By Anthony Diosdi
Form W-BBEN-E is used by foreign entities to document their status for purposes of Chapter 3 and Chapter 4, as well as for certain other Internal Revenue Code provisions.
Generally, withholding agents are required to withhold U.S. tax at the source on certain payments made to nonresident aliens and foreign corporations. A withholding agent for Chapter 3 means any person required to deduct and withhold any tax under Internal Revenue Code Sections 1441, 1442, 1443, or 1461. The withholding rate is typically 30%. FATCA introduced Chapter 4, a documentation regime imposed in addition to the existing Chapter 3 for certain payments to foreign payees that include FFIs and NFFEs. Chapter 4 withholding can be considered a penalty tax imposed when certain withholding payments are made and the U.S. payer does not have the appropriate documentation regarding the foreign payee. If Chapter 4 withholding applies, the payer must withhold 30% of the payment. There is no reduced rate of Chapter 4 withholding permitted under an income tax treaty. The withholding rate under Chapter 4 is either zero or 30 percent. See FATCA: A New World of Terminology and Compliance, Philip Pasmanik and Peter Stratos (April 30, 2015).
Generally, an amount subject to Chapter 3 withholding is an amount from sources within the U.S. that is FDAP income. FDAP income is all income included in gross income, issue discount (“OID”), dividends, rents, royalties, and compensation. On March 18, 2010, the HIRE Act added to the Internal Revenue Code Chapter 4, composed of Sections 1471 through 1474 (referred to as FATCA). Chapter 4 generally requires withholding agents to withhold 30 percent on withholdable payments made to certain FFIs (FFI is the abbreviation for foreign financial institution) and NFFEs (NFFE is the abbreviation for any non-U.S. entity that is not treated as a financial institution). Chapter 4 payments may not be reduced by tax treaty.
Withholding taxes is effected primarily through the imposition of an obligation on the person or entity making the payment to the foreign person to withhold the tax and pay it over to the Internal Revenue Service or (“IRS”).
A withholding agent who fails to withhold is liable for the uncollected tax. Therefore, withholding agents must carefully monitor any payments to foreign persons to ensure that the appropriate amount of tax is being withheld. The withholding regulations focus on the documentation that the payee must provide to the payor. U.S. persons must provide Form W-9, which contains the U.S. person’s taxpayer identification number. A U.S. person’s taxpayer identification number is typically the social security number for individuals and employer identification number for entities.
Foreign persons must file a type of Form W-8. Although there are three different types of Forms W-8, a Form W-8BEN-E, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) is often used. A foreign entity uses a Form W-8BEN-E to:
1) Establish foreign status;
2) Claim beneficial ownership of the income for which the form is furnished;
3) Claim a reduced rate of withholding under an income tax treaty; and
4) Claim exemption from back-up withholding for income that is not subject to withholding under Section 1441.
Receipt of valid documentation by the payor, such as a Form W-9 or Form W-8BEN-E can be relied on when determining the appropriate withholding. See Treas. Reg. Section 1.1441-1(b)(2)(vii)(A). Many times income is paid to foreign recipients through foreign intermediaries. The withholding regulations differentiate between a qualified intermediary (“QI”) and a nonqualified intermediary (“NQI”). A qualified intermediary has qualified and registered with the IRS to be responsible for withholding payments to the ultimate beneficiaries at the appropriate withholding rate. NQIs must provide the appropriate Form W-9 and W-8BEN-E to the payor, who retains responsibility for withholding at the appropriate rate.
This article will discuss how to prepare the W-8BEN-E that is provided to a U.S. withholding agent or payer of income. The W-8BEN-E is used by foreign entities that may be subject to U.S. withholding tax. The W-8BEN-E is provided to a withholding agent and not the IRS. This article is based on instructions issued by the IRS to prepare the W-8BEN-E. This article goes through the W-8BEN-E line by line.
Part I. Identification of Beneficial Owner
Line 1.
For Line 1, the name of the beneficial owner must be entered. The term beneficial owner means the person who is the owner of the income for tax purposes and who beneficially owns that income. Thus, a person receiving income in a capacity as a nominee, agent or custodian for another person is not the beneficial owner of the income. Foreign partnerships, foreign simple trusts, and foreign grantor trusts are not the beneficial owners of income paid to the partnership or trust.
If you are an account holder providing this form to an foreign financial institution (“FFI”) (An FFI is defined as any financial institution that is a foreign entity, other than a financial institution organized under the laws of a possession of the United States) for purposes of documenting yourself as an account holder and you are not receiving a withholding payment, you should complete Part I by substituting the reference to “beneficial owner” with “account holder.”
Line 2.
If you are a corporation, enter your country of incorporation. If you are another type of entity, enter the country under whose laws you are created, organized, or governed.
Line 3.
If you are a disregarded entity receiving a withholdable payment, enter your name on Line 3 if you: 1) have registered with the IRS and have been assigned a GIIN associated with the legal name of the disregarded entity; 2) are reporting Model 1 FFI or reporting Model 2 FFI; (the terms Model 1 FFI and Model 2 FFI will be defined below) and 3) are not a hybrid entity using this form to claim treaty benefits.
