[Federal Register Volume 65, Number 99 (Monday, May 22, 2000)]
[Rules and Regulations]
[Pages 32152-32212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11937]
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Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1 and 31
Revisions to Regulations Relating to Withholding of Tax on Certain U.S.
Source Income Paid to Foreign Persons and Revisions of Information
Reporting Regulations; Final Rule
Federal Register / Vol. 65, No. 99 / Monday, May 22, 2000 / Rules and
Regulations
[[Page 32152]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 31
[TD 8881]
RIN 1545-AX53; RIN 1545-AV27; RIN 1545-AV41
Revisions to Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons and Revisions of
Information Reporting Regulations.
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains amendments to final regulations
relating to the withholding of income tax under sections 1441, 1442,
and 1443 on certain U.S. source income paid to foreign persons and
related requirements governing collection, deposit, refunds, and
credits of withheld amounts under sections 1461 through 1463.
Additionally, this document contains amendments under sections 6041,
6041A, 6042, 6045, 6049, and 3406. This regulation affects persons
making payments of U.S. source income to foreign persons.
DATES: These regulations are effective January 1, 2001.
FOR FURTHER INFORMATION CONTACT: Carl Cooper, Laurie Hatten-Boyd, or
Kate Hwa (202) 622-3840 (not a toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these final regulations have been
reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545-1484. Responses to these collections of
information are required to obtain a benefit (to claim an exemption to,
or a reduction in, withholding), and to facilitate tax compliance (to
verify entitlement to an exemption or a reduced rate). The likely
respondents are individuals, businesses, and other for-profit
organizations.
Comments on the collections of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.
The estimated average annual burden per respondent and/or
recordkeeper are reflected in the burdens of Forms W-8, 1042, 1042-S,
1099, and the income tax return of a foreign person filed for purposes
of claiming a refund.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office of
Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
In Treasury Decision (TD) 8734 (62 FR 53387), the Treasury
Department and the IRS issued comprehensive regulations (final
regulations) under chapter 3 (sections 1441-1464) and subpart G of
Subchapter A of chapter 61 (sections 6041-6050S) of the Internal
Revenue Code. Those final regulations were amended by TD 8804 (63 FR
72183 [1999-12 I.R.B. 5]) which delayed the effective date of the final
regulations to payments made after December 31, 1999. The effective
date of the regulations was again extended by TD 8856 (64 FR 73408) to
payments made after December 31, 2000.
Need for Changes
Since the publication of TD 8734, the IRS and Treasury have
received numerous comments relating to technical errors in the
regulations and ways to ease compliance while keeping the objectives of
the regulations in place. In Notice 99-8 (1999-5 I.R.B. 26), the IRS
and Treasury announced amendments that would be made to the
regulations. This TD implements Notice 99-8 and contains additional
changes made in response to comments as well as the IRS and Treasury's
further analysis of the regulations.
Explanation of Revisions
A. Changes to Sec. 1.1441-1
1. Payments to a U.S. Branch of Certain Foreign Banks or Foreign
Insurance Companies
Generally, a payment to a U.S. branch of a foreign person is a
payment to a foreign person. Under Sec. 1.1441-1(b)(2)(iv), however, a
U.S. branch of certain foreign banks or insurance companies and a
withholding agent may agree to treat the U.S. branch as a U.S. person
for purposes of chapter 3 of the Internal Revenue Code. The regulation
as initially drafted required a withholding agent to treat such a U.S.
branch as a U.S. person for all purposes under chapter 3 of the
Internal Revenue Code. The regulation itself, however, does not treat a
U.S. branch as a U.S. person for all purposes under chapter 3 of the
Internal Revenue Code. For example, a U.S. branch of a foreign bank or
insurance company provides a withholding certificate on a Form W-8,
which is used only by foreign persons. Further, under Sec. 1.1461-1(c),
payments to such a branch are reportable as payments to a foreign
person on Form 1042-S. Therefore, Sec. 1.1441-1(b)(2)(iv) has been
amended to state that, notwithstanding the agreement between the
withholding agent and a U.S. branch to treat the U.S. branch as a U.S.
person, the branch is not treated as a U.S. person for purposes of
providing documentation or for reporting payments to the branch.
2. Rules for Reliably Associating a Payment With a Withholding
Certificate or Other Appropriate Documentation
Section 1.1441-1(b)(2)(vii) contains rules to determine whether a
payment can be reliably associated with valid documentation. A payment
that cannot be reliably associated with valid documentation is subject
to the presumption rules in Secs. 1.1441-1(b)(3), 1.1441-4(a)(2)(ii)
and (3)(i), 1.1441-5(d) and (e)(6), 1.1441-9(b)(3), and 1.6049-5(d).
Paragraph (b)(2)(vii) did not adequately address when a payment made to
a nonqualified intermediary, a flow-through entity, or a U.S. branch of
certain foreign banks and insurance companies (other than a branch that
acts as a U.S. person) would be treated as reliably associated with
documentation. These entities provide a withholding certificate for
themselves and withholding certificates, documentary evidence, or other
information for the persons on whose behalf they act. Therefore, the
payment must be reliably associated not only with a withholding
certificate from the intermediary, flow-through entity, or U.S. branch,
but also with documentation from, or information relating to, the payee
on whose behalf the entity acts.
Paragraph (b)(2)(vii) has been amended to provide more detailed
reliable association rules. For a payment made to a nonqualified
intermediary, a flow-through entity, or a U.S. branch, new paragraph
(b)(2)(vii)(B) provides that a withholding agent can reliably associate
the payment with valid documentation if, prior to the payment, it has
received a valid nonqualified
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intermediary withholding certificate on Form W-8IMY; it can determine
the portion of the payment that relates to valid documentation
associated with the Form W-8IMY from a payee (i.e., a person other than
a nonqualified intermediary, flow-through entity, or U.S. branch); and
the nonqualified intermediary, flow-through entity, or U.S. branch has
provided sufficient information for the withholding agent to report the
payment on Form 1042-S or Form 1099, if reporting is required.
Paragraph (b)(2)(vii)(C) provides rules for a withholding agent
that makes a payment to a qualified intermediary that does not assume
primary withholding responsibility under chapter 3 of the Internal
Revenue Code or primary Form 1099 reporting and backup withholding
responsibility under chapter 61 and section 3406 of the Internal
Revenue Code. The payment can be reliably associated with valid
documentation if, prior to the payment, the withholding agent receives
a valid qualified intermediary withholding certificate on Form W-8IMY
and a withholding statement that allocates the payment among
withholding rate pools, including withholding rate pools for each U.S.
non-exempt recipient for which the qualified intermediary has provided
a valid Form W-9 (or other information if a Form W-9 has not been
provided).
For a payment made to a qualified intermediary that assumes primary
withholding responsibility under chapter 3 of the Internal Revenue Code
with respect to the payment, but does not assume primary Form 1099
reporting and backup withholding responsibility under chapter 61 and
section 3406 of the Internal Revenue Code, paragraph (b)(2)(vii)(D)
provides that a withholding agent can reliably associate the payment
with valid documentation if, prior to the payment, it receives a valid
Form W-8IMY and the withholding statement associated with the Form W-
8IMY allocates the payment between a single withholding rate pool for
which the qualified intermediary assumes primary withholding
responsibility and separate withholding rate pools for each U.S. non-
exempt recipient.
Paragraph (b)(2)(vii)(E) provides rules for a withholding agent
that makes a payment to a qualified intermediary that assumes primary
Form 1099 reporting and backup withholding responsibility under chapter
61 and section 3406 of the Internal Revenue Code, but does not assume
primary withholding responsibility under chapter 3 of the Internal
Revenue Code. The payment can be reliably associated with valid
documentation if, prior to the payment, the withholding agent can
associate the payment with a valid Form W-8IMY and the withholding
statement associated with the Form W-8IMY allocates the payment among
the withholding rate pool or pools for which withholding responsibility
is not assumed and the portion of payment for which the qualified
intermediary assumes Form 1099 reporting and backup withholding
responsibility.
Finally, for a payment made to a qualified intermediary that
assumes both primary withholding responsibility under chapter 3 of the
Internal Revenue Code and primary Form 1099 reporting and backup
withholding responsibility under chapter 61 and section 3406 of the
Internal Revenue Code, paragraph (b)(2)(vii)(F) provides that a
withholding agent can reliably associate the payment with valid
documentation if, prior to the payment, it can associate the payment
with a valid Form W-8IMY. In this case, no withholding rate pool
allocation information is required. This same rule applies for payments
made to a withholding foreign partnership.
3. Presumptions of Classification as Individual, Corporation,
Partnership, etc.
As initially drafted, Sec. 1.1441-1(b)(3)(ii) provided a
withholding agent with presumption rules to determine a payee's
classification (e.g., individual, corporation, partnership) if it could
not reliably associate a payment with valid documentation. Paragraph
(b)(3)(ii) did not, however, provide a presumption rule if a
withholding agent could reliably associate a payment with documentary
evidence (i.e., documentation other than a withholding certificate)
from which it could not determine the payee's classification. For
example, documentary evidence may indicate that a payee (other than an
entity that is treated as a per se corporation under Sec. 301.7701-
2(b)(8)(i)) is a type of entity that can be organized so that all of
its members have limited liability, in which case it would be treated
as an association, or so that one or more of its members have unlimited
liability, in which case it would be treated as a partnership. The
determination of classification can be critical because if the entity
is a flow-through entity, it is not the beneficial owner of the payment
and its documentary evidence cannot be relied upon to grant a reduced
rate of withholding.
Section 1.1441-1(b)(3)(ii)(C) has been added to permit a
withholding agent to treat an entity that has provided documentary
evidence as a corporation if the classification of the entity cannot be
determined from documentary evidence or by reference to the exempt
recipient rules under Sec. 1.6049-4(c)(1)(ii). This presumption rule
will reduce burdens on withholding agents that are permitted to use
documentary evidence, such as foreign intermediaries and flow-through
entities, which would otherwise have to request from payees additional
information regarding U.S. tax classification. The presumption rule is
not, however, intended to allow foreign entities to avoid making the
correct determination of their classification and to provide the
correct documentation. Thus, a foreign entity must make a determination
about its classification and if it determines that it is an
intermediary, partnership, foreign simple trust, or foreign grantor
trust under U.S. tax law principles, it must provide an intermediary or
flow-through withholding certificate on Form W-8IMY together with the
appropriate information relating to its customers, partners,
beneficiaries, owners, or other payees. Further, a withholding agent
cannot treat an entity as a corporation if it knows, or should know,
that the entity is a flow-through entity or intermediary. For example,
if a particular type of collective investment vehicle provides
documentary evidence that does not establish that it is a corporation,
partnership, or trust, but the withholding agent knows, or has reason
to know, that the investment vehicle is classified as a partnership for
U.S. tax purposes, it must request a partnership withholding
certificate from the entity.
An entity that is presumed to be a foreign corporation under new
paragraph (b)(2)(ii)(C) cannot be treated as the beneficial owner
entitled to a reduced rate of withholding to the extent the documentary
evidence indicates that it is a bank, broker, custodian, intermediary,
or other agent unless the entity provides a statement that it is the
beneficial owner of the income. For example, documentary evidence that
indicates that the payee is a bank does not permit a withholding agent
to apply the portfolio interest exception to payments of interest made
to the bank. In addition, even though a foreign entity is treated as a
beneficial owner for purposes of the exceptions to withholding under
the Internal Revenue Code and regulations, it is not necessarily
entitled to claim treaty benefits. Whether treaty benefits may be
claimed by an entity depend on whether it meets the requirements under
the income tax treaty and section 894.
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4. Changes to Presumption Rules
Several simplifying and clarifying changes have been made to the
presumption rules in Sec. 1.1441-1(b)(3). First, the presumption rule
applicable to pensions and annuities contained in Sec. 1.1441-
1(b)(3)(iii)(C) has been expanded to apply to individual retirement
accounts and individual retirement annuities. Second, Sec. 1.1441-
1(b)(3)(iii)(D), which contains presumption rules applicable to
offshore accounts, was revised to state the applicable rule more
clearly. In addition, the restriction on applying the presumption rule
of paragraph (b)(3)(iii)(D) to amounts that are not subject to
withholding has been moved from that paragraph to Sec. 1.6049-5(d)(2).
This change eliminates a conflict with Sec. 1.6049-5(d)(2), as
previously drafted, which applied the paragraph (b)(3)(iii)(D) rule to
amounts not subject to withholding.
Section 1.1441-1(b)(3)(iv) contains a grace period presumption rule
that permits a withholding agent to treat a payee as a foreign person
in certain situations where the withholding agent would presume the
payee to be a U.S. person. Although the grace period rule generally
does not permit a withholding agent to apply any exceptions to
withholding, it does permit a withholding agent to apply a reduced rate
of withholding for 90 days to a payee that provides a withholding
certificate that would have been valid except that it was transmitted
by facsimile. One commentator noted that because the facsimile rule
applied only to payees that a withholding agent could, ``in its
discretion'' treat as a foreign person, the rule was limited to those
situations where the presumption rules would have treated the payee as
a U.S. person and the withholding agent was exercising its discretion
to treat the payee as foreign. Therefore, the commentator argued, the
rule arguably could not be applied to payees that were required to be
treated as foreign persons under the presumption rules, e.g., an exempt
recipient with indicia of foreign status. The regulation has been
modified by removing the phrase ``in its discretion'' thereby
permitting the facsimile rule to apply to payees that are treated as
foreign payees under the presumption rules.
Paragraph (b)(3)(v), as promulgated in TD 8734, provided several
presumption rules that applied if a withholding agent did not receive
from a nonqualified intermediary the withholding certificates or
documentary evidence of the persons on whose behalf the nonqualified
intermediary acted or did not receive information allocating the
payment to each person. Under paragraph (b)(3)(v)(C), if the
withholding agent could associate a payment with a group of beneficial
owners or payees, it could treat the payment as being made in its
entirety to the person in the group that was subject to the highest
withholding rate or, if the rates were equal, to the payee in the group
with the highest U.S. tax liability. If a nonqualified intermediary
grouped persons subject to similar withholding and tax rates together
and allocated the payment to the group, the nonqualified intermediary
could achieve a reduced rate of withholding for its customers without
reliably associating the payment to each of the customers that would be
entitled to the payment. Treasury and the IRS stated in Notice 99-8
that affording a reduced rate of withholding under these circumstances
was inappropriate. Further, it was inappropriate to report the entire
payment as if it were made to a single documented payee who was not
entitled to receive the entire amount of income.
Paragraph (b)(3)(v) has been revised so that whenever a payment to
a nonqualified intermediary cannot be reliably associated with valid
documentation from a specific payee, the payment is treated as made to
an undocumented foreign payee and is subject to 30 percent withholding.
Under Sec. 1.1461-1(c), such payments are reported to an unknown owner
on Form 1042-S. Thus, a payment can no longer be subject to a reduced
rate of withholding because it can be allocated to a group of
documented payees all of whom are subject to the same reduced rate of
withholding. Similar changes have been made to the presumption rules
that applied to foreign partnerships under former Sec. 1.1441-
5(d)(3)(ii).
Paragraph (b)(3)(vi), as originally drafted, was in error. It
stated that the presumption rules that applied to foreign
intermediaries also applied to U.S. branches of foreign banks and
insurance companies that assumed withholding responsibility. The rule
should have provided that the intermediary presumption rules also apply
to U.S. branches of foreign banks and insurance companies that do not
agree to be treated as U.S. persons. Those branches are generally
treated in the same manner as nonqualified intermediaries under chapter
3 of the Internal Revenue Code. Therefore, paragraph (b)(3)(vi) has
been revised to apply only to those branches that are not treated as
U.S. persons. Finally, paragraph (b)(3)(vii), which applies to payments
to joint payees, has been amended to clarify the treatment of payments
made to joint accounts.
5. Rules for Withholding and Reporting of Payments by a Foreign
Intermediary and Certain U.S. Branches
Section 1.1441-1(b)(6) sets forth the withholding obligations of a
foreign intermediary and certain U.S. branches. The regulation, as
originally drafted, stated that a qualified intermediary, a
nonqualified intermediary, or a U.S. branch of a foreign bank or
insurance company was deemed to have satisfied any obligation it had to
withhold and report an amount it paid if it did not know that the
correct amount had not been withheld. The rule did not, however,
require a foreign intermediary or U.S. branch to report a payment if it
knew that the withholding agent from whom it received the payment had
not reported the payment to the persons on whose behalf the foreign
intermediary or U.S. branch acted as long as the correct amount was
withheld. For example, if a U.S. withholding agent withheld 30 percent
from a payment of an amount subject to withholding made to a
nonqualified intermediary because the nonqualified intermediary failed
to provide documentation or allocation information relating to the
persons for whom it acted, the rule relieved the nonqualified
intermediary from any obligation to report the payment to those
persons. Foreign intermediaries and U.S. branches, however, are
withholding agents under Sec. 1.1441-7(a) and, as stated in Notice 99-
8, it is inappropriate to relieve them of any reporting responsibility
unless they have provided another withholding agent with all of the
information that the withholding agent needs to report amounts paid to
the appropriate recipients of the income. In addition, paragraph (b)(6)
should not have included qualified intermediaries, because a qualified
intermediary has reporting responsibilities whether or not another
withholding agent properly reported the payment made to the qualified
intermediary.
The regulation has been revised to provide that a nonqualified
intermediary or U.S. branch (other than a U.S. branch treated as a U.S.
person) is not required to withhold and report if the nonqualified
intermediary or U.S. branch (i) has provided a valid nonqualified
intermediary or U.S. branch withholding certificate, (ii) has provided
all of the information required to be included in a withholding
statement associated with its withholding certificate so that another
withholding agent can do the required reporting on Form 1042-S or Form
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1099, and (iii) does not know, and has no reason to know, that the
other withholding agent did not withhold the correct amount or did not
report the payment correctly. A qualified intermediary's obligations to
withhold and report are determined in accordance with its qualified
intermediary agreement.
6. Definitions
Section 1.1441-1(c) contains the definitions of terms used in the
regulations under chapter 3 of the Internal Revenue Code. The section
has been significantly expanded and certain definitions have been
consolidated in this section. New definitions, or cross-references to
definitions, have been provided for the terms beneficial owner, payee,
intermediary, nonqualified intermediary, qualified intermediary,
withholding certificate, documentary evidence, documentation, payor,
exempt recipient, non-exempt recipient, reportable amounts, flow-
through entity, foreign simple trust, foreign complex trust, foreign
grantor trust, partnership, nonwithholding foreign partnership, and
withholding foreign partnership.
Paragraph (c)(6)(i) has been changed to state specifically that the
definition of beneficial owner does not apply in cases where a reduced
rate of withholding is being claimed under an income tax treaty. This
change has been made to clarify that a person who is a beneficial owner
of an item of income for purposes of these regulations would not
necessarily beneficially own the item of income for purposes of an
income tax treaty.
Paragraph (c)(6), as originally drafted, did not include rules to
determine the beneficial owner of a payment made to a foreign trust or
estate. In general, the regulations retained the rules for foreign
trusts and estates that existed prior to the publication of TD 8734.
The paragraph has been revised to provide specific rules for payments
to foreign trusts and estates. Generally, the beneficial owners of a
payment to a foreign simple trust are the beneficiaries of the trust.
The beneficial owners of a payment made to a foreign grantor trust are
the owners of the trust. Foreign complex trusts and foreign estates are
considered to be the beneficial owners of income paid to such entities.
Paragraph (c)(12) has been added to clarify the term payee. It
provides cross-references to those sections under which the payee of
income is determined, and emphasizes that foreign intermediaries and
flow-through entities are generally not considered the payees of
income. A qualified intermediary is, however, a payee to the extent it
assumes primary withholding responsibility with respect to a payment,
and a flow-through entity is a payee if it is receiving income that is,
or is treated as, effectively connected with the conduct of a U.S.
trade or business.
The definition of a flow-through entity has been moved from
Sec. 1.1441-1(e)(3)(i) to paragraph (c)(23). The definition has also
been expanded and clarified. The term flow-through entity refers to any
entity which has an obligation to transmit documentation to another
withholding agent. Therefore, an entity may be a flow-through entity
whether or not the income paid to the entity is includible in the gross
income of the entity's owners. A flow-through entity includes a
nonwithholding foreign partnership, a foreign simple trust, a foreign
grantor trust, or an entity that is fiscally transparent under section
894 to the extent it provides documentation on behalf of its interest
holders. A withholding foreign partnership and a withholding foreign
trust are not flow-through entities. The term flow-through entity has
replaced the term partnership in numerous places throughout the
regulation.
7. Withholding Certificates
a. Forms W-9. Section 1.1441-1(d) contains rules for a payee to
establish its status as a U.S. payee. Under paragraph (d), a payee that
provides a Form W-9 may be treated as a U.S. payee that is not subject
to withholding under section 1441. Commentators have noted that under
current law, there is no prohibition against a foreign person providing
a Form W-9 to establish status as an exempt recipient. They therefore
suggest that the regulations should be clarified to specifically state
that providing a Form W-9 serves as a representation of U.S. status and
should only be furnished by a U.S. person. In response to these
comments, paragraph (d)(2) has been amended to state that furnishing a
Form W-9 serves as a statement that the person providing the form is a
U.S. person. Therefore, a foreign person, including a U.S. branch of a
foreign person, should not provide a Form W-9 to a withholding agent.
The instructions to Form W-9 will also be modified to make clear that
providing a Form W-9 is a declaration of U.S. status.
Paragraph (d)(3) is revised to eliminate the requirement for a
permanent residence address. Permanent residence address is a term
defined in Sec. 1.1441-1(e)(2)(ii) and is generally the address of a
foreign person in the country in which the person is a resident for tax
purposes. The term is inapplicable, and potentially misleading, as
applied to the address a U.S. person should provide on Form W-9.
Paragraph (d)(4), as originally drafted, provided rules to
determine whether a payment was made to a U.S. beneficial owner.
Generally, the regulation provided that if a customer of a foreign
intermediary provided a Form W-9, the withholding agent could treat
such person as a U.S. beneficial owner. A customer of a foreign
intermediary could also be treated as a U.S. beneficial owner if it
provided a U.S. branch withholding certificate that evidenced its
agreement to be treated as a U.S. person. A Form W-9 and a U.S. branch
withholding certificate, however, do not establish beneficial
ownership. Further, it is not necessary under the regulations to
determine whether a U.S. payee is a beneficial owner because a payment
to a U.S. payee is not subject to withholding under chapter 3 of the
Internal Revenue Code whether or not the payee is the beneficial owner
of the income. Thus, the paragraph has been modified to provide that
the withholding agent may treat the payee of a payment made to a
foreign intermediary or a flow-through entity as a U.S. payee if the
payee provides a Form W-9 or a U.S. branch withholding certificate that
evidences the branch's agreement to be treated as a U.S. person.
b. Intermediary and flow-through withholding certificates. Section
1.1441-1(e)(3)(i) provides definitions for the terms intermediary
withholding certificate, flow-through withholding certificate, and U.S.
branch withholding certificate. That section originally defined a flow-
through withholding certificate as a Form W-8 furnished by a
partnership (other than a withholding foreign partnership) or a trust
or estate. The paragraph has been revised to conform to the definition
of flow-through entity contained in Sec. 1.1441-1(c)(23) and the new
rules contained in Sec. 1.1441-5(e) regarding foreign trusts and
foreign estates, discussed in section E of this Explanation of
Provisions. Under paragraph (e)(3)(i), as revised, a flow-through
withholding certificate is defined as a withholding certificate on Form
W-8 furnished by a nonwithholding foreign partnership, a foreign simple
trust, a foreign grantor trust, or a foreign entity presenting claims
on behalf of its interest holders for a reduced rate of withholding
under an income tax treaty. Foreign complex trusts and foreign estates
generally provide beneficial owner withholding certificates.
Section 1.1441-1(e)(3)(ii) provides the requirements for a valid
withholding certificate provided by a qualified intermediary. The
paragraph has been
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modified to reflect the procedures applicable to qualified
intermediaries as set forth in Rev. Proc. 2000-12 (2004-4 I.R.B. 1).
Section Sec. 1.1441-1(e)(3)(iii) provides rules relating to a
nonqualified intermediary withholding certificate. Paragraph
(e)(3)(iii) generally provided that payee documentation provided with a
nonqualified intermediary withholding certificate needed to be attached
to the certificate. Similar requirements existed for flow-through
withholding certificates and U.S. branch withholding certificates. The
regulations have been revised to require that payee documentation be
associated with, rather than attached to, a nonqualified intermediary,
flow-through, or U.S. branch certificate to obviate the need for a new
withholding certificate each time payee documentation is provided to a
withholding agent. The regulations do not set forth specific
requirements for associating documentation. Any reasonable method may
be used to associate documentation with its intermediary withholding
certificate.
Paragraph (e)(3)(iii), as originally drafted, required a
certification that the withholding certificates or other appropriate
documentation attached to a nonqualified intermediary withholding
certificate represented all of the persons to whom the intermediary
withholding certificate related or that the amounts of income allocable
to persons for whom no documentation was provided was separately
stated. A similar requirement applied to nonwithholding foreign
partnership withholding certificates in Sec. 1.1441-5(c)(3)(iii)(D).
The requirement for this certification has been eliminated. The persons
on whose behalf a nonqualified intermediary acts will frequently change
as persons open and close accounts with the intermediary. Thus, any
such certification may be true at the time made, but false at a later
point, necessitating a new withholding certificate. The elimination of
the certification is not an elimination, however, of the requirement to
provide payee withholding certificates to a withholding agent prior to
a payment. The certification requirement has also been eliminated for
nonwithholding foreign partnerships.
Section 1.1441-1(e)(3)(iii) permits a nonqualified intermediary to
provide payee documentation either in the form of withholding
certificates or in the form of documentary evidence. The withholding
agent is required to derive information from the withholding
certificates or other documentary evidence and report payments to each
specific payee on whose behalf the nonqualified intermediary acts.
However, the regulations were silent on how a withholding agent was to
determine the status (U.S. or foreign) or classification (e.g.,
corporate, partnership, trust, or estate) and other information
required to report payments on Form 1042-S from documentary evidence,
particularly when that documentary evidence was in a foreign language.
Further, although the regulations require a nonqualified intermediary
to allocate payments to each payee on whose behalf it acts so that a
withholding agent can report payments to each payee on Form 1042-S or
Form 1099, the regulations provided no detail on how the allocation
information was to be provided.
The regulations have been revised to take these considerations into
account. Under Sec. 1.1441-1(e)(3)(iv) as revised, a nonqualified
intermediary must associate with its nonqualified intermediary
withholding certificate a withholding statement which sets forth the
information a withholding agent needs to allocate a payment to each
payee on whose behalf the nonqualified intermediary acts and to report
the payment. Specifically, the withholding statement must contain for
each payee the payee's name, address, country of residence, TIN (if
any), the payee's recipient type for Form 1042-S reporting, the
applicable rate of withholding, the type of withholding exception
applied (if any), and the name of any other intermediary or flow-
through entity from whom the payee directly receives the income.
Additional information is required if a reduced rate of withholding
under an income tax treaty is claimed. The withholding statement may be
provided in any manner that the withholding agent and nonqualified
intermediary agree, including electronically. It must be updated as
frequently as necessary to remain accurate prior to each payment. The
regulation does not require a nonqualified intermediary to provide
information for a payee unless the payee is a U.S. non-exempt
recipient. Information regarding U.S. non-exempt recipients must be
provided irrespective of any local laws that prohibit disclosure of an
account holder or account information. Therefore, a nonqualified
intermediary should obtain waivers from non-disclosure provisions from
U.S. non-exempt recipients. To the extent payee information is not
provided, whether for a U.S. non-exempt recipient or any other payee,
the regulation has been clarified to state explicitly that a
withholding agent must withhold under the presumption rules. Further,
the nonqualified intermediary remains liable for any tax not withheld
by a withholding agent and, unless the nonqualified intermediary itself
files information returns, will also be held liable for penalties
imposed for failure to file information returns under sections 6721 and
6722.
Many commentators have argued that it is not practical to provide
information allocating a payment to each payee prior to each payment
because the customers of nonqualified intermediaries are constantly
acquiring and disposing of investments. Several commentators made
suggestions on how the regulations might ease compliance burdens. One
commentator suggested that no allocation information should be required
except in the case of income subject to reduced rates of withholding
under an income tax treaty and payments made to U.S. non-exempt
recipients. This suggestion was rejected. The IRS has provided a
mechanism for aggregate reporting of payments in the model qualified
intermediary agreement in Rev. Proc. 2000-12. It is inappropriate to
extend such treatment to nonqualified intermediaries without the
safeguards contained in a qualified intermediary agreement. Other
commentators suggested that a withholding agent should withhold the
difference between 30 percent of a payment and the claimed reduced rate
of withholding in escrow and release the amounts when allocation
information is provided. This suggestion was also not accepted. Such a
system would leave the escrow funds out of the control of both the IRS
and the beneficial owners of the payments. Further, because the
nonqualified intermediary would have to provide frequent allocations as
soon as possible after the time of payment to have the escrow funds
released, it appeared to provide little relief from the pressures
inherent in providing allocation information prior to a payment. Other
commentators argued that a reduced rate of withholding should be
provided at the time of payment with allocation information to follow
after the close of the year with various disincentives provided for
failure to furnish the allocation information. The regulations
generally adopt this approach.
Paragraph (e)(3)(iv)(D) provides alternative procedures that permit
a nonqualified intermediary to provide information allocating
reportable amounts to payees (including U.S. exempt recipients) by
January 31 of the year following the calendar year of payment. The
alternative procedures do
[[Page 32157]]
not apply to payments made to U.S. non-exempt recipients. Therefore,
allocation information for those persons must be provided prior to a
payment. Under the alternative procedures, only allocation information
may be provided after a payment is made: all other information that is
required to be included in a withholding statement and appropriate
payee documentation must be provided prior to a payment. The
nonqualified intermediary may have reduced rates of withholding apply
by identifying pools of income subject to a particular withholding rate
(withholding rate pools) and identifying the payees with the
appropriate withholding rate pools.
Various penalties apply if a nonqualified intermediary fails to
provide information to allocate payments in a withholding rate pool to
a withholding agent by January 31. First, the withholding agent must
commence withholding on all payments in accordance with the presumption
rules. Therefore, 30 percent withholding applies to amounts subject to
withholding and 31 percent backup withholding applies to payments of
deposit interest and original issue discount on original issue discount
obligations of 183 days or less. Under a cure provision, the withheld
amounts may be returned, and the alternative procedures may continue to
be used, if the nonqualified intermediary provides allocation
information by February 14. If the nonqualified intermediary fails to
provide allocation information by that date, withholding continues for
the taxable year, and all subsequent taxable years, unless the
withholding agent provides allocation information prior to a payment.
Further, because no allocation information has been provided, the
payments are considered never to have been reliably associated with
valid documentation and the foreign beneficial owners and other payees
on whose behalf the nonqualified intermediary is acting are not
entitled to a reduced rate of withholding. Therefore, the nonqualified
intermediary shall remain liable under section 1461 for the difference
between the amount, if any, withheld by the withholding agent and the
amount that should have been withheld under the presumption rules. Any
tax due because of an allocation failure will be assessed against the
nonqualified intermediary and, if necessary, collected from the assets
that the nonqualified intermediary has with the withholding agent.
Interest and penalties may also be assessed against the nonqualified
intermediary. In particular, paragraph (e)(3)(iv)(7) states that a
failure to provide allocation information will be presumed to be an
intentional failure to file information returns and payee statements
under sections 6721 and 6722. The IRS will not, however, hold the
withholding agent liable for any tax, interest, or penalties, that are
due solely to the failure of the nonqualified intermediary to provide
allocation information.
The withholding statement rules and alternative allocation
procedures have also been made applicable to U.S. branches of certain
foreign banks and insurance companies and flow-through entities. This
change, together with certain other changes discussed in this
Explanation of Provisions, generally results in nonqualified
intermediaries, U.S. branches, and flow-through entities being treated
similarly.
Paragraph (e)(3)(iv)(E) has been added to permit the IRS to provide
a withholding agent with a notice prohibiting the withholding agent
from applying the alternative procedures of paragraph (e)(3)(iv)(D) to
an identified nonqualified intermediary (or to a flow-through entity or
a U.S. branch of a foreign bank or foreign insurance company) thereby
requiring allocation information prior to a payment to have a reduced
rate of withholding apply. In addition, the IRS may, in appropriate
circumstances issue a notice to a withholding agent prohibiting the
withholding agent from applying a reduced rate of withholding under any
circumstances, even if allocation information is provided prior to a
payment. The IRS contemplates issuing these notices in situations where
a nonqualified intermediary, flow-through entity, or U.S. branch fails
to pay a tax due or is not applying the rules of the regulations in
good faith.
c. Reportable amounts. Foreign intermediaries, flow-through
entities, and U.S. branches of foreign banks and insurance companies
(other than U.S. branches treated as U.S. persons) are required to
provide information with respect to reportable amounts, as defined in
Sec. 1.1441-1(e)(3)(vi). Prior to its revision, paragraph (e)(3)(vi)
included in the definition of reportable amounts original issue
discount or interest (OID) paid on short-term instruments. This
definition appeared to include interest and OID regardless of whether
those amounts were paid on the redemption of an obligation or from the
sale or exchange of an obligation in a transaction other than a
redemption. Under the presumption rules, if a withholding agent makes a
payment to a foreign intermediary of interest and OID on a short-term
obligation and it lacks documentation for such amounts, it must presume
that the payee is a U.S. non-exempt recipient and report the income on
Form 1099 and backup withhold on the payment. See Sec. 1.6049-
5(d)(3)(iii). These rules proved to be impractical for sales of short-
term obligations outside the United States. Foreign intermediaries have
contended that they do not have the appropriate systems to report gains
from sales transactions on Forms 1099 or to provide the proper
allocation information to U.S. payors. Moreover, treating the sale or
exchange of short-term OID instruments as reportable interest on Form
1099 was inconsistent with rules that treat amounts paid on the sale or
exchange, other than redemptions, of such obligations as gross
proceeds. See Secs. 1.6045-1(d)(3) and 31.3406(b)(2)-2. Because it is
more appropriate to treat sales, other than redemptions, of short-term
OID instruments as gross proceeds rather than payments of interest or
original issue discount, the regulation has been amended to provide
that reportable amounts do not include amounts representing interest or
OID on the sale or exchange, other than a redemption, of a short-term
OID instrument. Therefore, a foreign intermediary, flow-through entity,
or U.S. branch is not required to provide information regarding these
transactions to a withholding agent as part of its withholding
statement.
d. Period of validity. Section 1.1441-1(e)(4)(ii)(A) states that
documentary evidence (i.e., documentation other than a withholding
certificate) remains valid until ``the earlier of the last day of the
third calendar year following the year in which the documentary
evidence is created * * * .'' Commentators have stated that it is not
clear if a document is ``created'' when it comes into being or when it
is provided to a withholding agent. They also stated that basing the
validity period on the date a document came into being would be more
difficult to administer because they would have to calculate the
expiration date in every case rather than assuming that it was valid
for three years after it had been received by the withholding agent. In
response to these comments, the rule has been amended to permit the
validity period to be measured from the date documentation is provided
to the withholding agent.
Section 1.1441-1(e)(4)(ii)(B) sets forth the circumstances in which
a Form W-8 has an indefinite validity period. Paragraph
(e)(4)(ii)(B)(1), as originally drafted, provided that a Form W-8 that
contained a TIN was valid indefinitely ``if the income for which such
certificate is furnished is required to be reported''
[[Page 32158]]
on Form 1042-S. Commentators noted that a strict reading of this
language could preclude the indefinite validity of a Form W-8 with
respect to income that was not subject to reporting, even though other
income paid to the same beneficial owner by the withholding agent was
subject to reporting. The regulation has been amended to provide that
if there is annual reporting of at least one item of income paid by a
withholding agent to a beneficial owner, the Form W-8 remains valid
even for payments that are not subject to reporting. However, if a
withholding agent has a Form W-8 with a TIN but does not make any
payments of an amount subject to withholding, for example the
withholding agent pays only deposit interest, the form remains valid
only for 3 calendar years after the year of receipt. In addition,
paragraph (e)(4)(ii)(B)(8) has been added to provide an indefinite
validity period for a withholding certificate provided by a foreign
simple trust or foreign grantor trust for the purposes of transmitting
withholding certificates or documentary evidence.
e. Electronic transmission of information. These regulations
finalize the regulations proposed in REG-107872-97 (62 FR 53504)
relating to the electronic submission of Forms W-8 and make them
applicable beginning January 1, 2000. Like the proposed regulations,
the final regulations apply only to situations where there is a direct
relationship between the withholding agent or payor and the beneficial
owner or payee. The final regulations reserve an applicable standard
for transmitting forms through tiers of intermediaries. Comments were
solicited on this matter in the preamble to the proposed regulations
but none were received. The IRS and Treasury recognize the benefits of
allowing the electronic transmission of Forms W-8 through one or more
intermediaries and continue to solicit comments regarding requirements
to ensure the integrity, accuracy, and reliability of electronically
transmitted forms through tiers of intermediaries.
f. Requirement of taxpayer identifying number. Section 1.1441-
1(e)(4)(vii) provides guidance for when a TIN is required on a Form W-
8. Paragraph (e)(4)(vii), as originally drafted, required TINs on
withholding certificates from all trusts or estates or the fiduciaries
thereof. A number of commentators stated that the TIN requirement was
burdensome and unreasonable when applied to pension trusts and large
investment trusts. In addition, commentators noted that nonwithholding
foreign partnerships, which are treated similarly to foreign simple
trusts and foreign grantor trusts, are not required to have a TIN. In
response to these comments, the regulations have been amended by
eliminating the TIN requirement for foreign trusts other than foreign
grantor trusts with 5 or fewer owners.
Paragraph (e)(4)(vii) has also been modified to state that a TIN is
required on a withholding certificate from a beneficial owner that is
claiming an exemption based on its claim of tax exempt status under
section 501(c) or private foundation status. This does not represent a
change in the requirements for a withholding certificate from such a
beneficial owner. The regulation, as originally drafted, however,
contained the requirement only in Sec. 1.1441-9. The requirement of a
TIN has been repeated in this paragraph for convenience. Finally,
commentators noted that there was a conflict between paragraph
(e)(4)(vii), which did not require a TIN on a withholding certificate
from a nonwithholding foreign partnership, and Sec. 1.1441-
5(c)(3)(iii)(A), which stated that a TIN was required. It was never
intended that a nonwithholding foreign partnership withholding
certificate used to transmit documentation and information relating to
its partners have a TIN. Section 1.1441-5(c)(3)(iii)(A) has been
modified accordingly. TINs are required, however, if the withholding
foreign partnership is providing a withholding certificate on which it
claims an exemption from withholding because the income is effectively
connected with the conduct of a trade or business or when it is
entitled to claim treaty benefits under section 894 on income for which
a TIN is required under Sec. 1.1441-6(b)(1).
g. Requirement to furnish certificates for each account. Generally,
each withholding agent that makes a payment to a beneficial owner must
obtain a separate withholding certificate. In addition, a withholding
agent that is a financial institution must obtain withholding
certificates or other appropriate documentation on an account-by-
account basis from its customers. Under paragraph (e)(4)(ix)(A)(3) of
the regulations, a withholding agent may rely on a withholding
certificate held at another branch of the same withholding agent or of
a person related to the withholding agent if there is a system in place
that permits a withholding agent to access data regarding the
withholding certificate and to transmit data that affects the validity
of the documentation into the system. A commentator noted that the
regulations do not contain provisions, however, to let unrelated
withholding agents utilize such a system that they maintain in common
or that is maintained by another person. New paragraph (e)(4)(ix)(A)(4)
has been added to permit unrelated withholding agents to rely on such a
system.
h. Special rules for brokers. Section 1.1441-1(e)(4)(ix)(C)
provided that a withholding agent may rely on the certification of a
broker acting as the agent of a beneficial owner if the broker held a
valid beneficial owner withholding certificate or other documentation
for that beneficial owner. As originally drafted, the intention of this
provision was unclear. It also appeared to be overly broad because it
would have permitted a foreign broker to retain beneficial owner
documentation and not transmit the documentation to a U.S. withholding
agent.
Paragraph (e)(4)(ix)(C) has been redrafted to clarify, and
appropriately limit, its application. As redrafted, it applies only to
a U.S. broker. It permits such a broker that is acting as an
introducing or corresponding broker to provide a clearing broker with a
certification that it holds a valid withholding certificate or other
appropriate documentation. Without this rule, an introducing or
corresponding broker would have to obtain multiple Forms W-8 and
provide them to each clearing broker with whom the introducing or
corresponding broker executes transactions. In addition, paragraph
(e)(4)(ix)(C) has been amended to apply only to readily tradeable
instruments, as provided in Sec. 31.3406(h)-3(d), on which it is
modeled. An example has been added to illustrate the paragraph.
8. Qualified Intermediary Withholding Certificates
Section 1.1441-1(e)(5) provides rules regarding qualified
intermediaries. The rules have been redrafted to more closely conform
with the model qualified intermediary agreement published as part of
Rev. Proc. 2000-12. The regulation, as originally drafted, contained a
requirement that a qualified intermediary disclose U.S. non-exempt
recipients ``irrespective of local secrecy laws.'' The model qualified
intermediary agreement has specific provisions contained in section
6.04 of the agreement, as well as other sections, that govern the
treatment of U.S. persons whenever foreign law, whether or not a
``secrecy'' provision, may preclude disclosure of a U.S. non-exempt
recipient. Very generally, those provisions require a qualified
intermediary to disinvest a U.S. non-exempt recipient who does not
waive its
[[Page 32159]]
local law non-disclosure privileges and to collect backup withholding
on income and sales proceeds paid to such person. Therefore, the
language stating that disclosure is required ``irrespective of local
secrecy laws'' has been deleted to avoid creating an inconsistency
between the model qualified intermediary agreement and the regulation.
The provisions in paragraph (e)(5) regarding the terms of the
withholding agreement a qualified intermediary must enter with the IRS
have also been changed to more generally conform with the qualified
intermediary agreement as set forth in Rev. Proc. 2000-12. The
regulation clarifies the consequences of a qualified intermediary's
assumption of primary withholding responsibility. Section 1.1441-
1(e)(5)(iv), as originally drafted, stated that a withholding agent
making a payment to a qualified intermediary was required to presume
full withholding responsibility for that payment unless the qualified
intermediary assumed primary withholding responsibility. The regulation
was potentially misleading because it could have been interpreted to
mean that if a qualified intermediary did not assume primary
withholding responsibility, only the U.S. withholding agent was
responsible for withholding. Rev. Proc. 2000-12 makes clear, however,
that qualified intermediaries are required to withhold in certain
circumstances even though they have not assumed primary withholding
responsibility. The rule that was initially in paragraph (e)(5)(iv) was
intended to relieve a withholding agent making a payment to a qualified
intermediary that assumed primary withholding responsibility from the
obligation to withhold, not to relieve the qualified intermediary of
any withholding requirement. The paragraph has been amended to reflect
this intent.
Paragraph (e)(5)(iv) also stated that a qualified intermediary
generally would not be permitted to assume withholding and reporting
responsibility under section 3406 and chapter 61 of the Internal
Revenue Code on a payment made to a U.S. person unless the qualified
intermediary was a foreign branch of a U.S. person or a foreign person
that had a branch in the United States capable of performing such
reporting and withholding. In developing the model qualified
intermediary agreement, it became apparent that it was desirable to
permit certain qualified intermediaries that did not meet those
criteria to assume reporting and withholding responsibility under
chapter 61 of the Internal Revenue Code and section 3406. For example,
where payments are made through clearing organizations, it may be
impractical to require a qualified intermediary to provide information
regarding U.S. non-exempt recipients to a U.S. withholding agent. The
language that generally limited the ability to assume reporting and
withholding responsibility under chapter 61 of the Internal Revenue
Code and section 3406 has been eliminated. Whether a qualified
intermediary may assume such responsibility is left to the terms of the
qualified intermediary agreement. See section 3 of the model qualified
intermediary agreement in Rev. Proc. 2000-12.
Section 1.1441-1(e)(5)(v), as originally drafted, required a
qualified intermediary to associate a payment with one of three
categories of assets: (i) Assets associated with documented foreign
persons, (ii) assets associated with documented U.S. payees, and (iii)
assets associated with undocumented payees. These three asset
categories were subdivided into classes of assets based on withholding
rates and reporting requirements. The asset categories did not provide
the needed flexibility sought by qualified intermediaries. For example,
information regarding U.S. exempt recipient payees, who are not subject
to withholding under section 1441, could not be combined with
information regarding foreign beneficial owner payees subject to a zero
rate of withholding. The model qualified intermediary agreement, as
published in Rev. Proc. 2000-12, substituted the withholding rate pool
concept for asset classes and this concept has been reflected in the
revised regulation. A withholding rate pool is a payment of a single
type of income, determined in accordance with the categories of income
reported on Form 1042-S or Form 1099, as applicable, that is subject to
a single rate of withholding.
Finally, the regulations permit, in accordance with Rev. Proc.
2000-12, a qualified intermediary and a U.S. withholding agent to use a
single withholding rate pool for U.S. non-exempt recipients for whom no
backup withholding is required and a single withholding rate pool for
U.S. non-exempt recipients that are subject to backup withholding
provided that the qualified intermediary agreement permits such an
arrangement and sufficient information is provided to the withholding
agent no later than January 15 following the year of payment that
allocates the reportable payments to each U.S. non-exempt recipient
account holder. Failure to provide the allocation information timely
may result in penalties imposed on the qualified intermediary and the
termination of its qualified intermediary agreement. Unlike qualified
intermediaries, nonqualified intermediaries and flow-through entities
are not permitted to pool payments to U.S. non-exempt recipients.
Therefore, information sufficient to allocate the payment to each U.S.
non-exempt recipient must be provided before a payment is made or the
withholding agent must treat the payment as made to a U.S. payee that
has failed to provide a TIN and impose backup withholding.
B. Changes to Sec. 1.1441-2
1. Amounts Subject to Withholding
Section 1.1441-2(a) has been amended to exclude from the definition
of amount subject to withholding interest paid as part of the purchase
price of an obligation sold between interest payment dates (accrued
interest) and an amount representing original issue discount (OID) paid
as part of the purchase price of an obligation sold in a transaction
other than the redemption of such obligation. The exclusions do not
apply, however, if the sale of an obligation is part of a plan the
principal purpose of which is to avoid tax and the withholding agent
has actual knowledge or reason to know of such plan.
The exclusion of accrued interest and amounts representing OID paid
as part of the purchase price of an obligation sold in a transaction
other than a redemption were made in response to comments received on
Sec. 1.1441-2(b)(3) of the final regulations and proposed regulation
Sec. 1.1441-3(b) (REG-114000, 62 FR 53503). Section 1.1441-2(b)(3), as
originally drafted, required withholding on OID to the extent the
withholding agent had actual knowledge of the amount of the payment
that was taxable to the beneficial owner. A withholding agent was
treated as having actual knowledge if it had a direct account
relationship with the holder of the obligation. Proposed regulation
Sec. 1.1441-3(b) would have eliminated the rule that no withholding was
required on accrued interest and replaced it with a rule that conformed
with the rule applicable to OID on the theory that, from a withholding
perspective, the two payments were equivalent. The withholding rules
applicable to OID and accrued interest would have required withholding
whenever a payment of interest or OID was not subject to an exception,
such as the portfolio interest exception, or a payment of OID or
accrued interest was presumed made to a foreign person and
[[Page 32160]]
the withholding agent could not reliably associate the payment with
beneficial owner documentation. Such payments were subject to reporting
on Form 1042-S whether or not withholding was imposed.
