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?
Mandatory Withholding of Federal Income Tax on Nonresident Aliens
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.
Exceptions to Mandatory Withholding of Federal Income Tax on Nonresident Aliens
- 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;
- 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); and
- 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).
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:
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.
Beneficial Owner v. Groups of Foreign Entertainers:
Any foreign person (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 a Taxpayer Identification Number (TIN) on Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, or on Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (with certain exceptions involving income from interest and dividends).
The “beneficial owner” of the income:
- must make the tax treaty claim,
- is the person that is required under U.S. tax principles to include the amount paid in his gross income, and to report the income on a U.S. income tax return, and
- can be an individual, a corporation, a complex trust, an estate, or any other entity that is not a flow-through entity.
Groups of Foreign Entertainers
The "group" would be the beneficial owner of the income if it 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. 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 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.
You can call one of the following numbers for questions related to the taxation of foreign athletes and entertainers:
1-800-829-1040 (within the United States)
1-267-941-1000 (Outside the United States; not toll-free)