Line 4.
For Line 4, you are asked to check the one box that applies. By checking a box, you are representing that you qualify for the classification indicated. You must check the box that represents your classification under U.S. tax principles (not under the law of a treaty country):
1. Simple trust.
2. Central Bank of Issue.
3. Grantor Trust (A grantor trust is a trust where one or more persons are treated as owners of all or a portion of the trust under Sections 671 through 679. If only a portion of the trust is treated as owned by a person, that portion is a grantor trust with respect to that person)..
4. Tax-Exempt Organization.
5. Private Foundation.
6. Disregarded Entity.
7. Corporation.
8. Complex Trust.
9. Estate.
10. International Organization.
11. Partnership.
12. Foreign Government – Controlled Entity.
13. Foreign Government- Integral Part.
If you are providing Form W-8BEN-E to an FFI solely for purposes of documenting yourself for chapter 4 purposes as an account holder of an account maintained by an FFI, you need not complete Line 4.
Line 4 also asks to check “yes” or “no” if you are claiming treaty benefits for a partnership, disregarded entity, simple trust, or grantor trust. For such a case, you must check the “yes” box that you are a hybrid entity (A hybrid entity is any person (other than an individual) that is treated as fiscally transparent for purposes of the Internal Revenue Code but is treated as fiscally transparent by a country with which the United States has a tax treaty) making a treaty claim. You may only check the “no” box if (1) you are a disregarded entity (A business entity that has a single owner and is not a corporation under the Income Tax Regulations is a disregarded entity), partnership, simple trust or grantor trust and are using the form solely for purposes of documenting yourself as an account holder of an FFI and the form is not associated with a withholdable payment or a reportable amount or (2) you are using this form solely for purposes of documenting your status as a participating payee of Section 6050W (Section 6050W refers to returns relating to payments made in settlement of payment card and third party network transactions). In such cases, you may check the “no” box if you choose to complete Line 4.
Line 5.
Check the one box that applies to your Chapter 4 status. The term Chapter 4 status means a person’s status as a U.S. person, specified U.S. person, foreign individual, participating FFI, deemed-compliant FFI, restricted distributor, exempt beneficial owner, nonparticipating NFFE, or passive NFFE. You are only required to provide a Chapter 4 status on this form if you are the payee (a person to whom money is paid or is to be paid) of a withholdable payment or are documenting the status of a financial account you hold with an FFI requesting this form. By checking a box on Line 5, you are representing that you qualify for this classification in your country of residence. Line 5 permits you to select for the following boxes to describe your classification for purposes of Chapter 4:
1. Nonparticipating FFI (A nonparticipating FFI means an FFI other than a participating FFI) .
2. Participating FFI (A participating FFI that has agreed to comply with requirements of an FFI agreement- the term FFI agreement refers to an agreement between the IRS and the participating FFI).
3. Reporting Model 1 FFI (Model 1 is an intergovernmental agreement or (“IGA”). A Model 1 IGA means an agreement between the United States or the Treasury Department and a foreign government or one or more agencies to implement FATCA through reporting by FFIs to such foreign government or agency, followed by automatic exchange of the reported information with the IRS. An FFI in a Model 1 IGA jurisdiction that performs account reporting to the jurisdiction that performs account reporting to the jurisdiction’s government is referred to as a reporting Model 1 FFI).
4. Reporting Model 2 FFI (A Model 2 IGA means an agreement or arrangement between the United States or the Treasury Department and a foreign government or one or more agencies to implement FATCA through reporting by FFIs directly to the IRS in accordance with the requirements of an FFI agreement, supplemented by the exchange of information between such foreign government or agency and the IRS. An FFI in a Model 2 IGA jurisdiction that has entered into an FFI agreement with respect to a branch is a participating FFI but may be referred to as a reporting Model 2 FFI).
5. Registered deemed-compliant FFI.
6. Sponsored FFI.
7. Certified deemed- compliant nonregistered local bank.
8. Certified deemed-compliant sponsored, closely held investment vehicle.
9. Certified, deemed-compliant limited life debt investment entity.
10. Certain investment entities that do not maintain financial accounts.
11. Owner-documented FFI.
12. Restricted distributor.
13. Nonreporting IGA FFI.
14. Foreign government, government of a U.S. possession.
15. International organization.
16. Exempt organization.
17. Exempt retirement plans.
18. Entity wholly owned by exempt beneficial owners.
19. Territorial financial institution.
20. Excepted nonfinancial institution.
21. Excepted nonfinancial start-up company.
22. Excepted nonfinancial entity in liquidation or bankruptcy.
23. 501(c) organization.
24. Nonprofit organization.
25. Publicly traded NFFE or NFFE affiliate of a publicly traded corporation.
26. Excepted territory NFFE.
27. Passive NFFE.
28. Excepted inter-affiliate FFI.
29. Direct reporting NFFE.
30. Sponsored direct reporting NFFE.
31. Account that is not a financial account.
Line 6.