In Notice 99-8, Treasury and the IRS announced that they would make
modifications to the OID and accrued interest rules. The modifications
were intended to address criticisms by commentators that the OID and
accrued interest rules were unworkable. Commentators argued that debt
obligations are often sold in delivery-versus-payment transactions
which settle quickly and often involve multiple intermediaries. The
requirement to withhold in absence of a beneficial owner withholding
certificate would necessarily inhibit the speed with which sales
transactions are normally conducted. In addition, they argued that a
withholding agent does not necessarily know the amount of OID or
accrued interest merely because it has a direct account relationship
with the account holder. In addition, custodians stated that sales were
often accounted for in systems different from those used to report
interest and OID and therefore the reporting requirement of the
regulations would require significant systems modifications. They
argued that these modifications were not justified because nearly all
accrued interest and OID would be from instruments that could qualify
for the portfolio interest exception.
Notice 99-8 proposed rules that were intended to require only the
withholding agent that had a direct account relationship with a
beneficial owner to obtain a Form W-8. Thus, the notice proposed a rule
that would require a withholding agent to obtain a withholding
certificate only if it received the proceeds from a sale against
delivery of the debt obligation or, in the case of a retirement, the
withholding agent was the person responsible for paying the owner or
crediting its account. The notice would have prevented intermediaries
other than the intermediary with the direct account relationship with
the beneficial owner from having to obtain a Form W-8 by stating that
any withholding agent that effected a transaction for a broker was
generally not required to obtain a Form W-8. A broker was defined by
reference to Sec. 1.6045-1(a) and generally included a person that
makes sales of securities for customers in the ordinary course of that
person's trade or business. In addition, the notice proposed to
eliminate the rule that presumed knowledge of the amount of OID or
interest accrued between interest payment dates merely because there
was a direct account relationship with the beneficial owner of an
obligation.
Commentators criticized the Notice 99-8 proposal. They argued that
the multiple broker exception did not always accomplish its intended
purpose because certain participants in a transaction for whom a Form
W-8 should not be required could not meet the definition of a broker,
particularly since that definition does not include non-U.S. payors
that effect sales of obligations at an office outside the United States
and certain other persons, such as investment advisors, who might
participate in the transaction but did not stand ready to effect sales
of securities for others. In addition, the Notice did not solve the
problem faced by custodians.
In light of these criticisms, Treasury and the IRS have decided to
eliminate the requirement for withholding, and reporting, on accrued
interest and an amount representing OID paid on the sale of an OID
obligation, other than in a redemption. This change has been effected
by eliminating those items from the definition of amounts subject to
withholding. Withholding is required, however, if the withholding agent
knows or has reason to know that a sale is part of a plan to avoid tax.
For example, if a holder of a debt obligation that pays interest that
does not qualify for the portfolio interest exception sells the
instrument immediately prior to an interest payment date and reacquires
the same type of security after the interest payment date and the
withholding agent knows, or has reason to know, of this pattern of
sales, withholding and reporting of accrued interest is required.
Paragraph (a) has also been amended to state that insurance
premiums paid on a contract subject to the section 4371 excise tax are
not amounts subject to withholding. As previously drafted, these
amounts were excluded from the definition of fixed or determinable
annual or periodical (FDAP) income under Sec. 1.1441-1(b)(2)(ii) and
therefore were not included in amounts subject to withholding.
Excluding insurance premiums from FDAP is inappropriate, however.
Insurance premiums fall within the definition of FDAP provided in
paragraph (b)(1). Therefore, the better means for exempting premiums
subject to the section 4371 excise tax from withholding is to exclude
them from the definition of amounts subject to withholding.
2. Fixed or Determinable Annual or Periodical Income
Section 1.1441-2(b)(1)(i) provides the definition of fixed or
determinable annual or periodical (FDAP) income. Such income, if from
sources within the United States, is generally an amount subject to
withholding and therefore also subject to reporting on Form 1042-S if
paid to a foreign payee. Paragraph (b)(1)(i) states that amounts that
are excluded from gross income under any provision of law ``without
regard to the identity of the holder'' are not FDAP income. This
provision was, in part, intended to exclude from FDAP qualified
scholarship income under section 117. The language, however, failed to
accomplish its intended purpose because the section 117 exclusion is
dependent on the identity of the person receiving the income--the
recipient must be a candidate for a degree at a certain type of
educational organization. The paragraph has been revised to state that
amounts that are excluded from gross income without regard to the U.S.
or foreign status of the owner of the income is not FDAP. In addition,
the paragraph has been changed to clarify that amounts excluded from
gross income under sections 892 (income of foreign governments) and 115
(income of a U.S. possession) are not excluded from the definition of
FDAP since the foreign status of the owner of the income is
determinative of whether the exclusions provided by those sections
apply. Amounts subject to the section 892 and section 115 exclusions
are, therefore, included in the scope of amounts subject to withholding
and therefore are reportable on Form 1042-S under section 1461 even
though not taxable under section 871 or 881.
3. Original Issue Discount
Section 1.1441-2(b)(3) provides rules governing the treatment of
original issue discount. Paragraph (b)(3)(i) describes the amount of
OID subject to taxation in the hands of the owner of an OID obligation.
Minor changes have been made to this paragraph to clarify the amount of
OID that is taxable to the beneficial owner of the obligation.
Paragraph (b)(3)(ii) describes the amount of OID subject to
withholding. To conform paragraph (b)(3)(ii) to the changes discussed
in section B.1 of this Explanation of Provisions, the paragraph has
been revised to require a withholding agent to withhold on OID only
upon the redemption of the original issue discount obligation or in any
case where the withholding agent knows that a sale, other than a
redemption, is being made with the principal purpose of avoiding tax on
the obligation. A withholding agent is required to withhold on the
actual amount of OID includible in the gross
[[Page 32161]]
income of the owner of an obligation if it has actual knowledge of such
amount, or, if actual knowledge is lacking, on the entire amount of OID
determined under Publication 1212, ``List of Original Issue Discount
Instruments'' as if the obligation had been held since issuance.
Paragraph (b)(3)(iii) contained a rule that required a withholding
agent to withhold on interest and OID paid on an OID obligation even
though it did not know the amount of OID subject to taxation if the
withholding agent could not reliably associate the payment with valid
documentation. The rule was designed to eliminate an exception to
withholding that applied if a withholding agent did not have actual
knowledge of the amount of OID that accrued to the holder of the
obligation up to the date of sale. If the exception were not
eliminated, it was feared that the documentation requirement for
portfolio interest could be avoided by selling OID obligations through
intermediaries that had no knowledge of the accrued amount of OID. The
rule is no longer necessary. Under new Sec. 1.1441-2(a)(6), withholding
is required if a withholding agent knows, or has reason to know, that
an OID obligation is sold with the principal purpose of avoiding tax.
Therefore, the rule as originally contained in paragraph (b)(3)(iii)
has been removed. New paragraph (b)(3)(iii) contains the transition
rule formerly found in paragraph (b)(3)(iv). The rule has been
modified, however. As previously drafted, the rule appeared to
eliminate any withholding responsibility by the issuer of an OID
obligation or its agent, as formerly contained in Rev. Rul. 68-333
(1968-1 CB 390). As revised, issuers and their agents are subject to
any applicable withholding requirements on obligations issued before or
after December 31, 2000. The rule now states, however, that withholding
on OID obligations is only required by persons other than issuers or
their agents with respect to obligations issued after December 31,
2000.
C. Changes to Sec. 1.1441-3
1. Accrued Interest
Section 1.1441-3 provides rules to determine the amount subject to
withholding. In accordance with the change made in Sec. 1.1441-2(a)(5),
which eliminates interest accrued between sales dates from amounts
subject to withholding, Sec. 1.1441-3(b)(2) has been modified to
eliminate the requirement that a withholding agent that pays accrued
interest must report that interest on Form 1042-S.
32. Coordination With REIT Withholding
As originally drafted, Sec. 1.1441-3(c)(4)(i)(C) required
withholding under section 1441 on the portion of a Real Estate
Investment Trust (REIT) distribution that is not designated as a
capital gain dividend or return of basis. Therefore, Sec. 1.1441-
3(c)(4)(i)(C) inadvertently required withholding under section 1441 on
a distribution in excess of basis, which under section 301(c)(3) is
capital gain from the sale or exchange of stock and, therefore, not
subject to withholding under section 1441. To correct this error,
paragraph (c)(4)(i)(C) has been amended to provide that withholding
under section 1441 is not required on a distribution in excess of
basis. A distribution in excess of basis is, however, subject to
withholding under section 1445 unless the interest in the REIT is not a
U.S. real property interest (e.g., an interest in a domestically
controlled REIT under section 897(h)(2)).
D. Changes to Sec. 1441-4
1. Notional Principal Contracts
Section 1.1441-4(a)(3)(i) treats a payment of income on a notional
principal contract made to a foreign person as income effectively
connected with a trade or business within the United States unless the
withholding agent can reliably associate a payment with a withholding
certificate that certifies that the payment is not effectively
connected. This rule is overly broad because it presumes that any
notional principal contract payment made to a foreign person is
effectively connected even if the foreign person has no nexus to the
United States. As a result, Sec. 1.1441-4(a)(3)(i) has been amended to
limit the presumption that notional principal contract income is
effectively connected to a U.S. trade or business to those situations
in which the income is either paid to a U.S. qualified business unit of
a foreign person or the withholding agent otherwise knows, or has
reason to know, that the income is effectively connected with the
conduct of a U.S. trade or business. It is not expected that a
withholding agent would be considered to have reason to know that a
notional principal contract payment is effectively connected with the
conduct of a trade or business within the United States solely because
the foreign person receiving the payment has a qualified business unit
in the United States to which a portion of the payment may be allocated
pursuant to proposed regulation Sec. 1.863-3(h) (the global dealing
regulations).
Section 1.1441-4(a)(3)(ii), as originally drafted, stated that a
payment to a financial institution was not treated as effectively
connected with the conduct of a trade or business within the United
States if the financial institution provided a representation in a
master agreement that governs transactions in notional principal
contracts between the parties (for example, an International Swaps and
Derivatives Association (ISDA) Agreement) or in the confirmation on the
particular notional principal contract transaction that the counter
party was a U.S. person or a non-U.S. branch of a foreign person.
Commentators requested that the master agreement and confirmation
exceptions be expanded to apply to persons other than financial
institutions. Section 1.1441-4(a)(3)(ii) has been amended (in the table
or corrections at the end of the regulation) to allow any payee, not
just a financial institution, to provide in a master agreement or
confirmation statement a representation that the payee is a U.S. person
or a non-U.S. branch of a foreign person.
2. Withholding on Payments From Individual Retirement Accounts
Section 1.1441-4(b)(1)(ii), as originally drafted, provided that
section 1441 applied to distributions from any trust described in
section 401(a) made to a nonresident alien individual and to certain
other retirement distributions. The result of this rule is that section
1441, rather than section 3405, applies to retirement distributions.
This rule considerably eases the burdens that would otherwise apply to
retirement distributions.
Commentators noted that the regulations did not provide the same
rule for distributions from individual retirement accounts and
annuities described in section 408. The regulation has been amended so
that those distributions will be subject to section 1441 as well.
E. Changes to Sec. 1441-5
Section 1.1441-5 of the regulations concerns payments made to
partnerships, trusts, and estates. As originally drafted, the
regulations contained extensive rules for payments made to U.S. and
foreign partnerships, but applied the rules of the regulations prior to
the publication of TD 8734 to trusts and estates. The trust and estate
rules, however, were inconsistent with the rules contained in TD 8734
and were also incomplete. For example, Sec. 1.1441-1(c)(6)(ii)(B)
required a withholding agent to determine the
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beneficial owner of income paid to a trust or estate under Sec. 1.1441-
3(f) and (g) of the regulations in effect prior to January 1, 2001.
That section, however, did not determine the beneficial owner of income
paid to a trust. In addition, Sec. 1.1441-1(e)(3)(i) stated that a
trust or estate was to use a flow-through withholding certificate
furnished under Sec. 1.1441-5(e), but that section was reserved in the
regulation. The regulation has been revised to provide complete trust
and estate rules. Except as noted below, the partnership rules remain
generally unchanged; however, several changes were made to clarify
those rules.
1. Rules Applicable to U.S. Partnerships, Trusts, and Estates
Section 1.1441-5(b), as originally drafted, provided rules
regarding payments to U.S. partnerships. The rules of paragraph (b)
have been expanded to cover payments to U.S. trusts and U.S. estates as
well. Under revised paragraph (b)(1), a payment to a U.S. partnership,
U.S. trust, or U.S. estate is treated as a payment to a U.S. person
and, therefore, not subject to withholding under chapter 3 of the
Internal Revenue Code. United States partnerships, U.S. trusts, and
U.S. estates are required, however, to withhold on payments they make
to foreign partners, foreign beneficiaries, or, in the case of grantor
trusts, foreign owners. Fiduciaries of U.S. trusts and U.S. estates
should take particular note that it is the trust or the estate that is
the withholding agent, and Forms 1042 and Forms 1042-S must be filed
using the name and TIN of the U.S. trust or U.S. estate, not the name
and TIN of the fiduciary.
Under paragraph (b)(2), a U.S. partnership is a withholding agent
for a foreign partner's distributable share of partnership income that
consists of amounts subject to withholding. A U.S. simple trust is a
withholding agent for the distributable net income (DNI) includible in
the gross income of a foreign beneficiary to the extent the DNI
consists of an amount subject to withholding. Similarly, a U.S. complex
trust is a withholding agent on DNI includible in the gross income of a
foreign beneficiary to the extent the DNI consists of an amount subject
to withholding that is, or is required to be, distributed currently.
U.S. simple trusts and complex trusts are permitted to make reasonable
estimates of the portion of a distribution that constitute DNI
consisting of amounts subject to withholding. A U.S. grantor trust must
withhold on any income includible in the taxable income of a foreign
person that is treated as an owner to the extent the amount includible
consists of an amount subject to withholding.
In the case of a partnership, if amounts subject to withholding are
not actually distributed, the U.S. partnership must withhold at the
earlier of the time the statement required under section 6031(b) (Form
K-1) is mailed or otherwise provided to the partner or the due date for
furnishing the statement. In addition, if an amount of income is
required to be, but is not actually distributed to the foreign
beneficiary of a U.S. simple or complex trust, the U.S. trust must
withhold at the time the income is required to be reported on Form
1042-S. A U.S. grantor trust is required to withhold at the time the
trust receives the payment or the payment is credited to the trust's
account.
2. Payments Made to Foreign Partnerships
Section 1.1441-5(c) provides rules for payments made to foreign
partnerships. Generally, the payees of a payment made to a
nonwithholding foreign partnership are the partners of the partnership.
Paragraph (c)(1)(ii), however, contains rules on when the partnership
itself will be regarded as the payee of a payment. That paragraph, as
originally drafted, permitted a partnership to be treated as the payee
of income if the partnership provided a withholding certificate stating
that the payment was effectively connected with the conduct of the
partnership's U.S. trade or business. A commentator noted that the
paragraph did not treat the partnership as the payee, however, to the
extent the income was treated as being effectively connected under the
presumption rules in the absence of a withholding certificate.
The paragraph has been revised to treat the partnership as the
payee if the income is presumed to be effectively connected in the
absence of documentation. For example, if a nonwithholding foreign
partnership is receiving income on a notional principal contract and
the income is treated as effectively connected income under the
presumption rule of Sec. 1.1441-4(b)(3)(i), the nonwithholding foreign
partnership, and not the partners, is treated as the payee. In
addition, the example in paragraph (c)(1)(iv) has been replaced with
several less complex examples that better illustrate the operation of
the rules of paragraph (c)(1).
Section 1.1441-5(c)(2) contains rules relating to withholding
foreign partnerships. Section 1.1441-5(c)(2)(ii)(A), together with
Sec. 1.1461-1(c)(2)(ii)(A), required a withholding foreign partnership
to file a Form 1065 and Forms K-1 and exempted the partnership from
having to file Form 1042 and Forms 1042-S. The rule was incorrect. A
withholding foreign partnership is generally required to withhold on
payments and therefore must file a Form 1042, which is an income tax
return, and not merely report the amounts on Form 1065. Also, because
the IRS matches amounts reported on Forms 1042-S with amounts reported
on Form 1042, it was incorrect to substitute Forms K-1 for Forms 1042-
S. Therefore, the regulation has been amended to require a withholding
foreign partnership to file a tax return on Form 1042 and file
information returns on Form 1042-S for amounts subject to withholding
paid to, or included in the distributive share of, its foreign
partners. A withholding foreign partnership may also be required to
file a return on Form 1065 and make the statements on Form K-1 under
section 6031 for its partners. However, the IRS may agree in the
withholding agreement to modify information reporting requirements to
avoid double reporting. A rule that was formerly contained in
Sec. 1.1441-7(a), which permitted a withholding foreign partnership to
arrange with a withholding agent to have the withholding agent impose
withholding on a payment has been removed because a withholding foreign
partnership is required to assume withholding responsibility.
Section 1.1441-5(c)(3) provides rules relating to nonwithholding
foreign partnerships. Paragraph (c)(3)(iv) has been revised to require
a nonwithholding foreign partnership to provide a withholding statement
in the same manner as a nonqualified intermediary. In addition,
paragraph (c)(3)(v) has been revised to conform with revised
Sec. 1.1441-1(b)(6), discussed in section A. 5 of this Explanation of
Provisions. Thus, the regulation has been changed to make clear that a
nonwithholding foreign partnership has an obligation to report payments
even though another withholding agent has withheld the appropriate
amount if the nonwithholding partnership has failed to provide adequate
information for a withholding agent to report the payments
appropriately on Form 1042-S and Form 1099 or the nonwithholding
foreign partnership knows, or has reason to know, that the payments
were not correctly reported.
Paragraph (d) of Sec. 1.1441-5 provides presumption rules that
apply to determine the status of a partnership and its partners if a
payment cannot be
[[Page 32163]]
reliably associated with valid documentation. The rule in paragraph
(d)(3)(ii), which permitted a reduced rate of withholding to be applied
to a payment to a nonwithholding foreign partnership if the payment
could be associated with a group of documented payees all of whom were
subject to the same withholding rate has been removed for the reasons
stated in connection with the changes made to Sec. 1.1441-
1(b)(3)(v)(C). See section A. 4, of this Explanation of Provisions.
Under the revised rule, any payment of an amount subject to withholding
paid to a foreign partnership that has not been allocated to a specific
payee is presumed made to an undocumented foreign payee and subject to
30 percent withholding.
3. Payments to Foreign Trusts and Estates
Treasury Decision 8734 did not include new provisions regarding
withholding on payments by and to foreign trusts and foreign estates.
The IRS provided interim guidance in the instructions to Forms W-8BEN
and W-8IMY so that withholding agents could replace documentation that
was expiring under the withholding regulations with documentation that
would meet the requirements of TD 8734. In addition, Notice 99-8
announced that Treasury and the IRS intended to issue regulations that
would clarify the withholding obligations of income paid to trusts and
estates. Under the instructions and the notice, a payment to a foreign
fiduciary was treated as a payment to a foreign intermediary and,
therefore, the foreign fiduciary was required to furnish an
intermediary withholding certificate on Form W-8IMY. If the trust was a
trust described in section 651(a) or a trust, all or a portion of which
was treated as owned by the grantor or other persons under sections 671
through 679, the fiduciary was required to attach Forms W-8BEN, Forms
W-8EXP, or Forms W-9, from the beneficiaries or owners of the trust. In
all other cases, the foreign trustee or executor was required to attach
a Form W-8BEN, Form W-8EXP, or if required, Form W-9, completed on
behalf of the trust or estate.
Several commentators objected to the requirement that a foreign
fiduciary of a complex trust or a foreign estate provide an
intermediary withholding certificate. They requested that a withholding
certificate be required only from the trust or estate itself. Requiring
documentation from a fiduciary also was not consistent with the rules
under chapter 61, which generally require a Form W-9 from a trust or
estate and ignore the status of the fiduciary. Finally, Notice 99-8 did
not provide any presumption rules for payments to foreign trusts and
foreign estates.
The regulations now contain a comprehensive set of rules for
payments made to foreign trusts and foreign estates in Sec. 1.1441-
5(e). A foreign complex trust (as defined in paragraph (c)(25)) and a
foreign estate are generally considered beneficial owners of income
under Sec. 1.1441-1(c)(6). Therefore, under Sec. 1.1441-5(e)(2), a
foreign complex trust or a foreign estate may provide a beneficial
owner withholding certificate or other beneficial owner documentation
for payments for which a reduced rate of withholding is not claimed
under a treaty. Whether such a trust or estate can provide a beneficial
owner withholding certificate to claim a reduced rate of withholding
under an income tax treaty will depend on whether the trust or estate
can claim to be a resident of a treaty country, whether it derives the
income under section 894, and the regulations thereunder, and whether
treaty benefits are denied under a limitation on benefits provision.
Foreign simple trusts and foreign grantor trusts are not payees or
beneficial owners under Sec. 1.1441-5(e)(3), unless the payment is an
amount that is treated as effectively connected with the conduct of a
U.S. trade or business. The payees of payments to a foreign simple
trust or a foreign grantor trust are generally the beneficiaries or
owners of the trust. This is similar to the treatment accorded to
payments to foreign partnerships, where the partners, rather than the
partnership, are generally considered the payees of income paid to the
partnership. Therefore, the documentation rules applicable to foreign
simple trusts and foreign grantor trusts generally accord with those
applicable to foreign partnerships. The trust itself provides a flow-
through withholding certificate with which it associates the
withholding certificates or, if permitted, documentary evidence of its
beneficiaries or owners. The foreign simple trust or foreign grantor
trust must also associate with its flow-through withholding certificate
a withholding statement identical to that provided by foreign
partnerships and nonqualified intermediaries. The IRS may permit a
foreign trust to function as a withholding foreign trust. A withholding
foreign trust would generally be subject to the same provisions as a
withholding foreign partnership.
Section 1.1441-1(e)(6) provides presumption rules for payments of
amounts subject to withholding to foreign trusts and estates. Whether a
payee is a trust or estate is determined under the general presumption
rules of Sec. 1.1441-1(b)(3)(ii). A trust or estate is presumed to be
U.S. unless there are indicia of foreign status. If a payee is presumed
to be a foreign trust, but its status as a complex, simple, or grantor
trust is unknown, it will be treated as a complex trust. If the trust
is known to be a foreign simple or grantor trust, its beneficiaries or
owners will generally be presumed to be foreign with respect to
payments of amounts subject to withholding.
F. Changes to Sec. 1441-6
Section 1.1441-6 contains the provisions for claiming a reduced
rate of withholding under an income tax treaty. Section 1.1441-6(b) has
been revised to clarify the requirements for claiming treaty benefits.
Specifically, the provisions of paragraph (b)(2), as originally
drafted, which related to use of documentary evidence, have been moved
to newly revised paragraphs (c)(1) and (2) so that all the documentary
evidence rules appear in the same paragraph. Paragraph (b)(2) now
contains the provisions relating to treaty claims made by interest
holders of fiscally transparent entities. Clarifying changes to those
rules, which appeared in former paragraph (b)(4), have also been made.
Section 1.1441-6(c)(1) and (2), as originally drafted, required a
foreign person to establish residency by obtaining a certified taxpayer
identification number (certified TIN) from the IRS. Those provisions
required a person claiming a reduced rate of withholding to submit
either a certificate of residency or certain other prescribed
documentation, plus affidavits regarding compliance with the limitation
on benefits provisions of a treaty and with the regulations under
section 894. In Notice 99-8, the IRS announced that it would not
implement the procedures for obtaining certified TINs until January 1,
2002.
The certified TIN procedures have been removed. New paragraph
(b)(3), however, provides authority for the IRS to issue guidance on
requirements that a treaty claimant must follow to establish residency
and compliance with other requirements imposed by treaties and the
Internal Revenue Code, such as limitation on benefits provisions and
the requirement that the claimant derive the income under section 894.
Treasury and the IRS fully intend to implement such procedures.
However, Treasury and the IRS determined that it was appropriate to
delay
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implementation of the requirement while withholding agents and
beneficial owners implement other requirements under the regulation. In
addition, the IRS will examine ways to more effectively implement the
certified TIN requirement.
Paragraphs (c)(3) and (4) prescribe the types of documentation that
can be used to claim treaty benefits for income from marketable
instruments paid outside the United States to offshore accounts. Former
paragraph (b)(2) stated that documentary evidence could be used, in
certain cases, to claim treaty benefits if the documentary evidence was
accompanied by the certifications required in paragraph (c)(5).
Paragraph (c)(5) contained a requirement that a beneficial owner
applying for a certified TIN provide the IRS with certifications, made
in an affidavit signed under penalties of perjury, that the beneficial
owner was in compliance with any applicable limitation on benefits
provisions contained in a treaty and that the beneficial owner derives
the income for which treaty benefits will be claimed. It was unclear
from the regulations, as drafted, whether the certifications that were
provided to withholding agents were required to be made in affidavits
signed under penalties of perjury or whether the affidavit requirement
only applied to obtaining certified TINs. Although Treasury and the IRS
believe it is important that statements regarding compliance with
limitation on benefits provisions and section 894 be given in
conjunction with documentary evidence provided to a withholding agent,
a penalties of perjury requirement would impose a burden that
undermines the use of documentary evidence. One reason for permitting
use of documentary evidence is to eliminate, as much as possible, the
need for a penalties of perjury statement. Thus, the affidavit and
penalties of perjury requirements have been eliminated with respect to
documentary evidence provided to a withholding agent. The IRS may,
however, require an affidavit in connection with the certified TIN
procedures that it will establish. The affidavit requirement in
paragraph (c)(4), stating that the information on documentary evidence
is true and complete, has also been eliminated.
G. Changes to Sec. 1.1441-7
Section 1.1441-7 defines the term withholding agent and provides
various rules relating to the obligations of withholding agents,
including certain due diligence requirements regarding the
documentation they receive from payees.
1. Withholding Agent Defined
Sec. 1.1441-7(a) provides the definition of a withholding agent as
well as a withholding agent's obligation to withhold the appropriate
amount of taxes and file returns. The section has been revised by
removing language stating that a withholding foreign partnership does
not have to file Forms 1042-S for payments made to foreign partners
because it is required to provide Forms K-1. The reason for this change
is discussed in section E. 2 of this Explanation of Provisions.
Some U.S. withholding agents commented that foreign persons,
including U.S. branches of foreign persons, were taking the position
that they were not withholding agents for purposes of chapter 3 of the
Internal Revenue Code. Any person, whether U.S. or foreign, that pays,
or has control, receipt, custody, or disposal of an amount subject to
withholding is a withholding agent. In addition, with respect to a
single item of income, each person that handles the payment is a
withholding agent. Thus, there may be more than one withholding agent
with respect to a payment of an amount subject to withholding. Examples
have been added in new paragraph (a)(2) to illustrate these principles.
In particular, examples were added to emphasize that foreign persons
that pay, or have control, receipt, or custody, of amounts subject to
withholding are withholding agents, including U.S. branches of foreign
persons.
2. Reason To Know
Section 1.1441-7(b)(2)(ii), as originally drafted, provided the
exclusive rules for determining when a withholding agent that is a
financial institution making a payment of income from marketable
securities has reason to know that documentation provided to the
withholding agent is unreliable. Commentators noted that the language
of paragraph (b)(2)(ii) was inconsistent about whether the rules
applied only to withholding certificates (i.e., Forms W-8) or also to
documentary evidence. In addition, many commentators noted that the
rules could not be reasonably applied to documentary evidence received
through tiers of intermediaries, because that documentation would often
be in a foreign language. They further argued that the rules relating
to P.O. box addresses were unreasonable because in some countries P.O.
box addresses are standard. Finally, commentators noted that the means
for curing otherwise unreliable documentation were, in some instances,
too restrictive.
Section 1.1441-7 (b)(3) through (10) have been added to address the
comments. Some of the changes made to paragraph (b) reflect rules in
the model qualified intermediary agreement contained in Rev. Proc.
2000-12. Paragraphs (b)(4) through (b)(9) relate to the obligations of
a withholding agent for account holders that have a direct account
relationship with the withholding agent. The rules are limited to
direct account relationships because they often rely on account
information that will exist only if such a relationship exists.
However, under the rules of paragraph (b)(10), which relate to
documentation from persons that are not direct account holders, the
rules in paragraph (b)(4) through (9) apply to the extent that they
rely on information contained on the face of a withholding certificate,
documentary evidence, or a withholding statement.
Paragraph (b)(4) contains general rules regarding the reliability
of a withholding certificate provided on Form W-8. Paragraph (b)(5)
contains rules for when a Form W-8 will be regarded as unreliable to
establish a beneficial owner's foreign status and applicable cure
provisions. Paragraph (b)(6) contains rules for when a Form W-8 will be
regarded as unreliable to establish a beneficial owner's claim of
treaty benefits and applicable cure provisions. Paragraph (b)(7)
provides general rules relating to documentary evidence. Paragraphs
(b)(8) and (b)(9) contain rules regarding documentary evidence that is
unreliable to establish a beneficial owner's status as a foreign person
or a resident of a treaty country, respectively.
Paragraph (b)(10) provides rules regarding due diligence standards
for documentation from payees received through nonqualified
intermediaries, flow-through entities, and certain U.S. branches of
foreign banks and insurance companies. Under paragraph (b)(10), a
withholding agent is required to review the information contained in a
withholding statement provided by those entities and may not rely on
the information contained in the withholding statement to the extent it
does not support the claims made for the payee. A withholding agent
must also review each withholding certificate to verify that they
support the claims made and are consistent with the information on the
withholding statement. Under a transition rule, this review process
does not apply to withholding certificates received before December 31,
2001, if the payment is made prior to that date. If a withholding
certificate received before December 31, 2001, is relevant to a payment
made
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after that date, it must be reviewed for accuracy and matched to the
information contained in the withholding statement. Finally, a
withholding agent must review documentary evidence to determine that
there is no obvious indication that the payee is a U.S. non-exempt
recipient or no obvious indication that the documentary evidence does
not establish the identity of the person who provided the
documentation.
H. Changes to Sec. 1.1441-9
Section 1.1441-9 provides the rules for payments made to foreign
tax-exempt entities and foreign governments. Paragraph (b)(2) of that
section provided that if a tax-exempt organization did not have a
determination from the IRS, it could establish its exempt status by
attaching to its withholding certificate an opinion of counsel
concluding that the organization is described in section 501(c) of the
Internal Revenue Code. In addition, if the opinion concluded that the
organization was described in section 501(c)(3) and was not a private
foundation, an affidavit regarding the operations and support of the
organization was required to be attached to the organization's
withholding certificate as well. The opinion of counsel and affidavit
was required to be renewed whenever the certificate to which it was
attached was required to be renewed.
Commentators stated that the requirement that the opinion of tax-
exempt status be provided by an attorney was too narrow and that an
opinion from any federally authorized tax practitioner, as defined in
section 7525(a)(3), should be permitted. In addition, the requirement
that the opinion of counsel and the affidavit be renewed whenever the
certificate was required to be renewed was confusing because a
withholding certificate from a tax-exempt entity requires a TIN and,
provided the income paid is subject to reporting, is valid indefinitely
absent a change in circumstances.
Treasury and IRS are currently considering whether an opinion
issued by a person other than an attorney authorized to practice before
the IRS should suffice. Although the Treasury and IRS have not yet
concluded that a person other than an attorney should be permitted to
provide the opinion, the regulation has been amended to permit that
possibility in future guidance. In addition, the requirement to renew
the opinion and affidavit has been clarified by stating that it must be
renewed if there is a change in facts or circumstances relevant to the
organization's status under section 501(c)(3).
I. Changes to Sec. 1.1461-1
Section 1.1461-1 contains requirements regarding the payment and
deposit of tax withheld under chapter 3 of the Internal Revenue Code
and the filing of a tax return (Form 1042) and information returns
(Forms 1042-S) by withholding agents. Generally, the paragraph has been
amended to make a withholding agent's obligations clearer.
Paragraphs (b)(2) and (c)(4), as originally drafted, stated that a
withholding agent was not required to file a tax return or information
return if another withholding agent had done so. Numerous exceptions to
the rule were provided. These paragraphs were misleading because they
implied that the general rule was that a tax return and information
returns were not required if there was another withholding agent in the
chain of payment required to file a tax return and information returns.
The exceptions to the rule, however, required every withholding agent
that made payments of an amount subject to withholding to a foreign
person to file a tax return and information returns in every situation,
except that a nonqualified intermediary or flow-through entity was not
required to file a tax return and information returns for payments that
it made provided that it furnished to a withholding agent sufficient
information for the withholding agent to correctly withhold and report
the payment. Section 1.1461-1(b) and (c) have been clarified to state
that a withholding agent that makes a payment of an amount subject to
reporting to a recipient must file a Form 1042-S and provide a copy to
the recipient. The terms recipient and amount subject to reporting are
defined in paragraphs (c)(1)(ii) and (c)(2), respectively. A recipient
includes a beneficial owner (including a foreign complex trust and
estate), a qualified intermediary, a withholding foreign partnership, a
withholding foreign trust, an authorized foreign agent, a U.S. branch
treated as a U.S. person, a nonwithholding foreign partnership or
foreign simple trust receiving income effectively connected with a U.S.
trade or business, any payee presumed to be a foreign person, and any
other person for whom a Form 1042-S is required by the instructions to
the form. A nonqualified intermediary, a disregarded entity, a flow-
through entity, and a U.S. branch that is not treated as a U.S. person
are not recipients. Amounts paid to such entities are reported as paid
to the persons on whose behalf the entity acts or to the interest
holders in the entity. The term amount subject to reporting generally
means amount subject to withholding as defined under Sec. 1.1441-2(a).
The regulation has also been clarified by providing a more
extensive, but not exhaustive, list of those amounts subject to
reporting and those amounts for which there is an exception to
reporting. See new Sec. 1.1461-1(c)(2). Paragraph (c)(2)(i)(C), as
originally drafted, stated that the amount of effectively connected
income that was required to be reported with respect to a notional
principal contract was the net income described in Sec. 1.446-3(d).
Commentators objected to this requirement because their systems are
programmed to report cash payments, not accrued amounts. New paragraph
(c)(2)(i)(J) now provides that the amount required to be reported is
limited to the amount of cash paid from the notional principal
contract.
Finally, the section has been clarified by separately stating the
reporting requirements of U.S. withholding agents, qualified
intermediaries, nonqualified intermediaries, and flow-through entities.
Withholding agents should note, in particular, that information
regarding nonqualified intermediaries, flow-through entities, and U.S.
branches (other than U.S. branches treated as U.S. persons) in which a
recipient is an account holder or an interest holder must be included
on Form 1042-S. Such information is important to the IRS's efforts to
monitor compliance by such entities and branches with the requirements
of the regulations.
J. Changes to the Regulations Under Section 6041
Section 1.6041-1(d) has been revised to require that the amount of
a notional principal contract payment reported on Form 1099 is the
amount of cash paid on the contract for the calendar year. This change
conforms the Form 1099 reporting rule to that under Sec. 1.1461-
1(c)(2)(i)(J).
Section 1.6041-4(a)(3) states that a nonqualified intermediary, a
qualified intermediary, or certain U.S. branches of foreign banks and
insurance companies that receive payments reportable under section 6041
(e.g., rents, notional principal contract income, and other fixed or
determinable income) are not required to report the payments on Form
1099 when they, in turn, make the payment to their account holders
unless they know the payments are required to be reported and were not
so reported. Similar exceptions apply to dividends, gross proceeds from
sales of securities, and interest under Secs. 1.6042-3(b)(1)(vi),
[[Page 32166]]
1.6045-1(g)(v), and 1.6049-5(b)(14), respectively. These provisions
have been modified to state that the exception does not apply to a U.S.
branch of a foreign bank or insurance company that agrees with a
withholding agent to be treated as a U.S. person. The exception is
inappropriate in this case because such branches do not provide payee
documentation on Form W-9 (or the name, address, TIN, and information
allocating the payment to the payee) to a withholding agent. The
exception is also inappropriate if a qualified intermediary assumes
Form 1099 reporting responsibility. Therefore, the exception has been
changed to exclude qualified intermediaries that assume Form 1099
reporting. Finally, the exceptions have been amended to state that a
nonqualified intermediary, qualified intermediary, or U.S. branch is
deemed to know the required reporting was not done in any case where
the intermediary or branch has failed to provide documentation or other
information so that another payor can do the reporting.
K. Changes to Sec. 1.6041A-1
Section 1.6041A-1(d)(3)(i)(C) has been added to provide an
exception from reporting remuneration for services as a direct seller
paid outside the United States. Prior to this change, remuneration for
services was subject to reporting in absence of documentation
establishing the direct seller's status as a foreign person because the
presumption rules of Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii)
treated a direct seller as a U.S. non-exempt recipient. Commentators
stated that the presumption was inaccurate because most direct sellers
abroad are foreign persons. They also argued that obtaining
documentation from direct sellers to rebut the presumption was overly
burdensome.
L. Changes to Sec. 1.6045-1
Section 1.6045-1(g) provides an exception from Form 1099 reporting
for a broker if a customer is considered an exempt foreign person under
that section. Under Sec. 1.6045-1(g)(1)(i), a broker may treat a
customer as an exempt foreign person if the broker receives a
withholding certificate or documentary evidence that establishes the
person's status as a foreign person. As originally drafted, the last
sentence of Sec. 1.6045-1(g)(1)(i) stated that if a withholding
certificate was provided, a withholding agent could rely on the
certificate to exempt the customer from reporting only if the
certificate included a statement that the beneficial owner had not
been, and at the time the certificate was furnished reasonably expected
not to be, present in the United States for a period aggregating 183
days or more during each calendar year. The regulation did not state
whether the a statement was required if documentary evidence was
provided.
Two clarifying changes have been made to Sec. 1.6045-1(g)(1)(i).
First, the regulation has been modified to require the statement
relating to presence in the United States only from individuals.
Second, the regulation states that the statement is not required if
documentary evidence is provided. The statement is required on a
withholding certificate and not on documentary evidence because a
withholding certificate is the documentation required for an account
maintained in the United States. Documentary evidence can only be used
for amounts paid outside the United States to an offshore account and,
therefore, the likelihood that the person may be present in the United
States for the relevant period is greatly reduced.
Clarifying changes have also been made to Sec. 1.6045-1(g)(3)(iv).
The first sentence of that section stated that a broker could treat an
intermediary, as defined in Sec. 1.1441-1(c)(13), as an exempt
recipient except when the broker had actual knowledge or reason to know
the intermediary was acting on behalf of a U.S. person. The exception
should only apply if the intermediary is acting on behalf of a U.S.
person who is subject to reporting on Form 1099, that is, a U.S. non-
exempt recipient. The regulation has been amended to make this clear.
An erroneous cite to nonwithholding foreign partnerships has also been
eliminated.
In paragraph (g)(4) of Sec. 1.6045-1, Example 7 has been amended to
reflect the change to the regulations that now generally treats accrued
interest as an amount that is not subject to withholding. Under that
example, a foreign bank that is a U.S. payor effects a sale of an
interest bearing obligation at an office outside the United States on
behalf of an undocumented account holder. Under the regulation, as
originally drafted, the gross proceeds from the sale, net of accrued
interest, were reported on Form 1099 as paid to a payee that was
presumed to be a U.S. person. However, because the accrued interest was
considered an amount subject to withholding, it was reportable on Form
1042-S. Under the regulation, as revised, accrued interest is treated
as an amount that is not subject to withholding. Therefore, both the
gross proceeds, net of accrued interest, and the accrued interest are
now presumed paid to a U.S. payee and reported on Form 1099 under the
presumption rule Sec. 1.6049-5(d)(2). Two additional examples have been
added to paragraph (g)(4) to illustrate the operation of the
presumption rules on a sale of a short-term original issue discount
instrument. These examples were added to make clear that a sale of an
OID obligation outside the United States is a gross proceeds
transaction and, therefore, under the presumption rule of Sec. 1.6049-
5(d)(2), presumed made to a U.S. person. Whether the gross proceeds are
reportable depends on whether the exception of Sec. 1.6045-1(a) for
sales outside the United States by a non-U.S. payor applies.
M. Changes to Sec. 1.6049-5
Under Sec. 1.6049-5(c)(1), a withholding agent or payor may
generally rely on documentary evidence from a foreign payee instead of
a beneficial owner withholding certificate on Form W-8 if an amount is
paid outside the United States to an offshore account. An offshore
account is an account maintained at an office or branch of a U.S. or
foreign bank or other financial institution at any location outside the
United States and outside of a U.S. possession. Under Sec. 1.6049-5(e),
an amount is considered paid outside the United States if the payor
completes the acts necessary to effect payment outside the United
States.
The regulations do not specifically address whether partners of a
nonwithholding foreign partnership, foreign beneficiaries of a foreign
simple trust, or foreign owners of a foreign grantor trust can use
documentary evidence to establish their status as foreign payees.
Paragraph (c)(1) has been amended to permit the use of documentary
evidence by foreign partners, beneficiaries, and owners in these
situations. Documentary evidence can also be used for purposes of
chapter 3 of the Internal Revenue Code by virtue of the incorporation
of Sec. 1.6049-5(c)(1) in Sec. 1.1441-1(e)(1)(ii)(A)(2). The use of
documentary evidence is appropriate because the regulations generally
treat payments to foreign nonwithholding foreign partnerships, foreign
simple trusts, and foreign grantor trusts similar to payments made to
nonqualified intermediaries, and the latter are permitted to provide
documentary evidence on behalf of their account holders.
Section 1.6049-5(c)(4) provides rules that apply to U.S. payors
that make payments outside the United States of amounts not subject to
withholding (e.g., foreign source income and gross proceeds from the
sale of securities) other than deposit interest and interest
[[Page 32167]]
or OID on short-term OID instruments. Non-U.S. payors are generally
exempt from reporting these payments. There were several issues under
paragraph (c)(4) as originally drafted. First, the paragraph was
internally inconsistent. Paragraph (c)(4)(i) stated that a bank or
other financial institution could establish a payee's status as a
foreign person by relying on a written declaration made on an account
opening statement that the payee was not a U.S. person in two
circumstances: (i) If it was not customary in a country to obtain
documentary evidence to establish a person's identity, or (ii) if it
was customary to obtain documentary evidence but it was not customary
to renew it. Paragraph (c)(4)(iv), however, stated that a bank or
financial institution could not rely on a declaration if it was
customary to obtain documentary evidence but not customary to renew it.
Second, paragraph (c)(4)(i) did not permit a bank or financial
institution to rely on documentary evidence to establish a person's
foreign status if there was indicia of U.S. status, including
employment by a U.S.-based multinational organization. A commentator
noted that prohibiting use of documentary evidence merely because an
account holder worked for a U.S.-based multinational organization was
overly broad because such organizations commonly employ local employees
and a withholding agent may not know whether a particular multinational
is U.S. based. Finally, paragraph (c)(4)(iii) required a bank or
financial institution that relied upon a declaration of foreign status
or non-renewable documentary evidence to send a negative confirmation
statement each year to the account holder stating that the account
holder was being treated as a foreign payee and that the account holder
was obligated to notify the bank or financial institution if it became
a U.S. citizen or U.S. resident. A commentator argued that the expense
of such a requirement was not justified. The commentator argued that if
an account holder legitimately establishes foreign status, it is
unlikely that the account holder will become a U.S. citizen or resident
and that if it does, there are factors, such as a change of address,
that will indicate a change in the person's status.
Paragraph (c)(4) has been amended to remove the inconsistency and
to take the commentators' comments into account. Under paragraph
(c)(4)(ii), as revised, a declaration of foreign status may be used
only if it is not customary to obtain documentary evidence. The
declaration may be relied upon only if there is no address or other
indicia of U.S. status. If it is customary in the country where a bank
or financial institution maintains a branch or office to obtain, but
not renew, documentary evidence, then the bank or financial institution
may rely on the documentary evidence without the need to renew it
provided that it may rely on the documentation to establish foreign
status under the due diligence rules of Sec. 1.1441-7(b)(7) and (8).
The restriction on using such documentation in the case of a U.S. based
multinational employee has been removed. If, however, the bank or
financial institution may rely on the documentary evidence as
establishing foreign status even though there are indicia of U.S.
status, it can rely on the documentary evidence only for a period of
three full calendar years after the calendar year in which it is
received. Finally, neither the documentation rule of paragraph
(c)(4)(i) nor the declaration rule of paragraph (c)(4)(ii) requires a
payor to send a negative confirmation.
Section 1.6049-5(d) contains presumption rules that generally apply
for chapter 61 reporting if a payor lacks required documentation from a
payee. Paragraph (d)(2) governs payments other than payments to
intermediaries or flow-through entities. Paragraph (d)(2)(i) has been
clarified to state that the presumption rules of Sec. 1.1441-
1(b)(3)(iii)(D) (payments to offshore accounts) do not apply to amounts
that are not subject to withholding. As originally drafted, paragraph
(d)(2)(i) stated that the rules of Sec. 1.1441-1(b)(3)(iii) applied to
all payments, irrespective of whether they were subject to withholding.
Section 1.1441-1(b)(3)(iii)(D), however, stated that it did not apply
to amounts that were not subject to withholding. Revised paragraph
(d)(2)(i) eliminates the inconsistency. Therefore, payments of deposit
interest, and interest or OID arising from the redemption of an
obligation described in section 871(g)(1)(B)(i) paid to an offshore
account are presumed paid to a U.S. payee. In addition, gross proceeds,
which are not amounts subject to withholding, are also treated as paid
to U.S. persons under Sec. 1.6045-1(g)(1)(i). Under the exceptions of
Secs. 1.6045-1(a)(1) and 1.6045-1(g)(3), however, gross proceeds from
the sale of a security by a non-U.S. payor effected outside the United
States are not subject to reporting.
The grace period rule in Sec. 1.6049-5(d)(2)(ii), as originally
drafted, did not cover the same payments as were covered under the
grace period rule of Sec. 1.1441-1(b)(3)(iv) even though the latter
regulation cross-references Sec. 1.6049-5(d)(2)(ii). For example, the
rule under the 1441 regulations, but not the rule under section 6049,
covered dividends from any redeemable security issued by an investment
company and amounts paid with respect to loans of securities. Paragraph
5(d)(2)(ii) has been amended to cover the same payments as are covered
by the grace period rule of Sec. 1.1441-1(b)(3)(iv). In addition,
paragraph (d)(2)(ii) prior to amendment stated that the grace period
expired on the earlier of the of the 90th day after the grace period
began, the date on which documentation is provided, or the last day of
the calendar year. Commentators stated that terminating the grace
period at the end of a calendar year complicated systems programming
because there was a shrinking grace period for payments made within 90
days of the end of the year. The requirement to terminate the grace
period as of the close of a calendar year has been eliminated because
it is not necessary.
