Foreign Governments and Certain Other Foreign Organizations


Foreign Governments

Certain U.S. source investment income received by a foreign government is not included in the gross income of the foreign government and is not subject to U.S. tax (including U.S. withholding tax). U.S. investment income that is not subject to tax includes income received from investments in the United States in stocks, bonds, or other domestic securities owned by foreign governments, financial instruments held in the execution of governmental financial or monetary policy, and interest on deposits in banks in the United States of moneys belonging to foreign governments.

An "integral part" or a "controlled entity" of a foreign government must provide a Form W-8 EXP, 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 of the foreign government, documentary evidence to obtain this exemption. For the definition of "integral part" and "controlled entity," see Temporary Regulation section 1.892-2T. U.S. investment income that is paid to a foreign government, even if exempt from tax under section 892, is subject to reporting on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.

The following types of income are not exempt from tax by reason of section 892 and may be subject to withholding, including under sections 1441, 1442, 1445, and 1446(f): (1) income that is derived from the conduct of a commercial activity (whether within or outside the United States); (2) income received by a "controlled commercial entity" or received (directly or indirectly) from a controlled commercial entity; and (3) income derived from the disposition of any interest in a controlled commercial entity. For the definition of "integral part" and "controlled entity," see Temporary Regulation section 1.892-2T; for the definition of "commercial activities," see Temporary Regulation section 1.892-4T; and for the definition of "controlled commercial entity," see Temporary Regulation section 1.892-5T. Accordingly, a Form W-8EXP provided by a controlled commercial entity does not establish that entity's entitlement to an exemption from tax by reason of section 892. Also, certain distributions received by a foreign government from a U.S. real estate investment trust (REIT) are not eligible for exemption from tax under section 892. See Notice 2007-55, 2007-2 C.B. 13PDF.

If a foreign government is a direct or indirect partner in a partnership that is carrying on a trade or business in the United States, the effectively connected income (ECI) allocable to the foreign government likely will be considered income derived from a commercial activity. For more information regarding foreign governments receiving income that is derived from the conduct of a commercial activity and income as a partner in partnerships, refer to Proposed Treasury Regulations REG–146537–06 (IRB 2011-48, Page 813).

A government of a U.S. possession with appropriate documentation is exempt from U.S. tax on all U.S. source income, even that of commercial activities. This income is not subject to chapter 3 (NRA) withholding. These governments should use Form W-8EXP to qualify for this exemption.

International Organizations

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. Amounts paid to international organizations are subject to reporting on the Form 1042-S even if they are exempt from chapter 3 withholding under section 892 or 895.

Foreign Tax Exempt Organizations

A foreign organization may be tax exempt even if it has not sought IRS recognition of its exempt status. See the Tax Exempt Organization Search Tool for a list of organizations that have sought and been recognized as being tax exempt. See Treas. Reg. § 1.1441-9(b)(2). A foreign tax exempt organization is not subject to chapter 3 withholding on its unrelated business taxable income (UBTI) if it provides a Form W-8ECI to the payor. See Treas. Reg. § 1.1443-1. However, a foreign private foundation is generally subject to a 4% withholding tax on its U.S. source gross investment income. Id.

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-8 EXP. However, if a foreign organization is claiming an exemption from withholding under an income tax treaty, or the income is UBTI, the organization must provide a Form W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), or Form W-8 ECI, 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 a foreign tax-exempt organizations is subject to reporting on Form 1042-S.

For Withholding Agents and FFIs

Generally, a payment of an amount subject to withholding under chapter 3 or a withholdable payment under chapter 4 is subject to 30% withholding unless the payee/recipient has provided valid documentation that establishes that the payment qualifies for a reduced rate of withholding. See Instructions for the Requester of Forms W–8 BEN, W–8B EN–E, W–8 ECI, W–8 EXP, and W–8 IMY. Without documentation, backup withholding under section 3406 applies to any reportable payment.

A withholding agent or payor that fails to obtain, or cannot rely on, 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. If the payment is made to an intermediary or flow-through entity that receives the payment on behalf of a beneficial owner claiming an exemption from tax with a Form W-8EXP, the withholding agent must also obtain a valid Form W-8IMY from the entity that establishes its chapter 4 status.

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. Except for certain tax-exempt organizations described in section 501(c), the submission of Form W-8EXP will have no effect on whether there is a 1446 tax due with respect to such partner's allocable share of partnership ECTI. A partnership must still pay 1446 tax with respect of a foreign government partner's allocable share of ECTI. See Treas. Reg. 1.1446-1(c)(2)(ii)(G). 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.

A Form W-8EXP will not be valid if you know or have reason to know that it is incorrect or unreliable. This would include the completeness of relevant details. The Instructions for the Requester of Forms W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY provide further detail on when TINs, foreign TINs, and GIINs are required. A form is not valid, and you may 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. See Treas. Reg. 1441-7(b)(3) for limitations on reason to know for financial institutions.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, 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.