For Line 6, enter the permanent residence address of the entity identified on Line 1. Your permanent residence address is the address in the country where you claim to be a resident for purposes of that country’s income tax.
Line 7.
For Line 7, enter your mailing address.
Line 8.
For Line 8, enter your U.S. employer identification number (“EIN”). An EIN is a U.S. taxpayer identification number.
Line 9a.
If you are a participating FFI, registered deemed-compliant FFI, reporting Model 1 FFI, reporting Model 2 FFI, direct reporting NFFE, trustee of a trustee-document trust that is a foreign person providing this form for the trust, or sponsored direct NIFFE, you are required to enter your GIIN (with your country of residence) on Line 9a. A GIIN is the identification number used to identify a FFI for FATCA registration purposes and U.S. information reporting purposes.
Line 9b.
If you are providing this Form W-8BEN-E to document yourself as an account holder with respect to a financial account (as defined in Treasury Regulation Section 1.1471-5(b) that you hold at a U.S. office of a financial institution and you receive U.S. source income reportable on Form 1042-S associated with this form, you must provide on Line 9b the FTIN (As of January 1, 2018, the IRS requires that the Form W-8BEN include your foreign tax identification number (foreign TIN or “FTIN”). Otherwise, the form is not considered complete) issued to you by the jurisdiction in which you are a tax resident identified on Line 6 unless: 1) you properly identified yourself as a government (including a controlled entity that is a foreign government under Section 892), central bank of issue, or international organization on Line 4; 2) you are a resident of a U.S. territory; or 3) your jurisdiction of residence is identified on the list of jurisdictions that do not issues foreign TINs at IRS.gov/businesses/corporations/list-of-jurisdictions-that-do-not-issue-foreign-tins.
You do not need to provide an FTIN on Line 9b if you meet the requirements for checking the box on Line 9c.
Line 9c.
You may check the box in line 9c if you are an account holder as described for purposes of Line 9b and you are not legally required to obtain an FTIN from your jurisdiction of residence. By checking this box you will be treated as having provided an explanation for not providing an FTIN on Line 9b. Line 9b also permits you to provide a further explanation as to why you are not required to provide an FTIN.
Line 10.
This line may be used by you or by the withholding agent to FFI to include any referencing information that is useful to the withholding agent to document the beneficial owner. For example, you may want to use Line 10 to include the number of the accounts for which you are providing the form. You may also want to use LIne 10 to identify income from a notional principal contract that is not effectively connected with the conduct of a trade or business in the United States. (Treasury Regulation Section 1.446-3(c)(1)(i) defines a Notional Contract as “a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or promise to pay similar amounts”).
Part II Disregarded Entity or Branch Receiving Payment
You should complete Part II to report a disregarded entity that has its own GIIN and is receiving a withholding payment, or for a branch (including a branch that is a disregarded entity that does not have a GIIN) operating in a jurisdiction other than the country of residence identified on Line 2.
Line 11.
For Line 11, you should check the one box that applies for Chapter 4 Status:
1. Branch treated as nonparticipating FFI.
2. Participating FFI.
3. Reporting Model 1 FFI.
4. Reporting Model 2 FFI.
5. U.S. branch.
If no box applies to the disregarded entity, you do not need to complete this part.
Line 12.
For Line 12, enter the address of the branch or disregarded entity.
Line 13.
If you are reporting Model 1 FFI, reporting Model 2 FFI, or participating FFI, you must enter the GIIN on Line 13 of your branch that receives the payment. If you are a disregarded entity that completed Part I, Line 3 of this form and are receiving payments associated with this form, enter your GIIN.
Part III – Claim of Tax Treaty Benefits
You should complete Part III if you intend to take a treaty position to reduce withholding tax.
Line 14a.
If you are a beneficial owner (the person who is required under U.S. tax principles to include the payment in gross income) and you are claiming a reduced rate of, or exemption from, withholding under an income tax treaty you must enter the country where you are a resident for income tax purposes and check the box listed under Line 14a to certify that you are a resident of that country.
Line 14b.
If you are claiming a reduced rate of, or exemption from, withholding under an income tax treaty you must check the box under Line 14b to certify that you: 1) derive the item of income from which the treaty benefits is claimed, and 2) meet the limitation on benefits provision contained in the treaty, if any.
If you are a resident of a foreign country that has entered into an income tax treaty with the United States that contains a limitation on benefits or (“LOB”) article, you must complete one of the checkboxes on Line 14b.
1. Government.
2. Tax-exempt pension trust or pension fund.
3. Other tax-exempt organization.
4. Publicly traded company.
5. Subsidiary of a publicly traded company.
6. Company that meets the ownership and base erosion test.
7. Company with an item of income that meets the active trade or business test.
8. Favorable discretionary determination by the U.S. competent authority received.
9. No LOB article in the treaty.
In order to complete Line 14b, you must have a general understanding of the limitation on benefits or (“LOB”) provisions contained in most U.S. income tax treaties. The principal target of a LOB provision is a corporation that is organized in a treaty country by a resident of a non-treaty country merely to obtain the benefits of that country’s income tax treaty. Therefore, even if a corporation qualifies as a resident of the treaty country, that corporation is not entitled to treaty benefits unless it also satisfies the requirements of the treaty’s LOB provision.