Paragraph (d)(3) provides presumption rules for payments made to
foreign intermediaries. With exceptions for deposit interest and
interest and OID on short-term obligations, payments to foreign
intermediaries are presumed made to foreign payees. Paragraph (d)(4)
provided different presumptions for payments to partnerships. Under
that paragraph, payments made to foreign partnerships were generally
presumed made to U.S. payees, even if the partnership established its
status as a foreign partnership. Commentators argued that the disparate
treatment between intermediaries and partnerships was not justified
because they are treated similarly for other purposes under the
regulations. The differences also complicated payors' information
systems. In response to these comments, the presumption rules of
paragraph (d)(3) have been revised to apply to payments made to all
flow-through entities (nonwithholding foreign partnerships, foreign
simple trusts, and foreign grantor trusts).
Paragraph (d)(3)(ii) provides rules for payments of amounts that
are not subject to withholding (e.g., foreign source income and gross
proceeds from the sales of securities) other than deposit interest and
interest and OID on short-term obligations paid to foreign
intermediaries and flow-through entities. The paragraph required a
payor to presume that a payment was made to an exempt recipient unless
the payor had actual knowledge that any person for whom the
intermediary was collecting the payment was a U.S. non-
[[Page 32168]]
exempt recipient. In that case, the payment was treated as made to the
U.S. non-exempt recipient. The last sentence of the paragraph, however,
also appeared to require a payor to presume that a payment was made to
a U.S. non-exempt recipient if it appeared that the payment might be
collected on behalf of a U.S. non-exempt payee, because, for example,
an intermediary provided Forms W-9 for some payees but did not allocate
a payment to any particular payee. The application of the last sentence
of the paragraph, however, was uncertain.
Paragraph (d)(3)(ii) has been revised to generally reflect the
principle that a payment of an amount that is not subject to
withholding (other than short-term OID and deposit interest) made to an
intermediary should not be subject to Form 1099 reporting by a payor if
the payment would not be subject to Form 1099 reporting if made to a
U.S. non-exempt recipient by an intermediary that is not a U.S. payor.
Thus, the general rule is that a payment covered by the paragraph
(i.e., foreign source income or gross proceeds) is presumed paid to an
exempt recipient unless the payor has actual knowledge that the amount
is attributable to a U.S. non-exempt recipient.
As originally drafted, Sec. 1.6049-5(d)(3)(iii) provided special
presumption rules for payments of deposit interest and interest or OID
from short-term original issue discount obligations to foreign
intermediaries. It was not clear whether the presumption rule of the
paragraph applied to the portion of the sale proceeds representing OID
from the sale or exchange of short-term OID instrument in a transaction
other than a redemption.
Under paragraph (d)(3)(iii) as revised, a payment of deposit
interest or interest or OID on the redemption of a short-term original
issue discount obligation paid to an intermediary or flow-through
entity is presumed paid to a U.S. payee. The paragraph does not apply
to sales or exchanges (other than redemption) of short-term OID
instruments. Such sales or exchanges are treated as gross proceeds
transactions, in conformance with the rules in Secs. 1.6045-1(c) and
(d)(3) and 31.3406(b)(2)-2, and are subject to the general presumption
rule for payments made to foreign intermediaries under Sec. 1.6049-
5(d)(3)(ii). Therefore, gross proceeds from the sale or exchange (other
than a redemption) of a short-term OID instrument will generally be
presumed paid as made to an exempt recipient. Intermediaries that are
U.S. payors, however, may themselves be required to report such gross
proceeds under Sec. 1.6045-1(c) and (1)(g)(i) and the presumption rule
of Sec. 1.6049-5(d)(2), which applies to payments made to persons other
than an intermediary because under that section gross proceeds are
generally considered paid to U.S. payees under that section.
Paragraph (d)(3)(iii)(B) contained a presumption rule for payments
made to exempt recipients that had not provided documentation that they
were acting as intermediaries. The scope and application of this rule
were unclear. Paragraph (d)(3)(iii)(B) has been completely revised and
now states that a payment made to an exempt recipient that the payor
knows, or has reason to know, is acting as an intermediary is subject
to the presumptions that apply to intermediaries.
N. Withholding Certificate Transitional Issues
The changes made by this regulation will require revisions to
instructions to the withholding certificates issued on Form W-8 and
certain minor changes to the forms themselves. Until Forms W-8, and the
instructions, are revised withholding agents may rely on Forms W-8BEN,
W-8ECI, W-8EXP, and W-8IMY as currently in effect but should take into
account, particularly with respect to Form W-8IMY used by
intermediaries and flow-through entities, that the instructions to the
form do not reflect the withholding statement requirements contained in
this regulation. In particular, withholding agents and providers of
Form W-8IMY should furnish a withholding statement in connection with
the form that conforms to Sec. 1.1441-1(e)(3)(iv).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Finally, it has
been determined that the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply to these regulations because the regulations do not
impose a collection of information on small entities. Pursuant to
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking
preceding these regulations (61 FR 17614) was submitted to the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Carl Cooper, Laurie
Hatten-Boyd, and Kate Hwa of the Office of Associate Chief Counsel
(International).
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Adoption of Amendments to Regulations
Accordingly, 26 CFR parts 1 and 31 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Effective January 1, 2001, Sec. 1.1441-0 is amended by:
1. Revising the entry for Sec. 1.1441-1(b)(2)(vii).
2. Adding entries for Sec. 1.1441-1(b)(2)(vii)(A) through (F).
2a. Revising the entry for Sec. 1.1441-1(b)(3)(ii).
3. Adding entries for Sec. 1.1441-1(b)(3)(ii)(A) through (C).
4. Revising the entry for Sec. 1.1441-1(b)(3)(iv).
5. Revising entry for Sec. 1.1441-1(b)(3)(v)(B).
6. Revising the entry for Sec. 1.1441-1(b)(3)(vi).
7. Adding entries for Sec. 1.1441-1(b)(3)(vii)(A) and (B).
8. Adding entries for Sec. 1.1441-1(b)(6)(i) and (ii).
9. Revising the entries for Sec. 1.1441-1(c)(6)(ii), (c)(6)(ii)(B),
(c)(6)(ii)(C), and adding a new entry for Sec. 1.1441-1(c)(6)(ii)(D).
10. Adding entries for Sec. 1.1441-1(c)(12) through (29).
11. Revising the entry for Sec. 1.1441-1(d)(4).
12. Revising the entry for Sec. 1.1441-1(e)(3)(iii), (e)(3)(iv),
and (e)(3)(iv)(A) through (C).
13. Adding entries for Sec. 1.1441-1(e)(3)(iv)(D) and (E).
14. Adding entries for Sec. 1.1441-1(e)(4)(iv)(A), (B), and (C).
15. Revising the entries for Sec. 1.1441-1(e)(5)(v) and
(e)(5)(v)(B) and (C).
16. Revising the entries for Sec. 1.1441-2(b)(3)(i) and (ii).
[[Page 32169]]
17. Removing the entries for Sec. 1.1441-2(b)(3)(iii) and (iv).
18. Revising the entry for Sec. 1.1441-5(a).
19. Revising the entries for Sec. 1.1441-5(b), (b)(1), (b)(2), and
(b)(2)(i), adding entries for Sec. 1.1441-5(b)(2)(i)(A) and
(b)(2)(i)(B), and revising entries for Sec. 1.1441-5(b)(2)(ii),
(b)(2)(iii), (b)(2)(iv), and (b)(2)(v).
20. Revising the entry for Sec. 1.1441-5(c)(1)(iv).
21. Removing the entries for Sec. 1.1441-5(c)(2)(ii)(A) and (B).
21. Revising the entry for Sec. 1.1441-5(c)(3).
22. Revising the entries for Sec. 1.1441-5(c)(3)(iii).
23. Revising the entries for Sec. 1.1441-5(c)(3)(iv) and (v).
24. Revising the entry for Sec. 1.1441-5(d).
25. Removing the entries for Sec. 1.1441-5(d)(3)(i) through
(d)(3)(iv).
26. Revising the entry for Sec. 1.1441-5(d)(4).
27. Revising the entry for Sec. 1.1441-5(e).
28. Adding entries for Sec. 1.1441-5(e)(1), (e)(2), (e)(3),
(e)(3)(i), (e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii),
(e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6), (e)(6)(i), (e)(6)(ii) and
(e)(6)(iii).
29. Revising the entries for Sec. 1.1441-6(b)(2), (b)(2)(i) and
(b)(2)(ii).
30. Adding entries for Sec. 1.1441-6(b)(2)(iii) and (b)(2)(iv).
31. Revising the entry for Sec. 1.1441-6(b)(3).
32. Revising the entry for Sec. 1.1441-6(b)(4).
33. Removing the entries for Sec. 1.1441-6(b)(4)(i), (b)(4)(ii),
(b)(4)(ii)(A), (b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).
34. Removing the entry for Sec. 1.1441-6(b)(5).
35. Revising the entry for Sec. 1.1441-6(c).
36. Revising the entry for Sec. 1.1441-6(c)(2).
37. Removing the entries for Sec. 1.1441-6(c)(2)(i), (c)(2)(ii),
and (c)(2)(iii).
38. Revising the entries for Sec. 1.1441-6(c)(5), (c)(5)(i) and
(c)(5)(ii).
39. Revising the entry for Sec. 1.1441-6(e).
40. Adding entries for Sec. 1.1441-7(a)(1) and (2).
41. Removing the entries for Sec. 1.1441-7(b)(2)(i) and (b)(2)(ii).
42. Revising the entry for Sec. 1.1441-7(b)(3).
43. Adding entries for Sec. 1.1441-7(b)(4), (b)(4)(i), (b)(4)(ii),
and (b)(5) through (b)(11).
The additions and revisions read as follows.
Sec. 1.1441-0 Outline of regulation provisions for section 1441.
* * * * *
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
* * * * *
(b) * * *
(2) * * *
(vii) Rules for reliably associating a payment with a
withholding certificate or other appropriate documentation.
(A) Generally.
(B) Special rules applicable to a withholding certificate from a
nonqualified intermediary or flow-through entity.
(C) Special rules applicable to a withholding certificate
provided by a qualified intermediary that does not assume primary
withholding responsibility.
(D) Special rules applicable to a withholding certificate
provided by a qualified intermediary that assumes primary
withholding responsibility under chapter 3 of the Internal Revenue
Code.
(E) Special rules applicable to a withholding certificate
provided by a qualified intermediary that assumes primary Form 1099
reporting and backup withholding responsibility but not primary
withholding under chapter 3.
(F) Special rules applicable to a withholding certificate
provided by a qualified intermediary that assumes primary
withholding responsibility under chapter 3 and primary Form 1099
reporting and backup withholding responsibility and a withholding
certificate provided by a withholding foreign partnership.
(3) * * *
(ii) Presumptions of classification as individual, corporation,
partnership, etc.
(A) In general.
(B) No documentation provided.
(C) Documentary evidence furnished for offshore account.
* * * * *
(iv) Grace period.
(v) * * *
(B) Beneficial owner documentation or allocation information is
lacking or unreliable.
* * * * *
(vi) U.S. branches.
(vii) * * *
(A) In general.
(B) Special rule for offshore accounts.
* * * * *
(6) * * *
(i) In general.
(ii) Example.
* * * * *
(c) * * *
(6) * * *
(ii) Special rules.
* * * * *
(B) Foreign partnerships.
(C) Foreign simple trusts and foreign grantor trusts.
(D) Other foreign trusts and foreign estates.
* * * * *
(12) Payee.
(13) Intermediary.
(14) Nonqualified intermediary.
(15) Qualified intermediary.
(16) Withholding certificate.
(17) Documentary evidence; other appropriate documentation.
(18) Documentation.
(19) Payor.
(20) Exempt recipient.
(21) Non-exempt recipient.
(22) Reportable amounts.
(23) Flow-through entity.
(24) Foreign simple trust.
(25) Foreign complex trust.
(26) Foreign grantor trust.
(27) Partnership.
(28) Nonwithholding foreign partnership.
(29) Withholding foreign partnership.
(d) * * *
(4) When a payment to an intermediary or flow-through entity may
be treated as made to a U.S. payee.
(e) * * *
(3) * * *
(iii) Intermediary withholding certificate from a nonqualified
intermediary.
(iv) Withholding statement provided by nonqualified
Intermediary.
(A) In general.
(B) General requirements.
(C) Content of withholding statement.
(D) Alternative procedures.
(E) Notice procedures.
* * * * *
(4) * * *
(iv) * * *
(A) In general.
(B) Requirements.
(C) Special requirements for transmission of Forms W-8 by an
intermediary. [Reserved]
* * * * *
(5) * * *
(v) Withholding statement.
* * * * *
(B) Content of withholding statement.
(C) Withholding rate pools.
* * * * *
Sec. 1.1441-2 Amounts subject to withholding.
* * * * *
(b) * * *
(3) * * *
(i) Amount subject to tax.
(ii) Amounts subject to withholding.
* * * * *
Sec. 1.1441-5 Withholding on payments to partnerships trusts, and
estates.
(a) In general.
(b) Rules applicable to U.S. partnerships, trusts, and estates.
(1) Payments to U.S. partnerships, trusts, and estates.
(2) Withholding by U.S. payees.
(i) U.S. partnerships.
(A) In general.
(B) Effectively connected income of partners.
(ii) U.S. simple trusts.
(iii) U.S. complex trusts and U.S. estates.
(iv) U.S. grantor trusts.
(v) Subsequent distribution.
(c) * * *
(1) * * *
(iv) Examples.
* * * * *
(3) Nonwithholding foreign partnerships.
* * * * *
(iii) Withholding certificate from a nonwithholding foreign
partnership.
[[Page 32170]]
(iv) Withholding statement provided by nonwithholding foreign
partnership.
(v) Withholding and reporting by a foreign partnership.
(d) Presumption rules.
* * * * *
(4) Determination by a withholding foreign partnership of the
status of its partners.
(e) Foreign trusts and estates.
(1) In general.
(2) Payments to foreign complex trusts and estates.
(3) Payees of payments to foreign simple trusts and foreign
grantor trusts.
(i) Payments for which beneficiaries and owners are payees.
(ii) Payments for which trust is payee.
(4) Reliance on claim of foreign complex trust or foreign estate
status.
(5) Foreign simple trust and foreign grantor trust.
(i) Reliance on claim of foreign simple trust or foreign grantor
trust status.
(ii) Reliance on claim of reduced withholding by a foreign
simple trust or foreign grantor trust for its beneficiaries or
owners.
(iii) Withholding certificate from foreign simple trust or
foreign grantor trust.
(iv) Withholding statement provided by a foreign simple trust or
foreign grantor trust.
(v) Withholding foreign trusts.
(6) Presumption rules.
(i) In general.
(ii) Determination of status as U.S. or foreign trust or estate
in the absence of documentation.
(iii) Determination of beneficiary or owner's status in the
absence of certain documentation.
* * * * *
Sec. 1.1441-6 Claim of reduced withholding under an income tax treaty.
* * * * *
(b) * * *
(2) Payment to fiscally transparent entity.
(i) In general.
(ii) Certification by qualified intermediary.
(iii) Dual treatment.
(iv) Examples.
(3) Certified TIN.
(4) Claim of benefits under an income tax treaty by a U.S.
person.
(c) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income.
* * * * *
(2) Income to which special rules apply.
* * * * *
(5) Statements regarding entitlement to treaty benefits.
(i) Statement regarding conditions under a limitation on
benefits provision.
(ii) Statement regarding whether the taxpayer derives the
income.
* * * * *
(e) Competent authority.
* * * * *
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) * * *
(1) In general.
(2) Examples.
(b) * * *
(3) Financial institutions--limits on reason to know.
(4) Rules applicable to withholding certificates.
(i) In general.
(ii) Examples.
(5) Withholding certificate--establishment of foreign status.
(6) Withholding certificate--claim of reduced rate of
withholding under treaty.
(7) Documentary evidence.
(8) Documentary evidence--establishment of foreign status.
(9) Documentary evidence--claim of reduced rate of withholding
under treaty.
(10) Limits on reason to know--indirect account holders.
(11) Additional guidance.
* * * * *
Par. 3. Effective January 1, 2001, section 1.1441-1 is amended by:
1. Revising the first sentence of paragraph (b)(2)(i).
2. Revising paragraphs (b)(2)(iv)(A), (b)(2)(iv)(B)(3), and
(b)(2)(iv)(C).
3. Revising paragraphs (b)(2)(v)(A) and (b)(2)(v)(B).
4. Revising paragraph (b)(2)(vii).
5. Revising the first sentence of paragraph (b)(3)(i).
6. Revising paragraph (b)(3)(ii).
7. Revising paragraphs (b)(3)(iii)(C) and (b)(3)(iii)(D).
8. Revising paragraph (b)(3)(iv).
9. Revising paragraph (b)(3)(v).
10. Revising paragraphs (b)(3)(vi) and (b)(3)(vii).
11. Revising paragraph (b)(6).
12. Revising paragraph (c)(2).
13. Revising paragraph (c)(6).
14. Adding paragraphs (c)(12) through (c)(29).
15. Revising paragraphs (d)(2) through (d) (4).
16. Revising paragraphs (e)(1)(ii)(A)(1), (e)(1)(ii)(A)(3), and
(e)(1)(ii)(A)(4).
17. Revising paragraph (e)(3).
18. Revising paragraph (e)(4)(ii)(A).
19. Revising paragraphs (e)(4)(ii)(B)(1) through (e)(4)(ii)(B)(4)
and (e)(4)(ii)(B) (6), and adding paragraph (e)(4)(ii)(B)(8).
20. Revising paragraph (e)(4)(iv).
21. Revising paragraph (e)(4)(vii).
22. Adding paragraph (e)(4)(ix)(A)(4) and revising paragraph
(e)(4)(ix)(C).
23. Revising paragraph (e)(5)(i) and (e)(5)(iii) through (e)(5)(v).
The additions and revisions read as follows:
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
* * * * *
(b) * * *
(2) Determination of payee and payee's status--(i) In general.
Except as otherwise provided in this paragraph (b)(2) and Sec. 1.1441-
5(c)(1) and (e)(3), a payee is the person to whom a payment is made,
regardless of whether such person is the beneficial owner of the amount
(as defined in paragraph (c)(6) of this section). * * *
* * * * *
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies--(A) U.S. branch treated as a U.S. person in
certain cases. A payment to a U.S. branch of a foreign person is a
payment to a foreign person. However, a U.S. branch described in this
paragraph (b)(2)(iv)(A) and a withholding agent (including another U.S.
branch described in this paragraph (b)(2)(iv)(A)) may agree to treat
the branch as a U.S. person for purposes of withholding on specified
payments to the U.S. branch. Notwithstanding the preceding sentence, a
withholding agent making a payment to a U.S. branch treated as a U.S.
person under this paragraph (b)(2)(iv)(A) shall not treat the branch as
a U.S. person for purposes of reporting the payment made to the branch.
Therefore, a payment to such U.S. branch shall be reported on Form
1042-S under Sec. 1.1461-1(c). Further, a U.S. branch that is treated
as a U.S. person under this paragraph (b)(2)(iv)(A) shall not be
treated as a U.S. person for purposes of the withholding certificate it
may provide to a withholding agent. Therefore, the U.S. branch must
furnish a U.S. branch withholding certificate on Form W-8 as provided
in paragraph (e)(3)(v) of this section and not a Form W-9. An agreement
to treat a U.S. branch as a U.S. person must be evidenced by a U.S.
branch withholding certificate described in paragraph (e)(3)(v) of this
section furnished by the U.S. branch to the withholding agent. A U.S.
branch described in this paragraph (b)(2)(iv)(A) is any U.S. branch of
a foreign bank subject to regulatory supervision by the Federal Reserve
Board or a U.S. branch of a foreign insurance company required to file
an annual statement on a form approved by the National Association of
Insurance Commissioners with the Insurance Department of a State, a
Territory, or the District of Columbia. The Internal Revenue Service
(IRS) may approve a list of U.S. branches that may qualify for
treatment as a U.S. person under this paragraph (b)(2)(iv)(A) (see
Sec. 601.601(d)(2) of this chapter). See Sec. 1.6049-5(c)(5)(vi) for
the treatment of U.S. branches as U.S. payors if they make a payment
that is subject to reporting under chapter 61 of the Internal Revenue
Code. Also see Sec. 1.6049-5(d)(1)(ii) for the treatment of
[[Page 32171]]
U.S. branches as foreign payees under chapter 61 of the Internal
Revenue Code.
(B) * * *
(3) As a payment to a foreign person of income that is effectively
connected with the conduct of a trade or business in the United States
if the withholding agent cannot reliably associate the payment with a
withholding certificate from the U.S. branch or any other certificate
or other appropriate documentation from another person. See
Sec. 1.1441-4(a)(2)(ii).
(C) Consequences to the U.S. branch. A U.S. branch that is treated
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be
treated as a separate person solely for purposes of section 1441(a) and
all other provisions of chapter 3 of the Internal Revenue Code and the
regulations thereunder (other than for purposes of reporting the
payment to the U.S. branch under Sec. 1.1461-1(c) or for purposes of
the documentation such a branch must furnish under paragraph (e)(3)(v)
of this section) for any payment that it receives as such. Thus, the
U.S. branch shall be responsible for withholding on the payment in
accordance with the provisions under chapter 3 of the Internal Revenue
Code and the regulations thereunder and other applicable withholding
provisions of the Internal Revenue Code. For this purpose, it shall
obtain and retain documentation from payees or beneficial owners of the
payments that it receives as a U.S. person in the same manner as if it
were a separate entity. For example, if a U.S. branch receives a
payment on behalf of its home office and the home office is a qualified
intermediary, the U.S. branch must obtain a qualified intermediary
withholding certificate described in paragraph (e)(3)(ii) of this
section from its home office. In addition, a U.S. branch that has not
provided documentation to the withholding agent for a payment that is,
in fact, not effectively connected income is a withholding agent with
respect to that payment. See paragraph (b)(6) of this section and
Sec. 1.1441-4(a)(2)(ii).
* * * * *
(v) Payments to a foreign intermediary--(A) Payments treated as
made to persons for whom the intermediary collects the payment. Except
as otherwise provided in paragraph (b)(2)(v)(B) of this section, the
payee of a payment to a person that the withholding agent may treat as
a foreign intermediary in accordance with the provisions of paragraph
(b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the person or persons
for whom the intermediary collects the payment. Thus, for example, the
payee of a payment that the withholding agent can reliably associate
with a withholding certificate from a qualified intermediary (defined
in paragraph (e)(5)(ii) of this section) that does not assume primary
withholding responsibility or a payment to a nonqualified intermediary
are the persons for whom the qualified intermediary or nonqualified
intermediary acts and not to the intermediary itself. See paragraph
(b)(3)(v) of this section for presumptions that apply if the payment
cannot be reliably associated with valid documentation. For similar
rules for payments to flow-through entities, see Sec. 1.1441-5(c)(1)
and (e)(3).
(B) Payments treated as made to foreign intermediary. The payee of
a payment to a person that the withholding agent may treat as a
qualified intermediary is the qualified intermediary to the extent that
the qualified intermediary assumes primary withholding responsibility
under paragraph (e)(5)(iv) of this section for the payment. For example
if a qualified intermediary assumes primary withholding responsibility
under chapter 3 of the Internal Revenue Code but does not assume
primary reporting or withholding responsibility under chapter 61 or
section 3406 of the Internal Revenue Code and therefore provides Forms
W-9 for U.S. non-exempt recipients, the qualified intermediary is the
payee except to the extent the payment is reliably associated with a
Form W-9 from a U.S. non-exempt recipient.
* * * * *
(vii) Rules for reliably associating a payment with a withholding
certificate or other appropriate documentation--(A) Generally. The
presumption rules of paragraph (b)(3) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d) apply to any payment, or portion of a
payment, that a withholding agent cannot reliably associate with valid
documentation. Generally, a withholding agent can reliably associate a
payment with valid documentation if, prior to the payment, it holds
valid documentation (either directly or through an agent), it can
reliably determine how much of the payment relates to the valid
documentation, and it has no actual knowledge or reason to know that
any of the information, certifications, or statements in, or associated
with, the documentation are incorrect. Special rules apply for payments
made to intermediaries, flow-through entities, and certain U.S.
branches. See paragraph (b)(2)(vii)(B) through (F) of this section. The
documentation referred to in this paragraph (b)(2)(vii) is
documentation described in paragraphs (c)(16) and (17) of this section
upon which a withholding agent may rely to treat the payment as a
payment made to a payee or beneficial owner, and to ascertain the
characteristics of the payee or beneficial owner that are relevant to
withholding or reporting under chapter 3 of the Internal Revenue Code
and the regulations thereunder. For purposes of this paragraph
(b)(2)(vii), documentation also includes the agreement that the
withholding agent has in effect with an authorized foreign agent in
accordance with Sec. 1.1441-7(c)(2)(i). A withholding agent that is not
required to obtain documentation with respect to a payment is
considered to lack documentation for purposes of this paragraph
(b)(2)(vii). For example, a withholding agent paying U.S. source
interest to a person that is an exempt recipient, as defined in
Sec. 1.6049-4(c)(1)(ii), is not required to obtain documentation from
that person in order to determine whether an amount paid to that person
is reportable under an applicable information reporting provision under
chapter 61 of the Internal Revenue Code. The withholding agent must,
however, treat the payment as made to an undocumented person for
purposes of chapter 3 of the Internal Revenue Code. Therefore, the
presumption rules of paragraph (b)(3)(iii) of this section apply to
determine whether the person is presumed to be a U.S. person (in which
case, no withholding is required under this section), or whether the
person is presumed to be a foreign person (in which case 30-percent
withholding is required under this section). See paragraph (b)(3)(v) of
this section for special reliance rules in the case of a payment to a
foreign intermediary and Sec. 1.1441-5(d) and (e)(6) for special
reliance rules in the case of a payment to a flow-through entity.
(B) Special rules applicable to a withholding certificate from a
nonqualified intermediary or flow-through entity. (1) In the case of a
payment made to a nonqualified intermediary, a flow-through entity (as
defined in paragraph (c)(23) of this section), and a U.S. branch
described in paragraph (b)(2)(iv) of this section (other than a branch
that is treated as a U.S. person), a withholding agent can reliably
associate the payment with valid documentation only to the extent that,
prior to the payment, the withholding agent can allocate the
[[Page 32172]]
payment to a valid nonqualified intermediary, flow-through, or U.S.
branch withholding certificate; the withholding agent can reliably
determine how much of the payment relates to valid documentation
provided by a payee as determined under paragraph (c)(12) of this
section (i.e., a person that is not itself an intermediary, flow-
through entity, or U.S. branch); and the withholding agent has
sufficient information to report the payment on Form 1042-S or Form
1099, if reporting is required. See paragraph (e)(3)(iii) of this
section for the requirements of a nonqualified intermediary withholding
certificate, paragraph (e)(3)(v) of this section for the requirements
of a U.S. branch certificate, and Secs. 1.1441-5(c)(3)(iii) and
(e)(5)(iii) for the requirements of a flow-through withholding
certificate. Thus, a payment cannot be reliably associated with valid
documentation provided by a payee to the extent such documentation is
lacking or unreliable, or to the extent that information required to
allocate and report all or a portion of the payment to each payee is
lacking or unreliable. If a withholding certificate attached to an
intermediary, U.S. branch, or flow-through withholding certificate is
another intermediary, U.S. branch, or flow-through withholding
certificate, the rules of this paragraph (b)(2)(vii)(B) apply by
treating the share of the payment allocable to the other intermediary,
U.S. branch, or flow-through entity as if the payment were made
directly to such other entity. See paragraph (e)(3)(iv)(D) of this
section for rules permitting information allocating a payment to
documentation to be received after the payment is made.
(2) The rules of paragraph (b)(2)(vii)(B)(1) of this section are
illustrated by the following examples:
Example 1. WH, a withholding agent, makes a payment of U.S.
source interest to NQI, an intermediary that is a nonqualified
intermediary. NQI provides a valid intermediary withholding
certificate under paragraph (e)(3)(iii) of this section. NQI does
not, however, provide valid documentation from the persons on whose
behalf it receives the interest payment, and, therefore, the
interest payment cannot be reliably associated with valid
documentation provided by a payee. WH must apply the presumption
rules of paragraph (b)(3)(v) of this section to the payment.
Example 2. The facts are the same as in Example 1, except that
NQI does attach valid beneficial owner withholding certificates (as
defined in paragraph (e)(2)(i) of this section) from A, B, C, and D
establishing their status as foreign persons. NQI does not, however,
provide WH with any information allocating the payment among A, B,
C, and D and, therefore, WH cannot determine the portion of the
payment that relates to each beneficial owner withholding
certificate. The interest payment cannot be reliably associated with
valid documentation from a payee and WH must apply the presumption
rules of paragraph (b)(3)(v) of this section to the payment. See,
however, paragraph (e)(3)(iv)(D) of this section providing special
rules permitting allocation information to be received after a
payment is made.
Example 3. The facts are the same as in Example 2, except that
NQI does provide allocation information associated with its
intermediary withholding certificate indicating that 25 percent of
the interest payment is allocable to A and 25 percent to B. NQI does
not provide any allocation information regarding the remaining 50
percent of the payment. WH may treat 25 percent of the payment as
made to A and 25 percent as made to B. The remaining 50 percent of
the payment cannot be reliably associated with valid documentation
from a payee, however, since NQI did not provide information
allocating the payment. Thus, the remaining 50 percent of the
payment is subject to the presumption rules of paragraph (b)(3)(v)
of this section.
Example 4. WH makes a payment of U.S. source interest to NQI1,
an intermediary that is not a qualified intermediary. NQI1 provides
WH with a valid nonqualified intermediary withholding certificate as
well a valid beneficial owner withholding certificates from A and B
and a valid nonqualified intermediary withholding certificate from
NQI2. NQI2 has provided valid beneficial owner documentation from C
sufficient to establish C's status as a foreign person. Based on
information provided by NQI1, WH can allocate 20 percent of the
interest payment to A, and 20 percent to B. Based on information
that NQI2 provided NQI1 and that NQI1 provides to WH, WH can
allocate 60 percent of the payment to NQI 2, but can only allocate
one half of that payment (30 percent) to C. Therefore, WH cannot
reliably associate 30 percent of the payment made to NQI2 with valid
documentation and must apply the presumption rules of paragraph
(b)(3)(v) of this section to that portion of the payment.
(C) Special rules applicable to a withholding certificate provided
by a qualified intermediary that does not assume primary withholding
responsibility. (1) If a payment is made to a qualified intermediary
that does not assume primary withholding responsibility under chapter 3
of the Internal Revenue Code or primary Form 1099 reporting and backup
withholding responsibility under chapter 61 and section 3406 of the
Internal Revenue Code for the payment, a withholding agent can reliably
associate the payment with valid documentation only to the extent that,
prior to the payment, the withholding agent has received a valid
qualified intermediary withholding certificate and the withholding
agent can reliably determine the portion of the payment that relates to
a withholding rate pool, as defined in paragraph (e)(5)(v)(C) of this
section. In the case of a withholding rate pool attributable to a U.S.
non-exempt recipient, a payment cannot be reliably associated with
valid documentation unless, prior to the payment, the qualified
intermediary has provided the U.S. person's Form W-9 (or, in the
absence of the form, the name, address, and TIN, if available, of the
U.S. person) and sufficient information for the withholding agent to
report the payment on Form 1099. See paragraph (e)(5)(v)(C)(2) of this
section for special rules regarding allocation of payments among U.S.
non-exempt recipients.
(2) The rules of this paragraph (b)(2)(vii)(C) are illustrated by
the following examples:
Example 1. WH, a withholding agent, makes a payment of U.S.
source dividends to QI. QI provides WH with a valid qualified
intermediary withholding certificate on which it indicates that it
does not assume primary withholding responsibility under chapter 3
of the Internal Revenue Code or primary Form 1099 reporting and
backup withholding responsibility under chapter 61 and section 3406
of the Internal Revenue Code. QI does not provide any information
allocating the dividend to withholding rate pools. WH cannot
reliably associate the payment with valid payee documentation and
therefore must apply the presumption rules of paragraph (b)(3)(v) of
this section.
Example 2. WH makes a payment of U.S. source dividends to QI. QI
has 5 customers: A, B, C, D, and E. QI has obtained documentation
from A and B establishing their entitlement to a 15 percent rate of
tax on U.S. source dividends under an income tax treaty. C is a U.S.
person that is an exempt recipient as defined in paragraph (c)(20)
of this section. D and E are U.S. non-exempt recipients who have
provided Forms W-9 to QI. A, B, C, D, and E are each entitled to 20
percent of the dividend payment. QI provides WH with a valid
qualified intermediary withholding certificate as described in
paragraph (e)(2)(ii) of this section with which it associates the
Forms W-9 from D and E. QI associates the following allocation
information with its qualified intermediary withholding certificate:
40 percent of the payment is allocable to the 15 percent withholding
rate pool, and 20 percent is allocable to each of D and E. QI does
not provide any allocation information regarding the remaining 20
percent of the payment. WH cannot reliably associate 20 percent of
the payment with valid documentation and, therefore, must apply the
presumption rules of paragraph (b)(3)(v) of this section to that
portion of the payment. The 20 percent of the payment allocable to
the 15 percent withholding rate pool, and the portion of the
payments allocable to D and E are payments that can be reliably
associated with documentation.
(D) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 of the Internal Revenue
[[Page 32173]]
Code. (1) In the case of a payment made to a qualified intermediary
that assumes primary withholding responsibility under chapter 3 of the
Internal Revenue Code with respect to that payment (but does not assume
primary Form 1099 reporting and backup withholding responsibility under
chapter 61 and section 3406 of the Internal Revenue Code), a
withholding agent can reliably associate the payment with valid
documentation only to the extent that, prior to the payment, the
withholding agent has received a valid qualified intermediary
withholding certificate and the withholding agent can reliably
determine the portion of the payment that relates to the withholding
rate pool for which the qualified intermediary assumes primary
withholding responsibility under chapter 3 of the Internal Revenue Code
and the portion of the payment attributable to withholding rate pools
for each U.S. non-exempt recipient for whom the qualified intermediary
has provided a Form W-9 (or, in absence of the form, the name, address,
and TIN, if available, of the U.S. non-exempt recipient). See paragraph
(e)(5)(v)(C)(2) of this section for alternative allocation procedures
for payments made to U.S. persons that are not exempt recipients.
(2) Examples. The following examples illustrate the rules of
paragraph (b)(2)(vii)(D)(1) of this section:
Example 1. WH makes a payment of U.S. source interest to QI, a
qualified intermediary. QI provides WH with a withholding
certificate that indicates that QI will assume primary withholding
responsibility under chapter 3 of the Internal Revenue Code with
respect to the payment. In addition, QI attaches a Form W-9 from A,
a U.S. non-exempt recipient, as defined in paragraph (c)(21) of this
section, and provides the name, address, and TIN of B, a U.S. person
that is also a non-exempt recipient but who has not provided a Form
W-9. QI associates a withholding statement with its qualified
intermediary withholding certificate indicating that 10 percent of
the payment is attributable to A, and 10 percent to B, and that QI
will assume primary withholding responsibility with respect to the
remaining 80 percent of the payment. WH can reliably associate the
entire payment with valid documentation. Although under the
presumption rule of paragraph (b)(3)(v) of this section, an
undocumented person receiving U.S. source interest is generally
presumed to be a foreign person, WH has actual knowledge that B is a
U.S. non-exempt recipient and therefore must report the payment on
Form 1099 and backup withhold on the interest payment under section
3406.
Example 2. The facts are the same as in Example 1, except that
no Forms W-9 or other information have been provided for the 20
percent of the payment that is allocable to A and B. Thus, QI has
accepted withholding responsibility for 80 percent of the payment,
but has provided no information for the remaining 20 percent. In
this case, 20 percent of the payment cannot be reliably associated
with valid documentation, and WH must apply the presumption rule of
paragraph (b)(3)(v) of this section.
(E) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary Form 1099 reporting
and backup withholding responsibility but not primary withholding under
chapter 3. (1) If a payment is made to a qualified intermediary that
assumes primary Form 1099 reporting and backup withholding
responsibility for the payment (but does not assume primary withholding
responsibility under chapter 3 of the Internal Revenue Code), a
withholding agent can reliably associate the payment with valid
documentation only to the extent that, prior to the payment, the
withholding agent has received a valid qualified intermediary
withholding certificate and the withholding agent can reliably
determine the portion of the payment that relates to a withholding rate
pool or pools provided as part of the qualified intermediary's
withholding statement and the portion of the payment for which the
qualified intermediary assumes primary Form 1099 reporting and backup
withholding responsibility.
(2) The following example illustrates the rules of paragraph
(b)(2)((vii)(D)(1) of this section:
Example. WH makes a payment of U.S. source dividends to QI, a
qualified intermediary. QI has provided WH with a valid qualified
intermediary withholding certificate. QI states on its withholding
statement accompanying the certificate that it assumes primary Form
1099 reporting and backup withholding responsibility but does not
assume primary withholding responsibility under chapter 3 of the
Internal Revenue Code. QI represents that 15 percent of the dividend
is subject to a 30 percent rate of withholding, 75 percent of the
dividend is subject to a 15 percent rate of withholding, and that QI
assumed primary Form 1099 reporting and backup withholding for the
remaining 10 percent of the payment. The entire payment can be
reliably associated with valid documentation.
(F) Special rules applicable to a withholding certificate provided
by a qualified intermediary that assumes primary withholding
responsibility under chapter 3 and primary Form 1099 reporting and
backup withholding responsibility and a withholding certificate
provided by a withholding foreign partnership. If a payment is made to
a qualified intermediary that assumes both primary withholding
responsibility under chapter 3 of the Internal Revenue Code and primary
Form 1099 reporting and backup withholding responsibility under chapter
61 and section 3406 of the Internal Revenue Code for the payment, a
withholding agent can reliably associate a payment with valid
documentation provided that it receives a valid qualified intermediary
withholding certificate as described in paragraph (e)(3)(ii) of this
section. In the case of a payment made to a withholding foreign
partnership, the withholding agent can reliably associate the payment
with valid documentation to the extent it can associate the payment
with a valid withholding certificate described in Sec. 1.1441-
5(c)(2)(iv).
(3) Presumptions regarding payee's status in the absence of
documentation--(i) General rules. A withholding agent that cannot,
prior to the payment, reliably associate (within the meaning of
paragraph (b)(2)(vii) of this section) a payment of an amount subject
to withholding (as described in Sec. 1.1441-2(a)) with valid
documentation may rely on the presumptions of this paragraph (b)(3) to
determine the status of the payee as a U.S. or a foreign person and the
payee's other relevant characteristics (e.g., as an owner or
intermediary, as an individual, trust, partnership, or corporation). *
* *
(ii) Presumptions of classification as individual, corporation,
partnership, etc. (A) In general. A withholding agent that cannot
reliably associate a payment with a valid withholding certificate or
that has received valid documentary evidence under Secs. 1.1441-
1(e)(1)(ii)(2) and 1.6049-5(c)(1) or (4) but cannot determine a payee's
classification from the documentary evidence must apply the rules of
this paragraph (b)(3)(ii) to determine the payee's classification as an
individual, trust, estate, corporation, or partnership. The fact that a
payee is presumed to have a certain status under the provisions of this
paragraph (b)(3)(ii) does not mean that it is excused from furnishing
documentation if documentation is otherwise required to obtain a
reduced rate of withholding under this section. For example, if, for
purposes of this paragraph (b)(3)(ii), a payee is presumed to be a tax-
exempt organization based on Sec. 1.6049-4(c)(1)(ii)(B), the
withholding agent cannot rely on this presumption to reduce the rate of
withholding on payments to such person (if such person is also presumed
to be a foreign person under paragraph (b)(3)(iii)(A) of this section)
because a reduction in the rate of withholding for payments to a
foreign tax-exempt organization generally requires that a valid Form W-
8
[[Page 32174]]
described in Sec. 1.1441-9(b)(2) be furnished to the withholding agent.
(B) No documentation provided. If the withholding agent cannot
reliably associate a payment with a valid withholding certificate or
valid documentary evidence, it must presume that the payee is an
individual, a trust, or an estate, if the payee appears to be such
person (e.g., based on the payee's name or other indications). In the
absence of reliable indications that the payee is an individual, trust,
or an estate, the withholding agent must presume that the payee is a
corporation or one of the persons enumerated under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) if it can be so treated under Sec. 1.6049-
4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) without the need to furnish documentation.
If the withholding agent cannot treat a payee as a person described in
Sec. 1.6049-4(c)(1)(ii)(A)(1) through (Q), then the payee shall be
presumed to be a partnership. If such a partnership is presumed to be
foreign, it is not the beneficial owner of the income paid to it. See
paragraph (c)(6) of this section. If such a partnership is presumed to
be domestic, it is a U.S. non-exempt recipient for purposes of chapter
61 of the Internal Revenue Code.
(C) Documentary evidence furnished for offshore account. If the
withholding agent receives valid documentary evidence, as described in
Sec. 1.6049-5(c)(1) or (4), with respect to an offshore account from an
entity but the documentary evidence does not establish the entity's
classification as a corporation, trust, estate, or partnership, the
withholding agent may presume (in the absence of actual knowledge
otherwise) that the entity is the type of person enumerated under
Sec. 1.6049-4(c)(1)(ii)(B) through (Q) if it can be so treated under
any one of those paragraphs without the need to furnish documentation.
If the withholding agent cannot treat a payee as a person described in
Sec. 1.6049-4(c)(1)(ii)(B) through (Q), then the payee shall be
presumed to be a corporation unless the withholding agent knows, or has
reason to know, that the entity is not classified as a corporation for
U.S. tax purposes, the withholding agent is required to presume the
payee is a U.S. person under paragraph (b)(3)(iii) of this section, or
there are indicia of U.S. status. If the withholding agent must presume
the payee is a U.S. person, or there are indicia of U.S. status, the
withholding agent shall treat the entity as a partnership, and
therefore as a U.S. non-exempt recipient for purposes of chapter 61 of
the Internal Revenue Code; however backup withholding under section
3406 shall not apply if backup withholding is not required under
Sec. 31.3406(g)-1(e) of this chapter. Indicia of U.S. status exists if
payments are regularly made to a payee in the United States, the payee
has an account with the same withholding agent in the United States, or
the payee has a U.S. address. If a payee is, or is presumed to be, a
corporation under this paragraph (b)(3)(ii)(C) and a foreign person
under paragraph (b)(3)(iii) of this section, a withholding agent shall
not treat the payee as the beneficial owner of income if the
withholding agent knows, or has reason to know, that the payee is not
the beneficial owner of the income. For this purpose, a withholding
agent shall have reason to know that the payee is not a beneficial
owner if the documentary evidence indicates that the payee is a bank,
broker, intermediary, custodian, or other agent, or is treated under
Sec. 1.6049-4(c)(1)(ii)(B) through (Q) as such a person. A withholding
agent may, however, treat such a person as a beneficial owner if the
foreign person provides a statement, in writing and signed by a person
with authority to sign the statement, that is attached to the
documentary evidence stating it is the beneficial owner of the income.
(iii) * * *
(C) Pensions, annuities, etc. A payment from a trust described in
section 401(a), an annuity plan described in section 403(a), a payment
with respect to any annuity, custodial account, or retirement income
account described in section 403(b), or a payment from an individual
retirement account or individual retirement annuity described in
section 408 that a withholding agent cannot reliably associate with
documentation is presumed to be made to a U.S. person only if the
withholding agent has a record of a Social Security number for the
payee and relies on a mailing address described in the following
sentence. A mailing address is an address used for purposes of
information reporting or otherwise communicating with the payee that is
an address in the United States or in a foreign country with which the
United States has an income tax treaty in effect and the treaty
provides that the payee, if an individual resident in that country,
would be entitled to an exemption from U.S. tax on amounts described in
this paragraph (b)(3)(iii)(C). Any payment described in this paragraph
(b)(3)(iii)(C) that is not presumed to be made to a U.S. person is
presumed to be made to a foreign person. A withholding agent making a
payment to a person presumed to be a foreign person may not reduce the
30-percent amount of withholding required on such payment unless it
receives a withholding certificate described in paragraph (e)(2)(i) of
this section furnished by the beneficial owner. For reduction in the
30-percent rate, see Secs. 1.1441-4(e) or 1.1441-6(b).
(D) Certain payments to offshore accounts. A payment is presumed
made to a foreign payee if the payment is made outside the United
States (as defined in Sec. 1.6049-5(e)) to an offshore account (as
defined in Sec. 1.6049-5(c)(1)) and the withholding agent does not have
actual knowledge that the payee is a U.S. person. See Sec. 1.6049-
5(d)(2) and (3) for exceptions to this rule.
(iv) Grace period. A withholding agent may choose to apply the
provisions of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period
for purposes of this paragraph (b)(3) (by applying the term withholding
agent instead of the term payor) to amounts described in Sec. 1.1441-
6(c)(2) and to amounts covered by a Form 8233 described in Sec. 1.1441-
4(b)(2)(ii). Thus, for these amounts, a withholding agent may choose to
treat an account holder as a foreign person and withhold under chapter
3 of the Internal Revenue Code (and the regulations thereunder) while
awaiting documentation. For purposes of determining the rate of
withholding under this section, the withholding agent must withhold at
the unreduced 30-percent rate at the time that the amounts are credited
to an account. However, a withholding agent who can reliably associate
the payment with a withholding certificate that is otherwise valid
within the meaning of the applicable provisions except for the fact
that it is transmitted by facsimile may rely on that facsimile form for
purposes of withholding at the claimed reduced rate. For reporting of
amounts credited both before and after the grace period, see
Sec. 1.1461-1(c)(4)(i)(A). The following adjustments shall be made at
the expiration of the grace period:
(A) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section and the account
holder is presumed to be a U.S. non-exempt recipient, then backup
withholding applies to amounts credited to the account after the
expiration of the grace period only. Amounts credited to the account
during the grace period shall be treated as owned by a foreign payee
and adjustments must be made to correct any underwithholding on such
amounts in the manner described in Sec. 1.1461-2.
(B) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section, or if
documentation is furnished that
[[Page 32175]]
does not support the claimed rate reduction, and the account holder is
presumed to be a foreign person then adjustments must be made to
correct any underwithholding on amounts credited to the account during
the grace period, based on the adjustment procedures described in
Sec. 1.1461-2.
