Generally, if you are not a partnership, you do not need to withhold tax on ECI income (income which is effectively connected with a U.S. trade or business) if you receive a Form W-8ECI on which a foreign payee represents that:
- The foreign payee is the beneficial owner of the income,
- The income is effectively connected with the conduct of a trade or business in the United States, and
- The income is includible in the payee's gross income.
Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding under FATCA.
This withholding exemption applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation).
However, withholding may be required on any of the cases listed below:
- Payments for independent personal services performed by a foreign individual,
- Effectively connected taxable income of a partnership that you are allocating to a foreign partner (refer to Partnership Withholding on Effectively Connected Income),
- Income from a foreign person’s disposition of a U.S. real property interest or certain partnership interests (refer to U.S. Real Property Interest), or
- Payments to a foreign corporation for personal services if all three of the following apply:
- The foreign corporation otherwise qualifies as a personal holding company for income tax purposes (refer to IRC 542),
- The foreign corporation receives amounts under a contract for personal services of an individual whom the corporation has no right to designate, and
- 25% or more in value of the outstanding stock of the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform or may be designated as the one to perform, the services called for under the contract.
The beneficial owner of the income should provide Form W-8ECI or Form 8233 to the withholding agent to claim an exemption from NRA Withholding on ECI income.
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.