Tax & Accounting Blog

Withholding on U.S. Business Income of Foreign Vendors – Part 3: Effectively Connected Income Not Exempt from Withholding

ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management March 6, 2012

Non-U.S. individuals may use Form W-8ECI for their Effectively Connected Income (ECI), such as rents from U.S. real property for which the beneficial owner elected ECI treatment on Form 1040NR. Non-U.S. individuals are restricted by the regulations from using Form W-8ECI for their compensation for personal services performed in the U.S. (This restriction is indicated in the form’s instructions.) Their U.S.-source compensation income is, therefore, subject to NRA withholding unless the income is exempt from tax under an income tax treaty provision and the beneficial owner presents the payer with a valid Form 8233 prior to payment.

Likewise, a foreign corporation that qualifies as a personal holding company for U.S. income tax purposes may not use Form W-8ECI to claim an exemption from NRA withholding. A corporation is a personal holding company if: 1) the corporation is or will be receiving amounts under a contract for personal services of an individual whom the corporation has no right to designate, and 2) 25 percent or more in value of the outstanding stock of the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform or may be designated as the one to perform the services called for under the contract.