(v) Special rules applicable to payments to foreign
intermediaries--(A) Reliance on claim of status as foreign
intermediary. The presumption rules of paragraph (b)(3)(v)(B) of this
section apply to a payment made to an intermediary (whether the
intermediary is a qualified or nonqualified intermediary) that has
provided a valid withholding certificate under paragraph (e)(3)(ii) or
(iii) of this section (or has provided documentary evidence described
in paragraph (b)(3)(ii)(C) of this section that indicates it is a bank,
broker, custodian, intermediary, or other agent) to the extent the
withholding agent cannot treat the payment as being reliably associated
with valid documentation under the rules of paragraph (b)(2)(vii) of
this section. For this purpose, a U.S. person's foreign branch that is
a qualified intermediary defined in paragraph (e)(5)(ii) of this
section shall be treated as a foreign intermediary. A payee that the
withholding agent may not reliably treat as a foreign intermediary
under this paragraph (b)(3)(v)(A) is presumed to be a payee other than
an intermediary whose classification as an individual, corporation,
partnership, etc., must be determined in accordance with paragraph
(b)(3)(ii) of this section to the extent relevant. In addition, such
payee is presumed to be a U.S. or a foreign payee based upon the
presumptions described in paragraph (b)(3)(iii) of this section. The
provisions of paragraph (b)(3)(v)(B) of this section are not relevant
to a withholding agent that can reliably associate a payment with a
withholding certificate from a person representing to be a qualified
intermediary to the extent the qualified intermediary has assumed
primary withholding responsibility in accordance with paragraph
(e)(5)(iv) of this section.
(B) Beneficial owner documentation or allocation information is
lacking or unreliable. Any portion of a payment that the withholding
agent may treat as made to a foreign intermediary (whether a
nonqualified or a qualified intermediary) but that the withholding
agent cannot treat as reliably associated with valid documentation
under the rules of paragraph (b)(2)(vii) of this section is presumed
made to an unknown, undocumented foreign payee. As a result, a
withholding agent must deduct and withhold 30 percent from any payment
of an amount subject to withholding. If a withholding certificate
attached to an intermediary certificate is another intermediary
withholding certificate or a flow-through withholding certificate, the
rules of this paragraph (b)(3)(v)(B) (or Sec. 1.1441-5(d)(3) or
(e)(6)(iii)) apply by treating the share of the payment allocable to
the other intermediary or flow-through entity as if it were made
directly to the other intermediary or flow-through entity. Any payment
of an amount subject to withholding that is presumed made to an
undocumented foreign person must be reported on Form 1042-S. See
Sec. 1.1461-1(c). See Sec. 1.6049-5(d) for payments that are not
subject to withholding.
(vi) U.S. branches. The rules of paragraph (b)(3)(v)(B) of this
section shall apply to payments to a U.S. branch described in paragraph
(b)(2)(iv)(A) of this section that has not agreed to be treated as a
U.S. person.
(vii) Joint payees--(A) In general. Except as provided in paragraph
(b)(3)(vii)(B) of this section, if a withholding agent makes a payment
to joint payees and cannot reliably associate a payment with valid
documentation from all payees, the payment is presumed made to an
unidentified U.S. person. However, if one of the joint payees provides
a Form W-9 furnished in accordance with the procedures described in
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, the payment
shall be treated as made to that payee. See Sec. 31.3406(h)-2 of this
chapter for rules to determine the relevant payee if more than one Form
W-9 is provided. For purposes of applying this paragraph (b)(3), the
grace period rules in paragraph (b)(3)(iv) of this section shall apply
only if each payee meets the conditions described in paragraph
(b)(3)(iv) of this section.
(B) Special rule for offshore accounts. If a withholding agent
makes a payment to joint payees and cannot reliably associate a payment
with valid documentation from all payees, the payment is presumed made
to an unknown foreign payee if the payment is made outside the United
States (as defined in Sec. 1.6059-5(e)) to an offshore account (as
defined in Sec. 1.6049-5(c)(1)).
* * * * *
(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches--(i) In general. A foreign intermediary described
in paragraph (e)(3)(i) of this section or a U.S. branch described in
paragraph (b)(2)(iv) of this section that receives an amount subject to
withholding (as defined in Sec. 1.1441-2(a)) shall be required to
withhold (if another withholding agent has not withheld the full amount
required) and report such payment under chapter 3 of the Internal
Revenue Code and the regulations thereunder except as otherwise
provided in this paragraph (b)(6). A nonqualified intermediary or U.S.
branch described in paragraph (b)(2)(iv) of this section (other than a
branch that is treated as a U.S. person) shall not be required to
withhold or report if it has provided a valid nonqualified intermediary
withholding certificate or a U.S. branch withholding certificate, it
has provided all of the information required by paragraph (e)(3)(iv) of
this section (withholding statement), and it does not know, and has no
reason to know, that another withholding agent failed to withhold the
correct amount or failed to report the payment correctly under
Sec. 1.1461-1(c). A qualified intermediary's obligations to withhold
and report shall be determined in accordance with its qualified
intermediary withholding agreement.
(ii) Examples. The following examples illustrate the rules of
paragraph (b)(6)(i) of this section:
Example 1. FB, a foreign bank, acts as intermediary for five
different persons, A, B, C, D, and E, each of whom owns U.S.
securities that generate U.S. source dividends. The dividends are
paid by USWA, a U.S. withholding agent. FB furnished USWA with a
nonqualified intermediary withholding certificate, described in
paragraph (e)(3)(iii) of this section, to which it attached the
withholding certificates of each of A, B, C, D, and E. The
withholding certificates from A and B claim a 15 percent reduced
rate of withholding under an income tax treaty. C, D, and E claim no
reduced rate of withholding. FB provides a withholding statement
that meets all of the requirements of paragraph (e)(3)(iv) of this
section, including information allocating 20 percent of each
dividend payment to each of A, B, C, D, and E. FB does not have
actual knowledge or reason to know that USWA did not withhold the
correct amounts or report the dividends on Forms 1042-S to each of
A, B, C, D, and E. FB is not required to withhold or to report the
dividends to A, B, C, D, and E.
Example 2. The facts are the same as in Example 1, except that
FB did not provide any information for USWA to determine how much of
the dividend payments were made to A, B, C, D, and E. Because USWA
could not reliably associate the dividend payments with
documentation under paragraph (b)(2)(vii) of this section, USWA
applied the presumption rules of paragraph (b)(3)(v) of this section
and withheld 30 percent from all dividend payments. In addition,
USWA filed a single Form 1042-S reporting the payment to an unknown
foreign payee. FB is deemed to know that USWA did not report the
payment to A, B, C, D, and E because it did not provide all of the
information required on
[[Page 32176]]
a withholding statement under paragraph (e)(3)(iv) of this section
(i.e., allocation information). Although FB is not required to
withhold on the payment because the full 30 percent withholding was
imposed by USWA, it is required to report the payments on Forms
1042-S to A, B, C, D, and E. FB's intentional failure to do so will
subject it to intentional disregard penalties under sections 6721
and 6722.
* * * * *
(c) * * *
(2) Foreign and U.S. person. The term foreign person means a
nonresident alien individual, a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, and any other person
that is not a U.S. person described in the next sentence. Solely for
purposes of the regulations under chapter 3 of the Internal Revenue
Code, the term foreign person also means, with respect to a payment by
a withholding agent, a foreign branch of a U.S. person that furnishes
an intermediary withholding certificate described in paragraph
(e)(3)(ii) of this section. Such a branch continues to be a U.S. payor
for purposes of chapter 61 of the Internal Revenue Code. See
Sec. 1.6049-5(c)(4). A U.S. person is a person described in section
7701(a)(30), the U.S. government (including an agency or
instrumentality thereof), a State (including an agency or
instrumentality thereof), or the District of Columbia (including an
agency or instrumentality thereof).
* * * * *
(6) Beneficial owner--(i) General rule. This paragraph (c)(6)
defines the term beneficial owner for payments of income other than a
payment for which a reduced rate of withholding is claimed under an
income tax treaty. The term beneficial owner means the person who is
the owner of the income for tax purposes and who beneficially owns that
income. A person shall be treated as the owner of the income to the
extent that it is required under U.S. tax principles to include the
amount paid in gross income under section 61 (determined without regard
to an exclusion or exemption from gross income under the Internal
Revenue Code). Beneficial ownership of income is determined under the
provisions of section 7701(l) and the regulations under that section
and any other applicable general U.S. tax principles, including
principles governing the determination of whether a transaction is a
conduit transaction. Thus, a person receiving income in a capacity as a
nominee, agent, or custodian for another person is not the beneficial
owner of the income. In the case of a scholarship, the student
receiving the scholarship is the beneficial owner of that scholarship.
In the case of a payment of an amount that is not income, the
beneficial owner determination shall be made under this paragraph
(c)(6) as if the amount were income.
(ii) Special rules--(A) General rule. The beneficial owners of
income paid to an entity described in this paragraph (c)(6)(ii) are
those persons described in paragraphs (c)(6)(ii)(B) through (D) of this
section.
(B) Foreign partnerships. The beneficial owners of income paid to a
foreign partnership (whether a nonwithholding or a withholding foreign
partnership) are the partners in the partnership, unless they
themselves are not the beneficial owners of the income under this
paragraph (c)(6). For example, a partnership (first tier) that is a
partner in another partnership (second tier) is not the beneficial
owner of income paid to the second tier partnership since the first
tier partnership is not the owner of the income under U.S. tax
principles. Rather, the partners of the first tier partnership are the
beneficial owners (to the extent they are not themselves persons that
are not beneficial owners under this paragraph (c)(6)). See
Sec. 1.1441-5(b) for applicable withholding procedures for payments to
a domestic partnership. See also Sec. 1.1441-5(c)(3)(ii) for applicable
withholding procedures for payments to a foreign partnership where one
of the partners (at any level in the chain of tiers) is a domestic
partnership.
(C) Foreign simple trusts and foreign grantor trusts. The
beneficial owners of income paid to a foreign simple trust, as
described in paragraph (c)(23) of this section, are the beneficiaries
of the trust, unless they themselves are not the beneficial owners of
the income under this paragraph (c)(6). The beneficial owners of income
paid to a foreign grantor trust, as described in paragraph (c)(26) of
this section, are the persons treated as the owners of the trust,
unless they themselves are not the beneficial owners of the income
under this paragraph (c)(6).
(D) Other foreign trusts and foreign estates. The beneficial owner
of income paid to a foreign complex trust as defined in paragraph
(c)(25) of this section or to a foreign estate is the foreign complex
trust or estate itself.
* * * * *
(12) Payee. For purposes of chapter 3 of the Internal Revenue Code,
the term payee of a payment is determined under paragraph (b)(2) of
this section, Sec. 1.1441-5(c)(1) (relating to partnerships), and
Sec. 1.1441-5(e)(2) and (3) (relating to trusts and estates) and
includes foreign persons, U.S. exempt recipients, and U.S. non-exempt
recipients. A nonqualified intermediary and a qualified intermediary
(to the extent it does not assume primary withholding responsibility)
are not payees if they are acting as intermediaries and not the
beneficial owner of income. In addition, a flow-through entity is not a
payee unless the income is (or is deemed to be) effectively connected
with the conduct of a trade or business in the United States. See
Sec. 1.6049-5(d)(1) for rules to determine the payee for purposes of
chapter 61 of the Internal Revenue Code. See Secs. 1.1441-1(b)(3),
1.1441-5(d), and (e)(6) and 1.6049-5(d)(3) for presumption rules that
apply if a payee's identity cannot be determined on the basis of valid
documentation.
(13) Intermediary. An intermediary means, with respect to a payment
that it receives, a person that, for that payment, acts as a custodian,
broker, nominee, or otherwise as an agent for another person,
regardless of whether such other person is the beneficial owner of the
amount paid, a flow-through entity, or another intermediary.
(14) Nonqualified intermediary. A nonqualified intermediary means
any intermediary that is not a qualified intermediary, as defined in
paragraph (e)(5)(ii) of this section, or a qualified intermediary that
is not acting in its capacity as a qualified intermediary with respect
to a payment. For example, to the extent an entity that is a qualified
intermediary provides another withholding agent with a foreign
beneficial owner withholding certificate as defined in paragraph
(e)(2)(i) of this section, the entity is not acting in its capacity as
a qualified intermediary. Notwithstanding the preceding sentence, a
qualified intermediary is acting as a qualified intermediary to the
extent it provides another withholding agent with Forms W-9, or other
information regarding U.S. non-exempt recipients pursuant to its
qualified intermediary agreement with the IRS.
(15) Qualified intermediary. The term qualified intermediary is
defined in paragraph (e)(5)(ii) of this section.
(16) Withholding certificate. The term withholding certificate
means a Form W-8 described in paragraph (e)(2)(i) of this section
(relating to foreign beneficial owners), paragraph (e)(3)(i) of this
section (relating to foreign intermediaries), Sec. 1.1441-5(c)(2)(iv),
(c)(3)(iii), and (e)(3)(iv) (relating to flow-through entities), a Form
8233 described in Sec. 1.1441-4(b)(2), a Form W-9 as described in
paragraph (d) of this section, a statement described in Sec. 1.871-
14(c)(2)(v) (relating to portfolio
[[Page 32177]]
interest), or any other certificates that under the Internal Revenue
Code or regulations certifies or establishes the status of a payee or
beneficial owner as a U.S. or a foreign person.
(17) Documentary evidence; other appropriate documentation. The
terms documentary evidence or other appropriate documentation refer to
documents other than a withholding certificate that may be provided for
payments made outside the United States to offshore accounts or any
other evidence that under the Internal Revenue Code or regulations
certifies or establishes the status of a payee or beneficial owner as a
U.S. or foreign person. See Secs. 1.1441-6(b)(2), (c)(3) and (4)
(relating to treaty benefits), and 1.6049-5(c)(1) and (4) (relating to
chapter 61 reporting). Also see Sec. 1.1441-4(a)(3)(ii) regarding
documentary evidence for notional principal contracts.
(18) Documentation. The term documentation refers to both
withholding certificates, as defined in paragraph (c)(16) of this
section, and documentary evidence or other appropriate documentation,
as defined in paragraph (c)(17) of this section.
(19) Payor. The term payor is defined in Sec. 31.3406(a)-2 of this
chapter and Sec. 1.6049-4(a)(2) and generally includes a withholding
agent, as defined in Sec. 1.1441-7(a). The term also includes any
person that makes a payment to an intermediary, flow-through entity, or
U.S. branch that is not treated as a U.S. person to the extent the
intermediary, flow-through, or U.S. branch provides a Form W-9 or other
appropriate information relating to a payee so that the payment can be
reported under chapter 61 of the Internal Revenue Code and, if
required, subject to backup withholding under section 3406. This latter
rule does not preclude the intermediary, flow-through entity, or U.S.
branch from also being a payor.
(20) Exempt recipient. The term exempt recipient means a person
that is exempt from reporting under chapter 61 of the Internal Revenue
Code and backup withholding under section 3406 and that is described in
Secs. 1.6041-3(q), 1.6045-2(b)(2)(i), and 1.6049-4(c)(1)(ii), and
Sec. 5f.6045-1(c)(3)(i)(B) of this chapter. Exempt recipients are not
exempt from withholding under chapter 3 of the Internal Revenue Code
unless they are U.S. persons or foreign persons entitled to an
exemption from withholding under chapter 3.
(21) Non-exempt recipient. A non-exempt recipient is any person
that is not an exempt recipient under paragraph (c)(20) of this
section.
(22) Reportable amounts. Reportable amounts are defined in
paragraph (e)(3)(vi) of this section.
(23) Flow-through entity. A flow-through entity means any entity
that is described in this paragraph (c)(23) and that may provide
documentation on behalf of others to a withholding agent. The entities
described in this paragraph are a foreign partnership (other than a
withholding foreign partnership), a foreign simple trust (other than a
withholding foreign trust) that is described in paragraph (c)(24) of
this section, a foreign grantor trust (other than a withholding foreign
trust) that is described in paragraph (c)(25) of this section, or, for
any payments for which a reduced rate of withholding under an income
tax treaty is claimed, any entity to the extent the entity is
considered to be fiscally transparent under section 894 with respect to
the payment by an interest holder's jurisdiction.
(24) Foreign simple trust. A foreign simple trust is a foreign
trust that is described in section 651(a).
(25) Foreign complex trust. A foreign complex trust is a foreign
trust other than a trust described in section 651(a) or sections 671
through 679.
(26) Foreign grantor trust. A foreign grantor trust is a foreign
trust but only to the extent all or a portion of the income of the
trust is treated as owned by the grantor or another person under
sections 671 through 679.
(27) Partnership. The term partnership means any entity treated as
a partnership under Sec. 301.7701-2 or -3 of this chapter.
(28) Nonwithholding foreign partnership. A nonwithholding foreign
partnership is a foreign partnership that is not a withholding foreign
partnership, as defined in Sec. 1.1441-5(c)(2)(i).
(29) Withholding foreign partnership. A withholding foreign
partnership is defined in Sec. 1.1441-5(c)(2)(i).
(d) * * *
(2) Payments for which a Form W-9 is otherwise required. A
withholding agent may treat as a U.S. payee any person who is required
to furnish a Form W-9 and who furnishes it in accordance with the
procedures described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this
chapter (including the requirement that the payee furnish its taxpayer
identifying number (TIN)) if the withholding agent meets all the
requirements described in Sec. 31.3406(h)-3(e) of this chapter
regarding reliance by a payor on a Form W-9. Providing a Form W-9 or
valid substitute form shall serve as a statement that the person whose
name is on the form is a U.S. person. Therefore, a foreign person,
including a U.S. branch treated as a U.S. person under paragraph
(b)(2)(iv) of this section, shall not provide a Form W-9. A U.S. branch
of a foreign person may establish its status as a foreign person exempt
from reporting under chapter 61 and backup withholding under section
3406 by providing a withholding certificate on Form W-8.
(3) Payments for which a Form W-9 is not otherwise required. In the
case of a payee who is not required to furnish a Form W-9 under section
3406 (e.g., a person exempt from reporting under chapter 61 of the
Internal Revenue Code), the withholding agent may treat the payee as a
U.S. payee if the payee provides the withholding agent with a Form W-9
or a substitute form described in Sec. 31.3406(h)-3(c)(2) of this
chapter (relating to forms for exempt recipients) that contains the
payee's name, address, and TIN. The form must be signed under penalties
of perjury by the payee if so required by the form or by
Sec. 31.3406(h)-3 of this chapter. Providing a Form W-9 or valid
substitute form shall serve as a statement that the person whose name
is on the certificate is a U.S. person. A Form W-9 or valid substitute
form shall not be provided by a foreign person, including any U.S.
branch of a foreign person whether or not the branch is treated as a
U.S. person under paragraph (b)(2)(iv) of this section. See paragraph
(e)(3)(v) of this section for withholding certificates provided by U.S.
branches described in paragraph (b)(2)(iv) of this section. The
procedures described in Sec. 31.3406(h)-2(a) of this chapter shall
apply to payments to joint payees. A withholding agent that receives a
Form W-9 to satisfy this paragraph (d)(3) must retain the form in
accordance with the provisions of Sec. 31.3406(h)-3(g) of this chapter,
if applicable, or of paragraph (e)(4)(iii) of this section (relating to
the retention of withholding certificates) if Sec. 31.3406(h)-3(g) of
this chapter does not apply. The rules of this paragraph (d)(3) are
only intended to provide a method by which a withholding agent may
determine that a payee is a U.S. person and do not otherwise impose a
requirement that documentation be furnished by a person who is
otherwise treated as an exempt recipient for purposes of the applicable
information reporting provisions under chapter 61 of the Internal
Revenue Code (e.g., Sec. 1.6049-4(c)(1)(ii) for payments of interest).
(4) When a payment to an intermediary or flow-through entity may be
treated as made to a U.S. payee. A withholding agent that makes a
payment to an intermediary (whether a qualified intermediary or
nonqualified intermediary), a flow-through entity, or
[[Page 32178]]
a U.S. branch described in paragraph (b)(2)(iv) of this section may
treat the payment as made to a U.S. payee to the extent that, prior to
the payment, the withholding agent can reliably associate the payment
with a Form W-9 described in paragraph (d)(2) or (3) of this section
attached to a valid intermediary, flow-through, or U.S. branch
withholding certificate described in paragraph (e)(3)(i) of this
section or to the extent the withholding agent can reliably associate
the payment with a Form W-8 described in paragraph (e)(3)(v) of this
section that evidences an agreement to treat a U.S. branch described in
paragraph (b)(2)(iv) of this section as a U.S. person. In addition, a
withholding agent may treat the payment as made to a U.S. payee only if
it complies with the electronic confirmation procedures described in
paragraph (e)(4)(v) of this section, if required, and it has not been
notified by the IRS that any of the information on the withholding
certificate or other documentation is incorrect or unreliable. In the
case of a Form W-9 that is required to be furnished for a reportable
payment that may be subject to backup withholding, the withholding
agent may be notified in accordance with section 3406(a)(1)(B) and the
regulations under that section. See applicable procedures under section
3406(a)(1)(B) and the regulations under that section for payors who
have been notified with regard to such a Form W-9. Withholding agents
who have been notified in relation to other Forms W-9, including under
section 6724(b) pursuant to section 6721, may rely on the withholding
certificate or other documentation only to the extent provided under
procedures as prescribed by the IRS (see Sec. 601.601(d)(2) of this
chapter).
(e) * * * (1) * * *
(ii) * * * (A) * * *
(1) That the withholding agent can reliably associate the payment
with a beneficial owner withholding certificate described in paragraph
(e)(2) of this section furnished by the person whose name is on the
certificate or attached to a valid foreign intermediary, flow-through,
or U.S. branch withholding certificate;
* * * * *
(3) That the withholding agent can reliably associate the payment
with a valid qualified intermediary withholding certificate, as
described in paragraph (e)(3)(ii) of this section, and the qualified
intermediary has provided sufficient information for the withholding
agent to allocate the payment to a withholding rate pool other than a
withholding rate pool or pools established for U.S. non-exempt
recipients;
(4) That the withholding agent can reliably associate the payment
with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii) or
(e)(5)(iii) from a flow-through entity claiming the income is
effectively connected income;
* * * * *
(3) Intermediary, flow-through, or U.S. branch withholding
certificate--(i) In general. An intermediary withholding certificate is
a Form W-8 by which a payee represents that it is a foreign person and
that it is an intermediary (whether a qualified or nonqualified
intermediary) with respect to a payment and not the beneficial owner.
See paragraphs (e)(3)(ii) and (iii) of this section. A flow-through
withholding certificate is a Form W-8 used by a flow-through entity as
defined in paragraph (c)(23) of this section. See Sec. 1.1441-
5(c)(3)(iii) (a nonwithholding foreign partnership), Sec. 1.1441-
5(e)(5)(iii) (a foreign simple trust or foreign grantor trust) or
Sec. 1.1441-6(b)(2) (foreign entity presenting claims on behalf of its
interest holders for a reduced rate of withholding under an income tax
treaty). A U.S. branch certificate is a Form W-8 furnished under
paragraph (e)(3)(v) of this section by a U.S. branch described in
paragraph (b)(2)(iv) of this section. See paragraph (e)(4)(viii) of
this section for applicable reliance rules.
(ii) Intermediary withholding certificate from a qualified
intermediary. A qualified intermediary shall provide a qualified
intermediary withholding certificate for reportable amounts received by
the qualified intermediary. See paragraph (e)(3)(vi) of this section
for the definition of reportable amount. A qualified intermediary
withholding certificate is valid only if it is furnished on a Form W-8,
an acceptable substitute form, or such other form as the IRS may
prescribe, it is signed under penalties of perjury by a person with
authority to sign for the qualified intermediary, its validity has not
expired, and it contains the following information, statement, and
certifications--
(A) The name, permanent residence address (as described in
paragraph (e)(2)(ii) of this section), qualified intermediary employer
identification number (QI-EIN), and the country under the laws of which
the intermediary is created, incorporated, or governed. A qualified
intermediary that does not act in its capacity as a qualified
intermediary must not use its QI-EIN. Rather the intermediary should
provide a nonqualified intermediary withholding certificate, if it is
acting as an intermediary, and should use the taxpayer identification
number, if any, that it uses for all other purposes;
(B) A certification that, with respect to accounts it identifies on
its withholding statement (as described in paragraph (e)(5)(v) of this
section), the qualified intermediary is not acting for its own account
but is acting as a qualified intermediary;
(C) A certification that the qualified intermediary has provided,
or will provide, a withholding statement as required by paragraph
(e)(5)(v) of this section; and
(D) Any other information, certifications, or statements as may be
required by the form or accompanying instructions in addition to, or in
lieu of, the information and certifications described in this paragraph
(e)(3)(ii) or paragraph (e)(3)(v) of this section. See paragraph
(e)(5)(v) of this section for the requirements of a withholding
statement associated with the qualified intermediary withholding
certificate.
(iii) Intermediary withholding certificate from a nonqualified
intermediary. A nonqualified intermediary shall provide a nonqualified
intermediary withholding certificate for reportable amounts received by
the nonqualified intermediary. See paragraph (e)(3)(vi) of this section
for the definition of reportable amount. A nonqualified intermediary
withholding certificate is valid only to the extent it is furnished on
a Form W-8, an acceptable substitute form, or such other form as the
IRS may prescribe, it is signed under penalties of perjury by a person
authorized to sign for the nonqualified intermediary, it contains the
information, statements, and certifications described in this paragraph
(e)(3)(iii) and paragraph (e)(3)(iv) of this section, its validity has
not expired, and the withholding certificates and other appropriate
documentation for all persons to whom the certificate relates are
associated with the certificate. Withholding certificates and other
appropriate documentation consist of beneficial owner withholding
certificates described in paragraph (e)(2)(i) of this section,
intermediary and flow-through withholding certificates described in
paragraph (e)(3)(i) of this section, withholding foreign partnership
certificates described in Sec. 1.1441-5(c)(2)(iv), documentary evidence
described in Secs. 1.1441-6(c)(3) or (4) and 1.6049-5(c)(1), and any
other documentation or certificates applicable under other provisions
of the Internal Revenue Code or regulations that certify or establish
the status of the payee or beneficial owner as a U.S. or a foreign
[[Page 32179]]
person. If a nonqualified intermediary is acting on behalf of another
nonqualified intermediary or a flow-through entity, then the
nonqualified intermediary must associate with its own withholding
certificate the other nonqualified intermediary withholding certificate
or the flow-through withholding certificate and separately identify all
of the withholding certificates and other appropriate documentation
that are associated with the withholding certificate of the other
nonqualified intermediary or flow-through entity. Nothing in this
paragraph (e)(3)(iii) shall require an intermediary to furnish original
documentation. Copies of certificates or documentary evidence may be
transmitted to the U.S. withholding agent, in which case the
nonqualified intermediary must retain the original documentation for
the same time period that the copy is required to be retained by the
withholding agent under paragraph (e)(4)(iii) of this section and must
provide it to the withholding agent upon request. For purposes of this
paragraph (e)(3)(iii), a valid intermediary withholding certificate
also includes a statement described in Sec. 1.871-14(c)(2)(v) furnished
for interest to qualify as portfolio interest for purposes of sections
871(h) and 881(c). The information and certifications required on a
Form W-8 described in this paragraph (e)(3)(iii) are as follows--
(A) The name and permanent resident address (as described in
paragraph (e)(2)(ii) of this section) of the nonqualified intermediary,
and the country under the laws of which the nonqualified intermediary
is created, incorporated, or governed;
(B) A certification that the nonqualified intermediary is not
acting for its own account;
(C) If the nonqualified intermediary withholding certificate is
used to transmit withholding certificates or other appropriate
documentation for more than one person on whose behalf the nonqualified
intermediary is acting, a withholding statement associated with the
Form W-8 that provides all the information required by paragraph
(e)(3)(iv) of this section; and
(D) Any other information, certifications, or statements as may be
required by the form or accompanying instructions in addition to, or in
lieu of, the information, certifications, and statements described in
this paragraph (e)(3)(iii) or paragraph (e)(3)(iv) of this section.
(iv) Withholding statement provided by nonqualified intermediary--
(A) In general. A nonqualified intermediary shall provide a withholding
statement required by this paragraph (e)(3)(iv) to the extent the
nonqualified intermediary is required to furnish, or does furnish,
documentation for payees on whose behalf it receives reportable amounts
(as defined in paragraph (e)(3)(vi) of this section) or to the extent
it otherwise provides the documentation of such payees to a withholding
agent. A nonqualified intermediary is not required to disclose
information regarding persons for whom it collects reportable amounts
unless it has actual knowledge that any such person is a U.S. non-
exempt recipient as defined in paragraph (c)(21) of this section.
Information regarding U.S. non-exempt recipients required under this
paragraph (e)(3)(iv) must be provided irrespective of any requirement
under foreign law that prohibits the disclosure of the identity of an
account holder of a nonqualified intermediary or financial information
relating to such account holder. Although a nonqualified intermediary
is not required to provide documentation and other information required
by this paragraph (e)(3)(iv) for persons other than U.S. non-exempt
recipients, a withholding agent that does not receive documentation and
such information must apply the presumption rules of paragraph (b) of
this section, Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) or the
withholding agent shall be liable for tax, interest, and penalties. A
withholding agent must apply the presumption rules even if it is not
required under chapter 61 of the Internal Revenue Code to obtain
documentation to treat a payee as an exempt recipient and even though
it has actual knowledge that the payee is a U.S. person. For example,
if a nonqualified intermediary fails to provide a withholding agent
with a Form W-9 for an account holder that is a U.S. exempt recipient,
the withholding agent must presume (even if it has actual knowledge
that the account holder is a U.S. exempt recipient), that the account
holder is an undocumented foreign person with respect to amounts
subject to withholding. See paragraph (b)(3)(v) of this section for
applicable presumptions. Therefore, the withholding agent must withhold
30 percent from the payment even though if a Form W-9 had been
provided, no withholding or reporting on the payment attributable to a
U.S. exempt recipient would apply. Further, a nonqualified intermediary
that fails to provide the documentation and the information under this
paragraph (e)(3)(iv) for another withholding agent to report the
payments on Forms 1042-S and Forms 1099 is not relieved of its
responsibility to file information returns. See paragraph (b)(6) of
this section. Therefore, unless the nonqualified intermediary itself
files such returns and provides copies to the payees, it shall be
liable for penalties under sections 6721 (failure to file information
returns), and 6722 (failure to furnish payee statements), including the
penalties under those sections for intentional failure to file
information returns. In addition, failure to provide either the
documentation or the information required by this paragraph (e)(3)(iv)
results in a payment not being reliably associated with valid
documentation. Therefore, the beneficial owners of the payment are not
entitled to reduced rates of withholding and if the full amount
required to be held under the presumption rules is not withheld by the
withholding agent, the nonqualified intermediary must withhold the
difference between the amount withheld by the withholding agent and the
amount required to be withheld. Failure to withhold shall result in the
nonqualified intermediary being liable for tax under section 1461,
interest, and penalties, including penalties under section 6656
(failure to deposit) and section 6672 (failure to collect and pay over
tax).
(B) General requirements. A withholding statement must be provided
prior to the payment of a reportable amount and must contain the
information specified in paragraph (e)(3)(iv)(C) of this section. The
statement must be updated as often as required to keep the information
in the withholding statement correct prior to each subsequent payment.
The withholding statement forms an integral part of the withholding
certificate provided under paragraph (e)(3)(iii) of this section, and
the penalties of perjury statement provided on the withholding
certificate shall apply to the withholding statement. The withholding
statement may be provided in any manner the nonqualified intermediary
and the withholding agent mutually agree, including electronically. If
the withholding statement is provided electronically, there must be
sufficient safeguards to ensure that the information received by the
withholding agent is the information sent by the nonqualified
intermediary and all occasions of user access that result in the
submission or modification of the withholding statement information
must be recorded. In addition, an electronic system must be capable of
providing a hard copy of all withholding statements provided by the
nonqualified
[[Page 32180]]
intermediary. A withholding agent will be liable for tax, interest, and
penalties in accordance with paragraph (b)(7) of this section to the
extent it does not follow the presumption rules of paragraph (b)(3) of
this section or Secs. 1.1441-5(d) and (e)(6), and 1.6049-5(d) for any
payment of a reportable amount, or portion thereof, for which it does
not have a valid withholding statement prior to making a payment.
(C) Content of withholding statement. The withholding statement
provided by a nonqualified intermediary must contain the information
required by this paragraph (e)(3)(iv)(C).
(1) The withholding statement must contain the name, address, TIN
(if any) and the type of documentation (documentary evidence, Form W-9,
or type of Form W-8) for every person from whom documentation has been
received by the nonqualified intermediary to the withholding agent and
whether that person is a U.S. exempt recipient, a U.S. non-exempt
recipient, or a foreign person. See paragraphs (c)(2), (20), and (21)
of this section for the definitions of foreign person, U.S. exempt
recipient, and U.S. non-exempt recipient. In the case of a foreign
person, the statement must indicate whether the foreign person is a
beneficial owner or an intermediary, flow-through entity, or U.S.
branch described in paragraph (b)(2)(iv) of this section and include
the type of recipient, based on recipient codes used for filing Forms
1042-S, if the foreign person is a recipient as defined in Sec. 1.1461-
1(c)(1)(ii).
(2) The withholding statement must allocate each payment, by income
type, to every payee (including U.S. exempt recipients) for whom
documentation has been provided. Any payment that cannot be reliably
associated with valid documentation from a payee shall be treated as
made to an unknown payee in accordance with the presumption rules of
paragraph (b) of this section and Secs. 1.1441-5(d) and (e)(6) and
1.6049-5(d). For this purpose, a type of income is determined by the
types of income required to be reported on Forms 1042-S or 1099, as
appropriate. Notwithstanding the preceding sentence, deposit interest
(including original issue discount) described in section 871(i)(2)(A)
or 881(d) and interest or original issue discount on short-term
obligations as described in section 871(g)(1)(B) or 881(e) is only
required to be allocated to the extent it is required to be reported on
Form 1099 or Form 1042-S. See Sec. 1.6049-8 (regarding reporting of
bank deposit interest to certain foreign persons). If a payee receives
income through another nonqualified intermediary, flow-through entity,
or U.S. branch described in paragraph (e)(2)(iv) of this section (other
than a U.S. branch treated as a U.S. person), the withholding
certificate must also state, with respect to the payee, the name,
address, and TIN, if known, of the other nonqualified intermediary or
U.S. branch from which the payee directly receives the payment or the
flow-through entity in which the payee has a direct ownership interest.
If another nonqualified intermediary, flow-through entity, or U.S.
branch fails to allocate a payment, the name of the nonqualified
intermediary, flow-through entity, or U.S. branch that failed to
allocate the payment shall be provided with respect to such payment.
(3) If a payee is identified as a foreign person, the nonqualified
intermediary must specify the rate of withholding to which the payee is
subject, the payee's country of residence and, if a reduced rate of
withholding is claimed, the basis for that reduced rate (e.g., treaty
benefit, portfolio interest, exempt under section 501(c)(3), 892, or
895). The allocation statement must also include the taxpayer
identification numbers of those foreign persons for whom such a number
is required under paragraph (e)(4)(vii) of this section or Sec. 1.1441-
6(b)(1) (regarding claims for treaty benefits). In the case of a claim
of treaty benefits, the nonqualified intermediary's withholding
statement must also state whether the limitation on benefits and
section 894 statements required by Sec. 1.1441-6(c)(5) have been
provided, if required, in the beneficial owner's Form W-8 or associated
with such owner's documentary evidence.
(4) The withholding statement must also contain any other
information the withholding agent reasonably requests in order to
fulfill its obligations under chapter 3, chapter 61 of the Internal
Revenue Code, and section 3406.
(D) Alternative procedures--(1) In general. Under the alternative
procedures of this paragraph (e)(3)(iv)(D), a nonqualified intermediary
may provide information allocating a payment of a reportable amount to
each payee (including U.S. exempt recipients) otherwise required under
paragraph (e)(3)(iv)(B)(2) of this section after a payment is made. To
use the alternative procedure of this paragraph (e)(3)(iv)(D), the
nonqualified intermediary must inform the withholding agent on a
statement associated with its nonqualified intermediary withholding
certificate that it is using the procedure under this paragraph
(e)(3)(iv)(D) and the withholding agent must agree to the procedure. If
the requirements of the alternative procedure are met, a withholding
agent, including the nonqualified intermediary using the procedures,
can treat the payment as reliably associated with documentation and,
therefore, the presumption rules of paragraph (b)(3) of this section
and Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) do not apply even
though information allocating the payment to each payee has not been
received prior to the payment. See paragraph (e)(3)(iv)(D)(7) of this
section, however, for a nonqualified intermediary's liability for tax
and penalties if the requirements of this paragraph (e)(3)(iv)(D) are
not met. These alternative procedures shall not be used for payments
that are allocable to U.S. non-exempt recipients. Therefore, a
nonqualified intermediary is required to provide a withholding agent
with information allocating payments of reportable amounts to U.S. non-
exempt recipients prior to the payment being made by the withholding
agent.
(2) Withholding rate pools. In place of the information required in
paragraph (e)(3)(iv)(B)(2) of this section allocating payments to each
payee, the nonqualified intermediary must provide a withholding agent
with withholding rate pool information prior to the payment of a
reportable amount. The withholding statement must contain all other
information required by paragraph (e)(3)(iv)(B) of this section.
Further, each payee listed in the withholding statement must be
assigned to an identified withholding rate pool. To the extent a
nonqualified intermediary is required to, or does provide,
documentation, the alternative procedures do not relieve the
nonqualified intermediary from the requirement to provide documentation
prior to the payment being made. Therefore, withholding certificates or
other appropriate documentation and all information required by
paragraph (e)(3)(iv)(B) of this section (other than allocation
information) must be provided to a withholding agent before any new
payee receives a reportable amount. In addition, the withholding
statement must be updated by assigning a new payee to a withholding
rate pool prior to the payment of a reportable amount. A withholding
rate pool is a payment of a single type of income, determined in
accordance with the categories of income used to file Form 1042-S, that
is subject to a single rate of withholding. A withholding rate pool may
be established by any reasonable method to which the nonqualified
intermediary and a withholding agent agree (e.g., by establishing a
separate
[[Page 32181]]
account for a single withholding rate pool, or by dividing a payment
made to a single account into portions allocable to each withholding
rate pool). The nonqualified intermediary shall determine withholding
rate pools based on valid documentation or, to the extent a payment
cannot be reliably associated with valid documentation, the presumption
rules of paragraph (b)(3) of this section and Secs. 1.1441-5(d) and
(e)(6) and 1.6049-5(d).
(3) Allocation information. The nonqualified intermediary must
provide the withholding agent with sufficient information to allocate
the income in each withholding rate pool to each payee (including U.S.
non-exempt recipients) within the pool no later than January 31 of the
year following the year of payment. Any payments that are not allocated
to payees for whom documentation has been provided shall be allocated
to an undocumented payee in accordance with the presumption rules of
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and
1.6049-5(d). Notwithstanding the preceding sentence, deposit interest
(including original issue discount) described in section 871(i)(2)(A)
or 881(d) and interest or original issue discount on short-term
obligations as described in section 871(g)(1)(B) or 881(e) is not
required to be allocated to a U.S. exempt recipient or a foreign payee,
except as required under Sec. 1.6049-8 (regarding reporting of deposit
interest paid to certain foreign persons).
(4) Failure to provide allocation information. If a nonqualified
intermediary fails to provide allocation information, if required, by
January 31 for any withholding rate pool, a withholding agent shall not
apply the alternative procedures of this paragraph (e)(3)(iv)(D) to any
payments of reportable amounts paid after January 31 in the taxable
year following the calendar year for which allocation information was
not given and any subsequent taxable year. Further, the alternative
procedures shall be unavailable for any other withholding rate pool
even though allocation information was given for that other pool.
Therefore, the withholding agent must withhold on a payment of a
reportable amount in accordance with the presumption rules of paragraph
(b)(3) of this section, and Secs. 1.1441-5(d) and (e)(6) and 1.6049-
5(d), unless the nonqualified intermediary provides all of the
information, including information sufficient to allocate the payment
to each specific payee, required by paragraph (e)(3)(iv)(A) through (C)
of this section prior to the payment. A nonqualified intermediary must
allocate at least 90 percent of the income required to be allocated for
each withholding rate pool or the nonqualified intermediary will be
treated as having failed to provide allocation information for purposes
of this paragraph (e)(3)(iv)(D). See paragraph (e)(3)(iv)(D)(7) of this
section for liability for tax and penalties if a nonqualified
intermediary fails to provide allocation information in whole or in
part.
(5) Cure provision. A nonqualified intermediary may cure any
failure to provide allocation information by providing the required
allocation information to the withholding agent no later than February
14 following the calendar year of payment. If the withholding agent
receives the allocation information by that date, it may apply the
adjustment procedures of Sec. 1.1461-2 to any excess withholding for
payments made on or after February 1 and on or before February 14. Any
nonqualified intermediary that fails to cure by February 14, may
request the ability to use the alternative procedures of this paragraph
(e)(3)(iv)(D) by submitting a request, in writing, to the Assistant
Commissioner (International). The request must state the reason that
the nonqualified intermediary did not comply with the alternative
procedures of this paragraph (e)(3)(iv)(D) and steps that the
nonqualified intermediary has taken, or will take, to ensure that no
failures occur in the future. If the Assistant Commissioner
(International) determines that the alternative procedures of this
paragraph (e)(3)(iv)(D) may apply, a determination to that effect will
be issued by the IRS to the nonqualified intermediary.
(6) Form 1042-S reporting in case of allocation failure. If a
nonqualified intermediary fails to provide allocation information by
February 14 following the year of payment for a withholding rate pool,
the withholding agent must file Forms 1042-S for payments made to each
payee in that pool (other than U.S. exempt recipients) in the prior
calendar year by pro rating the payment to each payee (including U.S.
exempt recipients) listed in the withholding statement for that
withholding rate pool. If the nonqualified intermediary fails to
allocate10 percent or less of an amount required to be allocated for a
withholding rate pool, a withholding agent shall report the unallocated
amount as paid to a single unknown payee in accordance with the
presumption rules of paragraph (b) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d). The portion of the payment that can be
allocated to specific recipients, as defined in Sec. 1.1461-
1(c)(1)(ii), shall be reported to each recipient in accordance with the
rules of Sec. 1.1461-1(c).
(7) Liability for tax, interest, and penalties. If a nonqualified
intermediary fails to provide allocation information by February 14
following the year of payment for all or a portion of the payments made
to any withholding rate pool, the withholding agent from whom the
nonqualified intermediary received payments of reportable amounts shall
not be liable for any tax, interest, or penalties, due solely to the
errors or omissions of the nonqualified intermediary. See Sec. 1.1441-
7(b)(2) through (10) for the due diligence requirements of a
withholding agent. Because failure by the nonqualified intermediary to
provide allocation information results in a payment not being reliably
associated with valid documentation, the beneficial owners for whom the
nonqualified intermediary acts are not entitled to a reduced rate of
withholding. Therefore, the nonqualified intermediary, as a withholding
agent, shall be liable for any tax not withheld by the withholding
agent in accordance with the presumption rules, interest on the under
withheld tax if the nonqualified intermediary fails to pay the tax
timely, and any applicable penalties, including the penalties under
sections 6656 (failure to deposit), 6721 (failure to file information
returns) and 6722 (failure to file payee statements). Failure to
provide allocation information for more than 10 percent of the payments
made to a particular withholding rate pool will be presumed to be an
intentional failure within the meaning of sections 6721(e) and 6722(c).
The nonqualified intermediary may rebut the presumption.
(8) Applicability to flow-through entities and certain U.S.
branches. See paragraph (e)(3)(v) of this section and Sec. 1.1441-
5(c)(3)(iv) and (e)(5)(iv) for the applicability of this paragraph
(e)(3)(iv) to U.S. branches described in paragraph (b)(2)(iv) of this
section (other than U.S. branches treated as U.S. persons) and flow-
through entities.
(E) Notice procedures. The IRS may notify a withholding agent that
the alternative procedures of paragraph (e)(3)(iv)(D) of this section
are not applicable to a specified nonqualified intermediary, a U.S.
branch described in paragraph (b)(2)(iv) of this section, or a flow-
through entity. If a withholding agent receives such a notice, it must
commence withholding in accordance with the presumption rules of
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and
1.6049-5(d) unless the
[[Page 32182]]
nonqualified intermediary, U.S. branch, or flow-through entity complies
with the procedures in paragraphs (e)(3)(iv)(A) through (C) of this
section. In addition, the IRS may notify a withholding agent, in
appropriate circumstances, that it must apply the presumption rules of
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and
1.6049-5(d) to payments made to a nonqualified intermediary, a U.S.
branch, or a flow-through entity even if the nonqualified intermediary,
U.S. branch or flow-through entity provides allocation information
prior to the payment. A withholding agent that receives a notice under
this paragraph (e)(3)(iv)(E) must commence withholding in accordance
with the presumption rules within 30 days of the date of the notice.
The IRS may withdraw its prohibition against using the alternative
procedures of paragraph (e)(3)(iv)(D) of this section, or its
requirement to follow the presumption rules, if the nonqualified
intermediary, U.S. branch, or flow-through entity can demonstrate to
the satisfaction of the Assistant Commissioner (International) or his
delegate that it is capable of complying with the rules under chapter 3
of the Internal Revenue Code and any other conditions required by the
Assistant Commissioner (International).
(v) Withholding certificate from certain U.S. branches. A U.S.
branch certificate is a withholding certificate provided by a U.S.
branch described in paragraph (b)(2)(iv) of this section that is not
the beneficial owner of the income. The withholding certificate is
provided with respect to reportable amounts and must state that such
amounts are not effectively connected with the conduct of a trade or
business in the United States. The withholding certificate must either
transmit the appropriate documentation for the persons for whom the
branch receives the payment (i.e., as an intermediary) or be provided
as evidence of its agreement with the withholding agent to be treated
as a U.S. person with respect to any payment associated with the
certificate. A U.S. branch withholding certificate is valid only if it
is furnished on a Form W-8, an acceptable substitute form, or such
other form as the IRS may prescribe, it is signed under penalties of
perjury by a person authorized to sign for the branch, its validity has
not expired, and it contains the information, statements, and
certifications described in this paragraph (e)(3)(v). If the
certificate is furnished to transmit withholding certificates and other
documentation, it must contain the information, certifications, and
statements described in paragraphs (e)(3)(v)(A) through (C) of this
section and in paragraphs (e)(3)(iii) and (iv) (alternative procedures)
of this section, applying the term U.S. branch instead of the term
nonqualified intermediary. If the certificate is furnished pursuant to
an agreement to treat the U.S. branch as a U.S. person, the information
and certifications required on the withholding certificate are limited
to the following--
(A) The name of the person of which the branch is a part and the
address of the branch in the United States;
(B) A certification that the payments associated with the
certificate are not effectively connected with the conduct of its trade
or business in the United States; and
(C) Any other information, certifications, or statements as may be
required by the form or accompanying instructions in addition to, or in
lieu of, the information and certification described in this paragraph
(e)(3)(v).
(vi) Reportable amounts. For purposes of chapter 3 of the Internal
Revenue Code, a nonqualified intermediary, qualified intermediary,
flow-through entity, and U.S. branch described in paragraph (b)(2)(iv)
of this section (other than a U.S. branch that agrees to be treated as
a U.S. person) must provide a withholding certificate and associated
documentation and other information with respect to reportable amounts.