For example, under the limitation on benefits provision found in Article 22 of the U.S. Model Treaty, a corporation that is a resident of a treaty country generally is entitled to treaty benefits only if the corporation meets one of the following additional requirements: (i) more than 50% of the corporation’s stock is regularly traded on a recognized stock exchange (i.e., the corporation is a publicly traded company and the corporation’s primary place of management is in its country of incorporation; (ii) the corporation is a 50% or more owned by 5 or fewer companies entitled to treaty benefits; or (iii) the corporation meets both a stock ownership test (at least 50%) of the corporation’s stock is owned by residents who are entitled to treaty benefits), and a base erosion test (less than 50% of the corporation’s gross income is used to make deductible payments to persons who are not residents of either treaty country).
In order to determine if you satisfy the ownership and base erosion test, derivative benefits test, and active trade or business test discussed in Line 14b of Part III, we will discuss these LOB provisions in detail below. The following is a summary of the four corporate tests as they exist in the most recent U.S. Model Income Tax Treaty published in 2016 (the “2016 Model Treaty”). This summary is intended only to provide a brief overview of each test’s requirements in the 2016 Model Treaty and should not be construed to be an exact reproduction of the requirements in any other treaty. I
Publicly Traded Company Test
Under the publicly traded company test in the 2016 Model Treaty, a corporation must be a “publicly traded company” which is defined as a corporation whose principal class of shares is regularly traded on one or more recognized stock exchanges and either 1) such shares are also primarily traded on one or more recognized stock exchanges located in the contracting state where the corporation is a resident or 2) the corporation’s primary place of management and control is in the contracting state where the corporation is a resident.
Ownership-Base Erosion Test
The ownership-base erosion test in the 2016 Model Treaty consists of two parts, both of which must be satisfied. The first part addresses the composition of the corporation’s owners and requires that at least 50 percent of the aggregate voting power and value of the corporation’s shares be owned, directly or indirectly, by owners who are residents of the same contracting state where the corporation is a resident. These owners must own their shares in the corporation for a period of time equal to at least one-half of the corporation’s taxable year, and each such owner must be either an individual, a contracting state (or subdivision), a publicly traded company, or a qualified pension fund or tax-exempt organization.
The second part of the ownership-base erosion test addresses erosion of the corporation’s tax base. Specifically, this second part provides that certain payments made by the corporation in the taxable year must not total 50 percent or more of its gross income for such year. A payment is subject to this 50 percent limitation if it is deductible for tax purposes in the contracting state where the corporation is a resident and if such payment is made by the corporation to a restricted recipient. Restricted recipients include 1) recipients who are not residents of either contracting state and are not entitled to the benefits of the treaty as an individual, a contracting state (or subdivision), a publicly traded company, or a qualified pension fund or tax-exempt organization and 2) recipients who are connected to the corporation (by at least a 50 percent ownership interest) and benefit from a special tax regime with respect to the deductible payment. The payments limited by this second part of the test do not include arm’s-length payments made in the ordinary course of business for services or tangible property.
Active Trade or Business Test
Under the active trade or business test in the 2016 Model Treaty, a corporate resident that is engaged in the active conduct of a trade or business in its country of residence is entitled to treaty benefits on income derived from the source country to the extent that such income emanates from, or is incidental to, that trade or business. Moreover, if the income is derived from any trade or business activity conducted by the corporation in the source country, then the corporation’s trade or business activity in its residence country must be substantial in relation to the same or complementary trade or business activity carried on in the source country. Whether a trade or business activity is substantial for these purposes is determined based on all the facts and circumstances. Under this test, active trade or business generally involves a specific unified group of activities that constitute (or could constitute) an independent economic enterprise carried on for profit. In this regard, the corporation’s officers and employees (excluding, for this purpose, any independent contractor) must carry out substantial managerial and operational activities of the trade or business. Active trade or business does not include holding companies, group financing, group supervision and administration, or the making or management of investments. Activities conducted by persons connected to a corporation can be attributed to the corporation.
Derivative Benefits Test
The purpose of the derivative benefits test is actually to expand treaty benefits to a corporate resident in either contracting state with respect to an item of income. This test applies to closely held corporations that cannot otherwise qualify for treaty benefits to obtain treaty relief. Similar to the ownership-base erosion test, the derivative benefits test in the 2016 Model Treaty also consists of two parts, both of which must be satisfied. The first part requires at least 95 percent of the aggregate voting power and value of the corporation be owned, directly or indirectly, by seven or fewer shareholders who are equivalent beneficiaries. An “equivalent beneficiary” is a person who is the resident of another country that has entered into its own bilateral income tax treaty with the U.S. and who is entitled to the benefits of that other treaty as either an individual, a contracting state (or subdivision), a publicly traded company, or a qualified pension fund or tax-exempt organization within the meaning of the other treaty. However, the benefits afforded to the person by the other treaty (or by any domestic law or other international agreement) must be at least as favorable as the ones afforded by the current treaty under which the person is an equivalent beneficiary. For example, if the other treaty subjects the person to a rate of tax on dividends, interest, or royalties that is higher than the rate applicable under the current treaty, then the person would be disqualified from being an equivalent beneficiary under the current treaty.
