Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, is requested from a foreign payee by a U.S. payer to:
- Establish the payee’s foreign status,
- Claim that such person is the beneficial owner of the income for which the form is being furnished, and
- If applicable, claim a reduced rate of, or exemption from withholding under an income tax treaty.
This form is used for the following types of payments:
- Compensation for, or in expectation of, services performed (but not for independent personal services performed in the US – use Form 8233 instead);
- Other fixed or determinable annual or periodical gains (also referred to as FDAP).
It is one of the most frequently used forms and you should have it on file prior to making a payment to a foreign payee. You are not, however, responsible for misstatements on a Form W-8BEN for which you did not have actual knowledge, or reason to know, that the statements were incorrect.
What if you can’t get a Form W-8BEN?
If a foreign payee refuses to furnish a completed Form W-8BEN, you are obligated to withhold tax at a 30% rate. There are some exceptions to this rate, such as for payments to foreign partners and teachers for which different withholding rates are to be applied.
What to look for when you receive a Form W-8BEN?
If you do receive a completed form from your foreign vendor/contractor, please review it carefully to determine whether they are exempt or taxed at a reduced rate based on the exemption claimed under an income tax treaty. Whenever the tax treaty exemption is claimed, US TIN (taxpayer identification number) must be provided.
The validity of the form provided without US TIN is three years unless there is a change in circumstance, whereas a form with US TIN remains effective until a change of circumstances occurs that makes the furnished information incorrect.
However, do not ask for Form W-8BEN if your payee informs you that this income is effectively connected with the conduct of a trade or business in the US. In this case, the payee is to furnish you Form W-8ECI that effectively exempts him from withholding as he is to file his own US tax return. Part 3 of this series addresses Form W-8ECI in more detail.
If you missed part 1 of this series, here it is: How to Avoid Tax Traps When Paying Foreign Vendors Part 1: Overview. These are the federal rules, but it is paramount to also take into account state rules governing withholding from foreign payees. As always, please make sure you seek professional advice for any specific circumstances as this post is meant to be used as a general overview only.