For purposes of the regulations under chapter 3 of the Internal Revenue
Code, the term reportable amount means an amount subject to withholding
within the meaning of Sec. 1.1441-2(a), bank deposit interest
(including original issue discount) and similar types of deposit
interest described in section 871(i)(2)(A) or 881(d) that are from
sources within the United States, and any amount of interest or
original issue discount from sources within the United States on the
redemption of certain short-term obligations described in section
871(g)(1)(B) or 881(e). Reportable amounts shall not include amounts
received on the sale or exchange (other than a redemption) of an
obligation described in section 871(g)(1)(B) or 881(e) that is effected
at an office outside the United States. See Sec. 1.6045-1(g)(3) to
determine whether a sale is effected at an office outside the United
States. Reportable amounts also do not include payments with respect to
deposits with banks and other financial institutions that remain on
deposit for a period of two weeks or less, to amounts of original issue
discount arising from a sale and repurchase transaction that is
completed within a period of two weeks or less, or to amounts described
in Sec. 1.6049-5(b)(7), (10) or (11) (relating to certain obligations
issued in bearer form). While short-term OID and bank deposit interest
are not subject to withholding under chapter 3 of the Internal Revenue
Code, such amounts may be subject to information reporting under
section 6049 if paid to a U.S. person who is not an exempt recipient
described in Sec. 1.6049-4(c)(1)(ii) and to backup withholding under
section 3406 in the absence of documentation. See Sec. 1.6049-
5(d)(3)(iii) for applicable procedures when such amounts are paid to a
foreign intermediary.
(4) * * *
(ii) Period of validity--(A) Three-year period. A withholding
certificate described in paragraph (e)(2)(i) of this section, or a
certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify
interest as portfolio interest for purposes of sections 871(h) and
881(c)), shall remain valid until the earlier of the last day of the
third calendar year following the year in which the withholding
certificate is signed or the day that a change in circumstances occurs
that makes any information on the certificate incorrect. For example, a
withholding certificate signed on September 30, 2001, remains valid
through December 31, 2004, unless circumstances change that make the
information on the form no longer correct. Documentary evidence
described in Secs. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) shall remain
valid until the earlier of the last day of the third calendar year
following the year in which the documentary evidence is provided to the
withholding agent or the day that a change in circumstances occurs that
makes any information on the documentary evidence incorrect.
(B) * * *
(1) A withholding certificate described in paragraph (e)(2)(ii) of
this section that is furnished with a TIN, provided that the
withholding agent reports at least one payment annually to the
beneficial owner under Sec. 1.1461-1(c) or the TIN furnished on the
certificate is reported to the IRS under the procedures described in
Sec. 1.1461-1(d). For example, assume a withholding agent receives a
Form W-8 in 2001 from a beneficial owner with respect to an account
that contains bonds, the interest on which must be reported on Form
1042-S under Sec. 1.1461-1(c). The Form W-8 contains a valid TIN and
the withholding agent reports on Forms 1042-S interest to the
beneficial owner for 2001 through 2005. In 2005, the beneficial owner
sells some of the bonds. For purposes of the exemption from Form 1099
reporting under Sec. 1.6045-1(g), the withholding
[[Page 32183]]
agent may consider the Form W-8 as valid, even though the payment of
the sales proceeds is not reportable on Form 1042-S under Sec. 1.1461-
1(c) and even though the Form W-8 was provided more than three years
previously.
(2) A certificate described in paragraph (e)(3)(ii) of this section
(a qualified intermediary withholding certificate) but not including
the withholding certificates, documentary evidence, statements or other
information associated with the certificate.
(3) A certificate described in paragraph (e)(3)(iii) of this
section (a nonqualified intermediary certificate), but not including
the withholding certificates, documentary evidence, statements or other
information associated with the certificate.
(4) A certificate described in paragraph (e)(3)(v) of this section
(a U.S. branch withholding certificate), but not including the
withholding certificates, documentary evidence, statements or other
information associated with the certificate.
* * * * *
(6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (a
withholding certificate from a nonwithholding foreign partnership) but
not including the withholding certificates, documentary evidence,
statements or other information required to be associated with the
certificate.
* * * * *
(8) A withholding certificate described in Sec. 1.1441-5(e)(5)(iii)
provided by a foreign simple trust or a foreign grantor trust to
transmit documentation of beneficiaries or owners, but not including
the withholding certificates, documentary evidence, statements or other
information associated with the certificate.
* * * * *
(iv) Electronic transmission of information--(A) In general. A
withholding agent may establish a system for a beneficial owner or
payee to electronically furnish a Form W-8, an acceptable substitute
Form W-8, or such other form as the Internal Revenue Service may
prescribe. The system must meet the requirements described in paragraph
(e)(4)(iv)(B) of this section. A withholding agent may accept Forms W-8
that are furnished electronically on or after January 1, 2000, provided
the requirements of paragraph (e)(4)(iv)(B) of this section are met.
(B) Requirements--(1) In general. The electronic system must ensure
that the information received is the information sent, and must
document all occasions of user access that result in the submission
renewal, or modification of a Form W-8. In addition, the design and
operation of the electronic system, including access procedures, must
make it reasonably certain that the person accessing the system and
furnishing Form W-8 is the person named in the Form.
(2) Same information as paper Form W-8. The electronic transmission
must provide the withholding agent or payor with exactly the same
information as the paper Form W-8.
(3) Perjury statement and signature requirements. The electronic
transmission must contain an electronic signature by the person whose
name is on the Form W-8 and the signature must be under penalties of
perjury in the manner described in this paragraph (e)(4)(iv)(B)(3).
(i) Perjury statement. The perjury statement must contain the
language that appears on the paper Form W-8. The electronic system must
inform the person whose name is on the Form W-8 that the person must
make the declaration contained in the perjury statement and that the
declaration is made by signing the Form W-8. The instructions and the
language of the perjury statement must immediately follow the person's
certifying statements and immediately precede the person's electronic
signature.
(ii) Electronic signature. The act of the electronic signature must
be effected by the person whose name is on the electronic Form W-8. The
signature must also authenticate and verify the submission. For this
purpose, the terms authenticate and verify have the same meanings as
they do when applied to a written signature on a paper Form W-8. An
electronic signature can be in any form that satisfies the foregoing
requirements. The electronic signature must be the final entry in the
person's Form W-8 submission.
(4) Requests for electronic Form W-8 data. Upon request by the
Internal Revenue Service during an examination, the withholding agent
must supply a hard copy of the electronic Form W-8 and a statement
that, to the best of the withholding agent's knowledge, the electronic
Form W-8 was filed by the person whose name is on the form. The hard
copy of the electronic Form W-8 must provide exactly the same
information as, but need not be identical to, the paper Form W-8.
(C) Special requirements for transmission of Forms W-8 by an
intermediary. [Reserved]
* * * * *
(vii) Requirement of taxpayer identifying number. A TIN must be
stated on a withholding certificate when required by this paragraph
(e)(4)(vii). A TIN is required to be stated on--
(A) A withholding certificate on which a beneficial owner is
claiming the benefit of a reduced rate under an income tax treaty
(other than for amounts described in Sec. 1.1441-6(c)(2);
(B) A withholding certificate on which a beneficial owner is
claiming exemption from withholding because income is effectively
connected with a U.S. trade or business;
(C) A withholding certificate on which a beneficial owner is
claiming exemption from withholding under section 871(f) for certain
annuities received under qualified plans;
(D) A withholding certificate on which a beneficial owner is
claiming an exemption based solely on a foreign organization's claim of
tax exempt status under section 501(c) or private foundation status
(however, a TIN is not required from a foreign private foundation that
is subject to the 4-percent tax under section 4948(a) on income if that
income would be exempt from withholding but for section 4948(a) (e.g.,
portfolio interest));
(E) A withholding certificate from a person representing to be a
qualified intermediary described in paragraph (e)(5)(ii) of this
section;
(F) A withholding certificate from a person representing to be a
withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i));
(G) A withholding certificate from a person representing to be a
foreign grantor trust with 5 or fewer grantors;
(H) A withholding certificate provided by a foreign organization
that is described in section 501(c);
(I) A withholding certificate from a person representing to be a
U.S. branch described in paragraph (b)(2)(iv) of this section.
* * * * *
(ix) * * *
(A) * * *
(4) A withholding agent may rely on documentation furnished by a
beneficial owner or payee to an agent of the withholding agent. The
agent may retain the documentation as part of an information system
maintained for a single or multiple withholding agents provided that
the system permits any withholding agent that uses the system to easily
access data regarding the nature of the documentation, the information
contained in the documentation, and its validity, and must allow the
withholding agent to easily transmit data into the system regarding any
facts of which it becomes aware that may affect the reliability of
[[Page 32184]]
the documentation. The withholding agent must be able to establish how
and when it has accessed the data regarding the documentation and, if
applicable, how and when it has transmitted data regarding any facts of
which it became aware that may affect the reliability of the
documentation. In addition, the withholding agent must be able to
establish that any data it has transmitted to the information system
has been processed and appropriate due diligence has been exercised
regarding the validity of the documentation.
* * * * *
(C) Special rule for brokers--(1) In general. A withholding agent
may rely on the certification of a broker that the broker holds a valid
beneficial owner withholding certificate described in paragraph
(e)(2)(i) of this section or other appropriate documentation for that
beneficial owner with respect to any readily tradable instrument, as
defined in Sec. 31.3406(h)-1(d) of this chapter, if the broker is a
United States person (including a U.S. branch treated as a U.S. person
under paragraph (b)(2)(iv) of this section) that is acting as the agent
of a beneficial owner and the U.S. broker has been provided a valid
Form W-8 or other appropriate documentation. The certification must be
in writing or in electronic form and contain all of the information
required of a nonqualified intermediary under paragraphs (e)(3)(iv)(B)
and (C) of this section. If a U.S. broker chooses to use this paragraph
(e)(4)(ix)(C), that U.S. broker will be solely responsible for applying
the rules of Sec. 1.1441-7(b) to the withholding certificates or other
appropriate documentation. For purposes of this paragraph
(c)(4)(ix)(C), the term broker means a person treated as a broker under
Sec. 1.6045-1(a).
(2) The following example illustrates the rules of this paragraph
(e)(4)(ix)(C):
Example. SCO is a U.S. securities clearing organization that
provides clearing services for correspondent broker, CB, a U.S.
corporation. Pursuant to a fully disclosed clearing agreement, CB
fully discloses the identity of each of its customers to SCO. Part
of SCO's clearing duties include the crediting of income and gross
proceeds of readily tradeable instruments (as defined in
Sec. 31.3406(h)-1(d)) to each customer's account. For each disclosed
customer that is a foreign beneficial owner, CB provides SCO with
information required under paragraphs (e)(3)(iv)(B) and (C) of this
section that is necessary to apply the correct rate of withholding
and to file Forms 1042-S. SCO may use the representations and
beneficial owner information provided by CB to determine the proper
amount of withholding and to file Forms 1042-S. CB is responsible
for determining the validity of the withholding certificates or
other appropriate documentation under Sec. 1.1441-1(b).
* * * * *
(5) Qualified intermediaries--(i) General rule. A qualified
intermediary, as defined in paragraph (e)(5)(ii) of this section, may
furnish a qualified intermediary withholding certificate to a
withholding agent. The withholding certificate provides certifications
on behalf of other persons for the purpose of claiming and verifying
reduced rates of withholding under section 1441 or 1442 and for the
purpose of reporting and withholding under other provisions of the
Internal Revenue Code, such as the provisions under chapter 61 and
section 3406 (and the regulations under those provisions). Furnishing
such a certificate is in lieu of transmitting to a withholding agent
withholding certificates or other appropriate documentation for the
persons for whom the qualified intermediary receives the payment,
including interest holders in a qualified intermediary that is fiscally
transparent under the regulations under section 894. Although the
qualified intermediary is required to obtain withholding certificates
or other appropriate documentation from beneficial owners, payees, or
interest holders pursuant to its agreement with the IRS, it is
generally not required to attach such documentation to the intermediary
withholding certificate. Notwithstanding the preceding sentence a
qualified intermediary must provide a withholding agent with the Forms
W-9, or disclose the names, addresses, and taxpayer identifying
numbers, if known, of those U.S. non-exempt recipients for whom the
qualified intermediary receives reportable amounts (within the meaning
of paragraph (e)(3)(vi) of this section) to the extent required in the
qualified intermediary's agreement with the IRS. A person may claim
qualified intermediary status before an agreement is executed with the
IRS if it has applied for such status and the IRS authorizes such
status on an interim basis under such procedures as the IRS may
prescribe.
* * * * *
(iii) Withholding agreement--(A) In general. The IRS may, upon
request, enter into a withholding agreement with a foreign person
described in paragraph (e)(5)(ii) of this section pursuant to such
procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a
qualified intermediary shall generally be subject to the applicable
withholding and reporting provisions applicable to withholding agents
and payors under chapters 3 and 61 of the Internal Revenue Code,
section 3406, the regulations under those provisions, and other
withholding provisions of the Internal Revenue Code, except to the
extent provided under the agreement.
(B) Terms of the withholding agreement. Generally, the agreement
shall specify the type of certifications and documentation upon which
the qualified intermediary may rely to ascertain the classification
(e.g., corporation or partnership) and status (i.e., U.S. or foreign)
of beneficial owners and payees who receive payments collected by the
qualified intermediary and, if necessary, entitlement to the benefits
of a reduced rate under an income tax treaty. The agreement shall
specify if, and to what extent, the qualified intermediary may assume
primary withholding responsibility in accordance with paragraph
(e)(5)(iv) of this section. It shall also specify the extent to which
applicable return filing and information reporting requirements are
modified so that, in appropriate cases, the qualified intermediary may
report payments to the IRS on an aggregated basis, without having to
disclose the identity of beneficial owners and payees. However, the
qualified intermediary may be required to provide to the IRS the name
and address of those foreign customers who benefit from a reduced rate
under an income tax treaty pursuant to the qualified intermediary
arrangement for purposes of verifying entitlement to such benefits,
particularly under an applicable limitation on benefits provision.
Under the agreement, a qualified intermediary may agree to act as an
acceptance agent to perform the duties described in Sec. 301.6109-
1(d)(3)(iv)(A) of this chapter. The agreement may specify the manner in
which applicable procedures for adjustments for underwithholding and
overwithholding, including refund procedures, apply in the context of a
qualified intermediary arrangement and the extent to which applicable
procedures may be modified. In particular, a withholding agreement may
allow a qualified intermediary to claim refunds of overwithheld
amounts. If relevant, the agreement shall specify the manner in which
the qualified intermediary may deal with payments to other
intermediaries and flow-through entities. In addition, the agreement
shall specify the manner in which the IRS will verify compliance with
the agreement. In appropriate cases, the IRS may agree to rely on
audits performed by an intermediary's approved auditor. In such a case,
the IRS's audit may be
[[Page 32185]]
limited to the audit of the auditor's records (including work papers of
the auditor and reports prepared by the auditor indicating the
methodology employed to verify the entity's compliance with the
agreement). For this purpose, the agreement shall specify the auditor
or class of auditors that are approved. Generally, an auditor will not
be approved if the auditor is not subject to laws, regulations, or
rules that impose sanctions for failure to exercise its independence
and to perform the audit competently. The agreement may include
provisions for the assessment and collection of tax in the event that
failure to comply with the terms of the agreement results in the
failure by the withholding agent or the qualified intermediary to
withhold and deposit the required amount of tax. Further, the agreement
may specify the procedures by which deposits of amounts withheld are to
be deposited, if different from the deposit procedures under the
Internal Revenue Code and applicable regulations. To determine whether
to enter a qualified intermediary withholding agreement and the terms
of any particular withholding agreement, the IRS will consider
appropriate factors including whether or not the foreign person agrees
to assume primary withholding responsibility, the type of local know-
your-customer laws and practices to which it is subject, the extent and
nature of supervisory and regulatory control exercised under the laws
of the foreign country over the foreign person, the volume of
investments in U.S. securities (determined in dollar amounts and number
of account holders), the financial condition of the foreign person, and
whether the qualified intermediary is a resident of a country with
which the United States has an income tax treaty.
(iv) Assignment of primary withholding responsibility. Any person
who meets the definition of a withholding agent under Sec. 1.1441-7(a)
(whether a U.S. person or a foreign person) is required to withhold and
deposit any amount withheld under Sec. 1.1461-1(a) and to make the
returns prescribed by Sec. 1.1461-1(b) and (c). If permitted by its
qualified intermediary agreement, a qualified intermediary agreement
may, however, inform a withholding agent from which it receives a
payment that it will assume the primary obligation to withhold,
deposit, and report amounts under chapter 3 of the Internal Revenue
Code and/or under chapter 61 of the Internal Revenue Code and section
3406. If a withholding agent makes a payment of an amount subject to
withholding, as defined in Sec. 1.1441-2(a), or a reportable payment,
as defined in section 3406(b), to a qualified intermediary that
represents to the withholding agent that it has assumed primary
withholding responsibility for the payment, the withholding agent is
not required to withhold on the payment. The withholding agent is not
required to determine that the qualified intermediary agreement
actually permits the qualified intermediary to assume primary
withholding responsibility. A qualified intermediary that assumes
primary withholding responsibility under chapter 3 of the Internal
Revenue Code or primary reporting and backup withholding responsibility
under chapter 61 and section 3406 is not required to assume primary
withholding responsibility for all accounts it has with a withholding
agent but must assume primary withholding responsibility for all
payments made to any one account that it has with the withholding
agent. A qualified intermediary may agree with the withholding agent to
assume primary withholding responsibility under chapter 3 and section
3406, only if expressly permitted to do so under its agreement with the
IRS.
(v) Withholding statement--(A) In general. A qualified intermediary
must provide each withholding agent from which it receives reportable
amounts, as defined in paragraph (e)(3)(vi) of this section, as a
qualified intermediary with a written statement (the withholding
statement) containing the information specified in paragraph
(e)(5)(v)(B) of this section. A withholding statement is not required,
however, if all of the information a withholding agent needs to fulfill
its withholding and reporting requirements is contained in the
withholding certificate. The qualified intermediary agreement may
require, in appropriate circumstances, the qualified intermediary to
include information in its withholding statement relating to payments
other than payments of reportable amounts. The withholding statement
forms an integral part of the qualified intermediary's qualified
intermediary withholding certificate and the penalties of perjury
statement provided on the withholding certificate shall apply to the
withholding statement as well. The withholding statement may be
provided in any manner, and in any form, to which qualified
intermediary and the withholding agent mutually agree, including
electronically. If the withholding statement is provided
electronically, there must be sufficient safeguards to ensure that the
information received by the withholding agent is the information sent
by qualified intermediary and must also document all occasions of user
access that result in the submission or modification of withholding
statement information. In addition, the electronic system must be
capable of providing a hard copy of all withholding statements provided
by the qualified intermediary. The withholding statement shall be
updated as often as necessary for the withholding agent to meet its
reporting and withholding obligations under chapters 3 and 61 of the
Internal Revenue Code and section 3406. A withholding agent will be
liable for tax, interest, and penalties in accordance with paragraph
(b)(7) of this section to the extent it does not follow the presumption
rules of paragraph (b)(3) of this section, Secs. 1.1441-5(d) and
(e)(6), and 1.6049-5(d) for any payment, or portion thereof, for which
it does not have a valid withholding statement prior to making a
payment.
(B) Content of withholding statement. The withholding statement
must contain sufficient information for a withholding agent to apply
the correct rate of withholding on payments from the accounts
identified on the statement and to properly report such payments on
Forms 1042-S and Forms 1099, as applicable. The withholding statement
must--
(1) Designate those accounts for which the qualified intermediary
acts as a qualified intermediary;
(2) Designate those accounts for which qualified intermediary
assumes primary withholding responsibility under chapter 3 of the
Internal Revenue Code and/or primary reporting and backup withholding
responsibility under chapter 61 and section 3406; and
(3) Provide information regarding withholding rate pools, as
described in paragraph (e)(5)(v)(C) of this section.
(C) Withholding rate pools--(1) In general. Except to the extent it
has assumed both primary withholding responsibility under chapter 3 of
the Internal Revenue Code and primary reporting and backup withholding
responsibility under chapter 61 and section 3406 with respect to a
payment, a qualified intermediary shall provide as part of its
withholding statement the withholding rate pool information that is
required for the withholding agent to meet its withholding and
reporting obligations under chapters 3 and 61 of the Internal Revenue
Code and section 3406. A withholding rate pool is a payment of a single
type of income, determined in accordance with the categories of income
reported on Form 1042-S or Form 1099, as applicable,
[[Page 32186]]
that is subject to a single rate of withholding. A withholding rate
pool may be established by any reasonable method on which the qualified
intermediary and a withholding agent agree (e.g., by establishing a
separate account for a single withholding rate pool, or by dividing a
payment made to a single account into portions allocable to each
withholding rate pool). To the extent a qualified intermediary does not
assume primary reporting and backup withholding responsibility under
chapter 61 and section 3406, a qualified intermediary's withholding
statement must establish a separate withholding rate pool for each U.S.
non-exempt recipient account holder that the qualified intermediary has
disclosed to the withholding agent unless the qualified intermediary
uses the alternative procedures in paragraph (e)(5)(v)(C)(2) of this
section. A qualified intermediary shall determine withholding rate
pools based on valid documentation that it obtains under its
withholding agreement with the IRS, or if a payment cannot be reliably
associated with valid documentation, under the applicable presumption
rules. If a qualified intermediary has an account holder that is
another intermediary (whether a qualified intermediary or a
nonqualified intermediary) or a flow-through entity, the qualified
intermediary may combine the account holder information provided by the
intermediary or flow-through entity with the qualified intermediary's
direct account holder information to determine the qualified
intermediary's withholding rate pools.
(2) Alternative procedure for U.S. non-exempt recipients. If
permitted under its agreement with the IRS, a qualified intermediary
may, by mutual agreement with a withholding agent, establish a single
withholding rate pool (not subject to backup withholding) for all U.S.
non-exempt recipient account holders for whom the qualified
intermediary has provided Forms W-9 prior to the withholding agent
paying any reportable payments, as defined in section 3406(b), and a
separate withholding rate pool (subject to 31-percent withholding) for
all U.S. non-exempt recipient account holders for whom a qualified
intermediary has not provided Forms W-9 prior to the withholding agent
paying any reportable payments. If a qualified intermediary chooses the
alternative procedure of this paragraph (e)(5)(v)(C)(2), the qualified
intermediary must provide sufficient information to the withholding
agent no later than January 15 of the year following the year in which
the reportable payments are paid that allocates the reportable payments
to each U.S. non-exempt recipient account holder. Failure to provide
such information will result in the application of penalties to the
qualified intermediary under sections 6721 and 6722, as well as any
other applicable penalties, and may result in the termination of the
qualified intermediary's withholding agreement with the IRS. A
withholding agent shall not be liable for tax, interest, or penalties
for failure to backup withhold or report information under chapter 61
of the Internal Revenue Code due solely to the errors or omissions of
the qualified intermediary. If a qualified intermediary fails to
provide the allocation information required by this paragraph
(e)(5)(v)(C)(2), the withholding agent shall report the entire amount
paid from the withholding rate pool to an unknown recipient, or
otherwise in accordance with the appropriate Form 1099 and the
instructions accompanying the form.
* * * * *
Par 4. Effective January 1, 2001, Sec. 1.1441-2 is amended by:
1. Revising paragraph (a).
2. Revising paragraph (b)(1)(i).
3. Removing paragraph (b)(2)(ii), redesignating paragraph
(b)(2)(iii) as paragraph (b)(2)(ii), and adding the word ``and'' after
the semicolon in paragraph (b)(2)(i).
4. Revising paragraph (b)(3).
The revisions read as follows:
Sec. 1.1441-2 Amounts subject to withholding.
(a) In general. For purposes of the regulations under chapter 3 of
the Internal Revenue Code, the term amounts subject to withholding
means amounts from sources within the United States that constitute
either fixed or determinable annual or periodical income described in
paragraph (b) of this section or other amounts subject to withholding
described in paragraph (c) of this section. For purposes of this
paragraph (a), an amount shall be treated as being from sources within
the United States if the source of the amount cannot be determined at
the time of payment. See Sec. 1.1441-3(d)(1) for determining the amount
to be withheld from a payment in the absence of information at the time
of payment regarding the source of the amount. Amounts subject to
withholding include amounts that are not fixed or determinable annual
or periodical income and upon which withholding is specifically
required under a provision of this section or another section of the
regulations under chapter 3 of the Internal Revenue Code (such as
corporate distributions upon which withholding is required under
Sec. 1.1441-3(c)(1) that do not constitute dividend income). Amounts
subject to withholding do not include--
(1) Amounts described in Sec. 1.1441-1(b)(4)(i) to the extent they
involve interest on obligations in bearer form or on foreign-targeted
registered obligations (but, in the case of a foreign-targeted
registered obligation, only to the extent of those amounts paid to a
registered owner that is a financial institution within the meaning of
section 871(h)(5)(B) or a member of a clearing organization which
member is the beneficial owner of the obligation);
(2) Amounts described in Sec. 1.1441-1(b)(4)(ii) (dealing with bank
deposit interest and similar types of interest (including original
issue discount) described in section 871(i)(2)(A) or 881(d));
(3) Amounts described in Sec. 1.1441-1(b)(4)(iv) (dealing with
interest or original issue discount on certain short-term obligations
described in section 871(g)(1)(B) or 881(e));
(4) Amounts described in Sec. 1.1441-1(b)(4)(xx) (dealing with
income from certain gambling winnings exempt from tax under section
871(j));
(5) Amounts paid as part of the purchase price of an obligation
sold or exchanged between interest payment dates, unless the sale or
exchange is part of a plan the principal purpose of which is to avoid
tax and the withholding agent has actual knowledge or reason to know of
such plan;
(6) Original issue discount paid as part of the purchase price of
an obligation sold or exchanged in a transaction other than a
redemption of such obligation, unless the purchase is part of a plan
the principal purpose of which is to avoid tax and the withholding
agent has actual knowledge or reason to know of such plan; and
(7) Insurance premiums paid with respect to a contract that is
subject to the section 4371 excise tax.
(b) Fixed or determinable annual or periodical income--(1) In
general--(i) Definition. For purposes of chapter 3 of the Internal
Revenue Code and the regulations thereunder, fixed or determinable
annual or periodical income includes all income included in gross
income under section 61 (including original issue discount) except for
the items specified in paragraph (b)(2) of this section. Items of
income that are excluded from gross income under a provision of law
without regard to the U.S. or foreign status of the owner of the
income, such as interest excluded from gross income
[[Page 32187]]
under section 103(a) or qualified scholarship income under section 117,
shall not be treated as fixed or determinable annual or periodical
income under chapter 3 of the Internal Revenue Code. Income excluded
from gross income under section 892 (income of foreign governments) or
section 115 (income of a U.S. possession) is fixed or determinable
annual or periodical income since the exclusion from gross income under
those sections is dependent on the foreign status of the owner of the
income. See Sec. 1.306-3(h) for treating income from the disposition of
section 306 stock as fixed or determinable annual or periodical income.
* * * * *
(3) Original issue discount--(i) Amount subject to tax. An amount
representing original issue discount is fixed or determinable annual or
periodical income that is subject to tax under sections 871(a)(1)(C)
and 881(a)(3) to the extent provided in those sections and this
paragraph (b)(3) if not otherwise excluded under paragraph (a) of this
section. An amount of original issue discount is subject to tax with
respect to a foreign beneficial owner of an obligation carrying
original issue discount upon a sale or exchange of the obligation or
when a payment is made on such obligation. The amount taxable is the
amount of original issue discount that accrued while the foreign person
held the obligation up to the time that the obligation is sold or
exchanged or that a payment is made on the obligation, reduced by any
amount of original issue discount that was taken into account prior to
that time (due to a payment made on the obligation). In the case of a
payment made on the obligation, the tax due on the amount of original
issue discount may not exceed the amount of the payment reduced by the
tax imposed on any portion of the payment that is qualified stated
interest.
(ii) Amounts subject to withholding. A withholding agent must
withhold on the taxable amount of original issue discount paid on the
redemption of an original issue discount obligation unless an exception
to withholding applies (e.g., portfolio interest or treaty exception).
In addition, withholding is required on the taxable amount of original
issue discount upon the sale or exchange of an original issue discount
obligation, other than in a redemption, to the extent the withholding
agent has actual knowledge or reason to know that the sale or exchange
is part of a plan the principal purpose of which is to avoid tax. If a
withholding agent cannot determine the taxable amount of original issue
discount on the redemption of an original issue discount obligation (or
on the sale or exchange of such an obligation if the principal purpose
of the sale is to avoid tax), then it must withhold on the entire
amount of original issue discount accrued from the date of issue until
the date of redemption (or the date the obligation is sold or
exchanged) determined on the basis of the most recently published
``List of Original Issue Discount Instruments'' (IRS Publication 1212,
available from the IRS Forms Distribution Center) or similar list
published by the IRS as if the beneficial owner of the obligation had
held the obligation since its original issue.
(iii) Exceptions to withholding. To the extent that this paragraph
(b)(3) applies to require withholding by a person other than an issuer
of an original issue discount obligation, or the issuer's agent, it
shall apply only to obligations issued after December 31, 2000.
* * * * *
Par. 5. Effective January 1, 2001, Sec. 1.1441-3 is amended by:
1. Revising paragraph (b)(2)(i).
2. Revising paragraph (c)(1).
3. Revising paragraph (c)(4)(i)(C).
The revisions read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
* * * * *
(b) * * *
(2) No withholding between interest payment dates--(i) In general.
A withholding agent is not required to withhold under Sec. 1.1441-1
upon interest accrued on the date of a sale or exchange of a debt
obligation when that sale occurs between two interest payment dates
(even though the amount is treated as interest under Sec. 1.61-7(c) or
(d) and is subject to tax under section 871 or 881). See Sec. 1.6045-
1(c) for reporting requirements by brokers with respect to sale
proceeds. See Sec. 1.61-7(c) regarding the character of payments
received by the acquirer of an obligation subsequent to such
acquisition (that is, as a return of capital or interest accrued after
the acquisition). Any exemption from withholding pursuant to this
paragraph (b)(2)(i) applies without a requirement that documentation be
furnished to the withholding agent. However, documentation may have to
be furnished for purposes of the information reporting provisions under
section 6045 or 6049 and backup withholding under section 3406. The
exemption from withholding granted by this paragraph (b)(2) is not a
determination that the accrued interest is not fixed or determinable
annual or periodical income under section 871(a) or 881(a).
* * * * *
(c) Corporate distributions--(1) General rule. A corporation making
a distribution with respect to its stock or any intermediary (described
in Sec. 1.1441-1(c)(13)) making a payment of such a distribution is
required to withhold under section 1441, 1442, or 1443 on the entire
amount of the distribution, unless it elects to reduce the amount of
withholding under the provisions of this paragraph (c). Any exceptions
from withholding provided by this paragraph (c) apply without any
requirement to furnish documentation to the withholding agent. However,
documentation may have to be furnished for purposes of the information
reporting provisions under section 6042 or 6045 and backup withholding
under section 3406. See Sec. 1.1461-1(c) to determine whether amounts
excepted from withholding under this section are considered amounts
that are subject to reporting.
* * * * *
(4) * * * (i) * * *
(C) Coordination with REIT withholding. Withholding is required
under section 1441 (or 1442 or 1443) on the portion of a distribution
from a REIT that is not designated as a capital gain dividend, a return
of basis, or a distribution in excess of a shareholder's adjusted basis
in the stock of the REIT that is treated as a capital gain under
section 301(c)(3). A distribution in excess of a shareholder's adjusted
basis in the stock of the REIT is, however, subject to withholding
under section 1445, unless the interest in the REIT is not a U.S. real
property interest (e.g., an interest in a domestically controlled REIT
under section 897(h)(2)). In addition, withholding is required under
section 1445 on the portion of the distribution designated by a REIT as
a capital gain dividend. See Sec. 1.1445-8.
* * * * *
Par. 6. Effective January 1, 2001, Sec. 1.1441-4 is amended by:
1. Revising paragraph (a)(3)(i).
2. Revising paragraph (b)(1)(ii).
The revisions read as follows:
Sec. 1.1441-4 Exemptions from withholding for certain effectively
connected income and other amounts.
(a) * * *
(3) Income on notional principal contracts--(i) General rule. A
withholding agent that pays amounts attributable to a notional
principal contract described in Sec. 1.863-7(a) or 1.988-2(e) shall
have no obligation to withhold on the amounts paid under the
[[Page 32188]]
terms of the notional principal contract regardless of whether a
withholding certificate is provided. However, a withholding agent must
file returns under Sec. 1.1461-1(b) and (c) reporting the income that
it must treat as effectively connected with the conduct of a trade or
business in the United States under the provisions of this paragraph
(a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this
section, a withholding agent must treat the income as effectively
connected with the conduct of a U.S. trade or business if the income is
paid to, or to the account of, a qualified business unit of a foreign
person located in the United States or, if the payment is paid to, or
to the account of, a qualified business unit of a foreign person
located outside the United States, the withholding agent knows, or has
reason to know, the payment is effectively connected with the conduct
of a trade or business within the United States. Income on a notional
principal contract does not include the amount characterized as
interest under the provisions of Sec. 1.446-3(g)(4).
* * * * *
(b) * * * (1) * * *
(ii) Such compensation would be subject to withholding under
section 3402 but for the provisions of section 3401(a) (not including
section 3401(a)(6)) and the regulations under that section. This
paragraph (b)(1)(ii) does not apply to payments to a nonresident alien
individual from any trust described in section 401(a), any annuity plan
described in section 403(a), any annuity, custodial account, or
retirement income account described in section 403(b), or an individual
retirement account or individual retirement annuity described in
section 408. Instead, these payments are subject to withholding under
this section to the extent they are exempted from the definition of
wages under section 3401(a)(12) or to the extent they are from an
annuity, custodial account, or retirement income account described in
section 403(b), or an individual retirement account or individual
retirement annuity described in section 408. Thus, for example,
payments to a nonresident alien individual from a trust described in
section 401(a) are subject to withholding under section 1441 and not
under section 3405 or section 3406.
* * * * *
Par. 7. Effective January 1, 2001, in Sec. 1.1441-5 paragraphs (a)
through (e) are revised to read as follows:
Sec. 1.1441-5 Withholding on payments to partnerships, trusts, and
estates.
(a) In general. This section describes the rules that apply to
payments made to partnerships, trusts, and estates. Paragraph (b) of
this section prescribes the rules that apply to a withholding agent
making a payment to a U.S. partnership, trust, or estate. It also
prescribes the obligations of a U.S. partnership, trust, or estate that
makes a payment to a foreign partner, beneficiary, or owner. Paragraph
(c) of this section prescribes rules that apply to a withholding agent
that makes a payment to a foreign partnership. Paragraph (d) of this
section provides presumption rules that apply to payments made to
foreign partnerships. Paragraph (e) of this section prescribes rules,
including presumption rules, that apply to a withholding agent that
makes a payment to a foreign trust or foreign estate.
(b) Rules applicable to U.S. partnerships, trusts, and estates--(1)
Payments to U.S. partnerships, trusts, and estates. No withholding is
required under section 1.1441-1(b)(1) on a payment of an amount subject
to withholding (as defined in Sec. 1.1441-2(a)) that a withholding
agent may treat as made to a U.S. payee. Therefore, if a withholding
agent can reliably associate (within the meaning of Sec. 1.1441-
2(b)(vii)) a Form W-9 provided in accordance with Sec. 1.1441-1(d)(2)
or (4) by a U.S. partnership, U.S. trust, or a U.S. estate the
withholding agent may treat the payment as made to a U.S. payee and the
payment is not subject to withholding under section 1441 even though
the partnership, trust, or estate may have foreign partners,
beneficiaries, or owners. A withholding agent is also not required to
withhold under section 1441 on a payment it makes to an entity presumed
to be a U.S. payee under paragraphs (d)(2) and (e)(6)(ii) of this
section.
(2) Withholding by U.S. payees--(i) U.S. partnerships--(A) In
general. A U.S. partnership is required to withhold under Sec. 1.1441-1
as a withholding agent on an amount subject to withholding (as defined
in Sec. 1.1441-2(a)) that is includible in the gross income of a
partner that is a foreign person. Subject to paragraph (b)(2)(v) of
this section, a U.S. partnership shall withhold when any distributions
that include amounts subject to withholding (including guaranteed
payments made by a U.S. partnership) are made. To the extent a foreign
partner's distributive share of income subject to withholding has not
actually been distributed to the foreign partner, the U.S. partnership
must withhold on the foreign partner's distributive share of the income
on the earlier of the date that the statement required under section
6031(b) is mailed or otherwise provided to the partner or the due date
for furnishing the statement.
(B) Effectively connected income of partners. Withholding on items
of income that are effectively connected income in the hands of the
partners who are foreign persons is governed by section 1446 and not by
this section. In such a case, partners in a domestic partnership are
not required to furnish a withholding certificate in order to claim an
exemption from withholding under section 1441(c)(1) and Sec. 1.1441-4.
(ii) U.S. simple trusts. A U.S. trust that is described in section
651(a) (a U.S. simple trust) is required to withhold under chapter 3 of
the Internal Revenue Code as a withholding agent on the distributable
net income includible in the gross income of a foreign beneficiary to
the extent the distributable net income is an amount subject to
withholding (as defined in Sec. 1.1441-2(a)). A U.S. simple trust shall
withhold when a distribution is made to a foreign beneficiary. The U.S.
trust may make a reasonable estimate of the portion of the distribution
that constitutes distributable net income consisting of an amount
subject to withholding and apply the appropriate rate of withholding to
the estimated amount. If, at the end of the taxable year in which the
distribution is made, the U.S. simple trust determines that it
underwithheld under section 1441 or 1442, the trust shall be liable as
a withholding agent for the amount under withheld under section 1461.
No penalties shall be imposed for failure to withhold and deposit the
tax if the U.S. simple trust's estimate was reasonable and the trust
pays the underwithheld amount on or before the due date of Form 1042
under section 1461. Any payment of underwithheld amounts by the U.S.
simple trust shall not be treated as income subject to additional
withholding even if that amount is treated as additional income to the
foreign beneficiary, unless the additional amount is income to the
foreign beneficiary as a result of a contractual arrangement between
the parties regarding the satisfaction of the foreign beneficiary's tax
liability. To the extent a U.S. simple trust is required to, but does
not, distribute such income to a foreign beneficiary, the U.S. trust
must withhold on the foreign beneficiary's allocable share at the time
the income is required (without extension) to be reported on Form 1042-
S under Sec. 1.1461-1(c).
[[Page 32189]]
(iii) U.S. complex trusts and U.S. estates. A U.S. trust that is
not a trust described in section 651(a) (a U.S. complex trust) is
required to withhold under chapter 3 of the Internal Revenue Code as a
withholding agent on the distributable net income includible in the
gross income of a foreign beneficiary to the extent the distributable
net income consists of an amount subject to withholding (as defined in
Sec. 1.1441-2(a)) that is, or is required to be, distributed currently.
The U.S. complex trust shall withhold when a distribution is made to a
foreign beneficiary. The trust may use the same procedures regarding an
estimate of the amount subject to withholding as a U.S. simple trust
under paragraph (b)(2)(ii) of this section. To the extent an amount
subject to withholding is required to be, but is not actually
distributed, the U.S. complex trust must withhold on the foreign
beneficiary's allocable share at the time the income is required to be
reported on Form 1042-S under Sec. 1.1461-1(c), without extension. A
U.S. estate is required to withhold under chapter 3 of the Internal
Revenue Code on the distributable net income includible in the gross
income of a foreign beneficiary to the extent the distributable net
income consists of an amount subject to withholding (as defined in
Sec. 1.1441-2(a)) that is actually distributed. A U.S. estate may also
use the reasonable estimate procedures of paragraph (b)(2)(ii) of this
section. However, those procedures apply to an estate that has a
taxable year other than a calendar year only if the estate files an
amended return on Form 1042 for the calendar year in which the
distribution was made and pays the underwithheld tax and interest
within 60 days after the close of the taxable year in which the
distribution was made.
(iv) U.S. grantor trusts. A U.S. trust that is described in section
671 through 679 (a U.S. grantor trust) must withhold on any income
includible in the gross income of a foreign person that is treated as
an owner of the grantor trust to the extent the amount includible
consists of an amount that is subject to withholding (as described in
Sec. 1.1441-2(a)). The withholding must occur at the time the income is
received by, or credited to, the trust.
(v) Subsequent distribution. If a U.S. partnership or U.S. trust
withholds on a foreign partner, beneficiary, or owner's share of an
amount subject to withholding before the amount is actually distributed
to the partner, beneficiary, or owner, withholding is not required when
the amount is subsequently distributed.
(c) Foreign partnerships--(1) Determination of payee--(i) Payments
treated as made to partners. Except as otherwise provided in paragraph
(c)(1)(ii) of this section, the payees of a payment to a person that
the withholding agent may treat as a nonwithholding foreign partnership
under paragraph (c)(3)(i) or (d)(2) of this section are the partners
(looking through partners that are foreign intermediaries or flow-
through entities) as follows--
(A) If the withholding agent can reliably associate a partner's
distributive share of the payment with a valid Form W-9 provided under
Sec. 1.1441-1(d), the partner is a U.S. payee;
(B) If the withholding agent can reliably associate a partner's
distributive share of the payment with a valid Form W-8, or other
appropriate documentation, provided under Sec. 1.1441-1(e)(1)(ii), the
partner is a payee that is a foreign beneficial owner;
(C) If the withholding agent can reliably associate a partner's
distributive share of the payment with a qualified intermediary
withholding certificate under Sec. 1.1441-1(e)(3)(ii), a nonqualified
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(iii), or
a U.S. branch certificate under Sec. 1.1441-1(e)(3)(v), then the rules
of Sec. 1.1441-1(b)(2)(v) shall apply to determine who the payee is in
the same manner as if the partner's distributive share of the payment
had been paid directly to such intermediary or U.S. branch;
(D) If the withholding agent can reliably associate the partner's
distributive share with a withholding foreign partnership certificate
under paragraph (c)(2)(iv) of this section or a nonwithholding foreign
partnership certificate under paragraph (c)(3)(iii) of this section,
then the rules of this paragraph (c)(1)(i) or paragraph (c)(1)(ii) of
this section shall apply to determine whether the payment is treated as
made to the partners of the higher-tier partnership under this
paragraph (c)(1)(i) or to the higher-tier partnership itself (under the
rules of paragraph (c)(1)(ii) of this section) in the same manner as if
the partner's distributive share of the payment had been paid directly
to the higher-tier foreign partnership;
(E) If the withholding agent can reliably associate the partner's
distributive share with a withholding certificate described in
paragraph (e) of this section regarding a foreign trust or estate, then
the rules of paragraph (e) of this section shall apply to determine who
the payees are; and
(F) If the withholding agent cannot reliably associate the
partner's distributive share with a withholding certificate or other
appropriate documentation, the partners are considered to be the payees
and the presumptions described in paragraph (d)(3) of this section
shall apply to determine their classification and status.
(ii) Payments treated as made to the partnership. A payment to a
person that the withholding agent may treat as a foreign partnership is
treated as a payment to the foreign partnership and not to its partners
only if--
(A) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(2)(iv) of this
section (withholding certificate of a withholding foreign partnership);
(B) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(3)(iii) of this
section (nonwithholding foreign partnership) certifying that the
payment is income that is effectively connected with the conduct of a
trade or business in the United States; or
(C) The withholding agent can treat the income as effectively
connected income under the presumption rules of Sec. 1.1441-4(a)(2)(ii)
or (3)(i).
(iii) Rules for reliably associating a payment with documentation.
For rules regarding the reliable association of a payment with
documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence of
documentation, see Secs. 1.1441-1(b)(3) and 1.6049-5(d) and paragraphs
(d) and (e)(6) of this section for applicable presumptions.
(iv) Examples. The rules of paragraphs (c)(1)(i) and (ii) of this
section are illustrated by the following examples:
Example 1. FP is a nonwithholding foreign partnership organized
in Country X. FP has two partners, FC, a foreign corporation, and
USP, a U.S. partnership. USWH, a U.S. withholding agent, makes a
payment of U.S. source interest to FP. FP has provided USWH with a
valid nonwithholding foreign partnership certificate, as described
in paragraph (c)(3)(iii) of this section, with which it associates a
beneficial owner withholding certificate from FC and a Form W-9 from
USP together with the withholding statement required by paragraph
(c)(3)(iv) of this section. USWH can reliably associate the payment
of interest with the withholding certificates from FC and USP. Under
paragraph (c)(1)(i) of this section, the payees of the interest
payment are FC and USP.
Example 2. The facts are the same as in Example 1, except that
FP1, a nonwithholding foreign partnership, is a partner in FP rather
than USP. FP1 has two partners, A and B, both foreign persons. FP
provides USWH with a valid nonwithholding foreign partnership
certificate, as described in paragraph (c)(3)(iii) of this section,
with which it associates a beneficial owner
[[Page 32190]]
withholding certificate from FC and a nonwithholding foreign
partnership certificate from FP1. In addition, foreign beneficial
owner withholding certificates from A and B are associated with the
nonwithholding foreign partnership withholding certificate from FP1.
FP also provides the withholding statement required by paragraph
(c)(3)(iv) of this section. USWH can reliably associate the interest
payment with the withholding certificates provided by FC, A, and B.
Therefore, under paragraph (c)(1)(i) of this section, the payees of
the interest payment are FC, A, and B.
Example 3. USWH makes a payment of U.S. source dividends to WFP,
a withholding foreign partnership. WFP has two partners, FC1 and
FC2, both foreign corporations. USWH can reliably associate the
payment with a valid withholding foreign partnership withholding
certificate from WFP. Therefore, under paragraph (c)(1)(ii)(A) of
this section, WFP is the payee of the dividends.
Example 4. USWH makes a payment of U.S. source royalties to FP,
a foreign partnership. USWH can reliably associate the royalties
with a valid withholding certificate from FP on which FP certifies
that the income is effectively connected with the conduct of a trade
or business in the United States. Therefore, under paragraph
(c)(1)(ii)(B) of this section, FP is the payee of the royalties.
(2) Withholding foreign partnerships--(i) Reliance on claim of
withholding foreign partnership status. A withholding foreign
partnership is a foreign partnership that has entered into an agreement
with the Internal Revenue Service (IRS), as described in paragraph
(c)(2)(ii) of this section, with respect to distributions and
guaranteed payments it makes to its partners. A withholding agent that
can reliably associate a payment with a certificate described in
paragraph (c)(2)(iv) of this section may treat the person to whom it
makes the payment as a withholding foreign partnership for purposes of
withholding under chapter 3 of the Internal Revenue Code, information
reporting under chapter 61 of the Internal Revenue Code, backup
withholding under section 3406, and withholding under other provisions
of the Internal Revenue Code. Furnishing such a certificate is in lieu
of transmitting to a withholding agent withholding certificates or
other appropriate documentation for its partners. Although the
withholding foreign partnership generally will be required to obtain
withholding certificates or other appropriate documentation from its
partners pursuant to its agreement with the IRS, it will generally not
be required to attach such documentation to its withholding foreign
partnership withholding certificate. A foreign partnership may act as a
qualified intermediary under Sec. 1.1441-1(e)(5) with respect to
payments it makes to persons other than its partners. In addition, the
IRS may permit a foreign partnership to act as a qualified intermediary
under Sec. 1.1441-1(e)(5)(ii)(D) with respect to its partners in
appropriate circumstances.
