Payments to Withholding Foreign Trusts

 

A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT agreement with the IRS and is acting in that capacity with respect to its owners and beneficiaries. WT agreement and the application procedures for the agreements are in Revenue Procedure 2017-21 PDF.

If you are making payments to a WT, you do not have to withhold if the WT is acting in that capacity. The WT must assume primary Chapters 3 and 4 withholding responsibility for amounts that are distributed to, or included in the distributive share of, any direct beneficiary or owner and may assume primary Chapters 3 and 4 withholding responsibility for certain of its indirect beneficiaries or owners. The WT must withhold the amount required to be withheld. A WT must provide you (the U.S. Withholding Agent) with a Form W–8IMY that certifies that the WT is acting in that capacity and provides all other information and certifications required by the form. The Form W–8IMY must contain the WT EIN and GIIN (if applicable).

Responsibilities of WT

The WT must withhold on the date it makes a distribution of a withholdable payment or an amount subject to Chapter 3 withholding to a direct foreign beneficiary or owner. If the beneficiary's or owner's distributive share has not been distributed, the WT must withhold on the beneficiary's or owner's distributive share on the earlier of the date that the trust must mail or otherwise provide to the beneficiary or owner the statement required under section 6048(b) or the due date for furnishing the statement (whether or not the WT is required to furnish the statement).

The WT may determine the amount of withholding based on a reasonable estimate of the beneficiary's or owner´s distributive share of income subject to withholding for the year. The WT must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the due date (including extensions) for filing the WT's Form 1042–S or the date the WT actually issues Form 1042-S for the calendar year, the WT may withhold and report any adjustments in the following calendar year.

Form 1042 Filing

The WT must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WT must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments.

Form 1042-S Reporting

A WT can elect to report payments made to its foreign direct beneficiaries or owners on a pooled basis for Chapter 3 purposes rather than reporting payments to each foreign direct beneficiary or owner in addition to reporting payments in a Chapter 4 withholding rate pool to the extent the WT is permitted to do so based on its Chapter 4 status.

A WT can treat as its direct beneficiaries or owners those indirect beneficiaries or owners of the WT for which it applies joint account treatment or the agency option. A WT must otherwise issue a Forms 1042–S to each beneficiary or owner to the extent it is required to do so under the WT agreement. You may issue a single Form 1042-S for all payments you make to a WT other than payments for which the entity does not act as a WT. You may, however, have Form 1099 requirements for certain indirect beneficiaries or owners of a WT that are U.S. nonexempt recipients.

Collective Refund Procedures

A WT may seek a refund of tax withheld under Chapters 3 and 4 on behalf of its beneficiaries or owners when the WT has not issued a Form 1042-S to the beneficiaries or owners that received the payment that was subject to overwithholding. The beneficiaries or owners, therefore, are not required to file claims for refund with the IRS to obtain refunds, but rather may obtain them from the WT. A WT may obtain a refund of tax withheld under Chapter 4 to the extent permitted under the WT agreement.

Joint Account Treatment

Under special procedures provided in the WT agreement, a WT may apply joint account treatment to a partnership or trust that is a direct beneficiary or owner of the WT. A WT that applies the joint account option must elect to perform pool reporting for amounts subject to Chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no Chapter 4 withholding is required, and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. These rules only apply to a partnership or trust that meets the following conditions:

  • It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust.
  • It is a certified deemed-compliant FFI (other than a registered deemed-compliant Model 1 IGA FFI, as defined in the WT agreement), an owner-documented FFI, an exempt beneficial owner, or an NFFE (other than a WP or WT).
  • It is a direct beneficiary or owner of the WT.
  • None of its partners, beneficiaries, or owners is a flow-through entity or intermediary.
  • None of the partnership’s or trust’s partners, beneficiaries, or owners is a U.S. person or is subject to withholding or re-porting under Chapter 4.
  • It agrees to make available upon request to the WT (or the WT’s auditor) records that establish it has provided the WT with documentation for purposes of Chapters 3 and 4 for all of its partners, beneficiaries, or owners.

For more information on applying these rules, see section 9.01 of the WT agreement found in section 7 of Revenue Procedure 2017-21 PDF.

Agency Option

A WT may apply the agency option to a partnership or trust under which the partnership or trust agrees to act as an agent of the WT and to apply the provisions of the WT agreement to its partners, beneficiaries, or owners. A WT that applies the agency option must elect to perform pool reporting for amounts subject to Chapter 3 withholding that either are not withholdable payments or are withholdable payments for which no Chapter 4 withholding is required, and that the WT distributes to, or includes in the distributive share of, a foreign direct beneficiary or owner. A WT and a partnership or trust may only apply the agency option if the partnership or trust meets the following conditions:

  • It is a nonwithholding foreign partnership or nonwithholding foreign trust that is either a simple or grantor trust.
  • It is either a direct beneficiary or owner of the WT or an indirect beneficiary or owner of the WT that is a direct partner, beneficiary, or owner of a partnership or trust to which the WT also applies the agency option.
  • It is an FFI that is a certified deemed-com-pliant FFI (other than a registered deemed-compliant Model 1 IGA FFI, as defined in the WT agreement), an owner-documented FFI, an NFFE, or an exempt beneficial owner.
  • None of its partners, beneficiaries, or owners is a WT, WP, participating FFI, registered deemed-compliant FFI, registered deemed-compliant Model 1 IGA FFI (as defined in the WT agreement), or a QI acting as an intermediary for a payment made by the WT to the partnership or trust.
  • The WT may not act as a withholding foreign trust with respect to any direct or indirect beneficiary or owner of the partnership or trust that is a U.S. nonexempt recipient, unless the U.S. nonexempt recipient is a beneficiary or owner of an owner-documented FFI or passive NFFE to which the WT applies the agency option and is included in the WT’s U.S. payee pool.
  • It agrees to comply with the compliance procedures described in section 8.05 of the WT agreement by providing the WT

For more information on applying these rules, see section 9.02 of the WT agreement found in section 7 of Revenue Procedure 2017-21 PDF.

Not Acting as WT

A foreign trust that is not acting as a WT is a nonwithholding foreign trust. This occurs if a WT is not acting in that capacity for some or all of the amounts it receives from you.

Generally, you must treat payments made to a nonwithholding foreign trust as made to the beneficiaries of a simple trust or the owners of a grantor trust. The trust must provide you with a Form W–8IMY (with Part VIII completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the beneficiaries or owners, and certain information on a withholding statement that is associated with the Form W-8IMY.For more information on Withholding Statement requirements, please refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

References/Related Topics