Liability for tax.

As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties.

The applicable tax will be collected only once. If the foreign person satisfies its U.S. tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold.

Determination of amount to withhold.

You must withhold on the gross amount subject to chapter 3 withholding. You cannot reduce the gross amount by any deductions.

If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. In no case, however, should you withhold more than 30% of the total amount paid. You may elect to hold 30% of the payment in escrow until the earlier of the date that the amount of income from U.S. sources or the taxable amount can be determined or 1 year from the date the amount is placed in escrow, at which time the withholding becomes due, or, to the extent that withholding is not required, the escrowed amount must be paid to the payee.

When to withhold.

Withholding is required at the time you make a payment of an amount subject to withholding. A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. A payment is considered made to a person if it is paid for that person's benefit. For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. A payment is also considered made to a person if it is made to that person's agent.

A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U.S. partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is furnished or mailed to the partner or the due date for furnishing that schedule. Note. If the foreign distributable share of income includes effectively connected income (ECI), see Partnership Withholding on ECTI, later.

Chapter 3 payees.

The payees of payments (other than income effectively connected with a U.S. trade or business and dispositions of interests in partnerships engaged in a trade or business within the United States) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. This rule applies for purposes of chapter 3 withholding and for Form 1099 reporting and backup withholding. Income that is, or is deemed to be, effectively connected with the conduct of a U.S. trade or business of a flow-through entity is treated as paid to the entity.

The following are flow-through entities.

If the chapter 3 payee is a disregarded entity or flow-through entity for U.S. tax purposes, but the payee is claiming treaty benefits, see Fiscally transparent entities claiming treaty benefits, later.

Chapter 4 payees.

For purposes of chapter 4, however, a foreign entity that is a flow-through entity is a payee with respect to a payment (other than income effectively connected with the conduct of a U.S. trade or business) if the flow-through entity is:

If you make a withholdable payment to a flow-through entity that is not one of the types described above, you must treat the partner, beneficiary, or owner (as applicable) of the flow-through entity as the payee for chapter 4 purposes (similar to the determination of the payee for chapter 3 purposes) (looking through partners, beneficiaries, and owners that are themselves flow-through entities that are not one of the types described above).

In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation, later) on which it claims such status. You may also be required to treat the entity as a flow-through entity under the presumption rules, discussed later.

For purposes of chapter 3, you must determine whether the owners or beneficiaries of a flow-through entity are U.S. or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of chapter 3 withholding applies. For purposes of chapter 4, you must determine the chapter 4 status of the owners or beneficiaries of a flow-through entity (subject to the exceptions described above), how much of the payment relates to each owner or beneficiary, and whether withholding under chapter 4 applies. You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. See Documentation and Presumption Rules, later.

Withholding foreign partnerships and withholding foreign trusts are not flow-through entities.

Foreign partnerships.

A foreign partnership is any partnership (including an entity classified as a partnership) that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves flow-through entities or foreign intermediaries. However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not treated as fiscally transparent in the treaty jurisdiction and that it meets all the other requirements for claiming treaty benefits. If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees.

For purposes of chapter 4, a foreign partnership is a payee of a withholdable payment if the partnership is a withholding foreign partnership that is not acting as an agent or intermediary with respect to the payment. If the partnership is not a withholding foreign partnership, the payees are the partners (looking through any partners that are flow-through entities that are not treated as payees under the chapter 4 regulations).

Foreign simple and grantor trust.

A trust is foreign unless it meets both of the following tests.

In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679.

The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. The payees of a payment made to a foreign grantor trust are the owners of the trust. However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees.

Fiscally transparent entities claiming treaty benefits.

For purposes of claiming treaty benefits, if an entity is fiscally transparent for U.S. tax purposes (for example, a disregarded entity or flow-through entity for U.S. tax purposes) and the entity is or is treated as a resident of a treaty country, it will derive the item of income and may be eligible for treaty benefits. In such case, the entity is the payee for chapter 3 purposes. It does not need to be taxed by the treaty country on such item, but the item must be accounted for as the entity's income, not the interest holders' income, under the law of the treaty country whose treaty it is invoking. It must also meet any other requirements for claiming benefits, including a limitation on benefits article, if any, in the treaty. The entity should provide a Form W-8BEN-E to the U.S. withholding agent in such circumstances. If, for chapter 3 purposes, the payee is a foreign corporation or other non-flow-through entity for U.S. tax purposes, it is nonetheless not entitled to claim treaty benefits if the entity is fiscally transparent in its country of residence (that is, a foreign reverse hybrid). Instead, any interest holder resident in that country will derive its allocable share of the items of income paid to the foreign reverse hybrid and may be eligible for benefits. If an interest holder is a resident of a third country, the interest holder may claim treaty benefits under the third country’s treaty with the United States, if any, only if the foreign reverse hybrid is fiscally transparent under the laws of the third country. If an interest holder is entitled to treaty benefits under a treaty between the United States and its country of residence, the payee may provide a Form W-8IMY and attach Form W-8BEN or W-8BEN-E from any interest holder that claims treaty benefits on such income.

The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc.). An interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. An entity is considered to be fiscally transparent with respect to the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Subject to the Standards of Knowledge for Purposes of Chapter 3 and Standards of Knowledge for Purposes of Chapter 4, discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity.

For chapter 3 purposes, the payees of a payment made to a fiscally transparent entity are the interest holders of the entity if the interest holders are claiming treaty benefits with respect to the payment.

For chapter 4 purposes, if you are making a withholdable payment to a fiscally transparent entity, you must apply the rules of chapter 4 to determine the payee (applying the rules described earlier) and whether chapter 4 withholding applies to the payment based on the payee’s chapter 4 status. Thus, chapter 4 withholding may apply to a withholdable payment made to a fiscally transparent entity based on the chapter 4 status of the entity even when the interest holders in the entity would be eligible for reduced withholding under an income tax treaty with respect to the payment. Treaty benefits may be granted to the interest holder when the payment made is not subject to chapter 4 withholding based on the chapter 4 status of both the entity and the interest holder.

Special rule for chapter 4.

For purposes of chapter 4, a foreign person acting as an intermediary is generally not the payee if the foreign person is:

If you make a withholdable payment to one of the types of entities described above, the payee is the person for whom the agent or intermediary collects the payment.

Nonqualified intermediary (NQI).

An NQI is any intermediary that is a foreign person and that is not a QI. The payees of a payment made to an NQI for both chapter 3 and chapter 4 purposes are the customers or account holders on whose behalf the NQI is acting.

Qualified intermediary (QI).

A QI is generally a foreign intermediary (or foreign branch of a U.S. intermediary) that has entered into a QI agreement (discussed later) with the IRS. Certain entities may also act as QIs even when they are not intermediaries. You may treat a QI as a payee to the extent it assumes primary chapters 3 and 4 withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. In this situation, the QI is required to withhold the tax. You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI.

A payment to a QI to the extent it does not assume primary chapters 3 and 4 withholding responsibility is considered made to the person on whose behalf the QI acts. If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U.S. person. See Qualified Intermediary (QI), later, for a discussion of withholding rate pools and when a QI may include a U.S. nonexempt recipient in a U.S. payee pool.

Additionally, starting January 1, 2023, a QI may also assume primary withholding responsibilities with respect to PTP distributions (including withholding under section 1446(a)) and transfers of PTP interests for section 1446(f) purposes. For discussion of those provisions, see Publicly Traded Partnership Distributions (PTP Distributions) and Section 1446(f): PTP Interests, later.

Qualified derivatives dealers (QDDs).

For the definition of QDD, see Qualified derivatives dealer (QDD), later. For QDD liability, see Amounts paid to QDDs, later.

Branches of financial institutions.

Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. The countries with approved KYC rules are listed at IRS.gov/Businesses/International-Businesses/List-of-Approved-KYC-Rules.

QI agreement.

FFIs, foreign clearing organizations, and foreign branches of U.S. financial institutions or clearing organizations can enter into an agreement with the IRS to become a QI. An eligible entity (as defined in Regulations section 1.1441-1(e)(6)(ii)) may also enter into a QI agreement for purposes of becoming a QDD. To enter into a QI agreement, an FFI must have a chapter 4 status as:

Certain foreign corporations that are NFFEs acting on behalf of persons other than shareholders or foreign central banks of issue may also apply to the IRS to become QIs.

See Revenue Procedure 2022-43, 2022-52 I.R.B. 570, available at IRS.gov/irb/2022-43_IRB#RP-2022-52, for more information on becoming a QI.

An entity may apply for QI status at IRS.gov/Businesses/Corporations/Qualified-Intermediary-System.

Documentation requirements.

For documentation requirements applicable to payments made to QIs, for chapters 3 and 4 purposes, see Responsibilities and Documentation, discussed later under Qualified Intermediary (QI).

Reporting requirements.

For the reporting requirements of QIs, see Form 1042-S reporting and Collective refund procedures, discussed later under Qualified Intermediary (QI).

U.S. branches of foreign banks and foreign insurance companies.

Special rules apply to a U.S. branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. If you make a payment of an amount subject to chapter 3 withholding or a withholdable payment to a U.S. branch of a foreign bank or insurance company that agrees to be treated as a U.S. person, you may treat the U.S. branch as a payee that is a U.S. person, provided you receive a Form W-8IMY from the U.S. branch that you can reliably associate with the payment. If you treat the branch as a U.S. person, you are not required to withhold on an amount subject to chapter 3 withholding or a withholdable payment. Even though you agree to treat the branch as a U.S. person, you must report the payments made to the branch on Form 1042-S.

A territory financial institution is a financial institution as defined for chapter 4 purposes (except when it is an investment entity that is not also a depository institution, custodial institution, or specified insurance company) incorporated or organized under the laws of a territory of the United States. A territory financial institution that is an intermediary or flow-through entity is treated as a U.S. branch that agrees to be treated as a U.S. person. The special rules described in this section apply to a territory financial institution.

If you are paying a U.S. branch an amount that is not subject to chapter 3 withholding and is not a withholdable payment, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U.S. person for such amounts. Consequently, amounts not subject to chapter 3 withholding and that are not withholdable payments that are paid to a U.S. branch are not subject to Form 1099 reporting or backup withholding.

Alternatively, a U.S. branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. In this situation, the U.S. branch is not treated as a U.S. person, and the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. See Nonqualified Intermediary (NQI) under Documentation, later.

If you cannot reliably associate the payment with a Form W-8IMY from the U.S. branch but you have obtained an employer identification number (EIN) for the branch, you should treat the payment as a payment to a foreign person of income that is effectively connected with the conduct of a trade or business in the United States. If you cannot reliably associate the payment with a Form W-8IMY from the U.S. branch and you have not obtained an EIN for the branch, you should treat the payment as a payment to a foreign person of income that is not effectively connected with the conduct of a trade or business in the United States.

Withholding foreign partnership and withholding foreign trust.

A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP agreement with the IRS and is acting in that capacity with respect to its partners. A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT agreement with the IRS and is acting in that capacity with respect to its owners and beneficiaries. In order to enter into a WP or WT agreement with the IRS, a WP or WT that is an FFI must have chapter 4 status as a:

A WP or WT that is an NFFE may also enter into a WP or WT agreement with the IRS. An FFI that is a foreign reverse hybrid entity may apply to enter into a WP agreement, provided that the FFI is a participating FFI, a registered deemed-compliant FFI, or a registered deemed-compliant Model 1 IGA FFI.

A WP or WT must act in that capacity for reportable amounts that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. A WP or WT may act in that capacity for reportable amounts that are distributed to, or included in the distributive share of, its indirect partners, beneficiaries, or owners that are not U.S. nonexempt recipients (except for a U.S. nonexempt recipient that is included in a chapter 4 withholding rate pool of U.S. payees). A WP or WT acting in that capacity must assume primary chapters 3 and 4 withholding responsibility for payments subject to withholding and must assume certain reporting requirements with respect to its U.S. partners, beneficiaries, and owners. You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts.

