[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Rules and Regulations]
[Pages 53387-53498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25998]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517,
520, 521, and 602
[TD 8734]
RIN 1545-AU43; 1545-AT77
General Revision of Regulations Relating to Withholding of Tax on
Certain U.S. Source Income Paid to Foreign Persons and Related
Collection, Refunds, and Credits; Revision of Information Reporting and
Backup Withholding Regulations; and Removal of Regulations Under Part
35a and of Certain Regulations Under Income Tax Treaties
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final regulations relating to the
withholding of income tax under sections 1441, 1442, and 1443 on
certain U.S. source income paid to foreign persons, the related tax
deposit and reporting requirements under section 1461, and the related
requirements governing collection, refunds, and credits of withheld
amounts under sections 1461 through 1463 and sections 6402 and 6413.
Additionally, this document contains final regulations relating to the
statutory exemption under sections 871(h) and 881(c) for portfolio
interest.
[[Page 53388]]
This document removes temporary employment tax regulations under the
Interest and Dividend Compliance Act of 1983 and amends existing
regulations under sections 6041A and 6050N. This document finalizes
changes to the proposed regulations contained in project number INTL-
52-86, published on February 29, 1988, under sections 6041, 6042, 6044,
6045, and 6049. This document also finalizes proposed regulations
contained in project number IA-33-95, published on December 21, 1995 ,
relating to the effective date of certain temporary employment tax
regulations. This document finalizes related changes to the regulations
under sections 163(f), 165(j), 3401, 3406, 6109, 6114, 6413, and 6724.
This document removes certain regulations under income tax treaties.
EFFECTIVE DATES: These regulations are effective January 1, 1999,
except the addition of Sec. 31.9999-0, the removal of Sec. 35a.9999-0T
and the addition of Sec. 35a.9999-0, which are effective October 14,
1997.
FOR FURTHER INFORMATION CONTACT: Lilo Hester or Teresa Burridge Hughes,
telephone (202) 622-3840 (not a toll-free number), for questions on the
regulations generally; Carl Cooper, telephone (202) 622-3840 (not a
toll-free number), for questions on portfolio interest and qualified
intermediary agreements; Renay France, telephone (202) 622-4940 (not a
toll-free number), for questions on the regulations relating to chapter
61 of the Internal Revenue Code or section 3406.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545-1484. Responses to these collections of
information are required to obtain a benefit (to claim an exemption to,
or a reduction in, the withholding tax), and to facilitate tax
compliance (to verify entitlement to an exemption or a reduced rate).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number.
The estimate of the reporting burden in these final regulations
will be reflected in the burdens of Forms W-8, 1042, 1042S, 8233, 8833,
and the income tax return of a foreign person filed for purposes of
claiming a refund of tax.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing the burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains final amendments to the Income Tax
Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f),
165(j), 871, 881, 1441, 1442, 1443, 1461, 1462, 1463, 3401, 3406, 6041,
6041A, 6042, 6045, 6049, 6050A, 6050N, 6109, 6114, 6402, 6413, and 6724
of the Internal Revenue Code (Code) . This document also removes
certain regulations under income tax treaties.
On April 15, 1996, (61 FR 17614) the IRS and Treasury published a
notice of proposed rulemaking under a number of sections of the Code,
dealing with the withholding of tax under section 1441, 1442, or 1443
on amounts paid to foreign persons, procedures for claiming foreign
status to avoid backup withholding under section 3406 on certain
payments, and the reporting to the IRS of payments to foreign persons.
Reporting to the IRS may be required under sections 6011 and 1461 or
under the reporting provisions of chapter 61 of the Code, such as
sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A, or 6050N, (the
Form 1099 reporting provisions). Comments responding to the notice were
received and a public hearing was held on July 24, 1996. After
considering the comments submitted in writing and at the hearings, the
proposed regulations are adopted as revised by this Treasury decision.
The revisions are discussed below.
Payments to domestic and foreign persons create a number of
withholding and information reporting obligations for both the payor
and the recipient of these payments under various provisions of the
Code. These procedures are important to the operation of IRS matching
systems. Those systems are part of a compliance program that allows the
IRS to match information provided by payors with income reported on a
payee's income tax return and help detect U.S. taxpayers that fail to
file returns or underreport income. The withholding of tax at source
and the reporting of payments to foreign persons are also important to
insure that foreign persons comply with their U.S. tax obligations. The
final regulations contained in this document deal mostly with payments
to foreign persons, and the U.S. income tax liability resulting from
such payments.
Under sections 871(a) and 881(a) of the Code, nonresident alien
individuals and foreign corporations are subject to a 30-percent tax on
most items of income they receive from sources within the United States
that are not effectively connected with the conduct of a trade or
business in the United States. Income taxable under these provisions
includes interest, dividends, royalties, compensation, other fixed or
determinable annual or periodical (FDAP) income and certain gains. The
tax liability imposed under sections 871(a) and 881(a) is generally
collected by way of withholding at source under chapter 3 of the Code
pursuant to section 1441(a) (for payments to nonresident alien
individuals and foreign partnerships), section 1442(a) (for payments to
foreign corporations), or section 1443(a) (for payments of certain
income to foreign tax-exempt entities). Other special withholding
provisions apply under section 1443(b) (dealing with the withholding of
the 4-percent tax imposed under section 4948), section 1445 (dealing
with gains from the disposition of U.S. real property) and section 1446
(dealing with effectively connected income of foreign partners in a
partnership). The tax liability imposed under sections 871, 881, 1441,
1442, and 1443 also extends to payments to other foreign persons,
including foreign trusts and estates.
The 30-percent rate is often reduced under the Code or an income
tax treaty. Under current regulations, a withholding agent may
generally rely on a statement furnished by, or for, the beneficial
owner certifying eligibility for a reduced rate. The procedural
requirements for claiming a reduced rate of withholding may vary
depending upon the type of income, the status of the taxpayer, or
whether an income tax treaty applies. For example, the portfolio
interest exception under sections 871(h) and 881(c) for U.S. interest
on an obligation in registered form is conditioned upon the beneficial
owner of the interest providing a statement of foreign status to the
U.S. withholding agent, which can be
[[Page 53389]]
provided on a Form W-8. See Sec. 35a.9999-5(b), A-9. If a reduction is
claimed under an income tax treaty, the withholding agent may generally
rely on a Form 1001 provided by, or for, the beneficial owner claiming
residence in a treaty country. For dividends, however, the current
rules do not require certification of foreign status in order to obtain
a reduced rate of withholding at source under an income tax treaty.
Instead, the withholding agent may generally rely on the address of the
payee and grant a reduced rate of withholding at source if the
recipient's address is in a treaty country.
A withholding agent is generally required to file an annual income
tax return on Form 1042 to report amounts upon which an amount was
actually withheld under chapter 3 of the Code or would have been
required to be withheld but for an exemption under the regulations, or
an income tax treaty. An information return on a Form 1042-S must be
attached to the Form 1042 and must report each recipient's name and
address, amounts paid, and amounts withheld, if any. See Sec. 1.1461-2
(b) and (c).
A payor making payments to foreign persons must also be aware of
the information reporting provisions under chapter 61 of the Code and
of other withholding regimes, such as section 3406 (backup
withholding), section 3402 (wage withholding), and section 3405
(withholding on pensions, annuities, etc.). Payors subject to these
reporting and withholding rules include both U.S. persons and foreign
persons, subject to certain exceptions. Under chapter 61 of the Code,
many types of payments, such as interest, dividends, royalties, broker
proceeds, etc. (reportable payments) must be reported on a Form 1099 if
paid to certain U.S. persons. The form is filed with the IRS and a copy
is furnished to the recipient of the payment. In addition, section 3406
requires those same U.S. payees to furnish a taxpayer identifying
number (TIN) to the payor, generally on a Form W-9, and, for reportable
interest and dividends, a certification that the payee is not subject
to notified payee underreporting. Failure to provide a TIN would
generally require the payor to backup withhold on the payment at the
rate of 31-percent. A payor that fails to obtain a TIN or other
required information in the manner required or to backup withhold when
required under section 3406 may also be liable, under section 3403, for
interest and penalties, in addition to any amount that should have been
withheld under section 3406.
Payments to foreign persons are exempt from Form 1099 information
reporting and backup withholding. However, the exemption is generally
conditioned upon the recipient furnishing a certificate supporting its
foreign status. The existing regulations under the information
reporting provisions of chapter 61 contain guidance to help payors
determine when payments are made to a foreign person. Generally,
depending upon the type of payment involved, a payor may rely on a
certification of foreign status made on Form W-8, Form 1001, Form 4224,
or, in the case of certain payments outside the United States, on
alternative evidence of foreign status. See, for example,
Sec. 35a.9999-3, A-34. Therefore, even if an amount paid to a foreign
person is exempt from withholding under chapter 3 of the Code (e.g.,
gain from the sale of securities), a payor must nevertheless comply
with specified certification procedures in order to avoid being subject
to penalties for failure to comply with the information reporting and
the backup withholding procedures (only amounts subject to reporting
under the Form 1099 reporting provisions are subject to backup
withholding under section 3406; see section 3406(b) and
Sec. 31.3406(a)-1(a) and, for example, Sec. 31.3406(b)(2)-1(a)).
As explained in the preamble to the proposed regulations, the IRS
and Treasury have reviewed the current withholding and reporting
procedures applicable to cross-border payment flows and have concluded
that changes are necessary to accommodate the size and growth of
international financial markets. The IRS and Treasury have concluded
that allowing the benefit of the reduced rate at source, rather than
through a refund procedure, continues to be desirable. A regime based
on reduction of withholding at source avoids the administrative costs
and delays that can occur when applying for a refund of overwithheld
amounts. This regime, however, depends on withholding agents performing
important compliance functions. They must obtain documentation
substantiating claims of foreign status and of reduced rates of
withholding and must provide information to the IRS.
One of the important objectives of the revisions is to eliminate
unnecessary burdens that the lack of standardization and coordination
of current procedures may impose on withholding agents. While it is
unavoidable that different information be required for different types
of income or recipients, the forms currently in use apply different
standards of proof and are not uniform in the manner in which the
information is furnished to withholding agents. The final regulations
unify the documentation requirements and seek to facilitate compliance
by clarifying uncertainties that may exist under current rules (e.g.,
the scope of due diligence standards imposed on withholding agents).
These regulations also address important issues relating to
payments to intermediaries (e.g., nominees, agents, etc.), including
whether intermediaries should certify status on behalf of beneficial
owners and, if so, how. Intermediary procedures under current rules
have proved difficult to implement in a number of cases. In particular,
U.S. source interest on obligations in registered form do not qualify
as portfolio interest under sections 871(h) and 881(c) unless the U.S.
withholding agent receives a statement that the beneficial owner of the
obligation is not a U.S. person (see section 871(h)(2)(B)(ii)). When
the payment is made to a foreign person acting as an intermediary on
behalf of the beneficial owner or of other intermediaries, the current
regulations require that the beneficial owner certification be passed
up through the chain of intermediaries to the U.S. withholding agent.
See Sec. 35a.9999-5(b), A-9. The final regulations offer alternative
procedures and respond to the concerns expressed by various
representatives of the financial community regarding compliance costs.
The final regulations are also responsive to the Congressional
mandate in section 342 of the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA) that Treasury consider a range of options for replacing
the address/self-certification method of administering income tax
treaty benefits. The IRS and Treasury have studied several options for
improving the withholding procedures to respond to this mandate,
including a system of certification of residence in a treaty country
and refund systems. At hearings held in February of 1985 on proposed
regulations issued in 1984 under section 1441, comments from the public
and several U.S. treaty partners made it apparent that certification
requirements, as proposed, would create too many administrative
problems for payments made through nominees. The final regulations
reflect these comments. The procedures adopted for documenting
eligibility for benefits under tax treaties are similar to those
applicable to portfolio interest on obligations in registered form.
Streamlining the current procedures and implementing workable
intermediary certification procedures
[[Page 53390]]
represent a substantial simplification and reduction of burden. The IRS
and Treasury expect that this, in turn, should result in greater
compliance and improve the ability of withholding agents and the IRS to
detect abusive claims of foreign status or of benefits under U.S.
income tax treaties or under the Code.
On December 21, 1995, at 60 FR 66243, a notice of proposed
rulemaking (IA-33-95) was published proposing to add Sec. 31.9999-0.
This document finalizes the proposed regulations. The effective date of
this addition is October 14, 1997.
Explanation of Provisions and Revisions
A. Comments and Changes to Sec. 1.871-14 and Related Reporting
Requirements Under Section 6049
Consistent with the proposed regulations, the final regulations
incorporate without substantive changes the relevant provisions from
the existing temporary regulations implementing the repeal of the 30-
percent tax on portfolio interest (Questions and Answers Relating to
the Repeal of 30-percent Withholding by Section 127 of the Tax Reform
Act of 1984 and to the Application of Information Reporting and Backup
Withholding in Light of such Repeal). These provisions deal with bearer
obligations, convertible obligations, and pass-through certificates.
Section 1.871-14(b)(1) incorporates the provisions in Sec. 35a.9999-
5(a), A-1 and the rules in Sec. 5f.103-1(c) defining a bearer
obligation. It also reflects the rules in Sec. 5f.103-1(c) regarding
obligations in registered form that are convertible into bearer form.
At the request of commentators, the definition of an obligation in
registered form contained in Sec. 5f.103-1(c) is restated in
Sec. 1.871-14(c)(1)(i). The definition restates the rules in
Sec. 35a.9999-5(c), A-18, regarding the effect of convertibility
features on the status of an obligation as an obligation in bearer or
registered form. Further, at the request of commentators, the
provisions in Sec. 35a.9999-5(b), A-12 through 15 regarding obligations
issued in registered form and targeted to foreign markets are retained
without substantive changes. Comments received from U.S. agencies and
instrumentalities indicate that they have relied on these procedures in
the past and that they plan to do so again.
One commentator requested additional clarifications under
Sec. 1.165-12(c). In response to these comments, the $1 million minimum
denomination requirement under Sec. 1.165-12(c)(1)(ii) is eliminated in
order to conform that provision to Sec. 1.165-12(c)(3)(iii). In
addition, in Sec. 1.165-12(c), the term United States is replaced with
the term United States and its possessions to coordinate the provisions
with Sec. 1.163-5(c)(2)(i) (C) and (D). In Sec. 1.165-12(c)(1)(iii), a
provision was added to explain that a holder delivering a bearer
obligation to a financial institution or exempt organization may rely
on a written statement furnished by the institution or organization.
Further, although the commentator suggested adding a sentence to
Sec. 1.165-12(c)(1) to clarify that each of paragraphs (i) through
(iii) must be satisfied in order to avoid holder sanctions, this change
is unnecessary because the need to meet all of the requirements in each
of these clauses is sufficiently clear. The commentator proposed
various changes to the rules governing the foreign targeting of bearer
obligations on original issuance. However, the final regulations do not
address these changes which are outside the scope of this project.
The proposed regulations regarding the certification requirements
for obligations in registered form are finalized without substantive
changes. As in the proposed regulations, a TIN is not required to be
stated on a Form W-8 used to claim the benefit of the portfolio
interest exemption, regardless of whether the debt obligation is
publicly traded.
Several commentators have asked that, in the case of portfolio
interest on obligations in registered form, the provisions dealing with
late-received documentation be conformed to similar provisions under
proposed Sec. 1.1441-1(f)(5). Under proposed Secs. 1.871-14(c)(3) and
1.1441-1(f)(5), the failure to timely receive appropriate documentation
(i.e., in most cases, a Form W-8) may be cured by obtaining the
documentation later. Under the proposed regulations, the cure
procedures apply for purposes of withholding under section 1441 and for
purposes of meeting the requirement under sections 871(h) and 881(d)
that the U.S. withholding agent receive a statement. However, proposed
Sec. 1.871-14(c)(3) requires that the documentation be received before
the expiration of the limitations period of the beneficial owner. In
contrast, proposed Sec. 1.1441-1(f)(5) requires that the documentation
be received before the expiration of the limitations period of the
withholding agent. Commentators have asked that the relevant
limitations period for qualifying interest as portfolio interest under
sections 871(h) and 881(d) be that of the withholding agent and not of
the beneficial owner. This comment is not adopted because of the
special conditions for interest to qualify as portfolio interest. Under
section 871(h)(2)(B)(ii), interest on an obligation in registered form
is portfolio interest only if the U.S. withholding agent receives a
statement that the beneficial owner of the obligation is not a U.S.
person. The legislative history to the amended provisions (see section
1810(d)(3)(B) of the Tax Reform Act of 1986 (Public Law 99-514))
specifies that the statement may be received late, but no later than
the expiration of the beneficial owner's statute of limitation. This
indicates that, if the required statement is received after the
beneficial owner's statute of limitation has expired, the interest can
no longer qualify as portfolio interest. Although the withholding agent
is permitted to receive documentation at any time within its own
limitations period and establish an applicable reduction in the
withholding rate after the fact (e.g., under an income tax treaty),
such cure procedure is not effective to confer portfolio interest
status to the interest if it occurs after the beneficial owner's
statute of limitations has expired. A cross-reference to Sec. 1.1441-
1(b)(7) (i.e., proposed Sec. 1.1441-1(f)(5) as renumbered under the
final regulations) is included in Sec. 1.871-14(c)(3) to clarify the
difference between the two cure procedures.
B. Comments and Changes to Sec. 1.1441-1
1. Coordination With Other Withholding and Information Reporting
Provisions
Commentators noted that withholding and information reporting
requirements applicable to payments to foreign persons are governed by
a complex web of statutory provisions and that the relationship of
these provisions among themselves may be difficult to understand. In
response to these comments, a number of changes have been made to help
payors and their advisers locate relevant guidance.
As suggested, the table of contents in Sec. 1.1441-0 has been
expanded. Section 1.1441-1(b) (4) and (5) has been added to provide an
overview of how the withholding and reporting procedures under chapter
3 of the Code relate to the information reporting provisions under
chapter 61 of the Code and other withholding regimes under sections
3402 (wage withholding), 3405 (withholding on pensions, annuities,
etc.), and 3406 (backup withholding). Provisions explaining the
interaction of
[[Page 53391]]
applicable withholding and reporting provisions in the case of payments
to foreign intermediaries or foreign partnerships have been added also.
See explanation of those rules, under the heading ``Clarification of
Reporting and Withholding Obligations for Payments to and by Foreign
Intermediaries'' of this preamble. Where appropriate, additional cross
references to chapter 61 and to sections 3402, 3405, and 3406 have been
added in Sec. 1.1441-1 and cross-references in regulations under
sections 3402, 3405 and 3406 have also been added.
As a general matter, a withholding agent (whether U.S. or foreign)
must ascertain whether the payee is a U.S. or a foreign person. If the
payee is a U.S. person, the withholding provisions under chapter 3 of
the Code do not apply; however, information reporting under chapter 61
of the Code may apply; further, if a TIN is not furnished in the manner
required under section 3406, backup withholding may also apply. If the
payee is a foreign person, however, the withholding provisions under
chapter 3 of the Code apply instead. To the extent withholding is
required under chapter 3 of the Code, or is excused based on
documentation that must be provided, none of the information reporting
provisions under chapter 61 of the Code apply, nor do the provisions
under section 3406. If, however, withholding under chapter 3 of the
Code does not apply irrespective of documentation (e.g., in the case of
foreign source income or gross proceeds dealt with under section 6045),
documentation may nevertheless have to be furnished to the withholding
agent under the provisions of chapter 61 of the Code in order to be
excused from Form 1099 information reporting and, possibly, from backup
withholding under section 3406. Determinations of payee's status are
generally made at each level of the chain of payment, until,
ultimately, the payment is made to the beneficial owner. The following
example illustrates how these rules interact under the final
regulations.
For example, assume that a U.S. bank acting as a paying agent of a
U.S. issuer of an obligation pays interest to a U.S. brokerage firm.
Chapter 3 withholding does not apply to that payment because the payee
is a U.S. person. Form 1099 information reporting under section 6049 is
not required because the brokerage firm is an exempt recipient (i.e., a
securities dealer), meaning that it is exempt from having the payment
reported on a Form 1099. See Sec. 1.6049-4(c)(1)(i). The U.S. brokerage
firm may or may not have to provide a Form W-9 to the U.S. bank to
establish its exempt recipient status depending on whether it meets one
of the ``eyeball'' tests under Sec. 1.6049-4(c)(1)(ii). Assume further
that the U.S. brokerage firm credits the interest to the account of a
customer. If the brokerage firm does not hold a Form W-9 (or a Form W-
8) and cannot otherwise ascertain the exempt recipient status of the
customer under Sec. 1.6049-4(c)(1)(ii), it is required to backup
withhold 31-percent under section 3406. See Sec. 31.3406(a)-1(b). If it
determines that the customer is a U.S. person (e.g., the firm holds a
Form W-9 for the customer), then chapter 3 does not govern the payment.
Instead, the payment is governed by sections 3406 and 6049. If,
however, the U.S. brokerage firm determines that the customer is a
foreign person (e.g., it holds a valid Form W-8), then chapter 3
governs the payment and the payment is not reportable for purposes of
section 6049, meaning that it is also not subject to backup withholding
under section 3406. Thus, Form 1042 reporting and withholding at a 30-
percent rate are required unless the income is exempt under the Code or
an income tax treaty. For example, if the interest is of a kind that
may qualify as portfolio interest, then withholding is excused if the
brokerage firm holds a valid Form W-8 from the customer (but would
still be reportable on Form 1042-S).
If the payment to the customer is an amount exempt from withholding
under chapter 3 of the Code without the need to furnish documentation
(e.g., foreign source interest income), documentation may nevertheless
be required for purposes of chapter 61 of the Code. In this example,
the U.S. brokerage firm must report the payment of foreign source
interest on a Form 1099 unless the customer is an exempt recipient or
is a foreign person. If the customer's status as an exempt recipient
cannot be ascertained on an ``eyeball'' basis under Sec. 1.6049-
4(c)(1)(ii), the brokerage firm must obtain a Form W-9 or a Form W-8
from the customer. If the documentation that the brokerage firm
receives reliably indicates an exempt recipient or foreign status, no
information reporting or withholding is required. If documentation is
not obtained or is not reliable, Form 1099 information reporting is
required under section 6049 and backup withholding is required under
section 3406.
Assume, however, that the customer is not the beneficial owner of
the payment of U.S. and foreign source interest income. Instead, it is
a foreign bank acting on behalf of the beneficial owner. With respect
to the payment that is U.S. source interest, the brokerage firm would
be permitted to pay the interest free of withholding (assuming it would
qualify as portfolio interest if appropriate documentation were
received) if it held a Form W-8 (or alternative documentary evidence)
from the ultimate beneficial owner that is transmitted by the foreign
bank or if it held a Form W-8 from the foreign bank as a qualified
intermediary who, under the final regulations, is permitted to certify
on behalf of its own customer. See Sec. 1.1441-1(e)(5). In either case,
the brokerage firm must report the payment on a Form 1042 and must also
make an information return on Form 1042-S. The Form 1042-S must state
the name of the beneficial owner as shown on the Form W-8 (or
alternative documentary evidence) or the name of the foreign bank if
the bank is a qualified intermediary.
Continuing with the same example, the foreign bank also has
obligations under sections 1441, 6049, and 3406 when it, in turn, makes
a payment to its own customer. However, to the extent it received a
valid Form W-8 (or alternative documentary evidence) from the
beneficial owner and furnished a copy to the U.S. brokerage firm (or
complied with the documentation requirements as a qualified
intermediary), it would meet its obligation under applicable
withholding and reporting provisions and, accordingly, would be exempt
from withholding any amount from the payment and from reporting the
payment. See Secs. 1.1441-1(b)(6) and 1.6049-5(b)(14).
With respect to the foreign source interest paid to the foreign
bank acting as an intermediary, the only requirement imposed on the
U.S. brokerage firm is to obtain the Form W-8 of the foreign bank (and
not of the beneficial owner). Because the exemption sought by the
foreign bank is an exemption from Form 1099 information reporting and
backup withholding, the foreign bank may do so by establishing its
foreign status with a Form W-8 or by establishing its status as an
exempt recipient. Under the final regulations, a foreign bank's status
as an exempt recipient can be established on an ``eyeball'' test basis
if the bank s name reasonably indicates that it is a bank. However, as
is the case for U.S. income subject to chapter 3 withholding, the
foreign bank, acting as an agent for its own customer, may be required
to report the foreign source payment under section 6049 and to backup
withhold under 3406 when it, in turn, pays the amount to its customer
if the foreign bank is a U.S. payor (e.g., it is a controlled foreign
corporation). If it is not a U.S. payor or a U.S. middleman,
[[Page 53392]]
it has no withholding or reporting obligations under chapter 3 of the
Code due to the nature of the payment (i.e., foreign source income),
unless it makes the payment in the United States. If the foreign bank
makes a payment to its customer in the United States, then the payment
is reportable under section 6049 and the bank must obtain a Form W-8 or
a Form W-9 from its customer, unless the exempt status of the customer
can be established on an ``eyeball'' basis. If the customer is a U.S.
person who is not an exempt recipient, the bank must report the payment
on a Form 1099 and, if the customer has not provided a Form W-9 as
required under section 3406, backup withholding is required. The
provisions of Sec. 1.6049-5(b)(14) do not apply to exempt the foreign
bank from its reporting and withholding obligations because it has not
provided the required documentation to the U.S. withholding agent or
certified on behalf of the beneficial owner.
These examples are illustrative only. Different rules may apply
depending upon a number of factors, the most significant being the
nature of the payment (FDAP or not FDAP, U.S. source or foreign
source), the status of the payor (U.S. or foreign), the status of the
payee (U.S. or foreign, beneficial owner or intermediary), where the
payment is made (in the U.S. or outside the U.S.), and where the
account is held (on-shore or offshore).
2. U.S. Agent of Foreign Person
Under the proposed regulations, a payment to a U.S. person gives
rise to withholding liability if the payor has actual knowledge that
the U.S. person is acting as an agent for a foreign person.
Commentators suggested that the withholding liability should be imposed
on the last U.S. person who makes the payment to a foreign person. At a
minimum, commentators asked that the final regulations limit the
obligation to withhold to situations where the withholding would seem
jeopardized. This comment is accepted. Under the final regulations, a
U.S. person making a payment to a U.S. financial institution is not
required to withhold even if it knows that the payee is collecting the
payment for a foreign person, if the U.S. person has no reason to
believe that the financial institution will not comply with its
obligation to withhold when it makes the payment to the foreign person.
See Sec. 1.1441-1(b)(2)(ii).
3. Payments to Wholly-Owned Entities
The final regulations under Sec. 1.1441-1(b)(2)(iii) provide
guidance on applicable withholding procedures for payments to a
domestic or foreign wholly-owned entity that is disregarded for federal
tax purposes (i.e., treated as a branch of its single owner) under
Sec. 301.7701-1(c)(2). As a general rule, a payment to a disregarded
wholly-owned entity is treated as a payment to its owner. Thus, for
example, if a foreign person owns a domestic disregarded entity, a
person making a payment to the disregarded entity is treated as the
withholding agent because the owner is a foreign person. However,
because the fact that the entity is disregarded for tax purposes
generally may not be apparent to a person making a payment to the
entity, the person making the payment can rely on documentation
received from the recipient to determine its withholding and reporting
obligations. Thus, if the person receives a Form W-9 from the entity
representing that the recipient is a domestic corporation, the person
may rely on the form to treat the entity as a U.S. person unless it has
actual knowledge or reason to know that the representation is
incorrect. If the entity is a wholly-owned entity disregarded for
federal tax purposes, then it must furnish documentation representing
the status of its owner. For example, if the disregarded domestic
entity is owned by a foreign person, it must furnish a Form W-8 from
its single owner. In that case, a person making a payment to the entity
may rely on the Form W-8 that the entity provides for its foreign owner
and comply with withholding and reporting requirements accordingly. A
domestic disregarded entity that does not furnish a certificate is
subject to Form 1099 information reporting on payments that are
reportable and subject to backup withholding under section 3406
because, lacking the words ``inc.'', ``incorporated'', ``corp.'' or
``corporation'' in its name, it could not be treated as an exempt
recipient on an ``eyeball'' basis. If the entity had one of these words
in its name, it would be a per se corporation for U.S. tax purposes
because any of these words would indicate that the entity is organized
under a corporate statute; thus, it could not be a disregarded entity.
The TIN to be stated on the Form W-9 or the Form W-8, if required, is
that of the single owner and not that of the disregarded entity.
Different documentation procedures apply if the benefit of a
reduced rate is claimed under an income tax treaty and the entity is
not treated as fiscally transparent in the applicable treaty
jurisdiction. See Secs. 1.1441-6(b)(4) and 1.894-1T(d).
4. Payments to U.S. Branches of Foreign Institutions
Commentators also suggested that a payment to a U.S. branch of a
foreign bank or other financial institution should not be subject to
withholding. Instead, the U.S. branch should be responsible for
withholding when it makes the payment to the foreign person. In
addition, commentators have asked that the regulations eliminate the
requirement for a U.S. branch to furnish a certificate representing
that the payment it receives is effectively connected with the conduct
of a U.S. trade or business. In response to these comments, the rules
governing payments to the U.S. branch of certain foreign financial
institutions have been modified to alleviate the certification burden
for those U.S. branches that operate in a manner equivalent to U.S.
companies.
Therefore, Sec. 1.1441-4(a)(2)(ii) of the final regulations
provides that a payment to a U.S. branch of either a foreign financial
institution that is registered with the Federal Reserve Board or of a
foreign insurance company that is required to file an annual ``NAIC''
statement with a State Insurance Commissioner is presumed to be a
payment of effectively connected income for withholding purposes.
Section 1.1441-1(b)(2)(iv) has been added to provide that a U.S. branch
may rebut this presumption by furnishing a Form W-8 to the withholding
agent certifying that the payment that it receives is not effectively
connected with its conduct of a U.S. trade or business. For a
description of the form that a U.S. branch must furnish, see
Sec. 1.1441-1(e)(3)(v). Under the final regulations, the U.S. branch
that furnishes a Form W-8 may agree with the withholding agent to
assume responsibility for all withholding and reporting obligations for
the payments it receives from the withholding agent. In the absence of
such an agreement, the withholding agent remains responsible for the
withholding and reporting obligations associated with the payment. This
means, for example, that, if the U.S. branch receives the payment on
behalf of its home office and the home office is covered by a qualified
intermediary agreement that the IRS has concluded with the foreign
financial institution, the U.S. branch must give to the withholding
agent the home office's Form W-8. If the branch receives the payment
for its own customers, it must give to the withholding agent all of the
required certificates for its customers.
Similar withholding procedures are available to other U.S. branches
to the
[[Page 53393]]
extent permitted by the district director or the Assistant Commissioner
(International). Procedures for obtaining such permission existed under
prior regulations under Sec. 1.1441-4(f). These provisions are restated
in Sec. 1.1441-1(b)(2)(iv)(E) of the final regulations.
The final regulations do not eliminate the requirement to report on
a Form 1042 or 1042-S payments to these branches, including payments
for which the branch has assumed withholding and reporting
responsibility. In such a case, however, the reporting is made to the
branch as recipient of the amount for which it has assumed withholding
responsibility rather than to the beneficial owner. See Sec. 1.1461-
1(b)(2)(vi) and (c)(4)(v). Although commentators asked that these
reporting requirements be eliminated for payments of effectively
connected income, the IRS and Treasury believe that the reporting
serves an important compliance function.
5. Beneficial Owner
The definition of the term beneficial owner is clarified to
indicate that ownership is determined on the basis of existing
principles governing the determination of tax ownership, including
substance-over-form principles, such as those reflected in section
7701(l) dealing with conduit transactions. The special definition of
beneficial owner in proposed Sec. 1.1441-1(c)(6)(ii)(B) for purposes of
tax treaties has been eliminated. See the explanation below under
Sec. 1.1441-6 for claims of tax treaty-reduced rates for payments to
entities that are treated as fiscally transparent in the U.S. or in the
applicable treaty jurisdiction, or both.
6. Forms
a. Format and Design. Many comments were received regarding the
format and design of the revised Form W-8. In particular, several
commentators suggested that the IRS retain separate forms for
effectively connected income and payments to foreign governments. The
IRS is considering these comments and agrees that it may be more
convenient to keep certain forms separate from the basic beneficial
owner Form W-8. The revised forms will be released for public comments
before they are finalized.
b. Content of Forms. The final regulations are modified in several
respects regarding the Form W-8. A Form W-8 furnished by the beneficial
owner is generally payee-specific and applies to all income received
from the withholding agent to whom furnished, except to the extent
provided in forms and instructions (e.g., effectively connected
income). See Sec. 1.1441-1(e)(2)(i). Entitlement to different types of
reduced rates may require different types of information or
representations on a Form W-8. For example, entitlement to exemption
from withholding on portfolio interest requires only proof of foreign
status. Claims of treaty benefits may require a certified TIN (that is,
a TIN that the IRS has certified as belonging to a person who is a
resident of a country with which the U.S. has an income tax treaty in
effect; see Sec. 1.1441-6(c) for procedures to have a TIN certified by
the IRS). A withholding agent is responsible for making sure that the
information or representations relevant to a particular type of income
or applicable rate appear on the form and for requesting a new form
where an existing form fails to support a claim of reduced rate for a
different type of income. For example, a beneficial owner who furnishes
a Form W-8 for portfolio interest (and therefore, does not complete the
information on the form relating to claims of treaty benefits) would be
required to furnish a new form to the withholding agent if it receives
from the same withholding agent other income for which it claims a
reduced rate of withholding under a tax treaty. The new form could
serve both for portfolio interest and the other income for which treaty
benefits are claimed.
In response to comments, the final regulations clarify that, where
a person, other than an individual, does not have a tax residence in
any country, the required permanent residence address is the address of
the person's principal office, even though the principal office is not
in its country of incorporation (as was required in the proposed
regulations). Because of this change, the final regulations require
that the entity's country of organization or incorporation be stated on
the form. See Sec. 1.1441-1(e)(2)(ii).
c. Signature of Forms under Power of Attorney. Some commentators
have asked that custodians be permitted to execute the Form W-8 on
behalf of their customers, based upon a power of attorney. This
suggestion is not adopted. Like a tax return, a Form W-8 must be signed
under penalties of perjury. As such, the IRS and Treasury view the
signature of a Form W-8 as governed by the same rules that govern the
signature of a tax return. Therefore, the final regulations clarify in
Sec. 1.1441-1(e)(4)(i) that a withholding certificate may be signed by
any person authorized to sign a declaration under penalties of perjury
on behalf of the person issuing the certificate as provided under
section 6061 (for individuals), 6062 (for corporations), or 6063 (for
partnerships).
d. Facsimile and Electronic Transmission. Commentators have asked
that withholding agents be allowed to rely on a faxed copy or
electronically transmitted Form W-8 as if they were original forms. The
proposed regulations permit a faxed Form W-8 to indicate foreign status
for purposes of the grace period under proposed Sec. 1.1441-
1(f)(2)(i)(B), but do not allow it to be used for other purposes. The
question of whether and to what extent a faxed certificate ought to be
allowed instead of an original certificate arises because, under
current law, a faxed document (like a photocopy) has weaker evidentiary
value than an original document. This question is not unique to the
Form W-8 and is currently under study by the IRS. Pending completion of
the study, the final regulations allow a withholding agent to rely on a
faxed form only for purposes of presuming foreign status in order to
reduce the rate of withholding during a 90-day grace period. However,
an original form must be provided before the grace period expires.
On the other hand, the proposed regulations provide general
authority for the electronic transmission of Forms W-8, subject to
procedures issued by the IRS. The final regulations retain this rule
and, regulations issued together with these final regulation propose to
amend Sec. 1.1441-1(e)(4)(iv) of the final regulations by prescribing
the standards that electronic systems must meet in order to effect an
acceptable transmission of Forms W-8. The IRS believes that the
evidentiary value of documents transmitted with electronic systems
meeting these standards would equate with that of an original document.
See project REG-107872-97, published elsewhere in this issue of the
Federal Register. The option to use electronic transmission systems
should help alleviate the burden of having to mail original Forms W-8
in paper form.
e. Single Form for Related Withholding Agents. Commentators have
asked that several withholding agents be allowed to rely on a single
Form W-8. In response to this comment, a number of changes were made to
the final regulations. First, under Sec. 1.1441-1(e)(4)(ix)(A), a
withholding agent may rely on the Form W-8 furnished for another
account at the same branch location, at a different branch location of
the same entity, or at a different branch location of a related person
if the entity or group of entities uses a universal account system or
uses another type of coordinated account
[[Page 53394]]
information system that allows the withholding agent to easily access
information regarding the nature of the certificate furnished, the
information on the certificate, and its validity status.
In addition, the system must allow the withholding agent to keep a
record of how and when it accesses the information and, if applicable,
of how and when it communicates relevant facts affecting the
reliability of the certificate to the location where the certificate is
kept. Second, the rule in proposed Sec. 1.1441-1(e)(2)(i) allowing the
beneficial owner to provide a single Form W-8 with respect to a family
of mutual funds is extended to investors in affiliated partnerships and
corporations under Sec. 1.1441-1(e)(4)(ix)(B) of the final regulations.
Further, the final regulations also adopt a suggestion that a
withholding agent be able to rely on representations from a broker that
it holds a valid withholding certificate from a beneficial owner. See
Sec. 1.1441-1(e)(4)(ix)(C). The final regulations clarify that a
withholding agent has knowledge of all information in the system. See
Sec. 1.1441-7(b)(3).
f. Forms from Foreign Partnerships. In response to comments, the
provisions under proposed Sec. 1.1441-1(e)(3)(iii) dealing with
withholding certificates furnished by a foreign partnership have been
moved to Sec. 1.1441-5(c), which contains most of the withholding
provisions governing payments to foreign partnerships (see explanation
of the changes under Sec. 1.1441-5).
g. Forms from Non-Qualified Intermediaries. In response to
comments, provisions have been added to clarify the manner in which a
non-QI must transmit documentation to the withholding agent and the
information that it must contain. Proposed Sec. 1.1441-1(e)(3)(iv)
(renumbered as Sec. 1.1441-1(e)(3)(iii) in the final regulations) is
expanded to explain the manner in which withholding certificates or
other appropriate documentation is passed up a chain of non-QIs. The
final regulations allow the intermediary to furnish copies of an
original Form W-8 so as to avoid requesting multiple originals for
different accounts that the intermediary may hold on behalf of the same
beneficial owner. See Sec. 1.1441-1(e)(3)(iii).
Also, proposed Sec. 1.1441-1(e)(3)(iv) (C) and (D) (renumbered as
Sec. 1.1441-1(e)(3)(iii) (C) and (D) in the final regulations) has been
modified and paragraph (e)(3)(iv) has been added in response to
comments that the regulations should explain the information required
from a non-qualified intermediary to insure proper withholding by a
withholding agent making a payment to a non-qualified intermediary. In
particular, if different withholding rates apply to different owners of
the payment flowing through an intermediary, the withholding agent must
know which rate applies to each portion of the payment. Where such
information is necessary, the final regulations provide that the
intermediary must, in a statement attached to the withholding
certificate from the non-qualified intermediary, provide (and update as
often as is necessary) sufficient information for the withholding agent
or payor to determine the proportion of each payment subject to
withholding that is attributable to each person to whom the
intermediary certificate relates, including persons for whom the
intermediary has not attached a withholding certificate or other
appropriate documentation. Such statement is not necessary, however, if
the allocation information is known to the withholding agent due to the
account structure that it uses (for example, the withholding agent uses
separate accounts for different categories of income and applicable
withholding rates).
h. Validity Period. Comments were received under Sec. 1.1441-
1(e)(4)(ii) regarding the period of validity of a properly executed
Form W-8. Commentators requested that, irrespective of whether a Form
W-8 includes a TIN, all forms should be valid indefinitely, or at least
those furnished for a claim of effectively connected income. Some
commentators suggested that a Form W-8 should not expire where a payor
continues to send all correspondence to a mailing address that is also
the permanent address on a Form W-8. These suggestions are not adopted
because the IRS and Treasury believe that it is important for taxpayers
to re-certify status periodically. Similar re-certification is also
important for effectively connected income, since income may cease to
be effectively connected due to a change in the taxpayer's business
structure, without the withholding agent becoming aware of such
changes. However, the final regulations provide relief by presuming
that payments made to certain U.S. branches are effectively connected
income, thereby avoiding the need to provide a certificate in such a
case. See Sec. 1.1441-4(a)(2)(ii).
Also, Sec. 1.1441-1(e)(4)(ii)(B) is modified to make all
intermediary certificates and certificates for non-withholding foreign
partnerships valid indefinitely. (The indefinite validity period does
not apply to the withholding certificates or documentary evidence
required to be attached to a certificate from a non-qualified
intermediary, a U.S. branch of a foreign institution, or a foreign non-
withholding partnership.) In addition, Forms W-8 furnished by an
integral part of a foreign government, a foreign central bank of issue,
or the Bank for International Settlements are valid indefinitely. For
these certificates, the information required is likely to change only
infrequently. What may change more frequently is the withholding rate
information that an intermediary or foreign partnership may have to
furnish to a withholding agent on a separate statement, which the
intermediary or partnership must update as often as is necessary to
insure that the withholding agent withholds at the proper rates. See
Sec. 1.1441-1(e) (3)(iv) and (5)(v) for a description of the statement
and Sec. 1.1441-1(e)(4)(ii)(D) for related validity rules.
i. Effect of Changes in Circumstances. Proposed Sec. 1.1441-
1(e)(4)(ii)(D), dealing with changes in circumstances affecting the
validity of a Form W-8, is revised to clarify the due diligence imposed
on a non-qualified intermediary who becomes aware of a change in the
circumstances affecting the validity of a withholding certificate that
it has received and transmitted to the U.S. withholding agent or
another intermediary. The final regulations provide that, in such a
case, the non-qualified intermediary must inform the person to whom it
provided the affected withholding certificate (i.e., the U.S.
withholding agent or the other intermediary). It must also obtain a new
withholding certificate or other documentation to replace the
certificate or documentation that is no longer valid due to changes in
circumstances. The same rules apply to foreign partnerships that are
not withholding foreign partnerships and to a U.S. branch that passes
through documentation to a U.S. withholding agent.
The final regulations also clarify that a withholding agent does
not have a duty to inquire into possible changes of circumstances. In
other words, a withholding agent may assume that circumstances have not
changed unless it knows of facts suggesting that changes in
circumstances have occurred that may affect the validity of
documentation. Changes in circumstances relevant to the information and
certification provided on a withholding certificate, a statement, or in
documentary evidence affect the validity of the certificate, statement,
or documentary evidence as of the date that the withholding agent has
actual knowledge or reason to know of the changes. The final
regulations are
[[Page 53395]]
revised to clarify that point and give withholding agents the same 90-
day period as is given for a new account for perfecting documentation
(i.e., inquire into the change of circumstances and obtain a new
certificate, if necessary). See Secs. 1.1441-1(b)(3)(iv) and 1.6049-
5(d)(2)(ii).
j. Acceptable Substitute Form. In addition, proposed Sec. 1.1441-
1(e)(4)(vi) is modified in response to comments that asked that the
meaning of the cross-reference to Sec. 31.3406(h)-3(c)(1) defining an
acceptable substitute form be clarified. The revised provisions
enumerate the type of information and certifications that must appear
on any substitute form for purposes of the regulations under chapter 3
of the Code. The rules are similar to the rules contained in
Sec. 31.3406(h)-3(c)(1). Under the final regulations, a withholding
agent must provide a copy of the instructions to the recipient only to
the extent specified in the form and in the instructions to the
official form. As is the case for the Form W-9, the IRS expects that
the form instructions will waive the obligation to furnish the official
Form W-8 instructions to customers. Further, withholding agents are
also authorized to develop customized substitute Forms W-8 and
incorporate them as part of account opening documents.
k. Guidance Regarding Reliance on Withholding Certificates. Several
commentators asked for clearer guidance on the extent to which
withholding agents may rely on forms and the extent of their duty to
inquire into the truthfulness of information stated on forms. In
response to these comments, the final regulations contain a number of
clarifications. Section 1.1441-1(e)(4)(viii) has been added to provide
that a withholding agent may rely on a foreign entity's certification
of corporate (or other) status on a Form W-8. In the case of a
withholding certificate by or for a foreign entity whose name is on the
list of per se foreign corporations described in Sec. 301.7701-
2(b)(8)(i) that claims to be a partnership, the certificate must
represent that the entity's partnership status was grandfathered under
the regulations and has not been terminated. Further, a withholding
agent that receives a beneficial owner certificate from a foreign
financial institution may rely on such certificate to treat the
institution as the beneficial owner unless it has information in its
records that would indicate otherwise, or unless the certificate
contains information that would contradict such claim (e.g., sub-
account numbers or names). If a foreign intermediary receives payments
both in its capacity as an intermediary and for its own account, it
must furnish two certificates in order to allow the withholding agent
to apply the proper withholding rate and report the amounts
accordingly. Additional reliance guidance has been added regarding
claims of benefits under a tax treaty (see explanation under
Sec. 1.1441-6, below). Further, the provisions dealing with a
withholding agent's due diligence are also expanded and clarified (see
explanation under Sec. 1.1441-7, below).
7. Non-Qualified Intermediaries
Some commentators requested that the regulations eliminate the
requirement that non-qualified intermediaries (non-QIs) pass through
Forms W-8 to the U.S. withholding agent because investors and
intermediaries will not disclose customer information to third parties.
In particular, some commentators recommended that the regulations
eliminate any reference to the intermediary procedures currently
applicable under Sec. 35a.9999-5(b), A-9, dealing with certification
required in order for interest to qualify as portfolio interest. These
suggestions are not adopted. The qualified intermediary regime is
designed to provide these benefits, but only where the intermediary
follows procedures to insure adequate withholding compliance. In
addition, as explained in the preamble to the proposed regulations, the
intermediary procedures provided in Sec. 35a.9999-5(b), A-9 are
retained because, if the qualified intermediary regime does not apply
to the intermediary, these procedures may be useful.
The final regulations also do not adopt a suggestion that, for
income for which no TIN needs to be provided, the intermediary only
reports the aggregate amount on Form 1042 without having to report
individual amounts for each beneficial owner on a Form 1042-S.
Commentators have suggested that a financial institution acting as an
intermediary should be required to indicate only the proportion of a
payment subject to withholding and the applicable rate. Should the
proportion change, the certificate furnished by the intermediary would
have to be modified to reflect the change in circumstances. This
suggestion is not adopted because permission to report aggregate
amounts is limited to payments made to qualified intermediaries. In the
case of a qualified intermediary, the IRS may rely on audit procedures
in the qualified intermediary agreement described in Sec. 1.1441-
1(e)(5)(iii) to determine whether the intermediary has properly advised
the U.S. withholding agent regarding each portion of a payment to which
different withholding rates should apply. The IRS' ability to check the
representations made by a non-QI is limited, particularly if the non-QI
is not owned by U.S. persons. In that case, it must rely on reconciling
the amounts paid as reported on Forms 1042-S, disclosure of the
identity of beneficial owners (or further intermediaries), and
exchanges of information under tax treaties. In that context,
disclosure of the exact amounts allocated to each beneficial owner (or
further intermediary) is important to the compliance regime applicable
to non-QIs.
8. Qualified Intermediaries
a. Scope of Qualified Intermediary Provisions. Under the proposed
regulations, a withholding agent may rely on the certification of a
foreign person made on behalf of others to reduce the rate of
withholding. If the foreign person has a qualified intermediary
agreement with the IRS, the intermediary may certify without having to
furnish the certificates or other documentation of the persons for whom
it acts. Many comments were received regarding the proposal, which are
discussed below.
In response to comments, the final regulations are modified to
allow a foreign branch of a U.S. financial institution to be a
qualified intermediary (QI) in the same manner as a foreign financial
institution. However, U.S. branches of U.S. or foreign financial
institutions are not permitted to obtain QI status. Such difference in
treatment conforms to the distinction in the final regulations between
accounts maintained outside the United States and accounts maintained
on-shore. See Sec. 1.1441-1(e)(5)(ii) (A) and (B). This distinction is
appropriate because it reflects the policy that the Form W-8 (signed
under penalties of perjury) is the preferred means of establishing
foreign status for transactions in the United States. On the other
hand, documentary evidence provides appropriate evidence of foreign
status for transactions outside the United States, especially in those
countries where financial institutions must document the identity of
customers opening new accounts or for whom they process certain
transactions.
At the request of commentators, the definition of a clearing
organization for purposes of Sec. 1.1441-1(e)(5)(ii)(A) is revised so
that clearing organizations that, as members of other clearing
organizations, do not hold physical securities, are nevertheless
considered to hold obligations for members and,
[[Page 53396]]
therefore, qualify for QI status. Further, the final regulations allow
QI status for foreign corporations that receive U.S. income for which
the benefit of a reduced rate is claimed under an income tax treaty by
their shareholders (because the shareholders derive the income as
residents of an applicable treaty jurisdiction within the meaning of
Sec. 1.894-1T(d)(1)). By allowing these corporate entities to be QIs,
the regulations intend to facilitate the processing of treaty benefits
claims by reverse hybrid entities with large shareholdings. See
discussion under Sec. 1.1441-6, below. Also at the request of
commentators, a transition rule is added to Sec. 1.1441-1(e)(5)(i)
whereby institutions that are otherwise eligible for QI status and that
satisfy certain criteria (as will be published by the IRS) are
permitted to act as QIs while awaiting confirmation of their QI status.
Commentators were divided on whether the regulations should allow a
QI to assume primary withholding responsibility as proposed in
Sec. 1.1441-1(e)(5)(iv). In view of these comments, the final
regulations retain the provisions that permit the shifting of primary
responsibility for withholding and reporting under chapter 3 of the
Code. However, because of IRS concerns regarding compliance and
comments received from foreign institutions, the final regulations
provide that the responsibility for Form 1099 information reporting and
related backup withholding under section 3406 may not be assigned to a
QI, unless the QI is a foreign branch of a U.S. bank or another U.S.
person or establishes that the obligations related to information
reporting and backup withholding can adequately be carried out by a
U.S. branch of the QI (even though the branch itself cannot be a QI).
Some commentators suggested that, if a QI is allowed to assume primary
withholding responsibility, it should be allowed to do so only for all
the payments that it receives from a payor with respect to a particular
account. Permitting a QI to assume withholding responsibility with
respect to some but not all payments to an account would make it
difficult for payors to determine the correct amount of withholding on
payments to a single account. This comment has been adopted and the
final regulations are modified accordingly to provide that if a QI
assumes primary withholding responsibility for an account, it must do
so for all payments to the account. The decision to assume or not
assume withholding responsibility may be made on an account-by-account
basis. See Sec. 1.1441-1(e)(5)(iv).
As is the case for non-QIs, the regulations describe in greater
detail the information that must be provided by a QI in order for the
withholding agent or payor to comply with applicable reporting and
withholding obligations. Section 1.1441-1(e)(3)(ii)(C) requires an
allocation statement to be attached to the intermediary withholding
certificate, if necessary to provide sufficient information to allow
the withholding agent to determine the applicable withholding rate or
rates on payments to the QI. Such a statement may not be necessary if
the withholding agent allocates the assets among separate accounts for
each type of income and applicable withholding rates, as directed by
the intermediary at the time that the assets are acquired. The assets
with respect to which payments of reportable amounts are received must
be allocated to one of the three categories described below. If the
withholding agent maintains a system of separate accounts to keep track
of different withholding rates for different classes of income or
payees, it would maintain at least three separate accounts
corresponding to the three categories of assets. For this purpose, a
reportable amount is defined in Sec. 1.1441-1(e)(3)(vi) as income
subject to withholding under chapter 3 of the Code. For reasons
explained under the heading ``U.S. Source Bank Deposit Interest and
Short-term OID'' of this preamble, U.S. bank deposit interest and U.S.
short-term OID amounts are also included in the definition of
reportable amount. However, reportable amounts do not otherwise include
amounts that are not subject to chapter 3 withholding (e.g., foreign
source income, broker proceeds).
The three categories of assets are described in Sec. 1.1441-
1(e)(5)(v). They are (1) assets related to documented non-U.S. payees;
(2) assets related to documented U.S. payees (whether or not exempt
recipients); and (3) assets related to undocumented payees (i.e.,
payees for whom the QI holds no documentation or holds documentation
that is unreliable). Reportable amounts paid with respect to assets in
category 1 (documented non-U.S. payees) may benefit from a reduced rate
of withholding under the Code (e.g., portfolio interest) or under a
treaty (i.e., to the extent the QI further indicates subcategories of
assets associated with different withholding rates under an applicable
treaty).
Reportable amounts paid with respect to category 2 (documented U.S.
payees) are not subject to withholding or reporting under chapter 3 of
the Code. However, the payor must report the payment on a Form 1099 by
treating the payment of a reportable amount as made directly to any
U.S. person for whom it receives a Form W-9 to the extent the U.S.
person is not an exempt recipient. The final regulations clarify that a
QI must agree to disclose the identity of these U.S. persons,
regardless of local secrecy laws. The identity of U.S. payees that are
exempt recipients under an applicable provision of the regulations
under chapter 61 of the Code need not be disclosed to the withholding
agent. If a Form W-9 furnished by the QI to the payor on behalf of a
U.S. payee that is not an exempt recipient is not reliable (e.g.,
missing information or obviously incorrect TIN), the U.S. payor must
backup withhold under section 3406.
Reportable amounts paid with respect to assets in category 3
(undocumented owners) are treated as amounts paid to a foreign person
if the payment is an amount subject to chapter 3 withholding. See
Sec. 1.1441-1(b) (2)(v) and (3)(v)(B). Therefore, withholding applies
at the unreduced 30-percent rate. Reportable amounts that are U.S. bank
deposit interest or U.S. short-term original issue discount paid with
respect to asserts in category 3 are treated as paid to a U.S. person
who is not an exempt recipient. Therefore, 31-percent backup
withholding applies to those amounts and reporting on Form 1099 is
required. See Sec. 1.6049-5(d)(3)(iii) and explanation below under
paragraph 10 (U.S. source bank deposit interest and short-term OID).
If a QI assumes primary withholding responsibility, it must also
attach a statement to its withholding certificate if necessary for the
U.S. withholding agent to determine how much of each payment is
allocable to U.S. payees. All assets are presumed allocable to foreign
persons unless the QI indicates that it is acting for U.S. persons. The
QI must provide the same information about U.S. payees that are not
exempt recipients as is required in the case of a QI that has not
assumed primary withholding responsibility.
b. Agreements with Qualified Intermediaries. The IRS intends to
finalize the revenue procedure published in Announcement 96-23 (1996-18
I.R.B. 7) dealing with agreements between the IRS and certain
institutions that wish to be a qualified intermediary for purposes of
the U.S. tax withholding and reporting provisions (including the
provisions of the Announcement regarding the documentation of
beneficial ownership or foreign payee status (section 4.03)). A
preliminary review of applicable know-your-customer procedures in
several countries indicates that these
[[Page 53397]]
procedures will generally provide adequate information regarding the
nationality and residence status of account holders and their status as
owners or intermediaries. The IRS intends that the documentation
requirements imposed on QIs under their agreements with the IRS will
not be more burdensome than those imposed on withholding agents,
payors, or middlemen under applicable withholding and reporting
regulations.
The Announcement provides that a QI would generally be subject to
the same Form 1042 and 1042-S reporting requirements as apply to
withholding agents under Sec. 1.1461-1 (b) and (c). After further
review, the IRS intends to finalize the rules so that a QI will be
required to file an annual Form 1042 return with the IRS. Generally, a
Form 1042-S will not be required if a schedule in the form described
below is attached to the Form 1042.
Reporting on a Form 1042 would consist of providing the following
information to the IRS: the amount of reportable U.S. source income
received by the QI during the calendar year, identified by pool,
listing each payor's name, address, EIN, income type and rate of
withholding; information regarding overpayments or balance due; a
statement regarding the audit conducted by the QI's internal auditor,
providing a description of the audit conducted and including the
auditor's opinion and summary of findings. The audit statement should
define the scope and objective of the audit and report on the QI's
compliance with the terms of the QI agreement.
In addition, the Form 1042 must attach a schedule providing
information on payments of reportable U.S. source income made by the QI
and allocated to specified pools. Under a pool reporting system,
separate pools would generally be required for each type of income
(e.g., interest, dividends, etc.). These pools may have to be further
subdivided into pools consisting of income allocable to one of the
three assets categories identified in the regulations under
Sec. 1.1441-1(e)(5)(v)(B). Additional pools may be required for other
purposes, including differentiating among applicable withholding rates.
For example, assume that a QI pays portfolio interest and U.S. source
dividends in a calendar year. The rates applicable to portfolio
interest are zero (interest allocable to pool of documented foreign
owners), zero (interest allocable to pool of U.S. owners who are exempt
recipients), and 30% (interest allocable to pool of undocumented
owners), and the rates applicable to dividends are 30% (dividends
allocable to pool of residents in non-treaty countries), 15% (dividends
allocable to pool of residents in treaty country eligible for this
rate), zero (dividends allocable to pool of U.S. owners that are exempt
recipients), and zero (dividends allocable to pool of foreign pension
fund owners claiming an exemption under a tax treaty). In such a case,
the QI may have to report the interest and dividend income in seven
different pools.
The IRS will not require a QI to report beneficial ownership
information if this information is otherwise reasonably available in
appropriate cases, either under exchange of information provisions,
under income tax treaties or under other procedures stated in the
agreement to verify compliance with conditions for benefits claimed
under income tax treaties. Appropriate cases for which the IRS may
require beneficial ownership information include cases in which the IRS
needs to verify compliance with conditions under an applicable tax
treaty for reduced rates. This includes, for example, whether an entity
claiming benefits under a tax treaty is a resident of the applicable
treaty country, derives the income (within the meaning of the
regulations under Sec. 1.894-1T(d)), and meets any applicable
conditions imposed under limitation on benefits provisions in the
treaty. The IRS intends to limit requests for beneficial owner s
identity to cases where compliance concerns are significant due to the
size of investments involved or the extent of bank secrecy laws in
effect in the local jurisdiction.
The QI will not be required to provide a Form 1042-S to its account
holders. In fact, providing such a form would not be consistent with
the collective-type refund procedures which the IRS intends to develop.
These procedures will allow QIs to request refunds of overwithheld
amounts on behalf of their customers. In such a system, a Form 1042-S,
which can also serve as proof of tax withheld at source, would have to
be monitored by the IRS in order to insure that refunds are not claimed
twice for the same amount. Collective-type refund procedures are
intended to be the exclusive means by which taxpayers can obtain refund
of overwithheld amounts that they have received through a QI. Special
procedures will have to be developed in order to reconcile this regime
with regular refund procedures applicable to U.S. taxpayers that
receive U.S. source investment income in an account with a QI.
With respect to audits, the proposed regulations provide that the
IRS may, in appropriate cases, agree to rely on an audit of a QI
performed by an approved auditor where, for example, under an income
tax treaty or local laws, the IRS would be given access to appropriate
auditors records to verify compliance. Records may include workpapers
of, reports prepared by, and methodology employed by, the approved
external auditors. An auditor is approved if it is subject to
regulatory supervision under the laws of the country in which a
significant part of the QI s activities are expected to occur, its
internal procedures must require it to verify that the financial
institution complies with the terms of the QI agreement and to report
non-compliance findings under the QI agreement in the same manner as it
is required to report other findings of non-compliance with applicable
local laws and regulatory requirements, and its relevant records (i.e.,
workpapers and reports) must be available to the IRS.
Several comments were received asking that audits be performed
solely by internal auditors. The IRS, however, does not believe that it
is appropriate to rely solely on internal auditors to perform
compliance checks. The IRS intends to permit internal auditors to
certify that appropriate procedures, internal controls, and systems are
in effect and are sufficient to insure the QI's compliance with the
agreement, such as procedures to obtain documentation upon opening of
accounts, to monitor that the address on an account does not change to
a U.S. address or to an address outside the treaty country (if treaty
benefits are claimed), to organize and process such information in a
way relevant to U.S. tax withholding and reporting, to communicate the
information to withholding agents timely and updating the pool
information when necessary; procedures by which underwithholding and
overwithholding are identified and addressed; and the existence of
adequate manuals and programs for training and advising appropriate
personnel in standard operating procedures. However, it is important
that compliance with these procedures be verified periodically by
persons who are not also employed by the QI. The IRS does not believe
that internal auditors provide sufficient assurances that audits will
be performed with required impartiality, even if internal auditors are
required to operate independently and to report exclusively to the QI's
board of directors. However, the IRS intends to use external audits
only periodically, either when it becomes aware (e.g., based on a Form
[[Page 53398]]
1042 or an internal audit report) that there may be compliance problems
or as part of its regular audit program.
In addition, with respect to collection of taxes due, the IRS
intends to waive the requirement of a bond in appropriate cases,
particularly where the QI has assets in the United States from which
tax can be collected or where occurrences of underwithholding are
expected to be minimal due to the nature of the QI's established
procedures.
In QI agreements, the IRS intends to address the manner in which a
QI may pay to, or receive a payment from, another intermediary. A QI
making a payment to another intermediary must normally obtain the
underlying beneficial owner information from the intermediary, unless
the intermediary is itself a QI. In the alternative, the QI may agree
to a private arrangement with the intermediary that would be identical
to a QI agreement, except that it would not be concluded with the IRS
and the intermediary would have no reporting obligations to the IRS.
Under this regime, similar to that described for authorized foreign
agents in Sec. 1.1441-7(c)(2), the QI assumes responsibility for
failures by the intermediary to comply with the documentation and
withholding procedures. The intermediary would agree, under its private
arrangement with the QI, to be audited in the same manner as if it were
a QI. Auditors reports would be furnished to the QI and be available
for inspection by the IRS. A QI would normally obtain an
indemnification from the intermediary as a protection against its own
U.S. tax liability arising from failures by the intermediary.
Further, the IRS will permit QIs that assume primary withholding
responsibility to be combined in a chain of payment with QIs that do
not assume primary withholding responsibility. For example, a U.S.
withholding agent may pay to a QI that assumes primary withholding
responsibility (QI1) and withhold no amount. QI1 may, in turn, pay a
customer that is a QI that does not assume primary withholding
responsibility (QI2). In such a case, QI1 must withhold on payments to
QI2 in the same manner that a U.S. withholding agent would have had to
withhold if it were paying the amount to QI2. QI2 may also be dealing
with a third tier, QI3, that assumes primary withholding
responsibility. In such a case, QI2 would inform QI1 that the portion
of the payment allocable to QI3 (without having to disclose QI3's
identity to QI1) is allocable to a QI that has assumed primary
withholding responsibility. Accordingly, neither QI1 nor QI2 would
withhold on the portion of the payment allocable to QI3.
9. Clarification of Reporting and Withholding Obligations for Payments
to and by Foreign Intermediaries
Commentators have asked for clarification of how the procedures
applicable to payments to foreign intermediaries relate to the exempt
recipient rules under chapter 61 and to a foreign intermediary's
reporting and withholding obligations under chapter 61 of the Code and
section 3406.
Under chapter 61 of the Code and section 3406, the reporting and
backup withholding requirements depend, in part, upon the status of the
payee as an exempt recipient. Generally, exempt recipients include
corporations and financial institutions. See Sec. 1.6049-4(c)(1)(ii).
The category of persons treated as exempt recipients may vary depending
upon the type of income being paid. For this purpose, the payee is
generally identified as the person to whom the payment is actually
made. This person is not necessarily the beneficial owner of the
income. For example, a custodian receiving a payment may be a payee for
purposes of chapter 61 of the Code, even though it is not the
beneficial owner of the amounts that it receives on behalf of a
customer. Under the final regulations, a payment to a nominee or agent
is treated as a payment to an exempt recipient, which, as a result, is
exempt from information reporting and backup withholding. See
Sec. 1.6049-4(c)(1)(ii)(O). Treating a U.S. intermediary as an exempt
recipient avoids multiple information reporting and insures that the
liability for information reporting and, if applicable, backup
withholding, falls upon the last person in a chain of intermediaries,
that is the intermediary that has the direct relationship with the
customer.
When a payment is made to a foreign intermediary, however, the IRS
may not be able to obtain information and, thus, collect the tax that
may be due from the ultimate owner if the payment to the foreign
intermediary is exempt from information reporting (assuming that the
intermediary is an exempt recipient). If the payment to the foreign
intermediary involves amounts subject to withholding under chapter 3 of
the Code (e.g., U.S. source dividends, U.S. source interest on
obligations in registered form, or U.S. source royalties), a U.S. tax
is collected at source at a 30-percent rate (assuming that the
intermediary has furnished no reliable information concerning the
beneficial owners of those payments; see applicable presumptions rules,
as revised). If, however, the payment is not subject to chapter 3
withholding (e.g., broker proceeds or foreign source income) and the
beneficial owner is a U.S. person, the lack of information regarding
the beneficial owner is of greater concern to the IRS.
The regulations proposed in 1988 and in 1996 set forth procedures
for payments to intermediaries that are, in part, designed to address
some of these concerns (see, for example, the 1996 proposal to apply
30-percent withholding to U.S. source bank deposit interest unless
beneficial owner documentation is obtained). The final regulations
clarify how withholding and reporting under chapter 3 of the Code
interacts with Form 1099 reporting and backup withholding.
Under Sec. 1.1441-1(b)(2)(v)(A), a payment to a foreign
intermediary (if reliably identified as such by the payor) that has not
assumed primary withholding responsibility, is treated as a payment
made directly to the person or persons for whom the intermediary
(whether or not a QI) collects the payment. If that person is
undocumented (i.e., has not furnished a reliable withholding
certificate or other appropriate documentation), the person is presumed
to be foreign under Sec. 1.144-1(b)(3)(v)(B) to the extent the payment
consists of an amount subject to chapter 3 withholding. Therefore, for
example, if a U.S. source dividend is paid to a foreign intermediary
that furnishes a Form W-9 for another person and such U.S. person is
not an exempt recipient, the payor must treat the U.S. person as the
payee for purposes of the Form 1099 reporting provisions under section
6042 and backup withholding under section 3406. If the U.S. person is
not an exempt recipient, the payment is reportable even though the
person who actually receives the payment is the foreign intermediary.
The foreign intermediary is an exempt person by virtue of being a
foreign person and a nominee. However, as clarified under the final
regulations, the fact that the intermediary may be an exempt person is
not relevant because, under the final rules, it is not a payee with
respect to a payment associated with underlying documentation attached
to the certificate. See Secs. 1.6049-5(d)(3)(i) and 1.1441-
1(b)(3)(v)(B).
If, however, the amount paid to the person identified as a foreign
intermediary is not of a type that is subject to chapter 3 withholding
(e.g., foreign source income, broker proceeds), then Sec. 1.6049-
5(d)(3)(ii) provides that the amount is treated as paid to an exempt
recipient and, as such, exempt from reporting and backup withholding
[[Page 53399]]
under section 3406. This rule is subject to two exceptions. First, a
U.S. payor with actual knowledge that the person for whom the
intermediary collects the payment (including broker proceeds and
foreign source income) is a U.S. person is required to report the
payment (and backup withhold in the absence of a TIN) if the U.S.
person is not an exempt recipient. See Sec. 1.6049-5(d)(3)(iv), Example
7. A second exception is made for U.S. source bank deposit interest and
short-term OID. Because these amounts are not subject to withholding,
this exception appears under Sec. 1.6049-5(d)(3)(iii) and not under
section 1441. As explained under the heading ``U.S. Source Bank Deposit
Interest and Short-term OID'' of this preamble, a payment of such
amounts to a foreign intermediary (or certain foreign partnerships) is
reportable unless the intermediary establishes that the payee (other
than an intermediary or a flow-through entity) is a foreign person or
an exempt recipient.
Further, provisions have been added to explain how the U.S.
withholding and reporting requirements apply to payments made by a
foreign intermediary, certain U.S. branches, or certain foreign
partnerships. A foreign intermediary that furnishes a valid
intermediary withholding certificate to the withholding agent is
considered to have complied with its own reporting and withholding
obligations under chapters 3 and 61 of the Code and sections 3402,
3405, or 3406. See, for example, Sec. 1.1441-1(b)(6) applicable to
payments of amounts subject to chapter 3 withholding by a foreign
intermediary or a U.S. branch and corresponding provisions in
Sec. 1.6049-5(b)(14) for interest and Sec. 1.6042-3(b)(1)(vi) for
dividends. Similar provisions are made under Sec. 1.1441-5(c)(3)(v) for
payments by foreign partnerships that are not withholding foreign
partnerships. For example, a foreign custodian bank that is not a
qualified intermediary and acts as an agent for a nonresident alien
individual who holds U.S. publicly traded obligations in registered
form is not required to withhold under section 1441 when it credits the
customer's account if it has furnished the individual's Form W-8 (or
alternative documentary evidence) to the U.S. withholding agent in
compliance with Sec. 1.1441-1(e)(3)(iii). If, however, the foreign
custodian bank knows that the Form W-8 (or alternative documentary
evidence) is not reliable and has not so informed the U.S. withholding
agent who, as a result, has not withheld, then the bank is not relieved
from its obligation to withhold under section 3406 because it has not
acted in compliance with the regulations under section 1441.
These rules apply when the withholding agent/payor holds a valid
intermediary withholding certificate. The final regulations add
provisions to clarify applicable presumptions when the status of the
intermediary is not reliably established or parts of the intermediary
withholding certificate are not reliable. See a description of these
provisions under the heading ``Presumptions--Payments to Foreign
Intermediaries'' of this preamble.
10. U.S. Source Bank Deposit Interest and Short-Term OID
Some commentators objected to the requirement that eligibility for
the exemption from U.S. tax on U.S. source bank deposit interest be
subject to the same beneficial ownership documentation requirements
that apply to portfolio interest, suggesting lack of statutory
authority and an increase in burden in the context of interbank
financing transactions.
In view of these comments, the final regulations do not require a
withholding agent to withhold 30-percent on bank deposit interest under
section 1441 in the absence of beneficial owner documentation. Instead,
documentation regarding the beneficial owner is required under sections
6049 and 3406 for purposes of avoiding information reporting and backup
withholding. This documentation requirement also applies to short-term
OID. See Sec. 1.6049-5(d)(3)(iii). Therefore, the final regulations
provide that a payment to a foreign intermediary of U.S. source short-
term OID or of U.S. source interest on deposits with U.S. banks and
other financial institutions described in sections 871(i)(2)(A) and
881(d) is treated as made to a foreign payee or an exempt recipient
only to the extent that the payor can treat the payment as made to a
foreign beneficial owner under Sec. 1.1441-1 (d)(4) or (e)(1)(ii) or if
the payment is made to a qualified intermediary that has assumed
primary withholding responsibility or to a withholding foreign
partnership. In all other cases, the foreign intermediary is not
treated as an exempt recipient and its certification that it is a
foreign person is not sufficient to make the payment non-reportable
under Sec. 1.6049-5(b)(12). Under Sec. 1.6049-5(d)(3)(iii), the payment
is treated as made directly to the unidentified owners for whom the
intermediary receives the payment and, as such, is treated as made to a
U.S. payee who is not an exempt recipient.
The regulations provide special rules to help a payor determine
whether the person to whom it makes the payment is a foreign or a U.S.
person, and, if presumed to be a foreign person under these rules,
whether it is an intermediary or is acting for its own account. These
presumptions are helpful if the payment is to a foreign person that
qualifies as an exempt recipient on an ``eyeball'' basis (e.g., a
foreign bank with the word ``bank'' in its name). In such a case, no
documentation is required to be provided by such person and the payor
may have no ability to determine whether the person is U.S. or foreign
and whether it is acting as an intermediary or for its own account. A
person receiving a payment is presumed to be a foreign person for the
purpose of these rules if the payor has actual knowledge of the payee's
employer identification number and that number begins with the two
digits ``98,'' if the payor's communications with the payee are mailed
to an address in a foreign country, or if the name indicates that the
payee is a per se corporation under Sec. 301-7701-2(b)(8)(i), or the
payment is made outside the United States. The final regulations under
Sec. 1.6049-5(d)(4)(iii) presume that a person receiving a payment of
U.S. bank deposit interest or U.S. short-term OID is not acting for its
own account (note that this presumption is different from the general
presumption under Sec. 1.1441-1(b)(3)(v)(A) that presumes a foreign
person to be acting for its own account unless it furnishes certain
documentation establishing its status as an intermediary). Thus, in the
absence of documentation and any evidence that the foreign person is
acting for its own account, a payor would presume that the payment is
made to unidentified owners for whom the person receives the payment,
required to be reported under section 6049 and subject to 31-percent
backup withholding under section 3406.
A payee may rebut this presumption by furnishing an indication of
beneficial ownership to the payor. Such indication may be provided in
any manner as the parties may choose, but must be reflected in the
payor's records. An indication by a foreign person that it is not an
intermediary does not have to be made under penalties of perjury.
In order to minimize disruptions to high-volume wholesale banking
transactions and to the sale and repurchase (repo) market, the final
regulations exempt from these documentation requirements deposits with
banks and other financial institutions that remain on deposit for a
period of two weeks or less, and amounts of original issue discount
[[Page 53400]]
arising from any repo transaction that is completed within a period of
two weeks or less. Further, amounts paid with respect to certain bearer
obligations are also exempt.
11. Presumptions--In General
Proposed Sec. 1.1441-1(f), dealing with presumptions of U.S. or
foreign status in the absence of reliable documentation, is restated
with a number of clarifications, in Secs. 1.1441-1(b)(3) and 1.6049-
5(d) (2) through (5). The presumptions in Sec. 1.1441-1(b)(3) apply to
amounts that are subject to chapter 3 withholding. The same
presumptions apply under Sec. 1.6049-5(d)(2) to payments that are not
subject to chapter 3 withholding (e.g., foreign source income, sales
proceeds), with a few differences. As under the proposed regulations,
payments that a payor or withholding agent cannot reliably associate
with documentation are presumed to be made to a U.S. payee who is not
an exempt recipient, in which case 31-percent backup withholding
applies if the payment is otherwise a reportable payment (within the
meaning of the applicable information reporting provisions under
chapter 61 of the Code). As an exception to this rule, a payee is
presumed to be foreign if it is an exempt recipient for whom indicia of
foreign status exist. Special rules are also provided for scholarships
and pensions, for which no backup withholding applies under section
3406, and for certain payments to offshore accounts. See Sec. 1.1441-
1(b)(3)(iii).
In determining the extent to which the withholding agent can
consider that it can rely on documentation to determine the extent of
its withholding obligations, the final regulations rely on a concept of
``reliable association'' of a payment with withholding certificates or
other documentation. This concept replaces the requirement under
Sec. 1.1441-1(f)(1)(ii) of the proposed regulations that the
withholding agent hold required documentation. The definition of
``reliable association'' is set forth in Sec. 1.1441-1(b)(2)(vii). As
in the proposed regulations, a withholding agent cannot reliably
associate a payment with documentation if the documentation is lacking
or is unreliable. These provisions apply regardless of whether
documentation is otherwise required. For example, a payment of U.S.
source royalties to a corporation with the word ``Inc.'' in its name
requires no documentation from the payee under section 6050N because
the payee's status as an exempt recipient is inferred from its name
(i.e., on an ``eyeball'' basis) under Sec. 1.6049-4(c)(1)(ii)(A)(1). In
such a case, the payor must consider that there is a per se lack of
documentation. Therefore, under Sec. 1.1441-1(b)(3)(iii)(A), a payment
to such an exempt recipient is presumed made to a foreign person if
certain indicia of foreign status are present. If these indicia are
present, the payor, if also a withholding agent, must withhold 30-
percent from the payment under section 1441.
The final regulations modify the presumptions for certain payments
to offshore accounts. Under the proposed regulations, a payment to a
foreign account is presumed to be made to a U.S. person. Thus, the
payor must file a Form 1099 for the payee, but the payment is not
subject to backup withholding. See proposed Secs. 1.1441-1(f)(2)(ii)
and 31.3406(g)-1(e). The final regulations provide that, in the case of
a payment to a foreign account of an amount subject to chapter 3
withholding, the payment is presumed to be made to a foreign person and
not to a U.S. person. Thus, the withholding agent must withhold on the
payment at a 30-percent rate. In that case, the foreign status
presumption insures that a tax is paid on such amounts since, under
Sec. 31.3406(g)-1(e), no backup withholding would apply to an
undocumented account if the account holder were presumed to be a U.S.
person. See Sec. 1.1441-1(b)(3)(iii)(D). The final regulations adopt
the rule in the proposed regulations for payments involving amounts
that are not subject to chapter 3 withholding (i.e., payee is presumed
to be a U.S. person who is not an exempt recipient, subject to Form
1099 reporting but not to backup withholding). See Secs. 1.1441-
1(b)(3)(iii) and 1.6049-5(d)(2)(i).
The final regulations include presumptions regarding the
characteristics of a payee so that a payor or withholding agent may
determine whether to treat the payee as an owner of an account or as an
intermediary (see Sec. 1.1441-1(b)(3)(v)(A)), and as an individual, a
trust, an estate, a corporation or a partnership. See Sec. 1.1441-
1(b)(3)(ii). The final regulations also make a number of clarifications
to the presumption provisions in response to comments. First, the
revised rules clarify that the presumptions are mandatory. A payor that
withholds a lesser amount or does not report a payment contrary to what
the presumptions would require may be liable for the amount of the tax
in addition to interest and penalties, even if the withholding agent
acted on the basis of actual knowledge. Although the liability for the
tax may be eliminated if the withholding agent establishes that it
withheld the proper amount (based on its actual knowledge or
otherwise), liability for interest and penalties may be assessed. This
rule is consistent with the requirement under the regulations to
provide documentation before a payment is made so that a withholding
agent may not rely on actual knowledge to reduce a withholding or
reporting obligation. Treating the presumptions as mandatory rather as
mere safe harbors is necessary to avoid undermining the requirement
that withholding agents obtain documentation prior to the time of a
payment.
On the other hand, a withholding agent or payor may not rely on the
presumptions if it has actual knowledge (or, in the case of amounts
subject to chapter 3 withholding, reason to know) of facts that would
require it to withhold an amount greater than would otherwise be
required based upon an applicable presumption or to report a payment
that would be exempt from reporting under an applicable presumption.
See Sec. 1.1441-1(b)(3)(ix) and (b)(7).
The final regulations clarify that if, under the rules, a payment
is presumed to be made to a U.S. payee, the determination of whether to
report on a Form 1099 or backup withhold is governed by the provisions
under chapter 61 of the Code and section 3406 and not by chapter 3 of
the Code. See Sec. 1.1441-1(b)(3)(i). Also, the final regulations
clarify that a withholding agent that withholds in accordance with an
applicable presumption is not liable under another withholding
provision for that payment, even if the payee is subsequently
determined to have a status different from its presumed status. See
Sec. 1.1441-1(b)(3)(ix)(A).
12. Presumptions--Grace Period
Several comments were received regarding the grace period
provisions under proposed Sec. 1.1441-1(f)(2)(ii). Under the proposed
rules, a withholding agent or payor may presume that an account holder
for whom specified indicia of foreign status exist at the time that a
payment is first credited to the account may be treated as a foreign
person, even if no documentation has been received before the account
is first credited. This presumption has two consequences: first, backup
withholding is deferred until the end of the grace period (and may
never be required if foreign status documentation is provided when or
before the grace period terminates); second, an amount must be withheld
under chapter 3 of the Code without the benefit of a reduced rate under
the Code or an income tax treaty if the amount is
[[Page 53401]]
income subject to chapter 3 withholding. At the expiration of the grace
period, the account holder is treated as a U.S. or foreign person,
depending upon whether documentation is furnished, and, if so, what
type of documentation is furnished.
