Royalty Payments Made to International Entities and Individuals
Use account code 28531 Royalty Payments .
Payments for royalties to foreign individuals or foreign entities tax reportable. Royalties and Licenses to use are sourced where the copyright/intellectual property/patent/license is being used. If the source is inside the U.S., then U.S. tax reporting and 30% tax withholding, unless treaty benefits are available and formally claimed, is required per federal regulations. If there is not tax treaty or the tax treaty does not cover a particular type of income, then no treaty benefits are available. And there are some tax treaties, that have do have a royalty article, do not reduce the applicable tax rate to 0%.
Treaty Benefits can be formally claimed using the W-8BEN (U.S. Taxpayer Identification Number-TIN required, individuals) or W-8BEN-E (Foreign or U.S. Taxpayer Identification Number-FTIN, foreign entities).
Generally, a payment for use of a software product or database results in the payment of rent or lease of the product/database or royalty for use of the intellectual property. When the property is used in the United States, the source of income is considered to be U.S. source income subject to 30% withholding and reporting on Form 1042-S unless an exception applies. The possible exceptions are:
- The terms of the software agreement are essentially a sale of all substantial rights to use the product in perpetuity. (Such as the purchase of boxed software under a shrink-wrap license).
- The location of all servers providing the software service is attested in writing by the vendor to be outside the United States, in which case the source of income may be foreign (the IRS has issued no guidance in these matters)
- The payment is exempt from tax or subject to a reduced rate of tax under an income tax treaty and the payee has submitted a Form W-8BEN (individual, TIN required) or a W-8BEN-E (entity, FTIN required) with a valid, formal treaty claim.
1042-s Tax Form
The IRS form 1042-S is used to tax report the gross amounts paid to and taxes withheld from foreign persons or foreign entities that are subject to income tax reporting, even if no amount is deducted and withheld from the payment due to a treaty benefit. The 1042-S forms must be sent by the University of Oregon to both the IRS and to the recipients by March 15 of the year following the calendar year in which the income subject to reporting was paid. If March 15 falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. The University will make every effort to have these forms in the mail sooner than the due date. https://www.irs.gov/forms-pubs/about-form-1042-s
Please contact Joy Germack, Sr. Tax Analyst, at 346-0782 if you have questions about royalty payments or royalty treaty benefits.
Last updated 6/21/19