See Revenue Procedure 2017-21, 2017-6 I.R.B. 791, available at IRS.gov/irb/2017-06_IRB#RP-2017-21, for more information on becoming a WP or WT.

WP agreement and WT agreement.

The WP agreement and WT agreement and the application procedures for the agreements are in Revenue Procedure 2017-21, earlier. An entity applies for WP or WT status at IRS.gov/Businesses/Corporations/Qualified-Intermediary-System. The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity.

A WP or WT that is an FFI (other than a retirement fund) must also register with the IRS at IRS.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-Registration-System to obtain its applicable chapter 4 status and GIIN.

Documentation.

A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and provides all other information and certifications required by the form, including its WP-EIN or WT-EIN. When you make a withholdable payment to a WP or WT, the WP or WT generally may also provide a certificate of a chapter 4 status permitted of a WP or WT (and GIIN, if applicable). The WP or WT, when acting in such capacity, is not required to provide a withholding statement and is not required to disclose any information regarding its direct partners, beneficiaries, or owners, or any indirect partner, beneficiary, or owner for which it acts as a WP or WT that is not a U.S. nonexempt recipient (except for a U.S. nonexempt recipient included in a chapter 4 withholding rate pool of U.S. payees). A chapter 4 withholding rate pool also means a payment of a single type of income that is allocated to U.S. payees when the WP provides the certification required on Form W-8IMY for allocating payments to this pool. When a WP or WT is not acting as a WP or WT with respect to an amount distributed to, or included in the distributive share of, an indirect partner, beneficiary, or owner, it must provide you with a nonwithholding foreign partnership or nonwithholding foreign trust withholding certificate on a Form W-8IMY and documentation for its indirect partners, beneficiaries, and owners that are not included in a chapter 4 withholding rate pool.

Responsibilities and documentation for chapters 3 and 4.

Payments made to a QI that does not assume primary chapters 3 and 4 withholding responsibilities are treated as paid to its account holders. However, a QI is not required to provide you with documentation it obtains from its foreign account holders or from U.S. exempt recipients (U.S. persons exempt from Form 1099 reporting). Instead, it provides you with a withholding statement that contains either chapter 3 or chapter 4 withholding rate pool information. A chapter 4 withholding rate pool is a payment of a single type of income that is a withholdable payment that is allocated to payees that are nonparticipating FFIs or recalcitrant account holders (in a single pool). A chapter 4 withholding rate pool also means a payment of a single type of income that is allocated to U.S. payees when the QI provides the certification required on Form W-8IMY for allocating payments to this pool and a withholding statement. A QI may include in its chapter 4 withholding rate pools its direct account holders as well as account holders of another QI or a participating FFI or registered deemed-compliant FFI. With respect to a payment to a foreign person for which no chapter 4 withholding is required, a chapter 3 withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding and that is reported on Form 1042-S under a single chapter 4 exemption code. Payments made to U.S. exempt recipients may also be included in a chapter 3 withholding rate pool to which withholding does not apply.

A QI is required to provide you with information regarding U.S. nonexempt recipients (U.S. persons subject to Form 1099 information reporting) and to provide you withholding rate pool information separately for each such U.S. person unless it has assumed primary Form 1099 reporting and backup withholding responsibility and meets the requirements to include these recipients in a U.S. payee pool. For the alternative procedure for providing withholding rate pool information for U.S. nonexempt persons not included in a chapter 4 withholding rate pool of U.S. payees, see the Instructions for Form W-8IMY.

The withholding statement must:

The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI.

If a QI that is permitted to do so by the QI agreement obtains documentary evidence under the “KYC” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. A QI may rely on a Form W-8 until its validity expires under Regulations section 1.1441-1(e)(4)(ii) and may rely on documentary evidence not obtained pursuant to “KYC” rules until its validity expires under Regulations section 1.6049-5(c).

Primary chapters 3 and 4 withholding responsibilities not assumed.

If a QI does not assume primary chapters 3 and 4 withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign and U.S. payees. Unless the alternative procedure applies and the QI is permitted to include U.S. nonexempt recipients in a chapter 4 withholding rate pool of U.S. payees, the QI must provide you with a separate withholding rate pool for each U.S. nonexempt recipient that must be reported on Form 1099. If you and the QI agree, the QI may apply the alternative procedures for U.S. nonexempt recipients by establishing a single withholding rate pool (not subject to backup withholding) for all U.S. nonexempt recipient account holders for whom the QI is required to report on Form 1099 and has provided you with Forms W-9 prior to you making the reportable payment, or, if applicable, designated broker proceeds to which backup withholding does not apply. The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for each U.S. nonexempt recipient.

Primary chapters 3 and 4 withholding responsibilities assumed.

If you make a payment to a QI that assumes primary chapters 3 and 4 withholding responsibilities (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the chapter 4 withholding rate pools and chapter 3 withholding rate pools, as applicable, and the part of the payment attributable to withholding rate pools for each U.S. nonexempt recipient, unless the alternative procedure applies for Form 1099 reporting and/or backup withholding purposes. The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person.

Primary chapters 3 and 4 withholding responsibilities and Form 1099 reporting and backup withholding responsibilities assumed.

If you make a payment to a QI that assumes primary chapters 3 and 4 withholding responsibilities and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate the payment with valid documentation provided that you receive a valid Form W-8IMY. It is not necessary to associate the payment with any chapter 3 or chapter 4 withholding rate pools.

If you make a payment to a QI that is also a QDD, the QI must provide a withholding statement designating the accounts for which it acts as a QDD even if it assumes primary withholding responsibility for all payments, unless it is acting as a QDD for all payments it receives.

Joint account treatment for chapters 3 and 4.

A QI may apply joint account treatment to a partnership or trust if the partnership or trust meets the following conditions.

For information on these rules, see section 4.05 of the QI agreement in Revenue Procedure 2022-43, available at IRS.gov/irb/2022-52_IRB#RP-2022-43.

Agency option.

A QI may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the QI and to apply the provisions of the QI agreement to its partners, beneficiaries, or owners. A QI and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions.

For information on these rules, see section 4.06 of the QI agreement in Revenue Procedure 2022-43, available at IRS.gov/irb/2022-52_IRB#RP-2022-43.

Form 1042-S reporting.

A QI is generally permitted to report payments made to its foreign account holders on a pooled basis rather than reporting payments to each account holder specifically. Pooled basis reporting is not available for payments to certain account holders, such as nonqualified intermediaries, flow-through entities (discussed earlier) and certain of their account holders and owners, private arrangement intermediaries, and, in certain circumstances, qualified intermediaries, withholding foreign partnerships, and withholding foreign trusts. Notwithstanding these requirements, separate Forms 1042-S are not issued to account holders that the QI is permitted to include in a chapter 4 withholding rate pool.

Collective refund procedures.

A QI may seek a refund of tax withheld under chapters 3 and 4 on behalf of its account holders when the QI has not issued a Form 1042-S to the account holders that received the payment that was subject to overwithholding. The account holders, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the QI. A QI may obtain a refund of tax withheld under chapter 4, however, to the extent permitted under the QI agreement.

Withholding statement.

The NQI or U.S. branch must give you certain information on a withholding statement that is associated with the Form W-8IMY for chapter 3 or 4 purposes. A withholding statement must be updated to keep the information accurate prior to each payment. See, however, Regulations section 1.1441-3(e)(4)(iv)(C) for when a withholding agent may instead accept an alternative withholding statement.

For chapter 4 purposes.

An NQI receiving a withholdable payment must provide a withholding statement which satisfies the requirements of an FFI withholding statement or, if the NQI is not a participating FFI or registered deemed-compliant FFI, a chapter 4 withholding statement.

An FFI withholding statement may allocate the payment to chapter 4 reporting rate pools (as appropriate), including a chapter 4 withholding rate pool for nonparticipating FFIs, recalcitrant account holders (in each class of account holders, as described in the chapter 4 regulations), and, for an NQI that is a participating FFI (including a reporting Model 2 FFI) or a registered deemed-compliant FFI (including a reporting Model 1 FFI), U.S. payees. However, an NQI may allocate a payment of a reportable amount (regardless of whether the payment is a withholdable payment) to a chapter 4 withholding rate pool of U.S. payees when the NQI satisfies the requirements for providing such a pool, including the requirement to certify to its status as a participating FFI, including a reporting Model 2 FFI, or registered deemed-compliant FFI, including a reporting Model 1 FFI.

If the FFI withholding statement instead includes payee-specific information for purposes of chapter 4, it must indicate both the portion of the payment allocated to each payee and each payee’s chapter 4 status. The withholding statement must also identify each intermediary or flow-through entity that is receiving a payment (excluding any intermediary or flow-through entity that is an account holder or interest holder in another QI, WP, or WT), each such entity’s chapter 4 status and GIIN (if applicable) when required for chapter 4 purposes, and the chapter 4 withholding rate pools associated with each such entity.

A chapter 4 withholding statement must contain the name, address, TIN (if any), entity type, chapter 4 status of each payee, the amount allocated to each payee, and a valid withholding certificate or other documentation sufficient to establish each payee’s chapter 4 status for payees that are not included in a chapter 4 withholding rate pool of nonparticipating FFIs. The withholding statement must also identify each intermediary or flow-through entity that is receiving a payment (excluding any intermediary or flow-through entity that is an account holder or interest holder in another QI, WP, or WT), each such entity’s chapter 4 status and GIIN (if applicable), and the chapter 4 withholding rate pools associated with each such entity. An allocation of a payment to an NQI, nonwithholding foreign partnership, or nonwithholding foreign trust of an amount subject to chapter 3 withholding to a chapter 4 withholding rate pool of U.S. payees must identify the payees consistent with the description in Regulations section 1.1471-3(c)(3)(iii)(B)(2)(iii).

For chapter 3 purposes.

The withholding statement should allocate for chapter 3 purposes only the portion of the payment that was not allocated to a chapter 4 withholding rate pool or to a payee identified on a withholding statement to whom withholding was applied under chapter 4. For chapter 3 purposes, a withholding statement must include the information described below for a reportable amount.

Alternative procedure.

Under this alternative procedure, the NQI can give you the information that allocates each payment to each foreign and U.S. exempt recipient or chapter 4 withholding rate pool by January 31 following the calendar year of payment, rather than before the payment is made, as otherwise required. To take advantage of this procedure, the NQI must (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. You must receive the withholding statement with all the required information (other than item 5) before the NQI makes the payment.

.The alternative procedure cannot, however, be used for payments to U.S. nonexempt recipients other than those recipients included in a chapter 4 withholding rate pool of U.S. payees. See Chapter 4, later. Therefore, an NQI must provide you with allocation information for any U.S. nonexempt recipients not included in a chapter 4 withholding rate pool of U.S. payees before the NQI makes a payment..

Pooled withholding information for chapters 3 and 4.

If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, before the payment of a reportable amount. The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment, except as otherwise permitted for chapter 4 purposes, when using this procedure.

Chapter 4.

In the case of a reportable amount that is also a withholdable payment, an NQI may include amounts allocable to a chapter 4 withholding rate pool (other than a chapter 4 withholding rate pool of U.S. payees) and payees subject to chapter 4 withholding for whom the NQI will provide payee-specific information in a 30% rate pool together with payees subject to chapter 3 withholding at the 30% rate. For the amount of the payment allocable to a chapter 4 withholding rate pool of U.S. payees, an NQI may include amounts allocable to the pool with other amounts exempt from withholding (and an NQI may allocate payments to this pool regardless of whether the payment is a withholdable payment) and may not otherwise apply these provisions for payments made to U.S. nonexempt recipients. The NQI must identify prior to the payment each chapter 4 withholding rate pool to be allocated a portion of the payment, in addition to each payee to be allocated the payments that is not included in such a pool. The NQI must then also allocate, by January 31 following the calendar year of the payment, the portion of the payment to each such pool in addition to allocating the payment to each payee that is not included in the pool.

