Payments to Foreign Entities

Payments to Foreign Entities

Flowchart

Click here for the Payments to Foreign Entities (not individuals) flowchart.

Payments to Foreign Entities

Payments for tangible goods or products are not subject to U.S. reporting or tax withholding.

Payments for services provided outside the U. S. by Foreign Entities and individuals are considered foreign source, and are not subject to U.S. reporting or withholding.

Services provided inside the U.S. are subject to U.S. Taxation which include reporting and/or tax withholding when applicable.

Payments for Royalties or Software licenses purchased from foreign entities and used inside the U.S. are subject to U.S. taxation.

Collect the appropriate W8 form from the organization. There are five W8 forms that can be completed, and the appropriate form is determined by following the criteria outlined on the forms and instructions. Most commonly foreign entities will complete the W-8BEN-E form. The IRS requires us to have in our possession the original form. See Central Accounts Payable and Invoice Payments under Forms for W-8 forms and information.

The W-8ECI, W-8IMY and W-8EXP forms would exempt a foreign entity from tax withholding, but the payment would still be reportable at year end. The forms can only be completed by organizations that meet the specific criteria outlined on the forms and their associated instructions.

W-8BEN: Use restricted to foreign individuals only. It is used to claim foreign status and also to claim treaty benefits for royalty/passive income or scholarships/fellowships only.

  • Individuals not eligible for the other W8 forms should use the W-8BEN.
  • A U.S. Tax identification numbner is not required if no treaty benefits are requested.
  • A U.S. tax identification number is required for a treaty benefit exemption from tax withholding.
  • Regarding Treaty Benefits, all fields in line 10 must be completed to claim exemption on Royalty or Scholarship payments.
  • A birthdate is required.
  • An individual must fill out an 8233 form to claim treaty benefits for personal dependent or independent services and a US taxpayer identification number is required. If they are from a country with no treaty benefits, the income is not covered in the treaty, or the entity does not have a U.S. Tax reporting id, the payment will be subject to 30% withholding.

W-8BEN-E: Used primarily by entities  to claim foreign status and and also to claim treaty benefits.

  • Entities not eligible for the other W8 forms should use the W-8BEN-E.
  • A foreign entity from a country that has negotiated a tax treaty with the U.S. that has an article contained that exempts the type of income they are providing, will need to complete a W-8BEN-E to claim treaty benefits.
  • A Foreign or a U.S. tax identification number is required for exemption from tax withholding.
  • All fields in line 14-15 must be completed to claim treaty benefits exemption.

W-8ECI: Used primarily by the payee or beneficial owner that all the income that is listed on the form is effectively connected with the conduct of a trade or business located within the United States.

  • The type of income must be identified on Line 9 of the form to qualify for exemption. If it is not listed we are required to obtain from the entity a different type of W8 form.
  • A U.S. tax identification number is required for exemption from tax withholding.

W-8EXP: Used by the following entities to claim exemption from tax withholding, foreign governments, foreign tax exempt organization, foreign private foundation, govt. of a U.S. possession, or foreign central bank of issue.

  • The entity must be claiming exemption under IRS code 115(2), 501 (c), 892, 895 or 1443(b). Otherwise they need to file a W-8BEN or W-8ECI.

W-8IMY: Used by an intermediary, a withholding foreign partnership, a withholding foreign trust, or flow through entity.

  • Copies of appropriate withholding certificates, documentary evidence, and withholding statements must be attached to the W-8IMY as well.