Commentators argued that a withholding agent should be allowed to
rely on the apparent status of the beneficial owner to grant a reduced
rate of withholding for payments made during the grace period. They
point to the prohibition against depleting the account below 31-percent
of the amounts paid and argue that this prohibition protects the
government's interest that the proper amount of tax be collected upon
expiration of the grace period if entitlement to a reduced rate is not
confirmed. This comment is accepted but only if the withholding agent
has received a faxed Form W-8. Thus, for example, a reduced rate of
withholding for portfolio interest or under a tax treaty can apply to
amounts credited during the grace period based on a faxed Form W-8.
Commentators also argued that any backup withholding should not be
retroactively imposed after the expiration of the 90-day grace period
when documentation is still lacking at that time, because of the
difficulty to deduct and deposit a tax after the fact. In response to
these comments, the final regulations are revised to impose backup
withholding only to payments credited to the account after the
expiration of the grace period if, at that time, documentation is still
lacking or unreliable. The presumption that the account holder was a
foreign person during the grace period is not reversed. Thus, if
amounts credited during the grace period were subject to withholding at
less than the full 30-percent rate, and, at the end of the grace
period, the documentation is still lacking or unreliable, then the
payor must make an adjustment in order to correct the underwithholding,
so that all amounts credited during the grace period are withheld upon
at the full 30-percent rate (to the extent they are amounts subject to
chapter 3 withholding). Under the final regulations, amounts credited
to the account during the grace period could be subject to no or
reduced withholding if the withholding agent receives a faxed Form W-8.
Consistent with the 30-day grace period under Sec. 31.3406(d)-3(c), the
provisions are revised to treat reinvestment as withdrawals. The grace
period is terminated if withdrawals or other events leave a balance in
the account that is insufficient to cover potential backup withholding
liability. See Sec. 1.6049-5(d)(2)(ii) and Sec. 1.1441-1(b)(3)(iv) of
the final regulations, as renumbered.
For purposes of withholding under chapter 3 of the Code, the 90-day
grace period applies to all payments that are exempted from the TIN
requirement under Sec. 1.1441-6(b)(2)(ii). For purposes of information
reporting on amounts not subject to withholding, the 90-day grace
period applies to all payments reportable as dividends, interest,
royalties, and broker proceeds. Although comments were received asking
that the grace period be extended to existing accounts, the final
regulations do not do so. A grace period should not be necessary for
existing accounts where the expiration of withholding certificates is a
predictable event for which withholding agents and payors can plan
accordingly. On the other hand, the grace period is extended to
situations where the validity of documentation expires because of a
change of circumstances. In such a case, it is reasonable to allow time
to obtain new or corrected documentation to account for changes
affecting the validity of documentation in an unexpected manner. The
final regulations also extend the availability of a grace period for
purposes of payments for which a Form 8233 is required (i.e., claim of
treaty benefits for compensation to nonresident alien for personal
services). This benefit is intended to facilitate withholding on these
payments to beneficial owners who are awaiting their social security
number or ITIN. The final regulations clarify that the grace period
provisions apply at the option of the payor or withholding agent.
Therefore, a payor or withholding agent is not required to implement
procedures offering a grace period to its customers.
13. Presumptions--Payments to Foreign Intermediaries
At the request of commentators, the final regulations clarify how
the presumptions apply to payments to foreign intermediaries in the
absence of reliable documentation both for purposes of chapter 3 and
chapter 61 information, and sections 3402, 3405, and 3406. Under
Sec. 1.1441-1(b)(3)(v)(A), a payee who has not provided a valid
intermediary withholding certificate or whose intermediary withholding
certificate is defective because, for example, the information on the
certificate regarding the intermediary is lacking or unreliable, must
generally be treated as an undocumented owner of the payment. Under
Sec. 1.1441-1(b)(3)(ii), an undocumented owner is presumed to be an
individual, a trust, or an estate, if the payee appears to be such a
person. In the absence of reliable indication that the payee is an
individual, a trust, or an estate, the payee is presumed to be a
corporation if it can be treated as a corporation under the ``eyeball''
test described in Sec. 1.6049-4(c)(1)(ii)(A)(1) or is presumed to be
one of the persons enumerated under Sec. 1.6049-4(c)(1)(ii) (B) through
(Q) if it can be so treated under an ``eyeball'' test basis. If it
cannot be so treated, then it is presumed to be a partnership.
If the payee is presumed to be an individual, a trust, an estate,
or a partnership, it is presumed under Sec. 1.1441-1(b)(3)(iii) to be a
U.S. person who is not an exempt recipient and the information
reporting provisions under chapter 61 of the Code and section 3406
would govern the payor's reporting and withholding obligations with
respect to the payment. If the payee is presumed to be a corporation or
another exempt recipient under Sec. 1.6049-4(c)(1)(ii) (B) through (Q),
then it is also presumed to be a U.S. person. However, if the amount
paid consists of an amount that is subject to withholding under chapter
3 of the Code (e.g., U.S. source interest or dividends), the payee is
presumed to be a foreign person if there are indicia of foreign status,
in which case withholding at the 30-percent rate is required under
chapter 3 of the Code. See Sec. 1.1441-1(b)(3)(iii)(A).
If the payment can be treated as made to a foreign intermediary but
the intermediary's withholding certificate is unreliable either because
the withholding agent or payor has not been given sufficient
information to determine the proper amount of withholding or because
some or all of the underlying certificates that are required to be
attached are lacking or are unreliable, the payment is presumed made to
a foreign nominee acting for an undocumented owner. Therefore, the
payment is subject to withholding under chapter 3 of the Code at the
unreduced 30-percent rate to the extent it consists of income subject
to such withholding under chapter 3 of the Code. See Sec. 1.1441-
1(b)(3)(v)(B). Additional presumptions are provided under Sec. 1.1441-
1(b)(3)(v) (C) and (D) to deal with lacking or unreliable information
regarding the allocation of a payment among beneficial owners or other
payees and lacking or unreliable information regarding whether the
intermediary's certificate identifies all of the persons to whom the
payment relates. Section 1.6049-5(d)(3)(ii) clarifies, however, that if
the payment is not an amount subject to chapter 3 withholding, then the
payment is
[[Page 53402]]
presumed to be made to an exempt recipient not reportable under section
6042, 6045, or 6049 (except for certain payments of U.S. bank deposit
interest or U.S. short-term OID under Sec. 1.6049-5(d)(3)(iii)).
The lack of reliable information regarding beneficial owners or the
allocation of the payments among them raise an issue as to how the
amounts should be reported on a Form 1099 (if, for example, the
withholding agent has a Form W-9 from a beneficial owner but has no or
unreliable information regarding how much the payment is allocable to
such person) or on a Form 1042-S. The final regulations under
Sec. 1.1461-1(c)(4)(iv) provide that payments to an intermediary or
foreign partnership for the account of undocumented owners or partners
are reportable on a single Form 1042-S made out to the intermediary,
and bearing the mention ``unknown owners.'' The final regulations,
however, do not contain guidance for situations where the withholding
agent or payor is lacking reliable allocation information. This matter
is under consideration by the IRS and comments are solicited regarding
appropriate procedures before guidance is issued.
The final regulations contain similar provisions for payments to
foreign partnerships under Sec. 1.1441-5(d). See the explanation under
Sec. 1.1441-5, below.
15. Late-Received Form W-8--Cure Procedures
Generally, a Form W-8 or other applicable documentation must be
furnished to the withholding agent or payor prior to the time of
payment. The proposed regulations in Sec. 1.1441-1(f)(5) prescribe
procedures allowing a Form W-8 or other documentation to be furnished
late (i.e., after the 90-day grace period), subject to interest and
penalties. They also contemplate the possibility that, upon
examination, the IRS might require the withholding agent or payor to
furnish additional proof in support of the claim of foreign status or
eligibility for a reduced rate of withholding under the Code or a tax
treaty. Commentators asked for an exemption from interest and penalties
when it is determined that there is no underlying tax liability once
the documentation has been provided or, at least, that the liability be
abated where the withholding agent has acted in good faith.
The final regulations do not eliminate the possibility that
interest and penalties may apply because the liability for those items
is clearly contemplated under section 1463. However, several revisions
are made to relieve liability in certain cases. See Sec. 1.1441-
1(b)(7), restating the provisions of proposed Sec. 1.1441-1(f)(5).
First, in order to eliminate the possibility of a double interest
charge when the respective unsatisfied tax liabilities of the
withholding agent and of the beneficial owner run concurrently, the
regulations are modified to limit collection to one amount of interest
only. In that regard, interest will not be assessed against the
withholding agent if it otherwise is assessed or collected against the
beneficial owner. Next, in order to clarify that the cure rules apply
to all cases for which documentation must be provided to the
withholding agent, cross references have been added under Secs. 1.1441-
4(f), 1.1441-5(f), 1.1441-6(f), 1.1441-8(e), 1.1441-9(c), and 1.1443-
1(b)(3). In addition, the final regulations make this relief available
on a retroactive basis for all open years. This action is intended to
eliminate any ongoing controversy with the IRS regarding an issue that
is unclear under current law. The final regulations clarify that the
period for calculating penalties and interest is limited to the time
that the liability remains outstanding, i.e., starting with the due
date for filing the return under section 6601 (i.e., March 15 of the
year following the year in which the payment was made) and ending with
the date that the tax is considered paid (i.e., the time that the
documentation is furnished establishing the proper amount of tax due or
that the tax is actually paid, whichever is earlier). Also,
commentators asked for a clarification of how late deposit penalties
would apply when the withholding agent fails to withhold. This issue
remains under consideration.
16. Due Diligence With Respect to Information Returns Required Under
Chapter 61 of the Code
The Interest and Dividend Tax Compliance Act of 1983 provided that
the penalty for the failure to file an information return, furnish a
copy of it to a payee, or supply a TIN can be waived if it is shown
that the filer exercised due diligence in filing the return, furnishing
it to a payee, or supplying the payee's TIN. The due diligence standard
applied to failures on information returns reporting dividends under
section 6042, patronage dividends under section 6044, and interest or
OID under section 6049. The IRS issued regulations in question and
answer form providing the prerequisites to establish due diligence. See
Secs. 35a.9999-1 through 35a.9999-5.
The Omnibus Budget Reconciliation Act of 1989, Public Law 101-239,
103 Stat. 2393, repealed sections 6676 and 6678 with the enactment of
uniform information reporting penalties under sections 6721 through
6724 and replaced due diligence with a reasonable cause standard under
newly enacted section 6724. However, Congress provided that the
separate and higher due diligence waiver standard for returns filed
under sections 6042, 6044, and 6049 be considered to meet reasonable
cause. H. Rep. No. 247, 101st. Cong., 1st. Sess., at 1385 (1989).
These final regulations remove the Q/As under Part 35a, effective
January 1, 1999. Because due diligence will remain in effect, the IRS
will retain the relevant Q/As set forth in Part 35a. These final
regulations redesignate the relevant Q/As under Sec. 301.6724-1(g).
17. Effective Dates
Many comments were received regarding the effective dates of the
final regulations. Commentators argued that the January 1, 1998
effective date in the proposed regulations should be extended because
of the anticipated time required to complete QI agreements and for
withholding agents to make the administrative and operating systems
changes that will be necessary to comply with the regulations. However,
commentators have argued that provision should also be made for a
financial institution to elect earlier adoption of the new requirements
where possible.
The final regulations accommodate these concerns. The effective
date is changed to January 1, 1999. In view of the later effective date
and comments that staggered effective dates make system adjustments
more difficult and costly, all special delayed effective dates rules
are eliminated. Also, transition rules are modified for existing
certificates. Valid withholding certificates that are held on December
31, 1998, remain valid until the earlier of December 31, 1999 or the
due date of expiration of the certificate under rules currently in
effect (unless otherwise invalidated due to changes in the
circumstances of the person whose name is on the certificate). Further,
certificates dated prior to January 1, 1998 that are valid as of
January 1, 1998, remain valid until the end of 1998, irrespective of
the fact that their validity expires during 1998 (other than by reason
of changes in the circumstances of the person whose name is on the
certificate).
The final regulations do not accelerate the effective date of
certain provisions as had been requested by several commentators.
Although doing so would provide relief to a number of
[[Page 53403]]
taxpayers, it would also complicate the many system adjustments that
withholding agents, particularly financial institutions with large
volume of cross-border payments, must implement before the effective
date of these regulations. The IRS and Treasury feel that the benefits
of accelerating certain provisions would not sufficiently outweigh the
added costs and burdens to many withholding agents.
C. Comments and Changes to Sec. 1.1441-2
1. Amounts Subject to Withholding
Under Sec. 1.1441-1 of current regulations, an amount is subject to
withholding only if it is from sources within the United States. The
final regulations under Sec. 1.1441-2(a) clarify that an amount can be
sourced within the United States irrespective of the fact that the
source is undetermined at the time of payment. This clarification
addresses the Tax Court's ruling in Albert J. Miller v. Commissioner,
T.C. Memo 1997-134, 73 T.C.M. (CCH) 2319, that an amount whose source
cannot be determined at the time paid is sourced outside the United
States for purposes of sections 871(a) or 881(a) and the withholding
provisions of chapter 3 of the Code.
2. Fixed or Determinable Annual or Periodical Income
The definition of the term fixed or determinable annual or
periodical (FDAP) income under existing regulations under section 1441
is retained in the final regulations and clarified. In particular,
Sec. 1.1441-2(b)(1)(iii) addresses three types of uncertainties that a
withholding agent may encounter: (1) The proportion of the payment that
constitutes income cannot be determined when a payment is made (e.g., a
payment made on an obligation that may include interest, but the exact
amount of interest cannot be determined because the determination is
contingent upon future events); (2) the proportion of the payment that
constitutes U.S. source income cannot be determined at the time of
payment; or (3) the fact that the payment may be income in the future
cannot be anticipated at the time of payment. Only in the third case
would the payment not constitute FDAP income. In the first two cases,
income is actually being paid. The only uncertainty is the amount that
the recipient should include in income and this uncertainty does not
prevent the payment from constituting fixed or determinable annual or
periodical income for purposes of section 871(a) or 881(a) and the
withholding provisions of chapter 3 of the Code. See also the
additional provisions under Secs. 1.1441-2(b)(1)(iii) and 1.1441-
3(d)(1) dealing with determinability and rules of withholding for items
whose source cannot be determined at the time of payment.
3. Original Issue Discount
In response to comments, the final regulations regarding
withholding on original issue discount (OID) are simplified. As a
general principle, withholding is required on a payment that is treated
as taxable OID under section 871(a)(1)(C) or 881(a)(3)(A) to the extent
the withholding agent knows the amount that is OID. That amount is
known to the withholding agent if it knows how long the beneficial
owner has held the obligation on which a payment is made, the terms of
the obligation, and the extent to which the beneficial owner purchased
the obligation at a premium. A withholding agent has knowledge if the
information is obtainable upon exercising reasonable efforts. The
information is not considered obtainable in the case of payments with
respect to publicly traded securities where the withholding agent,
consistent with normal industry practices, does not have a direct
customer relationship with the person who has actual knowledge of the
relevant information or has no access to this information in the normal
course of its business due to the manner in which the obligation is
held (e.g., in street name or through intermediaries). In the case of a
withholding agent maintaining a direct customer relationship with the
beneficial owner, knowledge regarding the owner's holding period and
acquisition premium is considered to be reasonably available to the
withholding agent. Because of the complexities that may be involved in
calculating the amount taxable to the owner and, thus, subject to
withholding, withholding agents may rely on the most recently published
``List of OID Instruments'' or similar list published by the IRS
(currently contained in IRS Publication 1212 (available from the IRS
Forms Distribution Centers)).
Notwithstanding the rules described in the preceding paragraph,
withholding is required with respect to OID that would qualify as
portfolio interest except for the fact that documentation required
under section 871(h)(5) is not furnished to the withholding agent. In
the absence of information regarding the amount of OID, the withholding
agent may rely on IRS Publication 1212. The final regulations clarify
that no withholding applies to amounts that are not otherwise subject
to chapter 3 withholding (e.g., OID on obligations in bearer form that
qualifies as portfolio interest).
3. Securities Lending Transactions
The final regulations add paragraph (b)(4) to cross-reference the
regulations under sections 871 and 881 dealing with securities lending
transactions and equivalent transactions. Thus, the character of the
income arising from these transactions applies for purposes of
determining the amount of withholding under chapter 3 of the Code.
Similar rules apply for purposes of information reporting and backup
withholding on interest and dividends. See Secs. 1.6042-3(a)(2) and
1.6049-5(a)(5). See Sec. 1.1441-1(b)(4)(i) for documenting interest
equivalent amounts for which the beneficial owner claims a portfolio
interest exemption.
4. Relief for Deemed Payments of Income
Several comments were received regarding the difficulty for a
withholding agent to withhold on an amount of income that is not
represented by cash or property (i.e., deemed payments of income). The
final regulations in Sec. 1.1441-2(d) provide relief in cases in which
the withholding agent does not have custody of, or control over,
property of the taxpayer who is deemed to receive income under section
871(a) or 881(a) or does not have knowledge of the events that give
rise to the deemed payment. Relief, however, does not apply for deemed
payments arising between related parties or as part of a pre-arranged
plan to avoid withholding. Therefore, a withholding obligation arising
out of a deemed payment resulting from an allocation of income under
section 482 is not eliminated because the parties are related. Examples
are provided for cancellation of debt and constructive income arising
from correcting prior underwithholding by paying the amount of tax due
to the IRS. Withholding on deemed distributions with respect to stock
is not excused under these rules. For these amounts, the IRS and
Treasury believe that an exemption from withholding would be
inappropriate in view of the ongoing investment or business
relationship between the parties. Under the final regulations,
withholding is required at the time of the deemed distribution even if
the income from the distribution is prorated over time (such as a
redemption premium under section 305(c)). The IRS and Treasury
considered comments asking that withholding be deferred until income is
includable in the
[[Page 53404]]
shareholder's income but concluded that the withholding procedures
necessary to implement such an exception and insure proper withholding
would be too complex.
D. Comments and Changes to Sec. 1.1441-3
1. Withholding on Interest Payments
No obligation to withhold is imposed under current law on the
payment of stated interest on an obligation that was purchased between
interest payment dates. Under Sec. 1.61-7(c), interest received on the
interest payment date is treated as a return of basis to the extent it
represents accrued unpaid interest as of the date of purchase as
reflected in the new holder's basis for the obligation. Therefore, when
the new holder receives a payment of the stated interest, the holder s
tax liability is limited to the amount of interest accrued after the
date of purchase (subject to additional adjustments reflecting possible
acquisition premiums or market discounts). Because of the difficulty
for a withholding agent to determine the amount accrued to the holder
and other adjustments affecting the actual amount taxable to the
holder, withholding on the entire amount of stated interest is
permitted under the regulations. Although commentators have asked that
the withholding agent be permitted to withhold on the amount that it
knows is taxable, the final regulations do not modify the proposed
regulations on this point because the IRS and Treasury consider that
withholding on the entire amount is justified to the extent that, under
existing rules, withholding on sales of obligations between interest
payment dates is not required.
This comment is taken into account, however, in regulations that
are proposed together with these final regulations to require
withholding on sales of obligations between interest payment dates.
These proposed regulations are intended to conform the withholding
regime for sale of bonds between interest payment dates to that
implemented for OID obligations under the final regulations. See
project REG-114000-97 published elsewhere in this issue of the Federal
Register.
2. Withholding on Distributions
The proposed regulations regarding withholding on corporate
distributions are expanded and clarified in view of comments. Section
1.1441-3(c)(1) and (2)(i) are revised to clarify that the withholding
procedures are elective. In other words, a distributing corporation or
the custodian or nominee may choose to withhold on the entire amount
distributed and, thus, to not take advantage of the election to limit
withholding to the estimated earnings and profits amount. An election
by the distributing corporation to determine withholding based on the
estimated earnings and profits amount for distributions it makes
directly to a foreign person does not mean that a custodian or nominee
who receives payments of distributions for the account of foreign
investors must do the same when it makes a payment of these
distributions to the foreign investors. Instead, the custodian may
choose to disregard the estimate of earnings and profits and to
withhold on the entire distribution. The revisions reflect the fact
that each withholding agent must be able to make this decision
independently because of its own potential tax liability under section
1461 in the event of underwithholding. The final regulations clarify
that the amounts of tax that the withholding agent pays to satisfy the
tax liability under section 1461 if underwithholding has occurred is
not subject to withholding even if it constitutes a constructive
dividend. This rule applies irrespective of the fact that the
satisfaction of the tax liability may be additional income to the
shareholder unless the additional payment results from a contractual
arrangement between the parties regarding the shareholder's
satisfaction of its tax liability by the distributing corporation. With
this rule, the final regulations eliminate, for this situation, the
question as to whether a taxpayer realizes income when the withholding
agent satisfies a tax liability under section 1461.
Further, proposed Sec. 1.1441-3(c)(2)(iii) (renumbered as
Sec. 1.1441-3(c)(2)(ii)(C) in the final regulations) is revised so that
an erroneous estimate by the distributing corporation is imputed to an
intermediary not only in situations in which the IRS challenges the
estimate but also in situations in which the distributing corporation
unilaterally determines that its estimate is in error. Some
commentators questioned whether a reference to interest in Sec. 1.1441-
3(c)(3)(ii)(B) regarding consequences in the event of underwithholding
had been omitted in error. Interest is not mentioned in the provision
because, to the extent underwithholding is corrected by the due date of
filing the annual return under Sec. 1.1461-1(b), no interest charge
applies. On the other hand, if the withholding agent corrects the
underwithholding as part of an amended return filed after the due date
for filing the annual return, then an interest charge would apply, as
reflected in Sec. 1.1441-3(c)(3)(ii)(B)(2)(ii).
In response to another comment, Sec. 1.1441-3(c)(3)(ii) is added to
allow custodians and nominees to rely on estimates made by mutual funds
regarding their capital gain dividends and exempt interest dividends.
Some commentators also asked that Sec. 1.1441-3(c)(3)(ii) be revised to
provide that an adjustment to the amount of withholding is not a
distribution for all purposes and not just for purposes of section
562(c). This comment is not accepted because there are circumstances in
which the adjustment may constitute a distribution--such would be the
case, if, for example, the adjustment cannot be made by adjusting the
withholding on a subsequent distribution because the affected
shareholder is no longer a shareholder or the adjustment occurs after
the end of the taxable year.
Finally, Sec. 1.1441-3(c)(4) has been added to coordinate the
general distribution provisions with the regulations under section
1445. Under Sec. 1.1445-5(b)(1), no withholding is required under
section 1445 on a distribution from a U. S. real property holding
corporation (USRPHC) if the distribution is subject to withholding
under section 1441 or 1442. Given the change in the withholding
procedures applicable to corporate distributions, the exemption from
withholding under section 1445 may now lead to underwithholding on
distributions from a USRPHC. In order to correct this situation, the
final regulations give taxpayers a choice between two withholding
regimes. A USRPHC may choose to withhold under section 1441, provided
it withholds on the entire amount of the distribution, regardless of
estimated earnings or profits. However, the rate of withholding may be
reduced under income tax treaty provisions, although not below the 10-
percent rate applicable under section 1445 (unless the treaty provides
otherwise for distributions from USRPHCs). For purposes of applying the
treaty, the entire amount of the distribution is treated as a dividend.
Alternatively, the USRPHC may withhold under a mixed regime. Under this
regime, withholding applies under section 1441 on the portion of the
distribution that represents estimated earnings and profits and under
section 1445 on the remainder of the distribution. The mixed
withholding regime is mandatory for distributions from publicly-traded
real estate investment trusts (REITs). In other words, a REIT may not,
with respect to its distributions, choose to apply the withholding
regime of section
[[Page 53405]]
1441 to the entire distribution. Instead, the REIT must withhold under
section 1441 on the portion of the distribution that is not designated
as a capital gain dividend or a return of basis. Withholding under
section 1445 is also required on the portion of the distribution that
the REIT designates as a capital gain dividend in accordance with
Sec. 1.1445-8.
3. Withholding on Undetermined Amounts
The final regulations also address the practical difficulties of
withholding on an amount when, at the time of payment, there is not
sufficient information to calculate which portion, if any, is taxable
or to determine the source of the income. For these purposes,
provisions have been added under Sec. 1.1441-3(d)(1) that require a
withholding agent to withhold on the entire amount when such
uncertainties exist. This requirement in part reflects the policy that
withholding generally should apply to payments that leave the U.S.
taxing jurisdiction. The requirement to withhold in the event of
uncertainty is similar to the provisions under existing regulations
under Sec. 1.1441-3(d)(1) (restated as Sec. 1.1441-3(d)(2) of the final
regulations) requiring withholding of an amount sufficient to assure
that the tax withheld is no less than 30 percent of the recognized
gain. In order to minimize overwithholding, the final regulations
provide an alternative to withholding on the entire amount when
uncertainties exist. Instead, the withholding agent may make a
reasonable estimate of the amount from U.S. sources or of the taxable
amount and set aside a corresponding portion in escrow until the amount
subject to withholding can be determined. Under this alternative,
setting aside an amount is not an event of withholding for purposes of
Sec. 1.1461-1(a) that would give rise to the requirement to pay the
tax. Instead, the payment of the tax can be postponed until a
determination can be made of the amount of withholding liability under
this section. The provisions under Sec. 1.1441-1(d)(1) do not apply to
uncertainties that are specifically addressed under other provisions of
the regulations, such as lack of information regarding the identity or
status of the beneficial owner or payee (see Sec. 1.1441-1(b)(3) for
applicable presumptions in those cases and the grace period provisions
set forth in Sec. 1.1441-1(b)(3)(iv)) or withholding on original issue
discount amounts (see Sec. 1.1441-2(b)(3)).
E. Comments and Changes to Sec. 1.1441-4
1. Notional Principal Contracts
Commentators have questioned whether it is appropriate to treat
income from notional principal contracts as FDAP income, particularly
since it is unclear at the outset whether the arrangement will generate
any income. The IRS and Treasury believe that the statute contemplates
very few exceptions to the concept of FDAP, and the only clear
exception is for gain from the disposition of property. Income from
notional principal contracts is not gain from the disposition of
property, nor is it the equivalent of gain. However, the final
regulations minimize the burden associated with characterizing the
income as FDAP because the liability for withholding under chapter 3 of
the Code is eliminated for such income. See Sec. 1.1441-4(a)(3).
Reporting under section 1461 or 6041, however, continues to be required
under the final regulations. However, in response to comments, the
reporting burden has been reduced and clarified (see Secs. 1.1441-
4(a)(3), 1.1461-1(c)(2)(i)(C) and (ii)(D), 1.6041-1(d)(5) and 1.6041-
4(a)(4) of the final regulations).
Under the final regulations, notional principal contract payments
are exempt from withholding. However, if paid to a foreign person, they
are presumed effectively connected income and, as such, are required to
be reported on a Form 1042-S. The effectively connected income
presumption under Sec. 1.1441-4(a)(3) can be rebutted by providing to
the withholding agent a valid withholding certificate representing that
the payments are not effectively connected with the conduct of a U.S.
trade or business. In such a case, no reporting is required on a Form
1042-S for these amounts. A financial institution (as defined in
Sec. 1.165-12(c)(1)(iv)) may, instead of a withholding certificate,
represent in a master agreement that governs the transactions in
notional principal contracts between the parties (such as an
International Swaps and Derivatives Association (ISDA) Agreement,
including the Schedule thereto) or in the confirmation on the
particular notional principal contract transaction, that the
counterparty is a U.S. person or is a non-U.S. office of a foreign
person. These representations are not required to be made under
penalties of perjury.
In the final regulations, swap payments include payments on
notional principal contracts described in Sec. 1.988-2(e), dealing with
foreign currency swaps. Also, income on notional principal contracts
does not, for purposes of these rules, include amounts characterized as
embedded interest under Sec. 1.446-3(g)(4). Such amounts, if not
effectively connected with the conduct of a U.S. trade or business and
from U.S. sources, are subject to chapter 3 withholding and are
reportable on a Form 1042 and 1042-S.
Under Sec. 1.6041-1(d)(5), a payment on a notional principal
contract, including embedded interest, is a reportable payment, unless
paid to an exempt recipient (i.e., a person described in Sec. 1.6049-
4(c)(1)(ii)), paid outside the United States (unless the payor has
actual knowledge that the payee is a U.S. person), treated as
effectively connected with a U.S. trade or business under Sec. 1.1441-
4(a)(3), or paid by a non-U.S. payor or a non-U.S. middleman. If none
of these exceptions applies, and the payor does not hold a Form W-9,
then a payment is presumed under Sec. 1.6049-5(d)(2)(i) to be made to a
U.S. person that is not an exempt recipient, in which case backup
withholding would be required under section 3406.
The final regulations under Secs. 1.6041-1(d)(5) and 1.1461-
1(c)(2)(i)(C) adopt the suggestion that nonperiodic payments are
reportable only at the time that an actual payment is made. The final
regulations require reporting of net income rather than gross amounts
from notional principal contracts. Further, in response to comments,
the final regulations in Secs. 1.1441-4(a)(3) and 1.6041-1(d)(5)
specify that the reporting requirements apply only prospectively, i.e.,
to payments made after December 31, 1998.
2. Form 8233 Procedures
The current regulations prescribe a procedure by which a
withholding agent may grant a reduced rate under an income tax treaty
on payments to nonresident aliens for services rendered in the U.S.,
generally in connection with a sporting, cultural, scientific, or
artistic event. The procedure involves submitting a Form 8233 to the
IRS for review and approval as instructed under Sec. 1.1441-4(b)(2).
The regulations provide, in effect, that the withholding agent may not
grant an exemption from withholding until after a 10-day period
beginning with the date that the Form 8233, as reviewed and approved by
the withholding agent, is mailed by the withholding agent to the IRS.
The proposed regulations extend the 10-day period to 20 days.
Commentators objected to the 20-day period and asked for the
retention of the 10-day period. In addition, they suggested that,
instead of making the treaty exemption effective only after the
[[Page 53406]]
submission of Form 8233, the exemption should be retroactive to the
date of first payment covered by the certificate if the completed Form
8233 contains the nonresident alien's TIN, and if the withholding agent
is not subsequently notified by the IRS within the 20-day period that
the exemption is not valid. After further consideration, the comments
are adopted. The 10-day waiting period is continued and the approval of
the Form 8233 is made retroactive to the date of first payment covered
by the certificate. However, the final regulations clarify that the IRS
review process does not exonerate the withholding agent from liability
for underwithholding. In its review, the IRS simply insures that the
form contains all of the requested information, that the country of
residence stated on the form is a country with which the U.S. has an
income tax treaty, that the reduced rate that the withholding agent
plans to apply is the proper rate under the applicable treaty, and
that, based solely on information contained on the form, the reduced
rate appears applicable. The IRS approval of the form makes no
determination regarding whether the withholding agent's reliance on the
form is reasonable, based on facts that the withholding agent knows or
has reason to know at the time of the payment and that are not
disclosed to the IRS as part of the review process. In addition, the
final regulations allow the 90-day grace period to apply to payments
covered by a Form 8233, in order to allow time for foreign persons who
come to the United States for the first time and must complete a Form
8233 shortly after arrival to apply for and obtain an individual
taxpayer identifying number. See Sec. 1.1441-1(b)(3)(iv).
The final regulations modify the proposed rule under Sec. 1.1441-
1(b)(6) reducing the amount of certain compensation income by the
personal exemption under section 151. The proposed regulations allowed
a reduction for the full amount of the exemption. Commentators noted
that allowing a reduction for the full amount of the allowable personal
exemption may lead to inappropriate claims of multiple exemptions for
nonresident aliens who come to the U.S. frequently for short-term
events or assignments with different organizations. Commentators were
concerned that they would have no ability to keep track of prior claims
of the personal exemption. For this reason, the proration rule now
currently in effect, is continued in the final regulations.
3. Reimbursed Expenses
Commentators asked that the regulations provide an exemption from
withholding for reimbursed expenses paid to a nonresident alien
individual in relation to performance of services in the U.S. as an
independent contractor. A change to the regulations is not necessary,
however. If the payments are exempt from tax under the Code, they are
exempt from withholding under Sec. 1.1441-4(b)(1)(iv). If, on the other
hand, those payments are not exempt under the Code, then it would be
inappropriate to provide for an exemption from withholding under
section 1441.
F. Comments and Changes to Sec. 1.1441-5
In response to comments, many partnership provisions have been
consolidated in this section. A new paragraph (a) has been added to
describe the steps necessary to determine the status of the payee for
withholding purposes. The withholding procedures applicable to domestic
partnerships are stated in paragraph (b). The withholding procedures
applicable to foreign partnerships are stated in paragraph (c).
Paragraph (d) describes applicable presumptions in the absence of
documentation. Paragraph (e) is reserved for rules applicable to
estates and trusts. Paragraph (f) contains the effective date
provisions. Corresponding provisions have been added in Sec. 1.6049-
5(d)(4), dealing with payments of reportable amounts under chapter 61
of the Code to address reporting of payments of amounts that are not
subject to chapter 3 withholding.
Paragraph (c)(1) provides guidance for identifying the payee in the
case of a payment to a foreign partnership. As a general rule, a
payment to a foreign partnership is treated as a payment directly to
the partners, whether or not documentation has been provided for the
partners, with two exceptions: a payment to a ``withholding foreign
partnership'' and a payment to a foreign partnership that has furnished
a certificate upon which the withholding agent can rely to treat the
payment as effectively connected with the conduct of a U.S. trade or
business are treated as a payment to the foreign partnership and not to
the partners.
Paragraph (c)(2) restates the rule proposed under Sec. 1.1441-
1(e)(5), dealing with qualified intermediaries, for foreign
partnerships that are withholding foreign partnerships. In order to
avoid confusion, a withholding foreign partnership is no longer named a
qualified intermediary.
Paragraph (c)(3) deals with foreign partnerships that are not
withholding partnerships. Paragraph (c)(3)(iii) incorporates the
withholding certificate provisions that were in proposed Sec. 1.1441-
1(e)(3)(iii). Those rules parallel the rules applicable to non-QIs
under Sec. 1.1441-1(e)(3)(iii) of the final regulations. In particular,
the regulations require that a statement be attached to the withholding
certificate if necessary to provide information sufficient for the
withholding agent to determine each partner's distributive share of
income subject to withholding. The rules governing the statement are
stated in paragraph (c)(3)(iv) and parallel similar rules in
Sec. 1.1441-1(e)(3)(iv) of the final regulations applicable to non-QIs.
At the request of commentators, paragraph (c)(3)(iii) clarifies that a
foreign partnership receiving income that is effectively connected with
the conduct of a U.S. trade or business is not required to furnish
separate certificates for each of its partners. Instead, it may furnish
one single withholding certificate, even though the partnership is not
a withholding foreign partnership. See also paragraph (c)(1)(ii)(C).
This procedure is reasonable because, in such a case, the partnership
is subject to withholding procedures under section 1446.
Paragraph (d) describes the presumptions upon which a withholding
agent can rely when making payments to a partnership for which certain
documentation is lacking or unreliable. First, under paragraph (d)(2),
a recipient that is presumed to be a partnership (based on presumptions
set forth in Sec. 1.1441-1(b)(3)(ii)) is presumed to be a foreign
partnership if certain indicia of foreign status are present. If, based
on such a presumption, the withholding agent has determined that the
payment is made to a foreign partnership (presumably acting for the
account of its partners since intermediary status generally cannot be
presumed in the absence of valid documentation), uncertainties may
remain regarding the status of the partners, the allocation of a
payment among them, or whether all the partners have been accounted
for. Under the final regulations, a payment that cannot be reliably
associated with a withholding certificate from a partner is presumed
made to a foreign payee. As a result, the withholding agent is required
to withhold 30-percent from the payment, without a reduction. Also, any
part of a payment that it is not reliably allocated to a partner is
presumed allocable to the partner with
[[Page 53407]]
the highest withholding rate or the highest U.S. tax liability (as the
withholding agent can best estimate) if the withholding rates are
equal. Third, if the withholding agent does not have a reliable
certification that all the partners are accounted for, and, as a
result, the withholding agent cannot reliably determine the
distributive share of any one or more partners, then none of the
payment can be reliably associated with any one partner and the entire
payment is presumed made to a foreign payee.
These procedures parallel those applicable to foreign
intermediaries under Sec. 1.1441-1(b)(3)(v). They differ from the
presumptions stated in the proposed regulations under Sec. 1.1441-
1(f)(4)(ii) which provided that the amounts were paid to a U.S. payee
that is not an exempt recipient. Thus, the final regulations, by
presuming that the amounts are paid to a foreign payee, require that a
30-percent amount be withheld on amounts subject to withholding under
chapter 3 of the Code rather than a 31-percent amount under the backup
withholding provisions of section 3406. However, for amounts that are
not subject to chapter 3 withholding, Sec. 1.16049-5(d)(4) retains the
provisions in the proposed regulations that the payments are presumed
made to a non-exempt recipient U.S. payee. In such a case, 31-percent
backup withholding applies instead of 30-percent withholding.
The final regulations under Sec. 1.1441-5(d)(3)(iv) clarify that a
foreign partnership that is a withholding foreign partnership
determines who the payee is and the status of the payee, based on the
provisions of Sec. 1.1441-1(b)(2) and Sec. 1.1441-5 (c) and (d) in the
same manner as if it were making payments directly to the partners
other than in their capacity as partners. In the absence of
documentation regarding the partners, the partners are presumed to be
foreign persons rather than U.S. persons, including for amounts that
are not subject to chapter 3 withholding. A presumption of U.S. status
for amounts not subject to chapter 3 withholding would not be
meaningful because a foreign partnership is not a payor for purposes of
chapter 61 of the Code and backup withholding under section 3406 when
making payments to its partners. Therefore, payments made by a foreign
partnership to its partners are not reportable under chapter 61 and are
not subject to backup withholding. Instead, a foreign partnership must
file an annual return on Form 1065 and report each partner's
distributive share on Forms K-1, which forms are filed with the IRS
with a copy to each partner. Such filing requirements apply in all
cases in which the foreign partnership derives U.S. income,
irrespective of whether the tax liability has been satisfied by
withholding at source or whether all the partners are foreign. See
section 6031 and Secs. 1.6031-1(c) and 1.6031(b)-1T. However, in order
to reduce the burden on foreign partnerships that are not withholding
foreign partnerships, the IRS and Treasury are planning to issue
regulations under section 6031 that would eliminate the filing
requirement under section 6031 for foreign partnerships that are not
engaged in a U.S. trade or business, that furnish appropriate
documentation for each of their partners, and whose partners' U.S. tax
liability has been fully satisfied at source.
Commentators asked that foreign partnerships be allowed to certify
under penalties of perjury that all the partners are foreign and to use
the same sub-accounting procedures that qualified intermediaries may
use. In particular, where a partner is entitled to reduced withholding
under the regulations without providing a TIN, commentators argue that
there should not be a requirement that the partnership's intermediary
withholding certificate specify that partner's distributive share of
the item of income paid to the partnership. Also, they argue that there
should not be a requirement that a separate Form 1042-S be filed under
the partner's name. Instead, the partnership's intermediary withholding
certificate should indicate the aggregate distributive shares of all
members entitled to a single rate, and reporting should be done on the
aggregate amount under the partnership's account. These comments are
similar to those received for non-QIs and are not adopted for the same
reasons that they are rejected for non-QIs. It is important to retain
the distinction between foreign partnerships that qualify as
withholding agents (i.e., those that are withholding foreign
partnerships or are subject to section 1446) and those that are not
qualified to act as withholding agents. If a foreign partnership is not
a withholding foreign partnership, it should not be permitted to
certify the status of its partners on their behalf.
Commentators asked that a foreign entity holding a passive
investment for its own account be allowed to use the withholding
procedures applicable to foreign corporate entities, irrespective of
its actual classification for tax purposes. It is argued that, in many
cases, investments are structured using organizations that, under the
default classification rules of the check-the-box regulations would be
classified as partnerships. In order to avoid more onerous withholding
procedures, these entities would normally prefer a corporate
classification. It is argued that the need to make an election for this
purpose is an unnecessary step that should be eliminated. This comment
is not accepted because the election procedure to insure corporate
classification is simple and serves an important compliance role.
At the request of commentators, the final regulations in
Sec. 1.1441-7(a) clarify that, if a nominee holds an interest in a
domestic or foreign partnership on behalf of a partner and provides the
partnership with the information required under Sec. 1.6031(c)-1T(a)
with respect to the partner, the nominee is deemed to have satisfied
its obligations as a withholding agent under chapter 3 of the Code and
has no liability for underwithholding on the partner's distributive
share of the amounts to which the furnished information pertains. This
rule reflects the fact that a custodian holding a partnership interest
for an investor often lacks the information needed to determine which
withholding regime applies to income from the partnership. The
necessary information to correctly withhold on partnership income is
often only known to the partnership and is not easily accessible to the
custodian. On the other hand, the partnership, which is also a
withholding agent, or has withholding responsibilities, has the
information necessary to determine how withholding should apply. It is
also responsible for filing the partnership return and furnishing the
Forms K-1 to the partners.
Some commentators requested that a withholding agent should be
permitted to rely on a withholding certificate provided directly by a
partner, without a withholding certificate from the partnership. The
commentators argue that this reliance rule would permit partners to
claim a reduced rate of withholding even though the partnership refuses
to cooperate and to submit the proper documentation. This suggestion is
not accepted because it would, in effect, read the partnership
withholding certification rules out of the regulations. It may also
become a source of confusion for withholding agents who would not
always know how reliable the partner's information is. The IRS and
Treasury believe that the partnership withholding certificate provides
important information to the withholding agent, such as each partner's
distributive share of the payment. In addition, in the absence of a
partnership withholding certificate,
[[Page 53408]]
the withholding agent would lack information required to be stated on
the Form 1042-S (e.g., the partnership's EIN) and compliance may be
weakened as a result.
G. Comments and Changes to Sec. 1.1441-6
1. Address Rule
Comments were received asking reconsideration of the proposal to
eliminate the address rule for dividends. The IRS and Treasury believe,
however, that there is no longer a justification for the address rule
as in effect under current law. When the payment is made directly to a
foreign beneficial owner, there is no justification for not requiring a
Form W-8 from the owner in the same manner that is required for
payments on debt obligations. In the case of payments of dividends to
foreign intermediaries, the proposed and final regulations provide for
new intermediary procedures that are more adapted to the monitoring of
abusive claims of treaty benefits than is the address rule. For these
reasons, the address rule is not reinstated.
2. Reliance on Withholding Certificate
In response to comments, Sec. 1.1441-6(b)(1) clarifies, by cross-
reference to Sec. 1.1441-1(e)(4)(viii) dealing with reliance on
withholding certificates, that a withholding agent may rely on
information and certifications in a certificate without having to
inquire into the truthfulness thereof, absent actual knowledge or
reason to know otherwise. Therefore, absent actual knowledge or reason
to know that such claims are false, a withholding agent may rely on
claims on a Form W-8 of beneficial ownership and residence by a person
claiming benefits under a tax treaty. Under these principles, a
withholding agent may rely on representations from a foreign person
regarding the application of foreign tax laws or certifications
regarding the circumstances of the recipient or of the transaction. In
particular, a withholding agent may rely on the recipient's
representation made by furnishing a beneficial owner withholding
certificate that it is a beneficial owner of the income. If the address
on a withholding certificate comports with a claim of residence in a
particular country, a withholding agent may also rely on such address
as indicative of residence, even though the determination of residence
for tax treaty purposes may be far more complex than establishing an
address in the treaty country and is likely to involve the application
of foreign tax laws, particularly in the case of a person other than an
individual. However, if the withholding agent knows that the
representations on a Form W-8 are inconsistent with foreign laws or
with the recipient's or the transaction's circumstances, then the
withholding agent must question the basis for the representations.
3. Requirement of a TIN
Commentators have suggested that the final regulations require a
TIN only for related party transactions subject to treaty rate
withholding. This would eliminate the need to provide a specific list
of payments exempt from a TIN requirement. This suggestion is not
adopted because the IRS and Treasury believe that the TIN requirement
is useful in monitoring claims of reduced rates under tax treaties for
all transactions. Because the procedures for obtaining a TIN are
simple, the TIN requirement for non-market based transactions is not
viewed as overly burdensome relative to the compliance benefits.
Section 1.1441-1(e)(4)(vii) enumerates the instances in which a TIN
must be furnished on a withholding certificate. Under the proposed
rules, a TIN is required to obtain the benefit of reduced withholding
under an income tax treaty, unless the payment consists of dividends
paid on publicly traded stocks. Commentators have requested that the
exemption from having to furnish a TIN be extended to other securities,
including pre-1984 bonds and other debt obligations, payments on any
mutual fund investment (e.g., an open-end mutual fund), interests in
publicly-traded grantor trusts generating royalty income, interest- and
dividend-equivalent payments on the loan of exempted publicly traded
stocks or securities, income from repurchase agreements involving
exempted publicly traded stocks or securities, dividends on non-
publicly traded stocks, interest on syndicated or bank loans, income
from publicly-traded grantor trusts, contingent interest, and amounts
paid on private placements of stocks or securities.
In response to these comments, the final regulation are amended to
expand the categories of income for which a TIN is not required to be
furnished. Under the final regulations, the categories are dividends
and interest on publicly traded securities, dividends on redeemable
securities issued by an investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1), income related to
loans of publicly traded securities, and dividends, interest, or
royalties from units of beneficial interest in a publicly offered and
registered unit investment trusts. See Sec. 1.1441-6(b)(2)(ii). The
covered securities extend to foreign securities as well as U.S.
securities. Also, in response to comments that the regulations should
provide a reliable source to determine whether or not a stock (or other
security) is publicly traded, the regulations clarify that section
1092(d) and Sec. 1.1092(d)-1 apply to determine whether a stock or
security is publicly traded for this purpose. An exception is not made
for other securities because the IRS and Treasury believe that the TIN
exemptions should be limited to income arising from securities that are
publicly traded and should not extend to securities held and transacted
as part of a private business relationship. Also, an exception is not
made for sale-repurchase transactions (repos) because repos completed
within a 6-month period give rise to income that is treated as short-
term OID for tax purposes. Such income, if earned by a foreign person,
is exempt from chapter 3 withholding. Because the type of repo
transaction that would be equivalent to the type of TIN-exempted market
transactions would generally be of substantially shorter duration, the
IRS and Treasury believe that it is not appropriate to provide an
exemption for more than 6-month repo transactions.
Comments suggested that requiring TINs on intermediary certificates
is an undue compliance burden when reporting is not done to the
intermediary's account, especially if the Form W-8 of any underlying
beneficial owner is not required to bear a TIN. Commentators argue that
any IRS compliance concerns can be met without the requirement for a
TIN from a non-qualified intermediary since U.S. withholding agents
would, in any event, supply the identification and address of the
beneficial owners to the IRS on Form 1042-S. The final regulations
eliminate the need for a TIN on a non-qualified intermediary
certificate and on a certificate from a foreign partnership that is not
a withholding foreign partnership. However, a TIN continues to be
required in the case of a qualified intermediary certificate or in the
case of a certificate from a foreign partnership.
Some commentators asked that the TIN requirement be made optional.
They argue that this would provide a reasonable accommodation to
foreign investors who only occasionally or rarely enter into financial
transactions involving U.S. securities. This comment is not adopted;
instead, the final regulations broaden the types of transactions exempt
from the requirement to provide a TIN. This change should alleviate the
concern
[[Page 53409]]
expressed by these commentators. Also, commentators asked that the
final regulations provide an exemption for intermediaries with a small
number of foreign accounts (500 or less). This suggestion is also not
adopted in light of the fact that the burden of manually processing
account information for complying with these regulations should be
outweighed by the substantial compliance benefits.
With regard to documentary evidence required to validate a TIN used
to support a claim of treaty benefits, commentators asked that the
documentary evidence remain valid indefinitely rather than expire after
three years as provided in the proposed regulations. See Sec. 1.1441-
6(c). This comment is not adopted. The withholding certificates, and
the TIN showing on that certificate, are used to represent many facts,
including the foreign status of the owner and his residence for tax
treaty benefit purposes. These facts may change frequently,
particularly for individuals, and it is important that beneficial
owners recertify their status periodically to the IRS. This
recertification is also important because withholding agents cannot
monitor the continued validity of the original residence claim, since
the TIN on the certificate does not indicate which country of residence
has been represented to the IRS as part of the certification process.
The final regulations do not adopt a comment that some
organizations claiming tax-exempt status under section 501(c) should be
exempt from the requirement to obtain and furnish a TIN if the
organization is a universally recognized charitable organization, such
as a church or religious order. As previously stated, TINs are used by
the IRS to electronically process and match tax information. Any
exception to the TIN requirement precludes such electronic processing.
In light of the ease with which such organizations can obtain an EIN,
the IRS and Treasury believe that no change to the proposed regulations
is justified. However, the regulations clarify that a TIN is required
from a foreign exempt organization or foreign private foundation only
to the extent it claims a reduced rate of withholding solely based upon
its exempt status or if a TIN is otherwise required from non-tax exempt
taxpayers in order to claim a reduced rate of withholding (e.g., under
an income tax treaty). Also, a foreign private foundation is not
required to furnish a TIN for income subject to the 4-percent tax under
section 4948(a) if such income would otherwise be exempt from tax under
the Code if paid to a foreign person that is not a private foundation.
4. Certification and Electronic Matching of TINs
The final regulations are revised to specify that a taxpayer must
provide the IRS with a certificate of residence to enable it to certify
a TIN if that procedure is available in the country of residence.
Documentary evidence is permitted as an alternative means of
establishing residence in a treaty country only if a certificate of
residence is not reasonably available from the tax administration in
the country of residence. This change reflects the view that a
certificate of residence is more reliable evidence of tax residence in
a treaty country than is documentary evidence. The obligation to
furnish a certificate of residence if one is available does not apply
to corporate bodies who may, instead, furnish incorporation documents
establishing their status as a corporate body in the applicable treaty
jurisdiction.
The final regulations retain the provision in the proposed
regulations regarding the electronic confirmation by a withholding
agent of a TIN under procedures to be prescribed by the IRS. The IRS
has undertaken a TIN-matching prototype in the past. See 60 FR 66243
(December 21, 1995). More recently, the IRS and Treasury issued a
regulation under Sec. 31.3406(j)-1 (1997-26 I.R.B. 4) and Rev. Proc.
97-31 (1997-26 I.R.B. 6) making a TIN-matching program available to
Federal agency payors of reportable payments under section 3406. TIN-
matching, however, will not apply for chapter 3 withholding purposes
until specifically implemented by the IRS.
5. Treaty Benefits for Payments to Hybrids
The proposed regulations provide guidance on procedures for
claiming reduced withholding rates under an income tax treaty. For this
purpose, the proposed regulations define the term beneficial owner
under foreign law principles. See proposed Secs. 1.1441-1(c)(6)(i)(B)
and 1.1441-6(b)(4). Commentators were divided on whether the proposed
rule is a correct interpretation of the treaty. In particular, several
commentators noted that the term beneficial owner is meant to be
defined under the source country's domestic law. Also, commentators
asked whether the proposed rules were solely for withholding purposes
or were meant to define a foreign beneficial owner's eligibility for
treaty benefits for purposes of section 894.
In part in response to these comments, temporary regulations have
been issued under section 894 (62 FR 35673, published July 2, 1997)
that are largely consistent with the principles contained in the
proposed withholding regulations. Under these temporary regulations, a
reduced withholding rate applies under an income tax treaty only to the
extent that the income is treated as derived by a resident of the
applicable treaty jurisdiction. Income is treated as being so derived
only to the extent it is taxed in the hands of the resident as income
of a resident of the applicable treaty jurisdiction. The final
withholding regulations have been modified to reflect these temporary
regulations.
The regulations under Sec. 1.1441-6(b)(4)(ii) finalize the rules
regarding the type of withholding certificates that must be furnished
in situations involving hybrid entities where the payment is made to
the entity but the benefit is determined by the status of the interest
holder. Generally, a partnership Form W-8 would have to be provided by
the interest holder, which form must be presented by the entity on
behalf of the interest holder. In order to reduce the burden in the
case of reverse foreign hybrid entities (e.g., foreign mutual funds
treated as corporations for U.S. tax purposes but as fiscally
transparent entities for foreign countries' law purposes), the final
regulations allow those entities to become qualified intermediary, so
that, like foreign partnerships and entities acting as intermediaries
for others, they may present a global Form W-8 to a U.S. withholding
agent instead of furnishing individual forms for each of their
shareholders who claim a benefit under an income tax treaty. See
Sec. 1.1441-1(e)(5)(ii)(C).
The preamble to the temporary regulations under section 894
indicates that withholding agents should consider the effect of the
regulations on their withholding obligations, including the need to
obtain new withholding certificates to confirm claims of treaty
benefits for payments made on or after the effective date of
Sec. 1.894-1T(d). Until the final regulations under section 1441 are
effective (i.e., until 1999), withholding agents may continue to rely
on Forms 1001 regarding claims of reduced rates under income tax
treaties. In addition, with respect to dividends, no Form 1001 is
generally required due to the alternative ``address'' rule. However,
withholding agents that are making payments in 1998 should require new
Forms 1001 for payments that they believe are affected by the
provisions of Sec. 1.894-1T(d) in order to
[[Page 53410]]
insure that representations regarding entitlement to a reduced rate
under an income tax treaty are given in light of the provisions of
Sec. 1.894-1T(d). For this purpose, withholding agents may rely on
Forms 1001 that are prepared and furnished in accordance with the
procedures described in Sec. 1.1441-6(b)(4)(ii), even though these
procedures are not effective until 1999. Thus, for example, if the
withholding agent pays to a foreign reverse hybrid entity, it may rely
on a Form 1001 furnished by the entity even though the name of the
beneficial owner is that of the entity's interest holder. Implicit in
the entity's presentation of a Form 1001 from its interest holder is a
representation that the interest holder is a resident of an applicable
treaty country and derives the income paid to the entity within the
meaning of Sec. 1.894-1T(d)(1). A Form 1001 obtained in 1998 is valid
until December 31, 1999 (except to the extent that circumstances change
affecting its validity). Payments made after 1998 to persons for whom
the withholding agent does not hold a certificate will require a new
Form W-8.
In view of the temporary regulations under Sec. 1.894-1T(d),
several commentators have asked for guidance on how to apply the
``reason-to-know'' standard to self-certifications of entitlement to
treaty benefits in situations involving hybrid entities. The
regulations do not include special guidance on this point, because the
IRS and Treasury believe that the due diligence issues in this context
are not different from those arising in other contexts. Therefore,
withholding agents may rely on the general principles in Sec. 1.1441-
1(e)(4)(viii) (that, absent actual knowledge or reason to know
otherwise, a withholding agent may rely on information and
certifications without having to inquire into the truthfulness thereof)
and in Sec. 1.1441-6(b)(4)(ii) (that a withholding agent may rely on
representations that the beneficial owner derives the income within the
meaning of Sec. 1.894-T(d) and is a resident of the treaty country
without inquiring into the truthfulness thereof or researching foreign
law). For example, if a withholding agent knows that a person whose
name is on a Form 1001 or a Form W-8 is an interest holder in an entity
and that the treaty country where the person claims residence generally
treats the entity as a non-fiscally transparent entity, the withholding
agent would have reason to know that a claim of reduced rate by such
person may not be reliable and should make further inquiries.
Generally, any claim of treaty benefits by interest holders in a U.S.
LLC should be scrutinized based on many published indications that
foreign countries generally regard U.S. LLC's as corporate entities.
6. Certification of Entitlement to Benefits Under an Income Tax Treaty
The proposed regulations do not contain special procedures
regarding the manner in which a foreign person can establish that it
satisfies the conditions under applicable limitation on benefits
provisions of an income tax treaty. This matter is indirectly addressed
in Sec. 1.1441-6(b)(1) for foreign persons claiming benefits under an
income tax treaty that are required to file a disclosure statement
under section 6114 if they are related to the withholding agent and the
amounts received during the calendar year that exceed $500,000.
After further consideration, the IRS and Treasury have determined
that certification procedures, as had been suggested in Notice 94-85
(1994-2 CB 511), issued under the U.S.-Dutch tax treaty, are not
procedures that could realistically be extended to all tax treaties
within a reasonable time frame, if at all. Instead, the IRS and
Treasury believe that an approach relying on self-certification and
proper disclosure to the IRS is more practical. Therefore, the final
regulations provide in Sec. 1.1441-6(c)(5)(i) that those persons who
are required to furnish an IRS-certified TIN must, as part of the TIN
certification process, certify that they satisfy the conditions of an
applicable limitation on benefits provision. For this purpose, the
person must attach an affidavit to the request for certification,
describing sufficient facts for the IRS to determine the basis upon
which such conditions are satisfied. The IRS review of a foreign
person's affidavit does not constitute an audit of the taxpayer on this
issue. In view of these new procedures, Notice 94-85 is withdrawn.
The final regulations also provide under Sec. 1.1441-6(c)(5)(ii)
that a taxpayer (other than an individual) applying for IRS
certification of its TIN must certify to the IRS that any income for
which it intends to claim benefits under an applicable income tax
treaty is income that will properly be treated as derived by itself
within the meaning of Sec. 1.894-1T(d)(1).
7. Reporting Under Section 6114
Under proposed Sec. 1.1441-6(b)(1), a taxpayer receiving income
benefitting from a reduced rate under an income tax treaty is required
to file an information return under section 6114 if it is related to
the withholding agent and the amounts ``paid'' during the taxable year
exceed $500,000. The final regulations modify the $500,000 condition by
providing that the requirement to file an information return applies
only to amounts ``received'' during the calendar year that, in the
aggregate, exceed $500,000. The revision clarifies that the test is not
intended to be applied on a per-withholding agent basis. Rather, the
$500,000 threshold is intended to measure the total amount received by
the taxpayer, whether from one or several related withholding agents.
The final regulations under section 6114 are also revised to allow
the IRS to eliminate duplicate reporting requirements for payments
received by a foreign taxpayer that must be reported both on a Form
5472 under section 6038A and under section 6114. See Sec. 301.6114-
1(c)(6). Such change is to be reflected in the applicable forms and
instructions.
8. Joint Owners
One commentator suggested that since a joint owner can get a
separate Form 1042-S, the final regulations under Sec. 1.1441-6 should
let each joint owner claim its own treaty rate (if different) on its
pro-rata share of the income. This suggestion is not adopted because of
the difficulties, generally, for each joint owner to present reliable
representation of its pro-rata share of the income being paid.
9. Claim of Treaty Benefits by U.S. Taxpayer
A commentator noted that the existing regulations under
Sec. 1.1441-4(b)(2) fail to address the situation of a foreign national
who is a resident alien of the United States under section 7701(b) and
under a treaty tie-breaker rule, but who is entitled to treaty benefits
under a treaty saving clause exception. The commentator indicated that
procedures are needed to allow such persons to submit proper forms and
documentation. According to the commentator, such persons entitled to
treaty benefits often are not currently residents of a treaty country,
do not have a permanent residence address in the foreign country of
which they are claiming benefits, and are not able to obtain
certification or documentation to satisfy the three-year rule under
Sec. 1.1441-6(c)(4). Further, the commentator argued that the
regulations should specify which form such persons can file to claim
treaty benefits (under the proposed regulations neither Form W-8 nor W-
9 would accommodate this claim). In response to this suggestion,
paragraph (b)(5) is added to allow a U.S. taxpayer to claim benefits
under an income tax treaty on a Form W-9 or
[[Page 53411]]
such other form as the IRS may prescribe.
H.Comments and Changes to Sec. 1.1441-7
1. Withholding Agent's Due Diligence Standards
Section 1.1441-7(b)(1) is restated to clarify that a withholding
agent is under a general due diligence standard to determine its
withholding obligations based on its actual knowledge or reason to
know, if based on such knowledge or reason to know, it appears that the
obligation to withhold or report the payment is greater than would
otherwise be the case. This due diligence standard applies generally,
not just in the context of determining the extent to which a
withholding agent can rely on a withholding certificate. Therefore, for
example, if a withholding agent has reasons to believe that a foreign
beneficial owner of interest income is related to the debtor, so that
the portfolio interest exemption may not be available, the withholding
agent should make an inquiry in order to ascertain whether the
portfolio interest, in fact, applies. The fact that the Form W-8 is not
required to certify lack of relationship does not mean that the
withholding agent can ignore what it knows or otherwise suspects if
such knowledge or reason to know affects the tax liability of the
beneficial owner which withholding under chapter 3 of the Code is
intended to satisfy.
2. Due Diligence Safe Harbors
Some commentators asked that the standard of care governing the
withholding agent's liability should be actual knowledge rather than
reason to know, especially in the context of high-volume commercial
transactions where there is not necessarily a pre-existing client
relationship. In response to this comment, the final regulations define
reason to know so that certain circumstances described in paragraphs
(b)(2)(ii) (A) through (F) are the only circumstances that require the
withholding agent to exercise due diligence (other than actual
knowledge). Further, examples are added regarding the documentation
that a withholding agent may rely on in order to correct a defective
Form W-8. This limitation only applies to payments made by a financial
institution with which a customer may open an account that consists of
portfolio interest, payments on publicly traded securities described in
Sec. 1.1441-6(b)(2)(ii), deposit interest with banks or other financial
institutions as described in sections 871(i)(2)(a) and 881(d), or
original issue discount (or interest) on obligations with a maturity of
183 days or less from the date of original issue.
The final regulations eliminate the need to inquire further when
the customer directs the financial institution to make a payment to
another U.S. financial institution. While such direction may indicate
that the account holder is, in fact, residing in the U.S., the burden
of this due diligence requirement outweighs the compliance benefits.
However, the final regulations impose a duty to inquire when a
payment is directed to a P.O. box or an in-care-of address where the
withholding agent has a permanent address on file for the payee that is
neither a P.O. box or an in-care-of address. Contrary to the comments,
the IRS and Treasury believe that how a payment is directed may
indicate that the beneficial owner wishes not to disclose his or her
place of residence. As stated above, the beneficial owner may be
treated as a foreign person despite a P.O. box address; however, such
treatment would require that the withholding agent obtain evidence of
foreign status in addition to the Form W-8.
The final regulations add a due diligence item. A withholding agent
may not rely on a claim of partnership status on a Form W-8 if the name
of the person on the form indicates that the entity may be the type of
entity that is on the per se list of foreign corporations included in
Sec. 301.7701-2(b)(8)(i), unless the form explains that the entity is a
grandfathered partnership.
2. Authorized Foreign Agents
The proposed regulations would modify the current rules governing
foreign agents of U.S. withholding agents by allowing a foreign agent
to file Forms 1042 and 1042-S returns on behalf of the U.S. withholding
agent. Some commentators have pointed out that the inability to tier
authorized foreign agents limits the usefulness of the procedure.
However, after further consideration, the IRS and Treasury have decided
to leave the proposed rules unchanged. The authorized foreign agent
procedure relies on the IRS' ability to audit the agent. Any compliance
failure of the agent is imputed to the U.S. withholding agent. If the
U.S. withholding agent acts through several layers of agents, the IRS
would have to audit all of the agents in the chain of payment to
determine the compliance of the U.S. withholding agent. Such audits are
impractical. The procedure is retained, however, because it may still
be useful in its proposed form in cases not involving tiers of
intermediaries.
I.Comments and Changes to Sec. 1.1441-8
The final regulations are revised to take into account comments
that the proposed documentation requirements for payments to foreign
governments and international organizations are unnecessarily
cumbersome. The documentation requirement is eliminated entirely for
payments to international organizations and for interest on bankers'
acceptances paid to central banks of issue. This exception is
appropriate because the withholding exemption is not conditioned on any
representation of the beneficial owner, other than its status as such
(see Sec. 1.6049-4(c)(1)(ii) (G) and (H) for an ``eyeball'' test for
ascertaining the status of the payee as an international organization
or a foreign central bank of issue). Payments to foreign governments
and to the Bank for International Settlements must be documented,
however, because a withholding exemption applies only if the
government's or the Bank's income is not associated with a commercial
activity. However, if a person represents that it is an integral part
of a foreign government, the documentation remains valid permanently.
If, on the other hand, the person claiming to be a foreign government
represents that it is a controlled entity, then the certificate must be
renewed every three years. A certificate furnished by the Bank for
International Settlements is also valid permanently. In view of these
simplified documentation requirements, the final regulations require
that all payments to foreign governments, international organizations,
and the Bank for International Settlements be reported on a Form 1042
and 1042-S, to the extent reportable if paid to a foreign person.
J. Comments and Changes to Secs. 1.1441-9 and 1.1443-1
1. Foreign Tax-exempt Organization and Foreign Private Foundations
Several comments were received regarding withholding on the income
of foreign tax-exempt organizations and applicable procedures for
documenting the foreign organization's exempt status. The commentators
questioned whether section 1443(a) should apply to items of passive
income that would not be unrelated business income but for section 514
(relating to debt-financed property), and whether section 4948 should
apply to impose a 4-percent tax on U.S. source portfolio interest and
bank deposit interest so that a 4-percent withholding applies under
section
[[Page 53412]]
1443(b) to payments of such income to foreign foundations.
Commentators argued that a foreign organization meeting the
description of section 501(c)(3) should be permitted to claim tax-
exempt status even if it has not first obtained an IRS determination.
They argued that the IRS determination letter is required for domestic
organizations because contributions to a domestic section 501(c)(3)
organization are deductible. No such deduction is permitted for a
contributions to a foreign organization and, therefore, a foreign
organization described in section 501(c)(3) should be treated like any
other organization described under section 501(c). Also, commentators
argued that the regulations should not require an opinion of counsel to
be attached to the withholding certificate. The final regulations,
however, do not accept most of these comments. As in the proposed
regulations, foreign organizations that are required to obtain an IRS
determination letter in order to qualify as a tax-exempt organization
under section 501(c)(3) (i.e., those organizations that obtain a
substantial portion of their support from U.S. sources) must obtain
such a determination letter and attach it to the Form W-8. Other
foreign organizations that may qualify for tax-exempt status under
section 501(c)(3) without an IRS determination letter (i.e.,
organizations that receive substantially all of their support from
sources outside the United States; see section 4948(b)) may establish
their exempt status on the basis of an opinion of counsel. Also, they
clarify that the opinion must be from U.S. counsel, meaning an attorney
admitted to, and in good standing with, the bar in one of the fifty
States or the District of Columbia. In addition, the final regulations
under Sec. 1.1441-9(b)(2) provide that tax-exempt organizations that
claim that they are tax-exempt under section 501(c)(3) and not private
foundations and do not have an IRS determination letter must attach an
affidavit to their Form W-8 in addition to the opinion of counsel.
Thus, the final regulations relieve those organizations from the
obligation under the proposed regulations to provide an opinion of
counsel regarding their non-private foundation status. The IRS and
Treasury view the IRS certification procedure for section 501(c)(3)
organizations as an important compliance measure. They do not believe
that self-certification procedures should be substituted where the Code
clearly requires an IRS determination letter.
The final regulations under Sec. 1.1441-9(a) also clarify that a
foreign organization that does not rely on its tax-exempt qualification
to claim reduced withholding on a payment need not comply with the
special procedures in Sec. 1.1441-9. Instead, it may follow the same
procedures that apply to taxable entities. In particular, the final
regulations clarify that a foreign tax-exempt organization or foreign
private foundation that claims a benefit under an income tax treaty
must follow the procedures described under Sec. 1.1441-6 rather than
rely on the procedures described under Secs. 1.1441-9 or 1443-1.
The final regulations do not make a special exception for debt-
financed income that, under section 512, is treated as unrelated
business income. In addition, the final regulations do not eliminate
the 4-percent tax imposed under section 4948(a) on any items of
investment income of a private foreign foundation and required to be
withheld under section 1443(b). The IRS and Treasury believe that they
have no authority to eliminate a tax that is clearly imposed by
statute. Therefore, it would be inappropriate to eliminate the
requirement to withhold such tax. A foreign private foundation claiming
a reduced rate of 4-percent is subject to the same documentation
requirements as apply to tax-exempt foreign organizations, meaning that
a Form W-8 must be furnished, to which the appropriate determination
letter or opinion of U.S. counsel must be attached. The final
regulations restate the existing regulations under section 1443 in an
effort to eliminate unnecessary provisions. The elimination of several
provisions does not indicate that the procedures do not apply (e.g.,
requirement to file Forms 1042 and 1042-S), but, simply that these
provisions are not necessary.
K. Comments and Changes to Secs. 1.1461-1 and 1.1461-2
1. Form 1042-S Reporting
In response to comments, the deadline for filing Forms 1042 and
1042-S has been moved from February 28 to March 15. Regarding joint
accounts, the final regulations do not adopt the suggestion that only
one Form 1042-S be required for a joint account even where the other
joint owner requests another statement. Commentators argued that
subdividing payments made to a single account and providing multiple
Forms 1042-S would significantly increase administrative burden.
However, joint owners should be able to obtain a proof of tax payment
in case one of them wishes to apply for a refund of tax or needs to
substantiate the payment of tax for any reason and it does not have
access to the form issued to one of the joint owners. The fact that the
obligation to issue more than one Form 1042-S is only on request by one
of the joint owners should minimize the burden on withholding agents.
The proposed regulations require that a financial institution with
actual knowledge of the payee's TIN report the TIN on Form 1042-S even
though a TIN did not have to be provided in connection with the
payment. In response to comments, the final regulations clarify in
Sec. 1.1461-1(c)(3)(v) that, in the case of a financial institution
dealing with customers through a system of accounts, actual knowledge
exists only if such TIN was reported on a Form W-8 provided with
respect to another payment made through the same account or through
another account, the information with respect to which can be retrieved
through a centralized account information system (including a universal
account system) containing both accounts.
Commentators requested a clarification that Form 1042-S reporting
is not required with respect to interest on deposits paid by any U.S.
bank (including its foreign branches or subsidiaries), except in the
limited situation where the interest is paid to a Canadian resident.
This point is clarified under Sec. 1.1461-1(c)(2)(i), which limits
reporting to amounts subject to withholding, as defined in Sec. 1.1441-
2(a). However, Sec. 1.1461-1(c)(2)(i)(D) contains an exception for
interest paid to Canadian residents. In addition, Sec. 1.1461-
1(c)(2)(ii)(F) is added to clarify that interest or OID accrued on an
obligation is not required to be reported on a Form 1042-S to the
extent the interest or OID is not required to be withheld upon under
Sec. 1.1441-2(b)(3) due to the lack of knowledge by the withholding
agent. On the other hand, Sec. 1.1461-1(c)(2)(i)(E) clarifies that, as
is the case under existing regulations, amounts representing interest
on an obligation sold between interest payment dates is reportable on a
Form 1042 and 1042-S, even though it is not subject to withholding.
2. Adjustments for Overwithholding or Underwithholding of Tax
Commentators asked that withholding agents be permitted to process
refund claims for nonresident alien payees. Since refund claims will
now require TINs, duplication of claims can be avoided. Commentators
point to the fact that this procedure should be more efficient as it
may require the IRS to process only a single refund claim from a
withholding agent for all of its foreign
[[Page 53413]]
clients rather than dealing with claims filed by each individual
foreign client. This comment is accepted in the context of qualified
intermediary arrangements. However, in other situations, a procedure
allowing refunds on behalf of customers is impractical because of the
risk that customers would independently file for refunds based on their
form 1042-S.
Withholding agents also made a number of points regarding authority
to rectify any underwithholding situation discovered after the due date
for filing Form 1042 but before actual filing, streamlining current
refund procedures by, for example, providing for a ``quickie'' refund
form, and the reporting of adjustments to withholding during the
calendar year. Those points, however, should be addressed in the
context of forms and administrative procedures, rather than in the
regulations. The IRS will continue to work with the industry to find
ways to improve and streamline the information and return filing
procedures.
L. Comments and Changes to Information Reporting Provisions Under
Chapter 61 and Section 3406 of the Code
1. Information Reporting--Exempt Recipient
Commentators asked that the proposed changes to the exempt
recipient rules for corporations be eliminated. Under Sec. 1.6049-
4(c)(1)(ii)(A) of the proposed regulations, the ``eyeball'' test for
corporations with an account relationship with the payor would be
required to be supplemented by an EIN or a corporate resolution.
Commentators suggested that, instead, payors should be allowed to rely
on the per se list provided in the check the box regulations under
Sec. 301.7701-3.
In response to these comments, the final regulations eliminate the
proposed corporate resolution requirement and, therefore, reinstate the
``eyeball'' test for corporate payees. Foreign corporations are able to
establish their corporate payee status based on the per se list in
Sec. 301.7701-2(b)(8)(i). In addition, a payee may establish corporate
status with a copy of the Form 8832, if the entity has filed one with
the IRS in order to elect corporate classification. See Sec. 1.6049-
4(c)(1)(ii)(A) (1) and (2).
Section 1.6049-4(c)(1)(ii) of the 1988 proposed regulations delete
nominees, custodians, and brokers from the list of exempt recipients.
Some commentators objected to this change. The final regulations re-
instate nominees, custodians, and brokers as exempt recipients.
Additionally, swap dealers are included in the list of exempt
recipients, and the description of financial institutions that are
exempt recipients has been clarified to include clearing organizations.
Comments were received requesting that the list of international
organizations be re-instated in the regulations. The final regulations
do not contain such a list because frequent changes in the status of
such organizations would make it too burdensome for the IRS to keep
current. Instead, the IRS intends to issue guidance indicating that
withholding agents and payors may rely on the list published by the
Department of State.
Commentators asked that the list of exempt recipients under
sections 6041 and 6045 be conformed to that under section 6049 and, in
the case of section 6041, be extended to banks and financial
institutions. The final regulations apply the same exempt recipient
rules to interest under section 6049, dividends under section 6042, and
notional principal contracts under section 6041. The exempt recipient
rules under section 6045 remain unchanged, except that a foreign
central bank of issue is added to the list for substitute payments
under Sec. 1.6045-2(b)(2)(i)(G).
2. Information Reporting for Offshore Accounts--Documentary Evidence
The proposed regulations make a number of changes to the existing
procedures applicable to deposits with foreign branches of U.S. banks.
The proposed regulations modify the documentary evidence standard in
Sec. 35a.9999-3, A-34, as part of an effort to subject all off-shore
accounts to a uniform documentary evidence standard, whether the
account is with a foreign branch of a U.S. bank, with a foreign branch
of a domestic institution other than a bank, or with a foreign branch
of a foreign financial institution. As a result, foreign branches of
U.S. banks would become subject to more stringent documentary evidence
requirements to the extent they would no longer be able to rely on an
indication of foreign status from a customer. Instead, the proposed
regulations require a foreign banking branch to obtain actual
documentary evidence from the customer and keep a record of it. Some
commentators questioned whether the proposed regulations eliminate the
possibility of relying on a statement of foreign status incorporated in
the account opening form. In addition, the proposed regulations impose
a three-year renewal of the documentary evidence, a requirement that
does not currently apply to foreign banking branches. Further, the
proposed regulations eliminate the $600 threshold under the current
regulations (by making foreign branch bank deposit interest subject to
reporting under section 6041 rather than section 6049). They impose new
backup withholding requirements for accounts actually known to the
branch as being owned by a U.S. person. In addition, the provisions
under Sec. 1.1441-1(f) create a presumption of U.S. status for
undocumented accounts. Although a presumption of U.S. status is not
sufficient for triggering an obligation to backup withhold (because the
bank has no actual knowledge), it is sufficient to require the interest
to be reported on a Form 1099.
After further consideration, and based on comments received, the
final regulations are revised. Consistent with the regulations proposed
in 1988 and in 1996, the requirement to document owners of accounts
maintained at offshore branches of U.S. banks is imposed under section
6049 rather than section 6041. Therefore, the $600 limit will no longer
apply to those accounts. On the other hand, the documentation
requirements are substantially simplified. If the customer's address is
in the country where the branch is located and it is not customary in
that location that banks request documentary evidence from customers
when opening an account, then the bank or other financial institution
may rely on a declaration of foreign status, contained in an account
opening form, that does not have to be signed under penalties of
perjury. The declaration does not expire unless circumstances change
that would indicate that the account holder has become a U.S. person or
the payor is so notified. The payor must send a year-end reminder to
the account holder to notify the payor of change of status, if
applicable.
These alternative documentary evidence procedures are extended to
all offshore accounts for payments that are not subject to withholding
under chapter 3 of the Code and are not U.S. source bank deposit
interest. These amounts include foreign source income and gross
proceeds.
The alternative documentary evidence rules apply to accounts opened
on or after the effective date of the regulations (i.e., on or after
January 1, 1999). However, existing accounts as of that date are
required to comply with the due diligence requirements, including
inserting a negative confirmation statement in the annual year-end
statement provided to the customer.
[[Page 53414]]
In response to comments, the final regulations under Sec. 1.6049-
5(b)(10) are revised to incorporate a waiver from the certification
requirement of regulations Sec. 1.163-5(c)(2)(i)(D)(3) for debt
instruments with a maturity of 183 days or less from the date of issue.
In addition, Sec. 1.6049-4(d)(3) is modified to clarify that the same
conversion rules are applicable to all foreign currency-denominated
obligations for purposes of section 6049.
3. Reporting Obligations of Non-U.S. Payors or Middlemen
Under the regulations under section 6045, dealing with broker
proceeds, non-U.S. payors are exempt from reporting if the payment is
made outside the United States. See Sec. 1.6045-1(a)(1). In contrast,
non-U.S. payors and middlemen making payments of U.S. source interest
or dividends are required to report these payments on a Form 1099,
unless they receive documentation supporting the payee's foreign status
(or the payee is an exempt recipient). Commentators requested that non-
U.S. payors of U.S. interest and dividends be similarly exempt from
information reporting if the payments are made outside the United
States. This change is not appropriate, at least for amounts that are
subject to withholding under chapter 3 of the Code. To the extent the
U.S. interest or dividends are subject to U.S. 30-percent withholding,
and documentation is received for reducing the withholding rate, the
foreign payee exemption would apply under sections 6042 and 6049 and
the payment would not be reportable. Under the final regulations,
however, a payor making a payment of U.S. source dividends or interest
(whether inside or outside the U.S.) to a payee who has provided no
documentation is not exempt from Form 1099 information reporting, even
if another payor ``upstream'' has withheld an amount under chapter 3 of
the Code. However, a payor is exempt from backup withholding on the
payment if an ``upstream'' withholding agent has withheld a full 30-
percent amount from the payment. The payor, however, is not relieved
from making a return on Form 1099 under section 6042 or 6049 if it has
actual knowledge that the payee is a U.S. person who is not an exempt
recipient. See Sec. 31.3406(g)-1(e). These rules also apply to U.S.
source royalties reportable under section 6050N.
Further, the regulations under section 3406 are amended to
authorize the IRS to establish procedures by which an amount backup
withheld under section 3406 from a payee that subsequently establish
that it is a foreign person exempt from information reporting and
backup withholding can be credited toward amounts required to be
withheld under chapter 3 of the Code. Such ``cross-crediting''
procedures are not available at present and would require the IRS to
modify its systems.