The second part of the derivative benefits test mirrors that of the ownership-base erosion test in that it too limits the corporation’s payments that are deductible for tax purposes in the contracting state where the corporation is a resident to be less than 50 percent of its gross income for the taxable year. However, the second parts of both tests differ in who they define to be a restricted recipient of the deductible payment. In the case of the derivative benefits test, restricted recipients include 1) recipients who are not equivalent beneficiaries, 2) recipients who are equivalent beneficiaries only because they function as a headquarters company for a multinational corporate group consisting of the corporation and its subsidiaries, and 3) recipients who are equivalent beneficiaries that are connected to the corporation (by at least a 50 percent ownership interest) and benefit from a special tax regime with respect to the deductible payment.
“Equivalent Beneficiaries” under the Derivative Benefits Test of Various Treaties
The following U.S. income tax treaties contain a derivative benefits provision in their LOB articles: Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Jamaica, Luxembourg, Malta, Mexico, the Netherlands, Sweden, Switzerland, and the United Kingdom.
Each of these treaties has a specific “equivalent beneficiary” definition. For example, the U.S. treaties with Canada and Jamaica, like the 2016 U.S. Model Income Tax Treaty, broadly allow residents of any jurisdiction that has an income tax treaty with the U.S. to be treated as equivalent beneficiaries. In contrast, the U.S. treaties with Belgium, Sweden, and Finland limit equivalent beneficiaries to residents of a country in the EU or EEA, residents of a NAFTA country, and residents of Switzerland. The U.S. treaty with Mexico is even narrower, limiting equivalent beneficiaries to residents of a NAFTA country.
In addition to these country residency requirements, each treaty has other requirements that the equivalent beneficiary must satisfy in order to meet the derivative benefits test. For example, the derivative benefits tests in most treaties are similar to the one in the 2016 U.S. Model Income Tax Treaty in that they require the equivalent beneficiary to be entitled to the benefits under the other bilateral income tax treaty as an individual, a qualified contracting state (or subdivision), a publicly traded company, or a pension fund or tax-exempt entity within the meaning of that other treaty. As a consequence, a person who is an equivalent beneficiary under such a derivative benefits test in one treaty cannot be counted as a qualifying owner under the ownership-base erosion test in the same treaty (and also cannot meet the active trade or business test, in any, in such treaty). Treaties that contain this requirement include the U.S. treaties with Belgium, Denmark, France, Germany, Iceland, Malta, Mexico, the Netherlands, Sweden, and Switzerland.
Like the 2016 Model Treaty, these treaties provide that, if another country’s tax treaty with the United States lacks a LOB provision, then a person who is a resident in that other country can still be an equivalent beneficiary under the current tax treaty if such person would otherwise qualify as an individual, a contracting state (or subdivision), a publicly traded company, or a qualified pension fund or tax-exempt entity within the meaning of the current tax treaty.
If the treaty at issue does not contain a LOB, the appropriate box should be checked.
Line 14c.
Line 14c asks you to check the box if you are the beneficial owner claiming treaty benefits for U.S. source dividends received from a foreign corporation or interest from a U.S. trade or business of a foreign corporation and you meet the qualified resident status status. If you are a foreign corporation claiming treaty benefits under an income tax treaty that entered into force before January 1, 1987 (and has not been renegotiated) on 1) U.S. source dividends paid to you by another foreign corporation or 2) U.S. source interest paid to you be a U.S. trade or business or another foreign corporation, you must generally be a “qualified resident” of a treaty country. In general, a foreign corporation is a qualified resident of a country if any of the following apply: 1) it meets the 50% ownership and base erosion test; 2) it is primarily and regularly traded on an established securities market in its country of residence or in the United States; 3) it carries on an active trade or business in its country of residence; 4) it gets a ruling from the IRS that it is a qualified resident.
Line 15.
Line 15 must be used only if you are claiming treaty benefits that require you to meet conditions not covered by the representations you made on Line 14. This line is generally not applicable to claiming treaty benefits under an interest or dividends article of the treaty or other income articles. For example, certain treaties allow for a zero rate on dividends for certain qualified residents provided that additional requirements are satisfied, such as ownership percentage, ownership period, and that the resident meets a combination of tests under an applicable LOB. The following are examples of persons who should complete Line 15:
1. Exempt organizations claiming treaty benefits under the exempt organization articles of the U.S. treaties with Canada, Mexico, Germany, and the Netherlands.
2. Foreign corporations that are claiming a preferential rate applicable to dividends based on ownership of a specific percentage of stock in the entity paying the dividend and owning the stock for a specified period of time. Such persons should provide the percentage of ownership and the period of time they owned the stock. For example, under the United States-Italy income tax treaty, to claim the 5% dividend rate, the Italian corporation must own 25% of the voting stock for a 12-month period.
