Tax & Accounting Blog

Withholding on U.S. Business Income of Foreign Vendors – Part 2: Claiming Exemption from Withholding on Effectively Connected Income

1099, ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management February 27, 2012

A foreign enterprise that is engaged in a U.S. trade or business during the tax year may request an exemption from NRA withholding on its Effectively Connected Income (ECI) that is identified on line 9 of a valid Form W-8ECI presented to the payer prior to payment (unless an exemption is not available). To be valid, Form W-8ECI must include the U.S. Taxpayer Identification Number (TIN) of the beneficial owner identified on line 1. If the beneficial owner is an individual, the TIN must be a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). If the beneficial owner is an entity, the TIN must be an Employer Identification Number (EIN). See the article, When a Foreign Vendor Needs a U.S. Taxpayer Identification Number, in the May/June 2011 edition of the Crow’s Nest for more information about forms and required TINs.

Form W-8ECI requests the U.S. business address of the beneficial owner without further comment. Foreign enterprises with ECI only from the performance of services in the U.S. frequently lack a U.S. address, however. Informal advice from the IRS is to use the name and address of the organization for which the services are being performed.

The beneficial owner of the income (or a representative authorized to sign for the beneficial owner) submitting a Form W-8ECI is certifying that: 1) the beneficial owner is not a U.S. person; 2) the income identified on line 9 is effectively connected with the conduct of a U.S. trade or business; and, 3) the amounts are includible in the gross income of the beneficial owner for the taxable year. Although under U.S. tax principles, partners in a foreign partnership are considered the beneficial owners of the income rather than the partnership itself, Form W-8ECI may nevertheless be used by a foreign partnership (or other flow-through entity taxed as a partnership) to avoid NRA withholding. The ECI of the foreign partnership is reported on Form 1042-S in the name of the foreign partnership, which must then comply with the Section 1446 rules for withholding on and reporting U.S. income allocated to its foreign partners.