4. Information Reporting for Capital Gain Dividends
Under the proposed regulations, capital gain dividends as defined
under section 852(b)(3)(C) would no longer be reportable on Form 1099-
DIV. Commentators objected that, absent such reporting, shareholders
could not easily ascertain the amount of capital gain dividends paid
for the calendar year for purposes of calculating their income tax
liability. Accordingly, the final regulations eliminate the proposed
exclusion of capital gain dividends under Sec. 1.6042-3(b)(3).
Effect on Other Documents
The following publications are obsolete as of October 14, 1997:
Rev. Rul. 55-106, 1955-1 CB 102.
Rev. Rul. 57-391, 1957-2 CB 606.
Rev. Rul. 60-288, 1960-2 CB 265.
Rev. Rul. 65-86, 1965-1 CB 538.
Rev. Rul 68-173, 1968-1 CB 626.
Rev. Rul. 68-237, 1968-1 CB 391.
Rev. Rul. 68-333, 1968-1 CB 390.
Rev. Rul. 69-41, 1969-1 CB 214.
Rev. Rul. 69-244, 1969-1 CB 215.
Rev. Rul. 70-175, 1970-1 CB 184.
Rev. Rul. 70-250, 1970-1 CB 182.
Rev. Rul. 70-251, 1970-1 CB 183.
Rev. Rul. 70-616, 1970-2 CB 174.
Rev. Rul. 72-87, 1972-1 CB 274.
Rev. Rul. 80-222, 1980-2 CB 211.
Rev. Rul. 83-175, 1983-2 CB 109.
Rev. Rul. 84-158, 1984-2 CB 262.
Rev. Rul. 85-61, 1985-1 CB 355.
Rev. Rul. 89-17, 1989-1 CB 268.
Rev. Rul. 89-33, 1989-1 CB 269.
Rev. Rul. 89-91, 1989-2 CB 129.
Rev. Proc. 65-2, 1965-1 CB 715.
Rev. Proc. 67-24, 1967-1 CB 625.
Notice 94-85, 1994-2 CB 511.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations.
This Treasury decision finalizes notices of proposed rulemaking
published February 29, 1988 (53 FR 5991), December 21, 1995 (60 FR
66243), and April 15, 1996 (61 FR 17614), respectively. It has been
determined that a final regulatory flexibility analysis is required
under 5 U.S.C. Sec. 604 for the collections of information contained in
this Treasury decision with respect to the notice of proposed
rulemaking published on April 15, 1996. An initial regulatory
flexibility analysis was not required because the notice of proposed
rulemaking was issued prior to the effective date (June 27, 1996) of
the amendments to the Regulatory Flexibility Act (5 U.S.C. chapter 6)
made by the Small Business Regulatory Enforcement Fairness Act (SBREFA)
(Public Law 104-121). It also has been determined that a regulatory
flexibility analysis is not required for the notice of proposed
rulemaking published on (1) December 21, 1995 because the notice does
not impose any collection of information on a small entity, and was
published prior to the March 29, 1996 enactment date of SBREFA, and (2)
on February 29, 1988 because the notice was published prior to the
enactment of SBREFA.
Final Regulatory Flexibility Act Analysis
The major objective of the final regulations is to prescribe new
procedures to eliminate unnecessary burdens created by the lack of
standardization and coordination of the current withholding and
information reporting procedures with respect to amounts paid to
foreign persons. To this effect, the regulations facilitate compliance
and reduce taxpayer burden by simplifying the documentation
requirements, unifying the certification procedures and clarifying
reliance standards in an effort to streamline the processing of U.S.
source payments to foreign persons.
The economic impact of collection of information contained in these
regulations on any small entity would result primarily from the entity
being required either (1) to provide a Form W-8 as the beneficial owner
or payee of U.S. source income, or (2) to receive a Form W-8 as the
withholding agent or payor (and eventually, file a Form 1042 and Forms
1042-S). In both situations, these regulations generally impose minimal
additional reporting or recordkeeping requirements beyond those already
imposed under current law. In fact, the regulations significantly
reduce the withholding and reporting burdens associated with Form W-8
by, for example, consolidating the current withholding certificates
(Forms 1001, 1078, 4224, 8709 and W-8) into a Form W-8 format,
permitting certain foreign intermediaries to certify on behalf of their
customers, permitting the electronic transmission of the form (subject
to IRS prescribed procedures),
[[Page 53415]]
clarifying the standards for an acceptable substitute form, permitting
a 90-day grace period for actual receipt of the form, and providing
cure procedures for a late-received form.
For a small entity in the role of the beneficial owner, the new
collection of information contained in these regulations is the
extension of the Form W-8 requirement to claims for a treaty-based
reduction in the withholding rate with respect to dividend income;
thereby, subjecting dividends to the same documentation requirements as
other income types. This change imposes no recordkeeping requirements
beyond those necessary (and currently required for all other income
types) to ensure proper entitlement to treaty benefits, and is
illustrative of IRS efforts to eliminate unnecessary procedural
differences in order to reduce the burden on withholding agents.
Although there is no estimate of the number of beneficial owners or
payees of U.S. source income payments, the number of cross border
payments have steadily increased over the years (over 80 billion
dollars paid in 1995). The IRS and Treasury believe that most of these
payments are made to individuals, large financial institutions and
large corporations.
For a small entity in the role of the withholding agent, the most
significant change of the regulations that impacts the collection of
information is the establishment of the wholly-elective qualified
intermediary regime which will impose, but only pursuant to an
agreement with the IRS, additional reporting and recordkeeping
requirements in exchange for the benefit of furnishing a single Form W-
8 for multiple beneficiary owners or payees. The IRS and Treasury
believe that this alternative will be adopted primarily by large
foreign financial institutions that maintain numerous accounts for
large numbers of customers, and it is unlikely that a substantial
number of small entities would find it necessary or useful to agree to
act as a qualified intermediary. Of the approximately 25,000 tax
returns (Form 1042) filed by withholding agents per year, the IRS
estimates that 95 percent of such returns are filed by large financial
institutions.
A summary of the significant issues raised by the public comments
in response to the proposed regulations and IRS' views on such issues,
and changes made as a result of the comments is set forth above in the
section of the preamble to the regulations entitled ``Explanation of
Provisions and Revisions.''
The IRS and Treasury Department are not aware of any federal rules
that duplicate, overlap, or conflict with the regulations.
These regulations will affect small entities such as small banks,
small businesses paying interest and dividends, small private
foundations, and small tax-exempt organizations (including colleges and
charities). The IRS and Treasury believe that most of these small
entities will have a direct relationship with the foreign person and
therefore, will not act as, or have transactions through, an
intermediary (i.e., nominee, custodian, or agent). The professional
competence necessary to comply with these regulations is no greater
than that already necessary to handle the day-to-day business
operations of a small entity because much of the recordkeeping and
reporting requirements under the regulations can be easily (if not
already done under the existing regulations) incorporated into the
existing or customary recordkeeping and reporting obligations of the
small entity (e.g., an account opening form of a bank, the registration
form of a college, etc.).
None of the significant alternatives considered in drafting these
regulations would have significantly altered the economic impact of
these regulations on small entities. A detailed description of the
measures taken to minimize the economic impact of the collections of
information on small entities, consistent with the stated objectives of
applicable statutes is set forth above in the section of the preamble
to the regulations entitled ``Explanation of Provisions and
Revisions.'' In considering alternatives, the IRS and Treasury have
concluded that a withholding system (based on reduction of withholding
at source) rather than a refund system avoids the administrative
burdens (including costs and delays) that can occur when applying for a
refund of overwithheld amounts. Ensuring compliance under a withholding
system, however, requires documentation substantiating claims of
foreign status and of exemptions from, or reduced rates of,
withholding, and submission of proper information to the IRS.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Small
Business Administration for comment on its impact on small business.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
26 CFR Part 35a
Employment taxes, Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 502
Greece, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 503
Germany, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 509
Switzerland, Reporting and recordkeeping requirements, Tax
treaties.
26 CFR Part 513
Ireland, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 514
France, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 516
Austria, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 517
Pakistan, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 520
Sweden, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 521
Denmark, Reporting and recordkeeping requirements, Tax treaties.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 1,
31, 35a, 301, 502, 503, 509, 513, 514, 516, 517, 520, 521, and 602 are
amended as follows:
[[Page 53416]]
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Section 1.1441-4T, revising the entries for
Sections 1.1441-3, 1.1441-4, 1.1441-5, 1.1441-7, 1.6049-4 and 1.6049-5
adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4), 26
U.S.C. 3401(a)(6) and 26 U.S.C. 7701(l).
Section 1.1441-4 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1441-5 also issued under 26 U.S.C. 1441(c)(4), 26
U.S.C. 3401(a)(6) and 26 U.S.C. 7701(b)(11).
Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4), 26
U.S.C. 3401(a)(6) and 26 U.S.C. 7701(l).
Section 1.1443-1 also issued under 26 U.S.C. 1443(a). * * *
Section 1.1461-1 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1461-2 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6).
Section 1.1462-1 also issued under 26 U.S.C. 1441(c)(4) and 26
U.S.C. 3401(a)(6). * * *
Section 1.6042-3 also issued under 26 U.S.C. 6045. * * *
Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and
(d).
Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), and
(d). * * *
Sec. 1.163-5 [Amended]
Par. 2. In Sec. 1.163-5, paragraph (c)(2)(i)(B)(5) is amended by
removing the language ``subdivision (iii) of A-5 of Sec. 35a.9999-4T''
in the last sentence and adding ``Sec. 1.6049-5(c)(1)'' in its place.
Par. 3. Section 1.165-12 is amended by:
1. Adding a sentence at the end of paragraph (a).
2. Removing the language ``(c)(1)(v)'' and adding ``(c)(1)(iv)'' in
its place in paragraph (c)(1)(i).
3. Removing paragraph (c)(1)(iii) and redesignating paragraphs
(c)(1)(iv) and (c)(1)(v) as paragraphs (c)(1) (iii) and (iv).
4. Revising paragraphs (c)(1)(ii) and newly redesignated paragraph
(c)(1) (iii).
5. Removing the language (c)(1) (ii) and (iv) and adding (c)(1)
(ii) and (iii) in its place in paragraphs (c)(2)(iv) and (c)(3)(iv).
The addition and revisions read as follows:
Sec. 1.165-12 Denial of deduction for losses on registration-required
obligations not in registered form.
(a) * * * For purposes of this section, the term United States
means the United States and its possessions within the meaning of
Sec. 1.163-5(c)(2)(iv).
* * * * *
(c) * * *
(1) * * *
(ii) The holder must offer to sell, sell and deliver the obligation
in bearer form only outside of the United States except that a holder
that is a registered broker-dealer as described in paragraph (c)(1)(i)
of this section may offer to sell and sell the obligation in bearer
form inside the United States to a financial institution as defined in
paragraph (c)(1)(iv) of this section for its own account or for the
account of another financial institution or of an exempt organization
as defined in section 501(c)(3).
(iii) The holder may deliver an obligation in bearer form that is
offered or sold inside the United States only if the holder delivers it
to a financial institution that is purchasing for its own account, or
for the account of another financial institution or of an exempt
organization, and the financial institution or organization that
purchases the obligation for its own account or for whose account the
obligation is purchased represents that it will comply with the
requirements of section 165(j)(3) (A), (B), or (C). Absent actual
knowledge that the representation is false, the holder may rely on a
written statement provided by the financial institution or exempt
organization, including a statement that is delivered in electronic
form. The holder may deliver a registration-required obligation in
bearer form that is offered and sold outside the United States to a
person other than a financial institution only if the holder has
evidence in its records that such person is not a U.S. citizen or
resident and does not have actual knowledge that such evidence is
false. Such evidence may include a written statement by that person,
including a statement that is delivered electronically. For purposes of
this paragraph (c), the term deliver includes a transfer of an
obligation evidenced by a book entry including a book entry notation by
a clearing organization evidencing transfer of the obligation from one
member of the organization to another member. For purposes of this
paragraph (c), the term deliver does not include a transfer of an
obligation to the issuer or its agent for cancellation or
extinguishment. The record-retention provisions in Sec. 1.1441-
1(e)(4)(iii) shall apply to any statement that a holder receives
pursuant to this paragraph (c)(1)(iii).
* * * * *
Par. 4. Section 1.871-6 is revised to read as follows:
Sec. 1.871-6 Duty of withholding agent to determine status of alien
payees.
For the obligation of a withholding agent to withhold the tax
imposed by this section, see chapter 3 of the Internal Revenue Code and
the regulations thereunder.
Sec. 1.871-7 [Amended]
Par. 5. In Sec. 1.871-7, paragraph (b), the third sentence is
amended by removing the words ``see paragraph (a) of Sec. 1.1441-2''
and adding ``see Sec. 1.1441-2(b)'' in its place.
Par. 6. Section 1.871-14 is added to read as follows:
Sec. 1.871-14 Rules relating to repeal of tax on interest of
nonresident alien individuals and foreign corporations received from
certain portfolio debt investments.
(a) General rule. No tax shall be imposed under section
871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any portfolio
interest as defined in sections 871(h)(2) and 881(c)(2) received by a
foreign person. But see section 871(b) or 882(a) if such interest is
effectively connected with the conduct of a trade or business within
the United States.
(b) Rules concerning obligations in bearer form--(1) In general.
Interest (including original issue discount) with respect to an
obligation in bearer form is portfolio interest within the meaning of
section 871(h)(2)(A) or 881(c)(2)(A) only if it is paid with respect to
an obligation issued after July 18, 1984, that is described in section
163(f)(2)(B) and the regulations under that section and an exception
under section 871(h) or 881(c) does not apply. Any obligation that is
not in registered form as defined in paragraph (c)(1)(i) of this
section is an obligation in bearer form.
(2) Coordination with withholding and reporting rules. For an
exemption from withholding under section 1441 with respect to
obligations described in this paragraph (b), see Sec. 1.1441-
1(b)(4)(i). For rules relating to an exemption from Form 1099 reporting
and backup withholding under section 3406, see section 6049 and
Sec. 1.6049-5(b)(8) for the payment of interest and Sec. 1.6045-
1(g)(1)(ii) for the redemption, retirement, or sale of an obligation in
bearer form.
(c) Rules concerning obligations in registered form--(1) In
general--(i) Obligation in registered form. For purposes of this
section, an obligation is in registered form only as provided in this
paragraph (c)(1)(i). The conditions for an obligation to be considered
in registered form are identical to the conditions described in
Sec. 5f.103-1 of this chapter. Therefore, an obligation
[[Page 53417]]
that would be an obligation in registered form except for the fact that
it can be converted at any time in the future into an obligation that
is not in registered form shall not be an obligation in registered
form. An obligation that is not in registered form by reason of the
preceding sentence may nevertheless be in registered form, but only
after the possibility of conversion is terminated. An obligation that
is not in registered form and can be converted into an obligation that
would meet the requirements of this paragraph (c)(1)(i) for being in
registered form shall be considered in registered form only after the
conversion is effected. For purposes of this section, an obligation is
convertible if the obligation can be transferred by any means not
described in Sec. 5f.103-1(c) of this chapter. An obligation is treated
as an obligation in registered form if--
(A) The obligation is registered as to both principal and any
stated interest with the issuer (or its agent) and transfer of the
obligation may be effected only by surrender of the old instrument, and
either the reissuance by the issuer of the old instrument to the new
holder or the issuance by the issuer of a new instrument to the new
holder;
(B) The right to the principal of, and stated interest on, the
obligation may be transferred only through a book entry system
maintained by the issuer (or its agent) described in this paragraph
(c)(1)(i)(B). An obligation shall be considered transferable through a
book entry system if the ownership of an interest in the obligation, is
required to be reflected in a book entry, whether or not physical
securities are issued. A book entry is a record of ownership that
identifies the owner of an in interest in the obligation; or
(C) It is registered as to both principal and any stated interest
with the issuer (or its agent) and may be transferred by way of either
of the methods described in paragraph (c)(1)(i) (A) or (B) of this
section.
(ii) Requirements for portfolio interest qualification in the case
of an obligation in registered form. Interest (including original issue
discount) received on an obligation that is in registered form
qualifies as portfolio interest only if--
(A) The interest is paid on an obligation issued after July 18,
1984;
(B) The interest would be subject to tax under section
871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) but for section
871(h) or 881(c);
(C) A United States (U.S.) person otherwise required to deduct and
withhold tax under chapter 3 of the Internal Revenue Code (Code)
receives a statement that meets the requirements of section 871(h)(5)
that the beneficial owner of the obligation is not a U.S. person; and
(D) An exception under section 871(h) or 881(c) does not apply.
(2) Required statement. For purposes of paragraph (c)(1)(ii)(C) of
this section, a U.S. person will be considered to have received a
statement that meets the requirements of section 871(h)(5) if either it
complies with one of the procedures described in this paragraph (c)(2)
and does not have actual knowledge or reason to know that the
beneficial owner is a U.S. person or it complies with the procedures
described in paragraph (d) or (e) of this section.
(i) The U.S. person (or its authorized foreign agent described in
Sec. 1.1441-7(c)(2)) can reliably associate the payment with
documentation upon which it can rely to treat the payment as made to a
foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii).
See Sec. 1.1441-1(b)(2)(vii) for rules regarding reliable association
with documentation.
(ii) The U.S. person (or its authorized foreign agent described in
Sec. 1.1441-7(c)(2)) can reliably associate the payment with a
withholding certificate described in Sec. 1.1441-5(c)(2)(iv) from a
person claiming to be withholding foreign partnership and the foreign
partnership can reliably associate the payment with documentation upon
which it can rely to treat the payment as made to a foreign beneficial
owner in accordance with Sec. 1.1441-1(e)(1)(ii).
(iii) The U.S. person (or its authorized foreign agent described in
Sec. 1.1441-7(c)(2)) can reliably associate the payment with a
withholding certificate described in Sec. 1.1441-1(c)(3)(ii) from a
person representing to be a qualified intermediary that has assumed
primary withholding responsibility in accordance with Sec. 1.1441-
1(e)(5)(iv) and the qualified intermediary can reliably associate the
payment with documentation upon which it can rely to treat the payment
as made to a foreign beneficial owner in accordance with its agreement
with the Internal Revenue Service (IRS).
(iv) The U.S. person (or its authorized foreign agent described in
Sec. 1.1441-7(c)(2)) can reliably associate the payment with a
withholding certificate described in Sec. 1.1441-1(e)(3)(v) from a
person claiming to be a U.S. branch of a foreign bank or of a foreign
insurance company that is described in Sec. 1.1441-1(b)(2)(iv)(A) or a
U.S. branch designated in accordance with Sec. 1.1441-1(b)(2)(iv)(E)
and the U.S. branch can reliably associate the payment with
documentation upon which it can rely to treat the payment as made to a
foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii).
(v) The U.S. person receives a statement from a securities clearing
organization, a bank, or another financial institution that holds
customers' securities in the ordinary course of its trade or business.
In such case the statement must be signed under penalties of perjury by
an authorized representative of the financial institution and must
state that the institution has received from the beneficial owner a
withholding certificate described in Sec. 1.1441-1(e)(2)(i) (a Form W-8
or an acceptable substitute form as defined Sec. 1.1441-1(e)(4)(vi)) or
that it has received from another financial institution a similar
statement that it, or another financial institution acting on behalf of
the beneficial owner, has received the Form W-8 from the beneficial
owner. In the case of multiple financial institutions between the
beneficial owner and the U.S. person, this statement must be given by
each financial institution to the one above it in the chain. No
particular form is required for the statement provided by the financial
institutions. However, the statement must provide the name and address
of the beneficial owner, and a copy of the Form W-8 provided by the
beneficial owner must be attached. The statement is subject to the same
rules described in Sec. 1.1441-1(e)(4) that apply to intermediary Forms
W-8 described in Sec. 1.1441-1(e)(3)(iii). If the information on the
Form W-8 changes, the beneficial owner must so notify the financial
institution acting on its behalf within 30 days of such changes, and
the financial institution must promptly so inform the U.S. person. This
notice also must be given if the financial institution has actual
knowledge that the information has changed but has not been so informed
by the beneficial owner. In the case of multiple financial institutions
between the beneficial owner and the U.S. person, this notice must be
given by each financial institution to the institution above it in the
chain.
(vi) The U.S. person complies with procedures that the U.S.
competent authority may agree to with the competent authority of a
country with which the United States has an income tax treaty in
effect.
(3) Time for providing certificate or documentary evidence--(i)
General rule. Interest on a registered obligation shall qualify as
portfolio interest if the withholding certificate or documentary
evidence that must be provided is furnished before expiration of the
beneficial owner's period of limitation for claiming a refund of tax
with respect
[[Page 53418]]
to such interest. See, however, Sec. 1.1441-1(b)(7) for consequences to
a withholding agent that makes a payment without withholding even
though it cannot reliably associate the payment with the documentation
prior to the payment. If a withholding agent withholds an amount under
chapter 3 of the Code because it cannot reliably associate the payment
with the documentation for the beneficial owner on the date of payment,
the beneficial owner may nevertheless claim the benefit of an exemption
from tax under this section by claiming a refund or credit for the
amount withheld based upon the procedures described in Secs. 1.1464-1
and 301.6402-3(e) of this chapter. For this purpose, the taxpayer must
attach a withholding certificate described in Sec. 1.1441-1(e)(2)(i) to
the income tax filed for claiming a refund of tax. In the alternative,
adjustments to any amount of overwithheld tax may be made under the
procedures described in Sec. 1.1461-2(a) (for example, if the
beneficial owner furnishes documentation to the withholding agent
before the due date for filing the return required under Sec. 1.1461-
1(b) with respect to that payment).
(ii) Example. The following example illustrates the rules of this
paragraph (c)(3) and their coordination with Sec. 1.1441-1(b)(7):
Example. A is a withholding agent who, on October 12, 1999, pays
interest on a registered obligation to B, a foreign corporation. B
is a calendar year taxpayer, engaged in the conduct of a trade or
business in the United States, and is, therefore, required to file
an annual income tax return on Form 1120F. The interest, however, is
not effectively connected with B's U.S. trade or business. On the
date of payment, B has not furnished, and A cannot associate the
payment with documentation for B. However, A does not withhold under
section 1442, even though, under Sec. 1.1441-1(b)(3)(iii)(A), A
should presume that B is a foreign person, because A's
communications with B are mailed to an address in a foreign country.
Assuming that B files a return for its taxable year ending December
31, 1999, and that its statute of limitations period with regard to
that year expires on June 15, 2003, the interest paid on October 12,
1999, may qualify as portfolio interest only if B provides
appropriate documentation to A on or before June 15, 2003. If B does
not provide the documentation on or before June 15, 2003, and does
not pay the tax, A is liable for the tax under section 1463, even if
B provides the documentation to A after June 15, 2003. Therefore,
the provisions in Sec. 1.1441-1(b)(7), regarding late-received
documentation would not help A avoid liability for tax under section
1463 even if the documentation is furnished within the statute of
limitations period of A. This is because, in a case involving
interest, the documentation received within the limitations period
of the beneficial owner serves as a condition for the interest to
qualify as portfolio interest. When documentation is received after
the expiration of the beneficial owner's limitations period, the
interest can no longer qualify as portfolio interest. On the other
hand, A could rely on documentation that it receives after the
expiration of B's limitations period to establish B's right to a
reduced rate of withholding under an applicable income tax treaty
(since, in such a case, a claim of treaty benefits is not
conditioned upon providing documentation prior to the expiration of
the beneficial owner's limitations period).
(4) Coordination with withholding and reporting rules. For an
exemption from withholding under section 1441 with respect to
obligations described in this paragraph (c), see Sec. 1.1441-
1(b)(4)(i). For rules applicable to withholding certificates, see
Sec. 1.1441-1(e)(4). For rules regarding documentary evidence, see
Sec. 1.6049-5(c)(1). For application of presumptions when the U.S.
person cannot reliably associate the payment with documentation, see
Sec. 1.1441-1(b)(3). For standards of knowledge applicable to
withholding agents, see Sec. 1.1441-7(b). For rules relating to an
exemption from Form 1099 reporting and backup withholding under section
3406, see section 6049 and Sec. 1.6049-5(b)(8) for the payment of
interest and Sec. 1.6045-1(g)(1)(i) for the redemption, retirement, or
sale of an obligation in registered form. For rules relating to
reporting on Forms 1042 and 1042-S, see Sec. 1.1461-1 (b) and (c).
(d) Application of repeal of 30-percent withholding to pass-through
certificates--(1) In general. Interest received on a pass-through
certificate qualifies as portfolio interest under section 871(h)(2) or
881(c)(2) if the interest satisfies the conditions described in
paragraph (b)(1), (c)(1), or (e) of this section without regard to
whether any obligation held by the fund or trust to which the pass-
through certificate relates is described in paragraph (b)(1),
(c)(1)(ii), or (e) of this section. This paragraph (d)(1) applies only
to payments made to the holder of the pass-through certificate from the
trustee of the pass-through trust and does not apply to payments made
to the trustee of the pass-through trust. For example, a mortgage pass-
through certificate in bearer form must meet the requirements set forth
in paragraph (b)(1) of this section, but the obligations held by the
fund or trust to which the mortgage pass-through certificate relates
need not meet the requirements set forth in paragraph (b)(1),
(c)(1)(ii), or (e) of this section. However, for purposes of paragraphs
(b)(1), (c)(1)(ii), and (e) of this section and section 127 of the Tax
Reform Act of 1984, a pass-through certificate will be considered as
issued after July 18, 1984, only to the extent that the obligations
held by the fund or trust to which the pass-through certificate relates
are issued after July 18, 1984.
(2) Interest in REMICs. Interest received on a regular or residual
interest in a REMIC qualifies as portfolio interest under section
871(h)(2) or 881(c)(2) if the interest satisfies the conditions
described in paragraph (b)(1), (c)(1)(ii), or (e) of this section. For
purposes of paragraph (b)(1), (c)(1)(ii), or (e) of this section,
interest on a regular interest in a REMIC is not considered interest on
any mortgage obligations held by the REMIC. The foregoing rule,
however, applies only to payments made to the holder of the regular
interest from the REMIC and does not apply to payments made to the
REMIC. For purposes of paragraph (b)(1), (c)(1)(ii), or (e) of this
section, interest on a residual interest in a REMIC is considered to be
interest on or with respect to the obligations held by the REMIC, and
not on or with respect to the residual interest. For purposes of
paragraphs (b)(1), (c)(1)(ii), and (e) of this section and section 127
of the Tax Reform Act of 1984, a residual interest in a REMIC will be
considered as issued after July 18, 1984, only to the extent that the
obligations held by the REMIC are issued after July 18, 1984, but a
regular interest in a REMIC will be considered as issued after July 18,
1984, if the regular interest was issued after July 18, 1984, without
regard to the date on which the mortgage obligations held by the REMIC
were issued.
(3) Date of issuance. In general, a mortgage pass-through
certificate will be considered to have been issued after July 18, 1984,
if all of the mortgages held by the fund or trust were issued after
July 18, 1984. If some of the mortgages held by the fund or trust were
issued before July 19, 1984, then the portion of any interest payment
which represents interest on those mortgages shall not be considered to
be portfolio interest. The preceding sentence shall not apply, however,
if all of the following conditions are satisfied:
(i) The mortgage pass-through certificate is issued after December
31, 1986;
(ii) Payment of the mortgage pass-through certificate is guaranteed
by, and a guarantee commitment has been issued by, an entity that is
independent from the issuer of the underlying obligation;
(iii) The guarantee commitment with respect to the mortgage pass-
through certificate cannot have been issued more than 14 months prior
to the date on
[[Page 53419]]
which the mortgage pass-through certificate is issued; and
(iv) The fund or trust to which the mortgage pass-through
certificate relates cannot contain mortgage obligations on which the
first scheduled monthly payment of principal and interest was made more
than twelve months before the date on which the guarantee commitment
was made.
(e) Foreign-targeted registered obligations--(1) General rule. The
statement described in paragraph (c)(1)(ii)(C) of this section is not
required with respect to interest paid on a registered obligation that
is targeted to foreign markets in accordance with the provisions of
paragraph (e)(2) of this section if the interest is paid by a U.S.
person, a withholding foreign partnership, or a U.S. branch described
in Sec. 1.1441-1(b)(2)(iv) (A) or (E) to a registered owner at an
address outside the United States, provided that the registered owner
is a financial institution described in section 871(h)(5)(B). In that
case, the U.S. person otherwise required to deduct and withhold tax may
treat the interest as portfolio interest if it does not have actual
knowledge that the beneficial owner is a United States person and if it
receives the certificate described in paragraph (e)(3)(i) of this
section from a financial institution or member of a clearing
organization, which member is the beneficial owner of the obligation,
or the documentary evidence or statement described in paragraph
(e)(3)(ii) of this section from the beneficial owner, in accordance
with the procedures described in paragraph (e)(4) of this section.
(2) Definition of a foreign-targeted registered obligation. An
obligation is considered to be targeted to foreign markets for purposes
of paragraph (e)(1) of this section if it is sold (or resold in
connection with its original issuance) only to foreign persons (or to
foreign branches of United States financial institutions described in
section 871(h)(5)(B)) in accordance with procedures similar to those
prescribed in Sec. 1.163-5(c)(2)(i) (A), (B), or (D). However, the
provisions of that section that require an obligation to be offered for
sale or resale in connection with its original issuance only outside
the United States do not apply with respect to registered obligations
offered for sale through a public auction. Similarly, the provisions of
that section that require delivery to be made outside the United States
do not apply to registered obligations offered for sale through a
public auction if the obligations are considered to be in registered
form by virtue of the fact that they may be transferred only through a
book entry system. The obligation, if evidenced by a physical document
other than a confirmation receipt, must contain on its face a legend
indicating that it has been sold (or resold in connection with its
original issuance) in accordance with those procedures.
(3) Documentation. A certificate described in paragraph (e)(3)(i)
of this section is required if the United States person otherwise
required to deduct and withhold tax (the withholding agent) pays
interest to a financial institution described in section 871(h)(5)(B)
or to a member of a clearing organization, which member is the
beneficial owner of the obligation. The documentation described in
paragraph (e)(3)(ii) of this section is required if a withholding agent
pays interest to a beneficial owner that is neither a financial
institution described in section 871(h)(5)(B) nor a member of a
clearing organization.
(i) Interest paid to a financial institution or a member of a
clearing organization--(A) Requirement of a certificate--(1) If the
withholding agent pays interest to a financial institution described in
section 871(h)(5)(B) or to a member of a clearing organization, which
member is the beneficial owner of the obligation, the withholding agent
must receive a certificate which states that, beginning at the time the
last preceding certificate under this paragraph (e)(3)(i) was provided
and while the financial institution or clearing organization member has
held the obligation, with respect to each foreign-targeted registered
obligation which has been held by the person providing the certificate
at any time since the provision of such last preceding certificate,
either--
(i) The beneficial owner of the obligation has not been a United
States person on each interest payment date; or
(ii) If the person providing the certificate is a financial
institution which is holding or has held an obligation on behalf of the
beneficial owner, the beneficial owner of the obligation has been a
United States person on one or more interest payment dates (identifying
such date or dates), and the person making the certification has
forwarded or will forward the appropriate United States beneficial
ownership notification to the withholding agent in accordance with the
provisions of paragraph (e)(4) of this section.
(2) The person providing the certificate need not state the
foregoing where no previous certificate has been required to be
provided by the payee to the withholding agent under this paragraph
(e)(3)(i).
(B) Additional representations. Whether or not a previous
certificate has been required to be provided with respect to the
obligation, each certificate furnished pursuant to the provisions in
this paragraph (e)(3)(i) must further state that, for each foreign-
targeted registered obligation held and every other such obligation to
be acquired and held by the person providing the certificate during the
period beginning on the date of the certificate and ending on the date
the next certificate is required to be provided, the beneficial owner
of the obligation will not be a United States person on each interest
payment date while the financial institution or clearing organization
member holds the obligation and that, if the person providing the
certificate is a financial institution which is holding or will be
holding the obligation on behalf of a beneficial owner, such person
will provide a United States beneficial ownership notification to the
withholding agent (and a clearing organization that is not a
withholding agent where a member organization is required by this
paragraph (e)(3) to furnish the clearing organization with a statement)
in accordance with paragraph (e)(4) of this section in the event such
certificate (or statement in the case of a statement provided by a
member organization to a clearing organization that is not a
withholding agent) is or becomes untrue with respect to any obligation.
A clearing organization is an entity which is in the business of
holding obligations for member organizations and transferring
obligations among such members by credit or debit to the account of a
member without the necessity of physical delivery of the obligation.
(C) Obligation must be identified. The certificate described in
paragraph (e)(3)(ii)(A) of this section must identify the obligation or
obligations with respect to which it is given, except where the
certification is given with respect to an obligation that has not been
acquired at the time the certification is made. An obligation is
identified if it or the larger issuance of which it is a part is
described on a list (e.g., $5 million principal amount of 12%
debentures of ABC Savings and Loan Association due February 25, 1995,
$3 million principal amount of 10% U.S. Treasury notes due May 28,
1990) of all registered obligations targeted to foreign markets held by
or on behalf of the person providing the certificate and the list is
attached to, and incorporated by reference into, the certificate. The
certificate must identify
[[Page 53420]]
and provide the address of the person furnishing the certificate.
(D) Payment to a depository of a clearing organization. If the
withholding agent pays interest to a depository of a clearing
organization, then the clearing organization must provide the
certificate described in this paragraph (e)(3)(i) to the withholding
agent. Any certificate that is provided by a clearing organization must
state that the clearing organization has received a statement from each
member which complies with the provisions of this paragraph (e)(3)(i)
and of paragraph (e)(4) of this section (as if the clearing
organization were the withholding agent and regardless of whether the
member is a financial institution described in section 871(h)(5)(B)).
(E) Statement in lieu of Form W-8. Subject to the requirements set
out in paragraph (e)(4) of this section, a certificate or statement in
the form described in this paragraph (e)(3)(i), in conjunction with the
next annual certificate or statement, will serve as the certificate
that may be provided in lieu of a Form W-8 with respect to interest on
all foreign-targeted registered obligations held by the person making
the certification or statement and which is paid to such person within
the period beginning on the date of the certificate and ending on the
date the next certificate is required to be provided.
(F) Electronic transmission. The certificate described in this
paragraph (e)(3)(i) may be provided electronically under the terms and
conditions of Sec. 1.163-5(c)(2)(i)(D)(3)(ii).
(ii) Payment to a person other than a financial institution or
member of a clearing organization. If the withholding agent pays
interest to the beneficial owner of an obligation that is neither a
financial institution described in section 871(h)(5)(B) nor a member of
a clearing organization, then such owner must provide the withholding
agent a statement described in paragraph (c)(1)(ii)(C) of this section.
(4) Applicable procedures regarding documentation--(i) Procedures
applicable to certificates required under paragraph (e)(3)(i) of this
section--(A) Time for providing certificate. Where no previous
certificate for foreign-targeted registered obligations has been
provided to the withholding agent by the person providing the
certificate under paragraph (e)(3)(i) of this section, such certificate
must be provided within the period beginning 90 days prior to the first
interest payment date on which the person holds a foreign-targeted
registered obligation. The withholding agent may, in its discretion,
withhold under section 1441(a), 1442(a), or 1443 if the certificate is
not received by the date 30 days prior to the interest payment.
Thereafter the certificate must be filed within the period beginning on
January 15 and ending January 31 of each year. If a certificate
provided pursuant to the first sentence of this paragraph (e)(4)(i)(A)
is provided during the period beginning on January 15 and ending on
January 31 of any year, then no other certificate need be provided
during such period in such year.
(B) Change of status notification on Form W-9. If, on any interest
payment date after the obligation was acquired by the person making the
certification, the beneficial owner of the obligation is a U.S. person,
then the person to whom the withholding agent pays interest must
furnish the withholding agent with a U.S. beneficial ownership
notification within 30 days after such interest payment date. A U.S.
beneficial ownership notification must include a statement that the
beneficial owner of the obligation has been a U.S. person on an
interest payment date (identifying such date), that such owner has
provided to the person providing the notification a Form W-9 (or a
substitute form that is substantially similar to Form W-9 and completed
under penalties of perjury), and that the person providing the
notification has been and will be complying with the information
reporting requirements of section 6049, if applicable.
(C) Alternative notification statement. Where the person providing
the notification described in paragraph (e)(4)(i)(B) of this section is
neither a controlled foreign corporation within the meaning of section
957(a), nor a foreign corporation 50-percent or more of the gross
income of which from all sources for the three-year period ending with
the close of the taxable year preceding the date of the statement was
effectively connected with the conduct of trade or business in the
United States, such person must attach to the notification a copy of
the Form W-9 (or substitute form that is substantially similar to Form
W-9 and completed under penalties of perjury) provided by the
beneficial owner. When a person that provides the U.S. beneficial
ownership notification does not attach to it a copy of such Form W-9
(or substitute form that is substantially similar to Form W-9 and
completed under penalties of perjury), such person must state that it
is either a controlled foreign corporation within the meaning of
section 957(a), or a foreign corporation 50-percent or more of the
gross income of which from all sources for the three-year period ending
with the close of its taxable year preceding the date of the statement
was effectively connected with the conduct of a trade or business in
the United States. A withholding agent that receives a Form W-9 (or a
substitute form that is substantially similar to Form W-9 and completed
under penalties of perjury) must send a copy of such form to the IRS,
at such address as the IRS shall indicate, within 30 days after
receiving it and must attach a statement that the Form W-9 or
substitute form was provided pursuant to this paragraph (e)(4) with
respect to a U.S. person that has owned a foreign-targeted registered
obligation on one or more interest payment dates.
(D) Failure to provide notification. If either a Form W-9 (or a
substitute form that is substantially similar to a Form W-9 and
completed under penalties of perjury) or the statement described in
paragraph (e)(4)(i)(C) of this section is not attached to the U.S.
beneficial ownership notification provided pursuant to paragraph
(e)(4)(i)(B) of this section, the withholding agent is required to
withhold under section 1441, 1442, or 1443 on a payment of interest
made after the withholding agent has received the notification unless
such form or statement (or a statement that the beneficial owner of the
obligation is no longer a U.S. person) is received before the interest
payment date from the person who provided the notification (or
transferee). If, during the period beginning on the next January 15 and
ending on the next January 31, such person certifies as set out in
paragraph (e)(3)(i) of this section (subject to paragraph
(e)(3)(i)(A)(2) of this section) then the withholding agent is not
required to withhold during the year following such certification
(unless such person again provides a U.S. beneficial ownership
notification without attaching a Form W-9 or substitute form that is
substantially similar to Form W-9 and completed under penalties of
perjury or the statement described in paragraph (e)(4)(i)(C) of this
section).
(E) Procedures for clearing organizations. Within the period
beginning 10 days before the end of the calendar quarter and ending on
the last day of each calendar quarter, any clearing organization
(including a clearing organization that is a withholding agent) relying
on annual certificates or statements from its member organizations, as
set forth in paragraph (e)(3)(i) of this section, must send each member
organization having submitted such certificate or statement a reminder
that the member organization must give the clearing organization a U.S.
beneficial ownership
[[Page 53421]]
notification in the circumstances described in paragraph (e)(4)(i)(B)
of this section.
(F) Retention of certificates. The certificate described in
paragraph (e)(3)(i) of this section must be retained in the records of
the withholding agent for four years from the end of the calendar year
in which it was received. The statement described in paragraph
(e)(3)(i) of this section that is received by a clearing organization
from a member organization must be retained in the records of the
clearing organization for four years from the end of the calendar year
in which it was received.
(G) No reporting requirement. The withholding agent who receives
the certificate described in paragraph (e)(3)(i) of this section is not
required to file Form 1042S to report payments under Sec. 1.1461-1 (b)
or (c) of interest that are made with respect to foreign-targeted
registered obligations held by the person providing the certificate and
are made within the period beginning with the certificate date and
ending on the last date for filing the next certificate.
(ii) Procedures regarding certificates required under paragraph
(e)(3)(ii) of this section--(A) Time for providing certificate. The
statement described in paragraph (e)(3)(ii) of this section must be
provided to the withholding agent within the period beginning 90 days
prior to and ending on the first interest payment date on which the
withholding agent pays interest to the beneficial owner. The
withholding agent may, in its discretion, withhold under section
1441(a), 1442(a), or 1443 if the statement is not received by the date
30 days prior to the interest payment. The beneficial owner must
confirm to the withholding agent the continuing validity of the
documentary evidence within the period beginning 90 days prior to the
first day of the third calendar year following the provision of such
evidence and during the same period every three years thereafter while
the owner still owns the obligation. The withholding agent who receives
the statement described in paragraph (e)(3)(ii) of this section is not
required to report payments of interest under Sec. 1.1461-1(b) or (c)
if the payments are made with respect to foreign-targeted registered
obligations held by the person who provides the statement and are made
within the period beginning with the date on which the statement is
provided and ending on the last date for confirming the validity of the
statement. The statement received for purposes of paragraph (e)(3)(ii)
of this section is subject to the applicable procedures set forth in
Sec. 1.1441-1(e)(4).
(B) Change of status notification on Form W-9. If on any interest
payment date after the obligation was acquired by the person providing
the statement described in paragraph (e)(3)(ii) of this section, the
beneficial owner of the obligation is a U.S. person, then the
beneficial owner must so inform the withholding agent within 30 days
after such interest payment date and must provide a Form W-9 (or
substitute form that is substantially similar completed under penalties
of perjury) to the withholding agent. However, the beneficial owner is
not required to provide another Form W-9 (or substitute form that is
substantially similar and completed under penalties of perjury) if such
person has already provided it to the withholding agent within the same
calendar year.
(iii) Disqualification of documentation. In accordance with the
provisions of section 871(h)(4), the Secretary may make a determination
in appropriate cases that a certificate or statement by any person, or
class of persons, does not satisfy the requirements of that section.
Should that determination be made, all payments of interest that
otherwise qualify as portfolio interest to that person would become
subject to 30-percent withholding under section 1441(a), 1442(a), or
1443.
(iv) Special effective date. Notwithstanding the foregoing
requirements of this section--
(A) Any certificate that is required to be filed with the
withholding agent during the period beginning on January 15 and ending
on January 31, 1986, is not required to state that the beneficial owner
of an obligation, prior to the date of the certificate, either was not
a United States person or was a United States person if the obligation
was acquired by the person providing the certificate on or before
September 19, 1985; and
(B) All of the requirements of this paragraph (e), as in effect
prior to the effective date of these amendments, shall remain effective
with respect to each interest payment prior to the filing of the
certificate described in paragraph (e)(4)(iv)(A) of this section,
except that the provisions of paragraph (e)(3) of this section relating
to which persons are required to receive certificates or statements and
paragraph (e)(3)(ii) or (4)(ii) of this section shall become effective
with respect to each interest payment after September 20, 1985.
(5) Information reporting. See Sec. 1.6049-5(b)(7) for special
information reporting rules applicable to interest on foreign-targeted
registered obligations. See Sec. 1.6045-1(g)(1)(ii) for information
reporting rules applicable to the redemption, retirement, or sale of
foreign-targeted registered obligations.
(f) Securities lending transactions. For applicable rules regarding
substitute interest payments received pursuant to a securities lending
transaction or a sale-repurchase transaction, see Secs. 1.871-7(b)(2)
and 1.881-2(b)(2).
(g) Definitions. For purposes of this section, the terms U.S.
person and foreign person have the meaning set forth in Sec. 1.1441-
1(c)(2), the term beneficial owner has the meaning set forth in
Sec. 1.1441-1(c)(6), the term withholding agent has the meaning set
forth in Sec. 1.1441-7(a); the term payee has the meaning set forth in
Sec. 1.1441-1(b)(2); and the term payment has the meaning set forth in
Sec. 1.1441-2(e).
(h) Effective date--(1) In general. This section shall apply to
payments of interest made after December 31, 1998.
(2) Transition rule. For purposes of this section, a withholding
agent that on December 31, 1998, holds a Form W-8 that is valid under
the regulations in effect prior to January 1, 1999 (see 26 CFR parts 1
and 35a revised April 1, 1997), may treat it as a valid withholding
certificate until its validity expires under these regulations or, if
earlier, until December 31, 1999. Further, the validity of a Form W-8
that is dated prior to January 1, 1998, is valid on January 1, 1998,
and would expire at any time during 1998, is extended until December
31, 1998 (and is not extended after December 31, 1998 by reason of the
immediately preceding sentence). The rule in this paragraph (h)(2),
however, does not apply to extend the validity period of a Form W-8
that expires in 1998 solely by reason of changes in the circumstances
of the person whose name is on the certificate. Notwithstanding the
three preceding sentences, a withholding agent or payor may choose to
not take advantage of the transition rule in this paragraph (h)(2) with
respect to one or more withholding certificates and, therefore, to
require new withholding certificates conforming to the requirements
described in this section.
Par. 6. Section 1.1441-0 is added to read as follows:
Sec. 1.1441-0 Outline of regulation provisions for section 1441.
This section lists captions contained in Secs. 1.1441-1 through
1.1441-9.
Sec. 1.1441-1 Requirement for the deduction and withholding of tax
on payments to foreign persons.
(a) Purpose and scope.
(b) General rules of withholding.
[[Page 53422]]
(1) Requirement to withhold on payments to foreign persons.
(2) Determination of payee and payee's status.
(i) In general.
(ii) Payments to a U.S. agent of a foreign person.
(iii) Payments to wholly-owned entities.
(A) Foreign-owned domestic entity.
(B) Foreign entity.
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies.
(A) U.S. branch treated as a U.S. person in certain cases.
(B) Consequences to the withholding agent.
(C) Consequences to the U.S. branch.
(D) Definition of payment to a U.S. branch.
(E) Payments to other U.S. branches.
(v) Payments to a foreign intermediary.
(A) Payments treated as made to persons for whom the intermediary
collects the payment.
(B) Payments treated as made to foreign intermediary.
(vi) Other payees.
(vii) Rules for reliably associating a payment with documentation.
(3) Presumptions regarding payee's status in the absence of
documentation.
(i) General rules.
(ii) Presumptions of status as individual, corporation, partnership,
etc.
(iii) Presumption of U.S. or foreign status.
(A) Payments to exempt recipients.
(B) Scholarships and grants.
(C) Pensions, annuities, etc.
(D) Certain payments to offshore accounts.
(iv) Grace period in the case of indicia of a foreign payee.
(v) Special rules applicable to payments to foreign intermediaries.
(A) Reliance on claim of status as foreign intermediary.
(B) Beneficial owner documentation is lacking or unreliable.
(C) Information regarding allocation of payment is lacking or
unreliable.
(D) Certification that the foreign intermediary has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable.
(vi) U.S. branches and foreign flow-through entities.
(vii) Joint payees.
(viii) Rebuttal of presumptions.
(ix) Effect of reliance on presumptions and of actual knowledge or
reason to know otherwise.
(A) General rule.
(B) Actual knowledge or reason to know that amount of withholding is
greater than is required under the presumptions or that reporting of
the payment is required.
(x) Examples.
(4) List of exemptions from, or reduced rates of, withholding under
chapter 3 of the Code.
(5) Establishing foreign status under applicable provisions of
chapter 61 of the Code.
(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches.
(7) Liability for failure to obtain documentation timely or to act
in accordance with applicable presumptions.
(i) General rule.
(ii) Proof that tax liability has been satisfied.
(iii) Liability for interest and penalties.
(iv) Special effective date.
(v) Examples.
(8) Adjustments, refunds, or credits of overwithheld amounts.
(9) Payments to joint owners.
(c) Definitions.
(1) Withholding.
(2) Foreign and U.S. person.
(3) Individual.
(i) Alien individual.
(ii) Nonresident alien individual.
(4) Certain foreign corporations.
(5) Financial institution and foreign financial institution.
(6) Beneficial owner.
(i) General rule.
(ii) Special rules for flow-through entities and arrangements.
(A) General rule.
(B) Trusts and estates.
(C) Definition of a flow-through entity or arrangement.
(7) Withholding agent.
(8) Person.
(9) Source of income.
(10) Chapter 3 of the Code.
(11) Reduced rate.
(d) Beneficial owner's or payee's claim of U.S. status.
(1) In general.
(2) Payments for which a Form W-9 is otherwise required.
(3) Payments for which a Form W-9 is not otherwise required.
(4) Other payments.
(e) Beneficial owner's claim of foreign status.
(1) Withholding agent's reliance.
(i) In general.
(ii) Payments that a withholding agent may treat as made to a
foreign person that is a beneficial owner.
(A) General rule.
(B) Additional requirements.
(2) Beneficial owner withholding certificate.
(i) In general.
(ii) Requirements for validity of certificate.
(3) Intermediary, flow-through, or U.S. branch withholding
certificate.
(i) In general.
(ii) Intermediary withholding certificate from a qualified
intermediary.
(iii) Intermediary withholding certificate from an intermediary that
is not a qualified intermediary.
(iv) Information to the withholding agent regarding assets owned by
beneficial owners, etc.
(A) General rule.
(B) Updating the information.
(C) Examples.
(v) Withholding certificate from certain U.S. branches.
(vi) Reportable amounts.
(4) Applicable rules.
(i) Who may sign the certificate.
(ii) Period of validity.
(A) Three-year period.
(B) Indefinite validity period.
(C) Withholding certificate for effectively connected income.
(D) Change in circumstances.
(iii) Retention of withholding certificate.
(iv) Electronic transmission of information.
(v) Electronic confirmation of taxpayer identifying number on
withholding certificate.
(vi) Acceptable substitute form.
(vii) Requirement of taxpayer identifying number.
(viii) Reliance rules.
(A) Classification.
(B) Status of payee as an intermediary or as a person acting for its
own account.
(ix) Certificates to be furnished for each account unless exception
applies.
(A) Coordinated account information system in effect.
(B) Family of mutual funds.
(C) Special rule for brokers.
(5) Qualified intermediaries.
(i) General rule.
(ii) Definition of qualified intermediary.
(iii) Withholding agreement.
(A) In general.
(B) Terms of the withholding agreement.
(iv) Assignment of primary withholding responsibility.
(v) Information to withholding agent regarding applicable
withholding rates.
(A) General rule.
(B) Categories of assets.
(C) Updating the information.
(f) Effective date.
(1) In general.
(2) Transition rules.
(i) Special rules for existing documentation.
(ii) Lack of documentation for past years.
Sec. 1.1441-2 Amounts subject to withholding.
(a) In general.
(b) Fixed or determinable annual or periodical income.
(1) In general.
(i) Definition.
(ii) Manner of payment.
(iii) Determinability of amount.
(2) Exceptions.
(3) Original issue discount.
(i) General rule.
(ii) Amounts actually known to the withholding agent.
(iii) Amounts for which certain documentation is not furnished.
(iv) Exceptions to withholding.
(4) Securities lending transactions and equivalent transactions.
(c) Other income subject to withholding.
(d) Exceptions to withholding where no money or property is paid or
lack of knowledge.
(1) General rule.
(2) Cancellation of debt.
(3) Satisfaction of liability following underwithholding by
withholding agent.
(e) Payment.
(1) General rule.
(2) Income allocated under section 482.
(3) Blocked income.
(4) Special rules for dividends.
(5) Certain interest accrued by a foreign corporation.
(6) Payments other than in U.S. dollars.
(f) Effective date.
[[Page 53423]]
Sec. 1.1441-3 Determination of amounts to be withheld.
(a) Withholding on gross amount.
(b) Withholding on payments on certain obligations.
(1) Withholding at time of payment of interest.
(2) No withholding between interest payment dates.
(i) In general.
(ii) Anti-abuse rule.
(c) Corporate distributions.
(1) General rule.
(2) Exception to withholding on distributions.
(i) In general.
(ii) Reasonable estimate of accumulated and current earnings and
profits on the date of payment.
(A) General rule.
(B) Procedures in case of underwithholding.
(C) Reliance by intermediary on reasonable estimate.
(D) Example.
(3) Special rules in the case of distributions from a regulated
investment company.
(i) General rule
(ii) Reliance by intermediary on reasonable estimate.
(4) Coordination with withholding under section 1445.
(i) In general.
(A) Withholding under section 1441.
(B) Withholding under both sections 1441 and 1445.
(C) Coordination with REIT withholding.
(ii) Intermediary reliance rule.
(d) Withholding on payments that include an undetermined amount of
income.
(1) In general.
(2) Withholding on certain gains.
(e) Payments other than in U.S. dollars.
(1) In general.
(2) Payments in foreign currency.
(f) Tax liability of beneficial owner satisfied by withholding
agent.
(1) General rule.
(2) Example.
(g) Conduit financing arrangements
(h) Effective date.
Sec. 1.1441-4 Exemptions from withholding for certain effectively
connected income and other amounts.
(a) Certain income connected with a U.S. trade or business.
(1) In general.
(2) Withholding agent's reliance on a claim of effectively connected
income.
(i) In general.
(ii) Special rules for U.S. branches of foreign persons.
(A) U.S. branches of certain foreign banks or foreign insurance
companies.
(B) Other U.S. branches.
(3) Income on notional principal contracts.
(i) General rule.
(ii) Exception for certain payments.
(b) Compensation for personal services of an individual.
(1) Exemption from withholding.
(2) Manner of obtaining withholding exemption under tax treaty.
(i) In general.
(ii) Withholding certificate claiming withholding exemption.
(iii) Review by withholding agent.
(iv) Acceptance by withholding agent.
(v) Copies of Form 8233.
(3) Withholding agreements.
(4) Final payments exemption.
(i) General rule.
(ii) Final payment of compensation for personal services.
(iii) Manner of applying for final payment exemption.
(iv) Letter to withholding agent.
(5) Requirement of return.
(6) Personal exemption.
(i) In general.
(ii) Multiple exemptions.
(iii) Special rule where both certain scholarship and compensation
income are received.
(c) Special rules for scholarship and fellowship income.
(1) In general.
(2) Alternate withholding election.
(d) Annuities received under qualified plans.
(e) Per diem of certain alien trainees.
(f) Failure to receive withholding certificates timely or to act in
accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-5 Withholding on payments to partnerships, trusts, and
estates.
(a) Rules of withholding applicable to payments to partnerships.
(b) Domestic partnerships.
(1) Exemption from withholding on payment to domestic partnerships.
(2) Withholding by a domestic partnership.
(i) In general.
(ii) Determination by the domestic partnership of partners' status.
(iii) Reliance on a partner's claim for reduced withholding.
(iv) Rules for reliably associating a payment with documentation.
(v) Coordination with chapter 61 of the Internal Revenue Code and
section 3406.
(c) Foreign partnerships.
(1) Determination of payee.
(i) Payments treated as made to partners.
(ii) Payments treated as made to the partnership.
(iii) Rules for reliably associating a payment with documentation.
(iv) Example.
(2) Withholding foreign partnerships.
(i) Reliance on claim of withholding foreign partnership status.
(ii) Withholding agreement.
(A) In general.
(B) Terms of withholding agreement.
(iii) Withholding responsibility.
(iv) Withholding certificate from a withholding foreign partnership.
(3) Other foreign partnerships.
(i) Reliance on claim of foreign partnership status.
(ii) Reliance on claim of reduced withholding by a partnership for
its partners.
(iii) Withholding certificate from a foreign partnership that is not
a withholding foreign partnership.
(iv) Information to withholding agent regarding each partner's
distributive share.
(v) Withholding by a foreign partnership.
(d) Presumptions regarding payee's status in the absence of
documentation.
(1) In general.
(2) Determination of partnership's status as domestic or foreign in
the absence of documentation.
(3) Determination of partners' status in the absence of certain
documentation.
(i) Documentation regarding the status of a partner is lacking or
unreliable.
(ii) Information regarding the allocation of payment is lacking or
unreliable.
(iii) Certification that the foreign partnership has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable.
(iv) Determination by a withholding foreign partnership of the
status of its partners.
(4) Examples.
(e) Trusts and estates. [Reserved]
(f) Failure to receive withholding certificate timely or to act in
accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-6 Claim of reduced withholding under an income tax
treaty.
(a) In general.
(b) Reliance on claim of reduced withholding under an income tax
treaty.
(1) In general.
(2) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income.
(i) General rule.
(ii) Income to which special rules apply.
(3) Competent authority agreements.
(4) Eligibility for reduced withholding under an income tax treaty
in the case of a payment to a person other than an individual.
(i) General rule.
(ii) Withholding certificates.
(A) In general.
(B) Certification by qualified intermediary.
(iii) Multiple claims of treaty benefits.
(iv) Examples.
(5) Claim of benefits under an income tax treaty by a U.S. person.
(c) Proof of tax residence in a treaty country and certification of
entitlement to treaty benefits. (1) In general.
(2) Certification of taxpayer identifying number.
(i) In general.
(ii) IRS-certified TIN.
(iii) Special rules for qualified intermediaries.
(3) Certificate of residence.
(4) Documentary evidence establishing residence in the treaty
country.
(i) Individuals.
(ii) Persons other than individuals.
(5) Certifications regarding entitlement to treaty benefits.
(i) Certification regarding conditions under a Limitation on
Benefits Article.
(ii) Certification regarding whether the taxpayer is deriving the
income.
(d) Joint owners.
(e) Related party dividends under U.S.-Denmark income tax treaty.
[[Page 53424]]
(f) Failure to receive withholding certificate timely.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined.
(b) Standards of knowledge.
(1) In general.
(2) Reason to know.
(i) In general.
(ii) Limits on reason to know in certain cases.
(3) Coordinated account information systems.
(c) Authorized agent.
(1) In general.
(2) Authorized foreign agent.
(3) Notification.
(4) Liability of U.S. withholding agent.
(5) Filing of returns.
(d) United States obligations.
(e) Assumed obligations.
(f) Conduit financing arrangements.
(g) Effective date.
Sec. 1.1441-8 Exemption from withholding for payments to foreign
governments, international organizations, foreign central banks of
issue, and the Bank for International Settlements.
(a) Foreign governments.
(b) Reliance on claim of exemption by foreign government.
(c) Income of a foreign central bank of issue or the Bank for
International
Settlements.
(1) Certain interest income.
(2) Bankers' acceptances.
(d) Exemption for payments to international organizations.
(e) Failure to receive withholding certificate timely and other
applicable procedures.
(f) Effective date.
(1) In general.
(2) Transition rules.
Sec. 1.1441-9 Exemption from withholding on exempt income of a
foreign tax-exempt organization, including foreign private
foundations.
(a) Exemption from withholding for exempt income.
(b) Reliance on foreign organization's claim of exemption from
withholding.
(1) General rule.
(2) Withholding certificate.
(3) Presumptions in the absence of documentation.
(4) Reason to know.
(c) Failure to receive withholding certificate timely and other
applicable procedures.
(d) Effective date.
(1) In general.
(2) Transition rules.
Par. 7. Sections 1.1441-1 and 1.1441-2 are revised to read as
follows:
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
(a) Purpose and scope. This section, Secs. 1.1441-2 through 1.1441-
9, and 1.1443-1 provide rules for withholding under sections 1441,
1442, and 1443 when a payment is made to a foreign person. This section
provides definitions of terms used in chapter 3 of the Internal Revenue
Code (Code) and regulations thereunder. It prescribes procedures to
determine whether an amount must be withheld under chapter 3 of the
Code and documentation that a withholding agent may rely upon to
determine the status of a payee or a beneficial owner as a U.S. person
or as a foreign person and other relevant characteristics of the payee
that may affect a withholding agent's obligation to withhold under
chapter 3 of the Code and the regulations thereunder. Special
procedures regarding payments to foreign persons that act as
intermediaries are also provided. Section 1.1441-2 defines the income
subject to withholding under section 1441, 1442, and 1443 and the
regulations under these sections. Section 1.1441-3 provides rules
regarding the amount subject to withholding. Section 1.1441-4 provides
exemptions from withholding for, among other things, certain income
effectively connected with the conduct of a trade or business in the
United States, including certain compensation for the personal services
of an individual. Section 1.1441-5 provides rules for withholding on
payments made to flow-through entities and other similar arrangements.
Section 1.1441-6 provides rules for claiming a reduced rate of
withholding under an income tax treaty. Section 1.1441-7 defines the
term withholding agent and provides due diligence rules governing a
withholding agent's obligation to withhold. Section 1.1441-8 provides
rules for relying on claims of exemption from withholding for payments
to a foreign government, an international organization, a foreign
central bank of issue, or the Bank for International Settlements.
Sections 1.1441-9 and 1.1443-1 provide rules for relying on claims of
exemption from withholding for payments to foreign tax exempt
organizations and foreign private foundations.
(b) General rules of withholding--(1) Requirement to withhold on
payments to foreign persons. A withholding agent must withhold 30-
percent of any payment of an amount subject to withholding made to a
payee that is a foreign person unless it can reliably associate the
payment with documentation upon which it can rely to treat the payment
as made to a beneficial owner that is a U.S. person or as made to a
beneficial owner that is a foreign person entitled to a reduced rate of
withholding. However, a withholding agent making a payment to a foreign
person need not withhold where the foreign person assumes
responsibility for withholding on the payment under chapter 3 of the
Code and the regulations thereunder as a qualified intermediary (see
paragraph (e)(5) of this section), as a U.S. branch of a foreign person
(see paragraph (b)(2)(iv) of this section), as a withholding foreign
partnership (see Sec. 1.1441-5(c)(2)(i)), or as an authorized foreign
agent (see Sec. 1.1441-7(c)(1)). This section (dealing with general
rules of withholding and claims of foreign or U.S. status by a payee or
a beneficial owner), and Secs. 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-8,
1.1441-9, and 1.1443-1 provide rules for determining whether
documentation is required as a condition for reducing the rate of
withholding on a payment to a foreign beneficial owner or to a U.S.
payee and if so, the nature of the documentation upon which a
withholding agent may rely in order to reduce such rate. Paragraph
(b)(2) of this section prescribes the rules for determining who the
payee is, the extent to which a payment is treated as made to a foreign
payee, and reliable association of a payment with documentation.
Paragraph (b)(3) of this section describes the applicable presumptions
for determining the payee's status as U.S. or foreign and the payee's
other characteristics (i.e., as an owner or intermediary, as an
individual, partnership, corporation, etc.). Paragraph (b)(4) of this
section lists the types of payments for which the 30-percent
withholding rate may be reduced. Because the treatment of a payee as a
U.S. or a foreign person also has consequences for purposes of making
an information return under the provisions of chapter 61 of the Code
and for withholding under other provisions of the Code, such as
sections 3402, 3405 or 3406, paragraph (b)(5) of this section lists
applicable provisions outside chapter 3 of the Code that require
certain payees to establish their foreign status (e.g., in order to be
exempt from information reporting). Paragraph (b)(6) of this section
describes the withholding obligations of a foreign person making a
payment that it has received in its capacity as an intermediary.
Paragraph (b)(7) of this section describes the liability of a
withholding agent that fails to withhold at the required 30-percent
rate in the absence of documentation. Paragraph (b)(8) of this section
deals with adjustments and refunds in the case of overwithholding.
Paragraph (b)(9) of this section deals with determining the status of
the payee
[[Page 53425]]
when the payment is jointly owned. See paragraph (c)(6) of this section
for a definition of beneficial owner. See Sec. 1.1441-7(a) for a
definition of withholding agent. See Sec. 1.1441-2(a) for the
determination of an amount subject to withholding. See Sec. 1.1441-2(e)
for the definition of a payment and when it is considered made. Except
as otherwise provided, the provisions of this section apply only for
purposes of determining a withholding agent's obligation to withhold
under chapter 3 of the Code and the regulations thereunder.
(2) Determination of payee and payee's status--(i) In general.
Except as otherwise provided in this paragraph (b)(2), a payee is the
person to whom a payment is made, regardless of whether such person is
the beneficial owner of the amount (as defined in paragraph (c)(6) of
this section). A foreign payee is a payee who is a foreign person. A
U.S. payee is a payee who is a U.S. person. Generally, the
determination by a withholding agent of the U.S. or foreign status of a
payee and of its other relevant characteristics (e.g., as a beneficial
owner or intermediary, or as an individual, corporation, or flow-
through entity) is made on the basis of a withholding certificate that
is a Form W-8 or a Form 8233 (indicating foreign status of the payee or
beneficial owner) or a Form W-9 (indicating U.S. status of the payee).
The provisions of this paragraph (b)(2), paragraph (b)(3) of this
section, and Sec. 1.1441-5 (c), (d), and (e) dealing with
determinations of payee and applicable presumptions in the absence of
documentation, apply only to payments of amounts subject to withholding
under chapter 3 of the Code (within the meaning of Sec. 1.1441-2(a)).
Similar payee and presumption provisions are set forth under
Sec. 1.6049-5(d) for payments of amounts that are not subject to
withholding under chapter 3 of the Code (or the regulations thereunder)
but that may be reportable under provisions of chapter 61 of the Code
(and the regulations thereunder). See paragraph (d) of this section for
documentation upon which the withholding agent may rely in order to
treat the payee or beneficial owner as a U.S. person. See paragraph (e)
of this section for documentation upon which the withholding agent may
rely in order to treat the payee or beneficial owner as a foreign
person. For applicable presumptions of status in the absence of
documentation, see paragraph (b)(3) of this section and Sec. 1.1441-
5(d). For definitions of a foreign person and U.S. person, see
paragraph (c)(2) of this section.
(ii) Payments to a U.S. agent of a foreign person. A withholding
agent making a payment to a U.S. person (other than to a U.S. branch
that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of
this section) and who has actual knowledge that the U.S. person
receives the payment as an agent of a foreign person must treat the
payment as made to the foreign person. However, the withholding agent
may treat the payment as made to the U.S. person if the U.S. person is
a financial institution and the withholding agent has no reason to
believe that the financial institution will not comply with its
obligation to withhold. See paragraph (c)(5) of this section for the
definition of a financial institution.
(iii) Payments to wholly-owned entities--(A) Foreign-owned domestic
entity. A payment to a wholly-owned domestic entity that is disregarded
for federal tax purposes under Sec. 301.7701-2(c)(2) of this chapter as
an entity separate from its owner and whose single owner is a foreign
person shall be treated as a payment to the owner of the entity,
subject to the provisions of paragraph (b)(2)(iv) of this section. For
purposes of this paragraph (b)(2)(iii)(A), a domestic entity means a
person that would be treated as a U.S. person if it had an election in
effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be treated as
a corporation. For example, a limited liability company, A, organized
under the laws of the State of Delaware, opens an account at a U.S.
bank. Upon opening of the account, the bank requests A to furnish a
Form W-9 as required under section 6049(a) and the regulations under
that section. A does not have an election in effect under
Sec. 301.7701-3(c)(1)(i) of this chapter and, therefore, is not treated
as an organization taxable as a corporation, including for purposes of
the exempt recipient provisions in Sec. 1.6049-4(c)(1). If A has a
single owner and the owner is a foreign person (as defined in paragraph
(c)(2) of this section), then A may not furnish a Form W-9 because it
may not represent that it is a U.S. person for purposes of the
provisions of chapters 3 and 61 of the Code, and section 3406.
Therefore, A must furnish a Form W-8 with the name, address, and
taxpayer identifying number (TIN) (if required) of the foreign person
who is the single owner in the same manner as if the account were
opened directly by the foreign single owner. See Secs. 1.894-1T(d) and
1.1441-6(b)(4) for special rules where the entity's owner is claiming a
reduced rate of withholding under an income tax treaty.
(B) Foreign entity. A payment to a wholly-owned foreign entity that
is disregarded under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner shall be treated as a payment to the single
owner of the entity, subject to the provisions of paragraph (b)(2)(iv)
of this section if the foreign entity has a U.S. branch in the United
States. For purposes of this paragraph (b)(2)(iii)(B), a foreign entity
means a person that would be treated as a foreign person if it had an
election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be
treated as a corporation. See Secs. 1.894-1T(d) and 1.1441-6(b)(4) for
special rules where the foreign entity or its owner is claiming a
reduced rate of withholding under an income tax treaty. Thus, for
example, if the foreign entity's single owner is a U.S. person, the
payment shall be treated as a payment to a U.S. person. Therefore,
based on the savings clause in U.S. income tax treaties, such an entity
may not claim benefits under an income tax treaty even if the entity is
organized in a country with which the United States has an income tax
treaty in effect and treats the entity as a non-fiscally transparent
entity. See Sec. 1.894-1T(d)(6), Example 10. Unless it has actual
knowledge or reason to know that the foreign entity to whom the payment
is made is disregarded under Sec. 301.7701-2(c)(2) of this chapter, a
withholding agent may treat a foreign entity as an entity separate from
its owner unless it can reliably associate the payment with a
withholding certificate from the entity's owner.
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies--(A) U.S. branch treated as a U.S. person in
certain cases. A payment to the U.S. branch of a foreign person is a
payment to the foreign person. However, a U.S. branch described in this
paragraph (b)(2)(iv)(A) and a withholding agent (including another U.S.
branch described in this paragraph (b)(2)(iv)(A)) may agree to treat
the branch as a U.S. person for purposes of withholding on specified
payments to the U.S. branch. Such agreement must be evidenced by a U.S.
branch withholding certificate described in paragraph (e)(3)(v) of this
section furnished by the U.S. branch to the withholding agent. A U.S.
branch described in this paragraph (b)(2)(iv)(A) is any U.S. branch of
a foreign bank subject to regulatory supervision by the Federal Reserve
Board or a U.S. branch of a foreign insurance company required to file
an annual statement on a form approved by the National Association of
Insurance Commissioner with the Insurance Department of a State, a
Territory, or the District of Columbia. The Internal Revenue Service
(IRS) may approve a list of U.S. branches that may
[[Page 53426]]
qualify for treatment as a U.S. person under this paragraph
(b)(2)(iv)(A) (see Sec. 601.601(d)(2) of this chapter).
(B) Consequences to the withholding agent. Any person that is
otherwise a withholding agent regarding a payment to a U.S. branch
described in paragraph (b)(2)(iv)(A) of this section shall treat the
payment in one of the following ways--
(1) As a payment to a U.S. person, in which case the withholding
agent is not responsible for withholding on such payment to the extent
it can reliably associate the payment with a withholding certificate
described in paragraph (e)(3)(v) of this section that has been
furnished by the U.S. branch under its agreement with the withholding
agent to be treated as a U.S. person;
(2) As a payment directly to the persons whose names are on
withholding certificates or other appropriate documentation forwarded
by the U.S. branch to the withholding agent when no agreement is in
effect to treat the U.S. branch as a U.S. person for such payment, to
the extent the withholding agent can reliably associate the payment
with such certificates or documentation; or
(3) As a payment to a foreign person of income that is effectively
connected with the conduct by that foreign person of a trade or
business in the United States if the withholding agent cannot reliably
associate the payment with a certificate from the U.S. branch or any
other certificate or other appropriate documentation from another
person.
(C) Consequences to the U.S. branch. A U.S. branch that is treated
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be
treated as a person for purposes of section 1441(a) and all other
provisions of chapter 3 of the Code and the regulations thereunder for
any payment that it receives as such. Thus, the U.S. branch shall be
responsible for withholding on the payment in accordance with the
provisions under chapter 3 of the Code and the regulations thereunder
and other applicable withholding provisions of the Code. For this
purpose, it shall obtain and retain documentation from payees or
beneficial owners of the payments that it receives as a U.S. person in
the same manner as if it were a separate entity. For example, if a U.S.
branch receives a payment on behalf of its home office and the home
office is a qualified intermediary, the U.S. branch must obtain a
withholding certificate described in paragraph (e)(3)(ii) of this
section from its home office. In addition, a U.S. branch that has not
provided documentation to the withholding agent for a payment that is,
in fact, not effectively connected income is a withholding agent with
respect to that payment. See paragraph (b)(6) of this section.
(D) Definition of payment to a U.S. branch. A payment is treated as
a payment to a U.S. branch of a foreign bank or foreign insurance
company if the payment is credited to an account maintained in the
United States in the name of a U.S. branch of the foreign person, or
the payment is made to an address in the United States where the U.S.
branch is located and the name of the U.S. branch appears on documents
(in written or electronic form) associated with the payment (e.g., the
check mailed or a letter addressed to the branch).
(E) Payments to other U.S. branches. Similar withholding procedures
may apply to payments to U.S. branches that are not described in
paragraph (b)(2)(iv)(A) of this section to the extent permitted by the
district director or the Assistant Commissioner (International). Any
such branch must establish that its situation is analogous to that of a
U.S. branch described in paragraph (b)(2)(iv)(A) of this section
regarding its registration with, and regulation by, a U.S. governmental
institution, the type and amounts of assets it is required to, or
actually maintain in the United States, and the personnel who carry out
the activities of the branch in the United States. In the alternative,
the branch must establish that the withholding and reporting
requirements under chapter 3 of the Code and the regulations thereunder
impose an undue administrative burden and that the collection of the
tax imposed by section 871(a) or 881(a) on the foreign person (or its
members in the case of a foreign partnership) will not be jeopardized
by the exemption from withholding. Generally, an undue administrative
burden will be found to exist in a case where the person entitled to
the income, such as a foreign insurance company, receives from the
withholding agent income on securities issued by a single corporation,
some of which is, and some of which is not, effectively connected with
conduct of a trade or business within the United States and the
criteria for determining the effective connection are unduly difficult
to apply because of the circumstances under which such securities are
held. No exemption from withholding shall be granted under this
paragraph (b)(2)(iv)(E) unless the person entitled to the income
complies with such other requirements as may be imposed by the district
director or the Assistant Commissioner (International) and unless the
district director or the Assistant Commissioner (International) is
satisfied that the collection of the tax on the income involved will
not be jeopardized by the exemption from withholding. The IRS may
prescribe such procedures as are necessary to make these determinations
(see Sec. 601.601(d)(2) of this chapter).
(v) Payments to a foreign intermediary--(A) Payments treated as
made to persons for whom the intermediary collects the payment. Except
as otherwise provided in paragraph (b)(2)(v)(B) of this section, a
payment to a person that the withholding agent may treat as a foreign
intermediary in accordance with the provisions of paragraph
(b)(3)(v)(A) of this section is treated as a payment made directly to
the person or persons for whom the intermediary collects the payment.
Thus, for example, a payment that the withholding agent can reliably
associate with a withholding certificate from a qualified intermediary
(defined in paragraph (e)(5)(ii) of this section) and that is allocable
to the category of assets described in paragraph (e)(5)(v)(B)(3) of
this section (i.e., assets allocable to persons for whom the foreign
qualified intermediary does not hold documentation as specified under
its agreement with the IRS) is treated as a payment to the persons
holding assets in that category. See paragraph (b)(3)(v)(B) of this
section for applicable presumptions in such a case. For similar rules
for payments to flow-through entities, see Sec. 1.1441-5 (c)(1)(i) and
(e).
(B) Payments treated as made to foreign intermediary. A payment to
a person that the withholding agent can reliably associate with a
withholding certificate described in paragraph (e)(3)(ii) of this
section from a qualified intermediary that has elected to assume
primary withholding responsibility in accordance with paragraph
(e)(5)(iv) of this section is treated as a payment to the qualified
intermediary, except to the extent of the portion of the payment that
the withholding agent can reliably associate with Forms W-9. See
paragraphs (b)(1) and (e)(5)(iv) of this section for consequences to
the withholding agent.
(vi) Other payees. A payment to a person described in Sec. 1.6049-
4(c)(1)(ii) that the withholding agent would treat as a payment to a
foreign person without obtaining documentation for purposes of
information reporting under section 6049 (if the payment were interest)
is treated as a payment to a foreign payee for purposes of chapter 3 of
the Code and the regulations thereunder (or to a foreign beneficial
owner to the extent provided in paragraph (e)(1)(ii)(A) (6) or (7) of
this
[[Page 53427]]
section). Further, payments that the withholding agent can reliably
associate with documentary evidence described in Sec. 1.6049-5(c)(4)
relating to the payee is treated as a payment to a foreign payee. A
payment that the withholding agent may treat as a payment to an
authorized foreign agent (as defined in Sec. 1.1441-7(c)(2)) is treated
as a payment to the agent and not to the persons for whom the agent
collects the payment. See Sec. 1.1441-5 (b)(1) and (c)(1) for payee
determinations for payments to partnerships. See Sec. 1.1441-5(e) for
payee determinations for payments to foreign trusts or foreign estates.
(vii) Rules for reliably associating a payment with documentation.
Generally, a withholding agent can reliably associate a payment with
documentation if, for that payment, it holds valid documentation to
which the payment relates, it can reliably determine how much of the
payment relates to the valid documentation (e.g., based on information
furnished in accordance with paragraph (e)(3)(iv) or (5)(v) of this
section in the case of a payment to a foreign intermediary or in
accordance with Sec. 1.1441-5(c)(3)(iv) in the case of a payment to a
foreign partnership), and it has no actual knowledge or reason to know
that any of the information or certifications stated in the
documentation are incorrect. The documentation referred to in this
paragraph (b)(2)(vii) is documentation described in paragraph (d) or
(e) of this section upon which a withholding agent may rely in order to
treat the payment as a payment made to a payee or beneficial owner that
is a U.S. or a foreign person, and to ascertain the characteristics of
the payee or beneficial owner, as may be relevant to withholding or
reporting under chapter 3 of the Code and the regulations thereunder
(e.g., beneficial owner or intermediary, corporation or partnership).
For purposes of this paragraph (b)(2)(vii), documentation also includes
a withholding certificate described in paragraph (e)(3)(ii) of this
section from a person representing to be a qualified intermediary that
has assumed primary withholding responsibility, a withholding
certificate described in paragraph (e)(3)(v) of this section from a
person representing to be a U.S. branch described in paragraph
(b)(2)(iv)(A) of this section, a withholding certificate described in
Sec. 1.1441-5(c)(2)(iv) from a person representing to be a withholding
foreign partnership, and the agreement that the withholding agent has
in effect with an authorized foreign agent in accordance with
Sec. 1.1441-7(c)(2)(i). A withholding agent that is not required to
obtain documentation with respect to a payment is considered to lack
documentation for purposes of this paragraph (b)(2)(vii). For example,
a withholding agent paying U.S. source interest to a person that is an
exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii), is not
required to obtain documentation from that person in order to determine
whether an amount paid to that person is reportable under an applicable
information reporting provision under chapter 61 of the Code.
Therefore, the withholding agent may rely on the provisions of
paragraph (b)(3)(iii)(A) of this section to determine whether the
person is presumed to be a U.S. person (in which case, no withholding
is required under this section), or whether the person is presumed to
be a foreign person (in which case 30-percent withholding is required
under this section). See paragraph (b)(3)(v)(A) of this section for
special reliance rules in the case of a payment to a foreign
intermediary and Sec. 1.1441-5(d)(3) for special reliance rules in the
case of a payment to a foreign partnership.
