Do you make interest, dividends, rents or royalties income payments to foreign individuals or foreign entities? If so, are you certain you have the correct documentation on file?

General Rule

As a general rule, the IRS requires that US payers withhold on certain payments to foreign individuals or entities. US taxpayers are required to withhold at 30% on US source FDAP (Fixed Determinable Annual Periodic) income, such as interest, dividends, rents, or royalties, paid to foreign payees. However, some treaty benefits may either reduce the 30% withholding rate or exempt the payer from withholding on these payments.

In order to claim a treaty benefit, the US payer must have documentation from the foreign payee which supports the claim for a reduced withholding rate. This documentation is provided using a withholding certificate from the W-8 series. Note that this form must be received before the payment is made, even if the payer is making a payment to a related party. If the payer fails to withhold at 30% without proper documentation, the US payer will be liable for the tax, as well as for any assessed interest and penalties.

Recent Changes

In the past, the Form W-8BEN was used as a withholding certificate for both foreign individuals and foreign entities. In 2014, the IRS released a new Form W-8BEN-E, which is intended for use by foreign entities. Therefore, the Form W-8BEN is now only valid for foreign individuals, and foreign entities need to complete the Form W-8BEN-E.

Any Form W-8BEN dated after January 1, 2015 has expired. If you had this form on file, be sure to get updated forms before making these types of payments. Since this form is also used to document foreign status, you should have it on file even if you will not be claiming a reduced rate of withholding. Additionally, except under certain circumstances, the Form W-8 expires every 3 years. It may be a good idea to review the forms you have on file to ensure they are all still valid.

Please contact us if you have questions or would like further clarification on DMJ’s international tax services.

Clifford Aldrin, CPA