Caution: This page (and its links) has not been updated to include all Chapter 4 (FATCA) withholding matters. For Chapter 3 and Chapter 4 withholding obligations, please refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. The publication is available in PDF and HTML (internet) formats. The HTML format includes related topics listed in the hyperlinked table of contents on the left column of the page. Prior year versions of Publication 515 are also available.
The payees of payments (other than income effectively connected with a U.S. trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Income that is, or is deemed to be, effectively connected with the conduct of a U.S. trade or business of a flow-through entity, is treated as paid to the entity.
All of the following are flow-through entities:
A foreign partnership (other than a withholding foreign partnership and partnerships claiming treaty benefits as hybrid entities that are not fiscally transparent).
A foreign simple or foreign grantor trust (other than a withholding foreign trust), and foreign simple and foreign grantor trusts claiming treaty benefits as hybrid entities that are not fiscally transparent.
An entity receiving income for which treaty benefits are claimed by an interest holder in the entity and the entity is considered fiscally transparent.
Generally, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY on which it claims such status. You may also be required to treat the entity as a flow-through entity under the presumption rules.
You must determine whether the owners or beneficiaries of a flow-through entity are U.S. or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Refer to Beneficial Owners and Documentation and Presumption Rules.
"Withholding Foreign Partnerships" and "Withholding Foreign Trusts" are not flow-through entities. See the discussion of these entities on the Revised Qualified Intermediary (QI) Agreement (PDF), in Revenue Procedure 2017-15, and refer to Revenue Procedure 2017-21 (PDF) for guidance on entering into a withholding foreign partnership or trust agreement.
A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent for treaty purposes (even if the entity has checked the box to be treated as a partnership for other IRS purposes), and that it meets all the other requirements for claiming treaty benefits. If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees.
Example 1. A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation, and a U.S. citizen. You make a payment of U.S. source interest to the partnership. It gives you a Form W–8IMY, with which it associates Form W–8BEN from the nonresident alien and a W-8BEN-E from the foreign corporation, and a Form W–9 from the U.S. citizen. The partnership also gives you a complete withholding statement that enables you to associate component portions of the interest payment to each partner.
You must treat all three partners as the payees of the interest payment as if the payment were made directly to them (except you complete the Intermediary or flow through entity section of Form 1042-S). Report the payment to the nonresident alien and the foreign corporation on Forms 1042–S. Report the payment to the U.S. citizen on Form 1099–INT.
Example 2. A nonwithholding foreign partnership has two partners: a foreign corporation, and a nonwithholding foreign partnership. The second partnership has two partners, both nonresident alien individuals. You make a payment of U.S. source interest to the first partnership. It gives you a valid Form W–8IMY with which it associates a Form W–8BEN-E from the foreign corporation and a Form W–8IMY from the second partnership. In addition, Forms W–8BEN from the partners are associated with the Form W–8IMY from the second partnership. The Forms W–8IMY from the partnerships have complete withholding statements associated with them. Because you can reliably associate a portion of the interest payment with the Forms W–8BEN-E and W-8BEN provided by the foreign corporation and the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest.
Example 3. You make a payment of U.S. source dividends to a withholding foreign partnership. The partnership has two partners, both foreign corporations. You can reliably associate the payment with a valid Form W–8IMY from the partnership on which it represents that it is a withholding foreign partnership. You must treat the partnership as the payee of the dividends.
A trust is foreign unless it meets both the following tests.
A court within the United States is able to exercise primary supervision over the administration of the trust.
One or more U.S. persons have the authority to control all substantial decisions of the trust.
Generally, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Internal Revenue Code. The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. The payees of a payment made to a foreign grantor trust are the owners of the trust. However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent for treaty purposes (in its country of formation, even if it has checked the box to be fiscally transparent for other IRS purposes) and that it meets all the other requirements for claiming treaty benefits.
If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees.
Example. A foreign simple trust has three beneficiaries: a nonresident alien individual; a foreign corporation; and a U.S. citizen. You make a payment of interest to the foreign trust. It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien, Form W-8BEN-E from the foreign corporation and a Form W-9 from the U.S. citizen. The trust also gives you a complete withholding statement that enables you to associate a portion of the interest payment with the forms provided by each beneficiary. You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them (except you complete the Intermediary or flow through entity section of Form 1042-S). Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Report the payment to the U.S. citizen on Form 1099-INT.
If a reduced rate of withholding under an income tax treaty is claimed, the claimant must be able to treat as a flow-through entity any entity between you and the claimant. The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc.). The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Subject to the standard of knowledge rules, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity.
The payees of a payment made to a fiscally transparent entity are the interest holders of the entity.
Example. Entity A is a business organization organized under the laws of country X that has an income tax treaty in effect with the United States. A has two interest holders, B and C. B is a corporation organized under the laws of country Y. C is a corporation organized under the laws of country Z. Both countries Y and Z have an income tax treaty in effect with the United States.
A receives royalty income from U.S. sources that is not effectively connected with the conduct of a trade or business in the United States. For U.S. income tax purposes, A is treated as a partnership. Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Accordingly, A is fiscally transparent in its jurisdiction, country X.
B and C are not fiscally transparent under the laws of their respective countries of incorporation. Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U.S. source royalty income for purposes of the U.S.-Y income tax treaty. Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Therefore, A is not treated as fiscally transparent under the laws of country Z. Accordingly, C is not treated as deriving its share of the U.S. source royalty income for purposes of the U.S.-Z income tax treaty.
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.