(3) Presumptions regarding payee's status in the absence of
documentation--(i) General rules. A withholding agent that cannot
reliably associate a payment with documentation may rely on the
presumptions of this paragraph (b)(3) in order to determine the status
of the payee as a U.S. or a foreign person and the payee's other
relevant characteristics (e.g., as an owner or intermediary, as an
individual, trust, partnership, or corporation). The determination of
withholding and reporting requirements applicable to payments to a
person presumed to be a foreign person is governed only by the
provisions of chapter 3 of the Code and the regulations thereunder. For
the determination of withholding and reporting requirements applicable
to payments to a person presumed to be a U.S. person, see chapter 61 of
the Code, section 3402, 3405, or 3406, and the regulations under these
provisions. A presumption that a payee is a foreign payee is not a
presumption that the payee is a foreign beneficial owner. Therefore,
the provisions of this paragraph (b)(3) have no effect for purposes of
reducing the withholding rate if associating the payment with
documentation of foreign beneficial ownership is required as a
condition for such rate reduction. See paragraph (b)(3)(ix) of this
section for consequences to a withholding agent that fails to withhold
in accordance with the presumptions set forth in this paragraph (b)(3)
or if the withholding agent has actual knowledge or reason to know of
facts that are contrary to the presumptions set forth in this paragraph
(b)(3). See paragraph (b)(2)(vii) of this section for rules regarding
the extent which a withholding agent can reliably associate a payment
with documentation.
(ii) Presumptions of status as individual, corporation,
partnership, etc. A withholding agent that cannot reliably associate a
payment with documentation must presume that the payee is an
individual, a trust, or an estate, if the payee appears to be such
person (i.e., based on the payee's name or other indications). In the
absence of reliable indications that the payee is an individual,
estate, or trust, the withholding agent must presume that the payee is
a corporation or one of the persons enumerated under Sec. 1.6049-
4(c)(1)(ii) (B) through (Q) if it can be so treated under Sec. 1.6049-
4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec. 1.6049-
4(c)(1)(ii) (B) through (Q) without the need to furnish documentation.
If the withholding agent cannot treat a payee as a person described in
Sec. 1.6049-4(c)(1)(ii) (A)(1) through (Q), then the payee shall be
presumed to be a partnership. The fact that a payee is presumed to have
a certain status under the provisions of this paragraph (b)(3)(ii) does
not mean that it is excused from furnishing documentation, if
documentation is otherwise required in order to obtain a reduced rate
of withholding under this section. For example, if, for purposes of
this paragraph (b)(3)(ii), a payee is presumed to be a tax-exempt
organization based on Sec. 1.6049-4(c)(1)(ii)(B), the withholding agent
cannot rely on this presumption to reduce the rate of withholding on
payments to such person (if such person is also presumed to be a
foreign person under paragraph (b)(3)(iii)(A) of this section) because
a reduction in the rate of withholding for payments to a foreign tax-
exempt organization generally requires that a valid Form W-8 described
in Sec. 1.1441-9(b)(2) be furnished to the withholding agent.
(iii) Presumption of U.S. or foreign status. A payment that the
withholding agent cannot reliably associate with documentation is
presumed to be made to a U.S. person, except as otherwise provided in
this paragraph (b)(3)(iii), in paragraphs (b)(3) (iv) and (v) of this
section, or in Sec. 1.1441-5 (d) or (e).
(A) Payments to exempt recipients. If a withholding agent cannot
reliably associate a payment with documentation from the payee and the
[[Page 53428]]
payee is an exempt recipient (as determined under the provisions of
Sec. 1.6049-4(c)(1)(ii) in the case of interest, or under similar
provisions under chapter 61 of the Code applicable to the type of
payment involved, but not including a payee that the withholding agent
may treat as a foreign intermediary in accordance with paragraph
(b)(3)(v) of this section), the payee is presumed to be a foreign
person and not a U.S. person--
(1) If the withholding agent has actual knowledge of the payee's
employer identification number and that number begins with the two
digits ``98'';
(2) If the withholding agent's communications with the payee are
mailed to an address in a foreign country;
(3) If the name of the payee indicates that the entity is the type
of entity that is on the per se list of foreign corporations contained
in Sec. 301.7701-2(b)(8)(i) of this chapter; or
(4) If the payment is made outside the United States (as defined in
Sec. 1.6049-5(e)).
(B) Scholarships and grants. A payment representing taxable
scholarship or fellowship grant income that does not represent
compensation for services (but is not excluded from tax under section
117) and that a withholding agent that cannot reliably associate with
documentation is presumed to be made to a foreign person if the
withholding agent has a record that the payee has a U.S. visa that is
not an immigrant visa. See section 871(c) and Sec. 1.1441-4(c) for
applicable tax rate and withholding rules.
(C) Pensions, annuities, etc. A payment from a trust described in
section 401(a), an annuity plan described in section 401(a), an annuity
plan described in section 403(a), or a payment with respect to any
annuity, custodial account, or retirement income account described in
section 403(b) that a withholding agent cannot reliably associate with
documentation is presumed to be made to a U.S. person only if the
withholding agent has a record of a Social Security number for the
payee and relies on a mailing address described in the following
sentence. A mailing address is an address used for purposes of
information reporting or otherwise communicating with the payee that is
an address in the United States or in a foreign country with which the
United States has an income tax treaty in effect that provides that the
payee, if an individual resident in that country, would be entitled to
an exemption from U.S. tax on amounts described in this paragraph
(b)(3)(iii)(C). Any payment described in this paragraph (b)(3)(iii)(C)
that is not presumed made to a U.S. person is presumed to be made to a
foreign person. A withholding agent making a payment to a person
presumed to be a foreign person may not reduce the 30-percent amount of
withholding required on such payment unless it receives a withholding
certificate described in paragraph (e)(2)(i) of this section furnished
by the beneficial owner. For basis of reduction in the 30-percent rate,
see Sec. 1.1441-4(e) or Sec. 1.1441-6(b).
(D) Certain payments to offshore accounts. A payment that would be
subject to withholding under section 1441, 1442, or 1443 if made to a
foreign person and is exempt from backup withholding under section 3406
by reason of Sec. 31.3406(g)-1(e) of this chapter (relating to
exemption from backup withholding under section 3406 for certain
payments to offshore accounts) is presumed to be made to a foreign
payee.
(iv) Grace period in the case of indicia of a foreign payee. A
withholding agent may choose, in its discretion, to apply the
provisions of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period
for purposes of this paragraph (b)(3) (by substituting the term
withholding agent for the term payor) to amounts described in
Sec. 1.1441-6(b)(2)(ii) and to amounts covered by a Form 8233 described
in Sec. 1.1441-4(b)(2)(ii). Thus, for these amounts, a withholding
agent may, in its discretion, choose to treat an account holder as a
foreign person and withhold under chapter 3 of the Code (and the
regulations thereunder) while awaiting documentation. For purposes of
determining the rate of withholding under this section, the withholding
agent must withhold at the unreduced 30-percent rate at the time that
the amounts are credited to the account. However, a withholding agent
who can reliably associate the payment with a withholding certificate
that is otherwise valid within the meaning of the applicable provisions
except for the fact that it is transmitted by facsimile may rely on
that facsimile form for purposes of withholding at the claimed reduced
rate. For reporting of amounts credited both before and after the grace
period, see Sec. 1.1461-1(c)(7). The following adjustments shall be
made at the expiration of the grace period:
(A) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section and the account
holder is presumed to be a U.S. person who is not an exempt recipient,
then backup withholding applies to amounts credited to the account
after the expiration of the grace period only. Amounts credited to the
account during the grace period shall be treated as owned by a foreign
payee and adjustments must be made to correct any underwithholding on
such amounts in the manner described in Sec. 1.1461-2.
(B) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section and the account
holder is presumed to be a foreign person, or if documentation is
furnished that does not support the claimed rate reduction, then
adjustments must be made to correct the underwithholding on amounts
credited to the account during the grace period, based on adjustment
procedures described in Sec. 1.1461-2.
(v) Special rules applicable to payments to foreign
intermediaries--(A) Reliance on claim of status as foreign
intermediary. A withholding agent that can reliably associate a payment
with a withholding certificate described in paragraph (e)(3)(ii) or
(iii) of this section may treat the payment as made to a foreign
intermediary, as represented in the certificate. For this purpose, a
U.S. person's foreign branch that is a qualified intermediary defined
in paragraph (e)(5)(ii) of this section shall be treated as a foreign
intermediary. For purposes of this section, a payment that the
withholding agent can reliably associate with a withholding certificate
described in paragraph (e)(3)(ii) or (iii) of this section that would
be valid except for the fact that some or all of the withholding
certificates or other appropriate documentation required to be attached
are lacking or are unreliable or that information for allocating the
payment among the various persons for whom the intermediary is acting
is lacking or is unreliable shall nevertheless be treated as a payment
to a foreign intermediary and the rules of this paragraph (b)(3)(v)
shall apply accordingly. A payee that the withholding agent may not
reliably treat as a foreign intermediary under this paragraph
(b)(3)(v)(A) is presumed to be an owner whose status as an individual,
trust, estate, etc., must be determined in accordance with paragraph
(b)(3)(ii) of this section, to the extent relevant. In addition, such
payee is presumed to be a U.S. or a foreign payee based upon the
presumptions described in paragraph (b)(3)(iii) of this section. The
provisions of paragraphs (b)(3)(v) (B), (C), and (D) of this section
are not relevant to a withholding agent that can reliably associate a
payment with a withholding certificate from a person representing to be
a qualified intermediary that has assumed primary withholding
responsibility in accordance with paragraph (e)(5)(iv) of this section.
[[Page 53429]]
(B) Beneficial owner documentation is lacking or unreliable. Any
portion of a payment that the withholding agent may treat as made to a
foreign intermediary in accordance with paragraph (b)(3)(v)(A) of this
section but cannot reliably associate with a beneficial owner due to
the lack of a withholding certificate or other appropriate
documentation for that beneficial owner is presumed to be made to a
foreign payee for whom the foreign intermediary collects the payment
(see paragraph (b)(2)(v) of this section). For purposes of this
paragraph (b)(2)(v)(B), any payment that a foreign qualified
intermediary represents to be allocable to the category of assets
described in paragraph (e)(5)(v)(B)(3) of this section (i.e., assets
allocable to persons for whom the qualified intermediary does not hold
documentation as specified under its agreement with the IRS) is treated
as a payment that the withholding agent cannot reliably associate with
beneficial owners. As a result, any payment allocable to such category
of assets is presumed to be made to an unidentified foreign payee.
Under paragraph (b)(1) of this section, a payment to a foreign payee is
subject to withholding at a 30-percent rate.
(C) Information regarding allocation of payment is lacking or
unreliable. If a withholding agent can reliably associate a payment
with a group of beneficial owners or payees but lacks reliable
information to determine how much of the payment is allocable to one or
more of the beneficial owners or payees in the group (because, for
example, the statement described in paragraph (e)(3)(iv) of this
section has not been furnished), the payment, to the extent it cannot
reliably be allocated, is presumed to be allocable entirely to the
beneficial owner or payee in the group with the highest applicable
withholding rate or, if the rates are equal, to the beneficial owner or
payee in the group with the highest U.S. tax liability, as the
withholding agent shall estimate, based on its knowledge and available
information. If a withholding certificate attached to an intermediary
certificate is another intermediary certificate or a certificate from a
foreign partnership described in Sec. 1.1441-5(c)(3)(iii), the rules of
this paragraph (b)(3)(v)(C) apply by treating the share of the payment
allocable to the other intermediary or to the foreign partnership as if
the payment were made directly to the other intermediary or to the
foreign partnership.
(D) Certification that the foreign intermediary has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable. If the certification
required under paragraph (e)(3)(iii)(D) of this section (that the
attached withholding certificates and other appropriate documentation
represent all of the persons to whom the intermediary withholding
certificate relates) is lacking or is unreliable and, as a result, the
withholding agent cannot reliably determine how much of the payment is
allocable to each of the persons or group of persons for which the
withholding agent holds a withholding certificate or other appropriate
documentation, then none of the payment can reliably be associated with
any one person and the entire payment is presumed to be made to an
unidentified foreign payee for whom the intermediary collects the
payment and from which a 30-percent amount must be withheld in
accordance with paragraph (b)(1) of this section.
(vi) U.S. branches and foreign flow-through entities. The rules of
paragraphs (b)(3)(v) (B), (C), and (D) of this section shall apply to
payments to a U.S. branch described in paragraph (b)(2)(iv)(A) of this
section that has agreed to assume withholding responsibility in the
same manner that they apply to payments to a foreign intermediary. See
Sec. 1.1441-5(d) for similar rules in the case of payments to foreign
partnerships. See Sec. 1.1441-5(e) for similar rules in the case of
payments to foreign trusts or foreign estates.
(vii) Joint payees. A payment made to joint payees for whom the
withholding agent cannot reliably associate documentation for all joint
payees or can reliably associate the payment with a Form W-9 furnished
in accordance with the procedures described in Secs. 31.3406(d)-1
through 31.3406(d)-5 of this chapter from one of the joint payees is
presumed to be made to U.S. persons. For purposes of applying this
paragraph (b)(3), the grace period rules in paragraph (b)(3)(iv) of
this section shall apply only if each payee qualifies for the
conditions described in paragraph (b)(3)(iv) of this section. However,
as provided in paragraph (b)(3)(iii)(D) of this section, a payment of
an amount that would be subject to withholding under section 1441,
1442, or 1443 if paid to a foreign person and is exempt from the
application of the provisions of section 3406 by reason of
Sec. 31.3406(g)-1(e) of this chapter (relating to exemption from backup
withholding under section 3406 of the Code for certain payments made
with respect to offshore accounts), is presumed to be made to foreign
persons.
(viii) Rebuttal of presumptions. A payee or beneficial owner may
rebut the presumptions described in this paragraph (b)(3) by providing
reliable documentation to the withholding agent or, if applicable, to
the IRS.
(ix) Effect of reliance on presumptions and of actual knowledge or
reason to know otherwise--(A) General rule. Except as otherwise
provided in paragraph (b)(3)(ix)(B) of this section, a withholding
agent that withholds on a payment under section 3402, 3405 or 3406 in
accordance with the presumptions set forth in this paragraph (b)(3)
shall not be liable for withholding under this section even it is later
established that the beneficial owner of the payment is, in fact, a
foreign person. Similarly, a withholding agent that withholds on a
payment under this section in accordance with the presumptions set
forth in this paragraph (b)(3) shall not be liable for withholding
under section 3402 or 3405 or for backup withholding under section 3406
even if it is later established that the payee or beneficial owner is,
in fact, a U.S. person. A withholding agent that, instead of relying on
the presumptions described in this paragraph (b)(3), relies on its own
actual knowledge to withhold a lesser amount, not withhold, or not
report a payment, even though reporting of the payment or withholding a
greater amount would be required if the withholding agent relied on the
presumptions described in this paragraph (b)(3) shall be liable for
tax, interest, and penalties to the extent provided under section 1461
and the regulations under that section. See paragraph (b)(7) of this
section for provisions regarding such liability if the withholding
agent fails to withhold in accordance with the presumptions described
in this paragraph (b)(3).
(B) Actual knowledge or reason to know that amount of withholding
is greater than is required under the presumptions or that reporting of
the payment is required. Notwithstanding the provisions of paragraph
(b)(3)(ix)(A) of this section, a withholding agent may not rely on the
presumptions described in this paragraph (b)(3) to the extent it has
actual knowledge or reason to know that the status or characteristics
of the payee or of the beneficial owner are other than what is presumed
under this paragraph (b)(3) and, if based on such knowledge or reason
to know, it should withhold (under this section or another withholding
provision of the Code) an amount greater than would be the case if it
relied on the presumptions described in this paragraph (b)(3) or it
should report (under this section or under another provision of the
Code) an amount that would not otherwise be reportable if it relied on
the presumptions described in this
[[Page 53430]]
paragraph (b)(3). In such a case, the withholding agent must rely on
its actual knowledge or reason to know rather than on the presumptions
set forth in this paragraph (b)(3). Failure to do so and, as a result,
failure to withhold the higher amount or to report the payment, shall
result in liability for tax, interest, and penalties to the extent
provided under sections 1461 and 1463 and the regulations under those
sections.
(x) Examples. The provisions of this paragraph (b)(3) are
illustrated by the following examples:
Example 1. A withholding agent, W, makes a payment of U.S.
source dividends to person X, Inc. at an address outside the United
States. W cannot reliably associate the payment to X with
documentation. Under Secs. 1.6042-3(b)(1)(vii) and 1.6049-
4(c)(1)(ii)(A)(1), W may treat X as a corporation. Thus, under the
presumptions described in paragraph (b)(3)(iii) of this section, W
must presume that X is a foreign person (because the payment is made
outside the United States). However, W knows that X is a U.S. person
who is an exempt recipient. W may not rely on its actual knowledge
to not withhold under this section. If W s knowledge is, in fact,
incorrect, W would be liable for tax, interest, and, if applicable,
penalties, under section 1461. W would be permitted to reduce or
eliminate its liability for the tax by establishing, in accordance
with paragraph (b)(7) of this section, that the tax is not due or
has been satisfied. If W s actual knowledge is, in fact, correct, W
may nevertheless be liable for tax, interest, or penalties under
section 1461 for the amount that W should have withheld based upon
the presumptions. W would be permitted to reduce or eliminate its
liability for the tax by establishing, in accordance with paragraph
(b)(7) of this section, that its actual knowledge was, in fact,
correct and that no tax or a lesser amount of tax was due.
Example 2. A withholding agent, W, makes a payment of U.S.
source dividends to Y who does not qualify as an exempt recipient
under Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii). W cannot
reliably associate the payment to Y with documentation. Under the
presumptions described in paragraph (b)(3)(iii) of this section, W
must presume that Y is a U.S. person who is not an exempt recipient
for purposes of section 6042. However, W knows that Y is a foreign
person. W may not rely on its actual knowledge to withhold under
this section rather than backup withhold under section 3406. If W s
knowledge is, in fact, incorrect, W would be liable for tax,
interest, and, if applicable, penalties, under section 3403. If W s
actual knowledge is, in fact, correct, W may nevertheless be liable
for tax, interest, or penalties under section 3403 for the amount
that W should have withheld based upon the presumptions. Paragraph
(b)(7) of this section does not apply to provide relief from
liability under section 3403.
Example 3. A withholding agent, W, makes a payment of U.S.
source dividends to X, Inc. W cannot reliably associate the payment
to X, Inc. with documentation. X, nc. presents none of the indicia
of foreign status described in paragraph (b)(3)(iii)(A) of this
section, but W has actual knowledge that X, Inc. is a foreign
corporation. W may treat X, Inc. as an exempt recipient under
Sec. 1.6042-3(b)(1)(vii). Because there are no indicia of foreign
status, W would, absent actual knowledge or reason to know
otherwise, be permitted to treat X, Inc. as a domestic corporation
in accordance with the presumptions of paragraph (b)(3)(iii) of this
section. However, under paragraph (b)(3)(ix)(B) of this section, W
may not rely on the presumption of U.S. status since reliance on its
actual knowledge requires that it withhold an amount greater than
would be the case under the presumptions.
Example 4. A withholding agent, W, is a plan administrator who
makes pension payments to person X with a mailing address in a
foreign country with which the United States has an income tax
treaty in effect. Under that treaty, the type of pension income paid
to X is taxable solely in the country of residence. The plan
administrator has a record of X's U.S. social security number. W has
no actual knowledge or reason to know that X is a foreign person. W
may rely on the presumption of paragraph (b)(3)(iii)(C) of this
section in order to treat X as a U.S. person. Therefore, any
withholding and reporting requirements for the payment are governed
by the provisions of section 3405 and the regulations under that
section.
(4) List of exemptions from, or reduced rates of, withholding under
chapter 3 of the Code. A withholding agent that has determined that the
payee is a foreign person for purposes of paragraph (b)(1) of this
section must determine whether the payee is entitled to a reduced rate
of withholding under section 1441, 1442, or 1443. This paragraph (b)(4)
identifies items for which a reduction in the rate of withholding may
apply and whether the rate reduction is conditioned upon documentation
being furnished to the withholding agent. Documentation required under
this paragraph (b)(4) is documentation that a withholding agent must be
able to associate with a payment upon which it can rely to treat the
payment as made to a foreign person that is the beneficial owner of the
payment in accordance with paragraph (e)(1)(ii) of this section. This
paragraph (b)(4) also cross-references other sections of the Code and
applicable regulations in which some of these exceptions, exemptions,
or reductions are further explained. See, for example, paragraph
(b)(4)(viii) of this section, dealing with effectively connected
income, that cross-references Sec. 1.1441-4(a); see paragraph
(b)(4)(xv) of this section, dealing with exemptions from, or reductions
of, withholding under an income tax treaty, that cross-references
Sec. 1.1441-6. This paragraph (b)(4) is not an exclusive list of items
to which a reduction of the rate of withholding may apply and, thus,
does not preclude an exemption from, or reduction in, the rate of
withholding that may otherwise be allowed under the regulations under
the provisions of chapter 3 of the Code for a particular item of income
identified in this paragraph (b)(4).
(i) Portfolio interest described in section 871(h) or 881(c) and
substitute interest payments described in Sec. 1.871-7(b)(2)(i) or
1.881-2(b)(2) are exempt from withholding under section 1441(a). See
Sec. 1.871-14 for regulations regarding portfolio interest and section
1441(c)(9) for exemption from withholding. Documentation establishing
foreign status is required for interest on an obligation in registered
form to qualify as portfolio interest. See section 871(h)(2)(B)(ii) and
Sec. 1.871-14(c)(1)(ii)(C). For special documentation rules regarding
foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2), see Sec. 1.871-14(e) (3) and (4) and, in particular,
Sec. 1.871-14(e)(4)(i)(A) and (ii)(A) regarding the time when the
withholding agent must receive the documentation. The documentation
furnished for purposes of qualifying interest as portfolio interest
serves as the basis for the withholding exemption for purposes of this
section and for purposes of establishing foreign status for purposes of
section 6049. See Sec. 1.6049-5(b)(8). Documentation establishing
foreign status is not required for qualifying interest on an obligation
in bearer form described in Sec. 1.871-14(b)(1) as portfolio interest.
However, in certain cases, documentation for portfolio interest on a
bearer obligation may have to be furnished in order to establish
foreign status for purposes of the information reporting provisions of
section 6049 and backup withholding under section 3406. See
Sec. 1.6049-5(b)(7).
(ii) Bank deposit interest and similar types of deposit interest
(including original issue discount) described in section 871(i)(2)(A)
or 881(d) that are from sources within the United States are exempt
from withholding under section 1441(a). See section 1441(c)(10).
Documentation establishing foreign status is not required for purposes
of this withholding exemption but may have to be furnished for purposes
of the information reporting provisions of section 6049 and backup
withholding under section 3406. See Sec. 1.6049-5(d)(3)(iii) for
exceptions to the foreign payee and exempt recipient rules regarding
this type of income. See also Sec. 1.6049-5(b)(11) for applicable
documentation exemptions for certain
[[Page 53431]]
bank deposit interest paid on obligations in bearer form.
(iii) Bank deposit interest (including original issue discount)
described in section 861(a)(1)(B) is exempt from withholding under
sections 1441(a) as income that is not from U.S. sources. Documentation
establishing foreign status is not required for purposes of this
withholding exemption but may have to be furnished for purposes of the
information reporting provisions of section 6049 and backup withholding
under section 3406. Reporting requirements for payments of such
interest are governed by section 6049 and the regulations under that
section. See Sec. 1.6049-5(b)(12) and alternative documentation rules
under Sec. 1.6049-5(c)(4).
(iv) Interest or original issue discount from sources within the
United States on certain short-term obligations described in section
871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections
1441(a). Documentation establishing foreign status is not required for
purposes of this withholding exemption but may have to be furnished for
purposes of the information reporting provisions of section 6049 and
backup withholding under section 3406. See Sec. 1.6049-5(b)(12) for
applicable documentation for establishing foreign status and
Sec. 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt
recipient rules regarding this type of income. See also Sec. 1.6049-
5(b)(10) for applicable documentation exemptions for certain
obligations in bearer form.
(v) Income from sources without the United States is exempt from
withholding under sections 1441(a). Documentation establishing foreign
status is not required for purposes of this withholding exemption but
may have to be furnished for purposes of the information reporting
provisions of section 6049 or other applicable provisions of chapter 61
of the Code and backup withholding under section 3406. See, for
example, Sec. 1.6049-5(b) (6) and (12) and alternative documentation
rules under Sec. 1.6049-5(c)(4). See also paragraph (b)(5) of this
section for cross references to other applicable provisions of the
regulations under chapter 61 of the Code.
(vi) Distributions from certain domestic corporations described in
section 871(i)(2)(B) or 881(d) are exempt from withholding under
section 1441(a). See section 1441(c)(10). Documentation establishing
foreign status is not required for purposes of this withholding
exemption but may have to be furnished for purposes of the information
reporting provisions of section 6042 and backup withholding under
section 3406. See Sec. 1.6042-3(b)(1) (iii) through (vi).
(vii) Dividends paid by certain foreign corporations that are
treated as income from sources within the United States by reason of
section 861(a)(2)(B) are exempt from withholding under section
884(e)(3) to the extent that the distributions are paid out of earnings
and profits in any taxable year that the corporation was subject to
branch profits tax for that year. Documentation establishing foreign
status is not required for purposes of this withholding exemption but
may have to be furnished for purposes of the information reporting
provisions of section 6042 and backup withholding under section 3406.
See Sec. 1.6042-3(b)(1) (iii) through (vii).
(viii) Certain income that is effectively connected with the
conduct of a U.S. trade or business is exempt from withholding under
section 1441(a). See section 1441(c)(1). Documentation establishing
foreign status and status of the income as effectively connected must
be furnished for purposes of this withholding exemption to the extent
required under the provisions of Sec. 1.1441-4(a). Documentation
furnished for this purpose also serves as documentation establishing
foreign status for purposes of applicable information reporting
provisions under chapter 61 of the Code and for backup withholding
under section 3406. See, for example, Sec. 1.6041-4(a)(1).
(ix) Certain income with respect to compensation for personal
services of an individual that are performed in the United States is
exempt from withholding under section 1441(a). See section 1441(c)(4)
and Sec. 1.1441-4(b). However, such income may be subject to
withholding as wages under section 3402. Documentation establishing
foreign status must be furnished for purposes of any withholding
exemption or reduction to the extent required under Sec. 1.1441-4(b) or
31.3401(a)(6)-1 (e) and (f) of this chapter. Documentation furnished
for this purpose also serves as documentation establishing foreign
status for purposes of information reporting under section 6041. See
Sec. 1.6041-4(a)(1).
(x) Amounts described in section 871(f) that are received as
annuities from certain qualified plans are exempt from withholding
under section 1441(a). See section 1441(c)(7). Documentation
establishing foreign status must be furnished for purposes of the
withholding exemption as required under Sec. 1.1441-4(d). Documentation
furnished for this purpose also serves as documentation establishing
foreign status for purposes of information reporting under section
6041. See Sec. 1.6041-4(a)(1).
(xi) Payments to a foreign government (including a foreign central
bank of issue) that are excludable from gross income under section
892(a) are exempt from withholding under section 1442. See Sec. 1.1441-
8(b). Documentation establishing status as a foreign government is
required for purposes of this withholding exemption. Payments to a
foreign government are exempt from information reporting under chapter
61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(F)).
(xii) Payments of certain interest income to a foreign central bank
of issue or the Bank for International Settlements that are exempt from
tax under section 895 are exempt from withholding under section 1442.
Documentation establishing eligibility for such exemption is required
to the extent provided in Sec. 1.1441-8(c)(1). Payments to a foreign
central bank of issue or to the Bank for International Settlements are
exempt from information reporting under chapter 61 of the Code (see
Sec. 1.6049-4(c)(1)(ii) (H) and (M)).
(xiii) Amounts derived by a foreign central bank of issue from
bankers' acceptances described in section 871(i)(2)(C) or 881(d) are
exempt from tax and, therefore, from withholding. See section
1441(c)(10). Documentation establishing foreign status is not required
for purposes of this withholding exemption if the name of the payee and
other facts surrounding the payment reasonably indicate that the
beneficial owner of the payment is a foreign central bank of issue as
defined in Sec. 1.861-2(b)(4). See Sec. 1.1441-8(c)(2) for withholding
procedures. See also Secs. 1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) for
a similar exemption from information reporting.
(xiv) Payments to an international organization from investments in
the United States of stocks, bonds, or other domestic securities or
from interest on deposits in banks in the United States of funds
belonging to such international organization are exempt from tax under
section 892(b) and, thus, from withholding. Documentation establishing
status as an international organization is not required if the name of
the payee and other facts surrounding the payment reasonably indicate
that the beneficial owner of the payment is an international
organization within the meaning of section 7701(a)(18). See
Sec. 1.1441-8(d). Payments to an international organization are exempt
from information reporting under chapter 61 of the Code (see
Sec. 1.6049-4(c)(1)(ii)(G)).
[[Page 53432]]
(xv) Amounts may be exempt from, or subject to a reduced rate of,
withholding under an income tax treaty. Documentation establishing
eligibility for benefits under an income tax treaty is required for
this purpose as provided under Secs. 1.1441-6. Documentation furnished
for this purpose also serves as documentation establishing foreign
status for purposes of applicable information reporting provisions
under chapter 61 of the Code and for backup withholding under section
3406. See, for example, Sec. 1.6041-4(a)(1).
(xvi) Amounts of scholarships and grants paid to certain exchange
or training program participants that do not represent compensation for
services but are not excluded from tax under section 117 are subject to
a reduced rate of withholding of 14-percent under section 1441(b).
Documentation establishing foreign status is required for purposes of
this reduction in rate as provided under Sec. 1.1441-4(c). This income
is not subject to information reporting under chapter 61 of the Code
nor to backup withholding under section 3406. The compensatory portion
of a scholarship or grant is reportable as wage income. See
Sec. 1.6041-3(o).
(xvii) Amounts paid to a foreign organization described in section
501(c) are exempt from withholding under section 1441 to the extent
that the amounts are not income includible under section 512 in
computing the organization's unrelated business taxable income and are
not subject to the tax imposed by section 4948(a). Documentation
establishing status as a tax-exempt organization is required for
purposes of this exemption to the extent provided in Sec. 1.1441-9.
Amounts includible under section 512 in computing the organization's
unrelated business taxable income are subject to withholding to the
extent provided in section 1443(a) and Sec. 1.1443-1(a). Gross
investment income (as defined in section 4940(c)(2)) of a private
foundation is subject to withholding at a 4-percent rate to the extent
provided in section 1443(b) and Sec. 1.1443-1(b). Payments to a tax-
exempt organization are exempt from information reporting under chapter
61 of the Code and the regulations thereunder (see Sec. 1.6049-
4(c)(1)(ii)(B)(1)).
(xviii) Per diem amounts for subsistence paid by the U.S.
government to a nonresident alien individual who is engaged in any
program of training in the United States under the Mutual Security Act
of 1954 are exempt from withholding under section 1441(a). See section
1441(c)(6). Documentation of foreign status is required under
Sec. 1.1441-4(e) for purposes of establishing eligibility for this
exemption. See Sec. 1.6041-3(p).
(xix) Interest with respect to tax-free covenant bonds issued prior
to 1934 is subject to special withholding procedures set forth in
Sec. 1.1461-1 in effect prior to January 1, 1999 (see Sec. 1.1461-1 as
contained in 26 CFR part 1, revised April 1, 1997).
(xx) Income from certain gambling winnings of a nonresident alien
individual is exempt from tax under section 871(j) and from withholding
under section 1441(a). See section 1441(c)(11). Documentation
establishing foreign status is not required for purposes of this
exemption but may have to be furnished for purposes of the information
reporting provisions of section 6041 and backup withholding under
section 3406. See Secs. 1.6041-1 and 1.6041-4(a)(1).
(xxi) Any payments not otherwise mentioned in this paragraph (b)(4)
shall be subject to withholding at the rate of 30-percent if it is an
amount subject to withholding (as defined in Sec. 1.1441-2(a)) unless
and to the extent the IRS may otherwise prescribe in published guidance
(see Sec. 601.601(d)(2) of this chapter) or unless otherwise provided
in regulations under chapter 3 of the Code.
(5) Establishing foreign status under applicable provisions of
chapter 61 of the Code. This paragraph (b)(5) identifies relevant
provisions of the regulations under chapter 61 of the Code that exempt
payments from information reporting, and therefore, from backup
withholding under section 3406, based on the payee's status as a
foreign person. Many of these exemptions require that the payee's
foreign status be established in order for the exemption to apply. The
regulations under applicable provisions of chapter 61 of the Code
generally provide that the documentation described in this section may
be relied upon for purposes of determining foreign status.
(i) Payments to a foreign person that are governed by section 6041
(dealing with certain trade or business income) are exempt from
information reporting under Sec. 1.6041-4(a).
(ii) Payments to a foreign person that are governed by section
6041A (dealing with remuneration for services and certain sales) are
exempt from information reporting under Sec. 1.6041A-1(d)(3).
(iii) Payments to a foreign person that are governed by section
6042 (dealing with dividends) are exempt from information reporting
under Sec. 1.6042-3(b)(1) (iii) through (vi).
(iv) Payments to a foreign person that are governed by section 6044
(dealing with patronage dividends) are exempt from information
reporting under Sec. 1.6044-3(c)(1).
(v) Payments to a foreign person that are governed by section 6045
(dealing with broker proceeds) are exempt from information reporting
under Sec. 1.6045-1(g).
(vi) Payments to a foreign person that are governed by section 6049
(dealing with interest) to a foreign person are exempt from information
reporting under Sec. 1.6049-5(b) (6) through (15).
(vii) Payments to a foreign person that are governed by section
6050N (dealing with royalties) are exempt from information reporting
under Sec. 1.6050N-1(c).
(viii) Payments to a foreign person that are governed by section
6050P (dealing with income from cancellation of debt) are exempt from
information reporting under section 6050P or the regulations under that
section except to the extent provided in Notice 96-61 (I.R.B. 1996-49);
see also Sec. 601.601(b)(2) of this chapter.
(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches. A foreign intermediary described in paragraph
(e)(3)(i) of this section or a U.S. branch described in paragraph
(b)(2)(iv) of this section that receives an amount subject to
withholding (as defined in Sec. 1.1441-2(a)) shall be deemed to have
satisfied any obligation it has under chapter 3 of the Code and the
regulations thereunder to withhold and report the amount when it, in
turn, pays such amount to another person (whether or not the beneficial
owner) to the extent that the payment is associated with a valid
withholding certificate described in paragraph (e)(3) (ii), (iii), or
(v) of this section that it has furnished to another withholding agent
and the intermediary does not know and has no reason to know that the
correct amount has not been withheld under chapter 3 of the Code and
the regulations thereunder. See Sec. 1.1441-5(c)(3)(v) for a similar
rule for payments by certain foreign partnerships.
(7) Liability for failure to obtain documentation timely or to act
in accordance with applicable presumptions--(i) General rule. A
withholding agent that cannot reliably associate a payment with
documentation on the date of payment and that does not withhold under
this section, or withholds at less than the 30-percent rate prescribed
under section 1441(a) and paragraph (b)(1) of this section, is liable
under section 1461 for the tax required to be withheld under chapter 3
of the Code and the regulations thereunder, without the benefit of a
reduced rate unless--
[[Page 53433]]
(A) The withholding agent has appropriately relied on the
presumptions described in paragraph (b)(3) of this section (including
the grace period described in paragraph (b)(3)(iv) of this section) in
order to treat the payee as a U.S. person or, if applicable, on the
presumptions described in Sec. 1.1441-4(a) (2)(i) or (3) to treat the
payment as effectively connected income; or
(B) The withholding agent can demonstrate to the satisfaction of
the district director or the Assistant Commissioner (International)
that the proper amount of tax, if any, was in fact paid to the IRS; or
(C) No documentation is required under section 1441 or this section
in order for a reduced rate of withholding to apply.
(ii) Proof that tax liability has been satisfied. Proof of payment
of tax may be established for purposes of paragraph (b)(7)(i)(B) of
this section on the basis of a Form 4669 (or such other form as the IRS
may prescribe in published guidance (see Sec. 601.601(d)(2) of this
chapter)), establishing the amount of tax, if any, actually paid by or
for the beneficial owner on the income. Proof that a reduced rate of
withholding was, in fact, appropriate under the provisions of chapter 3
of the Code and the regulations thereunder may also be established
after the date of payment by the withholding agent on the basis of a
valid withholding certificate or other appropriate documentation
furnished after that date. However, in the case of a withholding
certificate or other appropriate documentation received after the date
of payment (or after the grace period specified in paragraph (b)(3)(iv)
of this section), the district director or the Assistant Commissioner
(International) may require additional proof if it is determined that
the delays in obtaining the withholding certificate affect its
reliability.
(iii) Liability for interest and penalties. A withholding agent
that has failed to withhold other than based on appropriate reliance on
the presumptions described in paragraph (b)(3) of this section or in
Sec. 1.1441-4(a) (2)(i) or (3) is not relieved from liability for
interest under section 6601. Such liability exists even if there is no
underlying tax liability due. The interest on the amount that should
have been withheld shall be imposed as prescribed under section 6601
beginning on the last date for paying the tax due under section 1461
(which, under section 6601, is the due date for filing the withholding
agent's return of tax). The interest shall stop accruing on the earlier
of the date that the required withholding certificate or other
documentation is provided to the withholding agent and to the extent of
the amount of tax that is determined not to be due based on
documentation provided, or the date, and to the extent, that the unpaid
tax liability under section 871, 881 or under section 1461 is
satisfied. Further, in the event that a tax liability is assessed
against the beneficial owner under section 871, 881, or 882 and
interest under section 6601(a) is assessed against, and collected from,
the beneficial owner, the interest charge imposed on the withholding
agent shall be abated to that extent so as to avoid the imposition of a
double interest charge. However, the withholding agent is not relieved
of any applicable penalties. See section 1464.
(iv) Special effective date. See paragraph (f)(2)(ii) of this
section for the special effective date applicable to this paragraph
(b)(7).
(v) Examples. The provisions of paragraph (b)(7) of this section
are illustrated by the following examples:
Example 1. On June 15, 1999, a withholding agent pays U.S.
source interest on an obligation in registered form (issued after
July 18, 1984) to a foreign corporation that it cannot reliably
associate with a Form W-8 or other appropriate documentation upon
which to rely to treat the beneficial owner as a foreign person. The
withholding agent does not withhold from the payment. On September
30, 2001, the withholding agent receives from the foreign
corporation a valid Form W-8 described in paragraph (e)(2)(ii) of
this section. Thus, the interest qualifies as portfolio interest
retroactively to June 15, 1999 (the date of payment). See
Sec. 1.871-14(c)(3). The foreign corporation does not file a U.S.
federal income tax return and does not pay the tax owed. The
withholding agent is not liable under section 1461 for the 30-
percent tax on the interest income because the receipt of the Form
W-8 exempts the interest from tax for purposes of sections 881(a)
and 1461. The withholding agent, however, is liable for interest on
the amount of withholding that should have been deducted from the
payment on June 15, 1999 and deposited. Under paragraph (b)(7)(iii)
of this section, the period during which interest may be assessed
against the withholding agent runs from March 15, 2000 (the due date
for the Form 1042 relating to the payment) until September 30, 2001
(i.e., the date that appropriate documentation is furnished to the
withholding agent).
Example 2. On June 15, 1999, a withholding agent pays U.S.
source dividends to a foreign corporation that it cannot reliably
associate with a Form W-8 or other appropriate documentation upon
which to rely to treat the beneficial owner as a foreign person. The
withholding agent does not withhold from the payment. On September
30, 2001, the withholding agent receives from the foreign
corporation a valid Form W-8 described in paragraph (e)(2)(ii) of
this section claiming a reduced 15-percent rate of withholding under
a U.S. income tax treaty. The dividend qualifies for the reduced
treaty rate retroactively to June 15, 1999 (the date of payment).
The foreign corporation does not file a U.S. federal income tax
return and does not pay the tax owed. Under section 1461, the
withholding agent is liable only for a 15-percent tax on the
dividend income because the receipt of the Form W-8 allows the tax
rate to be reduced for purposes of sections 881(a) and 1461 from 30
percent to 15 percent. The withholding agent, however, is liable for
interest on the full 30-percent amount that should have been
deducted and withheld from the payment on June 15, 1999, and
deposited, over a period running from March 15, 2000 (the due date
for the Form 1042 relating to the payment) until September 30, 2001
(the date that the appropriate documentation is furnished to the
withholding agent supporting a reduction in rate under a tax
treaty). Additional interest may be assessed relating to the
outstanding 15-percent tax liability (i.e., the portion of the 30-
percent total tax liability that is not reduced under the treaty).
Such additional interest runs from March 15, 2000, until such date
as that 15-percent tax liability is satisfied by the withholding
agent or the taxpayer (subject to abatement in order to avoid a
double interest charge).
(8) Adjustments, refunds, or credits of overwithheld amounts. If
the amount withheld under section 1441, 1442, or 1443 is greater than
the tax due by the withholding agent or the taxpayer, adjustments may
be made in accordance with the procedures described in Sec. 1.1461-
2(a). Alternatively, refunds or credits may be claimed in accordance
with the procedures described in Sec. 1.1464-1, relating to refunds or
credits claimed by the beneficial owner, or Sec. 1.6414-1, relating to
refunds or credits claimed by the withholding agent. If an amount was
withheld under section 3406 or is subsequently determined to have been
paid to a foreign person, see paragraph (b)(3)(vii) of this section and
Sec. 31.6413(a)-3(a)(1) of this chapter.
(9) Payments to joint owners. A payment to joint owners that
requires documentation in order to reduce the rate of withholding under
chapter 3 of the Code and the regulations thereunder does not qualify
for such reduced rate unless the withholding agent can reliably
associate the payment with documentation from each owner.
Notwithstanding the preceding sentence, a payment to joint owners
qualifies as a payment exempt from withholding under this section if
any one of the owners provides a certificate of U.S. status on a Form
W-9 in accordance with paragraph (d) (2) or (3) of this section or the
withholding agent can associate the payment with a withholding
certificate upon which it can rely to treat the payment as made
[[Page 53434]]
to a U.S. beneficial owner under paragraph (d)(4) of this section. See
Sec. 31.3406(h)-2(a)(3)(i)(B) of this chapter.
(c) Definitions--(1) Withholding. The term withholding means the
deduction and withholding of tax at the applicable rate from the
payment.
(2) Foreign and U.S. person. The term foreign person means a
nonresident alien individual, a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, and any other person
that is not a U.S. person described in the next sentence. For purposes
of the regulations under chapter 3 of the Code, the term foreign person
also means, with respect to a payment by a withholding agent, a foreign
branch of a U.S. person that furnishes an intermediary withholding
certificate described in paragraph (e)(3)(ii) of this section. A U.S.
person is a person described in section 7701(a)(30), the U.S.
government (including an agency or instrumentality thereof), a State
(including an agency or instrumentality thereof), or the District of
Columbia (including an agency or instrumentality thereof).
(3) Individual--(i) Alien individual. The term alien individual
means an individual who is not a citizen or a national of the United
States. See Sec. 1.1-1(c).
(ii) Nonresident alien individual. The term nonresident alien
individual means a person described in section 7701(b)(1)(B), an alien
individual who is a resident of a foreign country under the residence
article of an income tax treaty and Sec. 301.7701(b)-7(a)(1) of this
chapter, or an alien individual who is a resident of Puerto Rico, Guam,
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands,
or American Samoa as determined under Sec. 301.7701(b)-1(d) of this
chapter. An alien individual who has made an election under section
6013 (g) or (h) to be treated as a resident of the United States is
nevertheless treated as a nonresident alien individual for purposes of
withholding under chapter 3 of the Code and the regulations thereunder.
(4) Certain foreign corporations. For purposes of this section, a
corporation created or organized in Guam, the Commonwealth of Northern
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not
treated as a foreign corporation if the requirements of sections
881(b)(1) (A), (B), and (C) are met for such corporation. Further, a
payment made to a foreign government or an international organization
shall be treated as a payment made to a foreign corporation for
purposes of withholding under chapter 3 of the Code and the regulations
thereunder.
(5) Financial institution and foreign financial institution. For
purposes of the regulations under chapter 3 of the Code, the term
financial institution means a person described in Sec. 1.165-
12(c)(1)(iv) (not including a person providing pension or other similar
benefits or a regulated investment company or other mutual fund, unless
otherwise indicated) and the term foreign financial institution means a
financial institution that is a foreign person, as defined in paragraph
(c)(2) of this section.
(6) Beneficial owner--(i) General rule. In the case of a payment of
income, the term beneficial owner means the person who is the owner of
the income for tax purposes and who beneficially owns that income. A
person shall be treated as the owner of the income to the extent that
it is required under U.S. tax principles to include the amount paid in
gross income under section 61 (determined without regard to an
exclusion or exemption from gross income under the Code). Beneficial
ownership of income is determined under the provisions of section
7701(l) and the regulations under that section and any other applicable
general U.S. tax principles, including principles governing the
determination of whether a transaction is a conduit transaction. Thus,
a person receiving income in a capacity as a nominee, agent, custodian
for another person is not the beneficial owner of the income. In the
case of a scholarship, the student receiving the scholarship is the
beneficial owner of that scholarship. In the case of a payment of an
amount that is not income, the beneficial owner determination shall be
made under this paragraph (c)(6) as if the amount was income.
(ii) Special rules for flow-through entities and arrangements--(A)
General rule. The beneficial owners of income paid to a partnership or
other flow-through arrangements described in paragraph (c)(6)(ii)(C) of
this section are those persons who, under U.S. tax principles, are the
owners of the income for tax purposes in their separate or individual
capacities and who beneficially own that income. For example, a
partnership (first tier) that is a partner in another partnership
(second tier) is not the beneficial owner of income paid to the second
tier partnership since the first tier partnership is not the owner of
the income under U.S. tax principles. Rather, the partners of the first
tier partnership are the beneficial owners (to the extent they are not
themselves partnerships and are not conduits within the meaning of
section 7701(l) and the regulations under that section). See
Sec. 1.1441-5(b) for applicable withholding procedures for payments to
a domestic partnership. See also Sec. 1.1441-5(c)(3)(ii) for applicable
withholding procedures for payments to a foreign partnership where one
of the partners (at any level in the chain of tiers) is a domestic
partnership. See Sec. 1.1441-6(b)(4) for rules governing the
eligibility of a payment to an entity or other arrangement for a
reduced rate of withholding under an income tax treaty.
(B) Trusts and estates. The provisions of paragraphs (c)(6)(i) and
(ii)(A) of this section shall not apply to a trust or an estate,
whether domestic or foreign. The beneficial owner of income paid to a
trust or to an estate shall be determined under the provisions of
Sec. 1.1441-3(f) and (g) in effect prior to January 1, 1999 (see
Sec. 1.1441-3(f) and (g) as contained in 26 CFR part 1, revised April
1, 1997).
(C) Definition of a flow-through entity or arrangement. For
purposes of this paragraph (c)(6)(ii), a flow-through entity means a
partnership, estate, or trust. A flow-though arrangement is a
contractual arrangement that does not involve an entity and is treated
as a partnership for U.S. tax purposes or is a wholly-owned entity that
is disregarded for federal tax purposes under Sec. 301.7701-2(c)(2) of
this chapter as an entity separate from its owner. The term partnership
means any entity or arrangement (as defined in Sec. 301.7701-2(c)(1) of
this chapter) whose tax regime is governed by subchapter K of chapter 1
of the Code.
(7) Withholding agent. For a definition of the term withholding
agent and applicable rules, see Sec. 1.1441-7.
(8) Person. For purposes of the regulations under chapter 3 of the
Code, the term person shall mean a person described in section
7701(a)(1) and the regulations under that section and a U.S. branch to
the extent treated as a U.S. person under paragraph (b)(2)(iv) of this
section. For purposes of the regulations under chapter 3 of the Code,
the term person does not include a wholly-owned entity that is
disregarded for federal tax purposes under Sec. 301.7701-2(c)(2) of
this chapter as an entity separate from its owner. See paragraph
(b)(2)(iii) of this section for procedures applicable to payments to
such entities.
(9) Source of income. The source of income is determined under the
provisions of part I (section 861 and following) , subchapter N,
chapter 1 of the Code and the regulations under those provisions.
(10) Chapter 3 of the Code. For purposes of the regulations under
sections 1441, 1442, and 1443, any reference to chapter 3 of the Code
shall
[[Page 53435]]
not include references to sections 1445 and 1446, unless the context
indicates otherwise.
(11) Reduced rate. For purposes of regulations under chapter 3 of
the Code, and other withholding provisions of the Code, the term
reduced rate, when used in regulations under chapter 3 of the Code,
shall include an exemption from tax.
(d) Beneficial owner's or payee's claim of U.S. status--(1) In
general. Under paragraph (b)(1) of this section, a withholding agent is
not required to withhold under chapter 3 of the Code on payments to a
U.S. payee, to a person presumed to be a U.S. payee in accordance with
the provisions of paragraph (b)(3) of this section, or to a person that
the withholding agent may treat as a U.S. beneficial owner of the
payment. Absent actual knowledge or reason to know otherwise, a
withholding agent may rely on the provisions of this paragraph (d) in
order to determine whether to treat a payee or beneficial owner as a
U.S. person.
(2) Payments for which a Form W-9 is otherwise required. A
withholding agent may treat as a U.S. person a payee who is required to
furnish a Form W-9 and who furnishes it in accordance with the
procedures described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this
chapter (including the requirement that the payee furnish its taxpayer
identifying number (TIN)) if the withholding agent meets all the
requirements described in Sec. 31.3406(h)-3(e) of this chapter
regarding reliance by a payor on a Form W-9.
(3) Payments for which a Form W-9 is not otherwise required. In the
case of a payee who is not required to furnish a Form W-9 under section
3406, the withholding agent may rely on a certificate of U.S. status
described in this paragraph (d)(3). A certificate of U.S. status is a
certificate described in Sec. 31.3406(h)-3(c)(2) of this chapter
(relating to forms for exempt recipients) or a Form W-9 (or a
substitute form or such other form as the IRS may prescribe) that is
signed under penalties of perjury by the payee and contains the name,
permanent residence address, and TIN of the payee. The procedures
described in Sec. 31.3406(h)-2(a) of this chapter shall apply to
payments to joint payees. A withholding agent that receives a Form W-9
in order to satisfy this paragraph (d)(3) must retain the form in
accordance with the provisions of Sec. 31.3406(h)-3(g) of this chapter,
if applicable, or of paragraph (e)(4)(iii) of this section (relating to
the retention of withholding certificates) if Sec. 31.3406(h)-3(g) of
this chapter does not apply. The rules of this paragraph (d)(3) are
only intended to provide a method by which a withholding agent may
determine that a payee is not a foreign person and do not otherwise
impose a requirement that documentation be furnished by a person who is
otherwise treated as an exempt recipient for purposes of the applicable
information reporting provisions under chapter 61 of the Code (e.g.,
Sec. 1.6049-4(c)(1)(ii) for payments of interest).
(4) Other payments. This paragraph (d)(4) describes the
documentation upon which a withholding agent may rely in order to treat
a payment as made to a U.S. person that is a beneficial owner for
purposes of paragraph (b)(1) of this section. The withholding agent may
treat the payment as made to a U.S. beneficial owner only if it can
reliably associate the payment with documentation prior to the payment,
if it complies with the electronic confirmation procedures described in
paragraph (e)(4)(v) of this section, if required, and if it has not
been notified by the IRS that any of the information on the withholding
certificate or other documentation is incorrect or unreliable. In the
case of a Form W-9 that is required to be furnished for a reportable
payment that may be subject to backup withholding, the payor may be
notified in accordance with section 3406(a)(1)(B) and the regulations
under that section. See applicable procedures under that section and
the regulations under that section for payors who have been notified
with regard to such a Form W-9. Payors who have been notified in
relation to other Forms W-9, including under section 6724(b) pursuant
to section 6721, may rely on the withholding certificate or other
documentation only to the extent provided under procedures as
prescribed by the IRS (see Sec. 601.601(d)(2) of this chapter). A
withholding agent may treat a payment as made to a U.S. beneficial
owner--
(i) To the extent the withholding agent can reliably associate the
payment with a Form W-9 described in paragraph (d) (2) or (3) of this
section attached to a valid intermediary, flow-through, or U.S. branch
withholding certificate described in paragraph (e)(3)(i) of this
section;
(ii) To the extent the withholding agent can reliably associate a
payment to a qualified intermediary with the category of assets
described in paragraph (e)(5)(v)(B)(2) of this section that the
qualified intermediary has represented, in accordance with paragraphs
(e) (3)(ii)(E) and (5)(v) of this section as being allocable to U.S.
persons based on the Forms W-9 that they have furnished; or
(iii) To the extent the withholding agent can reliably associate
the payment with a Form W-8 from a U.S. branch described in paragraph
(e)(3)(v) of this section that evidences an agreement between the U.S.
branch and the withholding agent to treat the U.S. branch as U.S.
person.
(e) Beneficial owner's claim of foreign status--(1) Withholding
agent's reliance--(i) In general. Absent actual knowledge or reason to
know otherwise, a withholding agent may treat a payment as made to a
foreign beneficial owner in accordance with the provisions of paragraph
(e)(1)(ii) of this section. See paragraph (e)(4)(viii) of this section
for applicable reliance rules. See paragraph (b)(4) of this section for
a description of payments for which a claim of foreign status is
relevant for purposes of claiming a reduced rate of withholding for
purposes of section 1441, 1442, or 1443. See paragraph (b)(5) of this
section for a list of payments for which a claim of foreign status is
relevant for other purposes, such as claiming an exemption from
information reporting under chapter 61 of the Code.
(ii) Payments that a withholding agent may treat as made to a
foreign person that is a beneficial owner--(A) General rule. The
withholding agent may treat a payment as made to a foreign person that
is a beneficial owner if it complies with the requirements described in
paragraph (e)(1)(ii)(B) of this section and, then, only to the extent--
(1) That the withholding agent can reliably associate the payment
with a beneficial owner withholding certificate described in paragraph
(e)(2) of this section furnished by the person whose name is on the
certificate or attached to a valid foreign intermediary, flow-through
entity, or U.S. branch withholding certificate described in paragraph
(e)(3)(v) of this section;
(2) That the payment is made outside the United States (within the
meaning of Sec. 1.6049-5(e)) with respect to an offshore account
(within the meaning of Sec. 1.6049-5(c)(1)) and the withholding agent
can reliably associate the payment with documentary evidence described
in Secs. 1.1441-6(c)(3) or (4), or 1.6049-5(c)(1) relating to the
beneficial owner;
(3) That the withholding agent can reliably associate the payment
with the category of assets described in paragraph (e)(5)(v)(B)(1) of
this section that the qualified intermediary has represented, in
accordance with paragraphs (e) (3)(ii)(E) and (5)(v) of this section as
being allocable to foreign persons for whom the qualified intermediary
is holding valid documentation;
[[Page 53436]]
(4) That the withholding agent can reliably associate the payment
with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii)
from a foreign partnership claiming that the payment is effectively
connected income;
(5) That the withholding agent identifies the payee as a U.S.
branch described in paragraph (b)(2)(iv) of this section, the payment
to which it treats as effectively connected income in accordance with
Sec. 1.1441-4(a) (2)(ii) or (3);
(6) That the withholding agent identifies the payee as an
international organization (or any wholly-owned agency or
instrumentality thereof) as defined in section 7701(a)(18) that has
been designated as such by executive order (pursuant to 22 U.S.C. 288
through 288(f)); or
(7) That the withholding agent pays interest from bankers'
acceptances and identifies the payee as a foreign central bank of issue
(as defined in Sec. 1.861-2(b)(4)).
(B) Additional requirements. In order for a payment described in
paragraph (e)(1)(ii)(A) of this section to be treated as made to a
foreign beneficial owner, the withholding agent must hold the
documentation (if required) prior to the payment, comply with the
electronic confirmation procedures described in paragraph (e)(4)(v) of
this section (if required), and must not have been notified by the IRS
that any of the information on the withholding certificate or other
documentation is incorrect or unreliable. If the withholding agent has
been so notified, it may rely on the withholding certificate or other
documentation only to the extent provided under procedures prescribed
by the IRS (see Sec. 601.601(d)(2) of this chapter). See paragraph
(b)(2)(vii) of this section for rules regarding reliable association of
a payment with a withholding certificate or other appropriate
documentation.
(2) Beneficial owner withholding certificate--(i) In general. A
beneficial owner withholding certificate is a statement by which the
beneficial owner of the payment represents that it is a foreign person
and, if applicable, claims a reduced rate of withholding under section
1441. A separate withholding certificate must be submitted to each
withholding agent. If the beneficial owner receives more than one type
of payment from a single withholding agent, the beneficial owner may
have to submit more than one withholding certificate to the single
withholding agent for the different types of payments as may be
required by the applicable forms and instructions, or as the
withholding agent may require (such as to facilitate the withholding
agent's compliance with its obligations to determine withholding under
this section or the reporting of the amounts under Sec. 1.1461-1 (b)
and (c)). For example, if a beneficial owner claims that some but not
all of the income it receives is effectively connected with the conduct
of a trade or business in the United States, it may be required to
submit two separate withholding certificates, one for income that is
not effectively connected and one for income that is so connected. See
Sec. 1.1441-6(b)(4)(ii) for special rules for determining who must
furnish a beneficial owner withholding certificate when a benefit is
claimed under an income tax treaty. See paragraph (e)(4)(ix) of this
section for reliance rules in the case of certificates held by another
person or at a different branch location of the same person.
(ii) Requirements for validity of certificate. A beneficial owner
withholding certificate is valid only if it is provided on a Form W-8,
or a Form 8233 in the case of personal services income described in
Sec. 1.1441-4(b) or certain scholarship or grant amounts described in
Sec. 1.1441-4(c) (or a substitute form described in paragraph
(e)(4)(vi) of this section, or such other form as the IRS may
prescribe). A Form W-8 is valid only if its validity period has not
expired, it is signed under penalties of perjury by the beneficial
owner, and it contains all of the information required on the form. The
required information is the beneficial owner's name, permanent
residence address, and TIN (if required), the country under the laws of
which the beneficial owner is created, incorporated, or governed (if a
person other than an individual), the classification of the entity, and
such other information as may be required by the regulations under
section 1441 or by the form or accompanying instructions in addition
to, or in lieu of, the information described in this paragraph
(e)(2)(ii). A person's permanent residence address is an address in the
country where the person claims to be a resident for purposes of that
country's income tax. In the case of a certificate furnished in order
to claim a reduced rate of withholding under an income tax treaty, the
residence must be determined in the manner prescribed under the
applicable treaty. See Sec. 1.1441-6(b)(4)(i). The address of a
financial institution with which the beneficial owner maintains an
account, a post office box, or an address used solely for mailing
purposes is not a residence address for this purpose. If the beneficial
owner is an individual who does not have a tax residence in any
country, the permanent residence address is the place at which the
beneficial owner normally resides. If the beneficial owner is not an
individual and does not have a tax residence in any country, then the
permanent residence address is the place at which the person maintains
its principal office. See paragraph (e)(4)(vii) of this section for
circumstances in which a TIN is required on a beneficial owner
withholding certificate. See paragraph (f)(2)(i) of this section for
continued validity of certificates during a transition period.
(3) Intermediary, flow-through, or U.S. branch withholding
certificate--(i) In general. An intermediary withholding certificate is
a Form W-8 by which a payee represents that it is a foreign person and
that it is an intermediary with respect to a payment and not the
beneficial owner. A flow-through withholding certificate is a Form W-8
furnished by a flow-through entity under Sec. 1.1441-5(c)(2) or (3) for
a partnership or under Sec. 1.1441-5(e) for a foreign estate or trust.
See paragraph (c)(6)(ii)(C) of this section for a definition of a flow-
through entity. A U.S. branch certificate is a Form W-8 by which the
payee represents that it is a U.S. branch described in paragraph
(b)(2)(iv) (A) or (E) of this section and that the payment is not
effectively connected with the conduct of its trade or business in the
United States. An intermediary withholding certificate is used by an
intermediary either to make representations regarding the status of
beneficial owners of the amount paid or to transmit appropriate
documentation to the withholding agent. A flow-through certificate is
used by a flow-through entity to establish its status as a foreign
person or the status of its partners or beneficiaries, if required,
and, if applicable, to claim a reduced rate of withholding. An
intermediary means, with respect to a payment that it receives, a
person that, for that payment, acts as a custodian, broker, nominee, or
otherwise as an agent for another person, regardless of whether such
other person is the beneficial owner of the amount paid, a flow-through
entity, or another intermediary. See paragraph (e)(4)(viii) of this
section for applicable reliance rules.
(ii) Intermediary withholding certificate from a qualified
intermediary. An intermediary withholding certificate from a person
representing to be a qualified intermediary (described in paragraph
(e)(5)(ii) of this section) is valid only if it is furnished on a Form
W-8 (or an
[[Page 53437]]
acceptable substitute form or such other form as the IRS may
prescribe), it is signed under penalties of perjury by an officer of
the qualified intermediary with authority to sign for the intermediary,
its validity has not expired, and it contains the following
information, statement, and certifications:
(A) The name, permanent residence address (as described in
paragraph (e)(2)(ii) of this section), and the employer identification
number of the intermediary, and the country under the laws of which the
intermediary is created, incorporated, or governed.
(B) A certification that the person whose name is on the Form W-8
is not acting for its own account and is acting as a qualified
intermediary within the meaning of paragraph (e)(5)(ii) of this
section.
(C) A certification that the intermediary has obtained the
appropriate certificates (such as Forms W-8 or W-9) or other
appropriate documentation in the manner required in its withholding
agreement with the IRS for those account holders that are covered by
the certificate and whose assets are identified as being allocable to
the categories described in paragraph (e)(5)(v)(B) (1) or (2) (in
accordance with paragraph (e)(5)(v) of this section or otherwise).
(D) A certification whether the qualified intermediary is assuming
primary withholding responsibility for the amounts to which the
certificate relates.
(E) A statement attached to the certificate that provides such
information as may be required by the form and accompanying
instructions, including sufficient information for the withholding
agent to determine the amount required to be withheld from amounts paid
to the intermediary and reported to the IRS. See paragraph (e)(5)(v) of
this section for requirement of a statement and rules applicable
thereto.
(F) Any other information or certification as may be required by
the form or accompanying instructions in addition to, or in lieu of,
the information and certifications described in this paragraph
(e)(3)(ii).
(iii) Intermediary withholding certificate from an intermediary
that is not a qualified intermediary. An intermediary withholding
certificate from a person that does not represent to be a qualified
intermediary within the meaning of paragraph (e)(5)(ii) of this section
is valid only if it is furnished on a Form W-8 (or an acceptable
substitute form, or such other form as the IRS may prescribe), it is
signed under penalties of perjury by a person authorized to sign for
the intermediary, it contains the information, statement, and
certifications described in this paragraph (e)(3)(iii), its validity
has not expired, and the withholding certificates and other appropriate
documentation for all the persons to whom the certificate relates are
attached to the certificate. Appropriate documentation consists of
beneficial owner withholding certificates described in paragraph
(e)(2)(i) of this section, intermediary withholding certificates
described in paragraph (e)(3)(i) of this section, flow-through
certificates described in Sec. 1.1441-5(c)(2)(iv), (3)(iii), and (e),
documentary evidence described in Sec. 1.1441-6(b)(2)(i) or in
Sec. 1.6049-5(c)(1) related to the beneficial owner (or documentary
evidence described in Sec. 1.6049-5(c)(4) for purposes of information
reporting under chapter 61 of the Code), and other documentation or
certificate applicable under other provisions of the Code or
regulations that certify or establish the status of the payee or
beneficial owner as a U.S. or a foreign person. If the intermediary is
acting on behalf of another intermediary that is not a qualified
intermediary or on behalf of a partnership that is not a withholding
foreign partnership described in Sec. 1.1441-5(c)(2)(i), then the
intermediary must attach to its own withholding certificate the
intermediary withholding certificate or the partnership withholding
certificate to which all the withholding certificates and other
appropriate documentation required to be attached under this paragraph
(e)(3)(iii) or in Sec. 1.1441-5(c)(3)(iii) or (e) are also attached.
Nothing in this paragraph (e)(3)(iii) shall require an intermediary to
furnish original documentation. Copies of certificates or documentary
evidence may be passed up to the U.S. withholding agent, in which case
the intermediary must retain the original documentation for the same
time period that the copy is required to be retained by the withholding
agent under paragraph (e)(4)(iii) of this section and must provide it
to the withholding agent upon request. For purposes of this paragraph
(e)(3)(iii), a valid intermediary withholding certificate also includes
a statement described in Sec. 1.871-14(c)(2)(v) furnished in order for
interest to qualify as portfolio interest for purposes of sections
871(h) and 881(c) or in order for amounts described in Sec. 1.1441-
6(b)(2)(ii) to qualify as amounts paid to a foreign person. The
information and certification required on a Form W-8 described in this
paragraph (e)(3)(iii) (or on an acceptable substitute form or such
other form as the IRS may prescribe) are as follows:
(A) The name and permanent resident address (as described in
paragraph (e)(2)(ii) of this section) of the intermediary, and the
country under the laws of which the intermediary is created,
incorporated, or governed.
(B) A certification that the person whose name is on the Form W-8
is not acting for its own account and is using the certificate as a
form to transmit withholding certificates and other appropriate
documentation for the payment to which the form relates.
(C) If furnishing an intermediary certificate to transmit
withholding certificates or other appropriate documentation for more
than one person, a statement attached to the Form W-8 that provides
such information as may be required by the form and accompanying
instructions, including sufficient information for the withholding
agent to determine the amount required to be withheld from amounts paid
to the intermediary. See paragraph (e)(3)(iv) of this section for rules
applicable to such a statement.
(D) A certification either that the attached withholding
certificates and other appropriate documentation represent all of the
persons to whom the intermediary withholding certificate relates or
that the amounts allocable to persons covered by the intermediary
withholding certificate and for whom withholding certificates or other
appropriate documentation are lacking or unreliable are separately
identified.
(E) Any other information or certification as may be required by
the form or accompanying instructions in addition to, or in lieu of,
the information and certification described in this paragraph
(e)(3)(iii).
(iv) Information to the withholding agent regarding assets owned by
beneficial owners, etc.--(A) General rule. An intermediary that has not
represented that it is acting as a qualified intermediary within the
meaning of paragraph (e)(5)(ii) of this section must provide
information sufficient for the withholding agent to determine the
proportion of each payment of reportable amounts (as described in
paragraph (e)(3)(vi) of this section) that is allocable to each person
to whom the intermediary withholding certificate relates, including
persons for whom the intermediary has not attached a withholding
certificate or other appropriate documentation. The withholding agent
may rely on such information in order to determine the amount of
withholding on the payment
[[Page 53438]]
and how to report this payment under chapter 3 or 61 of the Code and
the regulations thereunder. The sum of all the proportions indicated by
the intermediary, expressed as a percentage, must equal, but not
exceed, one hundred percent of the payment. The information for persons
for whom a withholding certificate or other appropriate documentation
is lacking or unreliable may be provided in the aggregate and need not
be provided separately for each such person. The foreign intermediary
is not required to disclose the names of the persons for whom it
collects the payment, unless it has actual knowledge that any such
person is a U.S. person that is not an exempt recipient. In such a
case, the intermediary must state separately the information for such
U.S. person even though such person has not provided a Form W-9 to the
intermediary in the manner described in paragraph (d)(2) of this
section. The information may be furnished in any manner that the
parties choose. For example, if the withholding agent maintains
separate accounts for different types of income or withholding rates,
the intermediary must provide sufficient information so that the
withholding agent may allocate assets appropriately among the relevant
accounts. If the withholding agent does not maintain separate accounts,
it may require the intermediary to attach a statement to the
intermediary withholding certificate under paragraphs (e)(3)(iii)(C)
and (D) of this section providing the information described in this
paragraph (e)(3)(iv).
(B) Updating the information. The intermediary must update the
information furnished to the withholding agent in accordance with
paragraph (e)(3)(iv)(A) of this section as often as is necessary in
order to enable the withholding agent to withhold at the appropriate
rate on each payment and to report such income for purposes of chapter
3 or 61 of the Code and sections 3402, 3405 and 3406 (and the
regulations under those provisions). Any update of the information as
required under this paragraph (e)(3)(iv)(B) shall be treated as an
integral part of the intermediary withholding certificate with which it
is associated. See paragraph (e)(4)(ii)(D) of this section regarding
how changes in the information described in this paragraph (e)(3)(iv)
may affect the validity of withholding certificates. See paragraph
(b)(3)(v)(C) of this section for consequences if the information is not
updated as required.
(C) Examples. The rules of paragraph (e)(3)(iii) of this section
and of this paragraph (e)(3)(iv) are illustrated by the following
examples:
Example 1. A U.S. withholding agent, W, pays U.S. source
dividends to foreign intermediary X who, in turn, pays to foreign
intermediary Y, who collects on behalf of foreign beneficial owners,
A and B. A and B have each furnished a beneficial owner Form W-8 to
Y. Y must furnish to X an intermediary Form W-8 described in
paragraph (e)(3)(iii) of this section, to which it must attach the
original or copies of A's and B's Forms W-8. X, in turn, must
furnish to W its own intermediary Form W-8 described in paragraph
(e)(3)(iii) of this section, to which it must attach the original or
copies of the intermediary Form W-8 received from Y and A's and B's
Forms W-8.
Example 2. A foreign bank, X, acts as an intermediary for five
different persons, A, B, C, D, and E, who each own securities from
which they receive U.S. source dividends. The distributions are paid
by a U.S. financial institution, W, as custodian of the securities
for X. A's, B's, C's, D's, and E's respective claimed ownership
interest in the securities is 20-percent each. X has furnished to W
an intermediary Form W-8 described in paragraph (e)(3)(iii) of this
section, to which it has attached a statement described in this
paragraph (e)(3)(iv) stating each of A', B's, and C's interest in
the securities with respect to which distributions are made
periodically. The respective ownership interests of D and E are not
stated separately because X has not received a valid withholding
certificate or other appropriate documentation from D or E.
Therefore, on the statement, D's and E's interest in the securities
is stated in the aggregate (i.e., 40-percent attributable to
undocumented owners). X has attached a Form W-8 for A and
documentary evidence for B (who each claim a reduced rate of
withholding under an income tax treaty), and a Form W-9 for C. In
determining the amount to be withheld from the amount paid to X, W
may rely on X's intermediary Form W-8, the allocation statement
attached to the Form W-8, and the attached Form W-8, documentary
evidence, and Form W-9 for each of A, B, and C. Based on paragraphs
(b)(1), (b)(2)(v), (b)(2)(vii), (d)(4)(i), and (e)(1)(ii)(A)(1) of
this section, W may withhold as follows on the payment to X: no
withholding on 20-percent of the payment on the basis of C's Form W-
9, withholding at the reduced treaty rate on 40-percent of the
payment on the basis of A's Form W-8 and B's documentary evidence,
and 30-percent on 40-percent of the payment to the undocumented
owners group formed by D and E in accordance with the presumptions
described in paragraph (b)(3)(v)(B) of this section (i.e., due to
the lack of documentation for D and E). Under paragraph (e)(3)(iii)
of this section, X is not required to identify D or E to W. For
purposes of making a return under Sec. 1.1461-1(c), W would prepare
a single Form 1042-S for the group of undocumented owners, D and E
(if the names are undisclosed, the Form 1042-S should be made in the
name of X and state that the return is made for unknown owners (see
Sec. 1.1461-1(c)(4)(iv)). Because X has not furnished required
documentation for D and E, X does not qualify under paragraph (b)(6)
of this section for relief from an obligation to make a report on a
Form 1042-S (to the extent D and E are presumed to be foreign
persons under paragraph (b)(3)(iii) of this section) when X makes
the payment to D and E (however, because a full 30-percent amount
was withheld under this section, X does not have to withhold an
additional amount under the facts of this example). In contrast,
under paragraph (b)(6) of this section, X is not required to make a
report on Form 1042-S for its payments to A or B. Under Sec. 1.6042-
3(b)(1)(vi), X is not required to report C's share of the payment on
Form 1099 (unless X has actual knowledge that W has not reported the
portion of payment allocable to C in accordance with Sec. 1.6042-2).
Example 3. The facts are the same as in Example 2, except that
D's name is D Insurance Company whom X knows is a U.S. person.
Because of D's name, X may treat D as an exempt recipient on an
eyeball test basis under Secs. 1.6042-3(b)(1)(vii) and 1.6049-
4(c)(1)(ii)(A)(1). However, even if those facts are disclosed to W,
W must withhold 30-percent of the portion of the payment allocable
to D because W is making a payment to a foreign person (X). Under
paragraph (b)(1) of this section, W may reduce the rate of
withholding only if it can associate the payment with documentation
upon which it can rely to treat the beneficial owner as a U.S.
person or as a foreign person entitled to a reduced rate of
withholding. Because X has not furnished documentation for D, W does
not have the proper documentation with which it can associate the
payment allocable to D. Thus, insofar as W is concerned, the portion
of the payment allocable to D is treated as a payment to an
undocumented owner that W must presume to be a foreign person under
paragraph (b)(3)(v)(B) of this section. Accordingly, under this
paragraph (e)(3)(iv), W need not identify the information for D
separately and can aggregate the portion of the payment allocable to
D and E. W's reporting requirements for the portion of the payment
allocable to D and E are the same as under Example 2. When X makes
the payment to D, X does not benefit from the relief from reporting
under Sec. 1.6042-3(b)(1)(vi). However, X is not required to report
the payment to D on Form 1099 under section 6042 because, under
Sec. 1.6042-3(b)(1)(vii), X can treat D as an exempt recipient.
(v) Withholding certificate from certain U.S. branches. A U.S.
branch certificate is a representation by the U.S. branch whose name is
on the certificate that the payment it receives is not effectively
connected with the conduct of a trade or business in the United States
and that it is using the certificate either to transmit the appropriate
documentation for the persons for whom the branch receives the payment
(i.e., as an intermediary) or as evidence of its agreement with the
withholding agent to be treated as a U.S. person with respect to any
payment associated with the certificate. A U.S. branch withholding
certificate is valid only if it
[[Page 53439]]
is furnished on a Form W-8 (or an acceptable substitute form, or such
other form as the IRS may prescribe), it is signed under penalties of
perjury by a person authorized to sign for the branch, its validity has
not expired, and it contains the information, statement, and
certifications described in this paragraph (e)(3)(v). If the
certificate is furnished to transmit withholding certificates and other
documentation, it must contain the information and certifications
described in paragraphs (e)(3)(v) (A) through (C) of this section and
in paragraphs (e)(3)(iii) (C) and (D) of this section. If the
certificate is furnished pursuant to an agreement to treat the U.S.
branch as a U.S. person, the information and certification required on
the Form W-8 (or an acceptable substitute form or such other form as
the IRS may prescribe) are limited to the following--
(A) The name of the person of which the branch is a part and the
address of the branch in the United States;
(B) A certification that the payments associated with the
certificate are not effectively connected with the conduct of its trade
or business in the United States; and
(C) Any other information or certification as may be required by
the form or accompanying instructions in addition to, or in lieu of,
the information and certification described in this paragraph
(e)(3)(v).
(vi) Reportable amounts. For purposes of this section, the term
reportable amount means an amount subject to withholding within the
meaning of Sec. 1.1441-2(a), bank deposit interest (including original
issue discount) and similar types of deposit interest described in
section 871(i)(2)(A) or 881(d) that are from sources within the United
States, and any amount of interest or original issue discount from
sources within the United States on certain short-term obligations
described in section 871(g)(1)(B) or 881(a)(3). For purposes of this
paragraph (e)(3)(vi), however, reportable amounts do not include
payments with respect to deposits with banks and other financial
institutions that remain on deposit for a period of two weeks or less,
to amounts of original issue discount arising from a sale and
repurchase transaction that is completed within a period of two weeks
or less, or to amounts described in Sec. 1.6049-5(b) (7), (10) or (11)
(relating to certain obligations issued in bearer form). While short-
term OID and bank deposit interest are not subject to withholding under
chapter 3 of the Code, such amounts may be subject to information
reporting under section 6049 if paid to a U.S. person who is not an
exempt recipient described in Sec. 1.6049-4(c)(1)(ii) and to backup
withholding under section 3406 in the absence of documentation. See
Sec. 1.6049-5(d)(3)(iii) for applicable procedures when such amounts
are paid to a foreign intermediary.
(4) Applicable rules. The provisions in this paragraph (e)(4)
describe procedures applicable to withholding certificates on Form W-8
or Form 8233 (or a substitute form) or documentary evidence furnished
to establish foreign status. These provisions do not apply to Forms W-9
(or their substitutes). For corresponding provisions regrading Form W-9
(or a substitute form), see section 3406 and the regulations under that
section.
(i) Who may sign the certificate. A withholding certificate (or
other acceptable substitute) may be signed by any person authorized to
sign a declaration under penalties of perjury on behalf of the person
whose name is on the certificate as provided in section 6061 and the
regulations under that section (relating to who may sign generally for
an individual, estate, or trust, which includes certain agents who may
sign returns and other documents), section 6062 and the regulations
under that section (relating to who may sign corporate returns), and
section 6063 and the regulations under that section (relating to who
may sign partnership returns).
(ii) Period of validity--(A) Three-year period. A withholding
certificate described in paragraph (e)(2)(i) of this section, a
certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify
interest as portfolio interest for purposes of sections 871(h) and
881(c) or to qualify amounts paid on certain securities described in
Sec. 1.1441-6(b)(2)(ii) as paid to a foreign person), or documentary
evidence described in Sec. 1.1441-6(b)(2)(i) or in Sec. 1.6049-5(c)(1)
shall remain valid until the earlier of the last day of the third
calendar year following the year in which the certificate is signed or
the documentary evidence is created or the day that a change of
circumstances occurs that makes any information on the certificate or
documentary evidence incorrect. For example, a certificate signed on
September 30, 1999, remains valid through December 31, 2002, unless
circumstances change that make the information on the form no longer
correct.
(B) Indefinite validity period. Notwithstanding paragraph
(e)(4)(ii)(A) of this section, the following certificates or parts of
certificates shall remain valid until the status of the person whose
name is on the certificate is changed in a way relevant to the
certificate or circumstances change that make the information on the
certificate no longer correct:
(1) A beneficial owner withholding certificate described in
paragraph (e)(2)(ii) of this section that is furnished with a TIN if
the income for which such certificate is furnished is required to be
reported under Sec. 1.1461-1(c)(2)(i) or the TIN furnished on the
certificate is reported to the IRS under the procedures described in
Sec. 1.1461-1(d).
(2) A certificate described in paragraph (e)(3)(ii) of this section
(dealing with a certificate from a person representing to be a
qualified intermediary).
(3) A certificate described in paragraph (e)(3)(iii) of this
section (dealing with a certificate from a person representing to be a
non-qualified intermediary), but not including the withholding
certificates or documentary evidence required to be attached to the
certificate.
(4) A certificate described in paragraph (e)(3)(v) of this section
(dealing with a certificate from a person representing to be a U.S.
branch), but not the withholding certificates or documentary evidence
required to be attached to the certificate.
(5) A certificate described in Sec. 1.1441-5(c)(2)(iv) (dealing
with a certificate from a person representing to be a withholding
foreign partnership).
(6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (dealing
with a certificate from a person representing to be a foreign
partnership that is not a withholding foreign partnership), but not
including the withholding certificates or documentary evidence required
to be attached to the certificate.
(7) A certificate furnished by a person representing to be an
integral part of a foreign government (within the meaning of
Sec. 1.892-2T(a)(2)) in accordance with Sec. 1.1441-8(b), or by a
person representing to be a foreign central bank of issue (within the
meaning of Sec. 1.861-2(b)(4)) or the Bank for International
Settlements in accordance with Sec. 1.1441-8(c)(1).
