amount of tax required to be withheld will determine
whether the Withholding Agent must deposit the taxes prior to the
due date for filing the returns and how frequently such amounts must
be deposited. Penalties may be imposed for failure to file, to provide
complete and correct information, as well as for failure to pay any
taxes.
Gary S. Wolfe
A PROFESSIONAL LAW CORPORATION
9100 Wilshire Blvd., Suite 530 East
Beverly Hills, CA, 90212
Tel: 310-274-8847 Fax: 310-274-3118
http://www.gswlaw.com
email: gsw@gswlaw.com
GSW/Memos/W-8

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NEWSLETTER

RE: FORM W-8 TAX WITHHOLDING

Form W-8: Summary

Tax Withholding Agents

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