3. If you qualify for and are claiming a zero rate on dividend payments under Article 10(3) of the United States- Germany income tax treaty, you should fill out Line 15 with “Article 10(3),” “0,” and “dividends” in the spaces provided. In the space provided for an explanation, you may write that you are the beneficial owner of the dividends, you are a resident of Germany, you have directly owned shares representing 80% or more of the voting power of the company paying the dividends for the 12-month period ending on the date the entitlement to the dividend is determined, and that you satisfy the conditions of Article 28(2)(f)(aa) and (bb) and Article 28(4) of the treaty with respect to the dividends.
4. Persons claiming treaty benefits on interest other than the generally applicable rate. For example, under the United States- Australia income tax treaty, the general applicable interest rate is 10% under Article 11(2). However, interest may be exempted from withholding if the specific conditions under Article 11(3) is satisfied.
Part IV. Sponsored FFI
You should only complete Part IV if you are required to certify your Chapter 4 status.
Line 16.
If you are a sponsored FFI described in Regulations Section 1.1471-5(f)(i)(F), enter the name of the sponsored entity that has agreed to fulfill the name of the sponsored entity that has agreed to fulfill the due diligence, reporting and withholding obligations on behalf of the sponsored FFI identified on Line 1. A “sponsored entity” is an entity that will perform the due diligence, withholding, and reporting obligations of one or more Sponsored FFIs, or the due diligence and reporting obligations of one or more Sponsored Direct Reporting NFFs.
Line 17.
For Line 17, you must check the applicable box to certify that you are either a sponsored investment entity or sponsored controlled foreign corporation. A sponsored investment entity is typically an entity that is authorized to manage a sponsored financial institution (typically a fund or a sub-fund that is an investment entity but is not a U.S. qualified intermediary, withholding foreign partnership or withholding foreign trust. A sponsored controlled corporation is authorized to act on behalf of a financial institution.
Part V. Certified Deemed- Compliant Nonresgistering Local Bank
You should only complete Part V if you are required to certify your Chapter 4 status.
Line 18.
For Line 18, if you are a certified deemed-compliant nonregistered local bank, you must check the box to certify that you meet all of the requirements for this certified deemed-compliant status. A deemed-compliant status is reserved for a class of entities that the U.S. Treasury has deemed to pose a low risk of tax evasion, such as certain local banks, local FFI members of participating FFI groups, and certain investment vehicles.
Part VI. Certified Deemed-Compliant FFI With Only Low-Value Accounts
You should only complete Part VI if you are required to certify your Chapter 4 status.
Line 19.
For Line 19, you are asked to check the box certifying you are an FFI identified in Part 1. If you are a certified deemed-compliant FFI with only low-value accounts, you must check the box to certify that you meet all of the requirements for this certified deemed-compliant classification. A Certified deemed-compliant FFI with only low-value accounts is an entity that is not engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest (including a futures or forward contract or option) in such security, partnership interest, commodity, notional principal contract, insurance contract or annuity contract with no financial account maintained by the FFI or any member of its expanded affiliated group, if any, has a balance or value in excess of $50,000 (as determined after applying applicable account aggregation rules; and neither the FFI nor the entire expanded affiliated group, if any, of the FFI, have more than $50 million in assets on its consolidated or combined balance sheet as of the end of the most recent accounting year.
Part VII. Certified Deemed-Compliant Sponsored, Closely Held Investment Vehicle
You should only complete Part VII if you are required to certify your Chapter 4 status.
Line 20.
For Line 20, enter the name of your sponsoring entity that has agreed to fulfill the due diligence, reporting and withholding obligations of the entity identified on Line 1 as if the entity on Line 1 were a participating FFI. You must also enter the GIN of your sponsoring entity on Line 9a.
Line 21.
For Line 21, you are asked to check the box to certify that the entity identified in Part 1.
According to the IRS instruction, this means you must check the box certifying that you are a sponsored closely held investment vehicle. A sponsored investment vehicle (typically a fund manager) is an entity that is authorized to manage a sponsored financial institution (typically a fund, or a subfund that is an investment entity).
Part VIII. Certified Deemed- Compliant Limited Life Debt Investment Company
You should only complete Part VIII if you are required to certify your Chapter 4 status.
Line 22.
For Line 22, if you are a limited life debt investment entity, you must check the box to certify that you meet all of the requirements for this certified deemed-compliant status. The term “limited life debt entity” generally includes two types of entities: 1) an entity that primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer; and 2) an entity of which its gross income is primarily attributable to investing, reinvesting, or trading in financial assets.
Part IX. Certain Investment Entities That Do Not Maintain Financial Accounts
You should only complete Part IX if you are required to certify your Chapter 4 status.
Line 23.
For Line 23, if you are an FFI that is a financial institution solely because you are described in Treasury Regulation Section 1.1471-5(e)(4)(i)(A) and you do not maintain financial accounts, you must check the box to certify that you meet all of the requirements for this certified deemed-compliant status.
Part X- Owner-Documented FFI
You should only complete Part X if you are required to certify your Chapter 4 status.