(C) Withholding certificate for effectively connected income.
Notwithstanding paragraph (e)(4)(ii)(B)(1) of this section, the period
of validity of a withholding certificate furnished to a withholding
agent to claim a reduced rate of withholding for income that is
effectively connected with the conduct of a trade or business within
the United States shall be limited to the three-year period described
in paragraph (e)(4)(ii)(A) of this section.
(D) Change in circumstances. If a change in circumstances makes any
[[Page 53440]]
information on a certificate or other documentation incorrect, then the
person whose name is on the certificate or other documentation must
inform the withholding agent within 30 days of the change and furnish a
new certificate or new documentation. A certificate or documentation
becomes invalid from the date that the withholding agent holding the
certificate or documentation knows or has reason to know that
circumstances affecting the correctness of the certificate or
documentation have changed. However, a withholding agent may choose to
apply the provisions of paragraph (b)(3)(iv) of this section regarding
the 90-day grace period as of that date while awaiting a new
certificate or documentation or while seeking information regarding
changes, or suspected changes, in the person's circumstances. If an
intermediary (including a U.S. branch described in paragraph
(b)(2)(iv)(A) of this section that passes through certificates to a
withholding agent) or a flow-through entity becomes aware that a
certificate or other appropriate documentation it has furnished to the
person from whom it collects the payment is no longer valid because of
a change in the circumstances of the person who issued the certificate
or furnished the other appropriate documentation, then the intermediary
or flow-through entity must notify the person from whom it collects the
payment of the change of circumstances. It must also obtain a new
withholding certificate or new appropriate documentation to replace the
existing certificate or documentation whose validity has expired due to
the change in circumstances. If a beneficial owner withholding
certificate is used to claim foreign status only (and not, also,
residence in a particular foreign country for purposes of an income tax
treaty), a change of address is a change in circumstances for purposes
of this paragraph (e)(4)(ii)(D) only if it changes to an address in the
United States. Further, a change of address within the same foreign
country is not a change in circumstances for purposes of this paragraph
(e)(4)(ii)(D). A change in the circumstances affecting the withholding
information provided to the withholding agent in accordance with the
provisions in paragraph (e) (3)(iv) or (5)(v) of this section or in
Sec. 1.1441-5(c)(3)(iv) shall terminate the validity of the withholding
certificate with respect to the information that is no longer reliable
unless the information is updated. A withholding agent may rely on a
certificate without having to inquire into possible changes of
circumstances that may affect the validity of the statement, unless it
knows or has reason to know that circumstances have changed. A
withholding agent may require a new certificate at any time prior to a
payment, even though the withholding agent has no actual knowledge or
reason to know that any information stated on the certificate has
changed.
(iii) Retention of withholding certificate. A withholding agent
must retain each withholding certificate and other documentation for as
long as it may be relevant to the determination of the withholding
agent's tax liability under section 1461 and Sec. 1.1461-1.
(iv) Electronic transmission of information. Under procedures
issued by the IRS (see Sec. 601.601(d)(2) of this chapter), a
withholding agent may be permitted to receive in electronic form the
information required to be included on a withholding certificate.
(v) Electronic confirmation of taxpayer identifying number on
withholding certificate. The Commissioner may prescribe procedures in a
revenue procedure (see Sec. 601.601(d)(2) of this chapter) or other
appropriate guidance to require a withholding agent to confirm
electronically with the IRS information concerning any TIN stated on a
withholding certificate.
(vi) Acceptable substitute form. A withholding agent may substitute
its own form instead of an official Form W-8 or 8233 (or such other
official form as the IRS may prescribe). Such a substitute for an
official form will be acceptable if it contains provisions that are
substantially similar to those of the official form, it contains the
same certifications relevant to the transactions as are contained on
the official form and these certifications are clearly set forth, and
the substitute form includes a signature-under-penalties-of-perjury
statement identical to the one stated on the official form. The
substitute form is acceptable even if it does not contain all of the
provisions contained on the official form, so long as it contains those
provisions that are relevant to the transaction for which it is
furnished. For example, a withholding agent that pays no income for
which treaty benefits are claimed may develop a substitute form that is
identical to the official form, except that it does not include
information regarding claim of benefits under an income tax treaty. A
withholding agent who uses a substitute form must furnish instructions
relevant to the substitute form only to the extent and in the manner
specified in the instructions to the official form. A withholding agent
may refuse to accept a certificate from a payee or beneficial owner
(including the official Form W-8 or 8233) if the certificate is not
provided the acceptable substitute form provided by the withholding
agent. However, a withholding agent may refuse to accept a certificate
provided by a payee or beneficial owner only if the withholding agent
furnishes the payee or beneficial owner with an acceptable substitute
form immediately upon receipt of an unacceptable form or within 5
business days of receipt of an unacceptable form from the payee or
beneficial owner. In that case, the substitute form is acceptable only
if it contains a notice that the withholding agent has refused to
accept the form submitted by the payee or beneficial owner and that the
payee or beneficial owner must submit the acceptable form provided by
the withholding agent in order for the payee or beneficial owner to be
treated as having furnished the required withholding certificate.
(vii) Requirement of taxpayer identifying number. A TIN must be
stated on a withholding certificate when required by this paragraph
(e)(4)(vii). A TIN is required to be stated on a beneficial owner
certificate if the beneficial owner is claiming the benefit of a
reduced rate under an income tax treaty (other than for amounts
described in Sec. 1.1441-6(b)(2)(ii)), an exemption from withholding
because income is effectively connected with a U.S. trade or business,
an exemption under section 871(f) for certain annuities received under
qualified plans, or an exemption solely based on a foreign
organization's claim of tax exempt status under section 501(c) or
private foundation status. Thus, a TIN is not required from a foreign
private foundation that is subject to the 4-percent tax under section
4948(a) on income if that income is otherwise exempt under the Code. In
addition, a TIN is required to be stated on the withholding certificate
from a person representing to be a qualified intermediary described in
paragraph (e)(5)(ii) of this section, on the withholding certificate
from a person representing to be a withholding foreign partnership
described in Sec. 1.1441-5(c)(2)(i)), on the withholding certificate
from a person representing to be a foreign trust or foreign estate, or
from a fiduciary thereof, and on the withholding certificate from a
person representing to be a U.S. branch described in paragraph
(e)(3)(v) of this section. A TIN is an IRS individual taxpayer
identification number, an employer identification number, or a social
security number as described in section 6109 and Sec. 301.6109-1 of
this
[[Page 53441]]
chapter, or any other identifier that the Commissioner may designate.
(viii) Reliance rules. A withholding agent may rely on the
information and certifications stated on withholding certificates or
other documentation without having to inquire into the truthfulness of
this information or certification, unless it has actual knowledge or
reason to know that the same is untrue. In the case of amounts
described in Sec. 1.1441-6(b)(2)(ii), a withholding agent described in
Sec. 1.1441-7(b)(2)(ii) has reason to know that the information or
certifications on a certificate are untrue only to the extent provided
in Sec. 1.1441-7(b)(2)(ii). See Sec. 1.1441-6(b)(4)(ii) for reliance on
representations regarding eligibility for a reduced rate under an
income tax treaty. Paragraphs (e)(4)(viii) (A) and (B) of this section
provide examples of such reliance.
(A) Classification. A withholding agent may rely on the claim of
entity classification indicated on the withholding certificate that it
receives from or for the beneficial owner, unless it has actual
knowledge or reason to know that the classification claimed is
incorrect. A withholding agent may not rely on a person's claim of
classification other than as a corporation if the name of the
corporation indicates that the person is a per se corporation described
in Sec. 301.7701-2(b)(8)(i) of this chapter unless the certificate
contains a statement that the person is a grandfathered per se
corporation described in Sec. 301.7701-2(b)(8) of this chapter and that
its grandfathered status has not been terminated. In the absence of
reliable representation or information regarding the classification of
the payee or beneficial owner, see Sec. 1.1441-1(b)(3)(ii) for
applicable presumptions.
(B) Status of payee as an intermediary or as a person acting for
its own account. A withholding agent may rely on the type of
certificate furnished as indicative of the payee's status as an
intermediary or as an owner, unless the withholding agent has actual
knowledge or reason to know otherwise. For example, a withholding agent
that receives a beneficial owner withholding certificate from a foreign
financial institution may treat the institution as the beneficial
owner, unless it has information in its records that would indicate
otherwise or the certificate contains information that is not
consistent with beneficial owner status (e.g., sub-account numbers or
names). If the financial institution also acts as an intermediary, the
withholding agent may request that the institution furnish two
certificates, i.e., a beneficial owner certificate described in
paragraph (e)(2)(i) of this section for the amounts that it receives as
a beneficial owner, and an intermediary withholding certificate
described in paragraph (e)(3)(i) of this section for the amounts that
it receives as an intermediary. In the absence of reliable
representation or information regarding the status of the payee as an
owner or as an intermediary, see paragraph (b)(3)(v)(A) for applicable
presumptions.
(ix) Certificates to be furnished for each account unless exception
applies. Unless otherwise provided in this paragraph (e)(4)(ix), a
withholding agent that is a financial institution with which a customer
may open an account shall obtain withholding certificates or other
appropriate documentation on an account-by-account basis.
(A) Coordinated account information system in effect. A withholding
agent may rely on the withholding certificate or other appropriate
documentation furnished by a customer for a pre-existing account under
any one or more of the circumstances described in this paragraph
(e)(4)(ix)(A).
(1) A withholding agent may rely on documentation furnished by a
customer for another account if all such accounts are held at the same
branch location.
(2) A withholding agent may rely on documentation furnished by a
customer for an account held at another branch location of the same
withholding agent or at a branch location of a person related to the
withholding agent if the withholding agent and the related person are
part of a universal account system that uses a customer identifier that
can be used to retrieve systematically all other accounts of the
customer. See Sec. 31.3406(c)1(c)(3)(ii) and (iii)(C) of this chapter
for an identical procedure for purposes of backup withholding. For
purposes of this paragraph (e)(4)(ix)(A), a withholding agent is
related to another person if it is related within the meaning of
section 267(b) or 707(b).
(3) A withholding agent may rely on documentation furnished by a
customer for an account held at another branch location of the same
withholding agent or at a branch location of a person related to the
withholding agent if the withholding agent and the related person are
part of an information system other than a universal account system and
the information system is described in this paragraph (e)(4)(ix)(A)(3).
The system must allow the withholding agent to easily access data
regarding the nature of the documentation, the information contained in
the documentation, and its validity status, and must allow the
withholding agent to easily transmit data into the system regarding any
facts of which it becomes aware that may affect the reliability of the
documentation. The withholding agent must be able to establish how and
when it has accessed the data regarding the documentation and, if
applicable, how and when it has transmitted data regarding any facts of
which it became aware that may affect the reliability of the
documentation. In addition, the withholding agent or the related party
must be able to establish that any data it has transmitted to the
information system has been processed and appropriate due diligence has
been exercised regarding the validity of the documentation.
(B) Family of mutual funds. An interest in a mutual fund that has a
common investment advisor or common principal underwriter with other
mutual funds (within the same family of funds) may, in the discretion
of the mutual fund, be represented by one single withholding
certificate where shares are acquired or owned in any of the funds. See
Sec. 31.3406(h)-3(a)(2) of this chapter for an identical procedures for
purposes of backup withholding.
(C) Special rule for brokers. A withholding agent may rely on the
certification of a broker acting as the agent of a beneficial owner
that the broker holds a valid beneficial owner withholding certificate
described in paragraph (e)(2)(i) of this section or other documentation
for that beneficial owner. The certification must contain the date of
expiration of the certificate or documentation and be in writing or in
electronic form. For purposes of this paragraph (e)(4)(ix)(C), the term
broker shall have the same meaning as in Sec. 31.3406(h)-3(d) of this
chapter.
(5) Qualified intermediaries--(i) General rule. A qualified
intermediary, as defined in paragraph (e)(5)(ii) of this section, may
furnish an intermediary withholding certificate to a withholding agent.
Such a certificate certifies on behalf of other persons (such as
beneficial owners, intermediaries, flow-through entities described in
Sec. 1.1441-5, or U.S. payees) for the purpose of claiming and
verifying reduced rates of withholding under section 1441 or 1442 and
for the purpose of reporting and withholding under other provisions of
the Code, such as the provisions under chapter 61 of the Code and
section 3406 (and the regulations under those provisions). Furnishing
such a certificate is in lieu of transmitting to a withholding agent
withholding certificates or other appropriate documentation for the
persons for whom the qualified intermediary receives the payment or for
its shareholders (in the case of claims of
[[Page 53442]]
benefits under an income tax treaty by a reverse hybrid entity).
Although the qualified intermediary is required to obtain withholding
certificates or other appropriate documentation from beneficial owners,
payees, or shareholders pursuant to its agreement with the IRS, it is
not required to attach such documentation to the intermediary
withholding certificate. However, the qualified intermediary must
disclose the names of those U.S. persons for whom the qualified
intermediary receives reportable payments (within the meaning of
paragraph (e)(3)(vi) of this section) and who are not exempt recipients
(as defined in Sec. 1.6049-4(c)(1)(ii) or an applicable provision under
section 6041, 6042, 6045, or 6050N), irrespective of local secrecy
laws. A person may claim qualified intermediary status before an
agreement is executed with the IRS if it has applied for such status
and the IRS authorizes such status on an interim basis under such
procedures as the IRS may prescribe.
(ii) Definition of qualified intermediary. With respect to a
payment to a foreign person, the term qualified intermediary means a
person that is a party to a withholding agreement with the IRS and such
person is--
(A) A foreign financial institution or a foreign clearing
organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8), without regard
to the requirement that the organization hold obligations for members),
other than a U.S. branch or U.S. office of such institution or
organization;
(B) A foreign branch or office of a U.S. financial institution or a
foreign branch or office of a U.S. clearing organization (as defined in
Sec. 1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the
organization hold obligations for members);
(C) A foreign corporation for purposes of presenting claims of
benefits under an income tax treaty on behalf of its shareholders; or
(D) Any other person acceptable to the IRS.
(iii) Withholding agreement--(A) In general. The IRS may, upon
request, enter into a withholding agreement with a foreign person
described in paragraph (e)(5)(ii) of this section pursuant to such
procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). Under such withholding agreement,
a qualified intermediary shall be generally subject to the applicable
withholding and reporting provisions applicable to withholding agents
and payors under chapters 3 and 61 of the Code, and section 3406, and
the regulations under those provisions, and other withholding
provisions of the Code, except to the extent provided under the
agreement. A withholding agreement may apply to the entity as a whole
or to certain specified branches of the institution. The determination
of the scope of the agreement shall be made on a branch-by-branch
basis.
(B) Terms of the withholding agreement. Generally, the agreement
shall specify the type of certification and documentation upon which
the qualified intermediary may rely to ascertain the nationality and
residence of beneficial owners and U.S. payees who receive payments
collected by the qualified intermediary and, if necessary, entitlement
to the benefits of a reduced rate under an income tax treaty. It shall
specify if the qualified intermediary may assume primary withholding
responsibility in accordance with paragraph (e)(5)(iv) of this section.
It shall specify the extent to which applicable return filing and
information reporting requirements are modified so that, in appropriate
cases, the qualified intermediary may report payments to the IRS on an
aggregated basis, without having to disclose the identity of individual
customers. However, the qualified intermediary may be required to
provide to the IRS the name and address of those foreign customers who
benefit from a reduced rate under an income tax treaty pursuant to the
qualified intermediary arrangement for purposes of verifying
entitlement to such benefits, particularly under an applicable
Limitation on Benefits provision. Under the agreement, a qualified
intermediary may agree to act as an acceptance agent to perform the
duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The
agreement may specify the manner in which applicable procedures for
adjustments for underwithholding and overwithholding, including refund
procedures apply in the context of a qualified intermediary arrangement
and the extent to which applicable procedures may be modified. In
particular, a withholding agreement may allow a qualified intermediary
to claim refunds of overwithheld amounts on behalf of its customers. If
relevant, the agreement shall specify the manner in which the qualified
intermediary may deal with payments to other intermediaries. In
addition, the agreement must specify the manner in which the IRS will
verify compliance with the agreement. In appropriate cases, the IRS may
agree to rely on audits performed by an intermediary's approved
auditor. In such a case, the IRS' audit may be limited to the audit of
the auditor's records (including work papers of the auditor and reports
prepared by the auditor indicating the methodology employed to verify
the entity's compliance with the agreement). For this purpose, the
agreement shall specify which auditor or class of auditors is approved.
Generally, an auditor will be approved if it is subject to regulatory
supervision under the laws of the country in which a significant part
of the intermediary activities under the agreement are expected to
occur, its internal procedures require it to verify that the
intermediary complies with the terms of the withholding agreement and
to report non-compliance findings under the agreement in the same
manner as it is required to report other findings of non-compliance
with applicable local laws and regulatory requirements, and its
relevant records (i.e., work papers and reports) are available to the
IRS. The agreement must include provisions for the assessment and
collection of tax in the event that failure to comply with the terms of
the agreement results in the failure by the withholding agent or the
qualified intermediary to withhold and deposit the required amount of
tax. Further, the agreement shall specify the procedures by which
deposits of amounts withheld are to be deposited, if different from
normally applicable deposit procedures under the Code and applicable
regulations. The agreement shall also specify the assets that the
qualified intermediary has in the United States or alternative means of
collection, if necessary. To determine the terms of any particular
withholding agreement, the IRS will consider appropriate factors
including whether or not the foreign person agrees to assume primary
responsibility as a withholding agent, the type of local know-your-
customer laws and practices to which it is subject, the extent and
nature of supervisory and regulatory control exercised under the laws
of the foreign country over the foreign person, the volume of
investments in U.S. securities (determined in dollar amounts and number
of account holders), and financial condition of the foreign person.
(iv) Assignment of primary withholding responsibility. A
withholding agent making a payment to a qualified intermediary must
presume that the withholding agent has full withholding responsibility
for that payment, except as otherwise specified in this paragraph
(e)(5)(iv). For this purpose, withholding responsibility means the
obligation to withhold as
[[Page 53443]]
required under the provisions of section 1441, 1442, or 1443, and the
regulations under those sections, and the related reporting obligations
under Sec. 1.1461-1(b)(2)(ii) and (c)(4)(ii) for payments identified or
treated as made to foreign persons. Withholding responsibility also
means obligations imposed on payors under chapter 61 of the Code (and
the regulations under those provisions) and, if applicable, under
section 3405 or 3406 (and the regulations under those sections). A
qualified intermediary that assumes primary withholding responsibility
vis-a-vis a withholding agent must assume such responsibility for all
payments made to any one account. Any qualified intermediary may agree
with the withholding agent to assume primary withholding
responsibility, but only if expressly permitted to do so under its
agreement with the IRS. Generally, reporting or withholding liability
arising from a payment to a U.S. person (or treated as or presumed to
be made to a U.S. person) under any provision of the Code or applicable
regulations thereunder may not be assigned to a qualified intermediary
except where the qualified intermediary is a foreign branch of a U.S.
financial institution or except to the extent that the qualified
intermediary has a branch in the United States and establishes to the
satisfaction of the IRS that its U.S. branch can adequately fulfill the
qualified intermediary's obligations on behalf of the qualified
intermediary regarding information reporting under chapter 61 of the
Code and the regulations under the applicable provisions of that
chapter and, if necessary, backup withholding under section 3406 and
the regulations under that section (even though the U.S. branch is not
a qualified intermediary).
(v) Information to withholding agent regarding applicable
withholding rates--(A) General rule. The qualified intermediary must
separate the assets that generate payments of reportable amounts (as
described in paragraph (e)(3)(vi) of this section) that are associated
with its withholding certificate furnished to the withholding agent
into the categories described in paragraph (e)(5)(v)(B) of this
section, and provide that information to the withholding agent so that
the withholding agent may determine the applicable withholding rate
applicable to each category. The information may be furnished in any
manner that the parties choose. For example, if the withholding agent
maintains separate accounts for each category of assets described in
paragraph (e)(5)(v)(B) of this section, the intermediary must provide
information sufficient for the withholding agent to allocate assets
appropriately among the various accounts. If the withholding agent does
not maintain separate accounts, it may require the intermediary to
attach a statement to the intermediary withholding certificate under
paragraph (e)(3)(ii)(E) of this section providing the information
described in this paragraph (e)(5)(v).
(B) Categories of assets. A payment of a reportable amount (as
defined in paragraph (e)(3)(vi) of this section) must be associated
with one of the three categories of assets set forth in paragraphs
(e)(5)(v)(B) (1) through (3) of this section and may be associated with
only one of these three categories. Additional or different categories
of assets may be specified, however, under procedures prescribed by the
IRS (see Sec. 602.602-1(d) of this chapter) or in the qualified
intermediary agreement. No information is required regarding assets
that do not generate a reportable amount described in paragraph
(b)(3)(vi) of this section. The information provided to the withholding
agent, and any update thereof, shall be considered an integral part of
the intermediary withholding certificate. The three categories of
assets required to be identified to the withholding agent are as
follows:
(1) The first category of assets consists of assets that are
associated with non-U.S. payees to which the intermediary certificate
relates, and the applicable withholding rate. If different withholding
rates apply, the withholding agent must indicate the applicable rate
for each class of non-U.S. payees to which different withholding rates
apply and the assets associated with each class. In the case of a
qualified intermediary that has assumed primary withholding
responsibility, the intermediary must simply certify the amount of
assets for which it assumes primary withholding responsibility because
they are assets for which it holds the appropriate documentation and
are not described in the other two categories.
(2) The second category of assets consists of assets that are
associated with all U.S. payees to which the certificate relates. The
qualified intermediary must furnish a Form W-9 (or an acceptable
substitute form) for each U.S. payee described in paragraph (d)(2) of
this section or, in the absence of a Form W-9, the name and address of
the U.S. payee or such information it has available regarding the
payee. The identity of U.S. payees described in paragraph (d)(3) of
this section need not be disclosed to the withholding agent.
(3) The third category of assets consists of assets that are
associated with payees for whom the qualified intermediary holds no
documentation, or holds documentation that it knows or has reason to
know is unreliable and for which it has no actual knowledge that the
payees are U.S. persons. A qualified intermediary that has assumed
primary withholding responsibility need not furnish information
regarding this category of assets.
(C) Updating the information. The intermediary must update the
information furnished to the withholding agent in accordance with this
paragraph (e)(5)(v) as often as is necessary in order to enable the
withholding agent to withhold at the appropriate rate on each payment
and to report such income for purposes of chapter 3 or 61 of the Code
and sections 3402, 3405 and 3406 (and the regulations under those
provisions). See paragraph (e)(4)(ii)(D) of this section regarding how
changes in the information affect the validity of a withholding
certificate. See Sec. 1.1441-1(b)(3)(v)(C) for consequences if the
information is not updated as required.
(f) Effective date--(1) In general. This section applies to
payments made after December 31, 1998.
(2) Transition rules--(i) Special rules for existing documentation.
For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, a
withholding agent that on December 31, 1998, holds a Form W-8, 8233,
1001, 4224, 1078, or a statement described in Sec. 1.1441-5 in effect
prior to January 1, 1999 (see Sec. 1.1441-5 as contained in 26 CFR part
1, revised April 1, 1997) under the regulations in effect prior to
January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1, 1997),
that is a valid certificate or statement as determined under those
regulations may treat the certificate or statement as a valid
withholding certificate until its validity expires under those
regulations or, if earlier, until December 31, 1999. Further, the
validity of a withholding certificate or statement that is dated prior
to January 1, 1998, is valid on January 1, 1998, and would expire at
any time during 1998, is extended until December 31, 1998 (and is not
extended after December 31, 1998 by reason of the immediately preceding
sentence). The rule in this paragraph (f)(2)(i), however, does not
apply to extend the validity period of a withholding certificate that
expires in 1998 solely by reason of changes in the circumstances of the
person whose name is on the certificate. Notwithstanding the three
preceding sentences, a withholding agent may choose to not take
advantage of the
[[Page 53444]]
transition rule in this paragraph (f)(2)(i) with respect to one or more
withholding certificates and, therefore, to require new withholding
certificates conforming to the requirements described in this section.
(ii) Lack of documentation for past years. A taxpayer may elect to
apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of
this section, dealing with liability for failure to obtain
documentation timely, to all of its open tax years, including tax years
that are currently under examination by the IRS. The election is made
by simply taking action under those provisions in the same manner as
the taxpayer would take action for payments made after December 31,
1998.
Sec. 1.1441-2 Amounts subject to withholding.
(a) In general. For purposes of the regulations under chapter 3 of
the Internal Revenue Code (Code), the term amounts subject to
withholding means amounts from sources within the United States that
constitute either fixed or determinable annual or periodical income
described in paragraph (b) of this section or other amounts subject to
withholding described in paragraph (c) of this section. For purposes of
this paragraph (a), an amount shall not be treated as not being from
sources within the United States merely because the source of the
amount cannot be determined at the time of payment. See Sec. 1.1441-
3(d)(1) for determining the amount to be withheld from a payment in the
absence of information at the time of payment regarding the source of
the amount. Amounts subject to withholding include amounts that are not
fixed or determinable annual or periodical income and upon which
withholding is specifically required under a provision of this section
or another section of the regulations under chapter 3 of the Code (such
as corporate distributions that do not constitute dividend income upon
which withholding is required under Sec. 1.1441-3(c)(1)). Amounts
subject to withholding do not include amounts described in Sec. 1.1441-
1(b)(4)(i) to the extent they involve interest on obligations in bearer
form or on foreign-targeted registered obligations (but, in the case of
a foreign-targeted registered obligation, only to the extent of those
amounts paid to a registered owner that is a financial institution
within the meaning of section 871(h)(5)(B)), amounts described in
Sec. 1.1441-1(b)(4)(ii) (dealing with bank deposit interest and similar
types of interest (including original issue discount) described in
section 871(i)(2)(A) or 881(d)), amounts described in Sec. 1.1441-
1(b)(4)(iv) (dealing with interest or original issue discount on
certain short-term obligations described in section 871(g)(1)(B) or
881(a)(3)), and amounts described in Sec. 1.1441-1(b)(4)(xx) (dealing
with income from certain gambling winnings exempt from tax under
section 871(j)).
(b) Fixed or determinable annual or periodical income--(1) In
general--(i) Definition. For purposes of chapter 3 of the Code and the
regulations thereunder, fixed or determinable annual or periodical
income is all income included in gross income under section 61
(including original issue discount), except for the items specified in
paragraph (b)(2) of this section. Therefore, items of U.S. source
income that are excluded from gross income under any provision of law
without regard to the identity of the holder, such as interest excluded
from gross income under section 103(a), are not fixed or determinable
annual or periodical income. See Sec. 1.306-3(h) for treating income
from the disposition of section 306 stock as fixed or determinable
annual or periodical income.
(ii) Manner of payment. The term fixed or determinable annual or
periodical is merely descriptive of the character of a class of income.
If an item of income falls within the class of income contemplated in
the statute and described in paragraph (a) of this section, it is
immaterial whether payment of that item is made in a series of payments
or in a single lump sum. Further, the income need not be paid annually
if it is paid periodically; that is to say, from time to time, whether
or not at regular intervals. The fact that a payment is not made
annually or periodically does not, however, prevent it from being fixed
or determinable annual or periodical income (e.g., a lump sum payment).
In addition, the fact that the length of time during which the payments
are to be made may be increased or diminished in accordance with
someone s will or with the happening of an event does not disqualify
the payment as determinable or periodical. For this purpose, the share
of the fixed or determinable annual or periodical income of an estate
or trust from sources within the United States which is required to be
distributed currently, or which has been paid or credited during the
taxable year, to a nonresident alien beneficiary of such estate or
trust constitutes fixed or determinable annual or periodical income.
(iii) Determinability of amount. An item of income is fixed when it
is to be paid in amounts definitely pre-determined. An item of income
is determinable if the amount to be paid is not known but there is a
basis of calculation by which the amount may be ascertained at a later
time. For example, interest is determinable even if it is contingent in
that its amount cannot be determined at the time of payment of an
amount with respect to a loan because the calculation of the interest
portion of the payment is contingent upon factors that are not fixed at
the time of the payment. For purposes of this section, an amount of
income does not have to be determined at the time that the payment is
made in order to be determinable. An amount of income described in
paragraph (a) of this section which the withholding agent knows is part
of a payment it makes but which it cannot calculate exactly at the time
of payment, is nevertheless determinable if the determination of the
exact amount depends upon events expected to occur at a future date. In
contrast, a payment which may be income in the future based upon events
that are not anticipated at the time the payment is made is not
determinable. For example, loan proceeds may become income to the
borrower when and to the extent the loan is canceled without repayment.
While the cancellation of the debt is income to the borrower when it
occurs, it is not determinable at the time the loan proceeds are
disbursed to the borrower if the lack of repayment leading to the
cancellation of part or all of the debt was not anticipated at the time
of disbursement. The fact that the source of an item of income cannot
be determined at the time that the payment is made does not render a
payment not determinable. See Sec. 1.1441-3(d)(1) for determining the
amount to be withheld from a payment in the absence of information at
the time of payment regarding the source of the amount.
(2) Exceptions. For purposes of chapter 3 of the Code and the
regulations thereunder, the items of income described in this paragraph
(b)(2) are not fixed or determinable annual or periodical income--
(i) Gains derived from the sale of property (including market
discount and option premiums), except for gains described in paragraph
(b)(3) or (c) of this section;
(ii) Insurance premiums within the meaning of section 4372 paid to
a foreign insurer or reinsurer; and
(iii) Any other income that the Internal Revenue Service (IRS) may
determine, in published guidance (see Sec. 601.601(d)(2) of this
chapter), is not fixed or determinable annual or periodical income.
[[Page 53445]]
(3) Original issue discount--(i) General rule. An amount
representing original issue discount is fixed or determinable annual or
periodical income that is subject to withholding to the extent provided
in this paragraph (b)(3) if not otherwise excluded under paragraph (a)
of this section. Under sections 871(a)(1)(C) and 881(a)(3), an amount
of original issue discount is subject to tax to a foreign beneficial
owner of an obligation carrying original issue discount upon a taxable
sale or exchange of the obligation or when a payment is made on such
obligation. The amount taxable is the amount of original issue discount
that accrued while the foreign person held the obligation up to the
time that the obligation is sold or exchanged or that a payment is made
on the obligation, reduced by any amount of original issue discount
that was taken into account prior to that time (due to a payment made
on the obligation). In the case of a taxable event due to a payment
made on the obligation, the tax due on the amount of taxable original
issue discount may not exceed the payment less the tax imposed thereon.
A person who is a withholding agent with respect to a payment that,
under section 871(a)(1)(C) or 881(a)(3), is taxable to a foreign person
holding or disposing of an original issue discount obligation must
withhold to the extent provided in this paragraph (b)(3).
(ii) Amounts actually known to the withholding agent. A withholding
agent must withhold on the taxable amount of original issue discount to
the extent that it has actual knowledge of the proportion of the
payment that is taxable to the beneficial owner under section
871(a)(1)(C) or 881(a)(3)(A). A withholding agent has actual knowledge
if it knows how long the beneficial owner has held the obligation, the
terms of the obligation, and the extent to which the beneficial owner
purchased the obligation at a premium. A withholding agent is treated
as having knowledge if the information is reasonably available. The
information is not considered reasonably available if the withholding
agent does not have a direct customer relationship with the foreign
beneficial owner or such other person who has actual knowledge of the
facts relevant to the determination of the amount taxable to the
foreign beneficial owner, and has no access to such information in the
ordinary course of its business due to the manner in which the
obligation is held (e.g., in street name or through intermediaries). In
the case of a withholding agent maintaining a direct account
relationship with the beneficial owner, knowledge regarding the
beneficial owner's holding period and acquisition premium is considered
to be reasonably available to the withholding agent. A withholding
agent may rely on the most recently published List of Original Issue
Discount Instruments (IRS Publication 1212 (available from the IRS
Forms Distribution Centers) or similar list) published by the IRS in
order to determine the amount of taxable OID in any particular
transaction.
(iii) Amounts for which certain documentation is not furnished.
Notwithstanding lack of knowledge (within the meaning of paragraph
(b)(3)(ii) of this section), withholding is required on the entire
amount of stated interest, if any, and original issue discount on the
obligation as determined as of the date of original issue if the
withholding agent, pursuant to the provisions in Sec. 1.1441-1(b)(3),
treats the payment as made to a foreign payee because it cannot
reliably associate the payment with documentation and the amount would
qualify as portfolio interest if the withholding agent held
documentation described in Sec. 1.871-14(c)(2). A withholding agent may
rely on the most recently published List of Original Issue Discount
Instruments (IRS Publication 1212 (available from the IRS Forms
Distribution Centers) or similar list) published by the IRS in order to
determine the amount of taxable OID in any particular transaction. See
Sec. 1.1441-1(b)(8) for adjustments to any amount that has been
overwithheld.
(iv) Exceptions to withholding. The obligation to withhold under
this paragraph (b)(3) shall apply only to obligations issued after
December 31, 1998, and payable more than 183 days from the date of
original issue. Any exemption from withholding pursuant to this
paragraph (b)(3) applies without a requirement that documentation be
furnished to the withholding agent. However, documentation may have to
be furnished for purposes of the information reporting provisions under
section 6049 and backup withholding under section 3406. See
Sec. 1.6049-5(b) (7) through (15).
(4) Securities lending transactions and equivalent transactions.
See Secs. 1.871-7(b)(2) and 1.881-2(b)(2) regarding the character of
substitute payments as fixed and determinable annual or periodical
income. Such amounts constitute income subject to withholding to the
extent they are from sources within the United States, as determined
under section Secs. 1.861-2(a)(7) and 1.861-3(a)(6). See Secs. 1.6042-
3(a)(2) and 1.6049-5(a)(5) for reporting requirements applicable to
substitute dividend and interest payments, respectively.
(c) Other income subject to withholding. Withholding is also
required on the following items of income--
(1) Gains described in sections 631 (b) or (c), relating to
treatment of gain on disposal of timber, coal, or domestic iron ore
with a retained economic interest; and
(2) Gains subject to the 30-percent tax under section 871(a)(1)(D)
or 881(a)(4), relating to contingent payments received from the sale or
exchange of patents, copyrights, and similar intangible property.
(d) Exceptions to withholding where no money or property is paid or
lack of knowledge--(1) General rule. A withholding agent who is not
related to the recipient or beneficial owner has an obligation to
withhold under section 1441 only to the extent that, at any time
between the date that the obligation to withhold would arise (but for
the provisions of this paragraph (d)) and the due date for the filing
of return on Form 1042 (including extensions) for the year in which the
payment occurs, it has control over, or custody of money or property
owned by the recipient or beneficial owner from which to withhold an
amount and has knowledge of the facts that give rise to the payment.
The exemption from the obligation to withhold under this paragraph (d)
shall not apply, however, to distributions with respect to stock or if
the lack of control or custody of money or property from which to
withhold is part of a pre-arranged plan known to the withholding agent
to avoid withholding under section 1441, 1442, or 1443. For purposes of
this paragraph (d), a withholding agent is related to the recipient or
beneficial owner if it is related within the meaning of section 482.
Any exemption from withholding pursuant to this paragraph (d) applies
without a requirement that documentation be furnished to the
withholding agent. However, documentation may have to be furnished for
purposes of the information reporting provisions under chapter 61 of
the Code and backup withholding under section 3406. The exemption from
withholding under this paragraph (d) is not a determination that the
amounts are not fixed or determinable annual or periodical income, nor
does it constitute an exemption from reporting the amount under
Sec. 1.1461-1 (b) and (c).
(2) Cancellation of debt. A lender of funds who forgives any
portion of the loan is deemed to have made a payment
[[Page 53446]]
of income to the borrower under Sec. 1.61-12 at the time the event of
forgiveness occurs. However, based on the rules of paragraph (d)(1) of
this section, the lender shall have no obligation to withhold on such
amount to the extent that it does not have custody or control over
money or property of the borrower at any time between the time that the
loan is forgiven and the due date (including extensions) of the Form
1042 for the year in which the payment is deemed to occur. A payment
received by the lender from the borrower in partial settlement of the
debt obligation does not, for this purpose, constitute an amount of
money or property belonging to the borrower from which the withholding
tax liability can be satisfied.
(3) Satisfaction of liability following underwithholding by
withholding agent. A withholding agent who, after failing to withhold
the proper amount from a payment, satisfies the underwithheld amount
out of its own funds may cause the beneficial owner to realize income
to the extent of such satisfaction or may be considered to have
advanced funds to the beneficial owner. Such determination depends upon
the contractual arrangements governing the satisfaction of such tax
liability (e.g., arrangements in which the withholding agent agrees to
pay the amount due under section 1441 for the beneficial owner) or
applicable laws governing the transaction. If the satisfaction of the
tax liability is considered to constitute an advance of funds by the
withholding agent to the beneficial owner and the withholding agent
fails to collect the amount from the beneficial owner, a cancellation
of indebtedness may result, giving rise to income to the beneficial
owner under Sec. 1.61-12. While such income is annual or periodical
fixed or determinable, the withholding agent shall have no liability to
withhold on such income to the extent the conditions set forth in
paragraphs (d) (1) and (2) of this section are satisfied with respect
to this income. Contrast the rules of this paragraph (d)(3) with the
rules in Sec. 1.1441-3(f)(1) dealing with a situation in which the
satisfaction of the beneficial owner's tax liability itself constitutes
additional income to the beneficial owner. See, also, Sec. 1.1441-
3(c)(2)(ii)(B) for a special rule regarding underwithholding on
corporate distributions due to underestimating an amount of earnings
and profits.
(e) Payment--(1) General rule. A payment is considered made to a
person if that person realizes income whether or not such income
results from an actual transfer of cash or other property. For example,
realization of income from cancellation of debt results in a deemed
payment. A payment is considered made when the amount would be
includible in the income of the beneficial owner under the U.S. tax
principles governing the cash basis method of accounting. A payment is
considered made whether it is made directly to the beneficial owner or
to another person for the benefit of the beneficial owner (e.g., to the
agent of the beneficial owner). Thus, a payment of income is considered
made to a beneficial owner if it is paid in complete or partial
satisfaction of the beneficial owner's debt to a creditor. In the event
of a conflict between the rules of this paragraph (e)(1) governing
whether a payment has occurred and its timing and the rules of
Sec. 31.3406(a)-4 of this chapter, the rules in Sec. 31.3406(a)-4 of
this chapter shall apply to the extent that the application of section
3406 is relevant to the transaction at issue.
(2) Income allocated under section 482. A payment is considered
made to the extent income subject to withholding is allocated under
section 482. Further, income arising as a result of a secondary
adjustment made in conjunction with a reallocation of income under
section 482 from a foreign person to a related U.S. person is
considered paid to a foreign person unless the taxpayer to whom the
income is reallocated has entered into a repatriation agreement with
the IRS and the agreement eliminates the liability for withholding
under this section. For purposes of determining the liability for
withholding, the payment of income is deemed to have occurred on the
last day of the taxable year in which the transactions that give rise
to the allocation of income and the secondary adjustments, if any, took
place.
(3) Blocked income. Income is not considered paid if it is blocked
under executive authority, such as the President's exercise of
emergency power under the Trading with the Enemy Act (50 U.S.C. App.
5), or the International Emergency Economic Powers Act (50 U.S.C. 1701
et seq). However, on the date that the blocking restrictions are
removed, the income that was blocked is considered constructively
received by the beneficial owner (and therefore paid for purposes of
this section) and subject to withholding under Sec. 1.1441-1. Any
exemption from withholding pursuant to this paragraph (e)(3) applies
without a requirement that documentation be furnished to the
withholding agent. However, documentation may have to be furnished for
purposes of the information reporting provisions under chapter 61 of
the Code and backup withholding under section 3406. The exemption from
withholding granted by this paragraph (e)(3) is not a determination
that the amounts are not fixed or determinable annual or periodical
income.
(4) Special rules for dividends. For purposes of sections 1441 and
6042, in the case of stock for which the record date is earlier than
the payment date, dividends are considered paid on the payment date. In
the case of a corporate reorganization, if a beneficial owner is
required to exchange stock held in a former corporation for stock in a
new corporation before dividends that are to be paid with respect to
the stock in the new corporation will be paid on such stock, the
dividend is considered paid on the date that the payee or beneficial
owner actually exchanges the stock and receives the dividend. See
Sec. 31.3406(a)-4(a)(2) of this chapter.
(5) Certain interest accrued by a foreign corporation. For purposes
of sections 1441 and 6049, a foreign corporation shall be treated as
having made a payment of interest as of the last day of the taxable
year if it has made an election under Sec. 1.884-4(c)(1) to treat
accrued interest as if it were paid in that taxable year.
(6) Payments other than in U.S. dollars. For purposes of section
1441, a payment includes amounts paid in a medium other than U.S.
dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to
withholding in the case of such payments.
(f) Effective date. This section applies to payments made after
December 31, 1998.
Par. 8. Section 1.1441-3 is amended by:
1. Revising the section heading, and paragraphs (a) through (f) and
(h).
2. Removing paragraphs (g) and (i).
3. Redesignating paragraph (j) as paragraph (g).
4. Removing the language ``(j)'' and adding ``(g)'' in its place in
the fourth sentence of newly designated paragraph (g)(1) and in the
first sentence of newly designated paragraph (g)(2).
5. Removing the language ``Sec. 1.1441-7(d)'' in the last sentence
of newly designated paragraph (g)(1) and adding ``Sec. 1.1441-7(f)'' in
its place.
6. Removing the authority citation at the end of the section.
The revisions read as follows:
Sec. 1.1441-3 Determination of amounts to be withheld.
(a) Withholding on gross amount. Except as otherwise provided in
regulations under section 1441, the amount subject to withholding under
Sec. 1.1441-1 is the gross amount of income subject to withholding that
is
[[Page 53447]]
paid to a foreign person. The gross amount of income subject to
withholding may not be reduced by any deductions, except to the extent
that one or more personal exemptions are allowed as provided under
Sec. 1.1441-4(b)(6).
(b) Withholding on payments on certain obligations--(1) Withholding
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under
Sec. 1.1441-1 upon the gross amount of stated interest payable on the
interest payment date, regardless of whether the payment constitutes a
return of capital or the payment of income within the meaning of
section 61. To the extent an amount was withheld on an amount of
capital rather than interest, see the rules for adjustments, refunds,
or credits under Sec. 1.1441-1(b)(8).
(2) No withholding between interest payment dates--(i) In general.
A withholding agent is not required to withhold under Sec. 1.1441-1
upon interest accrued on the date of a sale of debt obligations when
that sale occurs between two interest payment dates (even though the
amount is treated as interest under Sec. 1.61-7 (c) or (d) and is
subject to tax under section 871 or 881). See Sec. 1.6045-1(c) for
reporting requirements by brokers with respect to sale proceeds. See
Sec. 1.61-7(c) regarding the character of payments received by the
acquirer of an obligation subsequent to such acquisition (that is, as a
return of capital or interest accrued after the acquisition). Any
exemption from withholding pursuant to this paragraph (b)(2)(i) applies
without a requirement that documentation be furnished to the
withholding agent. However, documentation may have to be furnished for
purposes of the information reporting provisions under section 6045 or
6049 and backup withholding under section 3406. The exemption from
withholding granted by this paragraph (b)(2) is not a determination
that the accrued interest is not fixed or determinable annual or
periodical income under section 871(a) or 881(a) nor does it constitute
an exemption from reporting under Sec. 1.1461-1 (b) and (c) the amount
of accrued interest paid.
(ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this
section does not apply if the sale of securities is part of a plan the
principal purpose of which is to avoid tax by selling and repurchasing
securities and the withholding agent has actual knowledge or reason to
know of such plan.
(c) Corporate distributions--(1) General rule. A corporation making
a distribution with respect to its stock or any intermediary (described
in Sec. 1.1441-1(e)(3)(i)) making a payment of such a distribution is
required to withhold under section 1441, 1442, or 1443 on the entire
amount of the distribution, unless it elects to reduce the amount of
withholding under the provisions of paragraph (c)(2) of this section.
The exemption from withholding provided by this paragraph (c) applies
without any requirement to furnish documentation to the withholding
agent. However, documentation may have to be furnished for purposes of
the information reporting provisions under section 6042 or 6045 and
backup withholding under section 3406. The exemption from withholding
granted by this paragraph (c) does not constitute a determination that
the exempted amounts are not fixed or determinable annual or periodical
income under sections 871(a) or 881(a) nor does it constitute an
exemption from reporting under Sec. 1.1461-1 (b) and (c) the amount of
the distribution.
(2) Exception to withholding on distributions--(i) In general. An
election described in paragraph (c)(1) of this section is made by
actually reducing the amount of withholding at the time that the
payment is made. An intermediary that makes a payment of a distribution
is not required to reduce the withholding based on the distributing
corporation's estimate of earnings and profits, even if the
distributing corporation itself elects to reduce the withholding on
payments of distributions that it itself makes to foreign persons.
Conversely, an intermediary may elect to reduce the amount of
withholding with respect to the payment of a distribution even if the
distributing corporation does not so elect for the payments of
distributions that it itself makes of distributions to foreign persons.
The amounts with respect to which a distributing corporation or
intermediary may elect to reduce the withholding are as follows:
(A) A distributing corporation or intermediary may elect to not
withhold on a distribution to the extent it represents a nontaxable
distribution payable in stock or stock rights.
(B) A distributing corporation or intermediary may elect to not
withhold on a distribution to the extent it represents a distribution
in part or full payment in exchange for stock.
(C) A distributing corporation or intermediary may elect to not
withhold on a distribution (actual or deemed) to the extent it is not
paid out of accumulated earnings and profits or current earnings and
profits, based on a reasonable estimate determined under paragraph
(c)(2)(ii) of this section.
(D) A regulated investment company or intermediary may elect to not
withhold on a distribution representing a capital gain dividend (as
defined in section 852(b)(3)(C)) or an exempt interest dividend (as
defined in section 852(b)(5)(A)) based on the applicable procedures
described under paragraph (c)(3) of this section.
(E) A U.S. Real Property Holding Corporation (defined in section
897(c)(2)) or a real estate investment trust (defined in section 856)
or intermediary may elect to not withhold on a distribution to the
extent it is subject to withholding under section 1445 and the
regulations under that section. See paragraph (c)(4) of this section
for applicable procedures.
(ii) Reasonable estimate of accumulated and current earnings and
profits on the date of payment--(A) General rule. A reasonable estimate
for purposes of paragraph (c)(2)(i)(C) of this section is a
determination made by the distributing corporation at a time reasonably
close to the date of payment of the extent to which the distribution
will constitute a dividend, as defined in section 316. The
determination is based upon the anticipated amount of accumulated
earnings and profits and current earnings and profits for the taxable
year in which the distribution is made, the distributions made prior to
the distribution for which the estimate is made and all other relevant
facts and circumstances. A reasonable estimate may be made based on the
procedures described in Sec. 31.3406(b)(2)-4(c)(2) of this chapter.
(B) Procedures in case of underwithholding. A distributing
corporation or intermediary that is a withholding agent with respect to
a distribution and that determines at the end of the taxable year in
which the distribution is made that it underwithheld under section 1441
on the distribution shall be liable for the amount underwithheld as a
withholding agent under section 1461. However, for purposes of this
section and Sec. 1.1461-1, any amount underwithheld paid by a
distributing corporation, its paying agent, or an intermediary shall
not be treated as income subject to additional withholding even if that
amount is treated as additional income to the shareholders unless the
additional amount is income to the shareholder as a result of a
contractual arrangement between the parties regarding the satisfaction
of the shareholder's tax liabilities. In addition, no penalties shall
be imposed for failure to withhold and deposit the tax if--
[[Page 53448]]
(1) The distributing corporation made a reasonable estimate as
provided in paragraph (c)(2)(ii)(A) of this section; and
(2) Either--
(i) The corporation or intermediary pays over the underwithheld
amount on or before the due date for filing a Form 1042 for the
calendar year in which the distribution is made, pursuant to
Sec. 1.1461-2(b); or
(ii) The corporation or intermediary is not a calendar year
taxpayer and it files an amended return on Form 1042X (or such other
form as the Commissioner may prescribe) for the calendar year in which
the distribution is made and pays the underwithheld amount and interest
within 60 days after the close of the taxable year in which the
distribution is made.
(C) Reliance by intermediary on reasonable estimate. For purposes
of determining whether the payment of a corporate distribution is a
dividend, a withholding agent that is not the distributing corporation
may, absent actual knowledge or reason to know otherwise, rely on
representations made by the distributing corporation regarding the
reasonable estimate of the anticipated accumulated and current earnings
and profits made in accordance with paragraph (c)(2)(ii)(A) of this
section. Failure by the withholding agent to withhold the required
amount due to a failure by the distributing corporation to reasonably
estimate the portion of the distribution treated as a dividend or to
properly communicate the information to the withholding agent shall be
imputed to the distributing corporation. In such a case, the Internal
Revenue Service (IRS) may collect from the distributing corporation any
underwithheld amount and subject the distributing corporation to
applicable interest and penalties as a withholding agent.
(D) Example. The rules of this paragraph (c)(2) are illustrated by
the following example:
Example. (i) Facts. Corporation X, a publicly traded corporation
with both U.S. and foreign shareholders and a calendar year
taxpayer, has an accumulated deficit in earnings and profits at the
close of 2000. In 2001, Corporation X generates $1 million of
current earnings and profits each month and makes an $18 million
distribution, resulting in a $12 million dividend. Corporation X
plans to make an additional $18 million distribution on October 1,
2002. Approximately one month before that date, Corporation X's
management receives an internal report from its legal and accounting
department concerning Corporation X's estimated current earnings and
profits. The report states that Corporation X should generate only
$5.1 million of current earnings and profits by the close of the
third quarter due to costs relating to substantial organizational
and product changes, but these changes will enable Corporation X to
generate $1.3 million of earnings and profits monthly for the last
quarter of the 2002 fiscal year. Thus, the total amount of current
and earnings and profits for 2002 is estimated to be $9 million.
(ii) Analysis. Based on the facts in paragraph (i) of this
Example, including the fact that earnings and profits estimate was
made within a reasonable time before the distribution, Corporation X
can rely on the estimate under paragraph (c)(2)(ii)(A) of this
section. Therefore, Corporation X may treat $9 million of the $18
million of the October 1, 2002, distribution to foreign shareholders
as a non-dividend distribution.
(3) Special rules in the case of distributions from a regulated
investment company--(i) General rule. If the amount of any
distributions designated as being subject to section 852(b)(3)(C) or
(5)(A) exceeds the amount that may be designated under those sections
for the taxable year, then no penalties will be asserted for any
resulting underwithholding if the designations were based on a
reasonable estimate (made pursuant to the same procedures as are
described in paragraph (c)(2)(ii)(A) of this section) and the
adjustments to the amount withheld are made within the time period
described in paragraph (c)(2)(ii)(B) of this section. Any adjustment to
the amount of tax due and paid to the IRS by the withholding agent as a
result of underwithholding shall not be treated as a distribution for
purposes of section 562(c) and the regulations thereunder. Any amount
of U.S. tax that a foreign shareholder is treated as having paid on the
undistributed capital gain of a regulated investment company under
section 852(b)(3)(D) may be claimed by the foreign shareholder as a
credit or refund under Sec. 1.1464-1.
(ii) Reliance by intermediary on reasonable estimate. For purposes
of determining whether a payment is a distribution designated as
subject to section 852(b) (3)(C) or (5)(A), a withholding agent that is
not the distributing regulated investment company may, absent actual
knowledge or reason to know otherwise, rely on the designations that
the distributing company represents have been made in accordance with
paragraph (c)(3)(i) of this section. Failure by the withholding agent
to withhold the required amount due to a failure by the regulated
investment company to reasonably estimate the required amounts or to
properly communicate the relevant information to the withholding agent
shall be imputed to the distributing company. In such a case, the IRS
may collect from the distributing company any underwithheld amount and
subject the company to applicable interest and penalties as a
withholding agent.
(4) Coordination with withholding under section 1445--(i) In
general. A distribution from a U.S. Real Property Holding Corporation
(USRPHC) (or from a corporation that was a USRPHC at any time during
the five-year period ending on the date of distribution) with respect
to stock that is a U.S. real property interest under section 897(c) or
from a Real Estate Investment Trust (REIT) with respect to its stock is
subject to the withholding provisions under section 1441 (or section
1442 or 1443) and section 1445. A USRPHC making a distribution shall be
treated as satisfying its withholding obligations under both sections
if it withholds in accordance with one of the procedures described in
either paragraph (c)(4)(i) (A) or (B) of this section. A USRPHC must
apply the same withholding procedure to all the distributions made
during the taxable year. However, the USRPHC may change the applicable
withholding procedure from year to year. For rules regarding
distributions by REITs, see paragraph (c)(4)(i)(C) of this section.
(A) Withholding under section 1441. The USRPHC may choose to
withhold on a distribution only under section 1441 (or 1442 or 1443)
and not under section 1445. In such a case, the USRPHC must withhold
under section 1441 (or 1442 or 1443) on the full amount of the
distribution, whether or not any portion of the distribution represents
a return of basis or capital gain. If a reduced tax rate under an
income tax treaty applies to the distribution by the USRPHC, then the
applicable rate of withholding on the distribution shall be no less
than 10-percent, unless the applicable treaty specifies an applicable
lower rate for distributions from a USRPHC, in which case the lower
rate may apply.
(B) Withholding under both sections 1441 and 1445. As an
alternative to the procedure described in paragraph (c)(4)(i)(A) of
this section, a USRPHC may choose to withhold under both sections 1441
(or 1442 or 1443) and 1445 under the procedures set forth in this
paragraph (c)(4)(i)(B). The USRPHC must make a reasonable estimate of
the portion of the distribution that is a dividend under paragraph
(c)(2)(ii)(A) of this section, and must--
(1) Withhold under section 1441 (or 1442 or 1443) on the portion of
the distribution that is estimated to be a dividend under paragraph
(c)(2)(ii)(A) of this section; and
[[Page 53449]]
(2) Withhold under section 1445(e)(3) and Sec. 1.1445-5(e) on the
remainder of the distribution or on such smaller portion based on a
withholding certificate obtained in accordance with Sec. 1.1445-
5(e)(2)(iv).
(C) Coordination with REIT withholding. Withholding is required
under section 1441 (or 1442 or 1443) on the portion of a distribution
from a REIT that is not designated as a capital gain dividend or return
of basis. Withholding is required under section 1445 on the portion of
the distribution designated by a REIT as a capital gain dividend. See
Sec. 1.1445-8.
(ii) Intermediary reliance rule. A withholding agent that is not
the distributing USRPHC must withhold under paragraph (c)(4)(i) of this
section, but may, absent actual knowledge or reason to know otherwise,
rely on representations made by the USRPHC regarding the determinations
required under paragraph (c)(4)(i) of this section. Failure by the
withholding agent to withhold the required amount due to a failure by
the distributing USRPHC to make these determinations in a reasonable
manner or to properly communicate the determinations to the withholding
agent shall be imputed to the distributing USRPHC. In such a case, the
IRS may collect from the distributing USRPHC any underwithheld amount
and subject the distributing USRPHC to applicable interest and
penalties as a withholding agent.
(d) Withholding on payments that include an undetermined amount of
income--(1) In general. Where the withholding agent makes a payment and
does not know at the time of payment the amount that is subject to
withholding because the determination of the source of the income or
the calculation of the amount of income subject to tax depends upon
facts that are not known at the time of payment, then the withholding
agent must withhold an amount under Sec. 1.1441-1 based on the entire
amount paid that is necessary to assure that the tax withheld is not
less than 30 percent (or other applicable percentage) of the amount
that will subsequently be determined to be from sources within the
United States or to be income subject to tax. The amount so withheld
shall not exceed 30 percent of the amount paid. In the alternative, the
withholding agent may make a reasonable estimate of the amount from
U.S. sources or of the taxable amount and set aside a corresponding
portion of the amount due under the transaction and hold such portion
in escrow until the amount from U.S. sources or the taxable amount can
be determined, at which point withholding becomes due under
Sec. 1.1441-1. See Sec. 1.1441-1(b)(8) regarding adjustments in the
case of overwithholding. The provisions of this paragraph (d)(1) shall
not apply to the extent that other provisions of the regulations under
chapter 3 of the Internal Revenue Code (Code) specify the amount to be
withheld, if any, when the withholding agent lacks knowledge at the
time of payment (e.g., lack of reliable knowledge regarding the status
of the payee or beneficial owner, addressed in Sec. 1.1441-1(b)(3), or
lack of knowledge regarding the amount of original issue discount under
Sec. 1.1441-2(b)(3)).
(2) Withholding on certain gains. Absent actual knowledge or reason
to know otherwise, a withholding agent may rely on a claim regarding
the amount of gain described in Sec. 1.1441-2(c) if the beneficial
owner withholding certificate, or other appropriate withholding
certificate, states the beneficial owner's basis in the property giving
rise to the gain. In the absence of a reliable representation on a
withholding certificate, the withholding agent must withhold an amount
under Sec. 1.1441-1 that is necessary to assure that the tax withheld
is not less than 30 percent (or other applicable percentage) of the
recognized gain. For this purpose, the recognized gain is determined
without regard to any deduction allowed by the Code from the gains. The
amount so withheld shall not exceed 30 percent of the amount payable by
reason of the transaction giving rise to the recognized gain. See
Sec. 1.1441-1(b)(8) regarding adjustments in the case of
overwithholding.
(e) Payments other than in U.S. dollars--(1) In general. The amount
of a payment made in a medium other than U.S. dollars is measured by
the fair market value of the property or services provided in lieu of
U.S. dollars. The withholding agent may liquidate the property prior to
payment in order to withhold the required amount of tax under section
1441 or obtain payment of the tax from an alternative source. However,
the obligation to withhold under section 1441 is not deferred even if
no alternative source can be located. Thus, for purposes of withholding
under chapter 3 of the Code, the provisions of Sec. 31.3406(h)-
2(b)(2)(ii) of this chapter (relating to backup withholding from
another source) shall not apply. If the withholding agent satisfies the
tax liability related to such payments, the rules of paragraph (f) of
this section apply.
(2) Payments in foreign currency. If the amount subject to
withholding tax is paid in a currency other than the U.S. dollar, the
amount of withholding under section 1441 shall be determined by
applying the applicable rate of withholding to the foreign currency
amount and converting the amount withheld into U.S. dollars on the date
of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) in
effect on that date. A withholding agent making regular or frequent
payments in foreign currency may use a month-end spot rate or a monthly
average spot rate. A spot rate convention must be used consistently for
all non-dollar amounts withheld and from year to year. Such convention
cannot be changed without the consent of the Commissioner. The U.S.
dollar amount so determined shall be treated by the beneficial owner as
the amount of tax paid on the income for purposes of determining the
final U.S. tax liability and, if applicable, claiming a refund or
credit of tax.
(f) Tax liability of beneficial owner satisfied by withholding
agent--(1) General rule. In the event that the satisfaction of a tax
liability of a beneficial owner by a withholding agent constitutes
income to the beneficial owner and such income is of a type that is
subject to withholding, the amount of the payment deemed made by the
withholding agent for purposes of this paragraph (f) shall be
determined under the gross-up formula provided in this paragraph
(f)(1). Whether the payment of the tax by the withholding agent
constitutes a satisfaction of the beneficial owner's tax liability and
whether, as such, it constitutes additional income to the beneficial
owner, must be determined under all the facts and circumstances
surrounding the transaction, including any agreements between the
parties and applicable law. The formula described in this paragraph
(f)(1) is as follows:
[GRAPHIC] [TIFF OMITTED] TR14OC97.000
(2) Example. The following example illustrates the provisions of
this paragraph (f):
Example. College X awards a qualified scholarship within the
meaning of section 117(b) to foreign student, FS, who is in the
United States on an F visa. FS is a resident of a country that does
not have an income tax treaty with the United States. The
scholarship is $20,000 to be applied to tuition, mandatory fees and
books, plus benefits in kind consisting of room and board and
roundtrip air transportation. College X agrees to pay any U.S.
income tax owed by FS with respect to the scholarship. The fair
market value of the room and board measured by the amount College X
charges non-scholarship students is $6,000. The cost
[[Page 53450]]
of the roundtrip air transportation is $2,600. Therefore, the total
fair market value of the scholarship received by FS is $28,600.
However, the amount taxable is limited to the fair market value of
the benefits in kind ($8,600) because the portion of the scholarship
amount for tuition, fees, and books is not included in gross income
under section 117. The applicable rate of withholding is 14 percent
under section 1441(b). Therefore, under the gross-up formula,
College X is deemed to make a payment of $10,000 ($8,600 divided by
(1-.14). The U.S. tax that must be deducted and withheld from the
payment under section 1441(b) is $1,400 (.14 x $10,000). College X
reports scholarship income of $30,000 and $1,400 of U.S. tax
withheld on Forms 1042 and 1042-S.
* * * * *
(h) Effective date. Except as otherwise provided in paragraph (g)
of this section, this section applies to payments made after December
31, 1998.
Par. 9. Section 1.1441-4 is amended by:
1. Revising the section heading, and paragraph (a).
2. Paragraph (b)(1) is amended by:
a. Revising of paragraphs (b)(1)(i) and (b)(1)(ii).
b. Removing the period at the end of paragraph (b)(1)(iii) and
adding a semicolon in its place.
c. Removing the language ``or'' at the end of paragraph (b)(1)(iv)
and adding a semicolon in its place.
d. Removing the period at the end of paragraph (b)(1)(v) and adding
`` ; or'' in its place.
e. Adding paragraph (b)(1)(vi).
3. Adding four sentences at the end of paragraph (b)(2)(i).
4. Paragraph (b)(2)(ii) is amended by:
a. Revising paragraph (b)(2)(ii) heading and introductory text, and
paragraph (b)(2)(ii)(A).
b. Redesignating paragraph (b)(2)(ii)(H) as paragraph (b)(2)(ii)(J)
and amending newly designated paragraph (b)(2)(ii)(J) by removing the
period and adding ``; and'' in its place.
c. Redesignating paragraphs (b)(2)(ii) (B), (C), (D), (E), (F) and
(G) as paragraphs (b)(2)(ii)(D), (E), (F), (G), (H) and (I),
respectively.
d. Adding new paragraphs (b)(2)(ii)(B), (C), and (K).
e. Removing the period at the end of newly designated paragraph
(b)(2)(ii)(D) and the comma at the end of newly designated paragraphs
(b)(2)(ii)(E), (F), (G), and (H) and adding a semicolon in each place.
f. Removing the language ``, and'' and adding a semicolon in its
place in newly designated paragraph (b)(2)(ii)(I).
5. Removing the concluding text immediately following paragraph
(b)(2)(iv)(C).
6. Revising paragraph (b)(2)(v).
7. Removing the language ``statement'' and adding the language
``withholding certificate'' in each place in paragraph (b)(2)(i).
8. Removing the language ``Director of the Foreign Operations
District'' in paragraphs (b)(2)(i) fourth sentence, (b)(2)(iii) fourth
and fifth sentences, and (b)(3) first sentence, and adding the language
``Assistant Commissioner (International)'' in each place.
9. Adding paragraph (b)(6).
10. Revising paragraphs (c), (d), (e), (f), and (g) .
11. Removing paragraphs (h) and (i).
12. Removing the OMB parenthetical and the authority citation at
the end of the section.
The revisions and additions read as follows:
Sec. 1.1441-4 Exemptions from withholding for certain effectively
connected income and other amounts.
(a) Certain income connected with a U.S. trade or business--(1) In
general. No withholding is required under section 1441 on income
otherwise subject to withholding if the income is (or is deemed to be)
effectively connected with the conduct of a trade or business within
the United States and is includible in the beneficial owner's gross
income for the taxable year. For purposes of this paragraph (a), an
amount is not deemed to be includible in gross income if the amount is
(or is deemed to be) effectively connected with the conduct of a trade
or business within the United States and the beneficial owner claims an
exemption from tax under an income tax treaty because the income is not
attributable to a permanent establishment in the United States. To
claim a reduced rate of withholding because the income is not
attributable to a permanent establishment, see Sec. 1.1441-6(b)(1).
This paragraph (a) does not apply to income of a foreign corporation to
which section 543(a)(7) applies for the taxable year or to compensation
for personal services performed by an individual. See paragraph (b) of
this section for compensation for personal services performed by an
individual.
(2) Withholding agent's reliance on a claim of effectively
connected income--(i) In general. Absent actual knowledge or reason to
know otherwise, a withholding agent may rely on a claim of exemption
based upon paragraph (a)(1) of this section if, prior to the payment to
the foreign person, the withholding agent can reliably associate the
payment with a Form W-8 upon which it can rely to treat the payment as
made to a foreign beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii). For purposes of this paragraph (a), a withholding
certificate is valid only if, in addition to other applicable
requirements, it includes the taxpayer identifying number of the person
whose name is on the Form W-8 and represents, under penalties of
perjury, that the amounts for which the certificate is furnished are
effectively connected with the conduct of a trade or business in the
United States. In the absence of a reliable claim that the income is
effectively connected with the conduct of a trade or business in the
United States, the income is presumed not to be effectively connected,
except as otherwise provided in paragraph (a) (2)(ii) or (3) of this
section. See Sec. 1.1441-1(e)(4)(ii)(C) for the period of validity
applicable to a certificate provided under this section and
Sec. 1.1441-1(e)(4)(ii)(D) for changes in circumstances arising during
the taxable year indicating that the income to which the certificate
relates is not, or is no longer expected to be, effectively connected
with the conduct of a trade or business within the United States. A
withholding certificate shall be effective only for the item or items
of income specified therein. The provisions of Sec. 1.1441-1(b)(3)(iv)
dealing with a 90-day grace period shall apply for purposes of this
section.
(ii) Special rules for U.S. branches of foreign persons--(A) U.S.
branches of certain foreign banks or foreign insurance companies. A
payment to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv)(A) is
presumed to be effectively connected with the conduct of a trade or
business in the United States without the need to furnish a
certificate, unless the U.S. branch provides a U.S. branch withholding
certificate described in Sec. 1.1441-1(e)(3)(v) that represents
otherwise. If no certificate is furnished but the income is not, in
fact, effectively connected income, then the branch must withhold
whether the payment is collected on behalf of other persons or on
behalf of another branch of the same entity. See Sec. 1.1441-1(b)
(2)(iv) and (6) for general rules applicable to payments to U.S.
branches of foreign persons.
(B) Other U.S. branches. See Sec. 1.1441-1(b)(2)(iv)(E) for similar
procedures for other U.S. branches to the extent provided in a
determination letter from the district director or the Assistant
Commissioner (International).
(3) Income on notional principal contracts--(i) General rule. A
withholding agent that pays amounts attributable to a notional
principal contract described in Sec. 1.863-7(a) or 1.988-2(e) shall
have no obligation to
[[Page 53451]]
withhold on the amounts paid under the terms of the notional principal
contract regardless of whether a withholding certificate is provided.
However, a withholding agent must file returns under Sec. 1.1461-1(b)
and (c) reporting the income that it must treat as paid to a foreign
person and as effectively connected with the conduct of a trade or
business in the United States under the provisions of this paragraph
(a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this
section, a withholding agent must so treat the income unless it can
reliably associate the payment with a withholding certificate upon
which it can rely to treat the payment as an amount that is not
effectively connected. Income on a notional principal contract does not
include the amount characterized as interest under the provisions of
Sec. 1.446-3(g)(4).
(ii) Exception for certain payments. A payment to a foreign
financial institution (within the meaning of Sec. 1.165-12(c)(1)(iv))
shall not be treated as effectively connected with the conduct of a
trade or business within the United States for purposes of paragraph
(a)(3)(i) of this section even if no withholding certificate is
furnished if the payee provides a representation in a master agreement
that governs the transactions in notional principal contracts between
the parties (for example an International Swaps and Derivatives
Association (ISDA) Agreement, including the Schedule thereto) or in the
confirmation on the particular notional principal contract transaction
that the counterparty is a U.S. person or a non-U.S. branch of a
foreign person.
(b) * * * (1) * * *
(i) Such compensation is subject to withholding under section 3402
(relating to withholding on wages) and the regulations under that
section;
(ii) Such compensation would be subject to withholding under
section 3402 but for the provisions of section 3401(a) (not including
paragraph (a)(6) of that section) and the regulations under that
section. This paragraph (b)(1)(ii) does not apply to payments to a
nonresident alien individual from any trust described in section
401(a), any annuity plan described in section 403(a), or any annuity,
custodial account, or retirement income account described in section
403(b). Instead, these payments are subject to withholding under this
section to the extent they are exempted from the definition of wages
under section 3401(a)(12) or to the extent they are from an annuity,
custodial account, or retirement income account described in section
403(b). Thus, for example, payments to a nonresident alien individual
from a trust described in section 401(a) are subject to withholding
under section 1441 and not under section 3405 or 3406;
* * * * *
(vi) Compensation that is exempt from withholding under section
3402 by reason of section 3402(e), provided that the employee and his
employer enter into an agreement under section 3402(p) to provide for
the withholding of income tax upon payments of amounts described in
Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to
enter into such an agreement should furnish his employer with Form W-4
(withholding exemption certificate) (or such other form as the Internal
Revenue Service (IRS) may prescribe). See section 3402(f) and the
regulations thereunder and Sec. 31.3402(p)-1 of this chapter.
(2) * * * (i) * * * The withholding agent may rely on an accepted
withholding certificate only if the IRS has not objected to the
certificate. For purposes of this paragraph (b)(2)(i), the IRS will be
considered to have not objected to the certificate if it has not
notified the withholding agent within a 10-day period beginning from
the date that the withholding certificate is forwarded to the IRS
pursuant to paragraph (b)(2)(v) of this section. After expiration of
the 10-day period, the withholding agent may rely on the withholding
certificate retroactive to the date of the first payment covered by the
certificate. The fact that the IRS does not object to the withholding
certificate within the 10-day period provided in this paragraph
(b)(2)(i) shall not preclude the IRS from examining the withholding
agent at a later date in light of facts that the withholding agent knew
or had reason to know regarding the payment and eligibility for a
reduced rate and that were not disclosed to the IRS as part of the 10-
day review process.
(ii) Withholding certificate claiming withholding exemption. The
statement claiming an exemption from withholding shall be made on Form
8233 (or an acceptable substitute or such other form as the IRS may
prescribe). Form 8233 shall be dated, signed by the beneficial owner
under penalties of perjury, and contain the following information--
(A) The individual's name, permanent residence address, taxpayer
identifying number (or a copy of a completed Form W-7 or SS-5 showing
that a number has been applied for), and the U.S. visa number, if any;
(B) The individual's current immigration status and visa type;
(C) The individual's original date of entry into the United States;
* * * * *
(K) Any other information as may be required by the form or
accompanying instructions in addition to, or in lieu of, the
information described in this paragraph (b)(2)(ii).
* * * * *
(v) Copies of Form 8233. The withholding agent shall forward one
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of
this section to the Assistant Commissioner (International), within five
days of such acceptance. The withholding agent shall retain a copy of
Form 8233.
* * * * *
(6) Personal exemption--(i) In general. To determine the tax to be
withheld at source under Sec. 1.1441-1 from remuneration paid for
personal services performed within the United States by a nonresident
alien individual and from scholarship and fellowship income described
in paragraph (c) of this section, a withholding agent may take into
account one personal exemption pursuant to sections 873(b)(3) and 151
regardless of whether the income is effectively connected. For purposes
of withholding under section 1441 on remuneration for personal
services, the exemption must be prorated upon a daily basis for the
period during which the personal services are performed within the
United States by the nonresident alien individual by dividing by 365
the number of days in the period during which the individual is present
in the United States for the purpose of performing the services and
multiplying the result by the amount of the personal exemption in
effect for the taxable year. See Sec. 31.3402(f)(6)-1 of this chapter.
(ii) Multiple exemptions. More than one personal exemption may be
claimed in the case of a resident of a contiguous country or a national
of the United States under section 873(b)(3). In addition, residents of
a country with which the United States has an income tax treaty in
effect may be eligible to claim more than one personal exemption if the
treaty so provides. Claims for more than one personal exemption shall
be made on the withholding certificate furnished to the withholding
agent. The exemption must be prorated on a daily basis in the same
manner as described in paragraph (b)(6)(i) of this section.
(iii) Special rule where both certain scholarship and compensation
income are received. The fact that both non-compensatory scholarship
income and compensation income (including
[[Page 53452]]
compensatory scholarship income) are received during the taxable year
does not entitle the taxpayer to claim more than one personal exemption
amount (or more than the additional amounts permitted under paragraph
(b)(6)(ii) of this section). Thus, if a nonresident alien student
receives non-compensatory taxable scholarship income from one
withholding agent and compensation income from another withholding
agent, no more than the total personal exemption amount permitted under
the Internal Revenue Code or under an income tax treaty may be taken
into account by both withholding agents. For this purpose, the
withholding agent may rely on a representation from the beneficial
owner that the exemption amount claimed does not exceed the amount
permissible under this section.
(c) Special rules for scholarship and fellowship income--(1) In
general. Under section 871(c), certain amounts paid as a scholarship or
fellowship for study, training, or research in the United States to a
nonresident alien individual temporarily present in the United States
as a nonimmigrant under section 101(a)(15) (F), (J), (M), or (Q) of the
Immigration and Nationality Act are treated as income effectively
connected with the conduct of a trade or business within the United
States. The amounts described in the preceding sentence are those
amounts that do not represent compensation for services. Such amounts
(as described in the second sentence of section 1441(b)) are subject to
withholding under section 1441, but at the lower rate of 14 percent.
That rate may be reduced under the provisions of an income tax treaty.
Claims of a reduced rate under an income tax treaty shall be made under
the procedures described in Sec. 1.1441-6(b)(1). Therefore, claims for
reduction in withholding under an income tax treaty on amounts
described in this paragraph (c)(1) may not be made on a Form 8233.
However, if the payee is receiving both compensation for personal
services (including compensatory scholarship income) and non-
compensatory scholarship income described in this paragraph (c)(1) from
the same withholding agent, claims for reduction of withholding on both
types of income may be made on Form 8233.
(2) Alternate withholding election. A withholding agent may elect
to withhold on the amounts described in paragraph (c)(1) of this
section at the rates applicable under section 3402, as if the income
were wages. Such election shall be made by obtaining a Form W-4 (or an
acceptable substitute or such other form as the IRS may prescribe) from
the beneficial owner. The fact that the withholding agent asks the
beneficial owner to furnish a Form
W-4 for such fellowship or scholarship income or to take such income
into account in preparing such Form
W-4 shall serve as notice to the beneficial owner that the income is
being treated as wages for purposes of withholding tax under section
1441.
(d) Annuities received under qualified plans. Withholding is not
required under section Sec. 1.1441-1 in the case of any amount received
as an annuity if the amount is exempt from tax under section 871(f) and
the regulations under that section. The withholding agent may exempt
the payment from withholding if, prior to payment, it can reliably
associate the payment with documentation upon which it can rely to
treat the payment as made to a beneficial owner in accordance with
Sec. 1.1441-1(e)(1)(ii). A beneficial owner withholding certificate
furnished for purposes of claiming the benefits of the exemption under
this paragraph (d) is valid only if, in addition to other applicable
requirements, it contains a taxpayer identifying number.
(e) Per diem of certain alien trainees. Withholding is not required
under section 1441(a) and Sec. 1.1441-1 on per diem amounts paid for
subsistence by the United States Government (directly or by contract)
to any nonresident alien individual who is engaged in any program of
training in the United States under the Mutual Security Act of 1954, as
amended (22 U.S.C. chapter 24). This rule shall apply even though such
amounts are subject to tax under section 871. Any exemption from
withholding pursuant to this paragraph (e) applies without a
requirement that documentation be furnished to the withholding agent.
However, documentation may have to be furnished for purposes of the
information reporting provisions under section 6041 and backup
withholding under section 3406. The exemption from withholding granted
by this paragraph (e) is not a determination that the amounts are not
fixed or determinable annual or periodical income.
(f) Failure to receive withholding certificates timely or to act in
accordance with applicable presumptions. See applicable procedures
described in Sec. 1.1441-1(b)(7) in the event the withholding agent
does not hold an appropriate withholding certificate or other
appropriate documentation at the time of payment or does not act in
accordance with applicable presumptions described in paragraph (a)
(2)(i), (2)(ii), or (3) of this section.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 1998.
(2) Transition rules. A withholding agent that on December 31,
1998, holds a Form 4224 or 8233 that is a valid certificate as
determined under the regulations in effect prior to January 1, 1999
(see CFR part 1 revised, April 1, 1997), may treat the certificate as a
valid withholding certificate until its validity expires under those
regulations or, if earlier, until December 31, 1999. Further, the
validity of a withholding certificate or statement that is dated prior
to January 1, 1998, is valid on January 1, 1998, and would expire at
any time during 1998, is extended until December 31, 1998 (and is not
extended after December 31, 1998 by reason of the immediately preceding
sentence). The rule in this paragraph (g)(2), however, does not apply
to extend the validity period of a withholding certificate that expires
in 1998 solely by reason of changes in the circumstances of the person
whose name is on the certificate. Notwithstanding the three preceding
sentences, a withholding agent may choose to not take advantage of the
transition rule in this paragraph (g)(2) with respect to one or more
withholding certificates and, therefore, to require new withholding
certificates conforming to the requirements described in this section.
Sec. 1.1441-4T [Removed]
Par. 10. Section 1.1441-4T is removed.
Par. 11. Sections 1.1441-5 and 1.1441-6 are revised to read as
follows:
Sec. 1.1441-5 Withholding on payments to partnerships, trusts, and
estates.
(a) Rules of withholding applicable to payments to partnerships.
This paragraph (a) describes the determinations that a withholding
agent must make when making a payment to a person that may be a
partnership (as defined in Sec. 1.1441-1(c)(6)(ii)(C)). Such
determinations are made in order to determine a withholding agent's
obligations under chapters 3 and 61 of the Internal Revenue Code (Code)
and sections 3402, 3405, and 3406 (and applicable regulations under
those provisions) to withhold and report payments of amounts subject to
withholding under chapter 3 of the Code and the regulations thereunder.
The reliance provisions stated in this paragraph (a) are subject to the
presumptions described in Sec. 1.1441-1(b)(3) and paragraph (d) of this
section, including Sec. 1.1441-1(b)(3)(ix) regarding
[[Page 53453]]
the withholding agent's actual knowledge or reason to know that the
presumptions are not correct. For similar presumptions for reporting
and withholding on amounts not subject to withholding under chapter 3
of the Code (e.g., foreign source income, broker proceeds) that may be
paid to a foreign partnership, see Sec. 1.6049-5(d) (2) through (5).
(1) The withholding agent must determine whether the payee is a
U.S. or a foreign person. For this purpose, the withholding agent may
treat the payee as U.S. or foreign if it can reliably associate the
payment with a Form W-9 described in Sec. 1.1441-1(d) or a Form W-8
described in Sec. 1.1441-1(e)(2)(i) or (3)(i). In the absence of
documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of this
section for applicable presumptions of foreign or U.S. status and other
relevant characteristics.