(ii) Withholding agreement. The IRS may, upon request, enter into a
withholding agreement with a foreign partnership pursuant to such
procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a
foreign partnership shall generally be subject to the applicable
withholding and reporting provisions applicable to withholding agents
and payors under chapters 3 and 61 of the Internal Revenue Code,
section 3406, the regulations under those provisions, and other
withholding provisions of the Internal Revenue Code, except to the
extent provided under the agreement. Under the agreement, a foreign
partnership may agree to act as an acceptance agent to perform the
duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The
agreement may specify the manner in which applicable procedures for
adjustments for underwithholding and overwithholding, including refund
procedures, apply to the withholding foreign partnership and its
partners and the extent to which applicable procedures may be modified.
In particular, a withholding agreement may allow a withholding foreign
partnership to claim refunds of overwithheld amounts on behalf of its
customers. In addition, the agreement must specify the manner in which
the IRS will audit the foreign partnership's books and records in order
to verify the partnership's compliance with its agreement. A
withholding foreign partnership must file a return on Form 1042 and
information returns on Form 1042-S. The withholding foreign partnership
agreement may also require a withholding foreign partnership to file a
partnership return under section 6031(a) and partner statements under
6031(b).
(iii) Withholding responsibility. A withholding foreign partnership
must assume primary withholding responsibility under chapter 3 of the
Internal Revenue Code. It is not required to provide information to the
withholding agent regarding each partner's distributive share of the
payment. The withholding foreign partnership will be responsible for
reporting the payments under Sec. 1.1461-1(c) and chapter 61 of the
Internal Revenue Code. A withholding agent making a payment to a
withholding foreign partnership is not required to withhold any amount
under chapter 3 of the Internal Revenue Code on a payment to the
withholding foreign partnership, unless it has actual knowledge or
reason to know that the foreign partnership is not a withholding
foreign partnership. The withholding foreign partnership shall withhold
the payments under the same procedures and at the same time as
prescribed for withholding by a U.S. partnership under paragraph (b)(2)
of this section, except that, for purposes of determining the partner's
status, the provisions of paragraph (d)(4) of this section shall apply.
(iv) Withholding certificate from a withholding foreign
partnership. The rules of Sec. 1.1441-1(e)(4) shall apply to
withholding certificates described in this paragraph (c)(2)(iv). A
withholding certificate furnished by a withholding foreign partnership
is valid with regard to any partner on whose behalf the certificate is
furnished only if it is furnished on a Form W-8, an acceptable
substitute form, or such other form as the IRS may prescribe, it is
signed under penalties of perjury by a partner with authority to sign
for the partnership, its validity has not expired, and it contains the
information, statement, and certifications described in this paragraph
(c)(2)(iv) as follows--
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, and the country under the laws of which the partnership is
created or governed;
(B) A certification that the partnership is a withholding foreign
partnership within the meaning of paragraph (c)(2)(i) of this section;
and
(C) Any other information, certifications or statements as may be
required by the withholding foreign partnership agreement with the IRS
or the form or accompanying instructions in addition to, or in lieu of,
the information, statements, and certifications described in this
paragraph (c)(2)(iv).
(3) Nonwithholding foreign partnerships--(i) Reliance on claim of
foreign partnership status. A withholding agent may treat a person as a
nonwithholding foreign partnership if it receives from that person a
nonwithholding foreign partnership withholding certificate as described
in paragraph (c)(3)(iii) of this section. A withholding agent that does
not receive a nonwithholding foreign partnership withholding
certificate, or does not receive a valid withholding certificate, from
an entity it knows, or has reason to know, is a foreign partnership,
must apply the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-
5(d) and
[[Page 32191]]
paragraphs (d) and (e)(6) of this section. In addition, to the extent a
withholding agent cannot, prior to a payment, reliably associate the
payment with valid documentation from a payee that is associated with
the nonwithholding foreign partnership withholding certificate or has
insufficient information to report the payment on Form 1042-S or Form
1099, to the extent reporting is required, must also apply the
presumption rules. See Sec. 1.1441-1(b)(2)(vii)(A) and (B) for rules
regarding reliable association. See paragraph (c)(3)(iv) of this
section and Sec. 1.1441-1(e)(3)(iv) for alternative procedures
permitting allocation information to be received after a payment is
made.
(ii) Reliance on claim of reduced withholding by a partnership for
its partners. This paragraph (c)(3)(ii) describes the manner in which a
withholding agent may rely on a claim of reduced withholding when
making a payment to a nonwithholding foreign partnership. To the extent
that a withholding agent treats a payment to a nonwithholding foreign
partnership as a payment to the nonwithholding foreign partnership's
partners (whether direct or indirect) in accordance with paragraph
(c)(1)(i) of this section, it may rely on a claim for reduced
withholding by the partner if, prior to the payment, the withholding
agent can reliably associate the payment (within the meaning of
Sec. 1.1441-1(b)(2)(vii)) with a valid withholding certificate or other
appropriate documentation from the partner that establishes entitlement
to a reduced rate of withholding. A withholding certificate or other
appropriate documentation that establishes entitlement to a reduced
rate of withholding is a beneficial owner withholding certificate
described in Sec. 1.1441-1(e)(2)(i), documentary evidence described in
Sec. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) (for a partner claiming to
be a foreign person and a beneficial owner, determined under the
provisions of Sec. 1.1441-1(c)(6)), a Form W-9 described in
Sec. 1.1441-1(d) (for a partner claiming to be a U.S. payee), or a
withholding foreign partnership withholding certificate described in
paragraph (c)(2)(iv) of this section. Unless a nonwithholding foreign
partnership withholding certificate is provided for income claimed to
be effectively connected with the conduct of a trade or business in the
United States, a claim must be presented for each portion of the
payment that represents an item of income includible in the
distributive share of a partner as required under paragraph
(c)(3)(iii)(C) of this section. When making a claim for several
partners, the partnership may present a single nonwithholding foreign
partnership withholding certificate to which the partners' certificates
or other appropriate documentation are associated. Where the
nonwithholding foreign partnership withholding certificate is provided
for income claimed to be effectively connected with the conduct of a
trade or business in the United States under paragraph (c)(3)(iii)(D)
of this section, the claim may be presented without having to identify
any partner's distributive share of the payment.
(iii) Withholding certificate from a nonwithholding foreign
partnership. A nonwithholding foreign partnership shall provide a
nonwithholding foreign partnership withholding certificate with respect
to reportable amounts received by the nonwithholding foreign
partnership. A nonwithholding foreign partnership withholding
certificate is valid only to the extent it is furnished on a Form W-8
(or an acceptable substitute form or such other form as the IRS may
prescribe), it is signed under penalties of perjury by a partner with
authority to sign for the partnership, its validity has not expired,
and it contains the information, statements, and certifications
described in this paragraph (c)(3)(iii) and paragraph (c)(3)(iv) of
this section, and the withholding certificates and other appropriate
documentation for all the persons to whom the certificate relates are
associated with the certificate. The rules of Sec. 1.1441-1(e)(4) shall
apply to withholding certificates described in this paragraph
(c)(3)(iii). No withholding certificates or other appropriate
documentation from persons who derive income through a partnership
(whether or not U.S. exempt recipients) are required to be associated
with the nonwithholding foreign partnership withholding certificate if
the certificate is furnished solely for income claimed to be
effectively connected with the conduct of a trade or business in the
United States. Withholding certificates and other appropriate
documentation that may be associated with the nonwithholding foreign
partnership withholding certificate consist of beneficial owner
withholding certificates under Sec. 1.1441-1(e)(2)(i), intermediary
withholding certificates under Sec. 1.1441-1(e)(3)(i), withholding
foreign partnership withholding certificates under paragraph (c)(2)(iv)
of this section, nonwithholding foreign partnership withholding
certificates under this paragraph (c)(3)(iii), withholding certificates
from foreign trusts or estates under paragraph (e) of this section,
documentary evidence described in Sec. 1.1441-6(c)(3) or (4) or
documentary evidence described in Sec. 1.6049-5(c)(1), and any other
documentation or certificates applicable under other provisions of the
Internal Revenue Code or regulations that certify or establish the
status of the payee or beneficial owner as a U.S. or a foreign person.
Nothing in this paragraph (c)(3)(iii) shall require a nonwithholding
foreign partnership to furnish original documentation. Copies of
certificates or documentary evidence may be transmitted to the U.S.
withholding agent, in which case the nonwithholding foreign partnership
must retain the original documentation for the same time period that
the copy is required to be retained by the withholding agent under
Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding agent
upon request. The information, statement, and certifications required
on the withholding certificate are as follows--
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, if any, and the country under the laws of which the
partnership is created or governed;
(B) A certification that the person whose name is on the
certificate is a foreign partnership;
(C) A withholding statement associated with the nonwithholding
foreign partnership withholding certificate that provides all of the
information required by paragraph (c)(3)(iv) of this section and
Sec. 1.1441-1(e)(3)(iv). No withholding statement is required, however,
for a nonwithholding foreign partnership withholding certificate
furnished for income claimed to be effectively connected with the
conduct of a trade or business in the United States;
(D) A certification that the income is effectively connected with
the conduct of a trade or business in the United States, if applicable;
and
(E) Any other information, certifications, or statements required
by the form or accompanying instructions in addition to, or in lieu of,
the information and certifications described in this paragraph
(c)(3)(iii).
(iv) Withholding statement provided by nonwithholding foreign
partnership. The provisions of Sec. 1.1441-1(e)(3)(iv) (regarding a
withholding statement) shall apply to a nonwithholding foreign
partnership by substituting the term nonwithholding foreign partnership
for the term nonqualified intermediary.
[[Page 32192]]
(v) Withholding and reporting by a foreign partnership. A
nonwithholding foreign partnership described in this paragraph (c)(3)
that receives an amount subject to withholding (as defined in
Sec. 1.1441-2(a)) shall be required to withhold and report such payment
under chapter 3 of the Internal Revenue Code and the regulations
thereunder except as otherwise provided in this paragraph (c)(3)(v). A
nonwithholding foreign partnership shall not be required to withhold
and report if it has provided a valid nonwithholding foreign
partnership withholding certificate, it has provided all of the
information required by paragraph (c)(3)(iv) of this section
(withholding statement), and it does not know, and has no reason to
know, that another withholding agent failed to withhold the correct
amount or failed to report the payment correctly under Sec. 1.1461-
1(c). A withholding foreign partnership's obligations to withhold and
report shall be determined in accordance with its withholding foreign
partnership agreement.
(d) Presumption rules--(1) In general. This paragraph (d) contains
the applicable presumptions for a withholding agent (including a
partnership) to determine the classification and status of a
partnership and its partners in the absence of documentation. The
provisions of Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace
period) and Sec. 1.1441-1(b)(3)(vii) through (ix) shall apply for
purposes of this paragraph (d).
(2) Determination of partnership status as U.S. or foreign in the
absence of documentation. In the absence of a valid representation of
U.S. partnership status in accordance with paragraph (b)(1) of this
section or of foreign partnership status in accordance with paragraph
(c)(2)(i) or (3)(i) of this section, the withholding agent shall
determine the classification of the payee under the presumptions set
forth in Sec. 1.1441-1(b)(3)(ii). If the withholding agent treats the
payee as a partnership under Sec. 1.1441-1(b)(3)(ii), the withholding
agent shall presume the partnership to be a U.S. partnership unless
there are indicia of foreign status. If there are indicia of foreign
status, the withholding agent may presume the partnership to be
foreign. Indicia of foreign status exist only if the withholding agent
has actual knowledge of the payee's employer identification number and
that number begins with the two digits ``98,'' the withholding agent's
communications with the payee are mailed to an address in a foreign
country, or the payment is made outside the United States (as defined
in Sec. 1.6049-5(e)). For rules regarding reliable association with a
withholding certificate from a domestic or a foreign partnership, see
Sec. 1.1441-1(b)(2)(vii).
(3) Determination of partners' status in the absence of certain
documentation. If a nonwithholding foreign partnership has provided a
nonwithholding foreign partnership withholding certificate under
paragraph (c)(3)(iii) of this section that would be valid except that
the withholding agent cannot reliably associate all or a portion of the
payment with valid documentation from a partner of the partnership,
then the withholding agent may apply the presumption rule of this
paragraph (d)(3) with respect to all or a portion of the payment for
which documentation has not been received. See Sec. 1.1441-
1(b)(2)(vii)(A) and (B) for rules regarding reliable association. The
presumption rule of this paragraph (d)(3) also applies to a person that
is presumed to be a foreign partnership under the rule of paragraph
(d)(2) of this section. Any portion of a payment that the withholding
agent cannot treat as reliably associated with valid documentation from
a partner may be presumed made to a foreign payee. As a result, any
payment of an amount subject to withholding is subject to withholding
at a rate of 30 percent. Any payment that is presumed to be made to an
undocumented foreign payee must be reported on Form 1042-S. See
Sec. 1.1461-1(c).
(4) Determination by a withholding foreign partnership of the
status of its partners. A withholding foreign partnership shall
determine whether the partners or some other persons are the payees of
the partners' distributive shares of any payment made by a withholding
foreign partnership by applying the rules of Sec. 1.1441-1(b)(2),
paragraph (c)(1) of this section (in the case of a partner that is a
foreign partnership), and paragraph (e)(3) of this section (in the case
of a partner that is a foreign estate or a foreign trust). Further, the
provisions of paragraph (d)(3) of this section shall apply to determine
the status of partners and the applicable withholding rates to the
extent that, at the time the foreign partnership is required to
withhold on a payment, it cannot reliably associate the amount with
documentation for any one or more of its partners.
(e) Foreign trusts and estates--(1) In general. This paragraph (e)
provides rules applicable to payments of amounts subject to withholding
(as defined in Sec. 1.1441-2(a)) that a withholding agent may treat as
made to any foreign trust or a foreign estate. For rules relating to
payments to a U.S. trust or a U.S. estate, see paragraph (b) of this
section. For the definitions of foreign simple trust, foreign complex
trust, and foreign grantor trust, see Sec. 1.1441-1(c)(24), (25), and
(26).
(2) Payments to foreign complex trusts and foreign estates. Under
Sec. 1.1441-1(c)(6)(ii)(D), a foreign complex trust or foreign estate
is generally considered to be the beneficial owner of income paid to
the foreign complex trust or foreign estate. See paragraph (e)(4) of
this section for rules describing when a withholding agent may treat a
payment as made to a foreign complex trust or a foreign estate.
(3) Payees of payments to foreign simple trusts and foreign grantor
trusts--(i) Payments for which beneficiaries and owners are payees. For
purposes of the regulations under chapters 3 and 61 of the Internal
Revenue Code and section 3406, a foreign simple trust is not a
beneficial owner or a payee of a payment. Also, a foreign grantor trust
(or a portion of a trust that is a foreign grantor trust) is not
considered a beneficial owner or a payee of a payment. Except as
otherwise provided in paragraph (e)(3)(ii) of this section, the payees
of a payment made to a person that the withholding agent may treat as a
foreign simple trust or a foreign grantor trust (or a portion of a
trust that is a foreign grantor trust) are determined under the rules
of this paragraph (e)(3)(i). The payees shall be treated as the
beneficial owners if they may be so treated under Sec. 1.1441-
1(c)(6)(ii)(C) and they provide documentation supporting their status
as the beneficial owners. The payees of a payment to a foreign simple
trust or foreign grantor trust are determined as follows--
(A) If the withholding agent can reliably associate a payment with
a valid Form W-9 provided under Sec. 1.1441-1(d) from a beneficiary or
owner of the foreign trust, then the beneficiary or owner is a U.S.
payee;
(B) If the withholding agent can reliably associate a payment with
a valid Form W-8, or other appropriate documentation, provided under
Sec. 1.1441-1(e)(1)(ii) from a beneficiary or owner of the foreign
trust, then the beneficiary or owner is a payee that is a foreign
beneficial owner;
(C) If the withholding agent can reliably associate a payment with
a qualified intermediary withholding certificate under Sec. 1.1441-
1(e)(3)(ii), a nonqualified intermediary withholding certificate under
Sec. 1.1441-1(e)(3)(ii), or a U.S. branch withholding certificate under
Sec. 1.1441-1(e)(3)(v), then the rules of Sec. 1.1441-1(b)(2)(v) shall
apply to determine the payee in the same manner
[[Page 32193]]
as if the payment had been paid directly to such intermediary or U.S.
branch;
(D) If the withholding agent can reliably associate a payment with
a withholding foreign partnership withholding certificate under
paragraph (c)(2)(iv) of this section or a nonwithholding foreign
partnership withholding certificate under paragraph (c)(3)(iii) of this
section, then the rules of paragraph (c)(1)(i) or (ii) of this section
shall apply to determine the payee;
(E) If the withholding agent can reliably associate the payment
with a foreign simple trust withholding certificate or a foreign
grantor trust withholding certificate (both described in paragraph
(e)(5)(iii) of this section) from a second or higher-tier foreign
simple trust or foreign grantor trust, then the rules of this paragraph
(e)(3)(i) or paragraph (e)(3)(ii) of this section shall apply to
determine whether the payment is treated as made to a beneficiary or
owner of the higher-tier trust or to the trust itself in the same
manner as if the payment had been made directly to the higher-tier
trust; and
(F) If the withholding agent cannot reliably associate a payment
with a withholding certificate or other appropriate documentation, the
payees shall be determined by applying the presumptions described in
paragraph (e)(6) of this section.
(ii) Payments for which trust is payee. A payment to a person that
the withholding agent may treat as made to a foreign trust under
paragraph (e)(5)(iii) of this section is treated as a payment to the
trust, and not to a beneficiary of the trust, only if--
(A) The withholding agent can reliably associate the payment with a
foreign complex trust withholding certificate under paragraph (e)(4) of
this section;
(B) The withholding agent can reliably associate the payment with a
foreign simple trust withholding certificate under paragraph
(e)(5)(iii) of this section certifying that the payment is income that
is treated as effectively connected with the conduct of a trade or
business in the United States; or
(C) The withholding agent can treat the income as effectively
connected income under the presumption rules of Sec. 1.1441-4(a)(3)(i).
(4) Reliance on claim of foreign complex trust or foreign estate
status. A withholding agent may treat a payment as made to a foreign
complex trust or a foreign estate if the withholding agent can reliably
associate the payment with a beneficial owner withholding certificate
described in Sec. 1.1441-1(e)(2)(i) or other documentary evidence under
Sec. 1.1441-6(c)(3) or (4) (regarding a claim for treaty benefits) or
Sec. 1.6049-5(c)(1) (regarding documentary evidence to establish
foreign status for purposes of chapter 61 of the Internal Revenue Code)
that establishes the foreign complex trust or foreign estate's status
as a beneficial owner. See paragraph (e)(6) of this section for
presumption rules if documentation is lacking.
(5) Foreign simple trust and foreign grantor trust--(i) Reliance on
claim of foreign simple trust or foreign grantor trust status. A
withholding agent may treat a person as a foreign simple trust or
foreign grantor trust if it receives from that person a foreign simple
trust or foreign grantor trust withholding certificate as described in
paragraph (e)(5)(iii) of this section. A withholding agent must apply
the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-5(d) and
paragraphs (d) and (e)(6) of this section to the extent it cannot,
prior to the payment, reliably associate a payment (within the meaning
of Sec. 1.1441-1(b)(2)(vii)) with a valid foreign simple trust or
foreign grantor trust withholding certificate, it cannot reliably
determine how much of the payment relates to valid documentation
provided by a payee (e.g., a person that is not itself a nonqualified
intermediary, flow-through entity, or U.S. branch) associated with the
foreign simple trust or foreign grantor trust withholding certificate,
or it does not have sufficient information to report the payment on
Form 1042-S or Form 1099, if reporting is required. See Sec. 1.1441-
1(b)(2)(vii)(A) and (B).
(ii) Reliance on claim of reduced withholding by a foreign simple
trust or foreign grantor trust for its beneficiaries or owners. This
paragraph (e)(5)(ii) describes the manner in which a withholding agent
may rely on a claim of reduced withholding when making a payment to a
foreign simple trust or foreign grantor trust. To the extent that a
withholding agent treats a payment to a foreign simple trust or foreign
grantor trust as a payment to payees other than the trust in accordance
with paragraph (e)(3)(i) of this section, it may rely on a claim for
reduced withholding by a beneficiary or owner if, prior to the payment,
the withholding agent can reliably associate the payment (within the
meaning of Sec. 1.1441-1(b)(2)(vii)) with a valid withholding
certificate or other appropriate documentation from a payee or
beneficial owner that establishes entitlement to a reduced rate of
withholding. A withholding certificate or other appropriate
documentation that establishes entitlement to a reduced rate of
withholding is a beneficial owner withholding certificate described in
Sec. 1.1441-1(e)(2)(i) or documentary evidence described in
Sec. 1.1441-6(c)(3) or(4) or in Sec. 1.6049-5(c)(1) (for a beneficiary
or owner claiming to be a foreign person and a beneficial owner,
determined under the provisions of Sec. 1.1441-1(c)(6)), a Form W-9
described in Sec. 1.1441-1(d) (for a beneficiary or owner claiming to
be a U.S. payee), or a withholding foreign partnership withholding
certificate described in paragraph (c)(2)(iv) of this section. Unless a
foreign simple trust or foreign grantor trust withholding certificate
is provided for income treated as income effectively connected with the
conduct of a trade or business in the United States, a claim must be
presented for each payee's portion of the payment. When making a claim
for several payees, the trust may present a single foreign simple trust
or foreign grantor trust withholding certificate with which the payees'
certificates or other appropriate documentation are associated. Where
the foreign simple trust or foreign grantor trust withholding
certificate is provided for income that is treated as effectively
connected with the conduct of a trade or business in the United States
under paragraph (e)(5)(iii)(D) of this section, the claim may be
presented without having to identify any partner's distributive share
of the payment.
(iii) Withholding certificate from foreign simple trust or foreign
grantor trust. A withholding certificate furnished by a foreign simple
trust or a foreign grantor trust that is not a withholding foreign
trust (within the meaning of paragraph (e)(5)(v) of this section) is
valid only if it is furnished on a Form W-8, an acceptable substitute
form, or such other form as the IRS may prescribe, it is signed under
penalties of perjury by a trustee, its validity has not expired, it
contains the information, statements, and certifications required by
this paragraph (e)(5)(iii) and Sec. 1.1441-1(e)(3)(iv), and the
withholding certificates or other appropriate documentation for all of
the payees (as determined under paragraph (e)(3)(i) of this section) to
whom the certificate relates are associated with the foreign simple
trust or foreign grantor trust withholding certificate. The rules of
Sec. 1.1441-1(e)(4) shall apply to withholding certificates described
in this paragraph (e)(5)(iii). No withholding certificates or other
appropriate documentation from persons who derive income through a
foreign simple trust or a foreign grantor trust (whether or not U.S.
exempt
[[Page 32194]]
recipients) are required to be associated with the foreign simple trust
or foreign grantor trust withholding certificate if the certificate is
furnished solely for income that is treated as effectively connected
with the conduct of a trade or business in the United States.
Withholding certificates and other appropriate documentation (as
determined under paragraph (e)(3)(i) of this section) that may be
associated with a foreign simple trust or foreign grantor trust
withholding certificate consist of beneficial owner withholding
certificates under Sec. 1.1441-1(e)(2)(i), intermediary withholding
certificates under Sec. 1.1441-1(e)(3)(i), withholding foreign
partnership withholding certificates under paragraph (c)(2)(iv) of this
section, nonwithholding foreign partnership withholding certificates
under paragraph (c)(3)(iii) of this section, withholding certificates
from foreign trusts or estates under paragraph (e)(4) or (5)(iii) of
this section, documentary evidence described in Secs. 1.1441-6(c)(3) or
(4), or 1.6049-5(c)(1), and any other documentation or certificates
applicable under other provisions of the Internal Revenue Code or
regulations that certify or establish the status of the payee or
beneficial owner as a U.S. or a foreign person. Nothing in this
paragraph (e)(5)(iii) shall require a foreign simple trust or foreign
grantor trust to provide original documentation. Copies of certificates
or documentary evidence may be passed up to the U.S. withholding agent,
in which case the foreign simple trust or foreign grantor trust must
retain the original documentation for the same time period that the
copy is required to be retained by the withholding agent under
Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding agent
upon request. The information, statement, and certifications required
on a foreign simple trust or foreign grantor trust withholding
certificate are as follows--
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number, if
required, of the trust and the country under the laws of which the
trust is created;
(B) A certification that the person whose name is on the
certificate is a foreign simple trust or a foreign grantor trust;
(C) A withholding statement associated with the foreign simple
trust or foreign grantor trust withholding certificate that provides
all of the information required by paragraph (e)(5)(iv) of this
section. No withholding statement is required, however, for a foreign
simple trust withholding certificate furnished for income that is
treated as effectively connected with the conduct of a trade or
business in the United States;
(D) A certification on a foreign simple trust withholding
certificate that the income is treated as effectively connected with
the conduct of a trade or business in the United States, if applicable;
and
(E) Any other information, certifications, or statements required
by the form or accompanying instructions in addition to, or in lieu of,
the information, certifications, and statements described in this
paragraph (e)(5)(iii);
(iv) Withholding statement provided by a foreign simple trust or
foreign grantor trust. The provisions of Sec. 1.1441-1(e)(3)(iv)
(regarding a withholding statement) shall apply to a foreign simple
trust or foreign grantor trust by substituting the term foreign simple
trust or foreign grantor trust for the term nonqualified intermediary.
(v) Withholding foreign trusts. The IRS may enter an agreement with
a foreign trust to treat the trust or estate as a withholding foreign
trust. Such an agreement shall generally follow the same principles as
an agreement with a withholding foreign partnership under paragraph
(c)(2)(ii) of this section. A withholding agent may treat a payment to
a withholding foreign trust in the same manner the withholding agent
would treat a payment to a withholding foreign partnership. The IRS may
also enter an agreement to treat a trust as a qualified intermediary in
appropriate circumstances. See Sec. 1.1441-1(e)(5)(ii)(D).
(6) Presumption rules--(i) In general. This paragraph (e)(6)
contains the applicable presumptions for a withholding agent (including
a trust or estate) to determine the classification and status of a
trust or estate and its beneficiaries or owners in the absence of valid
documentation. The provisions of Sec. 1.1441-1(b)(3)(iv) (regarding the
90-day grace period) and Sec. 1.1441-1(b)(3)(vii) through (ix) shall
apply for purposes of this paragraph (e)(6).
(ii) Determination of status as U.S. or foreign trust or estate in
the absence of documentation. In the absence of valid documentation
that establishes the U.S. status of a trust or estate under paragraph
(b)(1) of this section and of documentation that establishes the
foreign status of a trust or estate under paragraph (e)(4) or (5)(iii)
of this section, the withholding agent shall determine the
classification of the payee based upon the presumptions set forth in
Sec. 1.1441-1(b)(3)(ii). If, based upon those presumptions, the
withholding agent classifies the payee as a trust or estate, the trust
or estate shall be presumed to be a U.S. trust or U.S. estate unless
there are indicia of foreign status, in which case the trust or estate
shall be presumed to be foreign. Indicia of foreign status exists if
the withholding agent has actual knowledge of the payee's employer
identification number and that number begins with the two digits
``98,'' the withholding agent's communications with the payee are
mailed to an address in a foreign country, or the payment is made
outside the United States (as defined in Sec. 1.6049-5(e)). If an
undocumented payee is presumed to be a foreign trust it shall be
presumed to be a foreign complex trust. If a withholding agent has
documentary evidence that establishes that an entity is a foreign
trust, but the withholding agent cannot determine whether the foreign
trust is a complex trust, a simple trust, or foreign grantor trust, the
withholding agent may presume that the trust is a foreign complex
trust.
(iii) Determination of beneficiary or owner's status in the absence
of certain documentation. If a foreign simple trust or foreign grantor
trust has provided a foreign simple trust or foreign grantor trust
withholding certificate under paragraph (e)(5)(iii) of this section but
the payment to such trust cannot be reliably associated with valid
documentation from a specific beneficiary or owner of the trust, then
any portion of a payment that a withholding agent cannot treat as
reliably associated with valid documentation from a beneficiary or
owner may be presumed made to a foreign payee. As a result, any payment
of an amount subject to withholding is subject to withholding at a rate
of 30 percent. Any such payment that is presumed to be made to an
undocumented foreign person must be reported on Form 1042-S. See
Sec. 1.1461-1(c).
* * * * *
Par. 8. Effective January 1, 2001, Sec. 1.1441-6 is amended by:
1. Revising paragraphs (b)(1), (b)(2), and (b)(3).
2. Removing paragraph (b)(4) and redesignating paragraph (b)(5) as
new paragraph (b)(4).
3. Revising paragraphs (c) and (e).
The revisions read as follows:
Sec. 1.1441-6 Claim of reduced withholding under an income tax treaty.
* * * * *
(b) Reliance on claim of reduced withholding under an income tax
treaty--(1) In general. The withholding imposed under section 1441,
1442, or
[[Page 32195]]
1443 on any payment to a foreign person is eligible for reduction under
the terms of an income tax treaty only to the extent that such payment
is treated as derived by a resident of an applicable treaty
jurisdiction, such resident is a beneficial owner, and all other
requirements for benefits under the treaty are satisfied. See section
894 and the regulations thereunder to determine whether a resident of a
treaty country derives the income. Absent actual knowledge or reason to
know otherwise, a withholding agent may rely on a claim that a
beneficial owner is entitled to a reduced rate of withholding based
upon an income tax treaty if, prior to the payment, the withholding
agent can reliably associate the payment with a beneficial owner
withholding certificate, described in Sec. 1.1441-1(e)(2), that
contains the information necessary to support the claim, or, in the
case of a payment of income described in paragraph (c)(2) of this
section made outside the United States with respect to an offshore
account, documentary evidence described in paragraphs (c)(3), (4) and
(5) of this section. See Secs. 1.6049-5(e) for the definition of
payments made outside the United States and 1.6049-5(c)(1) for the
definition of offshore account. For purposes of this paragraph (b)(1),
a beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) contains information necessary to support the claim for a
treaty benefit only if it includes the beneficial owner's taxpayer
identifying number (except as otherwise provided in paragraph (c)(1) of
this section) and the representations that the beneficial owner derives
the income under section 894 and the regulations thereunder, if
required, and meets the limitation on benefits provisions of the
treaty, if any. The withholding certificate must also contain any other
representations required by this section and any other information,
certifications, or statements as may be required by the form or
accompanying instructions in addition to, or in place of, the
information and certifications described in this section. Absent actual
knowledge or reason to know that the claims are incorrect (and subject
to the standards of knowledge in Sec. 1.1441-7(b)), a withholding agent
may rely on the claims made on a withholding certificate or on
documentary evidence. A withholding agent may also rely on the
information contained in a withholding statement provided under
Secs. 1.1441-1(e)(3)(iv) and 1.1441-5(c)(3)(iv) and (e)(5)(iv) to
determine whether the appropriate statements regarding section 894 and
limitation on benefits have been provided in connection with
documentary evidence. If the beneficial owner is a person related to
the withholding agent within the meaning of section 482, the
withholding certificate must also contain a representation that the
beneficial owner will file the statement required under Sec. 301.6114-
1(d) of this chapter (if applicable). The requirement to file an
information statement under section 6114 for income subject to
withholding applies only to amounts received during the calendar year
that, in the aggregate, exceed $500,000. See Sec. 301.6114-1(d) of this
chapter. The Internal Revenue Service (IRS) may apply the provisions of
Sec. 1.1441-1(e)(1)(ii)(B) to notify the withholding agent that the
certificate cannot be relied upon to grant benefits under an income tax
treaty. See Sec. 1.1441-1(e)(4)(viii) regarding reliance on a
withholding certificate by a withholding agent. The provisions of
Sec. 1.1441-1(b)(3)(iv) dealing with a 90-day grace period shall apply
for purposes of this section.
(2) Payment to fiscally transparent entity--(i) In general. If the
person claiming a reduced rate of withholding under an income tax
treaty is the interest holder of an entity that is considered to be
fiscally transparent (as defined in the regulations under section 894)
by the interest holder's jurisdiction with respect to an item of
income, then, with respect to such income derived by that person
through the entity, the entity shall be treated as a flow-through
entity and may provide a flow-through withholding certificate with
which the withholding certificate or other documentary evidence of the
interest holder that supports the claim for treaty benefits is
associated. For purposes of the preceding sentence, interest holders do
not include any direct or indirect interest holders that are themselves
treated as fiscally transparent entities with respect to that income by
the interest holder's jurisdiction. See Sec. 1.1441-1(c)(23) and
(e)(3)(i) for the definition of flow-through entity and flow-through
withholding certificate. The entity may provide a beneficial owner
withholding certificate, or beneficial owner documentation, with
respect to any remaining portion of the income to the extent the entity
is receiving income and is not treated as fiscally transparent by its
own jurisdiction. Further, the entity may claim a reduced rate of
withholding with respect to the portion of a payment for which it is
not treated as fiscally transparent if it meets all the requirements to
make such a claim and, in the case of treaty benefits, it provides the
documentation required by paragraph (b)(1) of this section. If dual
claims, as described in paragraph (b)(2)(iii) of this section, are
made, multiple withholding certificates may have to be furnished.
Multiple withholding certificates may also have to be furnished if the
entity receives income for which a reduction of withholding is claimed
under a provision of the Internal Revenue Code (e.g., portfolio
interest) and income for which a reduction of withholding is claimed
under an income tax treaty.
(ii) Certification by qualified intermediary. Notwithstanding
paragraph (b)(2)(i) of this section, a foreign entity that is fiscally
transparent, as defined in the regulations under section 894, that is
also a qualified intermediary for purposes of claiming a reduced rate
of withholding under an income tax treaty for its interest holders (who
are deriving the income paid to the entity as residents of an
applicable treaty jurisdiction) may furnish a single qualified
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(ii), for amounts for which it claims a reduced rate of
withholding under an income tax treaty on behalf of its interest
holders.
(iii) Dual treatment. Under paragraph (b)(2)(i) of this section, a
withholding agent may make a payment to a foreign entity that is
simultaneously claiming to be the beneficial owner of a portion of the
income (whether or not it is also claiming a reduced rate of tax on its
own behalf) and a reduced rate on behalf of persons in their capacity
as interest holders in the entity with respect to the same, or a
different, portion of the income. If the same portion of a payment may
be reliably associated with both the entity's claim and an interest
holder's claim, the withholding agent may choose to reject both claims
and request new documentation and information allocating the payment
among the beneficial owners of the payment or the withholding agent may
choose which claim to apply. If the entity and the interest holder's
claims are reliably associated with separate portions of the payment,
the withholding agent may, at its option, accept such dual claims based
on withholding certificates or other appropriate documentation
furnished by the entity and its interest holders with respect to their
respective shares of the payment even though this will result in the
withholding agent treating the entity differently with respect to
different portions of the same payment. Alternatively, the withholding
agent may choose to apply only the
[[Page 32196]]
claim made by the entity, provided the entity may be treated as a
beneficial owner of the income. If the withholding agent does not
accept claims for a reduced rate of withholding presented by any one or
more of the interest holders, or by the entity, any interest holder or
the entity may subsequently claim a refund or credit of any amount so
withheld to the extent the interest holder's or entity's share of such
withholding exceeds the amount of tax due.
(iv) Examples. The following examples illustrate the rules of this
paragraph (b)(2):
Example 1. (i) Facts. Entity E is a business organization formed
under the laws of country Y. Country Y has an income tax treaty with
the United States. The treaty contains a limitation on benefits
provision. E receives U.S. source royalties from withholding agent W
and claims a reduced rate of withholding under the U.S.-Y tax treaty
on its own behalf (rather than on behalf of its interest holders). E
furnishes a beneficial owner withholding certificate described in
paragraph (b)(1) of this section that represents that E is a
resident of country Y (within the meaning of the U.S.-Y tax treaty),
is the beneficial owner of the income, derives the income under
section 894 and the regulations thereunder, and is not precluded
from claiming benefits by the treaty's limitation on benefits
provision.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, W may rely on the representations made by E to apply a
reduced rate of withholding.
Example 2. (i) Facts. The facts are the same as under Example 1,
except that one of E's interest holders, H, is an entity organized
in country Z. The U.S.-Z tax treaty reduces the rate on royalties to
zero whereas the rate on royalties under the U.S.-Y tax treaty
applicable to E is 5 percent. H is not fiscally transparent under
country Z's tax law with respect to such income. H furnishes a
beneficial owner withholding certificate to E that represents that H
derives, within the meaning of section 894 and the regulations
thereunder, its share of the royalty income paid to E as a resident
of country Z, is the beneficial owner of the royalty income, and is
not precluded from claiming treaty benefits by virtue of the
limitation on benefits provision in the U.S.-Z treaty. E furnishes
to W a flow-through withholding certificate described in
Sec. 1.1441-1(e)(3)(i) to which it attaches H's beneficial owner
withholding certificate and a withholding statement for the portion
of the payment that H claims as its distributive share of the
royalty income. E also furnishes to W a beneficial owner withholding
certificate for itself for the portion of the payment that H does
not claim as its distributive share.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, W may rely on the documentation furnished by E to treat
the royalty payment to a single foreign entity (E) as derived by
different residents of tax treaty countries as a result of the
claims presented under different treaties. W may, at its option,
grant dual treatment, that is, a reduced rate of zero percent under
the U.S.-Z treaty on the portion of the royalty payment that H
claims to derive as a resident of country Z and a reduced rate of 5
percent under the U.S.-Y treaty for the balance. However, under
paragraph (b)(2)(iii) of this section, W may, at its option, treat E
as the only relevant person deriving the royalty and grant benefits
under the U.S.-Y treaty only.
Example 3. (i) Facts. E is a business organization formed under
the laws of country X. Country X has an income tax treaty with the
United States. E has two interest holders, H1, organized in country
Y, and H2, organized in country Z. E receives from W, a U.S.
withholding agent, U.S. source royalties and interest that is
eligible for the portfolio interest exception under sections 871(h)
and 881(c), provided W receives the appropriate beneficial owner
statement required under section 871(h)(5). E is classified as a
corporation under U.S. tax law principles. Country X, E's country of
organization, treats E as an entity that is not fiscally transparent
with respect to items of income under the regulations under section
894. Under the U.S.-X income tax treaty, royalties are subject to 5
percent rate of withholding. Country Y, H1's country of
organization, treats E as fiscally transparent with respect to items
of income under section 894 and H1 as not fiscally transparent with
respect to items of income. Under the country Y-U.S. income tax
treaty, royalties are exempt from U.S. tax. Country Z, H2's country
of organization, treats E as not fiscally transparent under section
894 with respect to items of income. E provides W with a flow-
through beneficial owner withholding certificate with which it
associates a beneficial owner withholding certificate from H1. H1's
withholding certificate states that H1 is a resident of country Y,
derives the royalty income under section 894, meets the applicable
limitations on benefits provisions of the U.S.-Y treaty, and is the
beneficial owner of the income. The withholding statement attached
to E's flow-through withholding certificate allocates one-half of
the royalty payment to H1. E also provides W with a beneficial owner
withholding certificate for the interest income and the remaining
one-half of the royalty income. The withholding certificate states
that E is a resident of country X, derives the royalty income under
section 894, meets the limitation on benefits provisions of the
U.S.-X treaty, and is the beneficial owner of the income.
(ii) Analysis. Absent actual knowledge or reason to know that
the claims are incorrect, W may treat one-half of the royalty
derived by E as subject to a 5 percent withholding rate and one-half
of the royalty as derived by H1 and subject to no withholding.
Further, it may treat all of the interest as being paid to E and as
qualifying for the portfolio interest exception. W can, at its
option, treat the entire royalty as paid to E and subject it to
withholding at a 5 percent rate of withholding. In that case, H1
would be entitled to claim a refund with respect to its one-half of
the royalty.
(3) Certified TIN. The IRS may issue guidance requiring a foreign
person claiming treaty benefits and for whom a TIN is required to
establish with the IRS, at the time the TIN is requested or after the
TIN is issued, that the person is a resident in a treaty country and
meets other conditions (such as limitation on benefits provisions) of
the treaty. See Sec. 601.601(d)(2) of this chapter.
* * * * *
(c) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income--(1)
General rule. In the case of income described in paragraph (c)(2) of
this section, a withholding agent may rely on a beneficial owner
withholding certificate described in paragraph (b)(1) of this section
without regard to the requirement that the withholding certificate
include the beneficial owner's taxpayer identifying number. In the case
of payments of income described in paragraph (c)(2) of this section
made outside the United States (as defined in Sec. 1.6049-5(e)) with
respect to an offshore account (as defined in Sec. 1.6049-5(c)(1)), a
withholding agent may, as an alternative to a withholding certificate
described in paragraph (b)(1) of this section, rely on a certificate of
residence described in paragraph (c)(3) of this section or documentary
evidence described in paragraph (c)(4) of this section, relating to the
beneficial owner, that the withholding agent has reviewed and maintains
in its records in accordance with Sec. 1.1441-1(e)(4)(iii). In the case
of a payment to a person other than an individual, the certificate of
residence or documentary evidence must be accompanied by the statements
described in paragraphs (c)(5)(i) and (ii) of this section regarding
limitation on benefits and whether the amount paid is derived by such
person or by one of its interest holders. The withholding agent
maintains the reviewed documents by retaining either the documents
viewed or a photocopy thereof and noting in its records the date on
which, and by whom, the documents were received and reviewed. This
paragraph (c)(1) shall not apply to amounts that are exempt from
withholding based on a claim that the income is effectively connected
with the conduct of a trade or business in the United States.
(2) Income to which special rules apply. The income to which
paragraph (c)(1) of this section applies is dividends and interest from
stocks and debt obligations that are actively traded, dividends from
any redeemable security issued by an investment company registered
under the Investment Company Act of 1940 (15 U.S.C. 80a-1),
[[Page 32197]]
dividends, interest, or royalties from units of beneficial interest in
a unit investment trust that are (or were upon issuance) publicly
offered and are registered with the Securities and Exchange Commission
under the Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with
respect to loans of securities described in this paragraph (c)(2). For
purposes of this paragraph (c)(2), a stock or debt obligation is
actively traded if it is actively traded within the meaning of section
1092(d) and Sec. 1.1092(d)-1 when documentation is provided.
(3) Certificate of residence. A certificate of residence referred
to in paragraph (c)(1) of this section is a certification issued by an
appropriate tax official of the treaty country of which the taxpayer
claims to be a resident that the taxpayer has filed its most recent
income tax return as a resident of that country (within the meaning of
the applicable tax treaty). The certificate of residence must have been
issued by such official within three years prior to its being presented
to the withholding agent, or such other period as the IRS may prescribe
in published guidance (see Sec. 601.601(d)(2) of this chapter). See
Sec. 1.1441-1(e)(4)(ii)(A) for the period during which a withholding
agent may rely on a certificate of residence. The competent authorities
may agree to a different procedure for certifying residence, in which
case such procedure shall govern for payments made to a person claiming
to be a resident of the country with which such an agreement is in
effect.
(4) Documentary evidence establishing residence in the treaty
country--(i) Individuals. For an individual, the documentary evidence
referred to in paragraph (c)(1) of this section is any documentation
that includes the individuals name, address, and photograph, is an
official document issued by an authorized governmental body (i.e., a
government or agency thereof, or a municipality), and has been issued
no more than three years prior to presentation to the withholding
agent. A document older than three years may be relied upon as proof of
residence only if it is accompanied by additional evidence of the
person's residence in the treaty country (e.g., a bank statement,
utility bills, or medical bills). Documentary evidence must be in the
form of original documents or certified copies thereof.
(ii) Persons other than individuals. For a person other than an
individual, the documentary evidence referred to in paragraph (c)(1) of
this section is any documentation that includes the name of the entity
and the address of its principal office in the treaty country, and is
an official document issued by an authorized governmental body (e.g., a
government or agency thereof, or a municipality).
(5) Statements regarding entitlement to treaty benefits--(i)
Statement regarding conditions under a limitation on benefits
provision. In addition to the documentary evidence described in
(c)(4)(ii) of this section, a taxpayer that is not an individual must
provide a statement that it meets one or more of the conditions set
forth in the limitation on benefits article (if any, or in a similar
provision) contained in the applicable tax treaty.
(ii) Statement regarding whether the taxpayer derives the income. A
taxpayer that is not an individual must also provide, in addition to
the documentary evidence and the statement described in paragraph
(c)(5)(i) of this section, a statement that any income for which it
intends to claim benefits under an applicable income tax treaty is
income that will properly be treated as derived by itself as a resident
of the applicable treaty jurisdiction within the meaning of section 894
and the regulations thereunder. This requirement does not apply if the
taxpayer furnishes a certificate of residence that certifies that fact.
* * * * *
(e) Competent authority. The procedures described in this section
may be modified to the extent the U.S. competent authority may agree
with the competent authority of a country with which the United States
has an income tax treaty in effect.
* * * * *
Par. 9. Effective January 1, 2001, Sec. 1.1441-7 is amended by:
1. Revising paragraphs (a), (b)(2) and (b)(3).
2. Adding paragraphs (b)(4) through (b)(11).
The revisions and additions read as follows:
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined--(1) In general. For purposes of
chapter 3 of the Internal Revenue Code and the regulations under such
chapter, the term withholding agent means any person, U.S. or foreign,
that has the control, receipt, custody, disposal, or payment of an item
of income of a foreign person subject to withholding, including (but
not limited to) a foreign intermediary described in Sec. 1.1441-
1(e)(3)(i), a foreign partnership, or a U.S. branch described in
Sec. 1.1441-1(b)(2)(iv)(A) or (E). See Secs. 1.1441-1(b)(2) and (3) and
1.1441-5(c), (d), and (e), for rules to determine whether a payment is
considered made to a foreign person. Any person who meets the
definition of a withholding agent is required to deposit any tax
withheld under Sec. 1.1461-1(a) and to make the returns prescribed by
Sec. 1.1461-1(b) and (c), except as otherwise may be required by a
qualified intermediary withholding agreement, a withholding foreign
partnership agreement, or a withholding foreign trust agreement. When
several persons qualify as withholding agents with respect to a single
payment, only one tax is required to be withheld and deposited. See
Sec. 1.1461-1. A person who, as a nominee described in Sec. 1.6031(c)-
1T, has furnished to a partnership all of the information required to
be furnished under Sec. 1.6031(c)-1T(a) shall not be treated as a
withholding agent if it has notified the partnership that it is
treating the provision of information to the partnership as a discharge
of its obligations as a withholding agent.
(2) Examples. The following examples illustrate the rules of
paragraph (a)(1) of this section:
Example 1. USB is a broker organized in the United States. USB
pays U.S. source dividends and interest, which are amounts subject
to withholding under Sec. 1.1441-2(a), to FC, a foreign corporation
that has an investment account with USB. USB is a withholding agent
as defined in paragraph (a)(1) of this section.
Example 2. USB is a bank organized in the United States. FB is
a bank organized in country X. X has an omnibus account with USB
through which FB invests in debt and equity instruments that pay
amounts subject to withholding as defined in Sec. 1.1441-2(a). FB is
a nonqualified intermediary, as defined in Sec. 1.1441-1(c)(14).
Both USB and FB are withholding agents as defined in paragraph
(a)(1) of this section.