Line 24a.
For Line 24a, if you are an owner-documented FFI, you must check the box to certify that you meet all of the requirements for this status and are providing this form to a U.S. financial institution, participating FFI, reporting Model 1 FFI, or reporting Model 2 FFI that agrees to act as a designated withholding agent with respect to you.
Line 24b.
For Line 24b, check the box to certify that you have provided or will provide the documentation set forth in the certifications, including the FFI owner reporting statement and the valid documentation for each person identified on the FFI owner reporting statement on Line 24b.
Line 24c.
For Line 24c, check the box to certify that you have provided or will provide the auditor’s letter (in lieu of the information required by Line 24B) that satisfies the requirements reflected on this line.
Line 24d.
For Line 24d, check the box if you do not have any contingent beneficiaries or designated classes with unidentified beneficiaries.
Part XI. Restricted Distributor
You should only complete Part XI if you are required to certify your Chapter 4 status.
Line 25a.
If you are a restricted distributor you must check the box to certify that you meet all of the requirements for this status. A restricted distributor provides investment services to at least 30 customers unrelated to each other and less than half of its customers are related to each other. A restricted distributor: 1) is required to perform AML due diligence procedure under the anti-money laundering laws of its country of organization; 2) operates solely in its country of incorporation or organization, has no fixed place of business outside of that country, and has the same country of incorporation or organization as all members of its affiliated group; 3) does not solicit customers outside its country of incorporation or organization; 4) has no more than $175 million in total assets under management and no more than $7 million in gross revenue annually; 5) is not a member of an expanded affiliated group that has more than $500 million in total assets under management or more than $20 million in gross revenue for its most recent accounting year on a combined or consolidated income statement; and 6) does not distribute any debt or securities of the restricted fund to specified U.S. persons, passive NFFs with one or more substantial U.S. owners, or nonparticipating FFIs.
Lines 25b and 25c.
Check the appropriate box on Lines 25b and 25c of Part XI asking the preparer of the Form W-8BEN-E to certify your status.
Part XII. Nonreporting IGA FFI
You should only complete Part XII if you are required to certify your Chapter 4 status.
Line 26.
For Line 26, you should check the box to indicate that you are treated as a nonreporting IGA FFI. You must identify the IGA by entering the name of the jurisdiction that has the IGA treated as in effect with the United States and indicate whether it is a Model 1 or Model 2 IGA. You must also provide the withholding agent with the specific category of FFI described in the IGA.
Part XIII Foreign Government, Government of a U.S. Possession, or Foreign Central Bank of Issue
You should only complete Part XIII if you are required to certify your Chapter 4 status.
Line 27.
For Line 27, if you are a foreign government or political subdivision of a foreign government government of a U.S. possession, or foreign central bank of issue, you must check the box and certify that you meet all of the requirements for this status.
Part XIV. International Organization
Line 28a.
For Line 28a, Check this box to certify that you are an international organization described in Internal Revenue Code Section 7701(a)(18). Section 7701(a)(18) provides that the term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f). 22 U.S.C. If you are an entity that has been designated as an international organization by executive order (pursuant to 22 U.S.C. 288 through 288f), check box 28a. If you are claiming an exemption from withholding for Chapter 3, you should complete Form W-8EXP.
Line 28b.
For Line 28b, if you are an international organization other than an international organization described on Line 28a, you must check the box to certify that you satisfy all of the requirements to this status.
Part XV. Exempt Retirement Plans
Lines 29.
If you are an exempt retirement plan, you must check the appropriate box to certify that you meet all of the requirements for this status. Generally funds designed to provide retirement or health benefits to current or former employees are treated as exempt retirement plans.
Part XVI Entity Wholly Owned by Exempt Beneficial Owners
Line 30.
For Line 30, if you are an entity wholly owned by exempt beneficial owners you must check the box to certify that you meet all of the requirements for this status. The term “territory financial institution” means a financial institution that is incorporated or organized under the laws of any U.S. territory, not including a territory entity that is an investment entity but that is not a depository institution, custodial institution, or specified insurance company.
Part XVII. Territory Financial Institution
Line 31.
For Line 31, if you are a territory financial institution you must check the box to certify that you meet all of the requirements for this statute.
Part XVIII. Excepted Nonfinancial Group Entity
Line 32.
For line 32, if you are an excepted nonfinancial group entity you must check the box to certify that you meet all of the requirements for this statute.
Part XIX Excepted Nonfinancial Start-Up Company
Line 33.
For Line 33, if you are an excepted nonfinancial start-up company, you must check the box to certify that you meet all of the requirements status. An excepted nonfinancial start up was formed no earlier than 24 months prior to the filing of the Form W-8BEN-E. An excepted nonfinancial start-up company invests in assets with the intent to operate a business other than that of a financial institution and does not function as an investment fund.
Part XX Exceptional Entity in Liquidation or Bankruptcy
Line 34.
