Withholding   of Tax on   Nonresident   Aliens and   Foreign   Entities   n

For Withholding in 2006

taxmap/pubs/p515-000.htm#TXMP2f584229 What's New

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New procedure for calculating income tax withholding on wages.

Beginning with wages paid after December 31, 2005, employers are required to calculate income tax withholding on wages of nonresident alien employees using a new procedure. Under this procedure, the employer adds an amount to the employee's wages solely for the purpose of calculating the amount to withhold. The employee is no longer required to have additional tax withheld. See Wages Paid to Employees—Graduated Withholding.

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New rules for partnership withholding on effectively connected income (ECI).

For partnership tax years beginning after May 18, 2005, new regulations under section 1446 provide the rules for a partnership to withhold tax on ECI allocated to a foreign partner. See Partnership Withholding on Effectively Connected Income.

The appropriate Form W-8 can be used to inform the partnership that the partner is a foreign partner and its tax classification. A foreign partner that provides the partnership with a valid Form W-8 for purposes of withholding under sections 1441, 1442, and 1443 of the Internal Revenue Code will generally satisfy the documentation requirements for withholding by the partnership under section 1446 of the Code. See the regulations under section 1446 for more information.

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New rules for publicly traded partnership (PTP) withholding on distributions to foreign partners.

For partnership tax years beginning after May 18, 2005, a PTP can no longer elect to withhold tax based on ECI allocable to its foreign partners. The PTP must withhold on the distribution of that income to its foreign partners.

A nominee that receives a distribution of ECI from a PTP is treated as the withholding agent to the extent of the amount specified in the qualified notice received by the nominee. The withholding agent (PTP or nominee) must use Form 1042 and Form 1042-S to report withholding from distributions under section 1446 of the Code.

For more information, see Publicly Traded Partnerships under Partnership Withholding on Effectively Connected Income. Also see Regulations section 1.1446-4.

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Voluntary Compliance Program (VCP).

The IRS has initiated a "Section 1441 VCP." This program is available to certain withholding agents with respect to the withholding, payment, and reporting of certain taxes due on payments to foreign persons. Submissions under this program had to be made before January 1, 2006. This deadline has been extended to April 1, 2006. For information on the VCP, see Revenue Procedure 2004-59, which is on page 678 of the Internal Revenue Bulletin 2004-42 at www.irs.gov/pub/irs-irbs/irb04-42.pdf. Also see Revenue Procedure 2005-71 on page 985 of Internal Revenue Bulletin 2005-47.

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New rules for acceptance agents.

New rules apply to acceptance agents. There are four major changes to the rules.

• Applicants are subject to suitability checks.
• Acceptance agent agreements must be renewed every 4 years.
• Agreements in effect under the old procedures will expire on December 31, 2006. Acceptance agents will need to apply under the new procedures to maintain their approved status.
• Acceptance agents may request that their names be added to a public list of agents published periodically by the IRS.

For more information, see Revenue Procedure 2006-10 on page 293 of Internal Revenue Bulletin 2006-2 at www.irs.gov/pub/irs-irbs/irb06-02.pdf.

taxmap/pubs/p515-000.htm#TXMP078adca7 Reminders

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Note.

This publication serves as the Small Entity Compliance Guide required by section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, P.L. 104-121.

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Form W-8.

There are four forms in the W-8 series. The form to use depends on the type of certification being made. As used in this publication, the term "Form W-8" refers to the appropriate document. For more information, see Documentation, later.

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Electronic deposit rules.

You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur after 2005, if you meet either of the following conditions.

• You had to make electronic deposits in 2005.
• You deposited more than $200,000 in federal depository taxes in 2004.

If you do not meet these conditions, electronic deposits are voluntary.

For more information about depositing electronically, see Publication 966, The Secure Way to Pay Your Federal Taxes.

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Filing electronically.

If you file Form 1042-S electronically, you will use the Filing Information Returns Electronically (FIRE) system. You get to the system through the Internet at fire.irs.gov.

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IRS taxpayer identification numbers for aliens.

The IRS will issue an individual taxpayer identification number (ITIN) to an alien who does not have and is not eligible to get a social security number (SSN).

An ITIN is for tax use only. It does not entitle an alien to social security benefits or change his or her employment or immigration status under U.S. law.

For more information on ITINs, see U.S. Taxpayer Identification Numbers, later.

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Hong Kong.

Hong Kong and China continue to be treated as two separate countries for purposes of certain bilateral agreements, the Internal Revenue Code, and the Income Tax Regulations.