(2) If the payee is determined to be a foreign person, the
withholding agent must determine whether the foreign payee is acting
for its own account or for the account of others (i.e., as an
intermediary, as defined in Sec. 1.1441-1(e)(3)(i)). The withholding
agent may treat the payee as a foreign intermediary if it can reliably
associate the payment with a Form W-8 described in Sec. 1.1441-1(e)(3)
(ii), (iii), or (v), within the meaning of Sec. 1.1441-1(b)(3)(v)(A).
(3) If the foreign payee is determined to act as an intermediary
described in Sec. 1.1441-1(e)(3)(i), the withholding agent must
determine whether or not the payee is a qualified intermediary. The
withholding agent may treat the payee as a qualified intermediary only
if it can reliably associate the payment with a Form W-8 described in
Sec. 1.1441-1(e)(3)(ii). A foreign payee that is treated as an
intermediary with respect to a payment is subject to the provisions
applicable to intermediaries in Sec. 1.1441-1(e) (3) or (5). In such a
case, the provisions of paragraph (c) of this section do not apply to
the payment.
(4) If the foreign payee is determined to act for its own account
(or is so presumed), the withholding agent must determine the status of
the payee as a partnership. The withholding agent may treat the payee
as a domestic or as a foreign partnership if it can reliably associate
the payment with a Form W-9 furnished in accordance with Sec. 1.1441-
1(d) (2) or (4) (for a domestic partnership) or a Form W-8 described in
paragraph (c) (2)(iv) or (3)(iii) of this section (for a foreign
partnership). See Sec. 1.1441-1(e)(4)(viii) for reliance on the payee's
representations on a Form W-8. In the absence of documentation, see
Sec. 1.1441-1(b)(3)(ii) and paragraph (d)(2) of this section for
applicable presumptions of status.
(5) If the foreign payee is determined to be a foreign partnership
and the withholding agent has determined (or presumes) that the
partnership is acting for the account of its partners, then the
withholding agent must determine whether the payment represents income
effectively connected with the partnership's conduct of a U.S. trade or
business. The withholding agent may treat the payment as effectively
connected if it can reliably associate the payment with a Form W-8
described in paragraph (c)(3)(iii) of this section representing that
the income is effectively connected or if it so presumes in accordance
with the provisions in Sec. 1.1441-4(a) (2)(ii) or (3). In the absence
of documentation, the payment is generally presumed to be non-
effectively connected. See Sec. 1.1441-4(a)(2)(i). See Secs. 1.1461-
1(c)(2)(ii)(A), 1.6031-1 and 1.6031(b)-1T for reporting requirements
applicable to the withholding agent and to the partnership.
(6) If the withholding agent cannot reliably treat the payment as
effectively connected income nor presume that it is so connected, then
the withholding agent must determine whether the partnership is a
withholding foreign partnership described in paragraph (c)(2)(i) of
this section. The withholding agent may treat the foreign partnership
as a withholding partnership if it can reliably associate the payment
with a Form W-8 described in paragraph (c)(2)(iv) of this section. In
the absence of a reliable Form W-8, the foreign partnership is presumed
to be a non-withholding foreign partnership described in paragraph
(c)(3)(i) of this section. In such a case, under paragraph (c)(1)(i) of
this section, the withholding agent must treat the partners, rather
than the partnership, as payees. See paragraph (d) of this section for
determining the status of the partners as U.S. or foreign persons in
the absence of documentation. See Sec. 1.1461-1(c)(2)(ii)(A), 1.6031-1
and 1.6031(b)-1T for reporting requirements applicable to the
withholding agent and to the partnership.
(7) If the withholding agent determines that the payee is a U.S.
partnership, or so presumes in accordance with paragraph (d)(2) of this
section in the absence of documentation, the withholding agent is not
required to withhold under paragraph (b)(1) of this section because the
partnership is treated as a U.S. payee. See paragraph (b)(2) of this
section for withholding requirements applicable to a domestic
partnership with foreign partners. See Secs. 1.1461-1(c)(2)(ii)(A),
1.6031-1 and 1.6031(b)-1T for reporting requirements applicable to the
withholding agent and to the partnership.
(8) In order to determine whether to rely on a claim for a reduced
rate under a tax treaty by a person that the withholding agent treats
as a partnership or as a partner in a partnership, the withholding
agent must apply the provisions of Sec. 1.894-1T(d). For applicable
procedures regarding reliance by a withholding agent on a claim for
benefits under a tax treaty in such a situation, see Sec. 1.1441-
6(b)(4).
(b) Domestic partnerships--(1) Exemption from withholding on
payment to domestic partnerships. A payment to a person that the
withholding agent may treat as a domestic partnership is treated as a
payment to a U.S. payee. Therefore, a payment to a domestic partnership
is not subject to withholding under section 1441 even though it may
have partners that are foreign persons. A withholding agent may treat
the person to whom the payment is made as a domestic partnership if it
can reliably associate the payment with a Form W-9 furnished by the
partnership in accordance with the procedures under Sec. 1.1441-1(d)
(2) or (4) or based upon the presumptions described in paragraph (d)(2)
of this section.
(2) Withholding by a domestic partnership--(i) In general. A
domestic partnership is required to withhold under Sec. 1.1441-1 as a
withholding agent on the gross amount of items of income subject to
withholding that are includible in the distributive share of income of
a partner that is a foreign person. Pursuant to the authority provided
under section 702(a), each partner shall take into account separately
its distributive share of amounts subject to withholding, and thus the
partnership, pursuant to section 703(a)(1), shall separately state
these amounts when computing its taxable income. A partnership shall
withhold when any distributions that include amounts subject to
withholding are made or when guaranteed payments are made. To the
extent a foreign partner's distributive share of an amount subject to
withholding has not been actually distributed, the partnership is
required to withhold on the partner's distributive share of that amount
on the earlier of the date that the statement required under section
6031(b) and Sec. 1.6031(b)-1T to be provided to that partner is mailed
or otherwise furnished to the partner or the due date for furnishing
that statement as provided under Sec. 1.6031(b)-1T. If a
[[Page 53454]]
partnership withholds on a distributive share before the amount is
actually distributed to the partner, then withholding is not required
when the amount is subsequently distributed. Withholding on items of
income that are effectively connected income in the hands of the
partners who are foreign persons is governed by section 1446 and not by
this section. In such a case, partners in a domestic partnership are
not required to furnish a withholding certificate in order to claim an
exemption from withholding under section 1441(c)(1) and Sec. 1.1441-4.
(ii) Determination by the domestic partnership of the partners'
status. For purposes of determining whether the partners or some other
persons are the payees of the partners' distributive shares of any
payment made to the partnership and the status of the partners, the
partnership shall apply the rules of Sec. 1.1441-1(b) (2) and (3), and
of paragraphs (c)(1) and (d) of this section (in the case of a partner
that is a foreign partnership) and of paragraph (e) of this section (in
the case of a partner that is a foreign estate or a foreign trust) in
the same manner as if the partnership were making a payment directly to
the partners other than in their capacity as partners.
(iii) Reliance on a partner's claim for reduced withholding. Absent
actual knowledge or reason to know otherwise, a domestic partnership
may rely on a claim for reduced withholding under chapter 3 of the Code
by a partner, if prior to the time the partnership is required to
withhold, the partnership can reliably associate the partner's
distributive share of the partnership items with documentation upon
which it may rely to treat the partner or another person as a U.S.
person under Sec. 1.1441-1(d) (2) or (3), as a U.S. beneficial owner
under Sec. 1.1441-1(d)(4), or as a foreign beneficial owner under
Sec. 1.1441-1(e)(1)(ii).
(iv) Rules for reliably associating a payment with documentation.
For rules regarding the reliable association of a payment with
documentation, see Sec. 1.1441-1(b)(2)(vii).
(v) Coordination with chapter 61 of the Internal Revenue Code and
section 3406. A domestic partnership is not a payor for purposes of
chapter 61 of the Code or section 3406 with respect to payments to its
partners in their capacity as partners. Thus, it is not required to
make an information return on Form 1099 nor to backup withhold with
respect to its partners' distributive share of partnership items.
However, it must file returns under section 6031. Such returns are in
lieu of making returns under Sec. 1.1461-1 (b) and (c). See
Sec. 1.1461-1(c)(2)(ii)(A).
(c) Foreign partnerships--(1) Determination of payee--(i) Payments
treated as made to partners. Except as otherwise provided in paragraph
(c)(1)(ii) of this section, a payment to a person that the withholding
agent may treat as a foreign partnership in accordance with paragraph
(c)(2)(i), (3)(i), or (d)(2) of this section is treated as a payment to
the partners (looking through partners that are foreign flow-through
entities) as follows--
(A) If the withholding agent can reliably associate the partner's
distributive share of the payment with a Form W-9, a Form W-8, or other
appropriate documentation upon which it can rely to treat the payment
as made to a U.S. or foreign beneficial owner under Sec. 1.1441-1
(d)(4) or (e)(1)(ii), then the beneficial owner so identified is
treated as the payee;
(B) If the withholding agent can reliably associate the partner's
distributive share with an intermediary certificate described in
Sec. 1.1441-1(e)(3) (ii), (iii), or (v), then the rules of Sec. 1.1441-
1(b)(2)(v) shall apply to determine who the payee is in the same manner
as if the partner's distributive share of the payment had been paid
directly to such intermediary;
(C) If the withholding agent can reliably associate the partner's
distributive share with a partnership certificate described in
paragraph (c)(2)(iv) or (3)(iii) of this section, then the rules of
paragraph (c)(1) (i) or (ii) of this section shall apply to determine
whether the payment is treated as made to the partners of the higher-
tier partnership under this paragraph (c)(1)(i) or to the higher tier
partnership (under the rules of paragraph (c)(1)(ii) of this section),
in the same manner as if the partner's distributive share of the
payment had been paid directly to such foreign partnership;
(D) If the withholding agent can reliably associate the partner's
distributive share with a withholding certificate described in
Sec. 1.1441-1(e)(3)(i) regarding a foreign trust or estate, then the
rules of paragraph (e) of this section shall apply to determine who the
payees are; and
(E) If the withholding agent cannot reliably associate the
partner's distributive share with a withholding certificate or other
appropriate documentation, the partners are considered to be the payees
and the presumptions described in paragraph (d)(3) of this section
shall apply to determine the status of the partners.
(ii) Payments treated as made to the partnership. A payment to a
person that the withholding agent may treat as a foreign partnership in
accordance with paragraph (c) (2)(i), (3)(i), or (d)(2) of this section
is treated as a payment to the foreign partnership and not to its
partners only if--
(A) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(2)(iv) of this
section (dealing with a certificate from a person representing to be a
withholding foreign partnership); or
(B) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(3)(iii) of this
section certifying that the payment is income that is effectively
connected with the conduct of a trade or business in the United States.
(iii) Rules for reliably associating a payment with documentation.
For rules regarding the reliable association of a payment with
documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence of
documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of this
section for applicable presumptions.
(iv) Example. The rules of paragraphs (c)(1) (i) and (ii) of this
section are illustrated by the following example:
Example. (i) Facts. A foreign partnership, P, has two partners,
a corporation, C, and a partnership, P1, both organized in country
X. P1 has three partners, a foreign pension fund, a domestic
partnership, P2, and a foreign partnership, P3, organized in country
Y. P2's partners are foreign pension funds. P holds U.S. Treasury
obligations in registered form, on which it receives interest from
U.S. custodian, Z. P1 is not a withholding foreign partnership and
it does not certify that the interest is effectively connected with
the conduct of a U.S. trade or business. P3 is a withholding foreign
partnership. P has furnished a valid withholding certificate
described in paragraph (c)(3)(iii) of this section to which it has
attached valid withholding certificates for C (beneficial owner Form
W-8 described in Sec. 1.1441-1(e)(2)(i)), P1, and P1's three
partners (a Form W-9 for P2, a withholding certificate described in
paragraph (c)(2)(iv) of this section for P3 and a beneficial owner
Form W-8 described in Sec. 1.1441-1(e)(2)(i) for the foreign pension
fund). P has furnished appropriate information in accordance with
paragraph (c)(3)(iv) of this section upon which the withholding
agent can rely to determine which portion of the payment is
associated with each withholding certificate.
(ii) Analysis. The payment to P is treated as a payment to its
partners because none of the conditions described in paragraph
(c)(1)(ii) exist under the facts to treat P as the payee (i.e., it
is not a withholding foreign partnership and, although it has
furnished a withholding certificate described under paragraph
(c)(3)(iii) of this section, it is not claiming that the interest is
effectively connected with the conduct of a U.S. trade
[[Page 53455]]
or business). Under paragraph (c)(1)(i)(A) of this section, C, as a
partner of P, is treated as a payee because it is not a flow-through
entity or an intermediary (based on the documentation furnished for
C). Under paragraph (c)(1)(i)(C) of this section, P1 is not treated
as a payee because it is a foreign partnership and none of the
conditions described under paragraph (c)(1)(ii) of this section
exist under the facts to treat P as the payee. Instead, P2 (under
paragraph (c)(1)(i)(A) of this section), P3 (under paragraph
(c)(1)(ii)(A) of this section), and the foreign pension fund that is
a partner of P1 (under paragraph (c)(1)(i)(A) of this section), are
treated as the payees of P1's distributive share of the payment to
P. P2 is a payee because, although a flow-through entity, it is a
domestic partnership (see paragraph (b)(1) of this section). P3 is
treated as a payee under paragraph (c)(1)(ii)(A) of this section,
irrespective of who its partners are, because it has furnished a
valid withholding certificate as a withholding foreign partnership.
The foreign pension fund is treated as a payee under paragraph
(c)(1)(i)(A) of this section because it has furnished a beneficial
owner Form W-8 described in Sec. 1.1441-1(e)(2)(i).
(2) Withholding foreign partnerships--(i) Reliance on claim of
withholding foreign partnership status. A withholding foreign
partnership is a foreign partnership that has entered into an agreement
with the Internal Revenue Service (IRS), as described in paragraph
(c)(2)(ii) of this section. A withholding agent that can reliably
associate a payment with a certificate described in paragraph
(c)(2)(iv) of this section may treat the person to whom it makes the
payment as a withholding foreign partnership for purposes of
withholding under chapter 3 of the Code, information reporting under
chapter 61 of the Code, backup withholding under section 3406, and
withholding under other provisions of the Internal Revenue Code.
Furnishing such a certificate is in lieu of transmitting to a
withholding agent withholding certificates or other appropriate
documentation for its partners. Although the withholding foreign
partnership generally will be required to obtain withholding
certificates or other appropriate documentation from its partners
pursuant to its agreement with the IRS, it is not required to attach
such documentation to the partnership withholding certificate.
(ii) Withholding agreement--(A) In general. A foreign partnership
may claim withholding foreign partnership status before an agreement is
executed with the IRS if it has applied for such status and the IRS
authorizes such status on an interim basis under such procedures as the
IRS may issue. A withholding foreign partnership must file a
partnership return under section 6031(a) to the extent required under
the regulations under that section and furnish statements on Form K-1
to its partners under section 6031(b) to the extent required under the
regulations under that section. See Secs. 1.6031-1 and 1.6031(b)-1T.
See Sec. 1.1461-1(c)(2)(ii)(A) for an exemption from filing Forms 1042
and 1042-S. A foreign withholding partnership that wishes to also be a
qualified intermediary under Sec. 1.1441-1(e)(5) for payments it
receives for persons other than its partners may combine both
agreements into one single agreement.
(B) Terms of withholding agreement. The IRS may, upon request,
enter into a withholding agreement with a foreign partnership pursuant
to such procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). Under such withholding agreement,
a foreign partnership shall generally be subject to the applicable
withholding and reporting provisions applicable to withholding agents
and payors under chapters 3 and 61 of the Code, and section 3406, and
the regulations under those provisions, and other withholding
provisions of the Code, except to the extent provided under the
agreement. In particular, the agreement must include provisions for
reporting of information on Form 1065 and furnishing K-1 statements to
the partners in the manner required under section 6031 and the
regulations under that section. Under the agreement, a foreign
partnership may agree to act as an acceptance agent to perform the
duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The
agreement may specify the manner in which applicable procedures for
adjustments for underwithholding and overwithholding, including refund
procedures apply to the foreign partnership and its partners and the
extent to which applicable procedures may be modified. In particular, a
withholding agreement may allow a qualified intermediary to claim
refunds of overwithheld amounts on behalf of its customers. In
addition, the agreement must specify the manner in which the IRS will
audit the foreign partnership's books and records in order to verify
the accuracy of the Forms 1065 filed by the partnership and K-1
statements furnished to the partners as required under section 6031 and
the regulations under that section. The agreement shall also specify
the assets that the foreign partnership has in the United States or
alternative means of collection, if necessary.
(iii) Withholding responsibility. A withholding foreign partnership
must assume primary withholding responsibility for all payments that
are made to it and, therefore, is not required to provide information
to the withholding agent regarding each partner's distributive share of
the payment (see paragraph (c)(3)(iv) of this section for the
requirement to provide distributive share information to the
withholding agent in the case of other foreign partnerships). The
partnership shall be a withholding agent with respect to each of its
partner's distributive share of income subject to withholding that is
paid to the partnership. Therefore, the withholding agent is not
required to withhold any amount under chapter 3 of the Code on a
payment to a foreign partnership that has furnished a withholding
certificate representing that it is a withholding foreign partnership,
unless it has actual knowledge or reason to know that the certificate
is incorrect. The foreign partnership shall withhold the payments under
the same procedures and at the same time as is prescribed for
withholding by a domestic partnership under paragraph (b)(2) of this
section, except that, for purposes of determining the partner's status,
the provisions of paragraph (d)(4)(iv) of this section shall apply and
paragraph (b)(2)(ii) of this section shall not apply.
(iv) Withholding certificate from a withholding foreign
partnership. The rules of Sec. 1.1441-1(e)(4) shall apply to
withholding certificates described in this paragraph (c)(2)(iv). A
withholding certificate furnished by a withholding foreign partnership
is valid with regard to any partner on whose behalf the certificate is
furnished only if it is furnished on a Form W-8 (or an acceptable
substitute form or such other form as the IRS may prescribe), it is
signed under penalties of perjury by a partner with authority to sign
for the partnership, its validity has not expired, and it contains the
information, statement, and certifications described in this paragraph
(c)(2)(iv) as follows--
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, and the country under the laws of which the partnership is
created or governed;
(B) A certification that the partnership is a withholding foreign
partnership within the meaning of paragraph (c)(2)(i) of this section;
and
(C) Any other information or certification as may be required by
the form or accompanying instructions in addition to, or in lieu of,
the information and certifications described in this paragraph
(c)(2)(iv).
[[Page 53456]]
(3) Other foreign partnerships--(i) Reliance on claim of foreign
partnership status. A withholding agent that can reliably associate a
payment with a certificate described in paragraph (c)(3)(iii) of this
section may treat the person to whom it makes the payment as a foreign
partnership that is not a withholding foreign partnership. Such
reliance is permitted for purposes of withholding under chapter 3 of
the Code, information reporting under chapter 61 of the Code, backup
withholding under section 3406, and withholding under other provisions
of the Internal Revenue Code. For purposes of this paragraph (c)(3)(i),
a payment that the withholding agent can reliably associate with a
withholding certificate described in paragraph (c)(3)(iii) of this
section that would be valid except for the fact that some or all of the
withholding certificates or other appropriate documentation required to
be attached are lacking or are unreliable, or that information for
allocating the payment among the partners is lacking or is unreliable,
shall nevertheless be treated as a payment to a foreign partnership.
(ii) Reliance on claim of reduced withholding by a partnership for
its partners. This paragraph (c)(3)(ii) describes the manner in which a
withholding agent may rely on a claim of reduced withholding when
making a payment to a foreign partnership that is not a withholding
foreign partnership. To the extent that a withholding agent treats a
payment to a foreign partnership as a payment to its partners in
accordance with paragraph (c)(1) of this section, it may rely on a
claim for reduced withholding by a partner if, prior to the payment,
the withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(3)(iii) of this
section pertaining to the partner unless the withholding agent has
actual knowledge or reason to know that the withholding certificate is
unreliable. The certificate will be considered to pertain to the
partner if the appropriate withholding certificate for the partner is
attached to the partnership's withholding certificate. An appropriate
withholding certificate for a partner includes a beneficial owner
withholding certificate described in Sec. 1.1441-1(e)(2)(i) or, if
applicable, documentary evidence described in Sec. 1.1441-6(b)(2)(i) or
in Sec. 1.6049-5(c)(1) (for a partner claiming to be a foreign person
and a beneficial owner, determined under the provisions of Sec. 1.1441-
1(c)(6)), the applicable certificates described in Sec. 1.1441-1(d)(2)
or (3) (for a partner claiming to be a U.S. payee), an intermediary
withholding certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii),
a U.S. branch withholding certificate described in Sec. 1.1441-
1(e)(3)(v), or a partnership withholding certificate described in
paragraph (c)(2)(iv) or (3)(iii) of this section. Except where the
partnership certificate is provided for income claimed to be
effectively connected with the conduct of a trade or business in the
United States, a claim must be presented for each portion of the
payment that represents an item of income includible in the
distributive share of the partner as required under paragraph
(c)(3)(iii)(C) of this section. When making a claim for several
partners, the partnership may present a single partnership withholding
certificate to which the partners' certificates are attached. Where the
partnership certificate is provided for income claimed to be
effectively connected with the conduct of a trade or business in the
United States, the claim may be presented without having to identify
the partner's distributive share of the payment if the certificate
contains the certification described in paragraph (c)(3)(iii)(E) of
this section.
(iii) Withholding certificate from a foreign partnership that is
not a withholding foreign partnership. A withholding certificate
furnished by a foreign partnership that is not a withholding foreign
partnership is valid only if it is furnished on a Form W-8 (or an
acceptable substitute form or such other form as the IRS may
prescribe), it is signed under penalties of perjury by a partner with
authority to sign for the partnership, its validity has not expired, it
contains the information, statement, and certifications described in
this paragraph (c)(3)(iii), and the withholding certificates or other
appropriate documentation for all of the partners are attached (except
that certificates for partners are not required to be attached for a
certificate furnished solely for income claimed to be effectively
connected with the conduct of a trade or business in the United States,
regardless of any partner's status as a U.S. person). The rules of
Sec. 1.1441-1(e)(4) shall apply to withholding certificates described
in this paragraph (c)(3)(iii). The information, statement, and
certifications required on the withholding certificate are as follows:
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, and the country under the laws of which the partnership is
created or governed.
(B) A representation that the person whose name is on the
certificate is a foreign partnership.
(C) A statement attached to the certificate that provides such
information as may be required by the form and accompanying
instructions, including sufficient information to the withholding agent
to determine the amount required to be withheld from amounts paid to
the partnership, such as each partner's distributive share of amounts
to which the certificate relates, prepared in the manner described in
paragraph (c)(3)(iv) of this section. No statement is required for a
certificate furnished for income claimed to be effectively connected
with the conduct of a trade or business in the United States.
(D) If the withholding certificates are required to be attached to
the partnership's withholding certificate, a statement either that the
attached withholding certificates represent all of the partners or that
the partners for whom withholding certificates are lacking are
separately identified in the statement required under paragraph
(c)(3)(iv) of this section.
(E) A certification that the income is effectively connected with
the conduct of a trade or business in the United States, if applicable.
(F) Any other information or certification as may be required by
the form or accompanying instructions in addition to, or in lieu of,
the information and certifications described in this paragraph
(c)(3)(iii).
(iv) Information to the withholding agent regarding each partner's
distributive share. The partnership must furnish information sufficient
for the withholding agent to determine each partner's distributive
share of reportable amounts (described in Sec. 1.1441-1(e)(3)(vi)). The
sum of all partners' distributive shares, expressed as a percentage,
must equal, but not exceed one hundred percent. For purposes of this
paragraph (c)(3)(iv), the rules of Sec. 1.1441-1(e)(3)(iv) regarding
the information to furnish to the withholding agent shall apply.
(v) Withholding by a foreign partnership. A foreign partnership
described in this paragraph (c)(3) that receives an amount subject to
withholding under chapter 3 of the Code shall be deemed to have
satisfied any obligation under such chapter to withhold on the amount
with respect to any partner to the extent that the partner's
distributive share of the payment can be reliably associated with a
withholding certificate described in paragraph (c)(3)(iii) of this
section pertaining to the partner that the
[[Page 53457]]
partnership has furnished to a withholding agent and the partnership
does not know and has no reason to know that the correct amount has not
been withheld under chapter 3 of the Code and the regulations under
such chapter.
(d) Presumptions regarding payee's status in the absence of
documentation--(1) In general. This paragraph (d) contains the
applicable presumptions for determining the status of the partnership
and its partners in the absence of documentation. The provisions of
Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace period) and
Sec. 1.1441-1(b)(3) (vii) through (ix) shall apply for purposes of this
paragraph (d).
(2) Determination of partnership status as domestic or foreign in
the absence of documentation. In the absence of a valid representation
of domestic partnership status in accordance with paragraph (b)(1) of
this section and of foreign partnership status in accordance with
paragraph (c)(2)(i) or (3)(i) of this section, the withholding agent
shall determine the status of the payee as a corporation, a partnership
or otherwise, based upon the presumptions set forth in Sec. 1.1441-
1(b)(3)(ii). If, based upon these presumptions, the withholding agent
treats the payee as a partnership, the partnership shall be presumed to
be a foreign partnership if the withholding agent has actual knowledge
of the payee's employer identification number and that number begins
with the two digits ``98,'' if the withholding agent's communications
with the payee are mailed to an address in a foreign country, or if the
payment is made outside the United States (as defined in Sec. 1.6049-
5(e)). For rules regarding reliable association with a withholding
certificate from a domestic or a foreign partnership, see Sec. 1.1441-
1(b)(2)(vii).
(3) Determination of partners' status in the absence of certain
documentation. If the withholding agent treats the payee as a foreign
partnership in accordance with paragraph (c)(2)(i), (3)(i), or (d)(2)
of this section, the presumptions described in this paragraph (d)(3)
shall apply when the withholding agent cannot reliably associate a
payment with partner documentation. The provisions of paragraphs (d)
(3)(i), (ii), and (iii) of this section are not relevant to a payment
that a withholding agent can reliably associate with a withholding
certificate described in paragraph (c)(2)(iv) of this section.
(i) Documentation regarding the status of a partner is lacking or
unreliable. Any portion of a payment that the withholding agent cannot
reliably associate with a partner because a withholding certificate or
other appropriate documentation for that partner is lacking or
unreliable is presumed to be made to foreign payee. Therefore, under
Sec. 1.1441-1(b)(1), the withholding agent must withhold 30 percent
from payments to the partnership of amounts subject to withholding that
are allocable to such partner or group of partners.
(ii) Information regarding the allocation of payment is lacking or
unreliable. If a withholding agent can reliably associate a payment
with a group of partners but lacks reliable information to determine
how much of the payment is allocable to each partner in the group, the
payment, to the extent it cannot reliably be allocated, is presumed to
be allocable entirely to the partner in the group with the highest
applicable withholding rate or, if the rates are equal, to the partner
in the group with the highest U.S. tax liability, as the withholding
agent shall estimate, based on its knowledge and available information.
If a withholding certificate attached to the partnership certificate is
another partnership certificate or an intermediary certificate
described in Sec. 1.1441-1(e)(3)(iii), the rules of this paragraph
(d)(3)(ii) apply by treating the share of the payment allocable to the
other partnership or the intermediary certificate as if the payment
were made directly to the foreign partnership or intermediary.
(iii) Certification that the foreign partnership has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable. If the certification
required under paragraph (c)(3)(iii)(D) of this section (that the
attached withholding certificates and other appropriate documentation
represent all of the partners in the partnership) is lacking or is
unreliable and, as a result, the withholding agent cannot reliably
determine how much of the payment is allocable to each of the partners
or group of partners for which the withholding agent holds a
withholding certificate or other appropriate documentation, then none
of the payment can reliably be associated with any one partner and the
entire payment is presumed to be made to a foreign payee.
(iv) Determination by a withholding foreign partnership of the
status of its partners. For purposes of determining whether the
partners or some other persons are the payees of the partners'
distributive shares of any payment made to a withholding foreign
partnership, the partnership shall apply the rules of Sec. 1.1441-
1(b)(2), and of paragraph (c)(1) of this section (in the case of a
partner that is a foreign partnership) and of paragraph (e) (in the
case of a partner that is a foreign estate or a foreign trust), in the
same manner as if the partnership were making a payment directly to the
partners other than in their capacity as partners. Further, the
provisions of paragraphs (d)(3) (i), (ii), and (iii) of this section
shall apply to determine the status of partners and the applicable
withholding rates to the extent that, at the time the foreign
partnership is required to withhold on the amount, it cannot reliably
associate the amount with documentation for any one or more of its
partners. See Secs. 1.6031-1 and 1.6031-1T for reporting and filing
requirements applicable to a withholding foreign partnership.
(4) Examples. The rules of this paragraph (d) may be illustrated by
the following examples:
Example 1. (i) Facts. FP is a foreign partnership receiving U.S.
source interest that would qualify as portfolio interest described
in section 871(h)(2)(B) if the statement described in section
871(h)(5) were furnished. FP has three partners, A, B, and C. FP
furnishes to the withholding agent a partnership withholding
certificate described in paragraph (c)(3)(iii) of this section to
which it attaches a Form W-9 for A and a beneficial owner Form W-8
for B. Nothing on A's Form W-9 indicates that A is an exempt
recipient within the meaning of Sec. 1.6049-4(c)(1)(i). No
documentation is attached for C. The partnership has one single
account with the withholding agent. It furnishes a statement to the
withholding agent under paragraph (c)(3)(iv) of this section
indicating that A's, B's, and C's respective distributive shares of
the payments are 40%, 40%, and 20% and represents, in accordance
with paragraph (c)(3)(iii)(D) of this section, that there are only
three partners.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, the withholding agent may rely on FP's withholding
certificate and A's Form W-9 to treat A as a U.S. beneficial owner
under Sec. 1.1441-1(d)(4)(i) and as a U.S. payee under paragraph
(c)(1)(i)(A) of this section to the extent of 40 percent of the
payment. Under Sec. 1.1441-1(b)(1), the withholding agent is not
required to withhold on A's share of the payment. Under Sec. 1.6049-
4(a), the withholding agent must comply with information reporting
obligations (i.e., file a Form 1099) with respect to A who is
treated as a U.S. payee under paragraph (c)(1)(i)(A) of this section
and Sec. 1.6049-5(d)(1) for purposes of the information reporting
provisions of chapter 61 of the Code and the regulations thereunder.
Absent actual knowledge or reason to know otherwise, the withholding
agent may also rely on FP's withholding certificate and B's Form W-8
to treat B as a foreign beneficial owner under Sec. 1.1441-
1(e)(1)(ii)(A)(1) and paragraph (c)(1)(i)(A) of this section. Thus,
under Sec. 1.1441-1(b)(1), the withholding agent may rely on B's
claim for portfolio interest
[[Page 53458]]
treatment for B's share of the payment. Under Sec. 1.1461-1(b)(1)
and (c)(1), the withholding agent must report the payment to B on
Forms 1042 and 1042-S unless, under section 6031 and the regulations
under that section, the partnership is required to file a return.
Because the withholding agent cannot associate the documentation (as
defined in Sec. 1.1441-1(b)(3)(vii)) for C's share of the interest
income, the withholding agent must, under paragraph (d)(3)(i) of
this section, treat that amount as a payment made to an unidentified
foreign partner and withhold 30 percent under section 1441 in
accordance with Sec. 1.1441-1(b)(1).
Example 2. The facts are the same as in Example 1, but the
partnership has furnished no information under paragraph (c)(3)(iv)
of this section regarding how much of the payment to the foreign
partnership is attributable to A and C. Under paragraph (d)(3)(ii)
of this section, the payment allocable to group A-C is presumed made
entirely to A or to C, depending of who of A or C is subject to the
highest withholding rate. A is not subject to withholding because it
has furnished a valid Form W-9. C is subject to a 30-percent
withholding rate under Sec. 1.1441-1(b)(1) because it is presumed to
be an unidentified foreign partner under paragraph (d)(3)(i) of this
section. Therefore, under paragraph (d)(3)(ii) of this section, the
portion of the payment that the withholding agent can associate with
A and C is subject to withholding at a 30-percent rate. The
withholding agent may ignore the fact that A has furnished a valid
Form W-9 supporting his claim of exemption from withholding as a
U.S. person because it has no reliable information on how much of
the payment is allocable to A. Because the withholding agent has a
Form W-9 for the U.S. individual partner, it must also report A's
distributive share on a Form 1099. To the extent that A's exact
share is not known, the entire amount should be reported on the Form
1099.
(e) Trusts and estates. [Reserved]
(f) Failure to receive withholding certificate timely or to act in
accordance with applicable presumptions. See applicable procedures
described in Sec. 1.1441-1(b)(7) in the event the withholding agent
does not hold an appropriate withholding certificate or other
appropriate documentation at the time of payment or fails to rely on
the presumptions set forth in Sec. 1.1441-1(b)(3) or in paragraph (d)
or (e) of this section.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 1998.
(2) Transition rules. A withholding agent that on December 31,
1998, holds a withholding certificate that is valid under the
regulations in effect prior to January 1, 1999 (see 26 CFR parts 1 and
35a, revised April 1, 1997), may treat it as a valid withholding
certificate until its validity expires under those regulations or, if
earlier, until December 31, 1999. Further, the validity of a
withholding certificate or statement that is dated prior to January 1,
1998, is valid on January 1, 1998, and would expire at any time during
1998, is extended until December 31, 1998 (and is not extended after
December 31, 1998 by reason of the immediately preceding sentence). The
rule in this paragraph (g)(2), however, does not apply to extend the
validity period of a withholding certificate that expires in 1998
solely by reason of changes in the circumstances of the person whose
name is on the certificate. Notwithstanding the three preceding
sentences, a withholding agent may choose to not take advantage of the
transition rule in this paragraph (g)(2) with respect to one or more
withholding certificates and, therefore, to require new withholding
certificates conforming to the requirements described in this section.
Sec. 1.1441-6 Claim of reduced withholding under an income tax treaty.
(a) In general. The rate of withholding on a payment of income
subject to withholding may be reduced to the extent provided under an
income tax treaty in effect between the United States and a foreign
country. Most benefits under income tax treaties are to foreign persons
who reside in the treaty country. In some cases, benefits are available
under an income tax treaty to U.S. citizens or U.S. residents or to
residents of a third country.
See paragraph (b)(5) of this section for claims of benefits by U.S.
persons. If the requirements of this section are met, the amount
withheld from the payment may be reduced at source to account for the
treaty benefit. See also Sec. 1.1441-4(b)(2) for rules regarding claims
of reduced rate of withholding under an income tax treaty in the case
of compensation from personal services.
(b) Reliance on claim of reduced withholding under an income tax
treaty--(1) In general. Absent actual knowledge or reason to know
otherwise, a withholding agent may rely on a claim that a beneficial
owner is entitled to a reduced rate of withholding based upon an income
tax treaty if, prior to the payment, the withholding agent can reliably
associate the payment with documentation upon which it can rely to
treat the payment as made to a foreign beneficial owner in accordance
with Sec. 1.1441-1(e)(1)(ii) (not including 1.1441-1(e)(1)(ii)(B)
relating to documentary evidence). Except as otherwise provided in
paragraph (b)(2) or (3) of this section, for purposes of this paragraph
(b)(1), a beneficial owner withholding certificate described in
Sec. 1.1441-1(e)(2)(i) is valid only if it includes the beneficial
owner's taxpayer identifying number and certifies that the taxpayer has
complied with the advance ruling requirements described in paragraph
(e) of this section (if applicable), and, if the beneficial owner is a
person related to the withholding agent within the meaning of section
482, that the beneficial owner will file the statement required under
Sec. 301.6114-1(d) of this chapter (if applicable). The requirement to
file an information statement under section 6114 for income subject to
withholding applies only to amounts received during the calendar year
that, in the aggregate, exceed $500,000. See Sec. 301.6114-1(d) of this
chapter. The Internal Revenue Service (IRS) may apply the provisions of
Sec. 1.1441-1(e)(1)(ii)(B) to notify the withholding agent that the
certificate cannot be relied upon to grant benefits under an income tax
treaty. A beneficial owner's taxpayer identifying number on a
withholding certificate is valid for purposes of establishing proof of
residence in a treaty country only if the taxpayer identifying number
is certified by the IRS in accordance with the procedures set forth in
paragraph (c) of this section. However, absent actual knowledge or
reason to know otherwise, a withholding agent may rely on a taxpayer
identifying number without having to inquire as to whether the taxpayer
identifying number is certified, if the number appears correct on its
face and the permanent residence address on the certificate is in the
country whose tax treaty with the United States is invoked. See 1.1441-
1(e)(4)(viii) regarding reliance on a withholding certificate by a
withholding agent. The provisions of Sec. 1.1441-1(b)(3)(iv) dealing
with a 90-day grace period shall apply for purposes of this section.
(2) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income--(i)
General rule. In the case of income described in paragraph (b)(2)(ii)
of this section, a withholding agent may rely on a beneficial owner
withholding certificate described in paragraph (b)(1) of this section
even if the person whose name is on the certificate has not provided a
taxpayer identifying number. In the case of payments made outside the
United States (as defined in Sec. 1.6049-5(e)) with respect to an
offshore account (as defined in Sec. 1.6049-5(c)(1)), a withholding
agent may, as an alternative to a withholding certificate described in
paragraph (b)(1) of this section, rely on a certificate of residence
described in paragraph (c)(3) of this section or documentary evidence
described in paragraph (c)(4) of this section, relating
[[Page 53459]]
to the beneficial owner, that the withholding agent has reviewed and
maintains in its records in accordance with Sec. 1.1441-1(e)(4)(iii).
In the case of a payment to a person other than an individual, the
certificate of residence or documentary evidence must be accompanied by
the certifications described in paragraphs (c)(5) (i) and (ii) of this
section regarding limitation on benefits and whether the amount paid is
derived by such person or by one of its interest holders. The
withholding agent maintains the reviewed documents by retaining either
the documents viewed or a photocopy thereof and noting in its records
the date on which, and by whom, the documents were received and
reviewed. This paragraph (b)(2)(i) shall not apply to amounts that are
exempt from withholding based on a claim that the income is effectively
connected with the conduct of a trade or business in the United States.
(ii) Income to which special rules apply. The income to which
paragraph (b)(2)(i) of this section applies is dividends and interest
from stocks and debt obligations that are actively traded, dividends
from any redeemable security issued by an investment company registered
under the Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends,
interest, or royalties from units of beneficial interest in a unit
investment trust that are (or were, upon issuance) publicly offered and
are registered with the Securities and Exchange Commission under the
Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with respect to
loans of securities described in this paragraph (b)(2)(ii). For
purposes of this paragraph (b)(2)(ii), a stock or debt obligation is
actively traded if it is actively traded within the meaning of section
1092(d) and Sec. 1.1092(d)-1 when documentation is provided.
(3) Competent authority agreements. The procedures described in
this section may be modified to the extent the U.S. competent authority
may agree with the competent authority of a country with which the
United States has an income tax treaty in effect.
(4) Eligibility for reduced withholding under an income tax treaty
in the case of a payment to a person other than an individual--(i)
General rule. The withholding imposed under section 1441, 1442, or 1443
on any payment to a foreign person is eligible for reduction under the
terms of an income tax treaty only to the extent that such payment is
treated as derived by a resident of an applicable treaty jurisdiction,
such resident is a beneficial owner of the payment, and all other
applicable requirements for benefits under the treaty are satisfied. A
payment received by an entity is treated as derived by a resident of an
applicable treaty jurisdiction to the extent that the payment is
subject to tax in the hands of a resident of that jurisdiction. For
this purpose, a payment received directly by an entity that is treated
as fiscally transparent by the applicable treaty jurisdiction shall be
considered a payment subject to tax in the hands of a resident of the
jurisdiction to the extent that the interest holders in the entity are
residents of the jurisdiction. For purposes of the preceding sentence,
interest holders do not include any direct or indirect interest holders
that are themselves treated as fiscally transparent entities by the
applicable treaty jurisdiction. A payment received by an entity that is
not treated as fiscally transparent by the applicable treaty
jurisdiction shall be considered a payment subject to tax in the hands
of a resident of such jurisdiction only if the entity is itself a
resident of that jurisdiction. If the entity is a wholly-owned entity
that is disregarded for federal tax purposes under Sec. 301.7701-
2(c)(2) of this chapter as an entity separate from its owner and whose
single member is a foreign person, amounts paid to such entity may
nevertheless be treated as derived by a resident of a treaty country if
the entity is treated by the applicable treaty country as deriving the
income as a resident of that country. The provisions of Sec. 1.894-
1T(d) (1) through (4) shall apply for purposes of determinations made
under this paragraph (b)(4).
(ii) Withholding certificates--(A) In general. The type of
withholding certificate or other appropriate documentation that must be
furnished by a person claiming a reduced rate of withholding under an
income tax treaty depends upon the status of the entity under the laws
of the applicable treaty jurisdiction. For example, if the person
receiving the payment is a foreign entity but the persons eligible for
benefits under the applicable income tax treaty are the entity's
interest holders in the foreign entity receiving the payment, rather
than the entity itself, then the entity shall be treated as a foreign
partnership for purposes of determining which withholding certificate
is appropriate irrespective of the fact that the entity may be treated
as a corporation for U.S. tax purposes. If, conversely, the person
eligible for benefits under an income tax treaty is the entity rather
than the interest holders, then the entity shall be treated as a
corporation for purposes of determining which withholding certificate
is appropriate irrespective of the fact that the entity may be treated
as a partnership for U.S. tax purposes. In the event of a claim for
dual treatment described in paragraph (b)(4)(iii) of this section,
multiple withholding certificates may have to be furnished. Multiple
withholding certificates may also have to be furnished if the entity
receives income for which a reduction of withholding is claimed under a
provision of the Internal Revenue Code (e.g., portfolio interest) and
income for which a reduction of withholding is claimed under an income
tax treaty. Absent actual knowledge or reason to know otherwise, a
withholding agent may rely on the representations on the certificate
that the beneficial owner derives the income and is a resident of the
applicable treaty country, within the meaning of Sec. 1.894-1T(d) and
the applicable income tax treaty, without having to inquire into the
truthfulness of these representations or to research foreign law.
(B) Certification by qualified intermediary. A foreign corporation
that is a qualified intermediary described in Sec. 1.1441-
1(e)(5)(ii)(C) for purposes of claiming reduced rates of withholding
under an income tax treaty for its shareholders (who are treated as
deriving the income paid to the corporation as resident of an
applicable treaty jurisdiction) may furnish a single Form W-8 for its
shareholders for amounts for which it claims the benefit of a reduced
rate of withholding under an applicable income tax treaty. The Form W-8
shall be one described under Sec. 1.1441-1(e)(3)(ii).
(iii) Multiple claims of treaty benefits. A withholding agent may
make a payment to a foreign entity that is simultaneously claiming a
reduced rate of tax on its own behalf for a portion of the payment and
a reduced rate on behalf of persons in their capacity as interest
holders in that entity for the same or for another portion of the
payment. In the case of concurrent and inconsistent claims of treaty
benefits for the same amount, the withholding agent may choose to
reject the claim and request that a consistent claim be submitted or it
may choose which reduction to apply. In the case of concurrent and
consistent claims (e.g., the entity that is paid the amount claims a
reduced rate for a portion of the payment and an interest holder claims
a different reduced rate for the balance of the payment), the
withholding agent may, at its option, accept such dual claim based, as
appropriate, on withholding certificates furnished by such persons with
respect to their respective shares of such payment, even
[[Page 53460]]
though the withholding agent holds different withholding certificates
that requires it to treat the entity inconsistently with respect to
different payments or with respect to different portions of the same
payment. See paragraph (b)(4)(iv) Example 2 of this section. If the
withholding agent does not accept claims of reduced rate presented by
any one or more of the interest holders, or by the entity, any interest
holder or the entity may subsequently claim a refund or credit of any
amount so withheld to the extent the holder's or entity's share of such
withholding exceeds the amount of tax due under section 894 (in the
case of a foreign person) or under section 1 or 11 (in the case of a
U.S. person).
(iv) Examples. This paragraph (b)(4) is illustrated by the
following examples:
Example 1. (i) Facts. Entity A is a business organization formed
under the laws of country Y that has an income tax treaty with the
United States. A receives U.S. source royalties from withholding
agent R and claims a reduced rate of withholding under the U.S.-Y
tax treaty on its own behalf (rather than on behalf of its interest
holders). A furnishes a beneficial owner withholding certificate
described in paragraph (b)(1) of this section that represents that A
is a resident of country Y (within the meaning of the U.S.-Y tax
treaty) and the beneficial owner of the royalties (within the
meaning of the U.S.-Y tax treaty).
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, R may rely on the representation that A is a resident of
country Y and a beneficial owner of the royalty income within the
meaning of the U.S.-Y tax treaty.
Example 2. (i) Facts. The facts are the same as under Example 1,
except that one of A's interest holders, T, is an entity organized
in country Z. The U.S.-Z tax treaty reduces the rate on royalties to
zero whereas the rate on royalties under the U.S.-Y tax treaty is
only reduced to 5 percent. T furnishes a beneficial owner
withholding certificate to A that represents that T is deriving its
distributive share of the royalty income paid to A as a resident of
country Z (within the meaning of Sec. 1.894-1T(d)(1) and the U.S.-Z
tax treaty) and is the beneficial owner of the royalty income
(within the meaning of the U.S.-Z tax treaty). A furnishes to R an
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) to which it attaches T's beneficial owner withholding
certificate for the portion of the payment that T claims as its
distributive share of the royalty income. A also furnishes to R a
beneficial owner withholding certificate for itself for the portion
of the payment that T does not claim as its distributive share.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, R may rely on the documentation furnished by A in order
to treat the royalty payment to a single foreign entity (A) as
derived by different residents of tax treaty countries as a result
of concurrent and consistent claims presented under different
treaties. R may, at its option, grant dual treatment, that is, a
reduced rate of zero percent under the U.S.-Z treaty on the portion
of the royalty payment that T claims to derive as a resident of
country Z and a reduced rate of 5 percent under the U.S.-Y treaty
for the balance. However, under paragraph (b)(4)(iii) of this
section, R may, at its option, treat A as the only relevant person
deriving the royalty and grant benefits under the U.S.-Y treaty
only.
Example 3. (i) Facts. Entity A is a business organization formed
under the laws of the United States and is classified as a
partnership for U.S. tax purposes. A's partners are S and T. S is an
entity organized in country Z. T is an entity organized in country
X. Under the laws of country Z, A is treated as an entity taxable at
the entity level. Therefore, S is treated as a shareholder for
purposes of the laws of country Z and is not required to take A's
income into account for purposes of determining its tax liability
under those laws. Distributions from A are treated as distributions
from a corporate entity for purposes of the tax laws of Country Z.
Under the laws of country X, A is treated as a fiscally transparent
entity and T is required to take into account its distributive share
of A's income for purposes of determining its tax liability under
those laws. A receives U.S. source royalties that are not connected
with a trade or business. The United States has a tax treaty with
countries Z and X under which the rate on royalties is reduced to
zero. Both S and T furnish a beneficial owner certificate to A
representing that they are resident of their respective countries
and a beneficial owner of their respective distributive share of
royalty income. A has actual knowledge of the tax treatment of S and
T in their respective countries.
(ii) Analysis. Because A is a partnership for U.S. tax purposes,
S and T are each taxable on their respective distributive share of
the royalty income under section 881(a). However, under Sec. 1.1441-
5(b)(1), the payment of royalty to A is not a payment subject to
withholding. Instead, under Sec. 1.1441-5(b)(2), A must withhold on
each partner's distributive share of U.S. source royalty income and
may apply the rules of this section to determine the extent to which
the 30-percent withholding rate under section 1442 should be reduced
under the income tax treaties with countries Z and X. Because A has
actual knowledge of the tax treatment of S in country Z as a
shareholder of A and not as a partner (or owner of a fiscally
transparent entity), A may not rely on the certificate furnished by
S in order to reduce the rate of withholding under the U.S.-Z tax
treaty. Therefore, it withholds 30 percent of S's distributive share
of royalty income. A may rely on T's certificate to treat T as
deriving its distributive share of A's royalty income as a resident
of country X and as a beneficial owner. Therefore, A withholds on
T's distributive share of royalty income at the reduced rate under
the U.S.-X tax treaty.
Example 4. (i) Facts. Entity A is a business organization formed
under the laws of country Y. A receives from withholding agent R
U.S. source royalties and U.S. source interest income that is
potentially eligible for the portfolio interest exemption under
section 871(h) and 881(c). A's interest holders are S, an individual
who resides in country Y, T, an individual who resides in country Z,
and U, an individual resident in the United States. The United
States has a tax treaty with both country Y and country Z. The U.S.-
Y tax treaty reduces the rate on royalties to 5 percent, and the
U.S.-Z tax treaty reduces the rate to zero. A is classified as a
partnership under U.S. tax principles. Under the tax laws of country
Y, A is treated as a fiscally transparent entity and S is required
to include in income his distributive share of A's income. A
furnishes to R an intermediary withholding certificate described in
Sec. 1.1441-5(c)(3)(iii) to which it attaches--
(A) A Form W-9 for U; and
(B) Beneficial owner withholding certificates for S and T that
represent that S and T are foreign persons. For purposes of claiming
the reduced rate under each applicable tax treaty, each of S's and
T's certificates represents that S and T are deriving their
distributive share of the royalty income as a resident of their
respective countries (within the meaning of Sec. 1.894-1T(d)(1) and
of the applicable tax treaty) and as a beneficial owner (within the
meaning of the applicable tax treaty).
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, R may rely on the representations that S and T derive a
distributive share of the royalty income as resident of their
respective countries and are the beneficial owners of the income.
Therefore, R may withhold on S's distributive share of the royalty
income paid to A at the 5-percent rate under the U.S.-Y tax treaty.
R may withhold on T's distributive share of the royalty income paid
to A at the zero rate under the U.S.-Z tax treaty, even though A is
not organized in, or a resident of, country Z. R may rely on U's
Form W-9 to treat U as a U.S. person. Therefore, R does not withhold
on U's share of the royalty payment. R also does not withhold on any
portion of the interest paid to A because S and T have furnished
beneficial owner certificates and U has furnished a Form W-9.
Example 5. (i) Facts. The facts are the same as in Example 4,
except that A represents that it derives the royalty income it
receives from R as a resident of country Y (within the meaning of
Sec. 1.894-1T(d)(1) and the U.S.-Y tax treaty) and as a beneficial
owner of the income (within the meaning of the U.S.-Y tax treaty).
Neither T nor S represent to derive the royalty income as resident
of their respective country. A furnishes an intermediary withholding
certificate described in Sec. 1.1441-1(e)(3)(iii) to which it
attaches a Form W-9 for U and beneficial owner withholding
certificates for S and T. No claims of reduced rate under a tax
treaty are made on S's or T's certificates. A also furnishes to R
its own beneficial withholding certificate in order to claim the
reduced rate under the U.S.-Y tax treaty for the royalty income.
(ii) Analysis. Absent actual knowledge or reason to know
otherwise, R may rely on A's intermediary certificate and the
certificates attached thereto in order to treat S and T as
[[Page 53461]]
foreign beneficial owners for purposes of treating the interest as
portfolio interest and to treat U as a U.S. payee. Therefore, R does
not withhold on the payment of interest to A. In addition, absent
actual knowledge or reason to know otherwise, R may rely on A's
beneficial owner certificate in order to reduce the rate of
withholding on the royalty income under the U.S.-Y tax treaty.
(5) Claim of benefits under an income tax treaty by a U.S. person.
In certain cases, a U.S. person may claim the benefit of an income tax
treaty. For example, under certain treaties, a U.S. citizen residing in
the treaty country may claim a reduced rate of U.S. tax on certain
amounts representing a pension or an annuity from U.S. sources. Claims
of treaty benefits by a U.S. person may be made by furnishing a Form W-
9 to the withholding agent or such other form as the IRS may prescribe
in published guidance (see Sec. 601.601(d)(2) of this chapter).
(c) Proof of tax residence in a treaty country and certification of
entitlement to treaty benefits--(1) In general. A beneficial owner
establishes proof of its tax residence in a treaty country for purposes
of its claim to the withholding agent that a reduced rate of tax
applies under an income tax treaty by complying with the procedures
described in this paragraph (c) or with such other procedures as the
IRS may prescribe in published guidance (see Sec. 601.601(d)(2) of this
chapter). For purposes of this section, the residence of a beneficial
owner must be determined in accordance with the provisions of the
applicable U.S. income tax treaty as may be clarified by any applicable
regulations thereunder, or technical explanations thereof, or other
published guidance.
(2) Certification of taxpayer identifying number--(i) In general. A
taxpayer may certify its taxpayer identifying number as required under
paragraph (b)(1) of this section by having the number certified by the
IRS either directly as provided under paragraph (c)(2)(ii) of this
section or through a qualified intermediary as provided in paragraph
(c)(2)(iii) of this section.
(ii) IRS-certified TIN. The IRS shall certify a taxpayer
identifying number (TIN) upon a certificate of residence described in
paragraph (c)(3) of this section to which it shall attach the
certifications described in paragraphs (c)(5) (i) and (ii) of this
section, if applicable. The taxpayer may provide documentary evidence
described in paragraph (c)(4) of this section instead of a certificate
of residence. However, a taxpayer (other than a person organized as a
corporate body in the applicable treaty jurisdiction) may furnish
documentary evidence instead of a certificate of residence only if a
certificate of residence is not available to the taxpayer.
A certificate of residence is not available for purposes of this
paragraph (c)(2)(ii) if the tax administration of the country where the
taxpayer claims to be a resident does not have a procedure in effect by
which such certificates are routinely issued or the taxpayer
establishes that obtaining such certificate would require an
unreasonable amount of time or costs relative to the taxpayer's
circumstances (e.g., amount of investments in the United States). A
person organized as a corporate body in the applicable treaty
jurisdiction may, instead of a certificate of residence, furnish a
certificate of incorporation, articles of incorporation, or other
official document reflecting the taxpayer's status as a corporate body
in that jurisdiction, regardless of whether a certificate of residence
described in paragraph (c)(3) of this section is otherwise available.
The certificate or documentary evidence must be furnished to the IRS
by, or on behalf of, the beneficial owner upon application for the
taxpayer identifying number or at any other time, as permitted under
such procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). If the tax residence of the
beneficial owner changes, the beneficial owner shall notify the IRS of
that change within 30 days thereof. This requirement is in addition to
the notification requirements described in Sec. 1.1441-1(e)(4)(ii)(D)
regarding notification to a withholding agent in the event of changes
in the beneficial owner s circumstances. The IRS may, under the
exchange of information provisions of an applicable income tax treaty,
exchange information with the relevant foreign competent authority for
the purpose of confirming with appropriate tax officials of the other
country that the beneficial owner continues to be a tax resident of
that country. The IRS may from time to time, in its discretion, request
that the beneficial owner reconfirm its residence in the treaty
country.
(iii) Special rules for qualified intermediaries. The IRS may
certify a taxpayer identifying number based upon the certification of a
qualified intermediary described in Sec. 1.1441-1(e)(5)(ii) regarding
the tax residence of any of its account holders, under procedures
agreed upon with the IRS. If a new account holder has a TIN at the time
it opens an account, the qualified intermediary may rely on a statement
by the account or interest holder that appropriate proof of tax
residence in the treaty jurisdiction was previously provided to the
IRS. In such case, the qualified intermediary must notify the IRS each
time that the account or interest holder's address changes to another
country or when the account or interest holder terminates its
relationship with the qualified intermediary within 30 days of that
change.
(3) Certificate of residence. A certificate of residence referred
to in paragraph (b)(2)(i) or (c)(2)(ii) of this section is a
certification issued by the competent authority (or another appropriate
tax official) of the treaty country of which the taxpayer claims to be
a resident that the taxpayer has filed its most recent income tax
return as a resident of that country (within the meaning of the
applicable tax treaty). A certificate of residence is valid for a
period of three years or such longer period as the IRS may prescribe in
published guidance (see Sec. 601.601(d)(2) of this chapter). The
competent authorities may agree to a different procedure for certifying
residence, in which case such procedure shall govern for payments made
to a person claiming to be a resident of the country with which such an
agreement is in effect.
(4) Documentary evidence establishing residence in the treaty
country--(i) Individuals. For purposes of this paragraph (c)(4),
documentary evidence establishes the residence of an individual in a
treaty country if it includes the name, address, and photograph of the
person seeking to prove residence, is an official document issued by an
authorized governmental body (i.e., a government or agency thereof, or
a municipality), and has been issued no more than three years prior to
presentation to the IRS or the withholding agent. A document older than
three years may be relied upon as proof of residence only if it is
accompanied by additional evidence of the person's residence in the
treaty country (e.g., a bank statement, utility bills, or medical
bills). Documentary evidence must be in the form of original documents
or certified copies thereof. Documentary evidence must be accompanied
by an affidavit of the taxpayer signed under penalties of perjury that
the documentary evidence submitted is true and complete.
(ii) Persons other than individuals. For purposes of this paragraph
(c)(4), documentary evidence establishes the residence in a treaty
country of a person other than an individual if it includes the name of
the entity and the address of its principal office in the treaty
[[Page 53462]]
country, and is an official document issued by an authorized
governmental body (e.g., a government or agency thereof, or a
municipality).
(5) Certifications regarding entitlement to treaty benefits--(i)
Certification regarding conditions under a Limitation on Benefits
Article. A taxpayer that is not an individual must certify to the IRS
by way of an affidavit attached to its request for certification of its
employer identification number that it meets one or more of the
conditions set forth in the Limitation on Benefits Article (if any, or
in a similar provision) contained in the applicable tax treaty. The
affidavit must describe sufficient facts for the IRS to determine which
condition the taxpayer claims to satisfy. The affidavit must be signed
by the taxpayer under penalties of perjury.
(ii) Certification regarding whether the taxpayer derives the
income. A taxpayer that is not an individual shall certify to the IRS
by way of an affidavit attached to its request for certification of its
employer identification number that any income for which it intends to
claim benefits under an applicable income tax treaty is income that
will properly be treated as derived by itself as a resident of the
applicable treaty jurisdiction within the meaning of Sec. 1.894-
1T(d)(1). The affidavit must be signed under penalties of perjury. This
requirement does not apply if the taxpayer furnishes a certificate of
residence that certifies that fact.
(d) Joint owners. In the case of a payment to joint owners, each
owner must furnish a withholding certificate or, if applicable,
documentary evidence or a certificate of residence. The applicable rate
of tax on a payment of income to joint owners shall be the highest
applicable rate.
(e) Related party dividends under U.S.-Denmark income tax treaty.
Article VI(3) of the income tax treaty between the United States and
Denmark (see 1950-1 C.B. 77; see also Sec. 601.601(d)(2) of this
chapter) reduces the rate of tax on dividends between related
corporations to 5 percent subject to the condition that the
relationship between the domestic and foreign corporations was not
arranged or maintained for the purpose of securing the reduced rate. A
domestic corporation that makes a distribution derived by a resident of
Denmark may treat this condition as satisfied if, prior to the payment,
a request has been made to the IRS for a private letter ruling
determining that the relationship between the corporation and the
Danish resident was not arranged or maintained for such purpose and the
IRS has either issued a favorable ruling (and the ruling has not been
revoked) or is considering the ruling request.
(f) Failure to receive withholding certificate timely. See
applicable procedures described in Sec. 1.1441-1(b)(7) in the event the
withholding agent does not hold an appropriate withholding certificate
or other appropriate documentation at the time of payment.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 1998.
(2) Transition rules. For purposes of this section, a withholding
agent that on December 31, 1998, holds a Form 1001 or 8233 that is
valid under the regulations in effect prior to January 1, 1999 (see 26
CFR parts 1 and 35a, revised April 1, 1997), may treat it as a valid
withholding certificate until its validity expires under those
regulations or, if earlier, until December 31, 1999. Further, the
validity of a withholding certificate or statement that is dated prior
to January 1, 1998, is valid on January 1, 1998, and would expire at
any time during 1998, is extended until December 31, 1998 (and is not
extended after December 31, 1998 by reason of the immediately preceding
sentence). The rule in this paragraph (g)(2), however, does not apply
to extend the validity period of a withholding certificate that expires
in 1998 solely by reason of changes in the circumstances of the person
whose name is on the certificate or in interpretation of the law under
the regulations under Sec. 1.894-1T(d). Notwithstanding the three
preceding sentences, a withholding agent may choose to not take
advantage of the transition rule in this paragraph (g)(2) with respect
to one or more withholding certificates and, therefore, to require new
withholding certificates conforming to the requirements described in
this section. Certificates issued prior to April 1, 1998, that expire
at any time after March 31, 1998 (other than by reason of changes in
the circumstances of the person whose name is on the certificate) shall
remain valid until December 31, 1998.
Par. 12. Section 1.1441-7 is amended by
1. Revising paragraphs (a) through (c).
2. Redesignating paragraph (d) as paragraph (f).
3. Adding new paragraph (d), and paragraphs (e) and (g).
4. Removing the language ``(j)'' and adding ``(g)'' in its place in
the first sentence of newly designated paragraph (f)(1).
5. Removing the language ``(d)'' and adding ``(f)'' in its place in
the first sentence of newly designated paragraph (f)(1), in the first
sentence of newly designated paragraph (f)(2)(i), and in the first
sentence of newly designated paragraph (f)(3).
6. Removing the authority citation at the end of the section.
The revisions read as follows:
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined. For purposes of chapter 3 of the
Internal Revenue Code (Code) and the regulations under such chapter,
the term withholding agent means any person, U.S. or foreign, that has
the control, receipt, custody, disposal, or payment of an item of
income of a foreign person subject to withholding, including (but not
limited to) a foreign intermediary described in Sec. 1.1441-1(e)(3)(i),
a foreign partnership, or a U.S. branch described in Sec. 1.1441-
1(b)(2)(iv) (A) or (E). See Sec. 1.1441-1(b) (1) and (2) for
determining whether a payment is considered made to a foreign person.
Any person who meets the definition of a withholding agent is required
to deposit any tax withheld under Sec. 1.1461-1(a) and to make the
returns prescribed by Sec. 1.1461-1 (b) and (c), as modified by the
terms of an agreement with a qualified intermediary (in the case of a
qualified intermediary) or, in the case of a foreign partnership, to
make the returns prescribed under section 6031 and the regulations
thereunder. When several persons qualify as withholding agents with
respect to a single payment, only one tax is required to be withheld
and, generally, only one return (on Form 1042, as required under
Sec. 1.1461-1(b)), is required to be made. See Sec. 1.1461-1(b)(2) and
(c)(4) for filing procedures when multiple withholding agents are
involved. In the case of a withholding agent paying to partners of a
withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i),
the withholding agent may arrange with the partnership to withhold if
it is provided the information by the partnership, in which case the
partnership does not have to withhold. However, the partnership must
still file a partnership return under section 6031(a) and the
regulations under that section. The withholding agent does not have to
file Forms 1042-S (but does have to file a Form 1042) since the
withholding foreign partnership furnishes FormsK-1 to its partners
pursuant to section 6031(b) and Sec. 1.6031(b)-1T. For purposes of this
section and any requirement to withhold under chapter 3 of the Code and
the regulations thereunder, a person who, as a nominee described in
Sec. 1.6031(c)-1T, has furnished to a partnership all of the
information required to be furnished
[[Page 53463]]
under Sec. 1.6031(c)-1T(a) shall not be treated as a withholding agent
if it has notified the partnership that it is treating the provision of
information to the partnership as a discharge of its obligations as a
withholding agent.
(b) Standards of knowledge--(1) In general. A withholding agent
must withhold at the full 30-percent rate under section 1441, 1442, or
1443(a) or at the full 4-percent rate under section 1443(b) if it has
actual knowledge or reason to know that a claim of U.S. status or of a
reduced rate of withholding under section 1441, 1442, or 1443 is
incorrect. A withholding agent shall be liable for tax, interest, and
penalties to the extent provided under sections 1461 and 1463 and the
regulations under those sections if it fails to withhold the correct
amount despite its actual knowledge or reason to know the amount
required to be withheld. For purposes of the regulations under sections
1441, 1442, and 1443, a withholding agent may rely on information or
certifications contained in, or attached to, a withholding certificate
or other documentation furnished by or for a beneficial owner or payee
unless the withholding agent has actual knowledge or reason to know
that the information or certifications are not correct and, if based on
such knowledge or reason to know, it should withhold (under chapter 3
of the Code or another withholding provision of the Code) an amount
greater than would be the case if it relied on the information or
certifications, or it should report (under chapter 3 of the Code or
under another provision of the Code) an amount that would not otherwise
be reportable if it relied on the information or certifications. See
Sec. 1.1441-1(e)(4)(viii) for applicable reliance rules. A withholding
agent that has received notification by the Internal Revenue Service
(IRS) that a claim of U.S. status or of a reduced rate is incorrect has
actual knowledge beginning on the date that is 30 calendar days after
the date the notice is received. A withholding agent that fails to act
in accordance with the presumptions set forth in Secs. 1.1441-1(b)(3),
1.1441-4(a), 1.1441-5 (d) and (e), or 1.1441-9(b)(3) may also be liable
for tax, interest, and penalties. See Sec. 1.1441-1(b)(3)(ix) and (7).
(2) Reason to know--(i) In general. A withholding agent shall be
considered to have reason to know if its knowledge of relevant facts or
statements contained in the withholding certificates or other
documentation is such that a reasonably prudent person in the position
of the withholding agent would question the claims made.
(ii) Limits on reason to know in certain cases. Except as otherwise
provided in paragraph (b)(3) of this section, a withholding agent that
is a financial institution (including a regulated investment company)
with which a customer may open an account has a reason to know with
respect to payments of amounts described in Sec. 1.1441-6(b)(2)(ii)
that a beneficial owner withholding certificate or documentary evidence
for a beneficial owner is not reliable only if any one or more of the
circumstances described in this paragraph (b)(2)(ii) exist for a
withholding certificate. In such a case, the withholding agent may
require a new withholding certificate. In the absence of a new
certificate, a withholding agent may rely on the withholding
certificate only after documentation is provided in support of the
claim of foreign status, classification, or reduced rate of tax under a
tax treaty.
(A) The permanent residence address on the withholding certificate
is an address in the United States. In the case of an individual,
trust, or estate, the withholding agent may rely on information in its
files that is less than three years old and that supports the
beneficial owner's claim of foreign status, despite a U.S. address (for
example, a bank has evidence of the diplomatic status of a customer).
In the absence of evidence in the withholding agent's files, the agent
meets its due diligence obligation for purposes of this paragraph
(b)(2)(ii)(A) if it contacts the beneficial owner or its agent in the
United States and obtains an explanation in writing supporting the
foreign status of the beneficial owner (for example, the beneficial
owner is a nonresident alien individual temporarily present in the
United States as a teacher; see Sec. 301.7701(b)-3(b)(3) of this
chapter) and documentation supporting the claim of foreign status is
attached to the beneficial owner's statement (for example, in the case
of a nonresident alien individual teacher, a copy of the relevant pages
of the beneficial owner's passport showing the individual's U.S. visa
status or a copy of relevant INS documents). In the case of a
beneficial owner other than an individual, trust, or estate, the
withholding agent must inquire as to whether the person whose name is
on the certificate is actually organized or created under the laws of a
foreign country.
(B) The payment is directed to a P.O. Box, an in-care-of address,
or a U.S. address. In the case of an individual, the withholding agent
may rely, for example, on documentary evidence of a type described in
Sec. 1.1441-6(c) (3) or (4) supporting the beneficial owner's claim of
residence in a foreign country to ascertain that the individual is a
nonresident alien individual. In the case of a person other than an
individual, the withholding agent may rely on other evidence to
ascertain that the person whose name is on the certificate is not a
U.S. person.
(C) In the case of income for which benefits are claimed under an
income tax treaty, the permanent residence address or mailing address
is not in the corresponding treaty country. In such a case, the
withholding agent may rely, for example, on documentary evidence of a
type described in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial
owner's claim of residence in the country whose benefits under an
income tax treaty with the United States are invoked.
(D) The mailing address on the withholding certificate is in the
United States or the beneficial owner notifies the withholding agent of
a new address for mailing or residential purposes that is in the United
States, a P.O. box, or an in-care-address, or, in the case of income
for which benefits are claimed under an income tax treaty, the mailing
address on the certificate or the new mailing or residential address
notified to the withholding agent is not in the treaty country. The
withholding agent may, however, rely on documentary evidence of a type
described in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial
owner's claim of residence in a foreign country.
(E) The name of the person on the withholding certificate or
documentary evidence indicates that the person's status is a
corporation, partnership, trust, estate, or an individual, and the
person's claim of status is not consistent with such indication. For
example, a person whose name indicates that it is a per se corporation
described in Sec. 301.7701-2(b)(8)(i) of this chapter represents on a
Form W-8 that it is a partnership.
(F) Such other circumstances as the IRS may prescribe in published
guidance (see Sec. 601.601(d)(2) of this chapter).
(3) Coordinated account information systems. See Sec. 1.1441-
1(e)(4)(ix) for application of these rules other than on an account-by-
account basis so that a withholding agent that relies on a coordinated
account information system for documentation is considered to know or
have reason to know the facts recorded in the system.
(c) Authorized agent--(1) In general. The acts of an agent of a
withholding agent (including the receipt of withholding certificates,
the payment of
[[Page 53464]]
amounts of income subject to withholding, and the deposit of tax
withheld) are imputed to the withholding agent on whose behalf it is
acting. However, if the agent is a foreign person, a withholding agent
that is a U.S. person may treat the acts of the foreign agent as its
own for purposes of determining whether it has complied with the
provisions of this section, but only if the agent is an authorized
foreign agent, as defined in paragraph (c)(2) of this section. An
authorized foreign agent cannot apply the provisions of this paragraph
(c) to appoint another person its authorized foreign agent with respect
to the payments it receives from the withholding agent.
(2) Authorized foreign agent. An agent is an authorized foreign
agent only if--
(i) There is a written agreement between the withholding agent and
the foreign person acting as agent;
(ii) The notification procedures described in paragraph (c)(3) of
this section have been complied with;
(iii) Books and records and relevant personnel of the foreign agent
are available (on a continuous basis, including after termination of
the relationship) for examination by the IRS in order to evaluate the
withholding agent's compliance with the provisions of chapters 3 and 61
of the Code, section 3406, and the regulations under those provisions;
and
(iv) The U.S. withholding agent remains fully liable for the acts
of its agent and does not assert any of the defenses that may otherwise
be available, including under common law principles of agency in order
to avoid tax liability under the Internal Revenue Code.
(3) Notification. A withholding agent that appoints an authorized
agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), the
withholding provisions of chapter 3 of the Code, section 3406 or other
withholding provisions of the Internal Revenue Code, or the reporting
provisions of chapter 61 of the Code, is required to file notice of
such appointment with the Office of the Assistant Commissioner
(International). Such notice shall be filed before the first payment
for which the authorized agent acts as such. Such notice shall
acknowledge the withholding agent liability as provided in paragraph
(c)(2)(iv) of this section.
(4) Liability of U.S. withholding agent. An authorized foreign
agent is subject to the same withholding and reporting obligations that
apply to any withholding agent under the provisions of chapter 3 of the
Code and the regulations thereunder. In particular, an authorized
foreign agent does not benefit from the special procedures or
exceptions that may apply to a qualified intermediary. A withholding
agent acting through an authorized foreign agent is liable for any
failure of the agent, such as failure to withhold an amount or make
payment of tax, in the same manner and to the same extent as if the
agent's failure had been the failure of the U.S. withholding agent. For
this purpose, the foreign agent's actual knowledge or reason to know
shall be imputed to the U.S. withholding agent. The U.S. withholding
agent's liability shall exist irrespective of the fact that the
authorized foreign agent is also a withholding agent and is itself
separately liable for failure to comply with the provisions of the
regulations under section 1441, 1442, or 1443. However, the same tax,
interest, or penalties shall not be collected more than once.
(5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii)
regarding returns required to be made where a U.S. withholding agent
acts through an authorized foreign agent.
(d) United States obligations. If the United States is a
withholding agent for an item of interest, including original issue
discount, on obligations of the United States or of any agency or
instrumentality thereof, the withholding obligation of the United
States is assumed and discharged by--
(1) The Commissioner of the Public Debt, for interest paid by
checks issued through the Bureau of the Public Debt;
(2) The Treasurer of the United States, for interest paid by him or
her, whether by check or otherwise;
(3) Each Federal Reserve Bank, for interest paid by it, whether by
check or otherwise; or
(4) Such other person as may be designated by the IRS.
(e) Assumed obligations. If, in connection with the sale of a
corporation's property, payment on the bonds or other obligations of
the corporation is assumed by a person, then that person shall be a
withholding agent to the extent amounts subject to withholding are paid
to a foreign person. Thus, the person shall withhold such amounts under
Sec. 1.1441-1 as would be required to be withheld by the seller or
corporation had no such sale or assumption been made.
* * * * *
(g) Effective date. Except as otherwise provided in paragraph
(f)(3) of this section, this section applies to payments made after
December 31, 1998.
Par. 13. Section 1.1441-8T is redesignated as Sec. 1.1441-8 and
amended as follows:
1. The section heading and paragraph (b) are revised.
2. Paragraphs (c), (d), (e) and (f) are added.
The revisions and additions read as follows:
Sec. 1.1441-8 Exemption from withholding for payments to foreign
governments, international organizations, foreign central banks of
issue, and the Bank for International Settlements.
* * * * *
(b) Reliance on claim of exemption by foreign government. Absent
actual knowledge or reason to know otherwise, the withholding agent may
rely upon a claim of exemption made by the foreign government if, prior
to the payment, the withholding agent can reliably associate the
payment with documentation upon which it can rely to treat the payment
as made to a beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii). A Form W-8 furnished by a foreign government for purposes
of claiming an exemption under this paragraph (b) is valid only if, in
addition to other applicable requirements, it certifies that the income
is, or will be, exempt from taxation under section 892 and the
regulations under that section and whether the person whose name is on
the certificate is an integral part of a foreign government (as defined
in Sec. 1.892-2T(a)(2)) or a controlled entity (as defined in
Sec. 1.892-2T(a)(3)).
(c) Income of a foreign central bank of issue or the Bank for
International Settlements--(1) Certain interest income. Section 895
provides for the exclusion from gross income of certain income derived
by a foreign central bank of issue, or by the Bank for International
Settlements, from obligations of the United States or of any agency or
instrumentality thereof or from interest on deposits with persons
carrying on the banking business if the bank is the owner of the
obligations or deposits and does not hold the obligations or deposits
for, or use them in connection with, the conduct of a commercial
banking function or other commercial activity by such bank. See
Sec. 1.895-1. Absent actual knowledge or reason to know that a foreign
central bank of issue, or the Bank for International Settlements, is
operating outside the scope of the exclusion granted by section 895 and
the regulations under that section, the withholding agent may rely on a
claim of exemption if, prior to the payment, the withholding agent can
reliably associate the payment with documentation upon which it can
rely to treat the foreign central bank of issue or the Bank for
International
[[Page 53465]]
Settlements as the beneficial owner of the payment in accordance with
Sec. 1.1441-1(e)(1)(ii). A Form W-8 furnished by a foreign central bank
of issue or the Bank for International Settlements for purposes of
claiming an exemption under this paragraph (c)(1) is valid only if, in
addition to other applicable requirements, it certifies that the person
whose name is on the certificate is a foreign central bank of issue, or
the Bank for International Settlements, and that the bank does not, and
will not, hold the obligations or the bank deposits covered by the Form
W-8 for, or use them in connection with, the conduct of a commercial
banking function or other commercial activity.
(2) Bankers acceptances. Interest derived by a foreign central bank
of issue from bankers acceptances is exempt from tax under sections
871(i)(2)(C) and 881(d) and Sec. 1.861-2(b)(4). With respect to
bankers' acceptances, a withholding agent may treat a payee as a
foreign central bank of issue without requiring a withholding
certificate if the name of the payee and other facts surrounding the
payment reasonably indicate that the payee or beneficial owner is a
foreign central bank of issue, as defined in Sec. 1.861-2(b)(4).
(d) Exemption for payments to international organizations. A
payment to an international organization (within the meaning of section
7701(a)(18)) is exempt from withholding on any payment. A withholding
agent may treat a payee as an international organization without
requiring a withholding certificate if the name of the payee is one
that is designated as an international organization by executive order
(pursuant to 22 U.S.C. 288 through 288(f)) and other facts surrounding
the transaction reasonably indicate that the international organization
is the beneficial owner of the payment.
(e) Failure to receive withholding certificate timely and other
applicable procedures. See applicable procedures described in
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a
valid withholding certificate described in paragraph (b) or (c)(1) of
this section or other appropriate documentation at the time of payment.
Further, the provisions of Sec. 1.1441-1(e)(4) shall apply to
withholding certificates and other documents related thereto furnished
under the provisions of this section.
(f) Effective date--(1) In general. This section applies to
payments made after December 31, 1998.
(2) Transition rules. For purposes of this section, a withholding
agent that on December 31, 1998, holds a Form 8709 that is valid under
the regulations in effect prior to January 1, 1999 (see 26 CFR part 1,
revised April 1, 1997), may treat it as a valid withholding certificate
until its validity expires under those regulations or, if earlier,
until December 31, 1999. Further, the validity of a withholding
certificate or statement that is dated prior to January 1, 1998, is
valid on January 1, 1998, and would expire at any time during 1998, is
extended until December 31, 1998 (and is not extended after December
31, 1998 by reason of the immediately preceding sentence). The rule in
this paragraph (f)(2), however, does not apply to extend the validity
period of a withholding certificate that expires in 1998 solely by
reason of changes in the circumstances of the person whose name is on
the certificate. Notwithstanding the three preceding sentences, a
withholding agent may choose to not take advantage of the transition
rule in this paragraph (f)(2) with respect to one or more withholding
certificates and, therefore, to require new withholding certificates
conforming to the requirements described in this section.
Par. 14. Section 1.1441-9 is added to read as follows.
Sec. 1.1441-9 Exemption from withholding on exempt income of a foreign
tax-exempt organization, including foreign private foundations.
(a) Exemption from withholding for exempt income. No withholding is
required under section 1441(a) or 1442, and the regulations under those
sections, on amounts paid to a foreign organization that is described
in section 501(c) to the extent that the amounts are not income
includable under section 512 in computing the organization's unrelated
business taxable income. See, however, Sec. 1.1443-1 for withholding on
payments of unrelated business income to foreign tax-exempt
organizations and on payments subject to tax under section 4948. For a
foreign organization to claim an exemption from withholding under
section 1441(a) or 1442 based on its status as an organization
described in section 501(c), it must furnish the withholding agent with
a withholding certificate described in paragraph (b)(2) of this
section. A foreign organization described in section 501(c) may choose
to claim a reduced rate of withholding under the procedures described
in other sections of the regulations under section 1441 and not under
this section. In particular, if an organization chooses to claim
benefits under an income tax treaty, the withholding procedures
applicable to claims of such a reduced rate are governed solely by the
provisions of Sec. 1.1441-6 and not of this section.
(b) Reliance on foreign organization's claim of exemption from
withholding--(1) General rule. A withholding agent may rely on a claim
of exemption under this section only if, prior to the payment, the
withholding agent can reliably associate the payment with a valid
withholding certificate described in paragraph (b)(2) of this section.
