Generally, a foreign person is subject to U.S. tax on its U.S.
source income. Most types of U.S. source income received by a foreign
person are subject to U.S. tax of 30%. A reduced rate, including
exemption, may apply if there is a tax treaty between the foreign
person's country of residence and the United States. The tax is
generally withheld (NRA withholding) from the payment made to the
foreign person.
The term "NRA withholding" is used in this
publication descriptively to refer to withholding required under
sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally,
NRA withholding describes the withholding regime that requires 30%
withholding on a payment of U.S. source income. Payments to all
foreign persons, including nonresident alien individuals, foreign
entities and governments, may be subject to NRA withholding. The term
does not include withholding done under section 1445 of the Code (see
U.S. Real Property Interest, later) or under section 1446
of the Code (see Partnership Withholding on Effectively Connected
Income, later).
A withholding agent must withhold 30% of any payment subject to NRA
withholding, made to a payee that is a foreign person. However, a
withholding agent that can reliably associate the payment with
documentation (discussed later) from a U.S. person is not required to
withhold. In addition, a withholding agent may apply a reduced rate of
withholding (including an exemption from withholding) if it can
reliably associate the payment with documentation from a beneficial
owner that is a foreign person entitled to a reduced rate of
withholding.
Withholding Agent
You are a withholding agent if you are a U.S. or foreign person
that has control, receipt, custody, disposal, or payment of any item
of income of a foreign person that is subject to withholding. A
withholding agent may be an individual, corporation, partnership,
trust, association, or any other entity, including any foreign
intermediary, foreign partnership, or U.S. branch of certain foreign
banks and insurance companies. You may be a withholding agent even if
there is no requirement to withhold from a payment or even if another
person has withheld the required amount from the payment.
Although several persons may be withholding agents for a single
payment, the full tax is required to be withheld only once. Generally,
the U.S. person who pays an amount subject to NRA withholding to a
foreign person is the person responsible for withholding. However,
other persons may be required to withhold. For example a payment made
by a flow-through entity or nonqualified intermediary that knows, or
has reason to know, that the full amount of NRA withholding was not
done by the person from which it receives a payment is required to do
the appropriate withholding since it also falls within the definition
of a withholding agent. In addition, withholding must be done by any
qualified intermediary in accordance with the terms of its qualified
intermediary withholding agreement.
Liability for tax.
As a withholding agent, you are personally liable for any tax
required to be withheld. This liability is independent of the tax
liability of the foreign person to whom the payment is made. If you
fail to withhold and the foreign payee fails to satisfy its U.S. tax
liability, then both you and the foreign person are liable for tax, as
well as interest and any applicable penalties. The applicable tax will
be collected only once. If the foreign person satisfies its U.S. tax
liability, you may still be held liable for interest and penalties for
your failure to withhold.
Determination of amount to withhold.
You must withhold on the gross amount subject to NRA withholding.
You cannot reduce the gross amount by any deductions. However, see
Scholarships and Fellowship Grants, and Pay for
Personal Services Performed, later, for when a deduction for a
personal exemption may be allowed.
If the determination of the source of the income or the amount
subject to tax depends on facts that are not known at the time of
payment, you must withhold an amount sufficient to ensure that at
least 30% of the amount subsequently determined to be subject to
withholding is withheld. In no case, however, should you withhold more
than 30% of the total amount paid.
When to withhold.
Withholding is required at the time you make a payment of an amount
subject to withholding. A payment is made to a person if that person
realizes income whether or not there is an actual transfer of cash or
other property. A payment is considered made to a person if it is paid
for that person's benefit. For example, a payment made to a creditor
of a person in satisfaction of that person's debt to the creditor is
considered made to the person. A payment is also considered made to a
person if it is made to that person's agent.
A U.S. partnership should withhold when any distributions that
include amounts subject to withholding are made. However, if a foreign
partner's distributive share of income subject to withholding is not
actually distributed, the U.S. partnership must withhold on the
foreign partner's distributive share of the income on the earlier of
the date that a Schedule K-1 (Form 1065) is provided or mailed
to the partner or the due date for furnishing that schedule.
A U.S. trust is required to withhold on the amount includible in
the gross income of a foreign beneficiary to the extent the trust's
distributable net income consists of an amount subject to withholding.
To the extent a U.S. trust is required to distribute an amount subject
to withholding but does not actually distribute the amount, it must
withhold on the foreign beneficiary's allocable share at the time the
income is required to be reported on Form 1042-S.
Withholding and Reporting Obligations
You are required to report payments subject to NRA withholding on
Form 1042-S and to file a tax return on Form 1042. An exception
from reporting may apply to individuals who are not required to
withhold from a payment and who do not make the payment in the course
of their trade or business.
Form 1099 reporting and backup withholding. You may also
be responsible as a payer for information reporting on Form 1099 for
payments made to a U.S. person. In addition, you are required to
deduct and withhold 31% from a reportable payment made to a U.S.
person that is subject to Form 1099 reporting if (1) the U.S. person
has not provided its taxpayer identification number (TIN) in the
manner required, (2) the IRS notifies you that the TIN furnished by
the payee is incorrect, (3) there has been a notified payee
under-reporting, or (4) there has been a payee certification failure.
Generally, a TIN must be provided by a U.S. non-exempt recipient on
Form W-9. Foreign persons who provide Form W-8BEN, Form
W-8ECI, or Form W-8EXP (or, if applicable, documentary
evidence) are exempt from backup withholding and Form 1099 reporting.
A payer files a tax return on Form 945 for backup withholding.
You may be required to report payments on Form 1099, and, if
appropriate, backup withhold, if the payee is determined to be a U.S.
person subject to Form 1099 reporting even though you do not make the
payments directly to that U.S. person. For example, you are required
to report income paid to a foreign intermediary or flow-through entity
that collects for a U.S. person subject to Form 1099 reporting. See
Identifying the Payee, later, for more information.
Wages paid to employees.
If you are the employer of a nonresident alien employee, you may
have to withhold taxes at graduated rates. See Pay for Personal
Services Performed, later.
Effectively connected income by partnerships.
A withholding agent that is a partnership (whether U.S. or foreign)
is also responsible for withholding on its income effectively
connected with a U.S. trade or business that is allocable to foreign
partners. See Partnership Withholding on Effectively Connected
Income, later, for more information.
U.S. real property interest.
A withholding agent may also be responsible for withholding if a
foreign person transfers a U.S. real property interest to the agent,
or if it is a corporation, partnership, trust or estate that
distributes a U.S. real property interest to a shareholder, partner,
or beneficiary that is a foreign person. See U.S. Real Property
Interest, later.
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