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Japan.

The new treaty with Japan is generally effective for tax periods beginning on or after January 1, 2005. However, an individual who claimed treaty benefits under Article 19 (teachers and researchers) or Article 20 (students and trainees) of the former treaty can continue to apply those provisions.

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Photographs of missing children.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication is for withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations. Specifically, it describes the persons responsible for withholding (withholding agents), the types of income subject to withholding, and the information return and tax return filing obligations of withholding agents. In addition to discussing the rules that apply generally to payments of U.S. source income to foreign persons, it also contains sections on the withholding that applies to the disposition of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business.

taxmap/pubs/p515-000.htm#TXMP51236875 Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

 
Internal Revenue Service  
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SE:W:CAR:MP:T:I  
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We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

taxmap/pubs/p515-000.htm#TXMP75ba833d Tax questions.

If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

taxmap/pubs/p515-000.htm#TXMP0c15e625 Ordering forms and publications.

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the National Distribution Center at the address shown under How To Get Tax Help in the back of this publication.

Useful items

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See How To Get Tax Help, near the end of this publication for information about getting publications and forms.

taxmap/pubs/p515-000.htm#TXMP771a51d3 Withholding of Tax

Withholding

Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person.

The term "NRA withholding" is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires withholding on a payment of U.S. source income. Payments to foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding.

NRA withholding does not include withholding under section 1445 of the Code (see U.S. Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income, later).

A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U.S. person is not required to withhold. In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding.

taxmap/pubs/p515-000.htm#TXMP1af6383f Withholding Agent

Withholding Agent

You are a withholding agent if you are a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.

Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Generally, the U.S. person who pays an amount subject to NRA withholding is the person responsible for withholding. However, other persons may be required to withhold. For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later.

taxmap/pubs/p515-000.htm#TXMP11a4dcd2 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 may still be held liable for interest and penalties for your failure to withhold.

taxmap/pubs/p515-000.htm#TXMP51e4a361 Determination of amount to withhold.

You must withhold on the gross amount subject to NRA withholding. You cannot reduce the gross amount by any deductions. However, see Scholarships and Fellowship Grants, and Pay for Personal Services Performed, later, for when a deduction for a personal exemption may be allowed.

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.

taxmap/pubs/p515-000.htm#TXMP76920373 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 provided or mailed to the partner or the due date for furnishing that schedule. If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income, later.

A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. To the extent a U.S. trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S.

taxmap/pubs/p515-000.htm#TXMP43279efc Withholding and   Reporting Obligations

Withholding and Reporting Obligations

You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. (See Returns Required, later.) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business.

taxmap/pubs/p515-000.htm#TXMP592f1c53 Form 1099 reporting and backup withholding.

You may also be responsible as a payer for reporting on Form 1099 payments made to a U.S. person. You must withhold 28% (backup withholding rate) from a reportable payment made to a U.S. person that is subject to Form 1099 reporting if (1) the U.S. person has not provided its taxpayer identification number (TIN) in the manner required, (2) the IRS notifies you that the TIN furnished by the payee is incorrect, (3) there has been a notified payee underreporting, or (4) there has been a payee certification failure. Generally, a TIN must be provided by a U.S. non-exempt recipient on Form W-9. A payer files a tax return on Form 945 for backup withholding.

You may be required to file Form 1099, and, if appropriate, backup withhold, even if you do not make the payments directly to that U.S. person. For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U.S. person subject to Form 1099 reporting. See Identifying the Payee, later, for more information. Also see Section O. Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Forms 1099, 1098, 5498, and W-2G

Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting.

taxmap/pubs/p515-000.htm#TXMP13244f87 Wages paid to employees.

If you are the employer of a nonresident alien, you may have to withhold taxes at graduated rates. See Pay for Personal Services Performed, later.

taxmap/pubs/p515-000.htm#TXMP47c87ab6 Effectively connected income by partnerships.

A withholding agent that is a partnership (whether U.S. or foreign) is also responsible for withholding on its income effectively connected with a U.S. trade or business that is allocable to foreign partners. See Partnership Withholding on Effectively Connected Income, later, for more information.

taxmap/pubs/p515-000.htm#TXMP42690007 U.S. real property interest.

A withholding agent may also be responsible for withholding if a foreign person transfers a U.S. real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U.S. real property interest to a shareholder, partner, or beneficiary that is a foreign person. See U.S. Real Property Interest, later.

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