A common withholding exemption is a claim under an applicable provision of an income tax treaty with the country of tax residence of the income’s beneficial owner. Such a claim must be made by the vendor on a valid Form W- 8BEN, or a Form 8233 in the case of treaty claims by individuals on compensation for personal services. For a claim for exemption from withholding to be valid, the form must include a U.S. taxpayer identification number – an SSN or ITIN for an individual, an EIN for an entity. Treaty claims by entities for exemption from withholding will not be effective for FATCA withholding purposes (effective July 1, 2014). Foreign entities resident in a tax treaty country might be eligible to make a claim on a U.S. tax return for refund of FATCA withholding under an applicable tax treaty provision. Excluded nonfinancial payments and payments to individuals will not be subject to FATCA withholding, however.
Tax treaty provisions (called articles) set forth the conditions for exemptions from or reductions in withholding for specific types of fixed, determinable, annual, or periodical (FDAP) income such as dividends, interest, and royalties. The treaty rates for these types of income are illustrated in Table 1 in IRS Publication 515. Certain income types, such as income from real property and natural resources, are not exempt from tax under treaties and are excluded from this table. Table 1 footnotes add additional conditions and rates for specific types of income.For example, the reduced rate for credit financing interest may be different than the reduced rate in the table. Income not dealt with by a specific article might be exempt from tax under an Other Income Article. The conditions for treaty exemptions from withholding for compensation for services of individuals and for scholarship and fellowship grants made to individuals are set forth in Table 2 of IRS Publication 515.
Visit Paula’s blog archive page to read her posts on payments to foreign individuals and entities, as well as the other posts in this series.
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