(2) Withholding certificate. A withholding certificate under this
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition
to other applicable requirements, the Form W-8 includes the taxpayer
identifying number of the organization whose name is on the
certificate, and it certifies that the Internal Revenue Service (IRS)
has issued a favorable determination letter (and the date thereof) that
is currently in effect, what portion, if any, of the amounts paid
constitute income includable under section 512 in computing the
organization's unrelated business taxable income, and, if the
organization is described in section 501(c)(3), whether it is a private
foundation described in section 509. Notwithstanding the preceding
sentence, if the organization cannot certify that it has been issued a
favorable determination letter that is still in effect, its withholding
certificate is nevertheless valid under this paragraph (b)(2) if the
organization attaches to the withholding certificate an opinion that is
acceptable to the withholding agent from a U.S. counsel concluding that
the organization is described in section 501(c). If the determination
letter or opinion of counsel to which the withholding certificate
refers concludes that the organization is described in section
501(c)(3), and the certificate further certifies that the organization
is not a private foundation described in section 509, an affidavit of
the organization setting forth sufficient facts concerning the
operations and support of the organization for the Internal Revenue
Service (IRS) to determine that such organization would be likely to
qualify as an organization described in section 509(a) (1), (2), (3),
or (4) must be attached to the withholding certificate. An organization
that provides an opinion of U.S. counsel or an affidavit may provide
the same opinion or affidavit to more than one withholding agent
provided that the opinion is acceptable to each withholding agent who
receives it in conjunction with a withholding certificate. Any such
opinion of counsel or affidavit must be renewed whenever the
certificate to
[[Page 53466]]
which it is attached is required to be renewed.
(3) Presumptions in the absence of documentation. Notwithstanding
paragraph (b)(1) of this section, if the organization's certification
with respect to whether amounts paid constitute income includable under
section 512 in computing the organization's unrelated business taxable
income is not reliable or is lacking but all other certifications are
reliable, the withholding agent may rely on the certificate but the
amounts paid are presumed to be income includable under section 512 in
computing the organization's unrelated business taxable income. If the
certification regarding private foundation status is not reliable, the
withholding agent may rely on the certificate but the amounts paid are
presumed to be paid to a foreign beneficial owner that is a private
foundation.
(4) Reason to know. Reliance by a withholding agent on the
information and certifications stated on a withholding certificate is
subject to the agent's actual knowledge or reason to know that such
information or certification is incorrect as provided in Sec. 1.1441-
7(b). For example, a withholding agent must cease to treat a foreign
organization's claim for exemption from withholding based on the
organization's tax-exempt status as valid beginning on the earlier of
the date on which such agent knows that the IRS has given notice to
such foreign organization that it is not an organization described in
section 501(c) or the date on which the IRS gives notice to the public
that such foreign organization is not an organization described in
section 501(c). Similarly, a withholding agent may no longer rely on a
certification that an amount is not subject to tax under section 4948
beginning on the earlier of the date on which such agent knows that the
IRS has given notice to such foreign organization that it is subject to
tax under section 4948 or the date on which the IRS gives notice that
such foreign organization is a private foundation within the meaning of
section 509(a).
(c) Failure to receive withholding certificate timely and other
applicable procedures. See applicable procedures described in
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a
valid withholding certificate or other appropriate documentation at the
time of payment. Further, the provisions of Sec. 1.1441-1(e)(4) shall
apply to withholding certificates and other documents related thereto
furnished under the provisions of this section.
(d) Effective date--(1) In general. This section applies to
payments made after December 31, 1998.
(2) Transition rules. For purposes of this section, a withholding
agent that on December 31, 1998, holds a Form W-8, 1001 or 4224 or a
statement that is valid under the regulations in effect prior to
January 1, 1999,( see 26 CFR parts 1 and 35a, revised April 1, 1997),
may treat it as a valid withholding certificate until its validity
expires under those regulations or, if earlier, until December 31,
1999. Further, the validity of a withholding certificate or statement
that is dated prior to January 1, 1998, is valid on January 1, 1998,
and would expire at any time during 1998, is extended until December
31, 1998 (and is not extended after December 31, 1998, by reason of the
immediately preceding sentence). The rule in this paragraph(d)(2),
however, does not apply to extend the validity period of a withholding
certificate that expires in 1998 solely by reason of changes in the
circumstances of the person whose name is on the certificate.
Notwithstanding the three preceding sentences, a withholding agent may
choose to not take advantage of the transition rule in this paragraph
(d)(2) with respect to one or more withholding certificates and,
therefore, to require new withholding certificates conforming to the
requirements described in this section.
Par. 15. Sections 1.1442-1 and 1.1442-2 are revised to read as
follows:
Sec. 1.1442-1 Withholding of tax on foreign corporations.
For regulations concerning the withholding of tax at source under
section 1442 in the case of foreign corporations, foreign governments,
international organizations, foreign tax-exempt corporations, or
foreign private foundations, see Secs. 1.1441-1 through 1.1441-9.
Sec. 1.1442-2 Exemption under a tax treaty.
For regulations providing for a claim of reduced withholding tax
under section 1442 by certain foreign corporations pursuant to the
provisions of an income tax treaty, see Sec. 1.1441-6.
Par. 16. Section 1.1442-3 is added to read as follows:
Sec. 1.1442-3 Tax exempt income of a foreign tax-exempt corporations
For regulations providing for a claim of exemption for income
exempt from tax under section 501(a) of a foreign tax-exempt
corporation, see Sec. 1.1441-9. See Sec. 1.1443-1 for withholding rules
applicable to foreign private foundations and to the unrelated business
income of foreign tax-exempt organizations.
Par. 17. Section 1.1443-1 is revised to read as follows:
Sec. 1.1443-1 Foreign tax-exempt organizations.
(a) Income includible under section 512 in computing unrelated
business taxable income. In the case of a foreign organization that is
described in section 501(c), amounts paid to the organization
includible under section 512 in computing the organization's unrelated
business taxable income are subject to withholding under Secs. 1.1441-
1, 1.1441-4, and 1.1441-6 in the same manner as payments of the same
amounts to any foreign person that is not a tax-exempt organization.
Therefore, a foreign organization receiving amounts includible under
section 512 in computing the organization's unrelated business taxable
income may claim an exemption from withholding or a reduced rate of
withholding with respect to that income in the same manner as a foreign
person that is not a tax-exempt organization. See Sec. 1.1441-9(b)(3)
for presumption that amounts are includible under section 512 in
computing the organization's unrelated business taxable income in the
absence of a reliable certification.
(b) Income subject to tax under section 4948--(1) In general. The
gross investment income (as defined in section 4940(c)(2)) of a foreign
private foundation is subject to withholding under section 1443(b) at
the rate of 4 percent to the extent that the income is from sources
within the United States and is subject to the tax imposed by section
4948(a) and the regulations under that section. Withholding under this
paragraph (b) is required irrespective of the fact that the income may
be effectively connected with the conduct of a trade or business in the
United States by the foreign organization. See Sec. 1.1441-9(b)(3) for
applicable presumptions that amounts are subject to tax under section
4948. The withholding imposed under this paragraph (b)(1) does not
obviate a private foundation's obligation to file any return required
by law with respect to such organization, such as the form that the
foundation is required to file under section 6033 for the taxable year.
(2) Reliance on a foreign organization's claim of foreign private
foundation status. For reliance by a withholding agent on a foreign
organization's claim of foreign private foundation status, see
Sec. 1.1441-9 (b) and (c).
(3) Applicable procedures. A withholding agent withholding the 4-
percent amount pursuant to paragraph (b)(1) of this section shall treat
such
[[Page 53467]]
withholding as withholding under section 1441(a) or 1442(a) for all
purposes, including reporting of the payment on a Form 1042 and a Form
1042-S pursuant to Sec. 1.1461-1 (b) and (c). Similarly, the foreign
private foundation shall treat the 4-percent withholding as withholding
under section 1441(a) or 1442(a), including for purposes of claims for
refunds and credits.
(4) Claim of benefits under an income tax treaty. The withholding
procedures applicable to claims of a reduced rate under an income tax
treaty are governed solely by the provisions of Sec. 1.1441-6 and not
by this section.
(c) Effective date--(1) In general. This section applies to
payments made after December 31, 1998.
(2) Transition rules. For purposes of this section, a withholding
agent that on December 31, 1998, holds an affidavit or opinion of
counsel described in Sec. 1.1443-1(b)(4)(i) in effect prior to January
1, 1999 (see Sec. 1.1443-1(b)(4)(i) as contained in 26 CFR part 1,
revised April 1, 1997) that is valid under these provisions may treat
it as a valid withholding certificate until December 31, 1999. However,
a withholding agent may choose to not take advantage of the transition
rule in this paragraph (c)(2) with respect to one or more withholding
certificates and, therefore, to require new withholding certificates
conforming to the requirements described in this section.
Par. 18. Section 1.1445-5 is amended by revising the second
sentence of paragraph (b)(1) to read as follows:
Sec. 1.1445-5 Special rules concerning distributions and other
transactions by corporations, partnerships, trusts, and estates.
* * * * *
(b) * * * (1) * * * For rules coordinating the withholding under
section 1441 (or section 1442 or 1443) and under section 1445 on
distributions from a corporation, see Sec. 1.1441-3(b)(4). * * *
* * * * *
Par. 19. Sections 1.1461-1 and 1.1461-2 are revised to read as
follows:
Sec. 1.1461-1 Payment and returns of tax withheld.
(a) Payment of withheld tax--(1) Deposits of tax. Every withholding
agent who withholds tax pursuant to chapter 3 of the Internal Revenue
Code (Code) and the regulations under such chapter shall deposit such
amount of tax with a Federal reserve bank or authorized financial
institution as provided in Sec. 1.6302-2(a). If for any reason the
total amount of tax required to be returned for any calendar year
pursuant to paragraph (b) of this section has not been deposited
pursuant to Sec. 1.6302-2, the withholding agent shall pay the balance
of tax due for such year at such place as the Internal Revenue Service
(IRS) shall specify. The tax shall be paid when filing the return
required under paragraph (b)(1) of this section for such year, unless
the IRS specifies otherwise. See paragraph (b)(2) of this section when
there are multiple withholding agents.
(2) Penalties for failure to pay tax. For penalties and additions
to the tax for failure to timely pay the tax required to be withheld
under chapter 3 of the Code, see sections 6656, 6672, and 7202 and the
regulations under those sections.
(b) Income tax return--(1) General rule. A withholding agent shall
make an income tax return on Form 1042 (or such other form as the IRS
may prescribe) for income paid during the preceding calendar year that
the withholding agent is required to report on an information return on
Form 1042-S (or such other form as the IRS may prescribe) under
paragraph (c)(1) of this section. See section 6011 and Sec. 1.6011-
1(c). The withholding agent must file the return on or before March 15
of the calendar year following the year in which the income was paid.
The return must show the aggregate amount of income paid and tax
withheld required to be reported on all the Forms 1042-S for the
preceding calendar year by the withholding agent, in addition to such
information as is required by the form and accompanying instructions.
Withholding certificates or other statements or information provided to
a withholding agent are not required to be attached to the return. A
return must be filed under this paragraph (b)(1) even though no tax was
required to be withheld during the preceding calendar year. The
withholding agent must retain a copy of Form 1042 for the applicable
statute of limitations on assessments and collection with respect to
the amounts required to be reported on the Form 1042. See section 6501
and the regulations thereunder for the applicable statute of
limitations. Adjustments to the total amount of tax withheld, as
described in Sec. 1.1461-2, shall be stated on the return as prescribed
by the form and accompanying instructions.
(2) Multiple withholding agents--(i) General rule. Except as
otherwise provided in paragraph (b)(2)(ii), (iii), (iv), or (v) of this
section, no Form 1042 is required to be filed under paragraph (b)(1) of
this section if a return is filed by another withholding agent
reporting the same income in compliance with the provisions of this
paragraph (b) and any remaining tax due is paid by such other
withholding agent with the return in accordance with the provisions of
paragraph (a) of this section.
(ii) Payment to a qualified intermediary. A U.S. withholding agent
making a payment to a qualified intermediary (as defined in
Sec. 1.1441-1(e)(5)(ii)) must file a return under paragraph (b)(1) of
this section, regardless of whether the qualified intermediary assumes
primary withholding responsibility for the payment, as described in
Sec. 1.1441-1(e)(5)(iv) and regardless of whether the qualified
intermediary is also required to file a return under the terms of its
agreement with the IRS. A qualified intermediary's agreement with the
IRS shall specify the extent, if any, to which the intermediary is
subject to filing requirements under this section.
(iii) Payment to a non-qualified intermediary. A withholding agent
making a payment to a foreign intermediary that is not a qualified
intermediary described in Sec. 1.1441-1(e)(5)(ii) must file a return
under paragraph (b)(1) of this section to report such payments. The
foreign intermediary is not required to make a return to report the
payments that it itself makes to the persons for whom it collects the
payments to the extent that the withholding agent represents to the
intermediary that it will file such a return or that it has done so.
(iv) Payment to or through an authorized foreign agent. Both the
U.S. withholding agent making a payment to or through an authorized
foreign agent (defined in Sec. 1.1441-7(c)) and the authorized foreign
agent are required to file a return under paragraph (b)(1) of this
section.
(v) Payments to foreign partnerships. A withholding agent making a
payment to a foreign partnership shall file a return under paragraph
(b)(1) of this section in the same manner as is required for a
withholding agent making a payment to a qualified intermediary.
(vi) Payments to a U.S. branch of certain foreign banks, securities
dealers, or insurance companies. A withholding agent making a payment
to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) must file a
return under paragraph (b)(1) of this section, irrespective of the fact
that the branch is treated as a U.S. person or is presumed to receive
income that is effectively connected with its conduct of a trade or
business in the United States.
(3) Payments to wholly-owned entities. A withholding agent making a
payment to a wholly-owned entity that
[[Page 53468]]
is disregarded for Federal tax purposes under Sec. 301.7701-2(c)(2) of
this chapter as an entity separate from its owner and whose single
owner is a foreign person shall file a return under paragraph (b)(1) of
this section.
(4) Amended returns. An amended return may be filed on a Form 1042X
or such other form as the IRS may prescribe. An amended return must
include such information as the form or accompanying instructions shall
require, including, with respect to any information that has changed
from the time of the filing of the return, the information that was
shown on the original return and the corrected information.
(c) Information returns--(1) Filing requirement--(i) In general. A
withholding agent (other than an individual who is not acting in the
course of a trade or business with respect to the payment) must make an
information return on Form 1042-S (or such other form as the IRS may
prescribe) to report the amounts specified in paragraph (c)(2) of this
section that were paid during the preceding calendar year. One Form
1042-S shall be prepared for each beneficial owner (except as otherwise
provided in paragraph (c)(4) of this section regarding multiple
withholding agents). The Form 1042-S shall be prepared in such manner
as the form and accompanying instructions prescribe. One copy of the
Form 1042-S shall be filed with the IRS on or before March 15 of the
calendar year following the year in which the item of income was paid.
It shall be filed with a transmittal form as provided in the
instructions to the Form 1042-S and to the transmittal form.
Withholding certificates or other statements or documentation provided
to a withholding agent are not required to be attached to the
information return. Another copy of the Form 1042-S shall be furnished
to the payee on or before March 15 of the calendar year following the
year in which the item of income was paid.
The withholding agent shall retain a copy of each Form 1042-S for
the statute of limitations on assessment and collection applicable to
the Form 1042 to which the Form 1042-S relates.
(ii) Joint owners. In the case of joint owners, a single Form 1042-
S may be prepared. However, upon request of any one of the owners, the
withholding agent shall furnish to such owner its own Form 1042-S.
Where more than one Form 1042-S is issued with respect to a single
payment to joint owners, the aggregate amount of items paid and tax
withheld reported on the Forms 1042-S cannot exceed the amounts paid to
the joint owners and tax withheld thereon. If a single Form 1042-S is
prepared, the form shall state the name of only one owner and that name
shall be that of any person whose status the withholding agent relied
upon to determine the applicable rate of withholding tax.
(2) Amounts subject to reporting--(i) In general. Subject to the
exceptions described in paragraph (c)(2)(ii) of this section, the
amounts required to be reported on a Form 1042-S are amounts paid to
foreign persons (including persons who are presumed to be foreign) that
consist of amounts subject to withholding (as defined in Sec. 1.1441-
2(a)) under section 1441, 1442, or 1443. This includes (but is not
limited to)--
(A) The entire amount of corporate distributions (whether deemed or
actual) paid to a foreign person, irrespective of any estimate of the
portion of the distribution that represents a taxable dividend;
(B) Amounts deemed paid to a foreign person as described in
Sec. 1.1441-2(d) (dealing with exceptions to withholding where no money
or property is paid), except where the amount is exempt from
withholding due to lack of knowledge;
(C) Amounts that are (or are presumed to be) effectively connected
with the conduct of a trade or business in the United States,
irrespective of the fact that no withholding certificate is required to
be furnished by the payee or beneficial owner. In the case of amounts
paid on a notional principal contract described in Sec. 1.1441-4(a)(3)
that are presumed to be effectively connected with the conduct of a
trade or business in the United States, the amount required to be
reported is limited to the net income from the notional principal
contract as described in Sec. 1.446-3(d). Effectively connected non-
periodic payments are reportable for the year in which an actual
payment is made;
(D) Interest (including original issue discount) that is not exempt
from reporting as provided under Sec. 1.6049-8, dealing with certain
interest on deposits with banks paid to Canadian residents;
(E) Amounts representing interest paid on an obligation that is
sold between interest payment dates;
(F) Amounts paid to foreign governments, international
organizations, or the Bank for International Settlements, whether or
not documentation must be provided;
(G) Interest (including original issue discount) paid with respect
to foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2) to the extent the documentation requirements described in
Sec. 1.871-14(e)(3) and (4) are satisfied (taking into account the
provisions of Sec. 1.871-14(e)(4)(ii), if applicable).
(ii) Exceptions to reporting. The amounts listed in paragraphs
(c)(2)(ii)(A) through
(G) of this section are not required to be reported on a Form 1042-
S--
(A) Any item paid by a partnership, trust or estate to the extent
the item is required to be reported by the partnership under section
6031 or by the trust or estate under sections 6012(a) and 6034A, and
the regulations under those sections;
(B) Any item required to be reported on a Form W-2, including an
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2
(relating to return of information as to payments to employees) or
Sec. 1.6052-1 (relating to information regarding payment of wages in
the form of group-term life insurance);
(C) Any item required to be reported on Form 1099, and such other
forms as are prescribed pursuant to the information reporting
provisions of sections 6041 through 6050P and the regulations under
these sections;
(D) Amounts paid on a notional principal contract described in
Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the
conduct of a trade or business in the United States (or treated as not
effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
(E) Amounts required to be reported on Form 8288 (U.S. Withholding
Tax Return for Dispositions by Foreign Persons of U.S. Real Property
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax
(Section 1446)). A withholding agent that must report a distribution
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to
report the entire amount on a Form 8288 or 8804;
(F) Original issue discount for which no withholding is required
under Sec. 1.1441-2(b)(3); and
(G) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with
certain amounts paid by the U.S. government).
(3) Required information. The information required to be furnished
under this paragraph (c)(3) shall be based upon the information
provided by or on behalf of the beneficial owner (e.g., a beneficial
owner withholding certificate or documentary evidence), as corrected
and supplemented based on the withholding agent's actual knowledge. The
Form 1042-S must include the following information, if applicable--
[[Page 53469]]
(i) The name, address, and taxpayer identifying number of the
withholding agent;
(ii) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars;
(iii) The rate of withholding applied;
(iv) The name and permanent residence address of the beneficial
owner (or of the payee if the beneficial owner is unknown, or of the
person receiving the amount if the payee is also unknown);
(v) The taxpayer identifying number of the beneficial owner if
required under Sec. 1.1441-1(e)(4)(vii) to be stated on a beneficial
owner withholding certificate (or if actually known to the withholding
agent making the return). In the case of a financial institution,
actual knowledge exists with respect to accounts maintained for
customers only if such taxpayer identifying number was stated on a Form
W-8 furnished for another payment made through the same account or
through another account, the information for which can be retrieved
through a centralized account information system (as described in
Sec. 1.1441-1(e)(4)(ix)) containing both accounts; and
(vi) Such information as the form or the instructions may require
in addition to, or in lieu of, information required under this
paragraph (c)(3).
(4) Multiple withholding agents--(i) In general. Except as
otherwise provided in this paragraph (c)(4), no information return is
required to be made under paragraph (c)(1)(i) of this section if a
return is filed by another withholding agent reporting the same amount
pursuant to the provisions of this paragraph (c).
(ii) Payments to a qualified intermediary or a withholding foreign
partnership. A withholding agent making a payment to a qualified
intermediary (described in Sec. 1.1441-1(e)(5)(ii)) or to a withholding
foreign partnership (described in Sec. 1.1441-5(c)(2)(i)) must report
the payment on a single Form 1042-S or as otherwise directed by the
form or the accompanying instructions to the form and must provide a
copy of the Form 1042-S to the intermediary or partnership (but is not
required to provide the Form 1042-S to the beneficial owners or
partners). The Form 1042-S must report the different categories of
payments based on different types of income and applicable withholding
rates.
(iii) Payments to an authorized foreign agent--(A) Filing
obligation of foreign authorized agent. An authorized foreign agent (as
described in Sec. 1.1441-7(c)(2)) is subject to the filing requirements
described in paragraph (c)(1)(i) of this section because it is a
withholding agent. Therefore, to the extent the U.S. withholding agent
for which it is acting is not reporting the information required under
this paragraph (c), it must report the information required to be
reported under paragraph (c)(3) or (4)(vi) of this section.
(B) Filing obligations of the U.S. withholding agent. A U.S.
withholding agent making a payment to an authorized foreign agent is
exempted from the requirement under paragraph (c)(4)(iv) of this
section to make a return on Form 1042-S for each beneficial owner and
may, instead, make a return on a single Form 1042-S to report the
payment made to the authorized foreign agent. The exemption in this
paragraph (c)(4)(iii)(B) shall apply only to the extent the authorized
foreign agent complies with the filing requirements under paragraph
(c)(4)(iii)(A) of this section.
(iv) Payments to other intermediaries or foreign partnerships.
Payment of an amount to a foreign intermediary described in
Sec. 1.1441-1(e)(3)(i) that is not a qualified intermediary or to a
foreign partnership that is not a withholding foreign partnership
described in Sec. 1.1441-5(c)(2)(i) may not be shown on a single Form
1042-S but must be reported on separate Forms 1042-S for each
beneficial owner or payee whose name appears on a withholding
certificate attached to the intermediary's or partnership withholding
certificate that is from a qualified intermediary or a withholding
foreign partnership. Payments to an intermediary for the account of
undocumented owners or to a foreign partnership for the account of
undocumented partners should be reported on a single Form 1042-S made
out to the intermediary and bearing the mention ``unknown owners''.
(v) Payments to a U.S. branch of certain foreign entities. Payment
of an amount to the U.S. branch of a foreign entity described in
Sec. 1.1441-1(b)(2)(iv) shall be reported--
(A) On a single Form 1042-S as effectively connected income if the
withholding agent cannot reliably associate documentation with the
payment to the U.S. branch;
(B) On a single Form 1042-S as an amount paid to an intermediary if
the withholding agent can reliably associate the payment with a U.S.
branch withholding certificate described in Sec. 1.1441-1(e)(3)(v)
furnished as evidence of an agreement between the branch and the
withholding agent to treat the branch as a U.S. person; or
(C) On separate Forms 1042-S for each beneficial owner or payee
whose name appears on a withholding certificate or other appropriate
documentation attached to the U.S. branch withholding certificate.
(vi) Required information. An information return on a Form 1042-S
by a withholding agent reporting payments to an intermediary, to a
foreign partnership, or to a U.S. branch must contain the information
contained in this paragraph (c)(4)(vi). The information on the Form
1042-S must be based upon the withholding certificates furnished by the
payee, as corrected and supplemented by the withholding agent based on
its actual knowledge or reason to know other facts:
(A) The name, address, and taxpayer identifying number of the
withholding agent.
(B) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars.
(C) The rate of withholding applied.
(D) The basis for not withholding or withholding at a reduced rate.
(E) The name, address, and taxpayer identifying number of the
payee.
(F) In the case of payments described in paragraph (c)(4)(iv) of
this section, the information described in paragraphs (c)(3)(iv) and
(v) of this section regarding the person for whom a Form 1042-S is
required to be prepared under paragraph (c)(4)(iv).
(G) Such information as the form or instructions may require in
addition to, or in lieu of, the information required under this
paragraph (c)(4)(vi).
(5) Payments to single-member entity. A withholding agent that,
upon reliance on a valid withholding certificate, treats a payment as
made to a wholly-owned entity that is disregarded to federal tax
purposes under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner and whose single owner is a foreign person
shall make an information return on Form 1042-S in the name of the
foreign single owner, using the owner's taxpayer identifying number if
such a number is required to be stated on the form.
(6) Special rules in the case of claims of treaty benefits by
hybrid entities or their interest holders. A withholding agent must
make an information return on a Form 1042-S for each beneficial owner
(within the meaning of the applicable tax treaty) upon whose
withholding certificate or other appropriate documentation the
[[Page 53470]]
withholding agent relies to reduce the rate of withholding under a tax
treaty. Therefore, in the case of concurrent and consistent claims of
reduced rates under several tax treaties by the entity and by one or
more interest holders, the withholding agent must make an information
return for the entity and for each of the interest holders claiming to
derive an allocable share of amounts paid to the entity as a resident
of an applicable treaty country.
(7) Effect of grace period on filing requirements. A withholding
agent who relies on the provisions of Sec. 1.1441-1(b)(3)(iv) to treat
the payee as a foreign person during a 90-day grace period while
awaiting the documentation must make an information return on a Form
1042-S to report all payments to such person during the grace period
even if such person is (or is presumed to be) a U.S. person based upon
documentation furnished to the withholding agent when the grace period
expired or subsequently, or based upon applicable presumptions in
Sec. 1.1441-1(b)(3).
(8) Magnetic media reporting. A withholding agent that makes 250 or
more Form 1042-S information returns for a taxable year must file Form
1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter
for requirements applicable to a withholding agent that files Forms
1042-S with the IRS on magnetic media and publications of the IRS
relating to magnetic media filing.
(d) Report of taxpayer identifying numbers. When so required under
procedures that the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter), a withholding agent must attach to
the Form 1042 a list of all the taxpayer identifying numbers (and
corresponding names) that have been furnished to the withholding agent
and upon which the withholding agent has relied to grant a reduced rate
of withholding and that are not otherwise required to be reported on a
Form 1042-S under the provisions of this section.
(e) Indemnification of withholding agent. A withholding agent is
indemnified against the claims and demands of any person for the amount
of any tax it deducts and withholds in accordance with the provisions
of chapter 3 of the Code and the regulations under that chapter. A
withholding agent that withholds based on a reasonable belief that such
withholding is required under chapter 3 of the Code and the regulations
under that chapter is treated for purposes of section 1461 and this
paragraph (e) as having withheld tax in accordance with the provisions
of chapter 3 of the Code and the regulations under that chapter. In
addition, a withholding agent is indemnified against the claims and
demands of any person for the amount of any payments made in accordance
with the grace period provisions set forth in Sec. 1.1441-1(b)(3)(iv).
This paragraph (e) does not apply to relieve a withholding agent from
tax liability under chapter 3 of the Code or the regulations under that
chapter.
(f) Amounts paid not constituting gross income. Any amount withheld
in accordance with Sec. 1.1441-3 shall be reported and paid in
accordance with this section, even though the amount paid to the
beneficial owner may not constitute gross income in whole or in part.
For this purpose, a reference in this section and Sec. 1.1461-2 to an
amount shall, where appropriate, be deemed to refer to the amount
subject to withholding under Sec. 1.1441-3.
(g) Extensions of time to file Forms 1042 and 1042-S. The IRS may
grant an extension of time in which to file a Form 1042 or a Form 1042-
S. Form 2758, Application for Extension of Time to File Certain Excise,
Income, Information, and Other Returns (or such other form as the IRS
may prescribe), must be used to request an extension of time for a Form
1042. Form 8809, Request for Extension of Time to File Information
Returns (or such other form as the IRS may prescribe) must be used to
request an extension of time for a Form 1042-S. The request must
contain a statement of the reasons for requesting the extension and
such other information as the forms or instructions may require. It
must be mailed or delivered not later than March 15 of the year
following the end of the calendar year for which the return will be
filed.
(h) Penalties. For penalties and additions to the tax for failure
to file returns or furnish statements in accordance with this section,
see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203,
and the regulations under those sections.
(i) Effective date. This section shall apply to returns required
for payments made after December 31, 1998.
Sec. 1.1461-2 Adjustments for overwithholding or underwithholding of
tax.
(a) Adjustments of overwithheld tax--(1) In general. A withholding
agent that has overwithheld under chapter 3 of the Internal Revenue
Code (Code) and made a deposit of the tax as provided in Sec. 1.6302-
2(a) may adjust the overwithheld amount either pursuant to the
reimbursement procedure described in paragraph (a)(2) of this section
or pursuant to the set-off procedure described in paragraph (a)(3) of
this section. Adjustments under this paragraph (a) may only be made
within the time prescribed under paragraph (a) (2) or (3) of this
section. After such time, an adjustment to the amount overwithheld can
only be claimed by the beneficial owner with the Internal Revenue
Service (IRS) pursuant to the procedures described in chapter 65 of the
Code. For purposes of this section, the term overwithholding means any
amount actually withheld (determined before application of the
adjustment procedures under this section) from an item of income
pursuant to chapter 3 of the Code or the regulations thereunder in
excess of the actual tax liability due, regardless of whether such
overwithholding was in error or appeared correct at the time it
occurred.
(2) Reimbursement of tax--(i) General rule. Under the reimbursement
procedure, the withholding agent repays the beneficial owner or payee
for the amount overwithheld. In such a case, the withholding agent may
reimburse itself by reducing, by the amount of tax actually repaid to
the beneficial owner or payee, the amount of any deposit of tax made by
the withholding agent under Sec. 1.6302-2(a)(1)(iii) for any subsequent
payment period occurring before the end of the calendar year following
the calendar year of overwithholding. Any such reduction that occurs
for a payment period in the calendar year following the calendar year
of overwithholding shall be allowed only if--
(A) The withholding agent states, on a timely filed (not including
extensions) Form 1042-S for the calendar year of overwithholding, the
amount of tax withheld and the amount of any actual repayment; and
(B) The withholding agent states on a timely filed (not including
extensions) Form 1042 for the calendar year of overwithholding, that
the filing of the Form 1042 constitutes a claim for credit in
accordance with Sec. 1.6414-1.
(ii) Record maintenance. If the beneficial owner is repaid an
amount of withholding tax under the provisions of this paragraph
(a)(2), the withholding agent shall keep as part of its records a
receipt showing the date and amount of repayment and the withholding
agent must provide a copy of such receipt to the beneficial owner. For
this purpose, a canceled check or an entry in a statement is sufficient
provided that the check or statement contains a specific notation that
it is a refund of tax overwithheld.
(3) Set-offs. Under the set-off procedure, the withholding agent
may repay the beneficial owner by applying the amount overwithheld
against any
[[Page 53471]]
amount which otherwise would be required under chapter 3 of the Code or
the regulations thereunder to be withheld from income paid by the
withholding agent to such person before the earlier of the due date
(without regard to extensions) for filing the Form 1042-S for the
calendar year of overwithholding or the date that the Form 1042-S is
actually filed with the IRS. For purposes of making a return on Form
1042 or 1042-S (or an amended form) for the calendar year of
overwithholding and for purposes of making a deposit of the amount
withheld, the reduced amount shall be considered the amount required to
be withheld from such income under chapter 3 of the Code and the
regulations thereunder.
(4) Examples. The principles of this paragraph (a) are illustrated
by the following examples:
Example 1. (i) N is a nonresident alien individual who is a
resident of the United Kingdom. In December 1999, a domestic
corporation C pays a dividend of $100 to N, at which time C
withholds $30 and remits the balance of $70 to N. On February 10,
2000, prior to the time that C files its Form 1042, N furnishes a
valid Form W-8 described in Sec. 1.1441-1(e)(2)(i) upon which C may
rely to reduce the rate of withholding to 15 percent under the
provisions of the U.S.-U.K. tax treaty. Consequently, N advises C
that its tax liability is only $15 and not $30 and requests
reimbursement of $15. Although C has already deposited the $30 that
was withheld, as required by Sec. 1.6302-2(a)(1)(iv), C repays N in
the amount of $15.
(ii) During 1999, C makes no other payments upon which tax is
required to be withheld under chapter 3 of the Code; accordingly,
its return on Form 1042 for such year, which is filed on March 15,
2000, shows total tax withheld of $30, an adjusted total tax
withheld of $15, and $30 previously paid for such year. Pursuant to
Sec. 1.6414-1(b), C claims a credit for the overpayment of $15 shown
on the Form 1042 for 1999. Accordingly, it is permitted to reduce by
$15 any deposit required by Sec. 1.6302-2 to be made of tax withheld
during the calendar year 2000. The Form 1042-S required to be filed
by C with respect to the dividend of $100 paid to N in 1999 is
required to show tax withheld of $30 and tax released of $15.
Example 2. The facts are the same as in Example 1. In addition,
during 2000, C makes payments to N upon which it is required to
withhold $200 under chapter 3 of the Code, all of which is withheld
in June 2000. Pursuant to Sec. 1.6302-2(a)(1)(iii), C deposits the
amount of $185 on July 15, 2000 ($200 less the $15 for which credit
is claimed on the Form 1042 for 1999). On March 15, 2001, C
Corporation files its return on Form 1042 for calendar year 2000,
which shows total tax withheld of $200, $185 previously deposited by
C, and $15 allowable credit.
Example 3. The facts are the same as in Example 1. Under
Sec. 1.6032-2(a)(1)(ii)), C is required to deposit on a quarter-
monthly basis the tax withheld under chapter 3 of the Code. C
withholds tax of $100 between February 8 and February 15, 2000, and
deposits $75 [($100 x 90 percent) less $15] of the withheld tax
within 3 banking days after February 15, 2000, and by depositing $10
[($100-$15) less $75] within 3 banking days after March 15, 2000.
(b) Withholding of additional tax when underwithholding occurs. A
withholding agent may withhold from future payments made to a
beneficial owner the tax that should have been withheld from previous
payments to such beneficial owner. In the alternative, the withholding
agent may satisfy the tax from property that it holds in custody for
the beneficial owner or property over which it has control. Such
additional withholding or satisfaction of the tax owed may only be made
before the date that the Form 1042 is required to be filed (not
including extensions) for the calendar year in which the
underwithholding occurred. See Sec. 1.6302-2 for making deposits of tax
or Sec. 1.1461-1(a) for making payment of the balance due for a
calendar year.
(c) Definition. For purposes of this section, the term payment
period means the period for which the withholding agent is required by
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3
of the Code.
(d) Effective date. This section applies to payments made after
December 31, 1998.
Secs. 1.1461-3 and 1.1461-4 [Removed]
Par. 20. Sections 1.1461-3 and 1.1461-4 are removed.
Par. 21. Sections 1.1462-1 and 1.1463-1 are revised to read as
follows:
Sec. 1.1462-1 Withheld tax as credit to recipient of income.
(a) Creditable tax. The entire amount of the income from which the
tax is required to be withheld (including amounts calculated under the
gross-up formula in Sec. 1.1441-3(f)(1)) shall be included in gross
income in the return required to be made by the beneficial owner of the
income, without deduction for the amount required to be or actually
withheld, but the amount of tax actually withheld shall be allowed as a
credit against the total income tax computed in the beneficial owner's
return.
(b) Amounts paid to persons who are not the beneficial owner.
Amounts withheld at source under chapter 3 of the Internal Revenue Code
(Code) on payments to a fiduciary, partnership, or intermediary is
deemed to have been paid by the taxpayer ultimately liable for the tax
upon such income. Thus, for example, if a beneficiary of a trust is
subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion
of the income received from a foreign trust, the part of any amount
withheld at source which is properly allocable to the income so taxed
to such beneficiary shall be credited against the amount of the income
tax computed upon the beneficiary's return, and any excess shall be
refunded. Further, if a partnership withholds an amount under chapter 3
of the Code with respect to the distributive share of a partner that is
a partnership or with respect to the distributive share of partners in
an upper tier partnership, such amount is deemed to have been withheld
by the upper tier partnership.
(c) Effective date. This section applies to payments made after
December 31, 1998.
Sec. 1.1463-1 Tax paid by recipient of income.
(a) Tax paid. If the tax required to be withheld under chapter 3 of
the Internal Revenue Code is paid by the beneficial owner of the income
or by the withholding agent, it shall not be re-collected from the
other, regardless of the original liability therefor. However, this
section does not relieve the person that did not withhold tax from
liability for interest or any penalties or additions to tax otherwise
applicable. See Sec. 1.1441-7(b)(7) for additional applicable rules.
(b) Effective date. This section applies to failures to withhold
occurring after December 31, 1989.
Par. 23. Section 1.6041-1 is amended by:
1. Revising paragraph (a)(1).
2. Adding a sentence at the end of paragraph (a)(2) .
3. Revising paragraphs (d)(1) introductory text and (d)(3).
4. Adding a heading for paragraphs (d)(2) and (d)(4).
5. Adding paragraph (d)(5).
The additions and revisions read as follows:
Sec. 1.6041-1 Return of information as to payments of $600 or more
(a) General rule--(1) Information returns required--(i) Payments
required to be reported. Except as otherwise provided in Secs. 1.6041-3
and 1.6041-4, every person engaged in a trade or business shall make an
information return for each calendar year with respect to payments it
makes during the calendar year in the course of its trade or business
to another person of fixed or determinable income described in
paragraph (a)(1)(i) (A) or (B) of this section. For purposes of the
regulations under this section, the person described in this paragraph
(a)(1)(i) is a payor.
(A) Salaries, wages, commissions, fees, and other forms of
compensation
[[Page 53472]]
for services rendered aggregating $600 or more.
(B) Interest (including original issue discount), rents, royalties,
annuities, pensions, and other gains, profits, and income aggregating
$600 or more.
(ii) Information returns required under other provisions of the
Internal Revenue Code. The payments described in paragraphs (a)(1)(i)
(A) and (B) of this section shall not include any payments of amounts
with respect to which an information return is required by, or may be
required under authority of, section 6042(a) (relating to dividends),
section 6043(a)(2) (relating to distributions in liquidation), section
6044(a) (relating to patronage dividends), section 6045 (relating to
brokers' transactions with customers), sections 6049(a) (1) and (2)
(relating to interest), section 6050N(a) (relating to royalties), or
section 6050P (a) or (b) (relating to cancellation of indebtedness). In
addition, the payments described in paragraphs (a)(1)(i) (A) and (B) of
this section shall not include amounts excepted from the definition of
dividends under section 6042(b)(2) and Sec. 1.6042-3(b)(1), amounts
described in section 6044(b), amounts excepted from reporting under
Sec. 1.6045-1(g), amounts excepted from the definition of interest
under section 6049(b)(2) (C) or (D), Sec. 1.6049-4(c), or 1.6049-
5(b)(6) through (15). Notwithstanding the preceding sentence, interest
with respect to a notional principal contract excluded from the
definition of interest under Sec. 1.6049-5(b)(15) is reportable under
this section. The term interest as used in this paragraph (a)(1)(ii)
otherwise includes all interest, other than interest coming within the
definition of interest provided in Sec. 1.6049-5(a). For example, a
closely held corporation borrows money from one of its officers on a
promissory note not in registered form bearing annual stated interest
of $300. The corporation also pays royalties to the officer amounting
to $400 a year. An information return is required under this paragraph
(a)(1) to report the payments to the officer because the interest does
not come within the definition of interest in Sec. 1.6049-5(a) and the
aggregate of interest and royalties exceeds $600.
(2) * * * For the requirement to submit the information required by
Form 1099 on magnetic media for payments after December 31, 1983, see
section 6011(e) and Sec. 301.6011-2 of this chapter (Procedure and
Administration Regulations).
* * * * *
(d) * * * (1) In general. Amounts paid in respect of life
insurance, endowment, or annuity contracts are required to be reported
in returns of information under this section--
* * * * *
(2) Professional fees. * * *
(3) Prizes and awards. Amounts paid as prizes and awards that are
required to be included in gross income under section 74 and Sec. 1.74-
1 when paid in the course of a trade or business are required to be
reported in returns of information under this section.
(4) Disability payments. * * *
(5) Notional principal contracts. Amounts paid after December 31,
1998, with respect to notional principal contracts referred to in
Secs. 1.863-7 or 1.988-2(e) to persons who are not described in
Sec. 1.6049-4(c)(1)(ii) are required to be reported in returns of
information under this section. However, a payment made outside the
United States (as defined in Sec. 1.6049-5(e)) by a non-U.S. payor or a
non-U.S. middleman, or by a U.S. payor or U.S. middleman that is not a
U.S. person (such as a controlled foreign corporation defined in
section 957(a) or certain foreign corporations or foreign partnerships
engaged in a U.S. trade or business) or is a foreign branch of a U.S.
bank is not reportable under this section if, in the case of a person
that is a U.S. payor, a U.S. middleman, or a foreign branch of a U.S.
institution, the payor has no actual knowledge that the payee is a U.S.
person. The amount required to be reported under this paragraph (d)(5)
is limited to the net income from the notional principal contract as
described in Sec. 1.446-3(d). A non-periodic payment is reportable for
the year in which an actual payment is made. Any amount of interest
determined under the provisions of Sec. 1.446-3(g)(4) (dealing with
interest in the case of a significant non-periodic payment) is
reportable under this paragraph (d)(5) and not under section 6049 (see
Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4) for reporting exceptions
regarding payments to foreign persons. See, however, Sec. 1.1461-
1(c)(1) for reporting amounts described under this paragraph (d)(5)
that are paid to foreign persons. The provisions of Sec. 1.6049-5(d)
shall apply for determining whether a payment with respect to a
notional principal contract is made to a foreign person. See
Sec. 1.6049-4(a) for a definition of payor. For purposes of this
paragraph (d)(5), a payor includes a middleman defined in Sec. 1.6049-
4(f)(4). See Sec. 1.6049-5(c)(5) for a definition of a U.S. payor, a
U.S. middleman, a non-U.S. payor, and a non-U.S. middleman.
* * * * *
Par. 24. Section 1.6041-2 is amended by revising paragraph (c) to
read as follows:
Sec. 1.6041-2 Return of information as to payments to employees.
* * * * *
(c) Payments to foreign persons. See Sec. 1.6041-4 for reporting
exemptions regarding payments to foreign persons. See Sec. 1.6049-5(d)
for determining whether a payment is made to a foreign person.
Par. 25. Section 1.6041-3 is amended by:
1. Revising the introductory text of the section.
2. Revising paragraphs (a) and (b).
3. Removing the semicolon at the end of paragraphs (d) through (f),
and (h) through (j), and adding a period in its place; and removing the
language ``; and'' at the end of paragraph (o), and adding a period in
its place.
4. Removing paragraphs (c) and (l).
5. Redesignating paragraphs (d), (e), (f), (g), (h), (i), (j), (k),
(m), (n), (o), and (p) as paragraphs (c), (d), (e), (f), (g), (h), (i),
(j), (k), (l), (m), and (n), respectively.
6. Revising newly designated paragraphs (f) and (j).
7. Adding new paragraphs (o) and (p), and paragraph (q).
The addition and revisions read as follows:
Sec. 1.6041-3 Payments for which no return of information is required
under section 6041.
Returns of information are not required under section 6041 and
Secs. 1.6041-1 and 1.6041-2 for payments described in paragraphs (a)
through (q) of this section. See Sec. 1.6041-4 for reporting exemptions
regarding payments to foreign persons. See Sec. 1.6041-4 for reporting
exemptions regarding foreign persons.
(a) Payments of income required to be reported on Forms 1120-S,
941, W-2, and W-3 (however, see Sec. 1.6041-2(a) with respect to Forms
W-2 and W-3).
(b) Payments by a broker to his customer (but for reporting
requirements as to certain of such payments, see sections 6042, 6045,
and 6049 and the regulations thereunder in this part).
* * * * *
(f) Compensation and profits paid or distributed by a partnership
to the individual partners (but for reporting requirements, see
Sec. 1.6031-1).
* * * * *
(j) Payments of interest on corporate bonds (but for reporting
requirements as
[[Page 53473]]
to payments of interest on certain corporate bonds, see Sec. 1.6049-5).
* * * * *
(o) Payments to individuals as scholarships or fellowship grants
within the meaning of section 117(b)(1), whether or not ``qualified
scholarships'' as described in section 117(b). This exception does not
apply to any amount of a scholarship or fellowship grant that
represents payment for services within the meaning of section 117(c).
Instead, these amounts are required to be reported as wages on Form W-
2. See Sec. 1.1461-1(c) for applicable reporting requirements for
amounts paid to foreign persons.
(p) Per diem of certain alien trainees described under section
1441(c)(6).
(q) Payments made to the following persons:
(1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except a
corporation engaged in providing medical and health care services or
engaged in the billing and collecting of payments in respect to the
providing of medical and health care services. However, no reporting is
required where payment is made to a hospital or extended care facility
described in section 501(c)(3) which is exempt from taxation under
section 501(a) or to a hospital or extended care facility owned and
operated by the United States, a State, the District of Columbia, a
possession of the United States, or a political subdivision, agency or
instrumentality of any of the foregoing. For reporting requirements as
to payments by cooperatives, and to certain other payments, see
sections 6042, 6044, and 6049 and the regulations thereunder in this
part.
(2) An organization exempt from taxation under section 501(a), as
described in Sec. 1.6049-4(c)(1)(ii)(B)(1), or an individual retirement
plan, as described in Sec. 1.6049-4(c)(1)(ii)(C).
(3) The United States, as described in Sec. 1.6049-4(c)(1)(ii)(D).
(4) A State, the District of Columbia, a possession of the United
States, or any political subdivision of any of the foregoing, as
described in Sec. 1.6049-4(c)(1)(ii)(E).
(5) A foreign government or political subdivision of a foreign
government, as described in Sec. 1.6049-4(c)(1)(ii)(F).
(6) An international organization, as described in Sec. 1.6049-
4(c)(1)(ii)(G).
(7) A foreign central bank of issue, as described in Sec. 1.6049-
4(c)(1)(ii)(H) and the Bank for International Settlements.
(8) Any wholly owned agency or instrumentality of any person
described in paragraph (q) (2), (3), (4), (5), (6), or (7) of this
section.
Par. 26. Section 1.6041-4 is revised to read as follows:
Sec. 1.6041-4 Foreign-related items and other exceptions
(a) Exempted foreign-related items--(1) Returns of information are
not required for payments that a payor can, prior to payment, associate
with documentation upon which it may rely to treat as made to a foreign
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made
to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed
to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or
(5). However, such payments may be reportable under Sec. 1.1461-1(b)
and (c). For purposes of this paragraph (a)(1), the provisions in
Sec. 1.6049-5(c) (regarding rules applicable to documentation of
foreign status and definition of U.S. payor and non-U.S. payor) shall
apply. See Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules
regarding scholarships, grants, pensions, annuities, etc. The
provisions of Sec. 1.1441-1 shall apply by substituting the term payor
for the term withholding agent and without regard to the fact that the
provisions apply only to amounts subject to withholding under chapter 3
of the Internal Revenue Code and the regulations under that chapter.
(2) Returns of information are not required for payments of amounts
from sources outside the United States (determined under the provisions
of part I, subchapter N, chapter 1 of the Internal Revenue Code and the
regulations under those provisions) made by a non-U.S. payor or non-
U.S. middleman outside the United States. For a definition of non-U.S.
payor and non-U.S. middleman, see Sec. 1.6049-5(c)(5). For
circumstances in which a payment is considered to be made outside the
United States, see Sec. 1.6049-5(e).
(3) Returns of information are not required for amounts paid by a
foreign intermediary described in Sec. 1.1441-1(e)(3)(i) that it has
received in its capacity as an intermediary and that are associated
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign
bank or of a foreign insurance company described in Sec. 1.1441-
1(b)(2)(iv) that are associated with a valid withholding certificate
described in Sec. 1.1441-1(e)(3)(v), which certificate the intermediary
or branch has furnished to the payor or middleman from whom it has
received the payment, unless, and to the extent, the intermediary or
branch knows that the payments are required to be reported under
Sec. 1.6041-1 and were not so reported.
(4) Returns of information are not required for amounts paid with
respect to notional principal contracts referred to in Sec. 1.863-7 or
1.988-2(e) which the payor may treat as effectively connected income of
a foreign payee under the provisions of Sec. 1.1441-4(a)(3) or if the
payee provides a representation in a master agreement that governs the
transactions in notional principal contracts between the parties (for
example, an International Swap and Derivatives Association (ISDA)
Agreement, including the Schedule thereto) or in the confirmation on
the particular notional principal contract transaction that the
counterparty is a foreign person. See, however, Sec. 1.1461-1(c)(2)(i)
for applicable reporting requirements.
(5) Returns of information are not required for the period that the
amounts paid represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (a)(5) shall terminate when
payment is deemed to occur in accordance with the provisions of
Sec. 1.1441-2(e)(3).
(b) Joint owners. Amounts paid to joint owners for which a
certificate or documentation is required as a condition for being
exempt from reporting under paragraph (a) of this section are presumed
made to U.S. payees who are not exempt recipients if, prior to payment,
the payor or middleman cannot reliably associate the payment either
with a Form W-9 furnished by one of the joint owners in the manner
required in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or
with documentation described in paragraph (a)(1) of this section
furnished by each joint owner upon which the payor or middleman can
rely to treat each joint owner as a foreign payee or foreign beneficial
owner.
(c) Conversion into United States dollars of amounts paid in
foreign currency. For rules concerning foreign currency conversion, see
Sec. 1.6049-4(d)(3)(i).
(d) Effective date. The provisions of this section apply to
payments made after December 31, 1998.
Par. 27. Section 1.6041-7 is amended by revising the section
heading and adding a sentence to the end of paragraph (a) to read as
follows:
Sec. 1.6041-7 Magnetic media requirement.
(a) * * * High-volume filers of information returns must file their
returns on magnetic media. See section 6011(e) and Sec. 301.6011-2 of
this chapter (Procedure and Administration
[[Page 53474]]
Regulations) for the requirements for filing on magnetic media.
* * * * *
Par. 28. Section 1.6041-8 is added to read as follows:
Sec. 1.6041-8 Cross-reference to penalties.
For provisions relating to the penalty provided for failure to file
timely a correct information return required under section 6041(a) or
(b), see Sec. 301.6721-1 of this chapter (Procedure and Administration
Regulations). For provisions relating to the penalty provided for
failure to furnish timely a correct payee statement required under
section 6041(d), see Sec. 301.6722-1 of this chapter. See
Sec. 301.6724-1 of this chapter for the waiver of a penalty if the
failure is due to reasonable cause and is not due to willful neglect.
Par. 29. Section 1.6041A-1 is added to read as follows:
Sec. 1.6041A-1 Returns regarding payments of remuneration for services
and certain direct sales.
(a) through (c) [Reserved].
(d) Exceptions to return requirement. [Reserved].
(1) and (2) [Reserved].
(3) Foreign transactions--(i) In general. No return shall be
required under section 6041A with respect to payments described in this
paragraph (d)(3).
(A) Returns of information are not required for payments that a
payor can, prior to payment, associate with documentation upon which it
may rely to treat as made to a foreign beneficial owner in accordance
with Sec. 1.1441-1(e)(1)(ii) or as made to a foreign payee in
accordance with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign
payee under Sec. 1.6049-5(d)(2), (3), (4), or (5). However, such
payments may be reportable under Sec. 1.1461-1(b) and (c). For purposes
of this paragraph (d)(3)(i)(A), the provisions in Sec. 1.6049-5(c)
(regarding rules applicable to documentation of foreign status and
definition of U.S. payor and non-U.S. payor) shall apply. The
provisions of Sec. 1.1441-1 shall apply by substituting the term payor
for the term withholding agent.
(B) Returns of information are not required for payments of
remuneration for services and certain direct sales from sources outside
the United States (determined under the provisions of part I,
subchapter N, chapter 1 of the Internal Revenue Code and the
regulations under those provisions) if payments made outside the United
States by a non-U.S. payor or non-U.S. middleman. For a definition of
non-U.S. payor or non-U.S. middleman, see Sec. 1.6049-5(c)(5). For
circumstances in which a payment is considered to be made outside the
United States, see Sec. 1.6049-5(e).
(ii) Payor. The term payor has the same meaning as described in
Sec. 1.6049-4(a)(2).
(iii) Joint owners. Amounts paid to joint owners for which a
certificate or documentation is required as a condition for being
exempt from reporting under paragraph (d)(3)(i) of this section are
presumed made to U.S. payees who are not exempt recipients if, prior to
payment, the payor or middleman cannot reliably associate the payment
either with a Form W-9 furnished by one of the joint owners in the
manner required in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this
chapter, or with documentation described in paragraph (d)(3)(i)(A) of
this section furnished by each joint owner upon which it can rely to
treat each joint owner as a foreign payee or foreign beneficial owner.
(iv) Conversion into United States dollars of amount paid in
foreign currency. For rules concerning foreign currency conversion, see
Sec. 1.6049-4(d)(3)(i).
(v) Effective date. The provisions of this paragraph (d)(3) apply
to payments made after December 31, 1998.
(e) [Reserved].
(f) Statements to be furnished to persons with respect to whom
information is required to be furnished--(1) [Reserved].
(2) Time for furnishing statement. [Reserved].
(3) Contents of statement. [Reserved].
(g) [Reserved].
(h) Cross-reference to penalties. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6041A(a) or (b), see Sec. 301.6721-1 of
this chapter (Procedure and Administration Regulations). For provisions
relating to the penalty provided for failure to furnish timely a
correct payee statement required under section 6041A(e), see
Sec. 301.6722-1 of this chapter. See Sec. 301.6724-1 of this chapter
for the waiver of a penalty if the failure is due to reasonable cause
and is not due to willful neglect.
Par. 30. Section 1.6042-2 is amended by:
1. Revising the section heading, adding introductory text to
paragraph (a)(1), and revising paragraphs (a)(1)(i) and (a)(1)(ii).
2. Removing the language ``1099M'' in the first sentence of
paragraph (a)(1)(iii) and adding ``1099A'' in its place.
3. Removing the language ``1087'' each time it appears in the
second sentence of paragraph (a)(4) and adding ``1099'' in each place,
and removing the last sentence.
4. Revising paragraph (d).
5. Revising the heading of paragraph (e) and adding a sentence to
the end of paragraph (e).
The revisions and addition read as follows:
Sec. 1.6042-2 Returns of information as to dividends paid.
(a) Requirement of reporting--(1) In general. An information return
on Form 1099 shall be made under section 6042(a) by--
(i) Every person who makes a payment of dividends (as defined in
Sec. 1.6042-3) to any other person during a calendar year. The
information return shall show the aggregate amount of the dividends,
the name, address, and taxpayer identifying number of the person to
whom paid, the amount of tax deducted and withheld under section 3406
from the dividends, if any, and such other information as required by
the forms. An information return is generally not required if the
amount of dividends paid to the other person during the calendar year
aggregates less than $10 or if the payment is made to a person who is
an exempt recipient described in Sec. 1.6049-4(c)(1)(ii) unless the
payor backup withholds under section 3406 on such payment (because, for
example, the payee has failed to furnish a Form W-9 on request), in
which case the payor must make a return under this section, unless the
payor refunds the amount withheld pursuant to Sec. 31.6413(a)-3 of this
chapter.
(ii) Every person, except to the extent that he acts as a nominee
described in paragraph (a)(1)(iii) of this section, who receives
payments of dividends as a nominee on behalf of another person shall
make a return of information under this section for the calendar year
of the payment . The information return shall show the aggregate amount
of the dividends, the name, address, and taxpayer identification number
of the person on whose behalf the dividends are received, the amount of
tax deducted and withheld under section 3406 from the dividends, if
any, and such other information as required by the forms. An
information return is generally not required if the amount of the
dividends received on behalf of the other person during the calendar
year aggregates less than $10. However, a return of information is not
required under this section if--
(A) The record owner is, pursuant to section 6012(a) (3) or (4) and
Sec. 1.6012-3, required to file a fiduciary return on
[[Page 53475]]
Form 1041 that is filed for the estate or trust disclosing the name,
address, and identifying number of both the record owner and actual
owner and furnishes Form K-1 to each actual owner containing the
information required to be shown on the form, including amounts
withheld under section 3406;
(B) The record owner is a nominee of a banking institution or trust
company exercising trust powers, and such banking institution or trust
company is, pursuant to section 6012(a) (3) or (4) and Sec. 1.6012-3,
required to file a fiduciary return on Form 1041 that is filed for the
estate or trust disclosing the name, address, and identifying number of
both the record owner and the actual owner and furnishes Form K-1 to
each actual owner containing the information required to be shown on
the form, including amounts withheld under section 3406; or
(C) The record owner is a banking institution or trust company
exercising trust powers, or a nominee thereof, and the actual owner is
an organization exempt from taxation under section 501(a) for which
such banking institution or trust company files an annual return but
only if the name, address, and identifying number of the record owner
are included on or with the annual return filed for the tax exempt
organization).
* * * * *
(d) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6042(a), see Sec. 301.6721-1 of this
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1
of this chapter for the waiver of a penalty if the failure is due to
reasonable cause and is not due to willful neglect.
(e) Magnetic media requirement. * * * For the requirement to submit
the information required by Form 1099 on magnetic media for payments
after December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of
this chapter (Procedure and Administration Regulations).
Par. 31. Section 1.6042-3 is amended by:
1. Revising paragraphs (a) introductory text and (a)(2).
2. Removing the concluding text immediately following paragraph
(a)(2).
3. Adding paragraph (a)(3).
4. Revising paragraph (b).
5. Removing the authority citation at the end of the section.
The addition and revision read as follows:
Sec. 1.6042-3 Dividends subject to reporting.
(a) In general. Except as provided in paragraph (b) of this
section, the term dividend for purposes of this section and
Secs. 1.6042-2 and 1.6042-4 means the amounts described in the
following paragraphs (a) (1) through (3) of this section--
* * * * *
(2) Any payment made by a stockbroker to any person as a substitute
for a dividend. Such a payment includes any payment made in lieu of a
dividend to a person whose stock has been borrowed. See Sec. 1.6045-
2(h) for coordination of the reporting requirements under sections 6042
and 6045(d) with respect to such payments; and
(3) A distribution from a regulated investment company
(irrespective of the fact that any part of the distribution may not
represent ordinary income (i.e., may, for example, represent a capital
gain dividend as defined in section 852(b)(3)(C)).
(b) Exceptions--(1) In general. For purposes of Secs. 1.6042-2 and
1.6042-4, the amounts described in paragraphs (b)(1)(i) through ( vii)
of this section are not dividends.
(i) Amounts paid by an insurance company to a policyholder, other
than a dividend upon its capital stock.
(ii) Payments (however denominated) by a mutual savings bank,
savings and loan association, or similar organization, in respect of
deposits, investment certificates, or withdrawable or repurchasable
shares. See, however, section 6049 and the regulations under that
section for provisions requiring reporting of these payments.
(iii) Distributions or payments that a payor can, prior to payment,
reliably associate with documentation upon which it may rely to treat
as made to a foreign beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with
Sec. 1.6049-5(d)(1) or presumed to be made to a foreign payee under
Sec. 1.6049-5(d) (2), (3), (4), or (5). However, such payments may be
reportable under Sec. 1.1461-1(b) and (c). For purposes of this
paragraph (b)(1)(iii), the provisions in Sec. 1.6049-5(c) (regarding
rules applicable to documentation of foreign status and definition of
U.S. payor and non-U.S. payor) shall apply. The provisions of
Sec. 1.1441-1 shall apply by substituting the term payor for the term
withholding agent and without regard to the fact that the provisions
apply only to amounts subject to withholding under chapter 3 of the
Internal Revenue Code (Code).
(iv) Distributions or payments from sources outside the United
States (as determined under the provisions of part I, subchapter N,
chapter 1 of the Code and the regulations under those provisions) paid
outside the United States by a non-U.S. payor or a non-U.S. middleman.
For a definition of non-U.S. payor and non-U.S. middleman, see
Sec. 1.6049-5(c)(5). For circumstances in which a payment is considered
to be made outside the United States, see Sec. 1.6049-5(e).
(v) Distributions or payments for the period that the amounts
represent assets blocked as described in Sec. 1.1441-2(e)(3). The
exemption in this paragraph (b)(1)(v) shall terminate when payment is
deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
(vi) Payments made by a foreign intermediary described in
Sec. 1.1441-1(e)(3)(i) that it has received in its capacity as an
intermediary and that are associated with a valid withholding
certificate described in Sec. 1.1441-1(e)(3) (ii) or (iii) and payments
made by a U.S. branch of a foreign bank or of a foreign insurance
company described in Sec. 1.1441-1(b)(2)(iv) that are associated with a
valid withholding certificate described in Sec. 1.1441-1(e)(3)(v),
which certificate the intermediary or branch has furnished to the payor
or middleman from whom it has received the payment, unless, and to the
extent, the intermediary or branch knows that the payments are required
to be reported under Sec. 1.6042-2 and were not so reported.
(vii) With respect to amounts paid or credited after December 31,
1982, any amount paid or credited to any person described in
Sec. 1.6049-4(c)(1)(ii), unless a tax is withheld under section 3406
and is not refunded by the payor in accordance with Sec. 31.6413(a)-3
of this chapter (Employment Tax Regulations).
(2) Payor. The term payor has the same meaning as described in
Sec. 1.6049-4(a)(2).
(3) Joint owners. Amounts paid to joint owners for which a
certificate or documentation is required as a condition for being
exempt from reporting under this paragraph (b) are presumed made to
U.S. payees who are not exempt recipients if, prior to payment, the
payor or middleman cannot reliably associate the payment either with a
Form W-9 furnished by one of the joint owners in the manner required in
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with
documentation described in paragraph (b)(1)(iii) of this section
furnished by each joint owner upon which it can rely to treat each
joint owner as a foreign payee or foreign beneficial owner. For
purposes of applying this paragraph (b)(3), the grace period described
in
[[Page 53476]]
Sec. 1.6049-5(d)(2)(ii) shall apply only if each payee qualifies for
such grace period.
(4) Conversion into United States dollars of amounts paid in
foreign currency. For rules concerning foreign currency conversion, see
Sec. 1.6049-4(d)(3)(i).
(5) Effective date--(i) General rule. The provisions of this
paragraph (b) apply to payments made after December 31, 1998.
(ii) Transition rules. A payor that, on December 31, 1998, holds a
valid Form W-8 or other form upon which it is permitted to rely to hold
the payee as a foreign person pursuant to the regulations in effect
prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1,
1997), may treat it as a valid certificate until its validity expires
under those regulations or, if earlier, until December 31, 1999.
Further, the validity of a Form W-8 or other form that is dated prior
to January 1, 1998, is valid on January 1, 1998, and would expire at
any time during 1998, is extended until December 31, 1998 (and is not
extended after December 31, 1998 by reason of the preceding sentence).
The rule in this paragraph (b)(5)(ii), however, does not apply to
extend the validity period of a withholding certificate that expires in
1998 solely by reason of changes in the circumstances of the person
whose name is on the certificate. Notwithstanding the three preceding
sentences, a payor may choose not to take advantage of the transition
rule in this paragraph (b)(5)(ii) with respect to one or more
withholding certificates and, therefore, to require new withholding
certificates conforming to the requirements described in this section.
* * * * *
Par. 32. Section 1.6042-4 is amended by revising paragraphs
(d)(2)(i)(F) and (f) to read as follows:
Sec. 1.6042-4 Statement to recipients of dividend payments.
* * * * *
(d) * * *
(2) * * *
(i) * * *
(F) Any document concerning the solicitation of the Form W-9, as
described in Sec. 31.3406(h)-3(a) of this chapter, or of the Form W-8
as described in Sec. 1.1441-1(e)(1).
* * * * *
(f) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to furnish timely a correct payee
statement required under section 6042(c), see Sec. 301.6722-1 of this
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1
of this chapter for the waiver of a penalty if the failure is due to
reasonable cause and is not due to willful neglect.
* * * * *
Sec. 1.6043-2 [Amended]
Par. 33. In Sec. 1.6043-2, paragraph (a), the first, second, and
last sentences are amended by removing the reference to ``1099L'' and
adding ``966'' in each place.
Par. 34. Section 1.6044-2 is amended by:
1. Revising the section heading
2. Adding two sentences at the end of paragraph (a)(1).
3. Revising paragraph (e).
4. Revising the heading for paragraph (f) and adding a sentence at
the beginning of paragraph (f).
The revisions and additions read as follows:
Sec. 1.6044-2 Returns of information as to payments of patronage
dividends.
(a) Requirement of reporting--(1) In general. * * * The
organization is required to make an information return regardless of
the amount of the payment if the tax imposed by section 3406 is
required to be withheld. Thus, in the case of any amount subject to
backup withholding under section 3406 and not refunded by the payor
before the due date of the information return in accordance with the
regulations under section 3406, an information return shall be made
even if the payment is not generally reportable because it is made to
an exempt recipient described in Sec. 1.6049-4(c)(1)(ii) or the amount
paid during the calendar year to the recipient aggregates less than
$10.
* * * * *
(e) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6044(a), see Sec. 301.6721-1 of this
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1
of this chapter for the waiver of a penalty if the failure is due to
reasonable cause and is not due to willful neglect.
(f) Magnetic media requirement. For the requirement to submit the
information required by Form 1099 on magnetic media for payments after
December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of this
chapter (Procedure and Administration Regulations). * * *
Par. 35. In Sec. 1.6044-3, paragraph (c) is revised to read as
follows:
Sec. 1.6044-3 Amounts subject to reporting.
* * * * *
(c) Exceptions. An amount described in paragraph (a) of this
section does not include--
(1) Any amount described in Sec. 1.6042-3(b); or
(2) With respect to amounts paid or credited after December 31,
1982, any amount paid or credited to any person described in
Sec. 1.6049-4(c)(1)(ii).
* * * * *
Par. 36. In Sec. 1.6044-5, paragraph (c) is revised to read as
follows:
Sec. 1.6044-5 Statements to recipients of patronage dividends.
* * * * *
(c) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to furnish timely a correct payee
statement required under section 6044(e), see Sec. 301.6722-1 of this
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1
of this chapter for the waiver of a penalty if the failure is due to
reasonable cause and is not due to willful neglect.
* * * * *
Par. 37. Section 1.6045-1 is amended by:
1. Revising the heading of paragraph (a), paragraph (a)
introductory text, and paragraph (a)(1).
2. Removing paragraph (a)(12) and redesignating paragraph (a)(13)
as paragraph (a)(12).
3. Adding new paragraph (a)(13).
4. Paragraph (b) is amended by redesignating Example (1) through
Example (8) as Example 1 through Example 8, respectively; removing
newly designated Example 1(ii); and redesignating Example 1(iii)
through (vi) as Example 1(ii) through (v), respectively.
5. Paragraph (c) is amended by:
a. Redesignating paragraphs (c)(5)(i)(a) through (c)(5)(i)(f) as
paragraphs (c)(5)(i)(A) through (c)(5)(i)(F), respectively.
b. Redesignating paragraph (c)(5)(ii) and Example (1) through
Example (4) as paragraph (c)(5)(iii) and Example 1 through Example 4,
respectively.
c. Adding new paragraph (c)(5)(ii).
6. Paragraph (c)(6) is amended by:
a. Redesignating paragraphs (c)(6)(i)(a) and (c)(6)(i)(b) as
paragraphs (c)(6)(i)(A) and (c)(6)(i)(B), respectively.
b. Redesignating paragraphs (c)(6)(ii)(a) and (c)(6)(ii)(b) as
paragraphs (c)(6)(ii)(A) and (c)(6)(ii)(B), respectively.
7. Revising paragraphs (d)(4), (d)(6), (f)(2)(iii) last sentence of
introductory text, and (g).
8. In paragraph (h)(2), redesignating Example (1) and Example (2)
as paragraph (h)(2) Example 1 and Example 2, respectively.
[[Page 53477]]
9. Revising paragraphs (j), (k), and (l).
10. Removing the authority citation at the end of the section.
The revisions and additions read as follows:
Sec. 1.6045-1 Returns of information of brokers and barter exchanges.
(a) Definitions. The following definitions apply for purposes of
this section, Sec. 1.6045-2, and Sec. 5f.6045-1 of this chapter:
(1) The term broker means any person (other than a person who is
required to report a transaction under section 6043), U.S. or foreign,
that, in the ordinary course of a trade or business during the calendar
year, stands ready to effect sales to be made by others. A broker
includes an obligor that regularly issues and retires its own debt
obligations or a corporation that regularly redeems its own stock.
However, with respect to a sale (including a redemption or retirement)
effected at an office outside the United States, a broker includes only
a person described as a U.S. payor or U.S. middleman in Sec. 1.6049-
5(c)(5). In addition, a broker does not include an international
organization described in Sec. 1.6049-4(c)(1)(ii)(G) that redeems or
retires an obligation of which it is the issuer.
* * * * *
(13) The term person includes any governmental unit and any agency
or instrumentality thereof.
* * * * *
(c) * * *
(5) * * *
(ii) Determination of profit or loss from foreign currency
contracts. A broker effecting a closing transaction in foreign currency
contracts (as defined in section 1256(g)) shall report information with
respect to such contracts in the manner prescribed in paragraph
(c)(5)(i) of this section. If a foreign currency contract is closed by
making or taking delivery, the net realized profit or loss for purposes
of paragraph (c)(5)(i)(B) of this section is determined by comparing
the contract price to the spot price for the contract currency at the
time and place specified in the contract. If a foreign currency
contract is closed by entry into an offsetting contract, the net
realized profit or loss for purposes of paragraph (c)(5)(i)(B) of this
section is determined by comparing the contract price to the price of
the offsetting contract. The net unrealized profit or loss in a foreign
currency contract for purposes of paragraphs (c)(5)(i) (C) and (D) of
this section is determined by comparing the contract price to the
broker's price for similar contracts at the close of business of the
relevant year.
* * * * *
(d) * * *
(4) Sale date. With respect to sales of property that are
reportable under this section, a broker must report a sale as occurring
on the date the sale is entered on the books of the broker.
* * * * *
(6) Conversion into United States dollars of proceeds paid in
foreign currency--(i) Conversion rules. When a payment is made in a
foreign currency, the U.S. dollar amount shall be determined by
converting such foreign currency into U.S. dollars on the date of
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant
to a reasonable spot rate convention. For example, a withholding agent
may use a month-end spot rate or a monthly average spot rate. A spot
rate convention must be used consistently with respect to all non-
dollar amounts withheld and from year to year. Such convention cannot
be changed without the consent of the Commissioner or his or her
delegate.
(ii) Effect of identification under Sec. 1.988-5(a), (b), or (c)
where the taxpayer effects a sale and a hedge through the same broker--
(A) In general. In lieu of the amount reportable under paragraph
(d)(6)(i) of this section, the amount subject to reporting shall be the
integrated amount computed under Sec. 1.988-5(a), (b) or (c) if--
(1) A taxpayer effects through a broker a sale or exchange of
nonfunctional currency (as defined in Sec. 1.988-1(c)) and hedges all
or a part of such sale as provided in Sec. 1.988-5(a), (b) or (c) with
the same broker; and
(2) The taxpayer complies with the requirements of Sec. 1.988-5(a),
(b) or (c) and so notifies the broker prior to the end of the calendar
year in which the sale occurs.
(B) Effective date. The provisions of this paragraph (d)(6)(ii)
apply to transactions entered into after December 31, 1998.
* * * * *
(f) * * *
(2) * * *
(iii) Definition. * * * A barter exchange may treat a member or
client as a corporation (and therefore as a corporate member or client)
if such member or client provides an exemption certificate as described
in Sec. 31.3406(h)-3(a) of this chapter or provided that--
* * * * *
(g) Exempt foreign persons--(1) Brokers. No return of information
is required to be made by a broker with respect to a customer who is
considered to be an exempt foreign person under this paragraph (g)(1).
A broker may treat a customer as an exempt foreign person under the
circumstances described in paragraphs (g)(1)(i) through (iii) of this
section.
(i) With respect to a sale effected at an office of a broker either
inside or outside the United States, the broker may treat the customer
as an exempt foreign person if the broker can, prior to the payment,
associate the payment with documentation upon which it can rely in
order to treat the customer as a foreign beneficial owner in accordance
with Sec. 1.1441-1(e)(1)(ii), or as made to a foreign payee in
accordance with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign
payee under Sec. 1.6049-5(d) (2), (3), (4), or (5). For purposes of
this paragraph (g)(1)(i), the provisions in Sec. 1.6049-5(c) (regarding
rules applicable to documentation of foreign status and definition of
U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. middleman)
shall apply. The provisions of Sec. 1.1441-1 shall apply by
substituting the terms broker and customer for the terms withholding
agent and payee and without regard for the fact that the provisions
apply to amounts subject to withholding under chapter 3 of the Internal
Revenue Code (Code). The provisions of Sec. 1.6049-5(d) shall apply by
substituting the terms broker and customer for the terms payor and
payee. For purposes of this paragraph (g)(1)(i), the broker may rely on
a beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) only to the extent that the certificate includes a
certification that the beneficial owner has not been and, at the time
the certificate is furnished, reasonably expects not to be present in
the United States for a period aggregating 183 days or more during each
calendar year to which the certificate pertains.
(ii) With respect to a redemption or retirement of stock or an
obligation (the interest or original issue discount on, which is
described in Sec. 1.6049-5(b) (6), (7), (10), or (11) or the dividends
on, which are described in Sec. 1.6042-3(b)(1)(iv)) that is effected at
an office of a broker outside the United States by the issuer (or its
paying or transfer agent), the broker may treat the customer as an
exempt foreign person if the broker is not also acting in its capacity
as a custodian, nominee, or other agent of the payee.
(iii) With respect to a sale effected by a broker at an office of
the broker either inside or outside the United States, the broker may
treat the customer as an exempt foreign person for the period that
those proceeds are assets blocked, as described in Sec. 1.1441-2(e)(3).
For purposes of this paragraph (g)(1)(iii) and section 3406, a sale is
deemed to occur
[[Page 53478]]
in accordance with paragraph (d)(4) of this section. The exemption in
this paragraph (g)(1)(iii) shall terminate when payment of the proceeds
is deemed to occur in accordance with the provisions of Sec. 1.1441-
2(e)(3).
(2) Barter exchange. No return of information is required by a
barter exchange with respect to a client or a member that the barter
exchange may treat as a foreign person pursuant to the procedures
described in paragraph (g)(1) of this section.
(3) Applicable rules--(i) Joint owners. Amounts paid to joint
owners for which a certificate or documentation is required as a
condition for being exempt from reporting under paragraph (g) (1)(i) or
(2) of this section are presumed made to U.S. payees who are not exempt
recipients if, prior to payment, the broker or barter exchange cannot
reliably associate the payment either with a Form W-9 furnished by one
of the joint owners in the manner required in Secs. 31.3406(d)-1
through 31.3406(d)-5 of this chapter, or with documentation described
in paragraph (g)(1)(i) of this section furnished by each joint owner
upon which it can rely to treat each joint owner as a foreign payee or
foreign beneficial owner. For purposes of applying this paragraph
(g)(3)(i), the grace period described in Sec. 1.6049-5(d)(2)(ii) shall
apply only if each payee qualifies for such grace period.
(ii) Special rules for determining who the customer is. For
purposes of this paragraph (g), the determination of who the customer
is shall be made on the basis of the provisions in Sec. 1.6049-5(d) by
substituting in that section the terms payor and payee with the terms
broker and customer.
(iii) Place of effecting sale--(A) Sale outside the United States.
For purposes of this paragraph (g), a sale is considered to be effected
by a broker at an office outside the United States if, in accordance
with instructions directly transmitted to such office from outside the
United States by the broker's customer, the office completes the acts
necessary to effect the sale outside the United States. The acts
necessary to effect the sale may be considered to have been completed
outside the United States without regard to whether--
(1) Pursuant to instructions from an office of the broker outside
the United States, an office of the same broker within the United
States undertakes one or more steps of the sale in the United States;
or
(2) The gross proceeds of the sale are paid by a draft drawn on a
United States bank account or by a wire or other electronic transfer
from a United States account.
(B) Sale inside the United States. For purposes of this paragraph
(g), a sale that is considered to be effected by a broker at an office
outside the United States under paragraph (g)(3)(iii)(A) of this
section shall nevertheless be considered to be effected by a broker at
an office inside the United States if either--
(1) The customer has opened an account with a United States office
of that broker;
(2) The customer has transmitted instructions concerning this and
other sales to the foreign office of the broker from within the United
States by mail, telephone, electronic transmission or otherwise (unless
the transmissions from the United States have taken place in isolated
and infrequent circumstances);
(3) The gross proceeds of the sale are paid to the customer by a
transfer of funds into an account (other than an international account
as defined in Sec. 1.6049-5(e)(4)) maintained by the customer in the
United States or mailed to the customer at an address in the United
States;
(4) The confirmation of the sale is mailed to a customer at an
address in the United States; or
(5) An office of the same broker within the United States
negotiates the sale with the customer or receives instructions with
respect to the sale from the customer.
(iv) Special rules where the customer is a foreign intermediary or
certain U.S. branches. A foreign intermediary, as defined in
Sec. 1.1441-1(e)(3)(i), is an exempt foreign person, except when the
broker has actual knowledge or reason to know (within the meaning of
Sec. 1.6049-5(c)(3)) that the person for whom the intermediary acts is
a U.S. person. For an example of this exception, see Sec. 1.6049-
5(d)(3)(iv) Example 7. In addition, if a foreign intermediary (acting
as an intermediary) or a U.S. branch receives a payment from a payor or
middleman, which payment the payor or middleman can associate with a
valid withholding certificate described in Sec. 1.1441-1(e)(3) (ii),
(iii), or (v), or in Sec. 1.1441-5(c)(3)(iii) furnished by such
intermediary or U.S. branch, then the intermediary or U.S. branch is
not required to report such payment when it, in turn, pays the amount
to the person whose name is on the certificate furnished by the
intermediary or U.S. branch to the payor or middleman, unless, and to
the extent, the intermediary or U.S. branch knows that the payment is
required to be reported under this section and was not so reported. For
purposes of the preceding sentence, a foreign intermediary is one that
is described in Sec. 1.1441-1(e)(3)(i) and a U.S. branch is one that is
described in Sec. 1.1441-1(b)(2)(iv).
(4) Examples. The application of the provisions of this paragraph
(g) may be illustrated by the following examples:
Example 1. FC is a foreign corporation that is not a U.S. payor
or U.S. middleman described in Sec. 1.6049-5(c)(5) that regularly
issues and retires its own debt obligations. A is an individual
whose residence address is inside the United States, who holds a
bond issued by FC that is in registered form (within the meaning of
section 163(f) and the regulations under that section). The bond is
retired by FP, a foreign corporation that is a broker within the
meaning of paragraph (a)(1) of this section and the designated
paying agent of FC. FP mails the proceeds to A at A's U.S. address.
