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Back in 2013, I kicked off my blog, sharing my thoughts on Twitter. Reflecting on how things have evolved since then, it’s amusing—how swiftly social media has transformed. These days, seasoned tax professionals compete for attention alongside newcomers, each offering snippets of tax wisdom online. Admittedly, I’ve joined the fray as well. My goal is to be a voice of reason, discussing tax matters responsibly rather than sensationalizing them.
You might wonder why I’m bringing this up now. Recently, several individuals have reached out to me, puzzled by a US payor withholding 30% tax before disbursing their payments. It turns out, the payors didn’t need to withhold this tax. They had followed incorrect advice. We’ll delve deeper into this shortly.
Understanding Form W-8 BEN
What and Why? Form W-8 BEN is essential for foreign individuals who seek to claim exemption or reduce the rate of tax withholding on their US source income, as detailed in Chapters 3 and 4 of the Internal Revenue Code. Chapter 3 concentrates on the source and types of income, while Chapter 4 pertains to establishing oneself as a foreign person.
Typically, US income sources necessitating this form include:
- Interest
- Certain OID Interest
- Dividends
- Rents
- Royalties
- Premiums
- Annuities
- Compensation for services performed or anticipated
- Substitute payments in a securities lending transaction
- Other FDAP (fixed or determinable annual or periodic) gains, profits, or income such as:
- Foreign partner’s distributive share of income under §1446
- Amount realized from the transfer of partnership interest, if treated as effectively connected gain under §864
The IRS imposes a 30% tax on the gross payment amounts, typically collected at the source under §1441 for the aforementioned income types.
Other scenarios where Form W-8 BEN may be required include:
- Broker proceeds
- Short-term (183 days or less) OID
- Bank deposit interest
- Foreign source interest, dividends, rents, or royalties
- Proceeds from wagers placed by nonresident aliens in specified games
- Amounts of US source gross transportation income taxable under section 887(a)
When to Submit Form W-8 BEN
Provide Form W-8 BEN to your payor before receiving payments, having them credited to your account, or being allocated. The payor will keep this form on file; it is not submitted to the IRS.
Submit the form when requested by a withholding agent, payer, or FFI, regardless of whether you are claiming a reduced rate or exemption from withholding. The form is generally valid for three calendar years from the date initially provided. If your circumstances change, notify the payor/withholding agent within 30 days and submit a new form.
Who Needs to Provide Form W-8 BEN?
You must submit this form to the withholding agent/payer/payment settlement entity if you are:
- A non-resident individual/person who is the beneficial owner of an amount subject to withholding
- An account holder of a Foreign Financial Institution, documenting your status as a nonresident alien
- A single owner of a Disregarded Entity
- A seller of a life insurance contract under §6050Y
If you become a US citizen, resident alien, or tax resident by passing the Substantial Presence Test, inform the withholding agent/payer within 30 days and provide a Form W-9 instead.
Returning to our earlier story, we discovered that these payments weren’t US-sourced, and thus, Form W-8 BEN was unnecessary. It required some investigation to confirm these were not FDAP gains or effectively connected income for US taxation.
But that’s a discussion for another day! Always consult with knowledgeable tax professionals regarding foreign income and tax compliance if you have any questions.
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