Example 3. The facts are the same as in Example 2, except that
FB is a qualified intermediary. Both USB and FB are withholding
agents as defined in paragraph (a)(1) of this section.
Example 4. FB is a bank organized in country X. FB has a branch
in the United States. FB's branch has customers that are foreign
persons who receive amounts subject to withholding, as defined in
Sec. 1.1441-2(a). FB is a withholding agent under paragraph (a)(1)
of this section and is required to withhold and report payments of
amounts subject to withholding in accordance with chapter 3 of the
Internal Revenue Code.
Example 5. X is a foreign corporation. X pays dividends to
shareholders who are foreign persons. Under section 861(a)(2)(B), a
portion of the dividends are from sources within the United States
and constitute amounts subject to withholding within the meaning of
Sec. 1.1441-2(a). The dividends are not subject to tax under section
884(a). See 884(e)(3). X is a withholding agent under paragraph
(a)(1) of this section.
[[Page 32198]]
(b) * * *
(2) Reason to know. A withholding agent shall be considered to have
reason to know if its knowledge of relevant facts or of statements
contained in the withholding certificates or other documentation is
such that a reasonably prudent person in the position of the
withholding agent would question the claims made.
(3) Financial institutions--limits on reason to know. For purposes
of this paragraph (b)(3) and paragraphs (b)(4) through (b)(10) of this
section, the terms withholding certificate, documentary evidence, and
documentation are defined in Sec. 1.1441-1(c)(16), (17) and (18).
Except as otherwise provided in paragraphs (b)(4) through (b)(9) of
this section, a withholding agent that is a financial institution
(including a regulated investment company) that has a direct account
relationship with a beneficial owner (a direct account holder) has a
reason to know, with respect to amounts described in Sec. 1.1441-
6(c)(2), that documentation provided by the direct account holder is
unreliable or incorrect only if one or more of the circumstances
described in paragraphs (b)(4) through (b)(9) of this section exist. If
a direct account holder has provided documentation that is unreliable
or incorrect under the rules of paragraph (b)(4) through (b)(9) of this
section, the withholding agent may require new documentation.
Alternatively, the withholding agent may rely on the documentation
originally provided if the rules of paragraphs (b)(4) through (b)(9) of
this section permit such reliance based on additional statements and
documentation. Paragraph (b)(10) of this section provides limits on
reason to know for financial institutions that receive beneficial owner
documentation from persons (indirect account holders) that have an
account relationship with, or an ownership interest in, a direct
account holder. For rules regarding reliance on Form W-9, see
Sec. 31.3406(g)-3(e)(2) of this chapter.
(4) Rules applicable to withholding certificates--(i) In general. A
withholding agent has reason to know that a beneficial owner
withholding certificate provided by a direct account holder in
connection with a payment of an amount described in Sec. 1.1441-6(c)(2)
is unreliable or incorrect if the withholding certificate is incomplete
with respect to any item on the certificate that is relevant to the
claims made by the direct account holder, the withholding certificate
contains any information that is inconsistent with the direct account
holder's claim, the withholding agent has other account information
that is inconsistent with the direct account holder's claim, or the
withholding certificate lacks information necessary to establish
entitlement to a reduced rate of withholding. A withholding agent shall
also treat a withholding certificate as unreliable or incorrect if the
name of the person on the withholding certificate indicates that the
person is a corporation, partnership, trust, estate, or an individual,
and the person's claim of classification (e.g. individual, partnership,
corporation) is not consistent with such indication and a difference in
classification would result in a different rate of withholding or a
difference in the person or persons to whom the payment is reported
under Sec. 1.1461-1(c) of chapter 61 of the Internal Revenue Code. For
purposes of establishing a direct account holder's status as a foreign
person or resident of a treaty country a withholding certificate shall
be considered unreliable or inconsistent with an account holder's
claims only if it is not reliable under the rules of paragraph (b)(5)
and (6) of this section. A withholding agent that relies on an agent to
review and maintain a withholding certificate is considered to know or
have reason to know the facts within the knowledge of the agent.
(ii) Examples. The rules of paragraph (b)(4) of this section are
illustrated by the following examples:
Example 1. F, a foreign person that has a direct account
relationship with USB, a bank that is a U.S. person, provides USB
with a beneficial owner withholding certificate for the purpose of
claiming a reduced rate of withholding on U.S. source dividends. F
resides in a treaty country that has a limitation on benefits
provision in its income tax treaty with the United States. The
withholding certificate, however, does not contain a statement
regarding limitations on benefits or deriving the income under
section 894 as required by Sec. 1.1441-6(b)(1). USB cannot rely on
the withholding certificate to grant a reduced rate of withholding
because it is incomplete with respect to the claim made by F.
Example 2. F, a foreign person that has a direct account
relationship with USB, a broker that is a U.S. person, provides USB
with a withholding certificate for the purpose of claiming the
portfolio interest exception under section 881(c), which applies to
foreign corporations. F indicates on its withholding certificate,
however, that it is a partnership. USB may not treat F as a
beneficial owner of the interest for purposes of the portfolio
interest exception because F has indicated on its withholding
certificate that it is a foreign partnership, and therefore under
Sec. 1.1441-1(c)(6)(ii) it is not the beneficial owner of the
interest payment.
(5) Withholding certificate--establishment of foreign status. A
withholding agent has reason to know that a beneficial owner
withholding certificate (as defined in Sec. 1.1441-1(e)(2)) provided by
a direct account holder in connection with a payment of an amount
described in Sec. 1.1441-6(c)(2) is unreliable or incorrect for
purposes of establishing the account holder's status as a foreign
person if the certificate is described in paragraph (b)(5)(i) or (ii)
of this section.
(i) A withholding certificate is unreliable or incorrect if the
withholding certificate has a permanent residence address (as defined
in Sec. 1.1441-1(e)(2)(ii)) in the United States, the withholding
certificate has a mailing address in the United States, the withholding
agent has a residence or mailing address as part of its account
information that is an address in the United States, or the direct
account holder notifies the withholding agent of a new residence or
mailing address in the United States (whether or not provided on a
withholding certificate). A withholding agent may, however, rely on the
beneficial owner withholding certificate as establishing the account
holder's foreign status if it may do so under the provisions of
paragraph (b)(5)(i)(A) or (B) of this section.
(A) A withholding agent may treat a direct account holder as a
foreign person if the beneficial owner withholding certificate has been
provided by an individual and--
(1) The withholding agent has in its possession or obtains
documentary evidence (which does not contain a U.S. address) that is no
more than three years old, the documentary evidence supports the claim
of foreign status, and the direct account holder provides the
withholding agent with a reasonable explanation, in writing, supporting
the account holder's foreign status; or
(2) The account is maintained at an office of the withholding agent
outside the United States and the withholding agent is required to
report annually a payment to the direct account holder on a tax
information statement that is filed with the tax authority of the
country in which the office is located and that country has an income
tax treaty in effect with the United States.
(B) A withholding agent may treat an account holder as a foreign
person if the beneficial owner withholding certificate has been
provided by an entity that the withholding agent does not know, or does
not have reason to know, is a flow-through entity and--
(1) The withholding agent has in its possession, or obtains,
documentation that substantiates that the entity is actually organized
or created under the laws of a foreign country; or
[[Page 32199]]
(2) The account is maintained at an office of the withholding agent
outside the United States and the withholding agent is required to
report annually a payment to the direct account holder on a tax
information statement that is filed with the tax authority of the
country in which the office is located and that country has an income
tax treaty in effect with the United States.
(ii) A beneficial owner withholding certificate is unreliable or
incorrect if it is provided with respect to an offshore account (as
defined in Sec. 1.6049-5(c)(1)) and the direct account holder has
standing instructions directing the withholding agent to pay amounts
from its account to an address or an account maintained in the United
States. The withholding agent may treat the direct account holder as a
foreign person, however, if the direct account holder provides a
reasonable explanation in writing that supports its foreign status.
(6) Withholding certificate--claim of reduced rate of withholding
under treaty. A withholding agent has reason to know that a withholding
certificate (other than Form W-9) provided by a direct account holder
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing that
the direct account holder is a resident of a country with which the
United States has an income tax treaty if it is described in paragraphs
(b)(6)(i) through (iii) of this section.
(i) A beneficial owner withholding certificate is unreliable or
incorrect if the permanent residence address on the beneficial owner
withholding certificate is not in the country whose treaty is invoked,
or the direct account holder notifies the withholding agent of a new
permanent residence address that is not in the treaty country. A
withholding agent may, however, treat a direct account holder as
entitled to a reduced rate of withholding under an income tax treaty if
the direct account holder provides a reasonable explanation for the
permanent residence address outside the treaty country (e.g., the
address is the address of a branch of the beneficial owner located
outside the treaty country in which the entity is a resident) or the
withholding agent has in its possession, or obtains, documentary
evidence that establishes residency in a treaty country.
(ii) A beneficial owner withholding certificate is unreliable or
incorrect if the permanent residence address on the withholding
certificate is in the applicable treaty country but the withholding
certificate contains a mailing address outside the treaty country or
the withholding agent has a mailing address as part of its account
information that is outside the treaty country. A mailing address that
is a P.O. Box, in-care-of address, or address at a financial
institution (if the financial institution is not a beneficial owner)
shall not preclude a withholding agent from treating the direct account
holder as a resident of a treaty country if such address is in the
treaty country. If a withholding agent has a mailing address (whether
or not contained on the withholding certificate) outside the applicable
treaty country, the withholding agent may nevertheless treat a direct
account holder as a resident of an applicable treaty country if--
(A) The withholding agent has in its possession, or obtains,
additional documentation supporting the direct account holder's claim
of residence in the applicable treaty country (and the additional
documentation does not contain an address outside the treaty country);
(B) The withholding agent has in its possession, or obtains,
documentation that establishes that the direct account holder is an
entity organized in a treaty country (or an entity managed and
controlled in a treaty country, if the applicable treaty so requires);
(C) The withholding agent knows that the address outside the
applicable treaty country (other than a P.O. box, or in-care-of
address) is a branch of a bank or insurance company that is a resident
of the applicable treaty country; or
(D) The withholding agent obtains a written statement from the
direct account holder that reasonably establishes entitlement to treaty
benefits.
(iii) A beneficial owner withholding certificate is unreliable or
incorrect to establish entitlement to a reduced rate of withholding
under an income tax treaty if the direct account holder has standing
instructions for the withholding agent to pay amounts from its account
to an address or an account outside the treaty country unless the
direct account holder provides a reasonable explanation, in writing,
establishing the direct account holder's residence in the applicable
treaty country.
(7) Documentary evidence. A withholding agent shall not treat
documentary evidence provided by a direct account holder as valid if
the documentary evidence does not reasonably establish the identity of
the person presenting the documentary evidence. For example,
documentary evidence is not valid if it is provided in person by a
direct account holder that is a natural person and the photograph or
signature on the documentary evidence, if any, does not match the
appearance or signature of the person presenting the document. A
withholding agent shall not rely on documentary evidence to reduce the
rate of withholding that would otherwise apply under the presumption
rules of Secs. 1.1441-1(b)(3), 1.1441-5(d) and (e)(6), and 1.6049-5(d)
if the documentary evidence contains information that is inconsistent
with the direct account holder's claim of a reduced rate of
withholding, the withholding agent has other account information that
is inconsistent with the direct account holder's claim, or the
documentary evidence lacks information necessary to establish
entitlement to a reduced rate of withholding. For example, if a direct
account holder provides documentary evidence to claim treaty benefits
and the documentary evidence establishes the direct account holder's
status as a foreign person and a resident of a treaty country, but the
account holder fails to provide the treaty statements required by
Sec. 1.1441-6(c)(5), the documentary evidence does not establish the
direct account holder's entitlement to a reduced rate of withholding.
For purposes of establishing a direct account holder's status as a
foreign person or resident of a country with which the United States
has an income tax treaty with respect to income described in
Sec. 1.1441-6(c)(2), documentary evidence shall be considered
unreliable or incorrect only if it is not reliable under the rules of
paragraph (b)(8) and (9) of this section.
(8) Documentary evidence--establishment of foreign status. A
withholding agent has reason to know that documentary evidence provided
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing the
direct account holder's status as a foreign person if the documentary
evidence is described in paragraphs (b)(8)(i), (ii), (iii) or (iv) of
this section.
(i) A withholding agent shall not treat documentary evidence
provided by an account holder after December 31, 2000, as valid for
purposes of establishing the direct account holder's foreign status if
the only mailing or residence address that is available to the
withholding agent is an address at a financial institution (unless the
financial institution is a beneficial owner of the income), an in-care-
of address, or a P.O. box. In this case, the withholding agent must
obtain additional documentation that is sufficient to establish the
direct account holder's status as a foreign
[[Page 32200]]
person. A withholding agent shall not treat documentary evidence
provided by an account holder before January 1, 2001, as valid for
purposes of establishing a direct account holder's status as a foreign
person if it has actual knowledge that the direct account holder is a
U.S. person or if it has a mailing or residence address for the direct
account holder in the United States. If a withholding agent has an
address for the direct account holder in the United States, the
withholding agent may nevertheless treat the direct account holder as a
foreign person if it can so treat the direct account holder under the
rules of paragraph (b)(8)(ii) of this section. '
(ii) Documentary evidence is unreliable or incorrect to establish a
direct account holder's status as a foreign person if the withholding
agent has a mailing or residence address (whether or not on the
documentation) for the direct account holder in the United States or if
the direct account holder notifies the withholding agent of a new
address in the United States. A withholding agent may, however, rely on
documentary evidence as establishing the direct account holder's
foreign status if it may do so under the provisions of paragraph
(b)(8)(ii)(A) or (B) of this section.
(A) A withholding agent may treat a direct account holder that is
an individual as a foreign person even if it has a mailing or residence
address for the direct account holder in the United States if the
withholding agent--
(1) Has in its possession or obtains additional documentary
evidence (which does not contain a U.S. address) supporting the claim
of foreign status and a reasonable explanation in writing supporting
the account holder's foreign status;
(2) Has in its possession or obtains a valid beneficial owner
withholding certificate on Form W-8 and the Form W-8 contains a
permanent residence address outside the United States and a mailing
address outside the United States (or if a mailing address is inside
the United States the direct account holder provides a reasonable
explanation in writing supporting the direct account holder's foreign
status); or
(3) The account is maintained at an office of the withholding agent
outside the United States and the withholding agent is required to
report annually a payment to the direct account holder on a tax
information statement that is filed with the tax authority of the
country in which the office is located and that country has an income
tax treaty in effect with the United States.
(B) A withholding agent may treat a direct account holder that is
an entity (other than a flow-through entity) as a foreign person even
if it has a mailing or residence address for the direct account holder
in the United States if the withholding agent--
(1) Has in its possession, or obtains, documentation that
substantiates that the entity is actually organized or created under
the laws of a foreign country;
(2) Obtains a valid beneficial owner withholding certificate on
Form W-8 and the Form W-8 contains a permanent residence address
outside the United States and a mailing address outside the United
States (or if a mailing address is inside the United States the direct
account holder provides additional documentary evidence sufficient to
establish the direct account holder's foreign status); or
(3) The account is maintained at an office of the withholding agent
outside the United States and the withholding agent is required to
report annually a payment to the direct account holder on a tax
information statement that is filed with the tax authority of the
country in which the office is located and that country has an income
tax treaty in effect with the United States.
(iii) Documentary evidence is unreliable or incorrect if the direct
account holder has standing instructions directing the withholding
agent to pay amounts from its account to an address or an account
maintained in the United States. The withholding agent may treat the
direct account holder as a foreign person, however, if the account
holder provides a reasonable explanation in writing that supports its
foreign status.
(9) Documentary evidence--claim of reduced rate of withholding
under treaty. A withholding agent has reason to know that documentary
evidence provided in connection with a payment of an amount described
in Sec. 1.1441-6(c)(2) is unreliable or incorrect for purposes of
establishing that a direct account holder is a resident of a country
with which the United States has an income tax treaty if it is
described in paragraph (b)(9)(i) or (ii) of this section.
(i) Documentary evidence is unreliable or incorrect if the
withholding agent has a mailing or residence address for the direct
account holder (whether or not on the documentary evidence) that is
outside the applicable treaty country, or the only address that the
withholding agent has (whether in or outside of the applicable treaty
country) is a P.O. box, an in-care-of address, or the address of a
financial institution (if the financial institution is not the
beneficial owner). If a withholding agent has a mailing or residence
address for the direct account holder outside the applicable treaty
country, the withholding agent may nevertheless treat a direct account
holder as a resident of an applicable treaty country if the withholding
agent--
(A) Has in its possession, or obtains, additional documentary
evidence supporting the direct account holder's claim of residence in
the applicable treaty country (and the documentary evidence does not
contain an address outside the applicable treaty country, a P.O. box,
an in-care-of address, or the address of a financial institution);
(B) Has in its possession, or obtains, documentary evidence that
establishes the direct account holder is an entity organized in a
treaty country (or an entity managed and controlled in a treaty
country, if the applicable treaty so requires); or
(C) Obtains a valid beneficial owner withholding certificate on
Form W-8 that contains a permanent residence address and a mailing
address in the applicable treaty country.
(ii) Documentary evidence is unreliable or incorrect if the direct
account holder has standing instructions directing the withholding
agent to pay amounts from its account to an address or an account
maintained outside the treaty country unless the direct account holder
provides a reasonable explanation, in writing, establishing the direct
account holder's residence in the applicable treaty country.
(10) Limits on reason to know--indirect account holders. A
financial institution that receives documentation from a payee through
a nonqualified intermediary, a flow-through entity, or a U.S. branch
described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch that is
treated as a U.S. person) with respect to a payment of an amount
described in Sec. 1.1441-6(c)(2) has reason to know that the
documentation is unreliable or incorrect if a reasonably prudent person
in the position of a withholding agent would question the claims made.
This standard requires, but is not limited to, a withholding agent's
compliance with the rules of paragraphs (b)(10)(i) through (iii).
(i) The withholding agent must review the withholding statement
described in Sec. 1.1441-1(e)(3)(iv) and may not rely on information in
the statement to the extent the information does not support the claims
made for any payee. For this purpose, a withholding agent may not treat
a payee as a foreign person if an address in the United States is
provided
[[Page 32201]]
for such payee and may not treat a person as a resident of a country
with which the United States has an income tax treaty if the address
for that person is outside the applicable treaty country.
Notwithstanding a U.S. address or an address outside a treaty country,
the withholding agent may treat a payee as a foreign person or a
foreign person as a resident of a treaty country if a reasonable
explanation is provided, in writing, by the nonqualified intermediary,
flow-through entity, or U.S. branch supporting the payee's foreign
status or the foreign person's residency in a treaty country.
(ii) The withholding agent must review each withholding certificate
in accordance with the requirements of paragraphs (b)(5) and (6) of
this section and verify that the information on the withholding
certificate is consistent with the information on the withholding
statement required under Sec. 1.1441-1(e)(3)(iv). If there is a
discrepancy between the withholding certificate and the withholding
statement, the withholding agent may choose to rely on the withholding
certificate, if valid, and instruct the nonqualified intermediary,
flow-through entity, or U.S. branch to correct the withholding
statement or apply the presumption rules of Secs. 1.1441-1(b), 1.1441-
5(d) and (e)(6), and 1.6049-5(d) to the payment allocable to the payee
who provided the withholding certificate relates. A withholding agent
that receives a withholding certificate before December 31, 2001, is
not required to review the information on withholding certificates or
determine if it is consistent with the information on the withholding
statement until December 31, 2001. A withholding agent may withhold and
report in accordance with a withholding statement until December 31,
2001, unless it has actually performed the verification procedures
required by this paragraph (b)(10)(ii) and determined that the
withholding statement is inaccurate with respect to a particular payee.
(iii) The withholding agent must review the documentary evidence
provided by the nonqualified intermediary, flow-through entity, or U.S.
branch to determine that there is no obvious indication that the payee
is a U.S. non-exempt recipient or that the documentary evidence does
not establish the identity of the person who provided the documentation
(e.g., the documentary evidence does not appear to be an identification
document).
(11) Additional guidance. The IRS may prescribe other circumstances
for which a withholding certificate or documentary evidence is
unreliable or incorrect in addition to the circumstances described in
paragraph (b) of this section to establish an account holder's status
as a foreign person or a beneficial owner entitled to a reduced rate of
withholding in published guidance (see Sec. 601.601(d)(2) of this
chapter).
* * * * *
Par. 10. Effective January 1, 2001, Sec. 1.1441-9 is amended by
revising paragraph (b)(2) to read as follows:
Sec. 1.1441-9 Exemption from withholding on exempt income of a foreign
tax-exempt organization, including foreign private foundations.
* * * * *
(b) * * *
(2) Withholding certificate. A withholding certificate under this
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition
to other applicable requirements, the Form W-8 includes the taxpayer
identifying number of the organization whose name is on the
certificate, and it certifies that the Internal Revenue Service (IRS)
has issued a favorable determination letter (and the date thereof) that
is currently in effect, what portion, if any, of the amounts paid
constitute income includible under section 512 in computing the
organization's unrelated business taxable income, and, if the
organization is described in section 501(c)(3), whether it is a private
foundation described in section 509. Notwithstanding the preceding
sentence, if the organization cannot certify that it has been issued a
favorable determination letter that is still in effect, its withholding
certificate is nevertheless valid under this paragraph (b)(2) if the
organization attaches to the withholding certificate an opinion that is
acceptable to the withholding agent from a U.S. counsel (or any other
person as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter)) concluding that the organization
is described in section 501(c). If the determination letter or opinion
of counsel to which the withholding certificate refers concludes that
the organization is described in section 501(c)(3), and the certificate
further certifies that the organization is not a private foundation
described in section 509, an affidavit of the organization setting
forth sufficient facts concerning the operations and support of the
organization for the Internal Revenue Service (IRS) to determine that
such organization would be likely to qualify as an organization
described in section 509(a)(1), (2), (3), or (4) must be attached to
the withholding certificate. An organization that provides an opinion
of U.S. counsel or an affidavit may provide the same opinion or
affidavit to more than one withholding agent provided that the opinion
is acceptable to each withholding agent who receives it in conjunction
with a withholding certificate. Any such opinion of counsel or
affidavit must be renewed whenever there is a change in facts or
circumstances that are relevant to determine the organization's status
under section 501(c) or, if relevant, that the organization is or is
not a private foundation described in section 509.
* * * * *
Par. 12. Effective January 1, 2001, Sec. 1.1461-1 is amended by:
1. Removing the last sentence of paragraph (a)(1).
2. Removing paragraphs (b)(2) and (b)(3) and redesignating
paragraph (b)(4) as new paragraph (b)(2).
3. Revising paragraphs (c)(1), (c)(2), (c)(3), and (c)(4).
4. Removing paragraphs (c)(5), (c)(6), and (c)(7), and
redesignating paragraph (c)(8) as new paragraph (c)(5).
The revisions read as follows:
Sec. 1.1461-1 Payment and returns of tax withhold.
* * * * *
(c) Information returns--(1) Filing requirement--(i) In general. A
withholding agent (other than an individual who is not acting in the
course of a trade or business with respect to a payment) must make an
information return on Form 1042-S (or such other form as the IRS may
prescribe) to report the amounts subject to reporting, as defined in
paragraph (c)(2) of this section, that were paid during the preceding
calendar year. Notwithstanding the preceding sentence, any person that
withholds or is required to withhold an amount under sections 1441,
1442, or 1443 must file a Form 1042-S for the payment withheld upon
whether or not that person is engaged in a trade or business and
whether or not the payment is an amount subject to reporting. A Form
1042-S shall be prepared for each recipient of an amount subject to
reporting. The Form 1042-S shall be prepared in such manner as the form
and accompanying instructions prescribe. One copy of the Form 1042-S
shall be filed with the IRS on or before March 15 of the calendar year
following the year in which the amount subject to reporting was paid.
It shall be filed with a transmittal form as provided in the
instructions to the Form 1042-S and to the transmittal form.
Withholding certificates, documentary evidence, or other statements or
documentation
[[Page 32202]]
provided to a withholding agent are not required to be attached to the
form. Another copy of the Form 1042-S must be furnished to the
recipient for whom the form is prepared (or any other person, as
required under this paragraph (c) or the instructions to the form) on
or before March 15 of the calendar year following the year in which the
amount subject to reporting was paid. The withholding agent must retain
a copy of each Form 1042-S for the statute of limitations on assessment
and collection applicable to the Form 1042 to which the Form 1042-S
relates.
(ii) Recipient--(A) Defined. For purposes of this section, the term
recipient means--
(1) A beneficial owner as defined in paragraph (c)(6) of this
section, including a foreign estate or a foreign complex trust, as
defined in Sec. 1.1441-1(c)(25);
(2) A qualified intermediary as defined in Sec. 1.1441-1(e)(5)(ii);
(3) A withholding foreign partnership as defined in Sec. 1.1441-
5(c)(2) or a withholding foreign trust under Sec. 1.1441-5(e)(5)(v);
(4) An authorized foreign agent as defined in Sec. 1.1441-7(c);
(5) A U.S. branch that is treated as a U.S. person under
Sec. 1.1441-1(b)(2)(iv)(A);
(6) A nonwithholding foreign partnership or a foreign simple trust
as defined in Sec. 1.1441-1(c)(24), but only to the extent the income
is (or is treated as) effectively connected with the conduct of a trade
or business in the United States by such entity;
(7) A payee, as defined in Sec. 1.1441-1(b)(2) that is presumed to
be a foreign person under the presumption rules of Sec. 1.1441-1(b)(3);
1.1441-5(d) or (e)(6), or 1.6049-5(d); and
(8) Any other person as required on Form 1042-S or the instructions
to the form.
(B) Persons that are not recipients. A recipient does not include--
(1) A nonqualified intermediary;
(2) A payment to a wholly-owned entity that is disregarded under
Sec. 301.7701-2(c)(2) of this chapter as an entity separate from its
owner;
(3) A flow-through entity, as defined in Sec. 1.1441-1(c)(23) (to
the extent it is receiving amounts subject to reporting other than
income effectively connected with the conduct of a trade or business in
the United States); and
(4) A U.S. branch described in Sec. 1.1441-1(b)(2)(iv) that is not
treated as a U.S. person under that section.
(2) Amounts subject to reporting--(i) In general. Subject to the
exceptions described in paragraph (c)(2)(ii) of this section, amounts
subject to reporting on Form 1042-S are amounts paid to a foreign payee
(including persons presumed to be foreign) that are amounts subject to
withholding as defined in Sec. 1.1441-2(a). Amounts subject to
reporting include amounts subject to withholding even if no amount is
deducted and withheld from the payment because of a treaty or Internal
Revenue Code exception to taxation or because an amount withheld was
reimbursed to the payee under the adjustment procedures of Sec. 1.1461-
2. In addition, amounts subject to reporting include any amounts paid
to a foreign payee on which a withholding agent withheld an amount
(either under chapter 3 of the Internal Revenue Code or section 3406)
whether or not the amount is subject to withholding. Amounts subject to
reporting include, but are not limited to, the following items--
(A) The entire amount of a corporate distribution (whether actual
or deemed) irrespective of any estimate of the portion of the
distribution that represents a taxable dividend;
(B) Interest, including the portion of a notional principal
contract payment that is characterized as interest. Interest shall also
be reported on Form 1042-S if it is bank deposit interest paid to
nonresident alien individuals as required under Sec. 1.6049-8;
(C) Rents;
(D) Royalties;
(E) Compensation for dependent and independent personal services
performed in the United States;
(F) Annuities;
(G) Pension distributions and other deferred income;
(H) Gambling winnings that are not exempt from tax under section
871(j);
(I) Income from the cancellation of indebtedness unless the
withholding agent is unrelated to the debtor and does not have
knowledge of the facts that give rise to the payment (see Sec. 1.1441-
2(d));
(J) Amounts that are (or are presumed to be) effectively connected
with the conduct of a trade or business in the United States (including
deposit interest as defined in sections 871(i)(2)(A) and 881(d)) even
if no withholding certificate is required to be furnished by the payee
or beneficial owner. In the case of amounts paid on a notional
principal contract described in Sec. 1.1441-4(a)(3) that are presumed
to be effectively connected with the conduct of a trade or business in
the United States, the amount required to be reported is limited to the
amount of cash paid from the notional principal contract;
(K) Scholarship, fellowship, or grant income and compensation for
personal services that is not excludible from gross income under
section 117 (whether or not the taxable scholarship, fellowship, grant
income, or compensation for personal services is exempt from tax under
an income tax treaty) paid to foreign students, trainees, teachers, or
researchers;
(L) Amounts paid to foreign governments, international
organizations, or the Bank for International Settlements, whether or
not documentation must be provided;
(M) Interest (including original issue discount) paid with respect
to foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2) to the extent the documentation requirements described in
Sec. 1.871-14(e)(3) and (4) are required to be satisfied (taking into
account the provisions of Sec. 1.871-14(e)(4)(ii), if applicable); and
(N) Original issue discount paid on the redemption of an OID
obligation. The amount to be reported is the amount of OID includible
in the gross income of the holder of the obligation, if known, or, if
not known, the total amount of original issue discount determined as if
the holder held the obligation from its original issuance. A
withholding agent may determine the total amount of OID by using the
most recently published ``List of Original Issue Discount
Instruments,'' (Publication 1212, available from the IRS Forms
Distribution Centers).
(ii) Exceptions to reporting. The amounts listed in this paragraph
(c)(2)(ii) are not required to be reported on Form 1042-S--
(A) Interest (including original issue discount) that is deposit
interest under sections 871(i)(2)(A) and 881(d) and that is not
effectively connected with the conduct of a trade or business in the
United States, unless reporting is required under Sec. 1.6049-8
(regarding payments to certain foreign residents) or is interest that
is effectively connected with the conduct of a trade or business in the
United States;
(B) Interest or original issue discount on certain short-term
obligations, described in section 871(g)(1)(B) or 881(a)(3);
(C) Interest paid on obligations sold between interest payment
dates and the portion of the purchase price of an OID obligation that
is sold or exchanged in a transaction other than a redemption, unless
the sale or exchange is part of a plan, the principal purpose of which
is to avoid tax and the withholding agent has actual knowledge or
reason to know of such plan (see Sec. 1.1441-2(a)(5) and (6));
[[Page 32203]]
(D) Any item required to be reported on a Form W-2, including an
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2
(relating to return of information for payments to employees) or
Sec. 1.6052-1 (relating to information regarding payment of wages in
the form of group-term life insurance);
(E) Any item required to be reported on Form 1099, and such other
forms as are prescribed pursuant to the information reporting
provisions of sections 6041 through 6050P and the regulations under
those sections;
(F) Amounts paid on a notional principal contract described in
Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the
conduct of a trade or business in the United States (or not treated as
effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
(G) Amounts required to be reported on Form 8288 (U.S. Withholding
Tax Return for Dispositions by Foreign Persons of U.S. Real Property
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax
(section 1446)). A withholding agent that must report a distribution
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to
report the entire amount on a Form 8288 or 8804;
(H) Interest on a registered obligation that is targeted to foreign
markets and qualifies as portfolio interest to the extent it is paid to
a registered owner that is a financial institution or member of a
clearing organization that has provided the proper withholding
certificates (see Secs. 1.1441-1(b)(4)(i) and 1.1441-2(a));
(I) Interest on a foreign targeted bearer obligation (see
Secs. 1.1441-1(b)(4)(i) and 1.1441-2(a));
(J) Gain described in section 301(c)(3); and
(K) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with
certain amounts paid by the U.S. government).
(3) Required information. The information required to be furnished
under this paragraph (c)(3) shall be based upon the information
provided by or on behalf of the recipient of an amount subject to
reporting (as corrected and supplemented based on the withholding
agent's actual knowledge) or the presumption rules of Secs. 1.1441-
1(b)(3), 1.1441-4(a); 1.1441-5(d) and (e); 1.1441-9(b)(3) or 1.6049-
5(d). The Form 1042-S must include the following information, if
applicable--
(i) The name, address, and taxpayer identifying number of the
withholding agent;
(ii) A description of each category of income paid based on the
income codes provided on the form (e.g., interest, dividends,
royalties, etc.) and the aggregate amount in each category expressed in
U.S. dollars;
(iii) The rate of withholding applied or the basis for exempting
the payment from withholding (based on exemption codes provided on the
form);
(iv) The name and address of the recipient;
(v) The name and address of any nonqualified intermediary, flow-
through entity, or U.S. branch as described in Sec. 1.1441-1(b)(2)(iv)
(other than a branch that is treated as a U.S. person) to which the
payment was made;
(vi) The taxpayer identifying number of the recipient if required
under Sec. 1.1441-1(e)(4)(vii) or if actually known to the withholding
agent making the return;
(vii) The taxpayer identifying number of a nonqualified
intermediary or flow-through entity (to the extent it is not a
recipient) or other flow-through entity to the extent it is known to
the withholding agent;
(viii) The country (based on the country codes provided on the
form) of the recipient and of any nonqualified intermediary or flow-
through entity the name of which appears on the form; and
(ix) Such information as the form or the instructions may require
in addition to, or in lieu of, information required under this
paragraph (c)(3).
(4) Method of reporting--(i) Payments by U.S. withholding agents to
recipients. A withholding agent that is a U.S. person (other than a
foreign branch of a U.S. person that is a qualified intermediary as
defined in Sec. 1.1441-1(e)(5)(ii)) and that makes payments of amounts
subject to reporting on Form 1042-S must file a separate Form 1042-S
for each recipient who receives such amount. For purposes of this
paragraph (c)(4), a U.S. person includes a U.S. branch described in
Sec. 1.1441-1(e)(2)(iv)(A) or (E) that agrees to be treated as a U.S.
person. Except as may otherwise be required on Form 1042-S or the
instructions to the form, only payments for which the income code,
exemption code, withholding rate and recipient code are the same may be
reported on a single Form 1042-S. See paragraph (c)(4)(ii) of this
section for reporting of payments made to a person that is not a
recipient.
(A) Payments to beneficial owners. If a U.S. withholding agent
makes a payment directly to a beneficial owner it must complete Form
1042-S treating the beneficial owner as the recipient. Under the grace
period rule of Sec. 1.1441-1(b)(3)(iv), a U.S. withholding agent may,
under certain circumstances, treat a payee as a foreign person while
the withholding agent awaits a valid withholding certificate. A U.S.
withholding agent who relies on the grace period rule to treat a payee
as a foreign person must file a Form 1042-S to report all payments on
Form 1042-S during the period that person was presumed to be foreign
even if that person is later determined to be a U.S. person based on
appropriate documentation or is presumed to be a U.S. person after the
grace period ends. In the case of joint owners, a withholding agent may
provide a single Form 1042-S made out to the owner whose status the
U.S. withholding agent relied upon to determine the applicable rate of
withholding. If, however, any one of the owners requests its own Form
1042-S, the withholding agent must furnish a Form 1042-S to the person
who requests it. If more than one Form 1042-S is issued for a single
payment, the aggregate amount paid and tax withheld that is reported on
all Forms 1042-S cannot exceed the total amounts paid to joint owners
and the tax withheld thereon.
(B) Payments to a qualified intermediary, a withholding foreign
partnership, or a withholding foreign trust. A U.S. withholding agent
that makes payments to a qualified intermediary (whether or not the
qualified intermediary assumes primary withholding responsibility), a
withholding foreign partnership, or a withholding foreign trust shall
complete Forms 1042-S treating the qualified intermediary or
withholding foreign partnership as the recipient. The U.S. withholding
agent must complete a separate Form 1042-S for each withholding rate
pool. A withholding rate pool is a payment of a single type of income
(determined by the income codes on Form 1042-S) that is subject to a
single rate of withholding. A qualified intermediary that does not
assume primary withholding responsibility on all payments it receives
provides information regarding the proportions of income subject to a
particular withholding rate to the withholding agent on a withholding
statement associated with a qualified intermediary withholding
certificate. A qualified intermediary may provide a U.S. withholding
agent with information regarding withholding rate pools for U.S. non-
exempt recipients (as defined under Sec. 1.1441-1(c)(21)). Amounts paid
with respect to such withholding rate pools must be reported on Form
1099 completed for each U.S. non-exempt recipient to the extent they
are subject to Form 1099 reporting. These amounts must not be reported
on
[[Page 32204]]
Form 1042-S. In addition, the qualified intermediary may provide the
U.S. withholding agent information regarding withholding rate pools for
U.S. persons that are exempt recipients as defined under Sec. 1.1441-
1(c)(20). If such information is provided, a U.S. withholding agent
should not report such withholding rate pools on Form 1042-S.
(C) Amounts paid to U.S. branches treated as U.S. persons. A U.S.
withholding agent making a payment to a U.S. branch of a foreign person
described in Sec. 1.1441-1(b)(2)(iv) shall complete Form 1042-S as
follows--
(1) If the branch has provided the U.S. withholding agent with a
withholding certificate that evidences its agreement with the
withholding agent to be treated as a U.S. person, the U.S. withholding
agent files Forms 1042-S treating the U.S. branch as the recipient;
(2) If the branch has provided the U.S. withholding agent with a
withholding certificate that transmits information regarding beneficial
owners, qualified intermediaries, withholding foreign partnerships, or
other recipients, the U.S. withholding agent must complete a separate
Form 1042-S for each recipient whose documentation is associated with
the U.S. branch's withholding certificate; or
(3) If the U.S. withholding agent cannot reliably associate a
payment with a valid withholding certificate from the U.S. branch, it
shall treat the U.S. branch as the recipient and report the income as
effectively connected with the conduct of a trade or business in the
United States.
(D) Amounts paid to an authorized foreign agent. If a U.S.
withholding agent makes a payment to an authorized foreign agent, the
withholding agent files Forms 1042-S treating the authorized foreign
agent as the recipient, provided that the authorized foreign agent
reports the payments on Forms 1042-S to each recipient to which it
makes payments. If the authorized foreign agent fails to report the
amounts paid on Forms 1042-S for each recipient to which the payment is
made, the U.S. withholding agent remains responsible for such
reporting.
(E) Dual Claims. A U.S. withholding agent may make a payment to a
foreign entity that is simultaneously claiming a reduced rate of tax on
its own behalf for a portion of the payment and a reduced rate on
behalf of persons in their capacity as interest holders in that entity
on the remaining portion. See Sec. 1.1441-6(b)(2)(iii). If the claims
are consistent and the withholding agent accepts the multiple claims,
the withholding agent must file a separate Form 1042-S for those
payments for which the entity is treated as the beneficial owner and
Forms 1042-S for each of the interest holder in the entity for which
the interest holder is treated as the recipient. For those payments for
which the interest holder in an entity is treated as the recipient, the
U.S. withholding agent shall prepare the Form 1042-S in the same manner
as a payment made to a nonqualified intermediary or flow-through entity
as set forth in paragraph (c)(4)(ii) of this section. If the claims are
consistent but the withholding agent has not chosen to accept the
multiple claims, or if the claims are inconsistent, the withholding
agent must file a separate Form 1042-S for the person or persons it has
chosen to treat as the recipients.
(ii) Payments made by U.S. withholding agents to persons that are
not recipients--(A) Amounts paid to a nonqualified intermediary, a
flow-through entity, and certain U.S. branches. If a U.S. withholding
agent makes a payment to a nonqualified intermediary, a flow-through
entity, or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (other
than a branch that agrees to be treated as a U.S. person), it must
complete a separate Form 1042-S for each recipient to the extent the
withholding agent can reliably associate a payment with valid
documentation (within the meaning of Sec. 1.1441-1(b)(2)(vii)) from the
recipient which is associated with the withholding certificate provided
by the nonqualified intermediary, flow-through entity, or U.S. branch.
If a payment is made through tiers of nonqualified intermediaries or
flow-through entities, the withholding agent must nevertheless complete
Form 1042-S for the recipients to the extent it can reliably associate
the payment with documentation from the recipients. A withholding agent
that is completing a Form 1042-S for a recipient that receives a
payment through a nonqualified intermediary, a flow-through entity, or
a U.S. branch must include on the Form 1042-S the name of the
nonqualified intermediary or flow-through entity from which the
recipient directly receives the payment. If a U.S. withholding agent
cannot reliably associate the payment, or any portion of the payment,
with valid documentation from a recipient either because no such
documentation has been provided or because the nonqualified
intermediary, flow-through entity, or U.S. branch has failed to provide
sufficient allocation information so that the withholding agent can
associate the payment, or any portion thereof, with valid
documentation, then the withholding agent must report the payments as
made to an unknown recipient in accordance with the appropriate
presumption rules for that payment. Thus, if under the presumption
rules the payment is presumed to be made to a foreign person, the
withholding agent must generally withhold 30 percent of the payment and
report the payment on Form 1042-S made out to an unknown recipient and
shall also include the name of the nonqualified intermediary or flow-
through entity that received the payment on behalf of the unknown
recipient. If, however, the recipient is presumed to be a U.S. non-
exempt recipient (as defined in Sec. 1.1441-1(c)(21)), the withholding
agent must withhold on the payment as required under section 3406 and
report the payment as made to an unknown recipient on the appropriate
Form 1099 as required under chapter 61 of the Internal Revenue Code.
(B) Disregarded entities. If a U.S. withholding agent makes a
payment to a disregarded entity but receives a valid withholding
certificate or other documentary evidence from a foreign person that is
the single owner of a disregarded entity, the withholding agent must
file a Form 1042-S treating the foreign single owner as the recipient.
The taxpayer identifying number on the Form 1042-S, if required, must
be the foreign single owner's TIN.
(iii) Reporting by qualified intermediaries, withholding foreign
partnerships, and withholding foreign trusts. A qualified intermediary,
a withholding foreign partnership, and a withholding foreign trust
shall report payments on Form 1042-S as provided in their agreements
with the IRS and the instructions to the form.
(iv) Reporting by a nonqualified intermediary, flow-through entity,
and certain U.S. branches. A nonqualified intermediary, flow-through
entity, or U.S. branch described in Sec. 1.1441-1(e)(2)(iv) (other than
a U.S. branch that is treated as a U.S. person) is a withholding agent
and must file Forms 1042-S for amounts paid to recipients in the same
manner as a U.S. withholding agent. A Form 1042-S will not be required,
however, if another withholding agent has reported the same amount to
the same recipient for which the nonqualified intermediary, flow-
through entity, or U.S. branch would be required to file a return and
the entire amount that should be withheld from such payment has been
withheld. A nonqualified intermediary, flow-through entity, or U.S.
branch must
[[Page 32205]]
report payments made to recipients to the extent it has failed to
provide the appropriate documentation to another withholding agent
together with the information required for that withholding agent to
reliably associate the payment with the recipient documentation or to
the extent it knows, or has reason to know, that less than the required
amount has been withheld. A nonqualified intermediary or flow-through
entity that is required to report a payment on Form 1042-S must follow
the same rules as apply to a U.S. withholding agent under paragraph
(c)(4)(i) and (ii) of this section.
(v) Pro rata reporting for allocation failures. If a nonqualified
intermediary, flow-through entity, or U.S. branch described in
Sec. 1.1441-1(b)(2)(iv) (other than a branch treated as a U.S. person)
that uses the alternative procedures of Sec. 1.1441-1(e)(3)(iv)(D)
fails to provide information sufficient to allocate the amount subject
to reporting paid to a withholding rate pool to the payees identified
for that pool, then the withholding agent shall report the payment in
accordance with the rule provided in Sec. 1.1441-1(e)(3)(iv)(D)(6).
(vi) Other withholding agents. Any person that is a withholding
agent not described in paragraph (c)(4)(i), (iii), or (iv) of this
section (e.g., a foreign person that is not a qualified intermediary,
flow-through entity, or U.S. branch) shall file Form 1042-S in the same
manner as a U.S. withholding agent and in accordance with the
instructions to the form.
* * * * *
Par. 11. Effective January 1, 2001, Sec. 1.6041-1 is amended by
revising paragraph (d)(5) to read as follows:
Sec. 1.6041-1 Return of information as to payments of $600 or more.
* * * * *
(d) * * *
(5) Notional principal contracts. Except as provided in paragraphs
(b)(5)(i) and (ii) of this section, amounts paid after December 31,
2000, with respect to notional principal contracts referred to in
Sec. 1.863-7 or 1.988-2(e) to persons who are not described in
Sec. 1.6049-4(c)(1)(ii) are required to be reported in returns of
information under this section. The amount required to be reported
under this paragraph (d)(5) is limited to the amount of cash paid from
the notional principal contract as described in Sec. 1.446-3(d). A non-
periodic payment is reportable for the year in which an actual payment
is made. Any amount of interest determined under the provisions of
Sec. 1.446-3(g)(4) (dealing with interest in the case of a significant
non-periodic payment) is reportable under this paragraph (d)(5) and not
under section 6049 (see Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4)
for reporting exceptions regarding payments to foreign persons. See,
however, Sec. 1.1461-1(c)(1) for reporting amounts described under this
paragraph (d)(5) that are paid to foreign persons. The provisions of
Sec. 1.6049-5(d) shall apply for determining whether a payment with
respect to a notional principal contract is made to a foreign person.
See Sec. 1.6049-4(a) for a definition of payor. For purposes of this
paragraph (d)(5), a payor includes a middleman defined in Sec. 1.6049-
4(f)(4).
(i) An amount paid with respect to a notional principal contract is
not required to be reported if the payment is made outside the United
States (as defined in Sec. 1.6049-5(e)) by a non-U.S. payor or a non-
U.S. middleman.
(ii) An amount paid with respect to a notional principal contract
is not required to be reported if the payment is made outside the
United States (as defined in Sec. 1.6049-5(e)) by a payor that has no
actual knowledge that the payee is a U.S. person, and the payor is--
(A) A U.S. payor or U.S. middleman that is not a U.S. person (such
as a controlled foreign corporation defined in section 957(a) or
certain foreign corporations or foreign partnerships engaged in a U.S.
trade or business); or
(B) A foreign branch of a U.S. bank. See Sec. 1.6049-5(c)(5) for a
definition of a U.S. payor, a U.S. middleman, a non-U.S. payor, and a
non-U.S. middleman.
* * * * *
Par. 12. Effective January 1, 2001, Sec. 1.6041-4 is amended by 1.
Revising paragraph (a)(3).
2. Adding paragraph (a)(6).
The revision and addition read as follows:
Sec. 1.6041-4 Foreign-related items and other exceptions.
(a) * * *
(3) Returns of information are not required for amounts paid by a
foreign intermediary described in Sec. 1.1441-1(c)(13) that it has
received in its capacity as an intermediary and that are associated
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign
bank or of a foreign insurance company described in Sec. 1.1441-
1(b)(2)(iv) (other than a U.S. branch that is treated as a U.S. person)
that are associated with a valid withholding certificate described in
Sec. 1.1441-1(e)(3)(v), which certificate the intermediary or branch
has furnished to the payor or middleman from whom it has received the
payment, unless, and to the extent, the intermediary or branch knows
that the payments are required to be reported under Sec. 1.6041-1 and
were not so reported. For example, if a foreign intermediary or U.S.
branch described in Sec. 1.1441-1(b)(2)(iv) fails to provide
information regarding U.S. persons that are not exempt from reporting
under Sec. 1.6041-3(q) to the person from whom the intermediary or U.S.
branch receives the payment, the foreign intermediary or U.S. branch
must report the payment on an information return. The exception of this
paragraph (a)(3) shall not apply to a qualified intermediary that
assumes reporting responsibility under chapter 61 of the Internal
Revenue Code.
