Although the Qualified Intermediary (QI) regime has been around for quite some time, simple questions surrounding the terminology and structure still remain quite common. For example, what is an Intermediary, a Qualified Intermediary, and a Non-Qualified Intermediary?
An Intermediary is any person or organisation holding securities other than for its own account. A Qualified Intermediary is a non-U.S. financial institution that has entered into a QI Agreement with the IRS. The QI Agreement requires that the QI must implement certain documentary procedures to identify its clients that invest in US securities. These procedures are subject to verification (two times in a six year period) by an external auditor.
A QI can certify treaty residence and/or non-U.S. residence on behalf of its direct clients, thereby obtaining a reduced rate of U.S. withholding for its direct non-U.S. customers without revealing their identity either to upstream custodians or to the IRS.
An Intermediary that does not apply to become a QI will, by default, be a Non-QI. Although a Non-QI does not have an agreement with the IRS, their responsibilities are practically the same as a QI with regard to documentation and reporting. However, they have to disclose the information of their direct customers in the form of W-8, W-9 or KYC documentation plus a detailed withholding statement disclosing the details of each beneficiary to their upstream custodians or the IRS.
It is without doubt that the documentation process of the QI is a simplified process to that of the Non-QI. Other benefits include the ability to obtain a refund of over-withholding on behalf of direct clients.