Failure to provide allocation information.

If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool or chapter 4 withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules. An NQI is deemed to have failed to provide specific allocation information if it does not give you such information for more than 10% of any one withholding rate pool.

Responsibilities of the WP.

The WP must withhold under chapter 3 or 4 on the date it makes a distribution of a withholdable payment or an amount subject to chapter 3 withholding to a direct foreign partner based on the Form W-8 or W-9 it receives from its partners. If the partner's distributive share has not been distributed, the WP must withhold on the partner's distributive share on the earlier of the date that the partnership must mail or otherwise provide to the partner a Schedule K-1 (Form 1065) or the due date for furnishing the statement (whether or not the WP is required to furnish the statement).

The WP may determine the amount of withholding based on a reasonable estimate of the partner's distributive share of income subject to withholding for the year. The WP must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the earlier of the due date (including extensions) for filing the WP's Form 1042-S or the date the WP actually issues Form 1042-S for the calendar year, the WP may withhold and report any adjustments required by correcting the information for the following calendar year.

Form 1042 filing.

The WP must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WP must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments.

Form 1042-S reporting.

The WP can elect to report payments made to its foreign direct partners on a pooled basis for chapter 3 purposes rather than reporting payments to each direct partner in addition to reporting payments in a chapter 4 withholding rate pool to the extent the WP is permitted to do so based on its chapter 4 status. A WP can treat as its direct partners those indirect partners of the WP for which it applies joint account treatment or the agency option (described later). A WP must otherwise issue a Form 1042-S to each partner to the extent it is required to do so under the WP agreement. You may issue a single Form 1042-S for all payments you make to a WP other than payments for which the entity does not act as a WP. You may, however, have Form 1099 requirements for certain indirect partners of a WP that are U.S. nonexempt recipients.

Collective refund procedures.

A WP may seek a refund of tax withheld under chapters 3 and 4 on behalf of its partners when the WP has not issued a Form 1042-S to the partners that received the payment that was subject to overwithholding. The partners, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the WP. A WP may obtain a refund of tax withheld under chapter 4 to the extent permitted under the WP agreement.

Reporting of U.S. partners.

A WP must report its U.S. partners on Schedule K-1 to the extent required under the WP agreement. If the WP is an FFI, it is also required to report each of its U.S. accounts (or U.S. reportable accounts if a reporting Model 1 FFI) on Form 8966 consistent with its chapter 4 requirements or the requirements of an IGA. If the WP is an NFFE, the WP must file Form 8966 to report any partner that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) if the NFFE is the beneficial owner of a withholdable payment received by the WP. The WP must also file a Form 8966 to report withholdable payments made to a pass-through partner for which the WP acts under the WP agreement that provides information on an account holder (or interest holder) that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) and that is the beneficial owner of the withholdable payment received by the WP, unless the pass-through partner certifies to the WP that it is reporting on the account holder (or interest holder) pursuant to its U.S. account reporting requirements. The preceding sentence applies with respect to a pass-through partner to which the WP applies the agency option or which has partners, beneficiaries, or owners that are indirect partners of the WP.

Joint account treatment.

Under special procedures provided in the WP agreement, a WP may apply joint account treatment to a partnership or trust that is a direct partner of the WP. A WP that applies the joint account option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WP distributes to, or includes in the distributive share of, a foreign direct partner. These rules only apply to a partnership or trust that meets the following conditions.

For more information on applying these rules, see section 9.01 of the WP agreement in section 6 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

Agency option.

A WP may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the WP and to apply the provisions of the WP agreement to its partners, beneficiaries, or owners. A WP that applies the agency option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WP distributes to, or includes in the distributive share of, a foreign direct partner. A WP and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions.

For more information on applying these rules, see section 9.02 of the WP agreement in section 6 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

WP acting for indirect partners.

A WP may act as a WP with respect to an indirect partner of the WP that is not a U.S. nonexempt recipient. However, a WP may act as a WP for an indirect partner that is a U.S. nonexempt recipient if the indirect partner is included in a pass-through partner’s chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. A WP acting as a WP for an indirect partner is not required to forward to its withholding agent the documentation and the withholding statement of the pass-through partner and indirect partner that the WP would have otherwise been required to provide under the requirements of a nonwithholding foreign partnership. See Not acting as a WP, later. However, a WP must provide the withholding agent with documentation and any other information from any pass-through partner whose direct or indirect partner, beneficiary, or owner is a U.S. nonexempt recipient unless the recipient is included in the pass-through partner’s chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees.

If a WP is making a payment that is a withholdable payment, the pass-through partner’s withholding statement must meet the requirements of Regulations section 1.1471-3(c)(3)(iii)(B). The pass-through partner’s withholding statement must include the account holders or interest holders of the pass-through partner in chapter 4 withholding rate pools (to the extent permitted), and, for an amount subject to chapter 3 withholding that is not a withholdable payment or is a withholdable payment for which chapter 4 withholding is not required, valid documentation provided by the account holders or interest holders of the pass-through partner that are not themselves QIs or flow-through entities.

For more information on applying these rules, see section 9.03 of the WP agreement in section 6 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

Not acting as a WP.

A foreign partnership that is not acting as a WP is a nonwithholding foreign partnership. This occurs if a WP is not acting in that capacity for some or all of the amounts it receives from you.

You must treat payments made to a nonwithholding foreign partnership as made to the partners of the partnership. The partnership must provide you with a Form W-8IMY (with Part VIII completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the partners, and the information shown earlier under Withholding statement under Nonqualified Intermediary (NQI).

Responsibilities of a WT.

The WT must withhold on the date it makes a distribution of a withholdable payment or an amount subject to chapter 3 withholding to a direct foreign beneficiary or owner. If the beneficiary's or owner's distributive share has not been distributed, the WT must withhold on the beneficiary's or owner's distributive share on the earlier of the date that the trust must mail or otherwise provide to the beneficiary or owner the statement required under section 6048(b) or the due date for furnishing the statement (whether or not the WT is required to furnish the statement).

The WT may determine the amount of withholding based on a reasonable estimate of the beneficiary's or owner's distributive share of income subject to withholding for the year. The WT must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the earlier of the due date (including extensions) for filing the WT's Form 1042-S or the date the WT actually issues Form 1042-S for the calendar year, the WT may withhold and report any adjustments required by correcting the information for the following calendar year.

Form 1042 filing.

The WT must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WT must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments.

Form 1042-S reporting.

The WT can elect to report payments made to its foreign direct beneficiaries or owners on a pooled basis for chapter 3 purposes rather than reporting payments made to each foreign direct beneficiary or owner in addition to reporting payments in a chapter 4 withholding rate pool to the extent the WT is permitted to do so based on its chapter 4 status. A WT can treat as its direct beneficiaries or owners those indirect beneficiaries or owners of the WT for which it applies joint account treatment or the agency option (described later). A WT must otherwise issue a Form 1042-S to each beneficiary or owner to the extent it is required to do so under the WT agreement. You may issue a single Form 1042-S for all payments you make to a WT other than payments for which the entity does not act as a WT. You may, however, have Form 1099 requirements for certain indirect beneficiaries or owners of a WT that are U.S. nonexempt recipients.

Collective refund procedures.

A WT may seek a refund of tax withheld under chapters 3 and 4 on behalf of its beneficiaries or owners when the WT has not issued a Form 1042-S to the beneficiaries or owners that received the payment that was subject to overwithholding. The beneficiaries or owners, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the WT. A WT may obtain a refund of tax withheld under chapter 4 to the extent permitted under the WT agreement.

Reporting of U.S. beneficiaries or owners.

If the WT is a grantor trust with U.S. owners, the WT is required to file Form 3520-A, and to provide statements to a U.S. owner, as well as each U.S. beneficiary who is not an owner and receives a distribution. If the WT is an FFI, it is required to report each of its U.S. accounts (or U.S. reportable accounts if a reporting Model 1 FFI) on Form 8966 consistent with its FATCA requirements or the requirements of an IGA. If the WT is an NFFE, the WT must file Form 8966 to report any beneficiary or owner that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) if the NFFE is the beneficial owner of a withholdable payment received by the WT.

The WT must also file a Form 8966 to report withholdable payments made to a pass-through beneficiary or owner for which the WT acts under the WT agreement that provides information on an account holder (or interest holder) that is an NFFE (other than an excepted NFFE) with one or more substantial U.S. owners (or, under an applicable IGA, controlling persons that are specified U.S. persons) and that is the beneficial owner of the withholdable payment received by the WT, unless the pass-through beneficiary or owner certifies to the WT that it is reporting on the account holder (or interest holder) pursuant to its U.S. account reporting requirements. The preceding sentence applies with respect to a pass-through beneficiary or owner to which the WT applies the agency option or which has partners, beneficiaries, or owners that are indirect beneficiaries or owners of the WT. In addition, if the WT is not a participating FFI, a registered deemed-compliant FFI, or a registered deemed-compliant Model 1 IGA FFI and is not required to report with respect to a U.S. beneficiary of the WT on Form 3520-A, then the WT must report with respect to such beneficiary on Form 8966, as required in the WT agreement. A beneficiary for this purpose means a beneficiary that receives a distribution from the WT during the year or that is required to include an amount in gross income with respect to the WT under sections 652(a) or 662(a).

Joint account treatment.

Under special procedures provided in the WT agreement, a WT may apply joint account treatment to a partnership or trust that is a direct beneficiary or owner of the WT. A WT that applies the joint account option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. These rules only apply to a partnership or trust that meets the following conditions.

For more information on applying these rules, see section 9.01 of the WT agreement found in section 7 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

Agency option.

A WT may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the WT and to apply the provisions of the WT agreement to its partners, beneficiaries, or owners. A WT that applies the agency option must elect to perform pool reporting for amounts subject to chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no chapter 4 withholding is required and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. A WT and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions.

For more information on applying these rules, see section 9.02 of the WT agreement in section 7 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

WT acting for indirect beneficiaries or owners.

A WT may act as a WT with respect to an indirect beneficiary or owner of the WT that is not a U.S. nonexempt recipient. However, a WT may act as a WT for an indirect beneficiary or owner that is a U.S. nonexempt recipient if the indirect beneficiary or owner is included in a pass-through beneficiary’s or owner’s chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. A WT acting as a WT for an indirect beneficiary or owner is not required to forward to its withholding agent the documentation and the withholding statement of the pass-through beneficiary or owner and indirect beneficiary or owner that the WT would have otherwise been required to provide under the requirements of a nonwithholding foreign trust. See Not acting as a WT, later. However, a WT must provide the withholding agent with documentation and any other information from any pass-through beneficiary or owner whose direct or indirect partner, beneficiary, or owner is a U.S. nonexempt recipient unless the recipient is included in the pass-through beneficiary’s or owner’s chapter 4 withholding rate pool of recalcitrant account holders or U.S. payees. If a WT is making a payment that is a withholdable payment, the pass-through beneficiary’s or owner’s withholding statement must meet the requirements of Regulations section 1.1471-3(c)(3)(iii)(B). The pass-through beneficiary’s or owner’s withholding statement must include the account holders or interest holders of the pass-through beneficiary or owner in chapter 4 withholding rate pools (to the extent permitted), and, for an amount subject to chapter 3 withholding that is not a withholdable payment or is a withholdable payment for which chapter 4 withholding is not required, valid documentation provided by the account holders or interest holders of the pass-through beneficiary or owner that are not themselves QIs or flow-through entities.

For more information on applying these rules, see section 9.03 of the WT agreement in section 7 of Revenue Procedure 2017-21, available at IRS.gov/irb/2017-06_IRB#RP-2017-21.

Not acting as a WT.

A foreign trust that is not acting as a WT is a nonwithholding foreign trust. This occurs if a WT is not acting in that capacity for some or all of the amounts it receives from you.

