W-8BEN: Nonresident aliens (NRA) are generally not required to file a Form 1040. When a foreign person (nonresident alien) has U.S. source generated income, that income may be taxable in the US, but chances are the foreign person still may not be filing a U.S. tax return (especially if the only income is FDAP) — when they do file it, the NRA files a Form 1040NR instead of 1040 — unless certain elections are made. Still, many NRAs would opt to not have to file the 1040NR if they didn’t have to. Therefore, in order to ensure the IRS can collect taxes from the NRA for U.S. sourced income, the Internal Revenue Service requires certain withholding. The withholding rate is 30% (subject to treaty rules, which can lower the tax amount).
Nonresident Alien vs. US Person
Not all foreign nationals are considered to be nonresident aliens. Rather, a nonresident alien is a specific category of foreign person who is:
- Not a US citizen;
- Does not have Legal Permanent Residents status, and
- Does not meet the Substantial Presence Test
When a person is a nonresident alien (NRA), there are certain withholding requirements that are required by the Internal Revenue Service to ensure that taxes are collected on U.S. sourced income.
* An alien individual who is a bona fide resident of Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa is a nonresident alien individual. See Pub. 519 for more information on resident and nonresident alien status.
What is the Purpose of Form W-8BEN
As provided by the IRS:
“Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of:
- Interest (including certain original issue discount (OID));
- Annuities; and Compensation for, or in expectation of, services performed;
- Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income.
This tax is imposed on the gross amount paid and is generally collected by withholding under section 1441.
A payment is considered to have been made whether it is made directly to the beneficial owner or to another person, such as an intermediary, agent, or partnership, for the benefit of the beneficial owner.”
Who to Provide the W-8BEN Form to:
As provided by the IRS:
“If you receive certain types of income, you must provide Form W-8BEN to: Establish that you are not a U.S. person; Claim that you are the beneficial owner of the income for which Form W-8BEN is being provided or a foreign partner in a partnership subject to section 1446; and If applicable, claim a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the United States has an income tax treaty and who is eligible for treaty benefits.
You may also be required to submit Form W-8BEN to claim an exception from domestic information reporting and backup withholding (at the backup withholding rate under section 3406) for certain types of income that are not subject to foreign-person withholding at a rate of 30% under section 1441.
Such income includes:
- Broker proceeds;
- Short-term (183 days or less) OID;
- Bank deposit interest;
- Foreign source interest, dividends, rents, or royalties; and
- Proceeds from a wager placed by a nonresident alien individual in the games of blackjack, baccarat, craps, roulette, or big-6 wheel.”
Completing Form W-8BEN
Here is a short primer on filing the Form W-8BEN:
Part I Identification of Beneficial Owner
1. Name of individual who is the beneficial owner
2 Country of citizenship
3 Permanent residence address (street, apt. or suite no., or rural route).
4 Mailing address (if different from above) City or town, state or province.
5 U.S. taxpayer identification number (SSN or ITIN), if required (see instructions)
6 Foreign tax identifying number (see instructions)
7 Reference number(s) (see instructions)
8 Date of birth (MM-DD-YYYY) (see instructions)
Part II Claim of Tax Treaty Benefit
This is where it can get complicated.
Tax Treaties in General
Tax treaties can greatly benefit a Taxpayer’s tax position. They can be used to otherwise reduce or eliminate certain tax consequences depending on the particular treaty. While most treaties are relatively similar to each other, each treaty has its own set of nuances. Therefore it is important to evaluate the specific tax treaty before making any treaty election.
As provided by the W-8BEN
“If you are claiming treaty benefits as a resident of a foreign country with which the United States has an income tax treaty for payments subject to withholding under chapter 3, identify the country where you claim to be a resident for income tax treaty purposes.
For treaty purposes, a person is a resident of a treaty country if the person is a resident of that country under the terms of the treaty. A list of U.S. tax treaties is available at IRS.gov/ Individuals/International-Taxpayers/Tax-Treaties.”
Part III Certification
The certification portion of the W-8BEN is used to certify under penalty of perjury, as follows:
“Under penalties of perjury, I declare that I have examined the information on this form and to the best of my knowledge and belief it is true, correct, and complete. I further certify under penalties of perjury that:
- I am the individual that is the beneficial owner (or am authorized to sign for the individual that is the beneficial owner) of all the income to which this form relates or am using this form to document myself for chapter 4 purposes.
- The person named on line 1 of this form is not a U.S. person
- The income to which this form relates is:
- not effectively connected with the conduct of a trade or business in the United States,
- effectively connected but is not subject to tax under an applicable income tax treat, or
- the partner’s share of a partnership’s effectively connected income.
- The person named on line 1 of this form is a resident of the treaty country listed on line 9 of the form (if any) within the meaning of the income tax treaty between the United States and that country, and
- For broker transactions or barter exchanges, the beneficial owner is an exempt foreign person as defined in the instructions.
- Furthermore, I authorize this form to be provided to any withholding agent that has control, receipt, or custody of the income of which I am the beneficial owner or any withholding agent that can disburse or make payments of the income of which I am the beneficial owner. I agree that I will submit a new form within 30 days if any certification made on this form becomes incorrect.”
Penalties for W-8BEN Non-Compliance
If the form is filed incorrectly — or not filed — there can be penalties.
“Form W-8BEN must be signed and dated by the beneficial owner of the amount subject to withholding or the account holder of an FFI (or an agent with legal authority to act on the person’s behalf). If Form W-8BEN is completed by an agent acting under a duly authorized power of attorney for the beneficial owner or account holder, the form must be accompanied by the power of attorney in proper form or a copy thereof specifically authorizing the agent to represent the principal in making, executing, and presenting the form. Form 2848 can be used for this purpose.
The agent, as well as the beneficial owner or account holder, may incur liability for the penalties provided for an erroneous, false, or fraudulent form.”
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