Certain limited kinds of U.S. investment income earned by a foreign government is not included in the gross income of the foreign government and is not subject to U.S. withholding tax. U.S. investment income means only income from investments in the United States in stocks, bonds, or other domestic securities, financial instruments held in the execution of governmental financial or monetary policy, and interest on money deposited by a foreign government in banks in the United States.
A foreign government or its 100% owned “subsidiary” must provide a Form W-8EXP (Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding) or, in the case of a payment made outside the United States to an offshore account, documentary evidence to obtain this exemption. These types of investment income that are paid to a foreign government is subject to reporting on Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding).
Income (including investment income) received by a foreign government from the conduct of a commercial activity or from sources other than those stated above, is not exempt and is subject to nonresident alien (NRA) withholding. In addition, income received from a controlled commercial entity (including gain from the disposition of any interest in a controlled commercial entity) and income received by a controlled commercial entity is also subject to NRA Withholding.
If the foreign government is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income (ECI) allocable to the foreign government will usually be considered derived from a commercial activity. For more information regarding foreign governments receiving income from the conduct of a commercial activity and income as a partner in partnerships carrying on a trade or business in the U.S., refer to Proposed Treasury Regulations REG–146537–06 (IRB 2011-48, Page 813) (PDF).
If the ECI from the partnership is considered derived from a commercial activity, the ECI allocable to all foreign partners is subject to withholding under Internal Revenue Code (IRC) section 1446. Refer to Partnership Withholding.
A documented government of a U.S. possession is exempt from U.S. tax on all U.S. source income. This income is not subject to NRA withholding. These governments should use Form W-8EXP to get this exemption.
International organizations are exempt from U.S. tax on all U.S. source income. This income is not subject to NRA withholding. International organizations are not required to provide a Form W-8 or documentary evidence to receive the exemption if the name of the payee is one that is designated as an international organization by executive order.
Foreign Tax Exempt Organizations
A foreign organization that is a tax exempt organization is not subject to a withholding tax on amounts that are income unrelated to business taxable income. However, if a foreign organization is a foreign private foundation, it is subject to a 4% withholding tax on all U.S. source investment income.
For a foreign tax-exempt organization to claim an exemption from withholding because of its tax exempt status, or to claim withholding at a 4% rate, it must provide you with a Form W-8EXP (Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding). However, if a foreign organization is claiming an exemption from withholding under an income tax treaty, or the income is unrelated business taxable income, the organization must provide a Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) or Form W-8ECI (Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States). Income paid to foreign tax-exempt organizations are subject to reporting on Form 1042-S.
For Withholding Agents and FFIs
Generally, an amount is subject to 30% withholding for purposes of payments that are subject to withholding under chapter 3 and chapter 4 unless the payee/recipient has been validly documented. See Instructions for the Requester of Forms W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY for other withholding requirements for allocations of ECTI from partnerships.
A withholding agent or payor that fails to obtain a valid Form W-8 or Form W-9 and fails to withhold as required under the presumption rules may be assessed tax at the 30% rate under chapter 3 or 4 or the 24% backup withholding rate under section 3406, as well as interest and penalties for lack of compliance. Note that a W-8EXP must only be honored if it is from an entity that is a legal investor in the entity paying the income. If a government or its 100% controlled entity is merely one of the ultimate investors in the company paying the income, not a direct investor, its W-8EXP is not valid unless the intermediary provides a fully documented W-8IMY.
If you are a partnership allocating income that is effectively connected with the conduct of the partnership’s U.S. trade or business and you fail to withhold as required under section 1446, you will be liable for the tax required to be withheld. In addition, you may be liable for interest, penalties, and additions to the tax even if there is no underlying tax liability due from a foreign partner on its allocable share of the partnership’s ECTI.
If you are a withholding agent making a payment of an amount subject to chapter 3 withholding or a withholdable payment and you make the payment to an intermediary, you must obtain documentation from such intermediary (including the intermediary’s chapter 4 status if the payment is a withholdable payment), as well as any required documentation for the beneficial owner(s) of the payment to the extent required under the chapter 3 or 4 regulations.
A Form W-8EXP will not be valid if you have reason to know that it is not valid. This would include the completeness of relevant details. The Instructions for the Requester of Forms W–8 BEN, W–8 BEN–E, W–8 ECI, W–8 EXP, and W–8 IMY provides further detail on when TINs, foreign TINs and GIINs are required. A form is not valid and you will be liable for tax and penalties if you accept a form for which you have conflicting information about the account, or you have actual knowledge that representations on the form are incorrect or you fail to question a form that a reasonably prudent person would question, based on other facts surrounding the payment.
A withholding agent is not liable if the withholding agent overwithholds on a payment with a reasonable basis.
- Form W-8EXP (Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding)
Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
- Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding)
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.