In most cases, you must treat payments made to a nonwithholding foreign trust as made to the beneficiaries of a simple trust or the owners of a grantor trust. The trust must provide you with a Form W-8IMY (with Part VIII completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the beneficiaries or owners, and the information shown earlier under Withholding statement under Nonqualified Intermediary (NQI).

Limits on reason to know for preexisting obligations.

With respect to a preexisting obligation (that is, an obligation, including an account, held by an individual that is outstanding on June 30, 2014, or an obligation, including an account, held by an entity that is opened, executed, or issued before January 1, 2015), if you have documented the foreign status of an account holder for purposes of chapter 3 or 61 prior to July 1, 2014, you may continue to rely on that documentation. In addition, if you make a payment to a new entity account holder that you treat as a preexisting entity account under Notice 2014-33, 2014-20 I.R.B. 1006, available at IRS.gov/irb/2014-21_IRB#NOT-2014-33, you may apply the standards of knowledge in Regulations sections 1.1441-7(b)(5) and (b)(8), that were applicable prior to the issuance of the temporary regulations. See Notice 2014-59, 2014-44 I.R.B. 747, available at IRS.gov/irb/2014-44_IRB#NOT-2014-59.

However, if you review documentation for an individual account holder claiming foreign status that contains a U.S. place of birth or if you are notified of a change in circumstances, the obligation will be treated as having a change in circumstances as of the date you review the documentation or receive the notification, and you will then have reason to know that the documentation is unreliable or incorrect. However, if you are reviewing documentation provided by an entity before January 1, 2015, you will not be required to treat the additional U.S. indicia added to Regulations section 1.1441-7(b) by the temporary regulations as a change in circumstances. See Notice 2014-59, for more information.

Establishment of foreign status by certain withholding agents.

You have reason to know that a Form W-8BEN or W-8BEN-E is unreliable or incorrect to establish a direct account holder's status as a foreign person if:

You may, however, rely on a Form W-8 as establishing the account holder's foreign status if any of the following apply.

Claim of reduced rate of withholding under treaty by certain withholding agents.

You have reason to know that a Form W-8BEN or W-8BEN-E provided by a direct account holder to claim a reduced rate of withholding under a treaty is unreliable or incorrect for purposes of establishing the account holder's residency in a treaty country if:

You may, however, rely on a Form W-8 as establishing an account holder's claim of a reduced rate of withholding under a treaty if any of the following apply.

Hold mail instruction.

An address that is provided subject to an instruction to hold all mail to that address is not a permanent residence address such that you may not rely upon the Form W-8. However, the address can be used as a permanent residence address if the person has provided you with the documentary evidence that is permitted under Regulations section 1.1441-1(c)(38)(ii). If, after a Form W-8 is provided, a person’s permanent residence address is subsequently subject to a hold mail instruction, this is a change in circumstances requiring the person to provide the documentary evidence described in the preceding sentence in order to use the address as a permanent residence address.

Establishment of foreign status.

You have reason to know that documentary evidence is unreliable or incorrect to establish a direct account holder's status as a foreign person if any of the following apply.

You may, however, rely on documentary evidence as establishing an account holder's foreign status if any of the following apply.

Claim of reduced rate of withholding under treaty.

You have reason to know that documentary evidence provided by a direct account holder to claim a reduced rate of withholding under a treaty is unreliable or incorrect for purposes of establishing the account holder's residency in a treaty country if:

You may, however, rely on documentary evidence as establishing an account holder's claim of a reduced rate of withholding under a treaty if any of the following apply.

Withholding statement.

You must review the withholding statement provided with Form W-8IMY and may not rely on information in the statement to the extent the information does not support the claims made for a payee. You may not treat a payee as a foreign person if a U.S. address is provided for the payee. You may not treat a person as a resident of a country with which the United States has an income tax treaty if the address for the person is outside the treaty country.

You may, however, treat a payee as a foreign person and may treat a foreign person as a resident of a treaty country if the withholding statement is accompanied by a valid withholding certificate and documentary evidence or a reasonable explanation is provided, by the NQI, flow-through entity, or U.S. branch supporting the payee’s foreign status or residency in a treaty country.

Withholding certificate.

If you receive a Form W-8 for a payee in association with a Form W-8IMY, you must review each Form W-8 and verify that the information is consistent with the information on the withholding statement. If there is a discrepancy, you may rely on the Form W-8, if valid, and instruct the NQI, flow-through entity, or U.S. branch to correct the withholding statement, or, alternatively, you may apply the presumption rules, discussed later in Presumption Rules, to the payee.

If you choose to rely on the withholding certificate, you must, in addition to instructing the NQI, flow-through entity, or U.S. branch to correct the withholding statement, instruct the NQI, flow-through entity, or U.S. branch to confirm that it does not know or have reason to know that the withholding certificate is unreliable or inaccurate.

Documentary evidence.

If you receive documentary evidence for a payee in association with a Form W-8IMY, you must review the documentary evidence provided by the NQI, flow-through entity, or U.S. branch to determine that there is no obvious indication that the payee is a U.S. person subject to Form 1099 reporting or that the documentary evidence does not establish the identity of the person who provided the documentation (for example, the documentary evidence does not appear to be an identification document).

Branches and disregarded entities.

If you make a withholdable payment to a branch of, or an entity that is disregarded as an entity separate from, a participating FFI or registered deemed-compliant FFI located outside of the FFI's country of residence or organization, the GIIN you must verify is the GIIN of the branch or disregarded entity receiving the payment. You must identify a GIIN associated with a disregarded entity to the extent provided in the Instructions for Form W-8BEN-E or the Instructions for Form W-8IMY.

You will have reason to know that a withholdable payment is made to a branch (including a disregarded entity) of a participating FFI or registered deemed-compliant FFI that is not itself a participating FFI or registered deemed-compliant FFI when you are directed to make the payment to an address in a jurisdiction other than that of the participating FFI or registered deemed-compliant FFI (or branch of, or disregarded entity wholly owned by, such FFI) that is identified as the FFI (or branch of, or disregarded entity wholly owned by, such FFI) that is supposed to receive the payment and for which the FFI's GIIN is not confirmed, as described in the preceding paragraphs.

The preceding sentence does not apply to an FFI that is an investment entity. If an FFI (other than an investment entity) directs you to make the payment to an account held by the FFI and maintained by another financial institution, the FFI must provide to you a statement, in writing, that the FFI is not directing the payment to any branch of such FFI that is not a participating FFI or a registered deemed-compliant FFI.

Sponsored, closely held investment vehicles.

If you make a withholdable payment to a certified deemed-compliant FFI that is a sponsored, closely held investment vehicle, you must obtain a GIIN for the sponsoring entity and verify it against the published IRS FFI list.

In general.

If you receive documentation for a payee of a withholdable payment through one or more intermediaries or flow-through entities, you must, in addition to determining each such entity’s chapter 4 status when required for chapter 4 purposes, review all documentation obtained with respect to the payee. Under certain circumstances, you may rely on a withholding certificate with an electronic signature provided by an account holder that is an NQI, when you are permitted to do so under Regulations section 1.1441-1(e)(4)(i)(B). When withholding under chapter 4 is not applied based on the chapter 4 status of an intermediary or flow-through entity, you are not required to obtain documentation for a payee through an intermediary or flow-through entity that is a QI, WP, or WT, or a payee that is included in a chapter 4 withholding rate pool of U.S. payees.

Withholding statement.

You must review the withholding statement provided and may not rely on information in the statement to the extent the information does not support the claims made regarding the chapter 4 status of the payee. You may not treat a person as a foreign person if a U.S. address is provided, unless the withholding statement is accompanied by a valid withholding certificate and documentary evidence establishing foreign status.

Withholding certificate.

You must review each withholding certificate, written statement (as permitted for chapter 4 purposes with respect to certain payments to entities), or documentary evidence, and must verify that the information is consistent with the information on the withholding statement. If there is a discrepancy, you may rely on the documentation provided such documentation is valid and the intermediary or flow-through entity does not indicate that the documentation is unreliable or incorrect, or, alternatively, you may apply the presumption rules. If you choose to rely on the documentation, you must instruct the intermediary or flow-through entity to correct the withholding statement and confirm that the intermediary or flow-through entity does not know or have reason to know that the documentation is unreliable or incorrect. See Regulations section 1.1471-3(d) for when a written statement is permitted for chapter 4 purposes.

Documentation from participating FFIs and registered deemed-compliant FFIs.

If you receive documentation for a payee of a withholdable payment through a participating FFI or registered deemed-compliant FFI that is an intermediary or flow-through entity receiving the payment, you may rely on the chapter 4 status provided in the withholding statement, including a chapter 4 status determined under the requirements of (and documentation or information that is publicly available that determines the chapter 4 status of the payee permitted under) an applicable IGA, provided that you have the information necessary to report on Form 1042-S, unless you have information that conflicts with the chapter 4 status provided. If underlying documentation is provided for the payee and information in the documentation or in your records conflicts with the chapter 4 status claimed, you have reason to know that the chapter 4 status claimed is unreliable or incorrect. However, you are not required to verify the information contained in the documentation that is not facially incorrect, and you are generally not required to obtain supporting documentation for the payee. You may determine the recipient code of a payee for chapter 4 purposes (for filing Form 1042-S) that is not identified on a withholding statement when you are able to do so based on other information included on or with the withholding statement or in your records with respect to the payee.

Preexisting obligation of entities.

If you make a withholdable payment with respect to a preexisting obligation to an entity, the scope of review is limited with respect to the time in which you must determine the entity’s chapter 4 status. For more information, see Regulations section 1.1471-3(e)(4)(vii) or, if you are a reporting Model 1 FFI or a reporting Model 2 FFI, the requirements of the applicable IGA.

Interest paid by U.S. obligors—general (Income Code 1).

With specific exceptions, such as portfolio interest (for purposes of chapter 3), you must withhold on interest paid or credited on bonds, debentures, notes, open account indebtedness, governmental obligations, certain deferred payment arrangements (as provided in section 483), or other evidences of indebtedness of U.S. obligors. U.S. obligors include the U.S. Government or its agencies or instrumentalities, any U.S. citizen or resident, any U.S. corporation, and any U.S. partnership.

If, in a sale of a corporation's property, payment of the bonds or other obligations of the corporation is assumed by the buyer, that buyer, whether an individual, partnership, or corporation, must deduct and withhold the taxes that would be required to be withheld by the selling corporation as if there had been no sale or transfer. Also, if interest coupons are in default, the tax must be withheld on the gross amount of interest whether or not the payment is a return of capital or the payment of income.

A resident alien paying interest on a margin account maintained with a foreign brokerage firm must withhold from the interest whether the interest is paid directly or constructively.

Interest on bonds of a U.S. corporation paid to a foreign corporation not engaged in a trade or business in the United States is subject to withholding even if the interest is guaranteed by a foreign corporation.

Domestic corporations must withhold on interest credited to foreign subsidiaries or foreign parents.

For withholding under chapter 4 on the interest payments described in this section, see the definition of withholdable payments in Regulations section 1.1473-1(a).

Original issue discount (Income Code 30).

Original issue discount paid on the redemption of an obligation is subject to chapter 3 withholding and is a withholdable payment (except when paid with respect to a grandfathered obligation). Original issue discount paid as part of the purchase price of an obligation sold or exchanged, other than in a redemption, is not subject to chapter 3 withholding unless the purchase is part of a plan the principal purpose of which is to avoid tax and the withholding agent has actual knowledge or reason to know of the plan. However, such original issue discount is a withholdable payment (except when paid with respect to a grandfathered obligation). Withholding is required by a person other than the issuer of an obligation (or the issuer's agent).

The original issue discount that is subject to chapter 3 withholding and is a withholdable payment (except when paid with respect to a grandfathered obligation) is the taxable amount of original issue discount. The taxable amount for both chapters 3 and 4 withholding purposes is the original issue discount that accrued while the obligation was held by the foreign beneficial owner up to the time the obligation was sold or exchanged or a payment was made, reduced by any original issue discount that was previously taxed. If a payment was made, the tax due on the original issue discount may not exceed the payment reduced by the tax imposed on the part of the payment that is qualified stated interest.