For Line 34, if you are an exceptional nonfinancial group entity in liquidation or bankruptcy you must check the box to certify that you meet all of the requirements for status. An excepted nonfinancial entity in liquidation or bankruptcy has filed a plan of liquidation, filed a plan of reorganization, or filed for bankruptcy, during the past five years has not been engaged in business as a financial institution or acted as a passive NFFE (any entity that does not classify as (i) a financial institution; (ii) an active NFFE; or (iii) a U.S. person), is either liquiding or emerging from a reorganization or bankruptcy with the intent to continue or recommence operations as a nonfinancial entity, and has or will provide, documentary evidence such as a bankruptcy filing or other public documentation that supports its claim if it remains in bankruptcy or liquidation for more than three years.
Part XXI 501(c) Organization
Line 35.
For Line 35, if you are an entity claiming chapter 4 status as a Section 501(c) organization pursuant to the Regulations 1.1471-5(e)(5)(v) you must check the box and provide the date to the IRS issued you a determination letter or provide a copy of an opinion from U.S. counsel certifying that you qualify as a Section 501(c) organization. If you are a Section 501(c) organization claiming an exemption from withholding for purposes of Chapter 3, you must file Form W-8EXP.
Part XXII. Non Profit Organization
Line 36.
For Line 36, if you are a nonprofit organization (other than a Section 501(c)(3) organization), you must check the box that meets all of the requirements for this status.
Part XXII. Publicly-Traded NFFE or NFFE Affiliate of a Publicly-Traded Corporation
Line 37a.
For Line 37a, if you are a publicly-traded NFFE you must check the box to certify that you are not a financial institution and provide the name of a securities exchange on which your stock is publicly traded. A publicly traded NFFE is a foreign corporation that is not a financial institution; and the stock of such corporation is regularly traded on one or more established securities markets or the foreign corporation is not a financial institution.
Line 37b.
For Line 37b, if you are an NFFE that is a member of the same expanded affiliated group as a publicly-traded U.S. or foreign entity, you must check the box.
Part XXIV. Exception Territory NFFE
Line 38.
For Line 38, if you are an excepted territory NFFE you must check the NFFE you must check the box to certify that you need all of the requirements for this classification. An excepted territory NFFE is an entity that: 1) does not accept deposits in the ordinary course of a banking or similar business; 2) does not hold, as a substantial portion of its business, financial assets for the account of others, or 3) is not an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a financial account; and 4) all of the owners of the entity are bona fide residents of the possession in which the NFFE is organized or incorporated.
Part XXV. Active NFFE
Line 39.
For Line 39, if you are an active NFFE, you must check the box to certify that you meet all of the requirements for the status. An active NFFE is any entity that is a NFFE if less than 50 percent of its gross income for the preceding calendar year is passive income and less than 50 percent of the weighted average percentage of assets (tested quarterly) held by it are assets that produce or are held for the production of passive income (i.e., dividends, interest, annuities, etc).
Part XXVI. Passive NFFE
Line 40a.
For Line 40a, if you are a passive NFFE you must check the box to certify that you are not a financial institution and not a publicly traded NFFE. The term passive NFFE means an NFFE other than an excepted NFFE.
Line 40b.
For Line 40b, you will need to check this box to certify that you have no substantial U.S. owners. A substantial U.S. owner is 1) with respect to any foreign corporation, any specific United States person that owns, directly or indirectly, more than 10 percent of the corporate stock by vote or value; 2) with respect to any foreign partnership, a specified U.S. person that directly or indirectly owns more than 10 percent of the profits or capital interests of the partnership; and 3) with respect to any trust, any specified U.S. person treated as an owner of any portion of the trust under the grantor trust rules and, as provided by the IRS, any specified U.S. person holding more than 10 percent of the beneficial interest of the trust.
Part XXVII Excepted Inter – Affiliate FFI
Line 41.
For Line 41, if you are an excepted inter-affiliate FFI you must check the box to certify that you meet all of the requirements of the classification. An excepted inter-affiliate FFI is a member of an expanded affiliated group that does not maintain financial accounts (other than accounts maintained for members of its expanded group; does not make withholding payments to any person other than to members of its expanded affiliated group that are not limited FFIs or limited branches; does not hold an account (other than a depository account in the country in which the entity is operating other than members of its expanded affiliated group; and has not agreed to report as an agent for Chapter 4 purposes.
Part XXVII. Sponsored Direct Reporting NFFEs
Lines 42 and 43.
For Lines 42 and 43, if you are a sponsored direct reporting NFFE you must enter the name of the sponsoring entity on Line 42 and check the box to certify that it meets all of the requirements for this classification.
Part XXXIX. Substantial U.S. Owners of Passive NFFE
If you have identified yourself as a passive NFFE, you must identify each substantial owner.
Part XXX. Certification
Form W-8BEN-E must be signed and dated by an authorized representative or officer of the beneficial owner.
Conclusion
The W-8BEN-E is an incredibly difficult return. This article ambitiously attempts to summarize how to prepare the W-8BEN-E. Tax advisors and withholding agents must understand the U.S. withholding rules and the Form W-8BEN-E. Failure to understand the U.S. withholding rules along with the Form W-8BEN-E may trigger surprise tax liabilities and significant penalties.
Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.