Withholding of Tax on Payments to Foreign Athletes and Entertainers
The tax issues arising from the income accruing to foreign athletes and entertainers are complex. Some of the complex issues may be summarized as follows:
- Do the services of the athlete or entertainer constitute independent personal services or dependent personal services?
- Does the athlete or entertainer have a fixed base or permanent establishment in the United States?
- If a third-party agent is involved in arranging the events of the athlete or entertainer, is he a "dependent agent" or an "independent agent?"
- If a foreign corporation bills you for the services of the athlete or entertainer,
- Is the foreign corporation a personal holding company?
- Does the foreign corporation have a fixed base or permanent establishment in the United States?
- Does the athlete or entertainer control his own activities, or does the corporation control his activities?
- Is the athlete or entertainer a major shareholder in the foreign corporation?
- Is the athlete or entertainer trying to use the corporate structure for tax advantages, which would not accrue to an individual?
- Has the foreign corporation been formed under the laws of a tax haven country, or been formed in a certain country because of the favorable tax treaty treatment afforded by the U.S. treaty with that country?
- Is the athlete or entertainer allocating his income between the foreign corporation and himself for tax advantages?
- If a group of entertainers is involved, and the group asks for payment to be made to the group, which of the following best describes this group of entertainers:
- a group of alien individuals,
- a foreign partnership,
- a domestic partnership with foreign partners, or
- employees and/or agents and/or shareholders of a foreign corporation?
Unless you as the withholding agent are prepared to deal with all the complex tax issues raised above, you must withhold tax at the statutory rates (30% for independent personal services, graduated rates for dependent personal services, or 30% in cases in which you cannot determine the status of the payee) on all payments made to foreign athletes or entertainers. An exception may exist in cases in which only one individual athlete or entertainer is involved, the activities are clearly identifiable as independent personal services, and a tax treaty exemption clearly applies.
If you have questions regarding the taxation of foreign athletes and entertainers, please call one of the following numbers:
1-800-829-1040 (within the United States)
1-267-941-1000 (Outside the United States; not toll-free)
Central Withholding Agreements
Foreign athletes and entertainers who are making a tour of the United States may wish to enter into a "Central Withholding Agreement" with the IRS because, generally, such agreements reduce the amount of taxes withheld on the U.S.-source gross receipts of the foreign athlete or entertainer. A request for a central withholding agreement should be submitted at least 45 days before the agreement is to take effect. For additional information on obtaining a CWA, contact us at CWA.Program@irs.gov or forward your request to the address shown in the discussion found at Central Withholding Agreements.
Tax Treaty Claims by Groups of Foreign Entertainers:
TREASURY REGULATION 1.1441-1(e)(4)(vii) reads in part as follows:
"(vii) Requirement of taxpayer identifying number. A TIN must be stated on a withholding certificate when required by this paragraph (e)(4)(vii). A TIN is required to be stated on a beneficial owner certificate if the beneficial owner is claiming the benefit of a reduced rate under an income tax treaty (other than for amounts described in 1.1441-6(b)(2)(ii)). A TIN is an IRS individual taxpayer identification number, an employer identification number, or a social security number as described in section 6109 and @ 301.6109-1 of this chapter, or any other identifier that the Commissioner may designate."
This regulation makes clear that any foreign person (including a nonresident alien individual, a foreign corporation, a foreign partnership, or any other entity which is not a U.S. person) which makes a tax treaty claim with a U.S. withholding agent must provide his TIN (Taxpayer Identification Number) on Form 8233 or on Form W-8BEN (with certain exceptions involving income from interest and dividends). The regulation also makes clear that the “beneficial owner” of the income must make the tax treaty claim. The beneficial owner of the income is the person that is required under U.S. tax principles to include the amount paid in his gross income under Internal Revenue Code section 61, and to report the income on a U.S. income tax return. A beneficial owner can be an individual, a corporation, a complex trust, an estate, or any other entity that is not a flow-through entity.
A problem arises where a group of foreign entertainers makes a tax treaty claim with respect to the income, which accrues to the group from a joint performance because generally the "group" of foreign entertainers is not the beneficial owner of the income. The "group" would be the beneficial owner of the income if the group was a corporation, or some other entity legally organized under the laws of a foreign country that is not a flow-through entity. Such a foreign corporation, or other entity could make a tax treaty claim on Form W-8BEN or Form 8233 because such corporation, or other entity would be capable of filing an income tax return on which to report the entertainment income.
If the "group" of foreign entertainers does not constitute a corporation, or other entity, then the "group" is not the beneficial owner of the income. In this situation, the beneficial owners of the income are the nonresident alien individuals who comprise the "group." Each of the nonresident alien individuals in the group is a beneficial owner of the income and may claim a tax treaty benefit on either Form W-8BEN or Form 8233.
A nonresident alien individual and a foreign corporation are beneficial owners of income who can apply for and receive a TIN (Taxpayer Identification Number). A group of individuals that is not incorporated or is not some other entity that would be required to include the amount paid in gross income under Internal Revenue Code section 61 is not a beneficial owner of income for tax purposes, and therefore cannot be eligible for a tax treaty benefit. The IRS has correctly rejected all Forms 8233 submitted by such persons. The following statutory exceptions to mandatory withholding also apply to nonresident athletes and entertainers.
Exceptions to Mandatory Withholding of Federal Income Tax on Nonresident Aliens
- IRC section 861(a)(3) / IRC section 864(b)(1) - Wages or Nonemployee Compensation exempt from withholding of federal income tax if all 3 of the following conditions met:
- The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
- The compensation for such services does not exceed $3,000; and
- The nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or a foreign partnership not engaged in a trade or business in the U.S. or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).
- IRC section 872(b)(3) - Wages or Nonemployee Compensation exempt from withholding of federal income tax if both the following 2 conditions are met:
- The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant
- status; and
- The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.