If you cannot determine the taxable amount, you must withhold on the entire amount of original issue discount accrued from the date of issue until the date of redemption (or sale or exchange, if subject to chapter 3 withholding or a withholdable payment) determined on the basis of the most recently published Pub. 1212.

For more information on original issue discount, see Pub. 550.

Portfolio interest exempt from chapter 3 withholding.

Interest and original issue discount that qualifies as portfolio interest is exempt from chapter 3 withholding. However, these amounts are not exempt from withholding under chapter 4 when the interest is a withholdable payment, unless an exception from chapter 4 withholding applies. To qualify as portfolio interest, the interest must be paid on obligations issued after July 18, 1984, and otherwise subject to chapter 3 withholding.

Obligations in registered form.

Portfolio interest includes interest paid on an obligation that is in registered form, and for which you have received documentation that the beneficial owner of the obligation is not a U.S. person.

Generally, an obligation is in registered form if (i) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new holder, (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book entry system maintained by the issuer or its agent, or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be transferred both by surrender and reissuance and through a book entry system.

An obligation that would otherwise be considered to be in registered form is not considered to be in registered form as of a particular time if it can be converted at any time in the future into an obligation that is not in registered form, except as otherwise provided in Notice 2012-20, 2012-13 I.R.B. 574, available at IRS.gov/irb/2012-13_IRB#NOT-2012-20, as described in the following section.

Dematerialized book-entry systems and effectively immobilized obligations.

An obligation will be considered to be in registered form if it is issued through either a dematerialized book entry system maintained by a clearing organization (or agent thereof) or a clearing system in which the obligation (including a global obligation in bearer form) is effectively immobilized. See Notice 2012-20, amplified by Notice 2013-43, 2013-31 I.R.B. 113, available at IRS.gov/irb/2013-31_IRB#NOT-2013-43.

Under dematerialized book-entry systems, bonds are required to be represented only by book entries, and no physical certificates are issued or transferred. The bonds are transferred only by book entries.

An obligation will be considered to be effectively immobilized if (1) it is represented by one or more global securities in physical form that are issued to and held by a clearing organization (or by a custodian or depository acting as an agent of the clearing organization) for the benefit of purchasers and under arrangements that prohibit transfer except to a successor clearing organization subject to the same terms, and (2) beneficial interest in the underlying obligation is transferable only through a book-entry system maintained by the clearing organization or its agent.

These bonds are considered to be in registered form if the holder may only obtain a physical certificate in bearer form when (1) the clearing organization that maintains the book-entry system goes out of business without a successor, (2) the issuer defaults, or (3) definitive securities are issued at the issuer’s request upon a change in tax law adverse to the issuer. See Notice 2012-20 and proposed regulations in 82 FR 43720, for more information on registered form requirements.

Foreign-targeted registered obligations.

A registered bond issued after March 18, 2012, and before January 1, 2016, will also be considered to be in registered form if it is targeted to foreign markets, and portfolio interest treatment may apply even when you do not receive documentation regarding the beneficial owner of the bond.

If the registered obligation is not targeted to foreign markets, you must receive documentation on which you may rely to treat the payee as a foreign person that is the beneficial owner of the interest. A registered obligation is targeted to foreign markets if it is sold (or resold in connection with its original issuance) only to foreign persons or to foreign branches of U.S. financial institutions in accordance with procedures similar to those provided in Regulations section 1.163-5(c)(2)(i). However, the procedure that requires the obligation to be offered for sale (or resale) only outside the United States does not apply if the registered obligation is offered for sale through a public auction. Also, the procedure that requires the obligation to be delivered outside the United States does not apply if the obligation is considered registered because it may be transferred only through a book-entry system and the obligation is offered for sale through a public auction. The documentation needed depends on whether the interest is paid to a financial institution, a member of a clearing organization, or to some other foreign person. See Notice 2012-20 and Regulations section 1.871-14(e) for more information on foreign-targeted registered obligations.

Obligations not in registered form and obligations issued before March 19, 2012.

For obligations issued before March 19, 2012, interest on an obligation that is not in registered form (bearer obligation) is portfolio interest if the obligation is foreign targeted. A bearer obligation is foreign targeted if:

Documentation is not required for interest on bearer obligations to qualify as portfolio interest. In some cases, however, you may need documentation for purposes of Form 1099 reporting and backup withholding.

Interest on such obligations is not a withholdable payment under chapter 4, except when the instrument is materially modified after March 18, 2012.

Interest that does not qualify as portfolio interest.

Payments to certain persons and payments of contingent interest do not qualify as portfolio interest. You must withhold at the statutory rate on such payments unless some other exception, such as a treaty provision, applies and withholding under chapter 4 does not apply.

Contingent interest.

Portfolio interest generally does not include contingent interest. Contingent interest is interest that is determined by reference to any of the following.

The term “related person” is defined in section 871(h)(4)(B) .

10% owners.

Interest paid to a foreign person that owns 10% or more of the total combined voting power of all classes of stock of a corporation, or 10% or more of the capital or profits interest in a partnership, that issued the obligation on which the interest is paid is not portfolio interest. To determine 10% ownership, see Regulations section 1.871-14(g).

Banks.

Except in the case of interest paid on an obligation of the United States, interest paid to a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of the bank's trade or business does not qualify as portfolio interest.

Controlled foreign corporations.

Interest paid to a controlled foreign corporation from a person related to the controlled foreign corporation is not portfolio interest.

Reduced rate or exemption from chapter 3 withholding for interest on real property mortgages (Income Code 2).

Certain treaties permit a reduced rate or exemption for interest paid or credited on real property mortgages. This is interest paid on any type of debt instrument that is secured by a mortgage or deed of trust on real property located in the United States, regardless of whether the mortgagor (or grantor) is a U.S. citizen or a U.S. business entity.

REMIC excess inclusions.

A domestic partnership must separately state a partner's allocable share of REMIC taxable income or net loss and the excess inclusion amount on Schedule K-1 (Form 1065). If the partnership allocates all or some part of its allocable share of REMIC taxable income to a foreign partner, the partner must include the partner's allocated amount in income as if that amount was received on the earlier of the following dates.

For purposes of item (2), the disposition may occur as a result of:

The partnership must withhold tax on the part of the REMIC amount that is an excess inclusion. Excess inclusion income is treated as income from sources in the United States and is not eligible for any reduction in withholding tax (by treaty or otherwise). It is also a withholdable payment for chapter 4 purposes.

An excess inclusion allocated to the following foreign persons must be included in that person's income at the same time as other income from the entity is included in income.

The entity must withhold on the excess inclusion.

For information on the taxation and reporting of excess inclusion income by REITs, RICs, and other pass-through entities, see Notice 2006-97, 2006-46 I.R.B. 904, available at IRS.gov/irb/2006-46_IRB#NOT-2006-97.

Reduced rate or exemption from chapter 3 withholding for interest paid to controlling foreign corporations (Income Code 3).

A treaty may permit a reduced rate or exemption for interest paid by a domestic corporation to a controlling foreign corporation. The interest may be on any type of debt, including open or unsecured accounts payable, notes, certificates, bonds, or other evidences of indebtedness.

Reduced rate or exemption from chapter 3 withholding for interest paid by foreign corporations (Income Code 4).

If a foreign corporation is engaged in a U.S. trade or business, any interest paid by the foreign corporation's trade or business in the United States (branch interest) is subject to chapter 3 withholding as if paid by a domestic corporation (without considering the “payer having income from abroad” exception) and is a withholdable payment. As a result, the interest paid to foreign payees is generally subject to chapter 3 withholding and withholding may apply under chapter 4 absent an applicable withholding exception. In addition, if “allocable interest” exceeds the branch interest paid, the excess interest is also subject to tax and reported on the foreign corporation's income tax return, Form 1120-F. See the Instructions for Form 1120-F for more information.

If there is no treaty provision that reduces the rate of withholding on branch interest, you must withhold tax under chapter 3 at the statutory rate of 30% on the interest paid by a foreign corporation's U.S. trade or business and you must withhold under chapter 4 when otherwise applicable and without regard to a treaty provision.

Interest on deposits (Income Code 29).

Foreign persons are not subject to chapter 3 withholding on interest that is not connected with a U.S. trade or business if it is from:

Deposits include certificates of deposit, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements.

You may have to file Form 1042-S to report certain payments of interest on deposits. See Deposit interest paid to certain nonresident alien individuals under Returns Required, later. You may also have to file Form 1042-S when the deposit interest is a withholdable payment to which withholding applies (or was applied) to chapter 4.

Obligations issued before August 10, 2010.

Interest received from a resident alien individual or a domestic corporation is not subject to chapter 3 withholding and is not a withholdable payment if the interest meets all of the following requirements.

Interest from foreign business arrangements.

In certain cases, interest received from a domestic payer, most of whose gross income is active foreign business income, is not subject to chapter 3 withholding and is not a withholdable payment.

Active foreign business income is gross income which is:

Corporations existing on January 1, 2011.

Certain interest received from a domestic corporation that is an existing 80/20 company is not subject to withholding. An existing 80/20 company must meet all of the following requirements.

Transitional rule for active foreign business income.

In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes 1 or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.

A foreign beneficial owner does not need to provide a Form W-8 or documentary evidence for this exception. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.

Sales of bonds between interest dates.

Amounts paid as part of the purchase price of an obligation sold or exchanged between interest payment dates is not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. This does not apply if the sale or exchange is part of a plan the principal purpose of which is to avoid tax and you have actual knowledge or reason to know of the plan. The exemption from chapter 3 withholding and from withholdable payments applies even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.

Short-term obligations.

Interest and original issue discount paid on an obligation that is payable 183 days or less from the date of its original issue (without regard to the period held by the taxpayer) that satisfy other requirements intended to ensure that the debt is not held by a U.S. nonexempt person are not subject to chapter 3 withholding. In addition, such a payment is not a withholdable payment. These exemptions apply even if you do not have any documentation from the payee. However, documentation may be required for purposes of Form 1099 reporting and backup withholding.

Income from U.S. Savings Bonds of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands.

Interest from a Series E, Series EE, Series H, or Series HH U.S. Savings Bond is not subject to chapter 3 withholding if the nonresident alien individual acquired the bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.

Dividends paid by U.S. corporations—general (Income Code 6).

This category includes all distributions of domestic corporations (other than dividends qualifying for direct dividend rate—Income Code 7).

A corporation making a distribution with respect to its stock, or any intermediary making a payment of such a distribution, is required to withhold on the entire amount of the distribution at the rate applicable under chapter 3 when withholding under chapter 4 does not apply. However, a distributing corporation or intermediary may elect to not withhold on the part of the distribution that:

The election is made by actually reducing the amount of withholding at the time the distribution is paid.

Dividends paid by a QIE (Income Code 24).

A QIE is:

A distribution by a QIE to a nonresident alien or a foreign corporation is treated as a dividend and is not subject to withholding under section 1445 as a gain from the sale or exchange of a USRPI if:

Certain distributions by a REIT may be treated as a dividend and are not subject to withholding under section 1445 as a gain from the sale or exchange of a USRPI. See Qualified investment entities (QIEs) under U.S. Real Property Interest, later.

Dividends paid by a domestic corporation (an existing “80/20” company).

The active foreign business percentage of any dividend paid by a domestic corporation that is an existing 80/20 company is not subject to withholding. A domestic corporation is an existing 80/20 company if it satisfies all of the following.

Transitional rule for item (2).

In most cases, the domestic corporation determines its active foreign business income by combining its income and the income of any subsidiary in which it owns, directly or indirectly, 50% or more of the stock. However, if the testing period includes 1 or more tax years beginning before January 1, 2011, the corporation can use only its gross income for any tax year beginning before January 1, 2011, and will meet the 80% test if the weighted average percentage of active foreign business income is more than 80%.