* * * * *
(6) For rules concerning direct sellers, see Sec. 1.6041A-
1(d)(3)(i)(C).
* * * * *
Par. 13. Effective January 1, 2001, Sec. 1.6041A-1 is amended by:
1. Revising paragraph (d)(3)(i)(B).
2. Adding paragraph (d)(3)(i)(C).
The revision and addition read as follows:
Sec. 1.6041A-1 Returns regarding payments of remuneration for services
and certain direct sales.
* * * * *
(d) * * *
(3) * * * (i) * * *
(B) Returns of information are not required for payments of
remuneration for services from sources outside the United States
(determined under the provisions of part I, subchapter N, chapter 1 of
the Internal Revenue Code and the regulations under those provisions)
if payments are made outside the United States by a non-U.S. payor or
non U.S. middleman. For a definition of non U.S. payor or non-U.S.
middleman, see Sec. 1.6049-5(c)(5). For circumstances in which a
payment is considered to be made outside the United States, see
Sec. 1.6049-5(e).
(C) Returns of information are not required under sections 6041 or
6041A for amounts paid outside of the United States (within the meaning
of Sec. 1.6049-5(e)) as remuneration for services as a direct seller
(within the meaning of section 3508) performed outside of the United
States or for sales described in section 6041A(b) made outside of the
United States of consumer products for resale outside of the United
States.
* * * * *
Par. 14. Effective January 1, 2001, Sec. 1.6042-3 is amended by
revising paragraph (b)(1)(vi) to read as follows:
Sec. 1.6042-3 Dividends subject to reporting.
* * * * *
(b) * * * (1) * * *
[[Page 32206]]
(vi) Payments made by a foreign intermediary described in
Sec. 1.1441-1(c)(13) of amounts that it has received in its capacity as
an intermediary and that are associated with a valid withholding
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) and payments
made by a U.S. branch of a foreign bank or of a foreign insurance
company described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch
that is treated as a U.S. person) that are associated with a valid
withholding certificate described in Sec. 1.1441-1(e)(3)(v), which
certificate the intermediary or branch has furnished to the payor or
middleman from whom it has received the payment, unless, and to the
extent, the intermediary or branch knows that the payments are required
to be reported under Sec. 1.6042-2 and were not so reported. For
example, if a foreign intermediary or U.S. branch described in
Sec. 1.1441-1(b)(2)(iv) fails to provide information regarding U.S.
persons that are not exempt from reporting under Sec. 1.6049-
4(c)(1)(ii) to the person from whom the intermediary or U.S. branch
receives the payment, the amount paid by the foreign intermediary or
U.S. branch to such person is a dividend. The exception of this
paragraph (b)(1)(vi) shall not apply to a qualified intermediary that
assumes reporting responsibility under chapter 61 of the Internal
Revenue Code.
* * * * *
Par. 15. Effective January 1, 2001, Sec. 1.6045-1 is amended by:
1. Removing the last sentence of paragraph (g)(1)(i) and adding two
new sentences in its place.
2. Revising paragraph (g)(3)(iv).
3. Revising paragraph (g)(4), Example 7.
4. Adding Examples 8 and 9 to paragraph (g)(4).
The additions and revisions read as follows:
Sec. 1.6045-1 Returns of information of brokers and barter exchanges.
* * * * *
(g) * * * (1) * * *
(i) * * * For purposes of this paragraph (g)(1)(i), a broker that
is required to obtain, or chooses to obtain, a beneficial owner
withholding certificate described in Sec. 1.1441-1(e)(2)(i) from an
individual may rely on the withholding certificate only to the extent
the certificate includes a certification that the beneficial owner has
not been, and at the time the certificate is furnished, reasonably
expects not to be present in the United States for a period aggregating
183 days or more during each calendar year to which the certificate
pertains. The certification is not required if a broker receives
documentary evidence under Sec. 1.6049-5(c)(1) or (4).
* * * * *
(3) * * *
(iv) Special rules where the customer is a foreign intermediary or
certain U.S. branches. A foreign intermediary, as defined in
Sec. 1.1441-1(c)(13), is an exempt foreign person, except when the
broker has actual knowledge or reason to know (within the meaning of
Sec. 1.6049-5(c)(3)) that the person for whom the intermediary acts is
a U.S. person that is not exempt from reporting under Sec. 5f.6045-
1(c)(3) of this chapter or the broker is required to presume under
Sec. 1.6049-5(d)(3) that the payee is a U.S. person that is not an
exempt recipient. If an intermediary, as defined in Sec. 1.1441-
1(c)(13), or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (other
than a U.S. branch that is treated as a U.S. person) receives a payment
from a payor or middleman, which payment the payor or middleman can
associate with a valid withholding certificate described in
Sec. 1.1441-1(e)(3)(ii), (iii), or (v) furnished by such intermediary
or U.S. branch, then the intermediary or U.S. branch is not required to
report such payment when it, in turn, pays the amount to the person
whose name is on the certificate furnished by the intermediary or U.S.
branch to the payor or middleman, unless, and to the extent, the
intermediary or U.S. branch knows that the payment is required to be
reported under this section and was not so reported. For example, if a
foreign intermediary or U.S. branch fails to provide information
regarding U.S. persons that are not exempt from reporting under
Sec. 5f.6045-1(c)(3) of this chapter to the person from whom the
intermediary or U.S. branch receives the payment, the foreign
intermediary or U.S. branch must report the payment on an information
return. The exception of this paragraph (g)(3)(iv) shall not apply to a
qualified intermediary that assumes reporting responsibility under
chapter 61 of the Internal Revenue Code.
(4) * * *
Example 7. Customer A, an individual, owns U.S. corporate bonds
issued in registered form after July 18, 1984 and carrying a stated
rate of interest. The bonds are held through an account with foreign
bank, X, and are held in street name. X is a wholly-owned subsidiary
of a U.S. company and is not a qualified intermediary within the
meaning of Sec. 1.1441-1(e)(5)(ii). X has no documentation regarding
A. A instructs X to sell the bonds. In order to effect the sale, X
acts through its agent in the United States, Y. Y sells the bonds
and remits the sales proceeds to X. X credits A's account in the
foreign country. X does not provide documentation to Y.
(i) Y's obligations to withhold and report. Y treats X as the
customer, and not A, because Y cannot treat X as an intermediary
because it has received no documentation from X. Y is not required
to report the sales proceeds under the multiple broker exception
under Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is an
exempt recipient. Further, Y is not required to report the amount of
accrued interest paid to X on Form 1042-S under Sec. 1.1461-
1(c)(2)(ii) because accrued interest is not an amount subject to
reporting unless the withholding agent knows that the obligation is
being sold with a primary purpose of avoiding tax.
(ii) X's obligations to withhold and report. Although X has
effected, within the meaning of paragraph (a)(1) of this section,
the sale of a security at an office outside the United States under
paragraph (g)(3)(iii) of this section, X is treated as a broker,
under paragraph (a)(1) of this section, because as a wholly-owned
subsidiary of a U.S. corporation, X is a U.S. payor. See
Sec. 1.6049-5(c)(5). Under the presumptions described in
Sec. 1.6049-5(d)(2), X must presume that, with respect to the sales
proceeds, A is a U.S. person who is not an exempt recipient.
Therefore the payment of sales proceeds to A by X is reportable on a
Form 1099 under paragraph (c)(2) of this section. X has no
obligation to backup withhold on the payment based on the exemption
under Sec. 31.3406(g)-1(e) of this chapter, unless X has actual
knowledge that A is a U.S. person that is not an exempt recipient. X
is also required to separately report the accrued interest (see
paragraph (d)(3) of this section) on Form 1099 under section 6049
because A is also presumed to be a U.S. person who is not an exempt
recipient under the presumption rule in Sec. 1.6049-5(d)(2) and
Sec. 1.1441-1(b)(3)(iii) since accrued interest is not an amount
subject to reporting and therefore the presumption of foreign status
for offshore accounts under Sec. 1.1441-1(b)(3)(iii)(D) does not
apply.
Example 8. The facts are the same as in Example 7, except that
instead of U.S. corporate bonds that carry stated interest, A owns
original issue discount instruments described in section
871(g)(1)(B)(i) (i.e., obligations payable 183 days or less from the
date of original issue). In addition, the sale is in a transaction
other than a redemption.
(i) Y's obligations to withhold and report. Y is not required to
report the sales proceeds under the multiple broker exception under
Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is an exempt
recipient.
(ii) X's obligations to withhold and report. Although X has
effected, within the meaning of paragraph (a)(1) of this section,
the sale of a security at an office outside the United States under
paragraph (g)(3)(iii) of this section, X is treated as a broker,
under paragraph (a)(1) of this section, because as a wholly-owned
subsidiary of a U.S. corporation, X is a U.S. payor. See
Sec. 1.6049-5(c)(5). Under the presumptions described in
Sec. 1.6049-5(d)(2), X must presume that, with respect to the sales
proceeds, A is a U.S. person who is not an exempt recipient.
Therefore the payment of sales proceeds to A by X is reportable on a
Form 1099 under paragraph (c)(2) of this section. X has no
[[Page 32207]]
obligation to backup withhold on the payment based on the exemption
under Sec. 31.3406(g)-1(e) of this chapter, unless X has actual
knowledge that A is a U.S. person that is not an exempt recipient. X
is not required to separately report the amount of accrued original
issue discount. See paragraph (d)(3) of this section.
Example 9. The facts are the same as in Example 8, except that X
is a foreign corporation that is not a U.S. payor under Sec. 1.6049-
5(c).
(i) Y's obligations to withhold and report. Y is not required to
report the sales proceeds under the multiple broker exception under
Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is the person
responsible for paying the proceeds from the sale to A.
(ii) X's obligations to withhold and report. Although A is
presumed to be a U.S. payee under the presumptions of Sec. 1.6049-
5(d)(2), X is not considered to be a broker under paragraph (a)(1)
of this section because it is a not a U.S. payor under Sec. 1.6049-
5(c)(5). Therefore X is not required to report the sale under
paragraph (c)(2) of this section.
* * * * *
Par. 16. Effective January 1, 2001, Sec. 1.6049-4 is amended by
revising the introductory text of paragraph (c)(1)(ii) to read as
follows:
Sec. 1.6049-4 Return of information as to interest paid and original
issue discount includible in gross income after December 31, 1982.
* * * * *
(c) * * * (1) * * *
(ii) Exempt recipient defined. The term exempt recipient means any
person described in paragraphs (c)(1)(ii)(A) through (Q) of this
section. An exempt recipient is generally exempt from information
reporting without filing a certificate claiming exempt status unless
the provisions of this paragraph (c)(1)(ii) require a payee to file a
certificate.
A payor may, in any case, require a payee that is a U.S. person not
otherwise required to file a certificate under this paragraph
(c)(1)(ii) to file a certificate in order to qualify as an exempt
recipient. See Sec. 31.3406(h)-3(a)(1)(iii) and (c)(2) of this chapter
for the certificate that a payee that is a U.S. person must provide
when a payor requires the certificate to treat the payee as an exempt
recipient under this paragraph (c)(1)(ii). A payor may treat a payee as
an exempt recipient based upon a properly completed form as described
in Sec. 31.3406(h)-3(e)(2) of this chapter, its actual knowledge that
the payee is a person described in this paragraph (c)(1)(ii), or the
indicators described in this paragraph (c)(1)(ii).
* * * * *
Par. 17. Effective January 1, 2001, Sec. 1.6049-5 is amended by:
1. Adding a sentence at the end of paragraph (b)(10)(ii).
2. Adding a sentence at the end of the introductory text of
paragraph (b)(11).
3. Revising paragraph (b)(14).
4. Adding a sentence at the end of paragraph (c)(1).
5. Revising paragraph (c)(4).
6. In paragraph (c)(6), removing Example 3 and redesignating
Examples 4 and 5 as Examples 3 and 4, respectively; in newly designated
Example 3, revise the language ``The facts are the same as in Example
3'' to read ``The facts are the same as in Example 2''; in addition, in
newly designated Example 4, revise the language ``The facts are the
same as in Example 4'' to read ``The facts are the same as in Example
3''.
7. Revising the first sentence of paragraph (d)(1) introductory
text.
8. Revising paragraphs (d)(2)(i) and (d)(2)(ii), (d)(3), and
(d)(4).
9. Removing paragraph (d)(5).
The additions and revisions read as follows:
Sec. 1.6049-5 Interest and original issue discount subject to
reporting after December 31, 1982.
* * * * *
(b) * * *
(10) * * *
(ii) * * * The exemption from reporting described in this paragraph
(b)(10) shall not apply if the payor has actual knowledge that the
payee is a U.S. person who is not an exempt recipient.
(11) * * * The exemption from reporting described in this paragraph
(b)(11) shall not apply if the payor has actual knowledge that the
payee is a U.S. person who is not an exempt recipient.
* * * * *
(14) Payments made by a foreign intermediary described in
Sec. 1.1441-1(e)(3)(i) of amounts that it has received in its capacity
as an intermediary and that are associated with a valid withholding
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) and payments
made by a U.S. branch of a foreign bank or of a foreign insurance
company described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch
that is treated as a U.S. person) that are associated with a valid
withholding certificate described in Sec. 1.1441-1(e)(3)(v), which
certificate the intermediary or branch has furnished to the payor or
middleman from whom it has received the payment, unless, and to the
extent, the intermediary or branch knows that the payments are required
to be reported under Sec. 1.6049-4 and were not so reported. For
example, if a foreign intermediary or U.S. branch described in
Sec. 1.1441-1(b)(2)(iv) fails to provide information regarding U.S.
persons that are not exempt from reporting under Sec. 1.6049-
4(c)(1)(ii) to the person from whom the intermediary or U.S. branch
receives the payment, the amount paid by the foreign intermediary or
U.S. branch to such person is interest or original issue discount. The
exception of this paragraph (b)(14) shall not apply to a qualified
intermediary that assumes reporting responsibility under chapter 61 of
the Internal Revenue Code.
* * * * *
(c) * * * (1) * * * A payor may also rely on documentary evidence
associated with a flow-through withholding certificate for payments
treated as made to foreign partners of a nonwithholding foreign
partnership, as defined in Sec. 1.1441-1(c)(28), the foreign
beneficiaries of a foreign simple trust, as defined in Sec. 1.1441-
1(c)(24), or foreign owners of a foreign grantor trust, as defined in
Sec. 1.1441-1(c)(26), even though the partnership or trust account is
maintained in the United States.
* * * * *
(4) Special documentation rules for certain payments. This
paragraph (c)(4) modifies the provisions of this paragraph (c) for
payments to offshore accounts maintained at a bank or other financial
institution of amounts that are not subject to withholding under
chapter 3 of the Internal Revenue Code, other than amounts described in
paragraph (d)(3)(iii) of this section (dealing with U.S. short-term OID
and U.S. bank deposit interest). Amounts are not subject to withholding
under chapter 3 of the Internal Revenue Code if they are not included
in the definition of amounts subject to withholding under Sec. 1.1441-
2(a) (e.g., deposit interest with foreign branches of U.S. banks,
foreign source income, or broker proceeds).
(i) Special rule when non-renewable documentary evidence is
customary. If it is customary in the country in which a branch or
office of a bank or other financial institution is located to obtain
documentary evidence described in paragraph (c)(1) of this section, but
it is not customary for such documentary evidence to be renewed, then a
payor may, in lieu of obtaining a withholding certificate, request such
documentary evidence for an account maintained at such branch or
office. The bank or other financial institution may rely on such
documentary evidence to treat a person as a foreign person without
renewing such documentary evidence in accordance with paragraph (c)(2)
of this section and Sec. 1.1441-1(e)(4)(ii) if it may rely on the
documentary evidence as sufficient to establish the person's
[[Page 32208]]
foreign status under Sec. 1.1441-7(b)(7) and (8). If, however, the bank
or other financial institution may, under Sec. 1.1441-7(b)(8) treat a
payee as a foreign person even though it has a residence or mailing
address for the payee in the United States, or has standing
instructions to pay amounts from its account to an address in the
United States or an account maintained in the United States, then the
payor shall rely on the documentary evidence only for a period of three
full calendar years after the calendar year in which the documentary
evidence is provided to the payor or, if earlier, until the payor is
aware of a change of circumstances that affects the validity of the
documentation as establishing the payee's status as a foreign person.
(ii) Statement in lieu of documentary evidence. If under the local
laws, regulations, or practices applicable to a type of account or
transaction it is not customary to obtain documentary evidence
described in paragraph (c)(1) of this section, the bank or other
financial institution may, instead of obtaining a beneficial owner
withholding certificate described in Sec. 1.1441-1(e)(2)(i) or
documentary evidence described in paragraph (c)(1) of this section,
establish a payee's foreign status based on the statement described in
this paragraph (4)(ii) (or such substitute statement as the Internal
Revenue Service may prescribe) made on an account opening form. The
statement shall be valid only if the mailing and residence addresses of
the payee are outside the United States and there are no other indicia
of U.S. status. If reliance is not permitted because there are indicia
of U.S. status then the payor must obtain either documentary evidence
described in paragraph (c)(1) of this section or a Form W-8 described
in Sec. 1.1441-1(e)(2)(i) to treat the customer as a foreign payee. In
such a case, the form or documentary evidence must be renewed every
three years in accordance with the renewal procedures set forth in
Sec. 1.1441-1(e)(4)(ii)(A) for as long as indicia of U.S. status
continue to be present. The statement referred to in this paragraph
(c)(4)(i) of this section must appear near the signature line and must
read as follows:
By opening this account and signing below, the account owner
represents and warrants that he/she/it is not a U.S. person for
purposes of U.S. Federal income tax and that he/she/it is not acting
for, or on behalf of, a U.S. person. A false statement or
misrepresentation of tax status by a U.S. person could lead to
penalties under U.S. law. If your tax status changes and you become
a U.S. citizen or a resident, you must notify us within 30 days.
(iii) Continuous validity of declaration of foreign status subject
to due diligence by financial institution. A declaration of foreign
status described in paragraph (c)(4)(ii) of this section does not
expire unless the bank or financial institution becomes aware of
circumstances indicating that the customer may be a U.S. person.
(iv) Exception for existing accounts. The rules of paragraphs
(c)(4)(i) and (iii) of this section shall apply to accounts opened on
or after January 1, 2001. For accounts opened before 2001, a bank or
other financial institution may rely on the rules contained in
Secs. 35a.9999-3(ii) Q&A 34 and 35a.9999-4T Q&A 1 and 5 of this chapter
in effect prior to January 1, 2001 (see 26 CFR Parts 30-39 revised as
of April 1, 2000).
* * * * *
(d) * * * (1) Identifying the payee. The provisions of
Secs. 1.1441-1(b)(2), 1.1441-5(c)(1), (e)(2) and (3) shall apply (by
applying the term payor instead of the term withholding agent) to
identify the payee for purposes of this section (and other sections of
the regulations under this chapter to which this paragraph (d)(1)
applies), except to the extent provided in this paragraph (d)(1) in the
case of a payment of amounts that are not subject to withholding under
chapter 3 of the Internal Revenue
Code. * * *
* * * * *
(2) Presumptions of classification and U.S. or foreign status in
the absence of documentation--(i) In general. Except as otherwise
provided in this paragraph (d)(2)(i), for purposes of this section (and
other sections of regulations under this chapter to which this
paragraph (d)(2) applies), the provisions of Sec. 1.1441-1(b)(3)(i),
(ii), (iii), (vii), (viii), and (ix) and 1.1441-5(d) and (e)(6) shall
apply (by applying the term payor instead of the term withholding
agent) to determine the classification (e.g., individual, corporation,
partnership, trust), status (i.e., a U.S. or a foreign person), and
other relevant characteristics (e.g., beneficial owner or intermediary)
of a payee if a payment cannot be reliably associated with valid
documentation under Sec. 1.1441-1(b)(2)(vii) irrespective of whether
the payments are subject to withholding under chapter 3 of the Internal
Revenue Code. The provisions of Sec. 1.1441-1(b)(3)(iii)(D) and
(vii)(B) shall not apply, however, to payments of amounts that are not
subject to withholding. In addition, Sec. 1.1441-5(d)(2) shall not
apply to treat a partnership as a foreign partnership with respect to
amounts that are not subject to withholding unless the payor has actual
knowledge of the payee's employer identification number and that number
begins with the two digits ``98.'' The rules of Sec. 1.1441-
1(b)(2)(vii) shall apply for purposes of determining when a payment can
reliably be associated with documentation, by applying the term payor
instead of the term withholding agent. For this purpose, the
documentary evidence or statement described in paragraph (c)(4) of this
section can be treated as documentation with which a payment can be
associated.
(ii) Grace period in the case of indicia of a foreign payee. When
the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day
grace period provisions under section 3406(e) shall not apply and the
provisions of this paragraph (d)(2)(ii) shall apply instead. A payor
that, at any time during the grace period described in this paragraph
(d)(2)(ii), credits an account with payments described in Sec. 1.1441-
6(c)(2) that are reportable under sections 6042, 6045, 6049, or 6050N
may, instead of treating the account as owned by a U.S. person and
applying backup withholding under section 3406, if applicable, choose
to treat the account as owned by a foreign person if, at the beginning
of the grace period, the address that the payor has in its records for
the account holder is in a foreign country, the payor has been
furnished the information contained in a withholding certificate
described in Sec. 1.1441-1(e)(2)(i) or (3)(i) (by way of a facsimile
copy of the certificate or other non-qualified electronic transmission
of the information required to be stated on the certificate), or the
payor holds a withholding certificate that is no longer reliable other
than because the validity period as described in Sec. 1.1441-
1(e)(4)(ii)(A) has expired. In the case of a newly opened account, the
grace period begins on the date that the payor first credits the
account.
In the case of an existing account for which the payor holds a Form
W-8 or documentary evidence of foreign status, the grace period begins
on the date that the payor first credits the account after the existing
documentation held with regard to the account can no longer be relied
upon (other than because the validity period described in Sec. 1.1441-
1(e)(4)(ii)(A) has expired). A new account shall be treated as an
existing account if the account holder already holds an account at the
branch location at which the new account is opened. It shall also be
treated as an existing account if an account is held at another branch
location if the institution maintains a coordinated account
[[Page 32209]]
information system described in Sec. 1.1441-1(e)(4)(ix). The grace
period terminates on the earlier of the close of the 90th day from the
date on which the grace period begins or the date that the
documentation is provided. The grace period also terminates when the
remaining balance in the account (due to withdrawals or otherwise) is
equal to or less than 31 percent of the total amounts credited since
the beginning of the grace period that would be subject to backup
withholding if the provisions of this paragraph (d)(2)(ii) did not
apply. At the end of the grace period, the payor shall treat the
amounts credited to the account during the grace period as paid to a
U.S. or foreign payee depending upon whether documentation has been
furnished and the nature of any such documentation furnished upon which
the payor may rely to treat the account as owned by a U.S. or foreign
payee. If the documentation has not been received on or before the date
of expiration of the grace period, the payor may also apply the
presumptions described in this paragraph (d) to amounts credited to the
account after the date on which the grace period expires (until such
time as the payor can reliably associate the documentation with amounts
credited). See Sec. 31.6413(a)-3(a)(1)(iv) of this chapter for treating
backup withheld amounts under section 3406 as erroneously withheld when
the documentation establishing foreign status is furnished prior to the
end of the calendar year in which backup withholding occurs. If the
provisions of this paragraph (d)(2)(ii) apply, the provisions of
Sec. 31.3406(d)-3 of this chapter shall not apply. For purposes of this
paragraph (d)(2)(ii), an account holder's reinvestment of gross
proceeds of a sale into other instruments constitutes a withdrawal and
a non-qualified electronic transmission of information on a withholding
certificate is a transmission that is not in accordance with the
provisions of Sec. 1.1441-1(e)(4)(iv). See Sec. 1.1092(d)-1 for a
definition of the term actively traded for purposes of this paragraph
(d)(2)(ii).
* * * * *
(3) Payments to foreign intermediaries or flow-through entities--
(i) Payments of amounts subject to withholding under chapter 3 of the
Internal Revenue Code. In the case of payments of amounts that the
payor may treat as made to a foreign intermediary or flow-through
entity in accordance with Secs. 1.1441-1(b)(3)(ii)(C) and (b)(3)(v)(A),
1.1441-5(c) or (e) and that are subject to withholding under
Sec. 1.1441-2(a), the provisions of Secs. 1.1441-1(b)(2)(v) and 1.1441-
5(c)(1), (e)(2), and (3) shall apply (by applying the term payor
instead of the term withholding agent) to identify the payee. If a
payment of an amount subject to withholding cannot be reliably
associated with valid documentation from a payee in accordance with
Sec. 1.1441-1(b)(2)(vii) the presumption rules of Sec. 1.1441-
1(b)(3)(v) and Sec. 1.1441-5(d) and (e)(6) shall apply to determine the
payees status for purposes of this section (and other sections of
regulations under this chapter to which this paragraph (d)(3) applies).
(ii) Payments of amounts not subject to withholding under chapter 3
of the Internal Revenue Code. Except as provided in paragraph
(d)(3)(iii) of this section, amounts that are not subject to
withholding under chapter 3 of the Internal Revenue Code that the payor
may treat as paid to a foreign intermediary or flow-through entity
shall be treated as made to an exempt recipient described in
Sec. 1.6049-4(c) except to the extent that the payor has actual
knowledge that any person for whom the intermediary or flow-through
entity is collecting the payment is a U.S. person who is not an exempt
recipient. In the case of such actual knowledge, the payor shall treat
the payment that it knows is allocable to such U.S. person as a payment
to a U.S. payee who is not an exempt recipient.
(iii) Special rule for payments of certain short-term original
issue discount and bank deposit interest--(A) General rule. A payment
of U.S. source deposit interest described in section 871(i)(2)(A) or
881(d)(3) or interest or original issue discount on the redemption of
an obligation with a maturity from the date of issue of 183 days or
less (short-term OID) described in section 871(g)(1)(B) or 881(e) that
the payor may treat as paid to a foreign intermediary or flow-through
entity in accordance with the provisions of Sec. 1.1441-1(b)(3)(ii)(C)
or (v)(A) shall be treated as paid to an undocumented U.S. payee that
is not an exempt recipient under paragraph Sec. 1.6049-4(c) unless the
payor has documentation from the payees of the payment and the payment
is allocated to foreign payees, as a group, and to each U.S. non-exempt
recipient payee. See Sec. 1.1441-1(e)(3)(iv)(C)(2).
(B) Payee may be an intermediary. If a payment is made to a person
described in Sec. 1.6049-4(c)(1)(ii) that has not provided an
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(i) but
the payor knows or has reason to know that the payee may be an
intermediary, the payor must apply the rules of paragraph
(d)(3)(iii)(A) of this section. A payor has reason to know that such a
person may be an intermediary if that person has provided documentation
under Sec. 1.1441-3(b)(ii)(C) or (v)(A) for another account with the
same payor.
(iv) Short-term deposits and repurchase transactions. The
provisions of paragraph (d)(3)(ii) of this section and not paragraph
(d)(3)(iii) of this section shall apply to deposits with banks and
other financial institutions that remain on deposit for a period of two
weeks or less, to amounts of original issue discount arising from a
sale and repurchase transaction that is completed within a period of
two weeks or less, or to amounts described in paragraphs (b)(7), (10)
and (11) of this section (relating to certain obligations issued in
bearer form).
(4) Examples. The rules of paragraphs (d)(1) through (3) of this
section are illustrated by the following examples:
Example 1. (i) Facts. USP is a U.S. payor as defined in paragraph
(c)(5) of this section. USP pays interest from sources within the
United States to an account maintained in the United States by X. The
interest is not deposit interest described in sections 871(i)(2)(A) or
881(d). USP does not have a withholding certificate from X as defined
in Sec. 1.1441-1(c)(16). Moreover, USP cannot treat X as an exempt
recipient, as defined in Sec. 1.6049-4(c)(1)(ii), without documentation
and there is no indication that X is an individual, trust, or estate.
(ii) Analysis. The U.S. source interest is an amount subject to
withholding as defined in Sec. 1.1441-2(a). Under paragraph (d)(1) of
this section, USP must apply the provisions of Secs. 1.1441-1(b)(2) and
1.1441-5(c) and (e) to determine the payee of the interest. Under
Sec. 1.1441-1(b)(2)(i), X, the person to whom the payment is made, is
considered to be the payee, unless X is determined to be a flow-through
entity, in which case the rules of Sec. 1.1441-5 apply to determine the
payee. Under paragraph (d)(2)(i) of this section, the rules of
Sec. 1.1441-1(b)(3)(ii) apply to determine the classification of a
payee as an individual, trust, estate, corporation, or partnership.
Under Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership,
since X does not appear to be an individual, trust or estate, and X
cannot be presumed to be an exempt recipient in the absence of
documentation. Paragraph (d)(2)(i) of this section requires USP to
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to
determine whether X is presumed to be a U.S. or foreign partnership.
Under Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be
[[Page 32210]]
a U.S. partnership in absence of any indicia of foreign partnership
status. The U.S. source interest paid to X is reportable under section
6049 on Form 1099 and the interest is subject to backup withholding
under section 3406 because X has not provided its TIN on a valid Form
W-9.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that the interest paid by USP is from sources outside the
United States.
(ii) Analysis. Interest from sources outside the United States
is not an amount subject to withholding, as defined in Sec. 1.1441-
2(a). Under paragraph (d)(1) of this section, USP must apply the
provisions of Secs. 1.1441-1(b)(2) and 1.1441-5(c) and (e) to
determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, the person to
whom the payment is made, is considered to be the payee, unless X is
determined to be a flow-through entity, in which case the rules of
Sec. 1.1441-5(c) or (e) apply to determine the payee. Under
paragraph (d)(2)(i) of this section, the rules of Sec. 1.1441-
1(b)(3)(ii) apply to determine the classification of a payee as an
individual, trust, estate, corporation, or partnership. These rules
apply irrespective of whether the payment is an amount subject to
withholding. Under Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a
partnership, since X does not appear to be an individual, trust or
estate, and X cannot be presumed to be an exempt recipient in the
absence of documentation. Paragraph (d)(2)(i) of this section
requires USP to apply the provisions of Secs. 1.1441-1(b)(3)(iii)
and 1.1441-5(d) to determine whether, X is presumed to be a U.S. or
foreign partnership. Under Secs. 1.1441-1(b)(3)(iii) and 1.1441-
5(d)(2), X is presumed to be a U.S. partnership in absence of any
indicia of foreign partnership status. The foreign source interest
is a payment subject to reporting on Form 1099 under Sec. 1.6049-
5(a). Further, because X is a non-exempt recipient that has failed
to provide its TIN on a valid Form W-9, the foreign source interest
is subject to backup withholding under section 3406.
Example 3. (i) Facts. USP is a U.S. payor as defined in
paragraph (c)(5) of this section. USP makes a payment of U.S. source
interest outside the United States to an offshore account of X. See
paragraphs (c)(1) for a definition of offshore account and (e) for a
payment outside the United States. USP does not have a withholding
certificate from X as defined in Sec. 1.1441-1(c)(16) nor does it
have documentary evidence as described in Sec. 1.1441-
1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1). (ii) Analysis. The interest is
an amount subject to withholding as defined in Sec. 1.1441-2(a).
Under paragraph (d)(1) of this section, USP must apply the
provisions of Sec. 1.1441-1(b)(2) and Sec. 1.1441-5(c) and (e) to
determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, the person to
whom the payment is made, is considered to be the payee, unless X is
determined to be a flow-through entity, in which case the rules of
Sec. 1.1441-5(c) or (e) apply to determine the payee. Under
paragraph (d)(2)(i) of this section, the rules of Sec. 1.1441-
1(b)(3)(ii) apply to determine the classification of a payee as an
individual, trust, estate, corporation, or partnership. Under
Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since
X does not appear to be an individual, trust or estate, and X cannot
be presumed to be an exempt recipient in the absence of
documentation. Paragraph (d)(2)(i) of this section requires USP to
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to
determine whether, X is presumed to be a U.S. or foreign
partnership. Under Secs. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2),
X is presumed to be a foreign partnership. Therefore, under
paragraph (d)(1) of this section and Sec. 1.1441-5(c)(1)(i)(E), the
payees of the interest are presumed to be the partners of X. Under
Sec. 1.1441-5(d)(3), the partners are presumed to be undocumented
foreign persons. Therefore, USP must withhold 30 percent of the
interest payment under Sec. 1.1441-1(b)(1) and report the payment on
Form 1042-S in accordance with Sec. 1.1461-1(c).
Example 4. (i) Facts. The facts are the same as in Example 3,
except that the interest is paid by F, a non-U.S. payor. (ii)
Analysis. The analysis and result are the same as in Example 3. F is
a withholding agent under Sec. 1.1441-7 and its status as a non-U.S.
payor under paragraph (c)(5) of this section is irrelevant.
Example 5. (i) Facts. USP is a U.S. payor as defined in
paragraph (c)(5) of this section. USP makes a payment outside the
United States of interest from sources outside the United States to
an offshore account of X. USP does not have a withholding
certificate from X as defined in Sec. 1.1441-1(c)(16) nor does it
have documentary evidence as described in Secs. 1.1441-
1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1). USP does not have actual
knowledge of an employer identification number for X. X does not
appear to be an individual, trust, or estate and cannot be treated
as an exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii) in the
absence of documentation.
(ii) Analysis. The interest is not an amount subject to
withholding as defined in Sec. 1.1441-2(a). Under paragraph (d)(1)
of this section, USP must apply the rules of Secs. 1.1441-1(b)(2)
and 1.1441-5(c) and (e) to determine the payee of the interest.
Under Sec. 1.1441-1(b)(2)(i), X, the person to whom the payment is
made, is considered to be the payee, unless X is determined to be a
flow-through entity, in which case the rules of Sec. 1.1441-5(c) or
(e) apply to determine the payee. Under paragraph (d)(2)(i) of this
section, Sec. 1.1441-1(b)(3)(ii) applies to determine X's
classification as an individual, trust, estate, corporation or
partnership. Under Sec. 1.1441-1(b)(3)(ii)(B), X is treated as a
partnership, since it does not appear to be an individual, trust, or
estate and cannot be treated as an exempt recipient without
documentation. Paragraph (d)(2)(i) of this section requires USP to
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to
determine whether, X is presumed to be a U.S. or foreign
partnership. Paragraph (d)(2)(i) also states that the presumptions
of foreign status for payments made to offshore accounts contained
in Secs. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not apply to
amounts that are not subject to withholding. Therefore, under
Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a
U.S. partnership because it does not have actual knowledge that X's
employer identification number begins with the digits ``98.''
Therefore, USP must treat X as a U.S. person that is not an exempt
recipient and report the payment on Form 1099 under section 6049.
Under Sec. 31.3406(g)-1(e) of this chapter, however, USP is not
required to backup withhold on the payment unless it has actual
knowledge that X is a U.S. person that is not an exempt recipient.
Example 6. (i) Facts. The facts are the same as in Example 5,
except that the interest is paid by F, a non-U.S. payor, as defined
under paragraph (c)(5) of this section.
(ii) Analysis. The analysis is the same as under Example 5.
However, because F is a non-U.S. payor paying foreign source
interest outside the United States, paragraph (b)(6) of this section
exempts the payment from reporting under section 6049.
Example 7. (i) Facts. USP, a U.S. payor as defined in paragraph
(c)(5) of this section, makes a payment of U.S. source interest to
NQI, a foreign corporation and a nonqualified intermediary as
defined in Sec. 1.1441-1(c)(14). The interest is not deposit
interest as defined in sections 871(i)(2)(A) and 881(d). The
interest is paid inside the United States to an account maintained
in the United States. NQI has provided USP with a nonqualified
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(iii), but has not attached any documentation from the
persons on whose behalf it acts or a withholding statement as
described in Sec. 1.1441-1(e)(3)(iv).
(ii) Analysis. U.S. source interest is an amount subject to
withholding under Sec. 1.1441-2(a). USP may treat the payment as
made to a foreign intermediary under Sec. 1.1441-1(b)(3)(v)(A)
because USP has received a nonqualified intermediary withholding
certificate from NQI. Under paragraph (d)(3)(i) of this section, USP
must apply Sec. 1.1441-1(b)(2)(v) to determine the payees of the
payment. Under Sec. 1.1441-1(b)(2)(v)(A), USP must treat the persons
on whose behalf NQI is acting as the payees. Paragraph (d)(3)(i) of
this section also requires USP to apply the presumption rules of
Sec. 1.1441-1(b)(3)(v) if it cannot reliably associate the payment
with valid documentation from a payee. See Sec. 1.1441-1(b)(2)(vii).
Under Sec. 1.1441-1(b)(3)(v)(B), the interest is treated as paid to
an unknown foreign payee because it cannot be reliably associated
with documentation under Sec. 1.1441-1(b)(2)(vii). Therefore, the
payment is not subject to reporting on Form 1099 under paragraph
(b)(12) of this section because the payment is presumed made to a
foreign person. The payment is subject to withholding, however,
under Sec. 1.1441-1(b) at a rate of 30 percent and is subject to
reporting on Form 1042-S under Sec. 1.1461-1(c).
Example 8. (i) Facts. The facts are the same as in Example 7,
except that the interest is paid outside the United States, as
defined in paragraph (e) of this section to an offshore account, as
defined in paragraph (c)(1) of this section.
(ii) Analysis. The analysis and results are the same as in
Example 7. The rules of
[[Page 32211]]
Sec. 1.1441-1(b)(3)(v) apply irrespective of where the account is
maintained or the payment made.
Example 9. (i) Facts. The facts are the same as in Example 8,
except that the interest is paid by F, a non-U.S. payor, as defined
in paragraph (c)(5) of this section.
(ii) Analysis. The analysis and results are the same as in
Example 7.
Example 10. (i) USP, a U.S. payor as defined in paragraph (c)(5)
of this section, makes a payment of foreign source interest to NQI,
a foreign corporation and a nonqualified intermediary as defined in
Sec. 1.1441-1(c)(14). NQI has provided USP with a nonqualified
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(iii), but has not attached any documentation from the
persons on whose behalf it acts or a withholding statement as
described in Sec. 1.1441-1(e)(3)(iv).
(ii) Analysis. Foreign source interest is not an amount subject
to withholding under chapter 3 of the Internal Revenue Code. See
Sec. 1.1441-2(a). Under paragraph (d)(3)(ii)(A) of this section,
amounts that are not subject to withholding under chapter 3 of the
Internal Revenue Code that a payor may treat as paid to a foreign
intermediary are treated as made to an exempt recipient described in
Sec. 1.6049-4(c). Therefore, the foreign source interest is not
subject to reporting on Form 1099.
Example 11. (i) Facts. USP is a U.S. payor as defined in
paragraph (c)(5) of this section. USP pays U.S. source original
issue discount from the redemption of an obligation described in
section 871(g)(1)(B) to NQI, a foreign corporation that is a
nonqualified intermediary as defined in Sec. 1.1441-1(c)(14). The
redemption proceeds are paid to an account NQI has with USP in the
United States. NQI provides a nonqualified intermediary withholding
certificate as described in Sec. 1.1441-1(e)(3)(iii) but does not
attach any payee documentation or a withholding statement described
in Sec. 1.1441-1(e)(3)(iv).
(ii) Analysis. Under paragraph (d)(3)(ii)(A) of this section,
USP must treat the payment as made to an undocumented U.S. payee
that is not an exempt recipient and report the payment on Form 1099.
Further, because the payment is made inside the United States, the
exception to backup withholding for offshore accounts contained in
Sec. 31.3406(g)-1(e) of this chapter does not apply and the payment
is subject to backup withholding.
Example 12. (i) Facts. P, a payor, makes a payment to NQI of
U.S. source interest on debt obligations issued prior to July 18,
1984. Therefore, the interest does not qualify as portfolio interest
under section 871(h) or 881(d). NQI is a nonqualified foreign
intermediary, as defined in Sec. 1.1441-1(c)(14), and has furnished
P a valid nonqualified intermediary withholding certificate
described in Sec. 1.1441-1(e)(3)(iii) to which it has attached a
valid Form W-9 for A, and two valid beneficial owner Forms W-8, one
for B and one for C. A is not an exempt recipient under Sec. 1.6049-
4(c). NQI furnishes a withholding statement, described in
Sec. 1.1441-1(e)(3)(iv), in which it allocates 20 percent of the
U.S. source interest to A, but does not allocate the remaining 80
percent of the interest between B and C. B's withholding certificate
indicates that B is a foreign pension fund, exempt from U.S. tax
under the U.S. income tax treaty with Country T. C's withholding
certificate indicates that C is a foreign corporation not entitled
to a reduced rate of withholding.
(ii) Analysis. Under paragraph (d)(3)(i) of this section, P
applies the rules of Sec. 1.1441-1(b)(2)(v) to determine the payees
of the interest. Under that section, the payees are the persons on
whose behalf NQI acts--A, B and C. Because P can reliably associate
20 percent of the payment with valid documentation provided by A, P
must treat 20 percent of the interest as paid to A, a U.S. person
not exempt from reporting, and report the payment on Form 1099. P
cannot reliably associate the remaining 80 percent of the payment
with valid documentation under Sec. 1.1441-1(b)(2)(vii) and,
therefore, under paragraph (d)(3)(i) of this section must apply the
presumption rules of Sec. 1.1441-1(b)(3)(v). Under that section, the
interest is presumed paid to an unknown foreign payee. Under
paragraph (b)(12) of this section, P is not required to report the
interest presumed paid to a foreign person on Form 1099. Under
Sec. 1.1441-1(b), 80 percent of the interest is subject to 30
percent withholding, however, and the interest is reportable on Form
1042-S under Sec. 1.1461-1(c).
Example 13. (i) Facts. The facts are the same as in Example 12,
except that P can reliably associate 30 percent of the payment of
interest to B, but cannot reliably associate the remaining 70
percent with A or C.
(ii) Analysis. Under paragraph (d)(3)(i) of this section, P
applies the rules of Sec. 1.1441-1(b)(2)(v) to determine the payees
of the interest. Under that section, the payees are the persons on
whose behalf NQI acts--A, B and C. Because P can reliably associate
30 percent of the payment with B, a foreign pensions fund exempt
from withholding under an income tax treaty, P may treat that
payment as paid to B and not subject to reporting on Form 1099 under
paragraph (b)(12) of this section. P cannot reliably associate the
remaining 70 percent of the payment with valid documentation under
Sec. 1.1441-1(b)(2)(vii) and, therefore, under paragraph (d)(3)(i)
of this section must apply the presumption rules of Sec. 1.1441-
1(b)(3)(v). Under that section, the interest is presumed paid to an
unknown foreign payee. Under paragraph (b)(12) of this section, P is
not required to report the interest presumed paid to a foreign
person on Form 1099. Under Sec. 1.1441-1(b), 80 percent of the
interest is subject to 30 percent withholding, however, and the
interest is reportable on Form 1042-S under Sec. 1.1461-1(c).
Example 14. (i) Facts. The facts are the same as in Example 12,
except that P also makes a payment of foreign source interest to
NQI.
(ii) Analysis. Under paragraph (d)(3)(ii)(A), P may treat the
foreign source interest as paid to an exempt recipient as defined in
Sec. 1.6049-4(c) and not subject to reporting on Form 1099 even
though some or all of the foreign source interest may in fact be
owned by A, the U.S. person that is not exempt from reporting.
* * * * *
Parts 1 and 31 [Amended]
Par. 18. Effective January 1, 2001, in the list below, for each
section indicated in the left column remove the language in the middle
column and add the language in the right column:
------------------------------------------------------------------------
Section Remove Add
------------------------------------------------------------------------
1.1441-1(b)(1), first sentence.. to a beneficial to a payee that is
owner that is a a U.S. person.
U.S. person.
1.1441-1(b)(2)(iii)(A), last 1.1441-6(b)(4).... 1.1441-6(b)(2).
sentence.
1.1441-1(b)(2)(iii)(B), third 1.1441-6(b)(4).... 1.1441-6(b)(2).
sentence.
1.1441-1(b)(2)(vi), second 1.6049-5(c)(4).... 1.6049-5(c)(1).
sentence.
1.1441-1(b)(4)(iii), last Sec. 1.6049-5(c)( Sec. 1.6049-5(c)(
sentence. 4). 1).
1.1441-1(b)(4)(v), third Sec. 1.6049-5(c)( Sec. 1.6049-5(c).
sentence. 4).
1.1441-1(b)(4)(xviii), third is required....... is not required.
sentence.
1.1441-1(b)(7)(i)(A)............ Sec. 1.1441-4(a)( Sec. 1.1441-4(a)(
2)(i) or (3). 2)(ii) or (3)(i).
1.1441-1(b)(7)(iii), first Sec. 1.1441-4(a)( Sec. 1.1441-4(a)(
sentence. 2)(i) or (3). 2)(ii) or (3)(i).
1.14441-1(b)(9), second sentence a withholding an intermediary or
certificate. flow-through
withholding
certificate.
1.1441-1(b)(9), second sentence. a U.S. beneficial a U.S. payee.
owner.
1.1441-1(e)(1)(ii)(A)(2)........ with respect to an to an offshore
offshore account. account.
1.1441-1(e)(2)(i), fifth See Sec. 1.1441- See Sec. 1.1441-
sentence. 6(b)(4)(ii). 6(b)(2).
1.1441-1(e)(2)(ii), sixth See Sec. 1.1441- See Sec. 1.1441-
sentence. 6(b)(4)(i). 6(b).
1.1441-1(e)(4)(viii), Sec. 1.1441-6(b)( Sec. 1.1441-6(c)(
introductory text, second 2)(ii). 2).
sentence.
1.1441-1(e)(4)(viii), third Sec. 1.1441-6(b)( Sec. 1.1441-6(b)(
sentence. 4)(ii). 1).
[[Page 32212]]
1.1441-3(c)(2)(i), introductory estimate of estimates under
text, second sentence. earnings and this paragraph
profits,. (c)(2).
1.1441-4(a)(3)(ii).............. payment to a payment shall.
foreign financial
institution
(within the
meaning of Sec.
1.165-12(c)(1)(iv
)) shall.
1.1441-4(a)(3)(ii).............. counterparty...... payee.
1.1441-7(b)(1), first sentence.. is incorrect...... is unreliable or
incorrect.
1.1441-7(b)(1), third sentence.. contained in, or contained in, or
attached to, a associated with,
withholding a withholding
certificate. certificate.
1.1441-7(b)(1), third sentence.. are not correct are incorrect or
and. unreliable and.
1.1461-1(b)(2), first sentence.. Form 1042X........ Form 1042.
1.6045-1(j), first sentence..... the end of the February 28 of the
second calendar following
month following calendar year.
the close of the
calendar year of
such reporting
period.
1.6049-4(c)(1)(ii)(A), second meets the......... meets one of the.
sentence.
31.3406(h)-3(a), introductory the payee a payee that is a
text, first sentence. certifies. U.S. person
certifies.
------------------------------------------------------------------------
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-11937 Filed 5-15-00; 8:45 am]
BILLING CODE 4830-01-U