Instructions for Foreign Vendors on how to Properly Fill Out Form W-8
posted Dec 22, 2014 by Elizabeth Colagiovanni,Esq.,LLM
The new form W-8BEN-E replaces the prior form W-8BEN that used to be for both foreign individuals and foreign entities. This new form is not just for claiming treaty benefits on interest, dividends and royalties, but for any payments made to a foreign person that is fixed and determinable, annual and periodical. Therefore, if a US company pays a foreign vendor for services or products, those payments require the applicable W-8 to be on file with the US company, otherwise the US company must withhold 30% federal tax from the payment made to those foreign vendors.
As of January 1, 2015, the updated form W-8BEN will be for foreign individuals only, and the new form W-8BEN-E will be for entities. If the form is incorrectly filled out, it will be considered an invalid form and the 30% withholding will be required. For those US persons who make payments to foreign vendors (that are entities) for services or products in foreign jurisdictions, it is important that they not only request the foreign vendor complete the new W-8BEN-E, but make sure that the form has been properly completed.
What is the purpose of the new Form W-8BEN-E?
There are two areas on the W-8BEN-E that certification is being asked for, which are for Chapter 3 and Chapter 4 of Subtitle A of the Code withholdings. Under Chapter 3, unless foreign certification is given, a withholding agent must withhold 30% for withholding under sections 1441 (withholding for non-resident aliens), 1442 (withholding for foreign corporations), and 1446 (withholding for foreign partners’ share of effectively connected income). Under Chapter 4, the new FATCA withholding requirements for foreign financial institutions (“FFI”) require that the withholding agent must withhold 30% to a non-participating FFI or a non-financial foreign entity (“NFFE”) that is not an excepted NFFE. Therefore, the entity is certifying for Chapter 3 purposes they are a foreign entity so that they are not subject to withholdings, and certifying for Chapter 4 purposes that they are not a FFI or an excepted NFFE that is subject to withholdings.
How to determine whether a foreign vendor has properly completed the Form W-8BEN-E
When the foreign entity fills out Part I of the W-8BEN-E they must list their identifying information:
- US TIN (if applicable)
For Chapter 3 purposes, they must also identify what type of entity they are on Part I, Line 4.
It is important to note, that if this is a foreign disregarded entity, foreign partnership, or foreign trust receiving a payment from a US person, they should not be filling out this form. The W-8BEN-E is for foreign entities that are the actual beneficial owner of the payments (corporations and some reverse hybrid entities).
If the payment is made to one of these types of flow-through entities, and the beneficial owner is a foreign individual, then that individual will fill out the updated Form W-8BEN. If the owner of such a flow-through entity is a foreign corporation, then it will fill out the Form W-8BEN-E.
Next, for Chapter 4 purposes, they fill out their FATCA status on Part I, Line 5. This is where the confusion can come in. There are 31 statuses to choose from, and, once chosen, they each have an additional area that must be filled out on the form. Usually when it comes to payments for services to foreign vendors, the foreign vendor is an active NFFE. However, if there is reason to believe that payment is being made to a foreign holding company that holds foreign operating companies, then the payment is made to a passive NFFE.
Once the box is checked for the active NFFE, then the foreign entity must also complete Part XXV. There is no need to fill out any other sections of this form in between Part I and Part XXV because all of these other sections are for the other FATCA status entities. In Part XXV the entity is just checking the box to certify that the entity is (1) not an FFI, (2) less than 50% of the entity’s gross income for the preceding calendar year is passive income, and (3) less than 50% of the assets held by the entity are for passive income.
If the payment is made to a holding company that also conducts an active business, and the passive NFFE box has been checked, then Part XXVI also must be filled out to certify that the entity is not a FFI (along with other statements). There is a further certification that needs to be checked off which states there are no substantial US owners, or if there are US owners, that they are providing the name, address and TIN of each of these substantial US owners in Part XXX of the form. Substantial US owners are generally those with a more than 10% direct or indirect interest by vote or value in the entity.
Finally, in Part XXIX, the owner or individual authorized to sign for the owner must sign and date the document and check the box which states they have the capacity to sign for the entity.
If properly completed, how long is W-8BEN-E valid?
The form expires on December 31 three years after the date of signature. Therefore, if the foreign vendor has signed this form in September of 2014, then the form expires on December 31, 2017. However, if the foreign vendor has a US TIN, the form is valid until such time as any of the information changes on the form (change in identifying information, change of entity type, or change of entity FATCA status).
If your US company pays a foreign vendor for services or products, you obtain some version of Form W-8, which can be lengthy and complicated. If you have questions regarding whether or not these requirements apply to your company please contact us.