The active foreign business percentage is found by dividing the corporation’s active foreign business income for the testing period by the corporation’s total gross income for that period. The testing period is the 3 tax years before the year in which the dividends are declared (or shorter period if the corporation was not in existence for 3 years). If the corporation has no gross income for that 3-year period, the testing period is the tax year in which the dividend is paid.

Consent dividends.

If you receive a Form 972, Consent of Shareholder To Include Specific Amount in Gross Income, from a nonresident alien individual or other foreign shareholder who agrees to treat the amount as a taxable dividend, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend actually had been paid.

Interest-related dividends and short-term capital gain dividends received from mutual funds.

Certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other RIC are exempt from chapter 3 withholding.

Dividends qualifying for direct dividend rate (Income Code 7).

A treaty may reduce the rate of withholding on dividends from that which generally applies under the treaty if the shareholder owns a certain percentage of the voting stock of the corporation when withholding under chapter 4 does not apply. In most cases, this preferential rate applies only if the shareholder directly owns the required percentage, although some treaties permit the percentage to be met by direct or indirect ownership. The preferential rate may apply to the payment of a deemed dividend under section 304(a)(1). Under some treaties, the preferential rate for dividends qualifying for the direct dividend rate applies only if no more than a certain percentage of the paying corporation's gross income for a certain period consists of dividends and interest other than dividends and interest from subsidiaries or from the active conduct of a banking, financing, or insurance business. A foreign person should claim the direct dividend rate by filing the appropriate Form W-8.

Consent dividends.

If you receive a Form 972 from a foreign shareholder qualifying for the direct dividend rate, you must pay and report on Form 1042 and Form 1042-S any withholding tax you would have withheld if the dividend actually had been paid.

Dividends paid by foreign corporations (Income Code 8).

Dividends paid by a foreign corporation generally are not subject to chapter 3 withholding and are not withholdable payments. This exception does not require a Form W-8. However, a Form W-8 may be required for purposes of Form 1099 reporting and backup withholding.

The payment to a foreign corporation by a foreign corporation of a deemed dividend under section 304(a)(1) is subject to chapter 3 withholding and may be a withholdable payment except to the extent it can be clearly determined to be from foreign sources.

Corporation subject to branch profits tax.

If a foreign corporation is subject to branch profits tax for any tax year, withholding is not required on any dividends paid by the corporation out of its earnings and profits for that tax year. Dividends may be subject to withholding if they are attributable to any earnings and profits when the branch profits tax is prohibited by a tax treaty.

A foreign person may claim a treaty benefit on dividends paid by a foreign corporation to the extent the dividends are paid out of earnings and profits in a year in which the foreign corporation was not subject to the branch profits tax. However, you may apply a reduced rate of withholding under an income tax treaty only under rules similar to the rules that apply to treaty benefits claimed on branch interest paid by a foreign corporation. You should check the specific treaty provision.

Dividends paid to Puerto Rican corporation.

For chapter 3 purposes, the tax rate on dividends paid to a corporation created or organized in, or under the law of, the Commonwealth of Puerto Rico is 10%, rather than 30%, if:

No special rules apply to Puerto Rican corporations for chapter 4 purposes, but special withholding rules do apply for withholdable payments made to territory financial institutions and nonfinancial entities. See the chapter 4 regulations for information on these special requirements.

Dividend equivalent payments.

Dividend equivalent payments are treated as U.S. source dividends such that withholding under chapter 3 may apply. Use Income Code 34 or 40 to report dividend equivalent payments. Dividend equivalent payments are withholdable payments except when an exception applies for chapter 4 purposes.

A dividend equivalent is a payment (as defined in Regulations section 1.871-15(c)) that, directly or indirectly, is contingent on, or determined by reference to, the payment of a dividend from U.S. sources. Dividend equivalent payments include the following payments.

Substitute dividend (Income Code 34).

A substitute dividend is any payment made under a securities lending or sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources in the United States.

Specified notional principal contracts (SNPCs) and specified equity-linked instruments (SELIs) (Income Code 40).

Transactions entered into on or after January 1, 2017.

For transactions entered into on or after January 1, 2017 (including as a result of a deemed exchange pursuant to section 1001), an SNPC or SELI is a notional principal contract (NPC), or equity linked instrument, respectively, with a delta of 0.8 or greater if it is a simple contract under Regulations section 1.871-15(a)(14)(i), or it meets the substantial equivalence test if it is a complex contract under Regulations section 1.871-15(a)(14)(ii). See Regulations section 1.871-15(g) for the delta test and Regulations section 1.871-15(h) for the substantial equivalence test.

Notwithstanding the preceding paragraph, for transactions entered into prior to January 1, 2025, transition relief provides that, subject to an anti-abuse rule, only delta-one transactions will be treated as SNPCs and SELIs. See Notice 2022-37, 2022-37 I.R.B. 234, available at IRS.gov/irb/2022-37_IRB#NOT-2022-37.

NPCs entered into before January 1, 2017.

For transactions entered into before January 1, 2017, an SNPC is any NPC if:

For more information regarding dividend equivalents, see Regulations section 1.871-15 and Notice 2022-37.

Amounts paid to qualified securities lenders (QSLs).

A withholding agent that makes substitute dividend payments to a QSL may apply the transition rules described in Notice 2010-46, Part III, for payments made before January 1, 2025. See Notice 2022-37.

Amounts paid to QDDs.

Only an eligible entity that has entered into a QI agreement can be a QDD. An eligible entity is a home office or branch that is a QI and that is:

A QDD is liable for tax under section 881 on its section 871(m) amount for each dividend on each underlying security. The section 871(m) amount is described in Regulations section 1.871-15(q)(3).

For more information on amounts paid to QDDs, see the chapter 3 regulations issued with the section 871(m) regulations. You can view the regulations at IRS.gov/irb/2017-09_IRB#TD-9815.

Capital gains (Income Code 9).

You must withhold at 30%, or if applicable, a reduced treaty rate, on the gross amount of the following items.

If you do not know the amount of the gain, you must withhold an amount necessary to ensure that the tax withheld will not be less than 30% of the recognized gain. The amount to be withheld, however, must not be more than 30% of the amount payable because of the transaction.

Unless you have reason to believe otherwise, you may rely upon the written statement of the person entitled to the income as to the amount of gain. The Form W-8 or documentary evidence must show the beneficial owner's basis in the property giving rise to the gain.

Tax treaties.

Many tax treaties exempt certain types of gains from U.S. income tax. Be sure to carefully check the provision of the treaty that applies before allowing an exemption from withholding.

Industrial royalties (Income Code 10).

This category of income includes royalties for the use of, or the right to use, patents, trademarks, secret processes and formulas, goodwill, franchises, “know-how,” and similar rights. It may also include payments for the use of, or right to use, industrial, commercial, and scientific equipment, when this is included in the treaty definition of royalties.

Motion picture or television copyright royalties (Income Code 11).

This category refers to royalties paid for the use of motion picture and television copyrights.

Other royalties (for example, copyright, recording, publishing) (Income Code 12).

This category refers to the royalties paid for the use of copyrights on books, periodicals, articles, etc., except motion picture and television copyrights.

Pensions and annuities.

In most cases, you must withhold tax on the gross amount of pensions and annuities that you pay that are from sources within the United States. This includes amounts paid under an annuity contract issued by a foreign branch of a U.S. life insurance company.

Most tax treaties provide an exemption from tax on non-government pensions and annuities. See the specific treaty rules for government pensions. The exemption may not apply to lump-sum payments. See, for example, Article 17(2) of the United States–United Kingdom income tax treaty. In addition, it does not apply to payments treated as deferred compensation, which is often treated as income from employment.

For purposes of chapter 3 withholding, in the absence of a treaty exemption, you must withhold at the statutory rate of 30% on the entire distribution that is from sources within the United States. You may, however, apply withholding at graduated rates to the part of a distribution that arises from the performance of services in the United States after December 31, 1986.

Employer contributions to a defined benefit plan covering more than one individual are not made for the benefit of a specific participant, but are made based on the total liabilities to all participants. All funds held under the plan are available to provide benefits to any participant. If the distribution is from such a plan, you can use the method in Revenue Procedure 2004-37 to allocate the distribution to sources in the United States.

The withholding rules that apply to payments to foreign persons generally take precedence over any other withholding rules that would apply to distributions from qualified plans and other qualified retirement arrangements.

Foreign pension plans are exempt from applying withholding under chapter 4 when they are exempt beneficial owners under Regulations section 1.1471-6(f). A payment from a U.S. pension plan to a foreign individual beneficiary in the plan is not subject to withholding under chapter 4.

No withholding.

Do not withhold tax on an annuity payment to a nonresident alien if at the time of the first payment from the plan, 90% or more of the employees eligible for benefits under the plan are citizens or residents of the United States and the payment is:

If the payment otherwise qualifies under these rules, but less than 90% of the employees eligible for benefits are citizens or residents of the United States, you still need not withhold tax on the payment if:

The foreign person entitled to the payments must provide you with a Form W-8BEN that contains the TIN of the foreign person.

Alimony payments.

In most cases, alimony payments made by U.S. resident aliens to nonresident aliens are taxable and subject to chapter 3 withholding whether the recipients are residing abroad or are temporarily present in the United States.

Many tax treaties, however, provide for an exemption from withholding for alimony payments. See Tax Treaties, later, for information about treaty benefits.

Alimony payments made to a nonresident alien by a U.S. ancillary administrator of a nonresident alien estate are from foreign sources and are not subject to withholding. Alimony payments are not subject to chapter 4 withholding.

Candidate for a degree.

Do not withhold on a qualified scholarship from U.S. sources granted and paid to a candidate for a degree. A qualified scholarship means any amount paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant, the amount is to be used for the following expenses.

The payment of a qualified scholarship to a nonresident alien is not reportable and is not subject to withholding. However, the part of a scholarship or fellowship paid to a nonresident alien which does not constitute a qualified scholarship is reportable on Form 1042-S and is subject to withholding. For example, those parts of a scholarship devoted to travel, room, and board are subject to withholding and are reported on Form 1042-S. The withholding rate is 14% on taxable scholarship and fellowship grants paid to nonresident aliens temporarily present in the United States in “F,” “J,” “M,” or “Q” nonimmigrant status. Payments made to nonresident alien individuals in any other immigration status are subject to 30% withholding.

Nondegree candidate.

If the person receiving the scholarship or fellowship grant is not a candidate for a degree, and is present in the United States in “F,” “J,” “M,” or “Q” nonimmigrant status, you must withhold tax at 14% on the total amount of the grant that is from U.S. sources if the following requirements are met.

If the grant does not meet both (1) and (2) above, you must withhold at 30% on the amount of the grant that is from U.S. sources.

Alternate withholding procedure.

You may choose to treat the taxable part of a U.S. source grant or scholarship as wages. The student or grantee must have been admitted into the United States on an “F,” “J,” “M,” or “Q” visa. The student or grantee will know that you are using this alternate withholding procedure when you ask for a Form W-4.

The student or grantee must complete Form W-4 annually following the instructions given here and forward it to you, the payer of the scholarship, or your designated withholding agent. You may rely on the information on Form W-4 unless you know or have reason to know it is incorrect. You must file a Form 1042-S (discussed later) for each student or grantee who gives you, or your withholding agent, a Form W-4.

Each student or grantee who files a Form W-4 must file an annual U.S. income tax return to take the deductions claimed on that form. If the individual is in the United States during more than 1 tax year, they must attach a statement to the annual Form W-4 indicating that the individual has filed a U.S. income tax return for the previous year. If they have not been in the United States long enough to have to file a return, the individual must attach a statement to the Form W-4 saying that a timely U.S. income tax return will be filed.

The payer of the grant or scholarship must review the Form W-4 to make sure all the necessary and required information is provided. If the withholding agent knows or has reason to know that the amounts shown on the Form W-4 may be false, the withholding agent must reject the Form W-4 and withhold at the appropriate statutory rate (14% or 30%).

After receipt and acceptance of the Form W-4, the payer must withhold at the graduated rates in Pub. 15-T as if the grant or scholarship income were wages. The gross amount of the income is reduced by the total amount of any deductions on the Form W-4 and the withholding tax is figured on the rest.

Pay for services rendered.

Pay for services rendered as an employee by an alien who is also the recipient of a scholarship or fellowship grant is usually subject to graduated withholding under chapter 3 according to the rules discussed later in Wages Paid to Employees— Graduated Withholding. This includes taxable amounts an individual who is a candidate for a degree receives for teaching, doing research, and carrying out other part-time employment required as a condition for receiving the scholarship or fellowship grant (that is, compensatory scholarship or fellowship income).

Grants given to students, trainees, or researchers which require the performance of personal services as a necessary condition for disbursing the grant do not qualify as scholarship or fellowship grants. Instead, they are compensation for personal services considered to be wages. It does not matter what term is used to describe the grant (for example, stipend, scholarship, fellowship, etc.).

.Withholding agents who pay grants that are in fact wages must report such grants on Forms 941 and W-2 and withhold income tax on them at the graduated rates. Withholding agents may not allow tax treaty exemptions that apply to scholarships and fellowships to be applied to grants that are really wages. It is the responsibility of the withholding agent to determine whether a grant is “wages” or a “scholarship or fellowship,” and to report and withhold on the grant accordingly. An alien student, trainee, or researcher may not claim a scholarship or fellowship treaty exemption against income that has been reported to them on Form W-2 as wages..

Per diem paid by the U.S. Government.

Per diem for subsistence paid by the U.S. Government (directly or by contract) to a nonresident alien engaged in a training program in the United States funded by the U.S. Agency for International Development are not subject to 14% or 30% withholding. This is true even if the alien is subject to income tax on those amounts.

Tax treaties.

Many treaties contain exemptions from U.S. taxation for scholarships and fellowships. Although usually found in the student articles of the tax treaties, many of these exemptions also apply to research grants received by researchers who are not students. See Tax Treaties, later, for information about treaty benefits. The treaty provision usually exempts the entire scholarship or fellowship amount, regardless of whether the grant is a “qualified scholarship” under U.S. law.

An alien student, trainee, or researcher may claim a treaty exemption for a scholarship or fellowship by submitting Form W-8BEN to the payer of the grant. However, a scholarship or fellowship recipient who receives both wages and a scholarship or fellowship from the same institution can claim treaty exemptions on both kinds of income on Form 8233.

Nonresident alien who becomes a resident alien.

In most cases, only a nonresident alien individual may use the terms of a tax treaty to reduce or eliminate U.S. tax on income from a scholarship or fellowship grant. A student (including a trainee or business apprentice) or researcher who has become a resident alien for U.S. tax purposes may not use the terms of a tax treaty due to a provision known as a “saving clause.” However, an exception to the saving clause may permit an exemption from tax to continue for scholarship or fellowship grant income even after the recipient has otherwise become a U.S. resident alien for tax purposes. In this situation, the individual must give you a Form W-9 and an attachment that includes all the following information.

Grant.

The purpose of a grant must be to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. A grant must also be an amount which does not qualify as a scholarship or fellowship. The grantor must not intend the amount to be given to the grantee for the purpose of aiding the grantee to perform study, training, or research.

Prizes and awards.

Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, or are received as the result of entering a contest. A prize or award is taxable to the recipient unless all of the following conditions are met.

Targeted grants and achievement awards.

Targeted grants and achievement awards received by nonresident aliens for activities conducted outside the United States are treated as income from foreign sources. Targeted grants and achievement awards are issued by exempt organizations or by the United States (or one of its instruments or agencies), a state (or a political subdivision of a state), or the District of Columbia for an activity (or past activity in the case of an achievement award) undertaken in the public interest.

Note.

Any wages paid to a nonresident alien for personal services performed as an employee for an employer are generally not subject to the 30% withholding if the wages are subject to graduated withholding.

Special rule for certain agricultural workers.

The 30% withholding does not apply to pay for personal services performed by a foreign agricultural worker in the United States on an H-2A visa. However, if the total wages are $600 or more and the worker does not give you a TIN, you may need to backup withhold. You may withhold at graduated rates if the employee asks you to by giving you a completed Form W-4.

Pay for personal services that is not subject to withholding is not subject to reporting on Form 1042-S. If the compensation is more than $600, report it on Form W-2 (if the employee gave you a TIN) or on Form 1099-NEC, Nonemployee Compensation (if the employee did not give you a TIN). See the Instructions for Forms 1099-MISC and 1099-NEC for more information.

For more information on withholding on foreign agricultural workers, go to IRS.gov and enter “agricultural workers” in the search box.

Employer–employee relationship.

For pay for personal services to qualify as wages, there must be an employer–employee relationship.

Under the common law rules, every individual who performs services subject to the will and control of an employer, both as to what shall be done and how it shall be done, is an employee. It does not matter that the employer allows the employee considerable discretion and freedom of action, as long as the employer has the legal right to control both the method and the result of the services.

If an employer–employee relationship exists, it does not matter what the parties call the relationship. It does not matter if the employee is called a partner, coadventurer, agent, or independent contractor. It does not matter how the pay is measured, how the individual is paid, or what the payments are called. Nor does it matter whether the individual works full time or part time.

The existence of the employer–employee relationship under the usual common law rules will be determined, in doubtful cases, by an examination of the facts of each case.

Employee.

An employee generally includes any individual who performs services if the relationship between the individual and the person for whom the services are performed is the legal relationship of employer and employee. This includes an individual who receives a supplemental unemployment pay benefit that is treated as wages.

No distinction is made between classes of employees.

Superintendents, managers, and other supervisory personnel are employees. In most cases, an officer of a corporation is an employee, but a director acting in this capacity is not. An officer who does not perform any services, or only minor services, and neither receives nor is entitled to receive any pay is not considered an employee.

Employer.

An employer is any person or organization for whom an individual performs or has performed any service, of whatever nature, as an employee. The term “employer” includes not only individuals and organizations in a trade or business, but organizations exempt from income tax, such as religious and charitable organizations, educational institutions, clubs, social organizations, and societies. It also includes the governments of the United States, the States, Puerto Rico, and the District of Columbia, as well as their agencies, instrumentalities, and political subdivisions.

Two special definitions of employer that may have considerable application to nonresident aliens are:

For example, if a trust pays wages, such as certain types of pensions, supplemental unemployment pay, or retired pay, and the person for whom the services were performed has no legal control over the payment of the wages, the trust is the employer.

These special definitions have no effect upon the relationship between an alien employee and the actual employer when determining whether the pay received is considered to be wages.

Pay that is not wages.

Employment for which the pay is not considered wages (for graduated income tax withholding) includes, but is not limited to, the following items.

Services performed outside the United States.

Compensation paid to a nonresident alien (other than a resident of Puerto Rico, discussed later) for services performed outside the United States is not considered wages and is not subject to withholding.

Special instructions for Form W-4.

A nonresident alien subject to wage withholding must give the employer a completed Form W-4 to enable the employer to figure how much income tax to withhold.

.A nonresident alien cannot claim exemption from withholding on Form W-4. Use Form 8233 to claim a tax treaty exemption from withholding. See Form 8233, earlier..

In completing Form W-4, nonresident aliens should use the following instructions instead of the instructions on Form W-4.

For more information, see Notice 1392.

.Nonresident alien employees are not required to request an additional withholding amount, but they can choose to have an additional amount withheld..

Determining amount to withhold.

Employers are required to add an amount to the wages of a nonresident alien employee solely for the purpose of calculating income tax withholding. The specific amounts depend on the payroll period. These amounts can be found in Withholding Adjustment for Nonresident Alien Employees in the Introduction of Pub. 15-T. This adjustment does not apply to students and business apprentices from India.

.Do not include the additional amount on the employee's Form W-2, Wage and Tax Statement..

Reporting requirements for wages and withheld taxes paid to nonresident aliens.

The employer must report the amount of wages and deposits of withheld income and social security and Medicare taxes by filing Form 941. Household employers should see Pub. 926, for information on reporting and paying employment taxes on wages paid to household employees.

Form W-2.

The employer must also report on Form W-2 the wages subject to chapter 3 withholding and the withheld taxes. You must give copies of this form to the employee. If the employee submits Form 8233 to claim exemption from withholding under a tax treaty, the wages are reported on Form 1042-S and not in box 1 of Form W-2. Wages exempt under a tax treaty may still be reported in the state and local wages boxes of Form W-2 if such wages are subject to state and local taxation. For more information, see the instructions for these forms.

Trust fund recovery penalty.

If you are a person responsible for withholding, accounting for, or depositing or paying employment taxes, and willfully fail to do so, you can be held liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.

“Willfully” in this case means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the business instead of the withholding taxes.

Social security and Medicare tax.

In most cases, the employer must also withhold Federal Insurance Contributions Act (FICA) tax and file Form 941. In certain cases, wages paid to students and railroad and agricultural workers are exempt from FICA tax. Wages paid to nonresident alien students, teachers, researchers, trainees, and other nonresident aliens in “F-1,” “J-1,”“ M-1,” or “Q” nonimmigrant status are not subject to FICA. See Pub. 15-T for the rules on withholding.

In addition to withholding Medicare tax at 1.45%, you must withhold a 0.9% Additional Medicare Tax from wages you pay in excess of $200,000 in a calendar year. See Pub.15 for more information.

Federal unemployment tax (FUTA).

The employer must pay FUTA tax and file Form 940. Only the employer pays this tax; it is not deducted from the employee's wages. In certain cases, wages paid to students and railroad and agricultural workers are exempt from FUTA tax. For more information, see the Instructions for Form 940.

Wages paid to nonresident alien students, teachers, researchers, trainees, and other nonresident aliens in “F-1,” “J-1,” “M-1,” or “Q” nonimmigrant status are not subject to FUTA tax.

Pay for dependent personal services (Income Code 18).

Dependent personal services are personal services performed in the United States by a nonresident alien individual as an employee rather than as an independent contractor.

Pay for dependent personal services is subject to chapter 3 withholding and reporting as follows.

Graduated rates.

Ordinarily, you must withhold on pay (wages) for dependent personal services using graduated rates. The nonresident alien must complete Form W-4, as discussed earlier under Special instructions for Form W-4, and you must report wages and income tax withheld on Form W-2. However, you do not have to withhold if any of the following four exceptions applies.

Exception 1.

Compensation paid for labor or personal services performed in the United States is deemed not to be income from sources within the United States and is exempt from U.S. income tax if:

If the total pay is more than $3,000, the entire amount is income from sources in the United States and is subject to U.S. tax.

Exception 2.

Compensation paid by a foreign employer to a nonresident alien for the period the alien is temporarily present in the United States on an “F,” “J,” or “Q” visa is exempt from U.S. income tax. For this purpose, a foreign employer means:

Exception 3.

Compensation paid to certain residents of Canada or Mexico who enter or leave the United States at frequent intervals is not subject to withholding. These aliens must either:

To qualify for the exemption from withholding during a tax year, a Canadian or Mexican resident must give the employer a statement with the employee's name, address, and identification number, and certifying that the resident:

The statement can be in any form, but it must be dated and signed by the employee and must include a written declaration that it is made under penalties of perjury.

Canadian and Mexican residents employed entirely within the United States.

Neither the transportation service exception nor the international projects exception applies to the pay of a resident of Canada or Mexico who is employed entirely within the United States and who commutes from a home in Canada or Mexico to work in the United States. If an individual works at a fixed point or points in the United States (such as a factory, store, office, or designated area or areas), the wages for services performed as an employee for an employer are subject to graduated withholding.

Exception 4.

Compensation paid for services performed in Puerto Rico by a nonresident alien who is a resident of Puerto Rico for an employer (other than the United States or one of its agencies) is not subject to withholding.

Compensation paid for either of the following types of services is not subject to withholding if the alien does not expect to be a resident of Puerto Rico during the entire tax year.

To qualify for the exemption from withholding for any tax year, the employee must give the employer a statement showing the employee's name and address and certifying that the employee:

The statement must be signed and dated by the employee and contain a written declaration that it is made under penalties of perjury.

Tax treaties.

Pay for dependent personal services under some tax treaties is exempt from U.S. income tax only if both the employer and the employee are treaty country residents and the nonresident alien employee performs the services while temporarily living in the United States (usually for not more than 183 days). Other treaties provide for exemption from U.S. tax on pay for dependent personal services if the employer is any foreign resident and the employee is a treaty country resident and the nonresident alien employee performs the services while temporarily in the United States. See Tax Treaties, later, for information about treaty benefits.

Pay for teaching (Income Code 19).

This category is given a separate income code number because some tax treaties exempt a teacher from tax for a limited number of years. Pay for teaching means payments to a nonresident alien professor, teacher, or researcher by a U.S. university or other accredited educational institution for teaching or research work at the institution.

Graduated rates.

Graduated withholding of income tax usually applies to all wages, salaries, and other pay for teaching and research paid by a U.S. educational institution during the period the nonresident alien is teaching or performing research at the institution.

Social security and Medicare tax.

A nonresident alien temporarily in the United States on an “F-1,” “J-1,” “M-1,” or “Q-1” visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount.

If an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien is still in one of the nonimmigrant statuses mentioned above. This rule also applies to FUTA (unemployment) taxes paid by the employer. Teachers, researchers, and other employees temporarily present in the United States on other nonimmigrant visas or in refugee or asylee immigration status are fully liable for social security and Medicare taxes unless an exemption applies from one of the totalization agreements in force between the United States and several other nations.

. The Social Security Administration (SSA) publishes the complete texts and explanatory pamphlets of the totalization agreements, which are available by calling 410-965-7306 or by going to SSA.gov/international/totalization_agreements.html..

Tax treaties.

Under most tax treaties, pay for teaching or research is exempt from U.S. income tax and from withholding for a specified period of time when paid to a professor, teacher, or researcher who was a resident of the treaty country immediately prior to entry into the United States and who is not a citizen of the United States. The U.S. educational institution paying the compensation must report the amount of compensation paid each year that is exempt from tax under a tax treaty on Form 1042-S. See Tax Treaties, later, for information about treaty benefits. The employer should also report the compensation in the state and local wages boxes of Form W-2 if the wages are subject to state and local taxes, or in the social security and Medicare wages boxes of Form W-2 if the wages are subject to social security and Medicare taxes.

Claimants must give you either Form W-8BEN or Form 8233, as applicable, to obtain these treaty benefits.

Pay during studying and training (Income Code 20).

This category refers to pay (as contrasted with remittances, allowances, or other forms of scholarships or fellowship grants—see Scholarships and Fellowship Grants Subject to Chapter 3 Withholding, earlier) for personal services performed while a nonresident alien is temporarily in the United States as a student, trainee, or apprentice, or while acquiring technical, professional, or business experience.

Graduated rates.

Wages, salaries, or other compensation paid to a nonresident alien student, trainee, or apprentice for labor or personal services performed in the United States are subject to graduated withholding.

Social security and Medicare tax.

A nonresident alien temporarily in the United States on an “F-1,” “J-1,” “M-1,” or “Q-1” visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount. This exemption from social security and Medicare taxes also applies to employment performed under Curricular Practical Training and Optional Practical Training, on or off campus, by foreign students in “F-1,” “J-1,” “M-1,” or “Q” status as long as the employment is authorized by the U.S. Citizenship and Immigration Services.

If an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien is still in one of the nonimmigrant statuses mentioned above. This rule also applies to FUTA (unemployment) taxes paid by the employer.

Any student who is enrolled and regularly attending classes at a school may be exempt from social security, Medicare, and FUTA taxes on pay for services performed for that school. See Pub.15.

Tax treaties.

Certain tax treaties provide a limited exemption from U.S. income tax and from withholding on compensation paid to nonresident alien students or trainees during training in the United States for a limited period. In addition, some treaties provide an exemption from tax and withholding for compensation paid by the U.S. Government or its contractor to a nonresident alien student or trainee who is temporarily present in the United States as a participant in a program sponsored by the U.S. Government. See Tax Treaties, later, for information about treaty benefits. However, a withholding agent who is a U.S. resident, a U.S. Government agency, or its contractor must report the amount of pay on Form 1042-S.

Claimants must give you either Form W-8BEN or Form 8233, as applicable, to obtain these treaty benefits.

Failure to file Form 1042.

The penalty for not filing Form 1042 when due (including extensions) is usually 5% of the unpaid tax for each month or part of a month the return is late, but not more than 25% of the unpaid tax.

Failure to file correct Form 1042-S.

A penalty may be imposed for failure to file a complete and correct Form 1042-S when due (including extensions).

For more information on the penalty for failure to timely file a correct Form 1042-S with the IRS, see Penalties in the 2024 Instructions for Form 1042-S .

Failure to furnish Form 1042-S to recipient.

For more information on the penalty for failure to timely furnish Form 1042-S to a recipient, see Penalties in the 2024 Instructions for Form 1042-S.

Penalty for intentional disregard of requirements to file or furnish returns.

If you intentionally disregard the requirement to file Form 1042-S when due, to furnish Form 1042-S to the recipient when due, or to report correct information, the penalty is the greater of $630 or 10% of the total amount of the items that must be reported, with no maximum penalty.

Failure to e-file.

If you are required to e-file Form 1042-S but you fail to do so, and you do not have an approved waiver, penalties may apply unless you establish reasonable cause for your failure.

For more information on failure to e-file, see Penalties in the 2024 Instructions for Form 1042-S.

Reduction of withholding.

The foreign partner's share of the partnership's gross ECI is reduced by the following.

The partnership may reduce the foreign partner's share of partnership gross ECI by the following.

To certify the deductions and losses, a partner must submit to the partnership Form 8804-C.

If the partner's investment in the partnership is the only activity producing ECI and the section 1446 tax is less than $1,000, no withholding is required. The partner must provide Form 8804-C to the partnership to receive the exemption from withholding.

A foreign partner may submit a Form 8804-C to a partnership at any time during the partnership's year and prior to the partnership's filing of its Form 8804. An updated certificate is required when the facts or representations made in the original certificate have changed or a status report is required.

For more information, see the Instructions for Form 8804-C.

Tax rate.

The withholding tax rate on a partner's share of ECTI is 37% for noncorporate partners and 21% for corporate partners. However, the partnership may withhold at the highest rate applicable to a particular type of income allocated to a partner provided the partnership received the appropriate documentation. See Regulations section 1.1446-3(a)(2)(ii).

Installment payments.

A partnership must make installment payments of withholding tax on its foreign partners' share of effectively connected taxable income whether or not distributions are made during the partnership's tax year. The amount of a partnership's installment payment is the sum of the installment payments for each of its foreign partners. The amount of each installment payment can be figured by using Form 8804-W.

Notification to partners.

In most cases, a partnership must notify each foreign partner of the tax withheld on its behalf within 10 days of the installment payment date. No particular form is required for this notification. For more information on the substance of the notification and exceptions, see Regulations section 1.1446-3(d)(1)(i).

Real property transfers.

If a domestic partnership disposes of a USRPI, gain or loss from the sale allocable to a foreign partner is treated as effectively connected to the conduct of a U.S. trade or business and is included in ECTI. The partnership or withholding agent must withhold following the rules discussed here for section 1446(a) withholding. A domestic partnership's compliance with these rules satisfies the requirements for withholding on the disposition of U.S. real property interests (discussed later).

If a foreign partnership disposes of a U.S. property interest, the transferee must withhold under section 1445(a), although gain or loss from the sale is also treated as effectively connected to the conduct of a U.S. trade or business and is included in ECTI. The foreign partnership may credit the amount withheld under section 1445(a) that is allocable to foreign partners against its tax liability under section 1446.

Transfers of interests in partnerships engaged in the conduct of a U.S. trade or bussines.

If a domestic partnership transfers a direct or indirect interest in another partnership engaged in the conduct of a U.S. trade or business, gain or loss from the sale allocable to a foreign partner that is treated under section 864(c)(8) as effectively connected to the conduct of a U.S. trade or business is included in ECTI.

If a foreign partnership transfers an interest in another partnership for a gain and section 864(c)(8) treats any portion of that gain as effectively connected with the conduct of a trade or business in the United States, then the partnership will be withheld upon under section 1446(f)(1). The foreign partnership may credit the amount withheld under section 1446(f)(1) that is allocable to foreign partners against its tax liability under section 1446(a).

Form 8804.

The withholding tax liability of the partnership for its tax year is reported on Form 8804. Form 8804 is also a transmittal form for Forms 8805.

Any additional withholding tax owed for the partnership's tax year is paid (in U.S. currency) with Form 8804.

.File Form 8804 by the 15th day of the 3rd month after the close of the partnership's tax year. If you need more time to file Form 8804, file Form 7004 to request an extension of time to file. Form 7004 does not extend the time to pay the tax..

Form 8805.

This form is used to show the amount of ECTI and any withholding tax payments allocable to a foreign partner for the partnership's tax year. At the end of the partnership's tax year, Form 8805 must be sent to each foreign partner on whose behalf tax under section 1446 was withheld or whose Form 8804-C the partnership considered, whether or not any withholding tax is paid. It must be delivered to the foreign partner by the due date of the partnership return (including extensions). A copy of Form 8805 for each foreign partner must also be attached to Form 8804 when it is filed. Also attach the most recent Form 8804-C, discussed earlier, to the Form 8805 filed for the partnership's tax year in which the Form 8804-C was considered.

A copy of Form 8805 must be attached to the foreign partner's U.S. income tax return to take a credit on its Form 1040-NR or Form 1120-F.

Form 8813.

This form is used to make payments of withheld tax to the U.S. Treasury. Payments must be made in U.S. currency by the payment dates (see Date payments are due, earlier). See the Instructions for Form 8804-C for when you must attach a copy of that form to Form 8813.

Penalties.

A penalty may be imposed for failure to file Form 8804 when due (including extensions). It is generally the same as the penalty for not filing Form 1042, discussed earlier under Failure to file Form 1042.

A penalty may be imposed for failure to file Form 8805 when due (including extensions) or for failure to provide complete and correct information. The amount of the penalty depends on when you file a correct Form 8805. The penalty for each Form 8805 is generally the same as the penalty for not filing Form 1042-S. For more information, see Penalties in the 2024 Instructions for Form 1042-S.

If you fail to provide a complete and correct Form 8805 to each partner when due (including extensions), a penalty may be imposed. The amount of the penalty depends on when you provide the correct Form 8805. The penalty for each Form 8805 is generally the same as the penalty for not providing a correct and complete Form 1042-S. For more information, see Penalties in the 2024 Instructions for Form 1042-S.

Exception.

No penalty is imposed if you meet certain requirements. The rules are the same as for Form 1042-S. However, if a filer intentionally disregards the requirement to file Form 8805 when due, to furnish Form 8805 to the recipient when due, or to report correct information, the penalty for each Form 8805 (or statement to recipient) may be higher.

For more information, see Penalties in the 2024 Instructions for Form 1042-S.

Identification numbers.

A partnership that has not been assigned a U.S. EIN must obtain one. If a number has not been assigned by the due date of the first withholding tax payment, the partnership should enter the date the number was applied for on Form 8813 when making its payment. As soon as the partnership receives its EIN, it must immediately provide that number to the IRS.

To ensure proper crediting of the withholding tax when reporting to the IRS, the partnership must include each partner's U.S. TIN on Form 8805. If there are partners in the partnership without identification numbers, the partnership should inform them of the need to get a number. See U.S. or Foreign TINs, earlier.