The sale would be considered to be effected at an office outside the
United States under paragraph (g)(3)(iii)(A) of this section except
that the proceeds of the sale are mailed to a U.S. address. For that
reason, the sale is considered to be effected at an office of the
broker inside the United States under paragraph (g)(3)(iii)(B) of
this section. Therefore, FC is a broker under paragraph (a)(1) of
this section with respect to this transaction because, although it
is not a U.S. payor or U.S. middleman, as described in Sec. 1.6049-
5(c)(5), it is deemed to effect the sale in the United States. FP is
a broker for the same reasons. However, under the multiple broker
exception under Sec. 5f.6045-1(c)(3)(ii) of this chapter, FP, rather
than FC, is required to report the payment because FP is responsible
for paying the holder the proceeds from the retired obligations.
Under paragraph (g)(1)(i) of this section, FP may not treat A as an
exempt foreign person and must make an information return under
section 6045 with respect to the retirement of the FC bond, unless
FP obtains the certificate or documentation described in paragraph
(g)(1)(i) of this section.
Example 2. The facts are the same as in Example 1 except that FP
mails the proceeds to A at an address outside the United States.
Under paragraph (g)(3)(iii)(A) of this section, the sale is
considered to be effected at an office of the broker outside the
United States. Therefore, under paragraph (a)(1) of this section,
neither FC nor FP is a broker with respect to the retirement of the
FC bond. Accordingly, neither is required to make an information
return under section 6045.
Example 3. The facts are the same as in Example 2 except that FP
is also the agent of A. The result is the same as in Example 2.
Neither FP nor FC are brokers under paragraph (a)(1) of this section
with respect to the sale since the sale is effected outside the
United States and neither of them are U.S. payors (within the
meaning of Sec. 1.6049-5(c)(5)).
Example 4. The facts are the same as in Example 1 except that
the registered bond held by A was issued by DC, a domestic
corporation that regularly issues and retires its own debt
obligations. Also, FP mails the proceeds to A at an address outside
the United States. Interest on the bond is not
[[Page 53479]]
described in paragraph (g)(1)(ii) of this section. The sale is
considered to be effected at an office outside the United States
under paragraph (g)(3)(iii)(A) of this section. DC is a broker under
paragraph (a)(1)(i)(B) of this section. DC is not required to report
the payment under the multiple broker exception under Sec. 5f.6045-
1(c)(3)(ii) of this chapter. FP is not required to make an
information return under section 6045 because FP is not a U.S. payor
described in Sec. 1.6049-5(c)(5) and the sale is effected outside
the United States. Accordingly, FP is not a broker under paragraph
(a)(1) of this section.
Example 5. The facts are the same as in Example 4 except that FP
is also the agent of A. DC is a broker under paragraph (a)(1) of
this section. DC is not required to report under the multiple broker
exception under Sec. 5f.6045-1(c)(3)(ii) of this chapter. FP is not
required to make an information return under section 6045 because FP
is not a U.S. payor described in Sec. 1.6049-5(c)(5) and the sale is
effected outside the United States and therefore FP is not a broker
under paragraph (a)(1) of this section.
Example 6. The facts are the same as in Example 4 except that
the bond is retired by DP, a broker within the meaning of paragraph
(a)(1) of this section and the designated paying agent of DC. DP is
a U.S. payor under Sec. 1.6049-5(c)(5). DC is not required to report
under the multiple broker exception under Sec. 5f.6045-1(c)(3)(ii)
of this chapter. DP is required to make an information return under
section 6045 because it is the person responsible for paying the
proceeds from the retired obligations unless DP obtains the
certificate or documentary evidence described in paragraph (g)(1)(i)
of this section.
Example 7. Customer A owns U.S. corporate bonds issued in
registered form after July 18, 1984 and carrying a stated rate of
interest. The bonds are held through an account with foreign bank,
X, and are held in street name. X is a wholly-owned subsidiary of a
U.S. company and is not a qualified intermediary within the meaning
of Sec. 1.1441-1(e)(5)(ii). X has no documentation regarding A. A
instructs X to sell the bonds. In order to effect the sale, X acts
through its agent in the United States, Y. Y sells the bonds and
remits the sales proceeds to X. X credits A's account in the foreign
country. X does not provide documentation to Y.
(i) Y's obligations to withhold and report. Y is not required to
report the sales proceeds under the multiple broker exception under
Sec. 5f.6045-1(c)(3)(ii), because X is the person responsible for
paying the proceeds from the sale to A. However, the portion of the
payment that represents interest accrued on the obligation since the
last payment date and that is received as part of the total sales
proceeds from the transaction is reportable under Sec. 1.1461-1 (b)
and (c)(2)(i)(E), as an amount paid to a foreign person that is
subject to withholding under chapter 3 of the Code within the
meaning of Sec. 1.1441-2(a) (even though no withholding is required
under chapter 3 of the Code based on Sec. 1.1441-3(b)(2)(i), unless
Sec. 1.1441-3(b)(2)(ii) applies). The multiple broker exception
under the regulations under section 6045 does not affect a
withholding agent's obligation to report an amount otherwise
required to be reported under Sec. 1.1461-1 (b) and (c). Under
Sec. 1.1461-1(c)(3), Y must file Form 1042-S in the name of X who,
under Sec. 1.1441-1(b)(3)(v)(A), is presumed to be acting for its
own account because Y cannot associate the payment of interest with
a valid intermediary Form W-8 described in Sec. 1.1441-1(e)(3) (ii)
or (iii) from X.
(ii) X's obligations to withhold and report. X may also have
reporting and withholding obligations when it credits A's account with
the sales proceeds. Although the sale is considered to be effected at
an office outside the United States under paragraph (g)(3)(iii)(A) of
this section, X is a broker with respect to the sale because, as a
wholly-owned subsidiary of a U.S. company, it meets the definition of a
broker under paragraph (a)(1) of this section. Under the presumptions
described in Sec. 1.6049-5(d)(2), X, as a U.S. payor, must presume
that, with respect to the sales proceeds, A is a U.S. person who is not
an exempt recipient. Therefore, the payment of sales proceeds to A by X
is reportable on a Form 1099 under paragraph (c)(2) of this section. X
has no obligation to backup withhold on the payment, based on the
exemption under Sec. 31.3406(g)-1(e), unless X has actual knowledge
that A is a U.S. person who is not an exempt recipient. X is also a
withholding agent with respect to the portion of the sales proceeds
that represents accrued interest on the bonds. Based on the
presumptions under Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii)(D), X
must presume that A is a foreign person with respect to the interest
portion of the payment, because the interest amount is an amount
subject to withholding, within the meaning of Sec. 1.1441-2(a) (even
though a withholding agent is not required to withhold on such
amounts). Thus, X is required to file a Form 1042 and 1042-S with
respect to the interest portion of the payment. Y s filing of a Form
1042-S with respect to that portion of the payment to X does not meet
the conditions for the multiple withholding agent exception under
Sec. 1.1461-1(c)(4)(i) because Y did not report the payment to X as a
payment to an intermediary.
(5) Effective date--(i) General rule. The provisions of this
paragraph (g) apply to payments made after December 31, 1998.
(ii) Transition rules. A payor that, on December 31, 1998, holds a
valid Form W-8 or other form upon which the payor is permitted to rely
to hold the payee as a foreign person pursuant to the regulations in
effect prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised
April 1, 1997), may treat it as a valid certificate until its validity
expires under those regulations or, if earlier, until December 31,
1999. Further, the validity of a Form W-8 or other form that is dated
prior to January 1, 1998, is valid on January 1, 1998, and would expire
at any time during 1998, is extended until December 31, 1998 (and is
not extended after December 31, 1998 by reason of the preceding
sentence). The rule in this paragraph (g)(b)(ii), however, does not
apply to extend the validity period of a form that expires in 1998
solely by reason of changes in the circumstances of the person whose
name is on the certificate. Notwithstanding the three preceding
sentences, a payor may choose not to take advantage of the transition
rule in this paragraph (g)(5)(ii) with respect to one or more
withholding certificates and, therefore, to require new withholding
certificates conforming to the requirements described in this section.
* * * * *
(j) Time and place for filing; cross-reference to penalty. Forms
1096 and 1099 required under this section shall be filed after the last
calendar day of the reporting period elected by the broker or barter
exchange and on or before the end of the second calendar month
following the close of the calendar year of such reporting period with
the appropriate Internal Revenue Service Center, the address of which
is listed in the instructions for Form 1096. See paragraph (l) of this
section for the requirement to file certain returns on magnetic media.
For provisions relating to the penalty provided for the failure to file
timely a correct information return under section 6045(a), see
Sec. 301.6721-1 of this chapter. See Sec. 301.6724-1 of this chapter
for the waiver of a penalty if the failure is due to reasonable cause
and is not due to willful neglect.
(k) Requirement and time for furnishing statement; cross-reference
to penalty--(1) General requirements. A broker or barter exchange
making a return of information under this section with respect to a
transaction shall furnish to the person whose identifying number is (or
is required to be) shown on such return a written statement showing the
information required by paragraph (c)(5), (d), (f), or (p) of this
section and containing a legend stating that such information is being
reported to the Internal Revenue Service. If the return of information
is not made on magnetic media, this requirement may be satisfied by
furnishing to such person a copy of all Forms 1099 with respect to such
person filed with the Internal Revenue Service Center. A statement
[[Page 53480]]
shall be considered to be furnished to a person to whom a statement is
required to be made under this paragraph (k) if it is mailed to such
person at the last address of such person known to the broker or barter
exchange.
(2) Time for furnishing statements. A broker or barter exchange may
furnish the statements required by this paragraph (k) yearly,
quarterly, monthly, or on any other basis, without regard to the
reporting period elected by the broker or barter exchange, provided
that all statements required to be furnished under this paragraph (k)
for a calendar year shall be furnished on or before January 31 of the
following calendar year.
(3) Cross-reference to penalty. For provisions for failure to
furnish timely a correct payee statement, see Sec. 301.6724-1 of this
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1
of this chapter for the waiver of a penalty if the failure is due to
reasonable cause and is not due to willful neglect.
(l) Magnetic media requirement. For information returns filed after
December 31, 1996, see Sec. 301.6011-2 of this chapter (Procedure and
Administration Regulations) for rules relating to filing information
returns on magnetic media. A broker or barter exchange that fails to
file a Form 1099 under this section on magnetic media, when required,
may be subject to a penalty for each such failure. See paragraph (j) of
this section.
* * * * *
Sec. 1.6045-1T [Removed]
Par. 38. Section 1.6045-1T is removed.
Par. 39. Section 1.6045-2 is amended as follows:
1. Paragraph (b)(2) is amended by:
a. Removing the period at the end of paragraphs (b)(2)(i)(A),
(b)(2)(i)(B), and (b)(2)(i)(C), and adding semicolons in each place.
b. Removing the period and the end of paragraph (b)(2)(i)(D) and
adding a semicolon in its place.
c. Removing the language ``, or'' in paragraph (b)(2)(i)(E) and
adding a semicolon in its place.
d. Removing the period at the end of paragraph (b)(2)(i)(F) and
adding ``, or'' in its place.
e. Adding paragraph (b)(2)(i)(G).
2. Revising paragraph (g)(2).
3. Adding paragraph (g)(4).
The revision and additions read as follows:
Sec. 1.6045-2 Furnishing statement required with respect to certain
substitute payments.
* * * * *
(b) * * *
(2) * * * (i) * * *
(G) A foreign central bank of issue, as defined in Sec. 1.6049-
4(c)(1)(ii)(H), or the Bank for International Settlements.
* * * * *
(g) * * *
(2) Magnetic media requirement. For the requirement to submit the
information required by paragraph (a) of this section and by Form 1099
on magnetic media for information returns filed after December 31,
1996, see Sec. 301.6011-2 of this chapter (Procedure and Administration
Regulations). A broker or barter exchange that fails to file on
magnetic media, when required, may be subject to a penalty under
section 6721 for each such failure. See paragraph (g)(4) of this
section.
* * * * *
(4) Cross-reference to penalties. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6045(d) and Sec. 1.6045-2(g)(1),
including a failure to file on magnetic media, see Sec. 301.6721-1 of
this chapter. For provisions relating to the penalty provided for
failure to furnish timely a correct payee statement required under
section 6045(d) and Sec. 1.6045-2(a), see Sec. 301.6722-1 of this
chapter. See Sec. 301.6724-1 of this chapter for the waiver of a
penalty if the failure is due to reasonable cause and is not due to
willful neglect.
* * * * *
Sec. 1.6045-2T [Removed]
Par. 40. Section 1.6045-2T is removed.
Par. 41. Section 1.6049-4 is amended by:
1. Removing the reference ``section 3451'' and adding ``section
3406'' each place it appears in the following locations in Sec. 1.6049-
4:
a. Paragraph (b)(2) introductory text, third sentence.
b. Paragraph (b)(2)(iv).
c. Paragraph (b)(4), last sentence.
d. Paragraph (c)(2)(i).
e. Paragraph (c)(2)(ii) concluding text.
f. Paragraph (e)(4), second and last sentences.
g. Paragraph (e)(5)(iv).
h. Paragraph (f)(4)(i), fourth sentence.
2. Revising paragraphs (a), (b)(1), (b)(3), and (c)(1).
3. Removing the reference ``Sec. 1.6049-5(c)'' in paragraphs
(b)(5)(i) last sentence, and (d)(2) and adding ``Sec. 1.6049-5(f)'' in
its place.
4. Revising paragraph (d)(3).
5. Revising the heading for paragraph (d)(7) and adding a sentence
to the end of the paragraph.
6. Removing the reference ``Sec. 1.6049-5(b)(1)(ii)'' in the first
sentence of paragraph (d)(8) and adding ``1.6049-5(b)(2)'' in its
place.
7. Removing the reference ``paragraph (d)(10)(i)'' in paragraph
(d)(9)(ii) introductory text, and adding ``paragraph (d)(9)(i)'' in its
place.
8. Removing the reference ``paragraph (c)(1)(K)'' in the first
sentence of paragraph (f)(4)(i) and adding ``paragraph (c)(1)(ii)(M)''
in its place; and revising the last two sentences of paragraph
(f)(4)(i).
9. Revising the last sentence of the Example in paragraph
(f)(4)(ii).
10. Adding paragraph (g)(3).
The additions and revisions read as follows:
Sec. 1.6049-4 Return of information as to interest paid and original
issue discount includible in gross income after December 31, 1982.
(a) Requirement of reporting--(1) In general. Except as provided in
paragraph (c) of this section, an information return shall be made by a
payor, as defined in paragraph (a)(2) of this section, of amounts of
interest and original issue discount paid after December 31, 1982. Such
return shall contain the information described in paragraph (b) of this
section.
(2) Payor. A payor is a person described in paragraph (a)(2) (i) or
(ii) of this section.
(i) Every person who makes a payment of the type and of the amount
subject to reporting under this section (or under an applicable section
under this chapter) to any other person during a calendar year;
however, persons not treated as payors for purposes of Sec. 31.3406(a)-
2 of this chapter shall not be treated as payors for purposes of this
paragraph (a)(2).
(ii) Every person who collects on behalf of another person payments
of the type and of the amount subject to reporting under this section
(or under an applicable section under this chapter), including
middlemen treated as payors under Sec. 31.3406(a)-2 of this chapter, or
who otherwise acts as a middleman (as defined in paragraph (f)(4) of
this section) with respect to such payment.
(b) Information to be reported--(1) Interest payments. Except as
provided in paragraphs (b) (3) and (5) of this section, in the case of
interest other than original issue discount treated as interest under
Sec. 1.6049-5(f), an information return on Form 1099 shall be made for
the calendar year showing the aggregate amount of the payments, the
name, address, and taxpayer identification number of the person to whom
paid, the amount of tax deducted and withheld under section 3406 from
[[Page 53481]]
the payments, if any, and such other information as required by the
forms. An information return is generally not required if the amount of
interest paid to a person aggregates less than $10 or if the payment is
made to a person who is an exempt recipient described in paragraph
(c)(1)(ii) of this section, unless the payor backup withholds under
section 3406 on such payment (because, for example, the payee (i.e.,
exempt recipient) has failed to furnish a Form W-9 on request), in
which case the payor must make a return under this section, unless the
payor refunds the amount withheld pursuant to Sec. 31.6413(a)-3 of this
chapter (Employment Tax Regulations). For reporting interest paid to a
Canadian nonresident alien individual, see Sec. 1.6049-8.
* * * * *
(3) Returns made by middleman--(i) In general. Except as provided
in paragraph (b)(5) of this section, every person acting as a middleman
(as defined in paragraph (f)(4) of this section) shall make an
information return for the calendar year. In the case of interest
payments (other than original issue discount and other than interest
described in Sec. 1.6049-8), the information return shall be made on
Form 1099 and shall show the aggregate amount of the interest, the
name, address, and taxpayer identification number of the person on
whose behalf received, the amount of tax withheld under section 3406,
if any, and such other information as required by the forms. In the
case of original issue discount, the information return shall show the
information required to be shown for the person on whose behalf
received, as described in paragraph (b)(2) of this section. See
Sec. 1.6049-5(f) to determine whether a middleman is required to make
an information return with respect to original issue discount. A
middleman shall make an information return regardless of whether the
middleman receives a Form 1099. A middleman shall not be required to
make an information return if the payment of interest aggregates less
than $10 or if the payment is made to an exempt recipient described in
paragraph (c)(1)(ii) of this section, unless the payor backup withholds
under section 3406 on such payment (because, for example, the payee has
failed to furnish a Form W-9 on request), in which case the payor must
make a return under this section, unless the payor refunds the amount
withheld pursuant to Sec. 31.6413(a)-3 of this chapter (Employment Tax
Regulations).
(ii) Forwarding of interest coupons and original issue discount
obligations. In the case of a middleman who, from within the United
States, forwards an interest coupon or discount obligation on behalf of
a payee for presentation, collection or payment outside the United
States, the middleman shall make an information return on Form 1099 for
the calendar year showing, in the case of an interest coupon, the
information required under paragraph (b)(3)(i) of this section and, in
the case of a discount obligation, information required under paragraph
(b)(2) of this section. For purposes of this paragraph (b)(3)(ii), a
middleman is considered to forward an interest coupon or discount
obligation on behalf of a payee for presentation, collection or payment
outside the United States if the middleman forwards the coupon or
obligations outside the United States on or after the date when the
payee is entitled to be paid or at an earlier date that is within 90
days of such date or if the middleman has actual knowledge that the
coupon or obligation is being forwarded outside the United States for
presentation, collection, or payment outside the United States.
However, the transfer, although subject to information reporting under
this section, is not subject to backup withholding under section 3406.
(iii) Example. The following example illustrates the provisions of
paragraph (b)(3)(ii) of this section:
Example. Individual F, who is entitled to payment on an interest
coupon, instructs an office of Bank M in the United States to
forward the coupon to Bank N for collection by Bank N outside the
United States. Bank M in the United States forwards the interest
coupon to Bank N outside the United States. Bank M is required to
make an information return for the calendar year under paragraph
(b)(3)(ii) of this section showing the aggregate amount of the
interest coupon forwarded, the name, address of the permanent
residence, and the taxpayer identification number, if any, of
Individual F and such other information as the form requires.
* * * * *
(c) Information returns not required--(1) Payment to exempt
recipient--(i) In general. No information return is required with
respect to any payment made to an exempt recipient described in
paragraph (c)(1)(ii) of this section, except to the extent otherwise
provided in Sec. 1.6049-5(d)(3) (ii) and (iii). However, if the payor
backup withholds under section 3406 on such payment (because, for
example, the payee has failed to furnish a Form W-9 on request), then
the payor is required to make a return under this section, unless the
payor refunds the amount withheld in accordance with Sec. 31.6413(a)-3
of this chapter (Employment Tax Regulations).
(ii) Exempt recipient defined. The term exempt recipient means any
person described in paragraphs (c)(1)(ii) (A) through (Q) of this
section. An exempt recipient is generally exempt from information
reporting without filing a certificate claiming exempt status unless
the provisions of this paragraph (c)(1)(ii) require a payee to file a
certificate. A payor may in any case require a payee not otherwise
required to file a certificate under this paragraph (c)(1)(ii) to file
a certificate in order to qualify as an exempt recipient. See
Sec. 31.3406(h)-3 (a)(1)(iii) and (c)(2) of this chapter for the
certificate that a payee must provide when a payor requires it in order
to treat the payee as an exempt recipient under this paragraph
(c)(1)(ii). A payor may treat a payee as an exempt recipient based upon
a properly completed form as described in Sec. 31.3406(h)-3(e)(2) of
this chapter, its actual knowledge that the payee is a person described
in this paragraph (c)(1)(ii), or the indicators described in this
paragraph (c)(1)(ii).
(A) Corporation. A corporation, as defined in section 7701(a)(3),
whether domestic or foreign, is an exempt recipient. In addition, for
purposes of this paragraph (c)(1), the term corporation includes a
partnership all of whose members are corporations described in this
paragraph (c)(1), but only if the partnership files with the payor a
certificate meeting the certification requirements of paragraphs
(c)(2)(ii)(A) (1) through (5) of this section. Absent actual knowledge
otherwise, a payor may treat a payee as a corporation (and, therefore,
as an exempt recipient) if one of the requirements of paragraph
(c)(1)(ii)(A) (1), (2), (3), or (4), of this section are met before a
payment is made.
(1) The name of the payee contains an unambiguous expression of
corporate status that is Incorporated, Inc., Corporation, Corp., P.C.,
(but not Company or Co.) or contains the term insurance company,
indemnity company, reinsurance company, or assurance company, or its
name indicates that it is an entity listed as a per se corporation
under Sec. 301.7701-2(b)(8)(i) of this chapter.
(2) The payor has on file a corporate resolution or similar
document clearly indicating corporate status. For this purpose, a
similar document includes a copy of Form 8832, filed by the entity to
elect classification as an association under Sec. 301.7701-3(b) of this
chapter.
(3) The payor receives a Form W-9 which includes an EIN and a
statement from the payee that it is a domestic corporation.
[[Page 53482]]
(4) The payor receives a withholding certificate described in
Sec. 1.1441-1(e)(2)(i), that includes a certification that the person
whose name is on the certificate is a foreign corporation.
(B) Tax exempt organization--(1) In general. Any organization that
is exempt from taxation under section 501(a) is an exempt recipient. A
custodial account under section 403(b)(7) shall be considered an exempt
recipient under this paragraph. A payor may treat an organization as an
exempt recipient under this paragraph (c)(1)(ii)(B) without requiring a
certificate if the organization's name is listed in the compilation by
the Commissioner of organizations for which a deduction for charitable
contributions is allowed, if the name of the organization contains an
unambiguous indication that it is a tax-exempt organization, or if the
organization is known to the payor to be a tax-exempt organization.
(2) Examples. The application of the provisions of this paragraph
(c)(1)(ii)(B) may be illustrated by the following examples:
Example 1. The following persons maintain accounts at M Bank: N
College, O University, and P Church. M may treat N, O, and P as
exempt recipients even though such persons have not filed an
exemption certificate with M because the names of the organizations
contain an unambiguous indication that they are tax exempt
organizations.
Example 2. Q is listed in the current edition of Internal
Revenue Service Publication 78 as an organization for which
deductions are permitted for charitable contributions under section
170(c). Such listing has not been revoked by an announcement
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2)
of this chapter). A payor may treat Q as an exempt recipient even
though Q has not filed an exemption certificate with the payor.
Example 3. Employer R maintains a section 403(b)(7) custodial
account with Regulated Investment Company S on behalf of R's
employees. S may treat the account as an exempt recipient even
though R or its employees have not filed an exemption certificate
with S.
(C) Individual retirement plan. An individual retirement plan as
defined in section 7701(a)(37) is an exempt recipient. A payor may
treat any such plan of which it is the trustee or custodian as an
exempt recipient under this paragraph (c)(1) without requiring a
certificate.
(D) United States. The United States Government and any wholly-
owned agency or instrumentality thereof are exempt recipients. A payor
may treat a person as an exempt recipient under this paragraph (c)(1)
without requiring a certificate if the name of such person reasonably
indicates it is described in this paragraph (c)(1).
(E) State. A State, the District of Columbia, a possession of the
United States, a political subdivision of any of the foregoing, wholly-
owned agency or instrumentality of any one or more of the foregoing,
and a pool or partnership composed exclusively of any of the foregoing
are exempt recipients. A payor may treat a person as an exempt
recipient under this paragraph (c)(1) without requiring a certificate
if the name of such person reasonably indicates it is described in this
paragraph (c)(1) or if such person is known generally in the community
to be a State, the District of Columbia, a possession of the United
States or a political subdivision or a wholly-owned agency or
instrumentality of any one or more of the foregoing (for example, an
account held in the name of ``Town of S'' or ``County of T'' may be
treated as held by an exempt recipient under this paragraph
(c)(1)(ii)(E)).
(F) Foreign government. A foreign government, a political
subdivision of a foreign government, and any wholly-owned agency or
instrumentality of either of the foregoing are exempt recipients. A
payor may treat a foreign government or a political subdivision thereof
as an exempt recipient under this paragraph (c)(1) without requiring a
certificate provided that its name reasonably indicates that it is a
foreign government or provided that it is known to the payor to be a
foreign government or a political subdivision thereof (for example, an
account held in the name of the ``Government of V'' may be treated as
held by a foreign government).
(G) International organization. An international organization and
any wholly-owned agency or instrumentality thereof are exempt
recipients. The term international organization shall have the meaning
ascribed to it in section 7701(a)(18). A payor may treat a payee as an
international organization without requiring a certificate if the payee
is designated as an international organization by executive order
(pursuant to 22 U.S.C. 288 through 288(f)).
(H) Foreign central bank of issue. A foreign central bank of issue
is an exempt recipient. A foreign central bank of issue is a bank which
is by law or government sanction the principal authority, other than
the government itself, issuing instruments intended to circulate as
currency. See Sec. 1.895-1(b)(1). A payor may treat a person as a
foreign central bank of issue (and, therefore, as an exempt recipient)
without requiring a certificate provided that such person is known
generally in the financial community as a foreign central bank of issue
or if its name reasonably indicates that it is a foreign central bank
of issue.
(I) Securities or commodities dealer. A dealer in securities,
commodities, or notional principal contracts, that is registered as
such under the laws of the United States or a State or under the laws
of a foreign country is an exempt recipient. A payor may treat a dealer
as an exempt recipient under this paragraph (c)(1) without requiring a
certificate if the person is known generally in the investment
community to be a dealer meeting the requirements set forth in this
paragraph (c)(1) (for example, a registered broker-dealer or a person
listed as a member firm in the most recent publication of members of
the National Association of Securities Dealers, Inc.).
(J) Real estate investment trust. A real estate investment trust,
as defined in section 856 and Sec. 1.856-1, is an exempt recipient. A
payor may treat a person as a real estate investment trust (and,
therefore, as an exempt recipient) without requiring a certificate if
the person is known generally in the investment community as a real
estate investment trust.
(K) Entity registered under the Investment Company Act of 1940. An
entity registered at all times during the taxable year under the
Investment Company Act of 1940, as amended (15 U.S.C. 80a-1), (or
during such portion of the taxable year that it is in existence), is an
exempt recipient. An entity that is created during the taxable year
will be treated as meeting the registration requirement of the
preceding sentence provided that such entity is so registered at all
times during the taxable year for which such entity is in existence. A
payor may treat such an entity as an exempt recipient under this
paragraph (c)(1) without requiring a certificate if the entity is known
generally in the investment community to meet the requirements of the
preceding sentence.
(L) Common trust fund. A common trust fund, as defined in section
584(a), is an exempt recipient. A payor may treat the fund as an exempt
recipient without requiring a certificate provided that its name
reasonably indicates that it is a common trust fund or provided that it
is known to the payor to be a common trust fund.
(M) Financial institution. A financial institution such as a bank,
mutual savings bank, savings and loan association, building and loan
association, cooperative bank,
[[Page 53483]]
homestead association, credit union, industrial loan association or
bank, or other similar organization, whether organized in the United
States or under the laws of a foreign country is an exempt recipient. A
financial institution also includes a clearing organization defined in
Sec. 1.163-5(c)(2)(i)(D)(8) and the Bank for International Settlements.
A payor may treat any person described in the preceding sentence as an
exempt recipient without requiring a certificate if the person's name
(including a foreign name, such as ``Banco'' or ``Banque'') reasonably
indicates the payee is a financial institution described in the
preceding sentence. In the case of a foreign person, a payor may also
treat a person on such list as the Internal Revenue Service may publish
or approve (such as in the Thomson Bank Directory or a list approved by
the Federal Reserve Board).
(N) Trust. A trust which is exempt from tax under section 664(c)
(i.e., a charitable remainder annuity trust or a charitable remainder
unitrust) or is described in section 4947(a)(1) (relating to certain
charitable trusts) is an exempt recipient. A payor which is a trustee
of the trust may treat the trust as an exempt recipient without
requiring a certificate.
(O) Nominees or custodians. A nominee or custodian.
(P) Brokers. A broker as defined in section 6045(c) and
Sec. 1.6045-1(a)(1).
(Q) Swap dealers. A dealer in notional principal contracts as
defined in Sec. 1.446-3(c)(4)(iii).
(iii) Exempt recipient no longer exempt. Any person who ceases to
be an exempt recipient shall, no later than 10 days after such
cessation, notify the payor in writing when it ceases to be an exempt
recipient unless it reasonably appears that the person formerly
qualifying as an exempt recipient will not thereafter receive a
reportable payment from the payor. If a payor treats a person as an
exempt recipient by requiring the exempt recipient to file a
certificate claiming exempt status, that person shall revoke the
certificate as provided in the preceding sentence. If the exempt
recipient terminates its relationship with the payor prior to the time
that the notice of change in status is otherwise required, the exempt
recipient is not required to notify the payor. If, however, the person
who formerly qualified as an exempt recipient later reinstates the
relationship with the payor, the person must, prior to receiving a
reportable payment from such relationship, notify the payor that it no
longer qualifies as an exempt recipient in case the payor relies upon
the previous treatment.
* * * * *
(d) * * *
(3) Conversion into United States dollars of amounts paid in
foreign currency--(i) Conversion rules. When a payment is made in
foreign currency, the U.S. dollar amount of the payment shall be
determined by converting such foreign currency into U.S. dollars on the
date of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or
pursuant to a reasonable spot rate convention. For example, a
withholding agent may use a month-end spot rate or a monthly average
spot rate. A spot rate convention must be used consistently with
respect to all non-dollar amounts withheld and from year to year. Such
convention cannot be changed without the consent of the Commissioner or
the Commissioner's delegate.
(ii) Special rule for Sec. 1.988-5(a) transactions where the payor
on both components of a qualified hedging transaction is the same
person--(A) In general. Interest or original issue discount on a
qualified debt instrument that is part of a qualified hedging
transaction under Sec. 1.988-5(a) shall be computed for section 6049
reporting purposes under the rules described in Sec. 1.988-5(a)(9)(ii)
if--
(1) The payor on the qualified debt instrument and the counterparty
to the Sec. 1.988-5(a) hedge are the same person; and
(2) The payee complies with the requirements of Sec. 1.988-5(a) and
so notifies its payor prior to the date required for filing Form 1099
as required by this section.
(B) Effective date. The provisions of this paragraph (d)(3)(ii)
apply to transactions entered into after December 31, 1998.
* * * * *
(7) Magnetic media requirement. * * * For the requirement to submit
the information required by Form 1099 on magnetic media for payments
after December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of
this chapter (Regulations on Procedure and Administration).
* * * * *
(f) * * *
(4) * * * (i) * * * A person shall be considered to be a middleman
as to any portion of an interest payment made to such person which
portion is actually owned by another person, whether or not the other
person's name is also shown on the information return filed with
respect to such interest payment, except that a husband or wife will
not be considered as acting in the capacity of a middleman with respect
to his or her spouse. A person who, from within the United States,
forwards an interest coupon or discount obligation on behalf of a payee
for presentation, collection or payment outside the United States is
also a middleman for purposes of this section (but the transfer,
although subject to information reporting under this section, does not
make the payment subject to backup withholding under section 3406).
(ii) * * *
Example. * * * Broker B is required to make an information
return showing the amount of original issue discount treated as paid
to A under Sec. 1.6049-5(f).
(g) * * *
(3) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6049(a) and Sec. 1.6049-4(a)(1), see
Sec. 301.6721-1 of this chapter (Procedure and Administration
Regulations). See Sec. 301.6724-1 of this chapter for the waiver of a
penalty if the failure is due to reasonable cause and is not due to
willful neglect.
Par. 42. Section 1.6049-5 is amended by:
1. Removing the reference ``section 3451'' in the third sentence of
paragraph (a)(6) and adding ``section 3406'' in its place.
2. Removing the last sentence of paragraph (a)(6).
3. Revising paragraph (b).
4. Redesignating paragraph (c) as paragraph (f).
5. Adding new paragraphs (c), (d), (e) and (g).
The revisions and additions read as follows:
Sec. 1.6049-5 Interest and original issue discount subject to
reporting after December 31, 1982.
* * * * *
(b) Interest excluded from reporting requirement. The term interest
or original issue discount (OID) does not include--
(1) Interest on any obligation issued by a natural person as
defined in Sec. 1.6049-4(f)(2), irrespective of whether such interest
is collected on behalf of the holder of the obligation by a middleman.
(2) Interest on any obligation if such interest is exempt from
taxation under section 103(a), relating to certain governmental
obligations, or interest which is exempt from taxation under any other
provision of law without regard to the identity of the holder. The
holder of a tax exempt obligation that is not in registered form must
provide
[[Page 53484]]
written certification to the payor (other than the issuer of the
obligation) that the obligation is exempt from taxation. A statement
that interest coupons are tax exempt on the envelope or shell commonly
used by financial institutions to process such coupons, signed by the
payee, will be sufficient for this purpose if the envelope is properly
completed (i.e., shows the name, address, and taxpayer identification
number of the payee). A payor may rely on such written certification in
treating such interest as tax exempt for purposes of section 6049. See
Sec. 1.6049-4(d)(8) with respect to the requirement that the issuer of
a taxable obligation shall make an information return if such issuer
receives an envelope which improperly claims that the interest coupons
contained therein are tax exempt.
(3) Interest on amounts held in escrow to guarantee performance on
a contract or to provide security. However, interest on amounts held in
escrow with a person described in paragraph (a)(2) or (3) of this
section is interest subject to reporting under section 6049.
(4) Interest that a governmental unit pays with respect to tax
refunds.
(5) Interest on deposits for security, such as deposits posted with
a public utility company. However, interest on deposits posted for
security with a person described in paragraph (a)(2) or (3) of this
section is interest subject to reporting under section 6049.
(6) Amounts from sources outside the United States (determined
under the provisions of part I, subchapter N, chapter 1 of the Internal
Revenue Code (Code) and the regulations under those provisions) paid
outside the United States by a non-U.S. payor or a non-U.S. middleman
(as defined in paragraph (c)(5) of this section). See paragraph (e) of
this section for circumstances in which a payment is considered to be
made outside the United States.
(7) Portfolio interest, as defined in Sec. 1.871-14(b)(1), paid
with respect to obligations in bearer form described in section
871(h)(2)(A) or 881(c)(2)(A) or with respect to a foreign-targeted
registered obligation described in Sec. 1.871-14(e)(2) for which the
documentation requirements described in Sec. 1.871-14(e)(3) and (4)
have been satisfied (other than by a U.S. middleman (as defined in
paragraph (c)(5) of this section) that, as a custodian or nominee of
the payee, collects the amount for, or on behalf of, the payee,
regardless of whether the middleman is also acting as agent of the
payor).
(8) Portfolio interest described in Sec. 1.871-14(c)(1)(ii), paid
with respect to obligations in registered form described in section
871(h)(2)(B) or 881(c)(2)(B) that is not described in paragraph (b)(7)
of this section.
(9) Any amount paid by an international organization described in
Sec. 1.6049-4(c)(1)(ii)(G) (or its paying, transfer, or other agent
that is not also a payee's agent) with respect to an obligation of
which the international organization is the issuer.
(10)(i) Amounts paid outside the United States (other than by a
U.S. middleman (as defined in paragraph (c)(5) of this section) that,
as a custodian or nominee or other agent of the payee, collects the
amount for, or on behalf of, the payee, regardless of whether the
middleman is also acting as agent of the payor) with respect to an
obligation that: Has a face amount or principal amount of not less than
$500,000 (as determined based on the spot rate on the date of issuance
if in foreign currency); has a maturity (at issue) of 183 days or less;
satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and
the regulations thereunder (as if the obligation would otherwise be a
registration-required obligation within the meaning of section
163(f)(2)(A)) (however, an original issue discount obligation with a
maturity of 183 days or less from the date of issuance is not required
to satisfy the certification requirement of Sec. 1.163-
5(c)(2)(i)(D)(3)) and is issued in accordance with the procedures of
Sec. 1.163-5(c)(2)(i)(D); and has on its face the following statement
(or a similar statement having the same effect):
By accepting this obligation, the holder represents and warrants
that it is not a United States person (other than an exempt
recipient described in section 6049(b)(4) of the Internal Revenue
Code and regulations thereunder) and that it is not acting for or on
behalf of a United States person (other than an exempt recipient
described in section 6049(b)(4) of the Internal Revenue Code and the
regulations thereunder).
(ii) If the obligation is in registered form, it must be registered
in the name of an exempt recipient described in Sec. 1.6049-
4(c)(1)(ii). For purposes of this paragraph (b)(10), a middleman may
treat an obligation as described in section 163(f)(2)(B)(i) and (ii)(I)
and the regulations under that section if the obligation, or coupons
detached therefrom, whichever is presented for payment, contains the
statement described in this paragraph (b)(10).
(11) Amounts paid with respect to an account or deposit with a U.S.
or foreign branch of a domestic or foreign corporation or partnership
that is paid with respect to an obligation described in either
paragraph (b)(11)(i) or (ii) of this section, if the branch is engaged
in the commercial banking business; and the interest or OID is paid
outside the United States (other than by a U.S. middleman (as defined
in paragraph (c)(5) of this section) that acts as a custodian, nominee,
or other agent of the payee, and collects the amount for, or on behalf
of, the payee, regardless of whether the middleman is also acting as
agent of the payor).
(i) An obligation is described in this paragraph (b)(11)(i) if it
is not in registered form (within the meaning of section 163(f) and the
regulations under that section), is described in section 163(f)(2)(B)
and issued in accordance with the procedures of Sec. 1.163-
5(c)(2)(i)(C) or (D), and, in the case of a U.S. branch, is part of a
larger single public offering of securities. For purposes of this
paragraph (b)(11)(i), a middleman may treat an obligation as described
in section 163(f)(2)(B) if the obligation, and any detachable coupons,
contains the statement described in section 163(f)(2)(B)(ii)(II) and
the regulations under that section.
(ii)(A) An obligation is described in this paragraph (b)(11)(ii) if
it produces income described in section 871(i)(2)(A); has a face amount
or principal amount of not less than $500,000 (as determined based on
the spot rate on the date of issuance if in foreign currency);
satisfies the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and
the regulations thereunder (as if the obligation would otherwise be a
registration-required obligation within the meaning of section
163(f)(2)(A)) and is issued in accordance with the procedures of
Sec. 1.163-5(c)(2)(i) (C) or (D) (however, an original issue discount
obligation with a maturity of 183 days or less from the date of
issuance is not required to satisfy the certification requirement of
Sec. 1.163-5(c)(2)(i)(D)(3)). For purposes of this paragraph
(b)(11)(ii), a middleman may treat an obligation as described in
sections 163(f)(2)(b) (i) and (ii) and the regulations under that
section if the obligation, or any detachable coupon, contains the
statement described in paragraph (b)(11)(ii)(b) of this section.
(B) The obligation must have on its face, and on any detachable
coupons, the following statement (or a similar statement having the
same effect):
By accepting this obligation, the holder represents and warrants
that it is not a United States person (other than an exempt
recipient described in section 6049(b)(4) and regulations under that
section) and that it is not acting for or on behalf of a United
States person (other than an exempt recipient described in section
6049(b)(4) and the regulations under that section).
(C) If the obligation is in registered form, it must be registered
in the name
[[Page 53485]]
of an exempt recipient described in Sec. 1.6049-4(c)(1)(ii).
(12) Returns of information are not required for payments that a
payor can, prior to payment, reliably associate with documentation upon
which it may rely to treat the payment as made to a foreign beneficial
owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made to a
foreign payee in accordance with paragraph (d)(1) of this section or
presumed to be made to a foreign payee under paragraph (d) (2), (3),
(4), or (5) of this section. However, such payments may be reportable
under Sec. 1.1461-1 (b) and (c). The provisions of Sec. 1.1441-1 shall
apply by substituting the term payor for the term withholding agent and
without regard to the fact that the provisions apply only to amounts
subject to withholding under chapter 3 of the Code. In the event of a
conflict between the provisions of Sec. 1.1441-1 and paragraph (d) of
this section in determining the foreign status of the payee, the
provisions of Sec. 1.1441-1 shall govern for payments of amounts
subject to withholding under chapter 3 of the Code and the provisions
of paragraph (d) of this section shall govern in other cases. This
paragraph (b)(12) does not apply to interest paid to a Canadian
nonresident alien individual as provided in Sec. 1.6049-8.
(13) Amounts for the period that the debt obligation with respect
to which the interest arises represents an asset blocked as described
in Sec. 1.1441-2(e)(3). Payment of such amounts, including interest
that is past due and OID on obligations that mature on or before the
date that the assets are no longer blocked, is deemed to occur in
accordance with the rules of Sec. 1.1441-2(e)(3).
(14) Payments made by a foreign intermediary described in
Sec. 1.1441-1(e)(3)(i) that it has received in its capacity as an
intermediary and that are associated with a valid withholding
certificate described in Sec. 1.1441-1(e)(3) (ii) or (iii) and payments
made by a U.S. branch of a foreign bank or of a foreign insurance
company described in Sec. 1.1441-1(b)(2)(iv) that are associated with a
valid withholding certificate described in Sec. 1.1441-1(e)(3)(v),
which certificate the intermediary or branch has furnished to the payor
or middleman from whom it has received the payment, unless, and to the
extent, the intermediary or branch knows that the payments are required
to be reported under Sec. 1.6049-4 and were not so reported.
(15) Amounts of interest as determined under the provisions of
Sec. 1.446-3(g)(4) (dealing with interest in the case of a significant
non-periodic payment with respect to a notional principal contract).
Such amounts are governed by the provisions of section 6041. See
Sec. 1.6041-1(d)(5).
(c) Applicable rules--(1) Documentary evidence for offshore
accounts. A payor may rely on documentary evidence described in this
paragraph (c)(1) instead of a beneficial owner withholding certificate
described in Sec. 1.1441-1(e)(2)(i) in the case of a payment made
outside the United States to an offshore account or, in the case of
broker proceeds described in Sec. 1.6045-1(c)(2), in the case of a sale
effected outside the United States (as defined in Sec. 1.6045-
1(g)(3)(iii)(A)). For purposes of this paragraph (c)(1), an offshore
account means an account maintained at an office or branch of a U.S. or
foreign bank or other financial institution at any location outside the
United States (i.e., other than in any of the fifty States or the
District of Columbia) and outside of U.S. possessions. Thus, for
example, an account maintained in a foreign country at a branch of a
U.S. bank or of a foreign subsidiary of a U.S. bank is an offshore
account. For the definition of a payment made outside the United
States, see paragraph (e) of this section. A payor may rely on
documentary evidence if the payor has established procedures to obtain,
review, and maintain documentary evidence sufficient to establish the
identity of the payee and the status of that person as a foreign person
(including, but not limited to, documentary evidence described in
Sec. 1.1441-6(c) (3) or (4)); and the payor obtains, reviews, and
maintains such documentary evidence in accordance with those
procedures. A payor maintains the documents reviewed by retaining the
original, certified copy, or a photocopy (or microfiche or similar
means of record retention) of the documents reviewed and noting in its
records the date on which and by whom the document was received and
reviewed. Documentary evidence furnished for the payment of an amount
subject to withholding under chapter 3 of the Code must contain all of
the information that is necessary to complete a Form 1042-S for that
payment.
(2) Other applicable rules. The provisions of Sec. 1.1441-
1(e)(4)(i) through (ix) (regarding who may sign a certificate, validity
period of certificates, retention of certificates, etc.) shall apply
(by substituting the term payor for the term withholding agent and
disregarding the fact that the provisions under Sec. 1.1441-1(e)(4)
only apply to amounts subject to withholding under chapter 3 of the
Code) to withholding certificates and documentary evidence furnished
for purposes of this section. See Sec. 1.1441-1(b)(2)(vii) for
provisions dealing reliable association of a payment with
documentation.
(3) Standards of knowledge. A payor may not rely on a withholding
certificate or documentary evidence described in paragraph (c)(1) or
(4) of this section if it has actual knowledge or reason to know that
any information or certification stated in the certificate or
documentary evidence is unreliable. A payor has reason to know that
information or certifications are unreliable only if the payor would
have reason to know under the provisions of Sec. 1.1441-7(b)(2)(ii) and
(3) that the information and certifications provided on the certificate
or in the documentary evidence are unreliable or, in the case of a Form
W-9 (or an acceptable substitute), it cannot reasonably rely on the
documentation as set forth in Sec. 31.3406(h)-3(e) of this chapter (see
the information and certification described in Sec. 31.3406(h)-
3(e)(2)(i) through (iv) of this chapter that are required in order for
a payor reasonably to rely on a Form W-9). The provisions of
Sec. 1.1441-7(b)(2)(ii) and (3) shall apply for purposes of this
paragraph (c)(3) irrespective of the type of income to which
Sec. 1.1441-7(b)(2)(ii) is otherwise limited. The exemptions from
reporting described in paragraphs (b)(10) and (11) of this section
shall not apply if the payor has actual knowledge that the payee is a
U.S. person who is not an exempt recipient.
(4) Special documentation rules for certain payments. This
paragraph (c)(4) modifies the provisions of this paragraph (c) for
payments to offshore accounts maintained at a bank or other financial
institution of amounts that are not subject to withholding under
chapter 3 of the Code, other than amounts described in (d)(3)(iii) of
this section (dealing with U.S. short-term OID and U.S. bank deposit
interest). Amounts are not subject to withholding under chapter 3 of
the Code if they are not included in the definition of amounts subject
to withholding under Sec. 1.1441-2(a) (e.g., deposit interest with
foreign branches of U.S. banks, foreign source income, or broker
proceeds).
(i) Alternative documentary evidence. In the case of payments to
which this paragraph (c)(4) applies, the payor may, instead of a
beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) or documentary evidence described in paragraph (c)(1) of
this section, rely on a customer's declaration of foreign status made
on an account opening form that contains the statement described in
this paragraph (c)(4)(i) (or such substitute statement as
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the Internal Revenue Service may prescribe) if the mailing and
permanent residence address of the customer is in the country in which
the branch or office is located and, under the local laws, regulations,
or practices applicable to the type of account or transaction described
in this paragraph (c)(4), it is not customary to obtain documentary
evidence described in paragraph (c)(1) of this section or, it is
customary to obtain such documentary evidence, but it is not customary
to request that it be renewed periodically. Reliance on the documentary
evidence described in this paragraph (c)(4)(i) is permitted only if
there are no indications that the person opening the account is a U.S.
person (e.g., permanent residence address is in a foreign country, the
person does not have a mailing address in the United States, the person
is not employed by a U.S.-based multinational organization). If
reliance is not permitted because there are indications of U.S. status
(e.g., the person's permanent residence address is in the United
States, the person changes his mailing address to the United States,
the person is employed by a U.S.-based multinational organization) then
the payor must obtain either documentary evidence described in
paragraph (c)(1) of this section or a Form W-8 described in
Sec. 1.1441-1(e)(2)(i) in order to treat the customer as a foreign
payee. The form or documentary evidence must be renewed every three
years in accordance with the renewal procedures set forth in
Sec. 1.1441-1(e)(4)(ii)(A) for as long as indicia of U.S. status
continue to be present. The statement referred to in this paragraph
(c)(4)(i) must appear near the signature line and must read as follows:
By opening this account and signing below, the account owner
represents and warrants that he/she/it is not a U.S. person for
purposes of U.S. federal income tax and that he/she/it is not acting
for or on behalf of a U.S. person. A false statement or
misrepresentation of tax status by a U.S. person could lead to
penalties under U.S. law. If your tax status changes and you become
a U.S. citizen or a resident, you must notify us within 30 days.
(ii) Continuous validity of declaration of foreign status subject
to due diligence by financial institution. A declaration of foreign
status described in paragraph (c)(4)(i) of this section does not expire
if the financial institution complies with the mailing requirement
described in paragraph (c)(4)(iii) of this section, unless the
financial institution becomes aware of circumstances indicating that
the customer may be a U.S. person (including indications described in
Sec. 1.1441-7(b)(2)(ii), dealing with due diligence standards
applicable to financial institutions). If circumstances indicate that
the customer may be a U.S. person, then the financial institution may
rely on the foreign status of the customer only if it obtains
documentary evidence from the customer that is described in paragraph
(c)(1) of this section or a beneficial withholding certificate
described in Sec. 1.1441-1(e)(2)(i). Such documentary evidence or
certificate does not expire after the three-year validity period
otherwise prescribed for such documentation but must be renewed each
time new circumstances occur indicating that the customer may be a U.S.
person.
(iii) Negative confirmation of change of status. In order for a
declaration of foreign status to remain valid, the financial
institution must include the following statement on a year-end
statement mailed to the customer:
You have declared to us that you are not a U.S. person and,
unless you notify us to the contrary, we will continue to rely on
that declaration to treat the account as owned by a non-U.S. person.
You have an obligation to notify us if your status changes and you
become a U.S. citizen or a U.S. resident. A U.S. person who fails to
report earnings on the account could be subject to penalties under
U.S. law.
(iv) Special rule when non-renewable documentary evidence is
customary. If it is customary in the country in which the branch or
office is located to obtain documentary evidence described in paragraph
(c)(1) of this section, but it is not customary for such documentary
evidence to be renewed, then a payor must request such documentary
evidence in lieu of the statement described in paragraph (c)(4)(i) of
this section. All other requirements described in paragraphs (c)(4)(ii)
and (c)(4)(iii) of this section shall apply.
(v) Exception for existing accounts. The rules of paragraphs
(c)(4)(i) and (iv) of this section shall apply only to accounts opened
on or after January 1, 1999.
(5) U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S.
middleman. The terms payor and middleman have the meanings ascribed to
them under Sec. 1.6049-4(a). A non-U.S. payor or non-U.S. middleman
means a payor or middleman other than a U.S. payor or U.S. middleman.
The term U.S. payor or U.S. middleman means--
(i) A person described in section 7701(a)(30) (including a foreign
branch or office of such person);
(ii) The government of the United States or the government of any
State or political subdivision thereof (or any agency or
instrumentality of any of the foregoing);
(iii) A controlled foreign corporation within the meaning of
section 957(a);
(iv) A foreign partnership, if at any time during its tax year, one
or more of its partners are U.S. persons (as defined in Sec. 1.1441-
1(c)(2)) who, in the aggregate hold more than 50 percent of the income
or capital interest in the partnership or if, at any time during its
tax year, it is engaged in the conduct of a trade or business in the
United States;
(v) A foreign person 50 percent or more of the gross income of
which, from all sources for the three-year period ending with the close
of its taxable year preceding the collection or payment (or such part
of such period as the person has been in existence), was effectively
connected with the conduct of trade or business within the United
States; or
(vi) A U.S. branch of a foreign bank or a foreign insurance company
described in Sec. 1.1441-1(b)(2)(iv).
(6) Examples. The following examples illustrate the provisions of
paragraphs (b) and (c) of this section:
Example 1. FC is a foreign corporation that is not engaged in a
trade or business in the United States during the current calendar
year. D, an individual who is a resident and citizen of the United
States, holds a registered obligation issued by FC in a public
offering. Interest is paid on the obligation within the United
States by DC, a U.S. corporation that is the designated paying agent
of FC. D does not have an account with DC. Although interest paid on
the obligation issued by FC is foreign source, the interest paid by
DC to D is considered to be interest for purposes of information
reporting under section 6049 because it is paid in the United
States.
Example 2. The facts are the same as in Example 1 except that D
is a nonresident alien individual who has furnished DC with a Form
W-8 in accordance with the provisions of Sec. 1.1441-1(e)(1)(ii). By
reason of paragraph (b)(12) of this section, the payment of interest
by DC to D is not considered to be a payment of interest for
purposes of information reporting under section 6049. Therefore, DC
is not required to make an information return under section 6049.
Example 3. The facts are the same as in Example 2 except that D
has not furnished a Form W-8 and DC pays interest on the obligation
at its branch outside the United States. The payment of interest by
DC to D is not considered to be a payment of interest for purposes
of information reporting under section 6049 because DC, although a
U.S. person is not a middleman or a payor within the meaning of
Sec. 1.6049-4(a) and (f)(4). Thus, the amount is described in
paragraph (b)(6) of this section. Therefore, DC is not required to
make an information return under section 6049.
Example 4. The facts are the same as in Example 3 except that
the obligation of FC is held in a custodial account for D by FB,
[[Page 53487]]
a foreign branch of a U.S. financial institution. By reason of
paragraph (c)(5) of this section, FB is considered to be a U.S.
middleman. Therefore, FB is required to make an information return
unless FB may treat D as a beneficial owner that is a foreign person
in accordance with the provisions of Sec. 1.1441-1(e)(1)(ii).
Example 5. The facts are the same as in Example 4 except that
the FC obligation is held for D by NC, in a custodial account at
NC's foreign branch. NC is a foreign corporation that is a non-U.S.
middleman described in paragraph (c)(5) of this section. Under
paragraph (b)(6) of this section, the payment by NC to D is not
considered to be a payment of interest for purposes of section 6049.
Therefore, NC is not required to make an information return under
section 6049 with respect to the payment.
(d) Determination of status as U.S. or foreign payee and applicable
presumptions in the absence of documentation--(1) Identifying the
payee. The provisions of Sec. 1.1441-1(b)(2) shall apply (by
substituting the term payor for the term withholding agent) to identify
the payee for purposes of this section (and other sections of
regulations under this chapter to which this paragraph (d)(1) applies),
except to the extent provided in this paragraph (d)(1) in the case of
payments of amounts that are not subject to withholding under chapter 3
of the Code. Amounts are not subject to withholding under chapter 3 of
the Code if they are not included in the definition of amounts subject
to withholding under Sec. 1.1441-2(a) (e.g., deposit interest with
foreign branches of U.S. banks, foreign source income, or broker
proceeds). The exceptions to the application of Sec. 1.1441-1(b)(2) to
amounts that are not subject to withholding under chapter 3 of the Code
are as follows:
(i) The provisions of Sec. 1.1441-1(b)(2)(ii), dealing with
payments to a U.S. agent of a foreign person, shall not apply. Thus, a
payment to a U.S. agent of a foreign person is treated as a payment to
a U.S. payee.
(ii) Payments to U.S. branches of certain banks or insurance
companies described in Sec. 1.1441-1(b)(2)(iv) shall be treated as
payments to a foreign payee, irrespective of the fact that the U.S.
branch may have arranged with the payor to be treated as a U.S. person
for payments of amounts subject to withholding and irrespective of the
fact that the branch is treated as a U.S. payor for purposes of
paragraph (c)(5) of this section.
(2) Presumptions of U.S. or foreign status in the absence of
documentation--(i) In general. For purposes of this section (and other
sections of regulations under this chapter to which this paragraph
(d)(2) applies), the provisions of Sec. 1.1441-1(b)(3)(i), (ii), (iii),
(vii), (viii), and (ix) shall apply (by substituting the term payor for
the term withholding agent) to determine the status of a payee as a
U.S. or a foreign person and its relevant characteristics (e.g., as an
owner or intermediary, or as an individual, corporation, or flow-
through entity), irrespective of whether the payments are subject to
withholding under chapter 3 of the Code. In addition, the rules of
Sec. 1.1441-1(b)(2)(vii) shall apply for purposes of determining when a
payment can reliably be associated with documentation, by substituting
the term payor for the term withholding agent. For this purpose, the
documentary evidence described in paragraph (c)(4) of this section can
be treated as documentation with which a payment can be associated.
(ii) Grace period in the case of indicia of a foreign payee. When
the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day
grace period provisions under section 3406(e) shall not apply and the
provisions of this paragraph (d)(2)(ii) shall apply instead. A payor
that, at any time during the grace period described in this paragraph
(d)(2)(ii), credits an account with amounts reportable under section
6042, 6045, or 6049 with respect to publicly traded securities, or
under section 6050N in the case of royalties from a unit investment
trust that are (or were upon issuance) publicly offered and are
registered with the Securities and Exchange Commission under the
Securities Act of 1933 (15 U.S.C. 77a) may, instead of treating the
account as owned by a U.S. person and applying backup withholding under
section 3406, choose, in its discretion, to treat the account as owned
by a foreign person if, at the beginning of the grace period, the
address that the payor has in its records for the account holder is in
a foreign country, the payor has been furnished the information
contained in a withholding certificate described in Sec. 1.1441-
1(e)(2)(i) or (3)(i) (by way of a facsimile copy of the certificate or
other non-qualified electronic transmission of the information required
to be stated on the certificate), or the payor holds a withholding
certificate that is no longer reliable. In the case of a newly opened
account, the grace period begins on the date that the payor first
credits the account. In the case of an existing account for which the
payor holds a Form W-8 or documentary evidence of foreign status, the
grace period begins on the date that the payor first credits the
account after the existing documentation held with regard to the
account can no longer be relied upon (other than because the validity
period described in Sec. 1.1441-1(e)(4)(ii)(A) has expired). A new
account shall be treated as an existing account if the account holder
already holds an account at the branch location at which the new
account is opened. It shall also be treated as an existing account if
an account is held at another branch location if the institution
maintains a coordinated account information system described in
Sec. 1.1441-1(e)(4)(ix). The grace period terminates on the earlier of
the close of the 90th day from the date on which the grace period
begins, the date that the documentation is provided, or the last day of
the calendar year in which the grace period begins. The grace period
also terminates when the remaining balance in the account (due to
withdrawals or otherwise) is less than 31 percent of the total amounts
credited since the beginning of the grace period that would be subject
to backup withholding if the provisions of this paragraph (d)(2)(ii)
did not apply. At the end of the grace period, the payor shall treat
the amounts credited to the account during the grace period as paid to
a U.S. or foreign payee depending upon whether documentation has been
furnished and the nature of any such documentation furnished upon which
the payor may rely to treat the account as owned by a U.S. or foreign
payee. If the documentation has not been received on or before the date
of expiration of the grace period, the payor may also apply the
presumptions described in this paragraph (d) to amounts credited to the
account after the date on which the grace period expires (until such
time as the payor can reliably associate the documentation with amounts
credited). See Sec. 31.6413(a)-3(a)(1)(iv) of this chapter for treating
backup withheld amounts under section 3406 as erroneously withheld when
the documentation establishing foreign status is furnished prior to the
end of the calendar year in which backup withholding occurs. If the
provisions of this paragraph (d)(2)(ii) apply, the provisions of
Sec. 31.3406(d)-3 of this chapter shall not apply. For purposes of this
paragraph (d)(2)(ii), an account holder's reinvestment of gross
proceeds of a sale into other instruments constitutes a withdrawal and
a non-qualified electronic transmission of information on a withholding
certificate is a transmission that is not in accordance with the
provisions of Sec. 1.1441-1(e)(4)(iv). See Sec. 1.1092(d)-1 for a
definition of the term publicly
[[Page 53488]]
traded for purposes of this paragraph (d)(2)(ii).
(iii) Joint owners. Amounts paid to accounts held jointly for which
a certificate or documentation is required as a condition for being
exempt from reporting under paragraph (b) of this section are presumed
made to U.S. payees who are not exempt recipients if, prior to payment,
the payor cannot reliably associate the payment either with a Form W-9
furnished by one of the joint owners in the manner required in
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with
documentation described in paragraph (b)(12) of this section furnished
by each joint owner upon which it can rely to treat each joint owner as
a foreign payee or foreign beneficial owner. For purposes of applying
this paragraph (d)(2)(iii), the grace period described in paragraph
(d)(2)(ii) of this section shall apply only if each payee qualifies for
such grace period.
(3) Payments to foreign intermediaries--(i) Payments of amounts
subject to withholding under chapter 3 of the Internal Revenue Code. In
the case of payments of amounts that are subject to withholding under
chapter 3 of the Code, the provisions of Sec. 1.1441-1(b) (2)(v) and
(3)(v) shall apply (by substituting the term payor for the term
withholding agent) to identify the payee and determine the applicable
presumptions for purposes of this section (and other sections of
regulations under this chapter to which this paragraph (d)(3) applies).
(ii) Payments of amounts not subject to withholding under chapter 3
of the Internal Revenue Code. Amounts that are not subject to
withholding under chapter 3 of the Code that the payor may treat as
paid to a foreign intermediary in accordance with Sec. 1.1441-
1(b)(3)(v)(A) shall be treated as made to an exempt recipient described
in Sec. 1.6049-4(c)(1)(ii) (M), (O), (P), or (Q) except to the extent
that the payor has actual knowledge that any person for whom the
intermediary is collecting the payment is a U.S. person who is not an
exempt recipient. In the case of such actual knowledge, the payor shall
treat the payment that it knows is allocable to such U.S. person as a
payment to a U.S. payee who is not an exempt recipient. If the payor
does not have sufficient reliable information regarding the portion of
the payment to the foreign intermediary that is allocable to such
presumed U.S. payee, then the payor shall treat the maximum portion of
the payment that could be allocable to such presumed U.S. payee as so
allocable.
(iii) Special rule for payments of certain short-term original
issue discount and bank deposit interest--(A) General rule. A payment
of U.S. source original issue discount on an obligation with a maturity
from the date of issue of 183 days or less (short-term OID) described
in sections 871(g)(1)(B) or 881(a)(3) or of U.S. source interest
(including original issue discount) on deposits with banks and other
financial institutions described in sections 871(i)(2)(A) or 881(d)
that the payor may treat as paid to a foreign intermediary in
accordance with the provisions of Sec. 1.1441-1(b)(3)(v)(A) shall be
treated as paid to an exempt recipient only to the extent that the
payor can treat the payment as made to a foreign person that is a
beneficial owner in accordance with the provisions of Sec. 1.1441-
1(e)(1)(ii), or can treat as a payment to a U.S. beneficial owner in
accordance with the provisions of Sec. 1.1441-1(d)(4) (except to the
extent that the payment is associated with a Form W-9 described in
Sec. 1.1441-1(d)(2) relating to a U.S. payee who is not an exempt
recipient), or can rely on the payee's claim that the payee assumes
withholding responsibility in accordance with Sec. 1.1441-1(e)(5)(iv).
(B) Payee has not furnished reliable documentation. If the payment
is made to a person described in Sec. 1.6049-4(c)(1)(ii) that the payor
may treat as an exempt recipient without requiring documentation and
the payor may not treat the payee as a foreign intermediary in
accordance with the provisions of Sec. 1.1441-1(b)(3)(v)(A), then the
payee shall be treated as an exempt recipient only if the payor can
treat the person as a U.S. person, or if the person has furnished a
certificate as a U.S. branch described in Sec. 1.1441-1(b)(2)(iv), or
the person has furnished a certificate such that the payor can treat
the payment as a payment made to a foreign person that is a beneficial
owner, or if the payor can treat the person as a foreign person that
has furnished an indication to the payor that such person is receiving
the payment for its own account. A payor must treat the payee as a
foreign person for purposes of this paragraph (d)(3)(iii) if the payor
has actual knowledge of the person's employer identification number and
that number begins with the two digits ``98,'' if the payor's
communications with the person are mailed to an address in a foreign
country, or if the payment is made outside the United States (as
defined in paragraph (e) of this section). The payor may treat as a
U.S. person any person not described in the preceding sentence for
purposes of this paragraph (d)(3)(iii). If the payee is treated as a
foreign person under this paragraph (d)(3)(iii)(B), it must be treated
as not acting for its own account unless it furnishes an indication of
beneficial ownership in any manner that the payor and the person may
choose, provided the indication is documented in the payor's records.
The indication is not required to be under penalties of perjury. The
provisions of this paragraph (d)(3)(iii) shall not apply to deposits
with banks and other financial institutions that remain on deposit for
a period of two weeks or less, to amounts of original issue discount
arising from a sale and repurchase transaction that is completed within
a period of two weeks or less, or to amounts described in paragraphs
(b)(7), (10) and (11) of this section (relating to certain obligations
issued in bearer form).
(iv) Examples. The rules of this paragraph (d)(3) are illustrated
by the following example:
Example 1. A payor, X, makes a payment to Y of U.S. source
interest on debt obligations issued prior to July 18, 1984.
Therefore, the interest does not qualify as portfolio interest under
sections 871(h) or 881(d). Y is a non-qualified foreign intermediary
that has furnished to X a valid intermediary withholding certificate
described in Sec. 1.1441-1(e)(3)(iii) to which it has attached a
valid Form W-9 for A, and two valid beneficial owner Forms W-8, one
for B and one for C. Y's withholding certificate does not contain
reliable information regarding B and C's share of the payment. B's
withholding certificate (attached to Y's withholding certificate)
indicates that B is a foreign pension fund, exempt from U.S. tax
under the U.S. income tax treaty with Country T. C's withholding
certificate (attached to Y's withholding certificate) indicates that
C is a foreign corporation not entitled to a reduced rate of
withholding. Under paragraph (b)(12) of this section, X may rely on
the withholding certificates to determine the status of A, B, and C
for purposes of deciding whether the amounts paid are interest
within the meaning of this section. However, because X cannot
reliably determine how much of the payment is allocable to B and C,
it must presume under paragraph (d)(3)(i) of this section and
Sec. 1.1441-1(b)(3)(v)(C) that 80 percent of the payment (i.e., all
of the payment less A's share) is allocable to C because the rate of
withholding applicable to the payment to C is the highest of the
withholding rates applicable to B and C. Thus, based on such
presumption, X may treat C as a foreign payee under paragraph
(b)(12) of this section and, therefore, may treat the payment as not
being interest reportable under Sec. 1.6049-4(a).
Example 2. The facts are the same as in Example 1, except that X
can reliably determine C's allocable share, but cannot reliably
determine A's and B's share. No withholding is required under
chapter 3 of the Code or under section 3406 on the payment to A or B
since A is a U.S. person who has furnished a valid Form W-9 and B is
an exempt recipient (as defined in
[[Page 53489]]
Sec. 1.6049-4(c)(1)(ii)(B)) and a foreign tax-exempt organization
exempt from chapter 3 withholding (see Sec. 1.1441-9). However, X
estimates that A, as a U.S. person, is subject to a higher U.S. tax
liability with respect to the payment than B is, since B is a
foreign tax-exempt organization. Therefore, X must presume under
paragraph (d)(3)(i) of this section and Sec. 1.1441-1(b)(3)(v)(C)
that 70 percent of the payment (i.e., all of the payment less C's
share) is allocable to A. Consequently, X must report all of the
payment on the Form 1099 filed for A under Sec. 1.6049-4(a).
Example 3. A payor, X, makes a payment of foreign source
interest to Y, a non-qualified foreign intermediary that has
furnished an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(iii) to which it has attached a withholding
certificate described in Sec. 1.1441-1(e)(3)(iii) for Z, that is
also a non-qualified foreign intermediary. Beneficial owner
certificates are attached to Z's certificate. Under paragraph (d)(1)
of this section, X must rely on the provisions of Sec. 1.1441-
1(b)(2)(v) to treat the payment as made to the persons whose
withholding certificates are attached to Z's certificate to the
extent both Y and Z have reliably certified in accordance with
Sec. 1.1441-1(e)(3)(iii)(D) that the certificates that each of them
has attached to their respective intermediary withholding
certificate represent all of the persons to whom the intermediary
withholding certificate relates. X must rely on the provisions of
Sec. 1.1441-1(b)(2)(v) even though the payment is not an amount
subject to withholding under chapter 3 of the Code.
Example 4. A payor, X, makes a payment to Y of foreign source
interest and U.S. source dividends. Y has furnished to X a qualified
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) for itself. Y indicates that 10 percent of each type of
payments is allocable to the category described in Sec. 1.1441-
1(e)(5)(v)(B)(3), relating to assets owned by persons for whom the
qualified intermediary does not hold the documentation. X has no
actual knowledge that the persons owning the assets are U.S.
persons. With respect to the payment of foreign source interest (an
amount that is not subject to withholding under chapter 3 of the
Code), X must, under paragraph (d)(3)(ii) of this section, treat the
payment as made to a foreign payee. Such treatment is effective for
purposes of paragraph (b)(12) of this section, meaning that the 10-
percent amount is not treated as interest for purposes of reporting
under Sec. 1.6049-4(a). With respect to the amount of U.S. source
dividends, X must, under paragraph (d)(3)(i) of this section, treat
the payment as made to a foreign payee (based upon paragraph
(d)(3)(i)'s cross-reference to Sec. 1.1441-1(b)(3)(v)(B)). Such
treatment is effective for purposes of Sec. 1.6042-3(b)(1)(iii),
meaning that the 10-percent amount is not treated as a dividend for
purposes of reporting under Sec. 1.6042-2(a).
Example 5. A payor, X, makes a payment of foreign source
interest to Y, a non-qualified foreign intermediary that has
furnished an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(iii) to which it has attached beneficial owner
Forms W-8. In its withholding certificate, Y represents to X that 30
percent of the payment is allocable to a U.S. person who has not
furnished a Form W-9 and whom Y cannot treat as an exempt recipient.
Under paragraph (d)(3)(ii) of this section, X must treat 70 percent
of the payment as made to a foreign payee. X, however, may not rely
on the rule of paragraph (d)(3)(ii) of this section to treat the
remainder of the payment as made to a foreign payee because X has
actual knowledge that the remainder of the payment is allocable to a
U.S. person. Under paragraph (d)(3)(ii) of this section, X must
treat 30 percent of the payment as made to a U.S. payee who is not
an exempt recipient.
Example 6. A payor, X, holds a valid withholding certificate
from Y, a qualified intermediary, with which it reliably associates
payments made to A, a U.S. individual who maintains an account
relationship with Y and who has furnished a valid Form W-9 to Y. Y
has furnished A's Form W-9 to X who has set up a separate account
for those assets held in Y's name, and which Y has indicated are
allocable to A. The assets consist of 10,000 shares of stock of
domestic corporation T, publicly traded on a U.S. stock exchange.
When dividends are paid on the T stock held in the Y/A account, X
credits the dividend amounts to the account and reports the dividend
amounts credited to that account on a Form 1099-DIV under section
6042, treating A as the payee in accordance with paragraph (d)(1) of
this section (cross-referencing Sec. 1.1441-1(b)(2)(v)). When A
later instructs Y to sell the shares, X effects the sale and credits
the Y/A account with the gross proceeds from the sale of 10,000
shares of the T stock. Under Sec. 1.6045-1(c)(2) and paragraph
(d)(3)(ii) of this section, X must report the gross proceeds
credited to the Y/A account on a Form 1099--B made in the name of A
since it has actual knowledge that the gross proceeds are paid to a
U.S. person who is not an exempt recipient. See section 1.6045-
1(g)(3)(iv).
Example 7. A payor, X, holds a valid withholding certificate
from Y, a non-qualified intermediary, and can reliably associate a
payment of U.S. short-term OID and proceeds from the sale of shares
with the certificate. Y has not attached any certificates or
documentary evidence to its certificate and informs X that the
payment is allocable to persons for whom it holds no documentation.
Under paragraph (d)(3)(iii) of this section, X must, for purposes of
this section and section 3406, treat the payment of short-term OID
as made to a U.S. payee who is not an exempt recipient. However,
under paragraph (d)(3)(ii) of this section, the payment of gross
proceeds from the sale of shares is treated as made to a foreign
payee. X must rely on this treatment for purposes of determining its
reporting obligations under section 6045 and the regulations under
that section (see Sec. 1.6045-1(g)(1)(i)) and, consequently, its
withholding obligations under section 3406 and the regulations under
that section.
(4) Determination of partnership and partners status in the absence
of documentation--(i) Payments of amounts subject to withholding under
chapter 3 of the Internal Revenue Code. In the case of payments of
amounts that are subject to withholding under chapter 3 of the Code,
the provisions of Secs. 1.1441-1(b)(3)(ii) and 1.1441-5(c)(1), and (d)
shall apply (by substituting the term payor for the term withholding
agent) to determine the status of the payee as a partnership, as a
domestic or foreign partnership, and the status of its partners for
purposes of this section (and other sections of regulations under this
chapter to which this paragraph (d)(4) applies).
(ii) Payments of amounts not subject to withholding under chapter 3
of the Internal Revenue Code. In the case of amounts that are not
subject to withholding under chapter 3 of the Code, the provisions of
Secs. 1.1441-1(b)(3)(ii) and 1.1441-5(c)(1), and (d) shall also apply
(by substituting the term payor for the term withholding agent),
subject to the following exceptions--
(A) If, in the absence of documentation, the payor treats the payee
as a partnership in accordance with the presumptions set forth in
Sec. 1.1441-1(b)(3)(ii), the presumptions of Sec. 1.1441-5(d)(2) shall
not apply to treat the partnership as a foreign partnership; instead,
the person treated as a partnership shall be presumed to be a domestic
partnership; and
(B) In the case of payments described in Sec. 1.1441-5(d)(3)(i)
(dealing with lacking or unreliable documentation regarding the status
of partners) or in Sec. 1.1441-5(d)(3)(iii), dealing with lacking or
unreliable information regarding the number of partners represented by
the withholding certificate), the partners are presumed to be U.S.
payees who are not exempt recipients and not foreign payees.
(5) Presumptions for payments to or by foreign trusts or estates.
[Reserved]
(e) Determination of whether amounts are considered paid outside
the United States--(1) In general. For purposes of section 6049 and
this section, an amount is considered to be paid by a payor or
middleman outside the United States if the payor or middleman completes
the acts necessary to effect payment outside the United States. See
paragraphs (e)(2), (3), and (4) of this section for further
clarification of where amounts are considered paid. A payment shall not
be considered to be made within the United States for purposes of
section 6049 merely by reason of the fact that it is made on a draft
drawn on a United States bank account or by a wire or other electronic
transfer from a United States account. However, without regard to the
location
[[Page 53490]]
of the account from which the amount is drawn, an amount that is
described in paragraph (e)(1) (i) or (ii) of this section and paid by
transfer to an account maintained by the payee in the United States or
by mail to a United States address is not considered to be paid outside
the United States.
(i) The amount is paid by an issuer or the paying agent of the
issuer and the obligation is either--
(A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this
section;
(B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
(C) Listed on an exchange that is registered as a national
securities exchange in the United States or included in an interdealer
quotation system in the United States.
(ii) The amount is paid by a U.S. middleman (as defined in
paragraph (c)(5) of this section) that, as a custodian, nominee, or
other agent of a payee, collects the amount for or on behalf of the
payee.
(2) Amounts paid with respect to deposits or accounts with banks
and other financial institutions. Notwithstanding paragraph (e)(1) of
this section, an amount paid by a bank or other financial institution
with respect to a deposit or with respect to an account with the
institution is considered paid at the branch or office at which the
amount is credited unless the amount is collected by the financial
institution as the agent of the payee. However, an amount will not be
considered to be paid at the branch or office where the amount is
considered to be credited unless the branch or office is a permanent
place of business that is regularly maintained, occupied, and used to
carry on a banking or similar financial business; the business is
conducted by at least one employee of the branch or office who is
regularly in attendance at such place of business during normal
business hours; and the branch or office receives deposits and engages
in one or more of the other activities described in Sec. 1.864-
4(c)(5)(i). In addition, an amount paid by a bank or other financial
institution with respect to a deposit or an account with the
institution is not considered paid at a branch or office outside the
United States if the customer has transmitted instructions to an agent,
branch, or office of the institution from inside the United States by
mail, telephone, electronic transmission, or otherwise concerning the
deposit or account (unless the transmission from the United States has
taken place in isolated and infrequent circumstances).
(3) Coupon bonds and discount obligations in bearer form.
Notwithstanding paragraph (e)(1) of this section, an amount paid with
respect to a bond with coupons attached (including a certificate of
deposit with detachable interest coupons) or a discount obligation that
is not in registered form (within the meaning of section 163(f) and the
regulations thereunder) is considered to be paid where the coupon or
the discount obligation is presented to the payor or its paying agent
for payment. However, without regard to where the coupon or discount
obligation is presented for payment, an amount paid with respect to
either a bond with coupons attached or a discount obligation by
transfer to an account maintained by the payee in the United States or
by mail to the United States is considered paid in the United States if
the payment is described in paragraphs (e)(3) (i) and (ii) of this
section.
(i) The amount is paid by an issuer or the paying agent of the
issuer and the obligation is either--
(A) Issued by a U.S. payor, as defined in paragraph (c)(5) of this
section;
(B) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or
(C) Listed on an exchange that is registered as a national
securities exchange in the United States or included in a interdealer
quotation system in the United States.
(ii) The amount is paid by a U.S. middleman (as defined in
paragraph (c)(5) of this section) that, as a custodian, nominee, or
other agent of payee, collects the amount for or on behalf of the
payee.
(4) Foreign-targeted registered obligations. Notwithstanding
paragraph (e)(1) of this section, where the payor is the issuer or the
issuer's agent, an amount is considered paid outside the United States
with respect to a foreign-targeted registered obligation, as described
in Sec. 1.871-14(e)(2), if either the amount is paid by transfer to an
account maintained by the registered owner outside the United States,
or by mail to an address of the registered owner outside the United
States, or by credit to an international account. For purposes of this
paragraph (e)(4), the term international account means the book-entry
account of a financial institution (within the meaning of section
871(h)(4)(B)) or of an international financial organization with the
Federal Reserve Bank of New York for which the Federal Reserve Bank of
New York maintains records that specifically identifies an
international financial organization or a financial institution (within
the meaning of section 871(h)(4)(B)) as either a non-United States
person or a foreign branch of a United States person as registered
owner. An international financial organization is a central bank or
monetary authority of a foreign government or a public international
organization of which the United States is a member to the extent that
such central bank, authority, or organization holds obligations solely
for its own account and is exempt from tax under section 892 or 895.
(5) Examples. The application of the provisions of this paragraph
(e) are illustrated by the following examples:
Example 1. FC is a foreign corporation that is not a U.S. payor
or U.S. middleman, as defined in paragraph (c)(5) of this section. A
holds FC coupon bonds that are not in registered form under section
163(f) and the regulations thereunder, that were issued by FC in a
public offering outside the United States, that are not registered
under the Securities Act of 1933 (15 U.S.C. 77a), and that are
neither listed on an exchange that is registered as a national
securities exchange in the United States nor included in an
interdealer quotation system. DC, a U.S. corporation that is engaged
in a commercial banking business, is the designated fiscal agent for
FC. FB, a foreign branch of DC, is the designated paying agent with
respect to the bonds issued by FC. A does not have an account with
FB. A presents a coupon from a FC bond for payment to FB at its
office outside the United States. FB pays A with a check drawn
against a bank account maintained in the United States. For purposes
of section 6049, the place of payment of interest on the FC bond by
FB to A is considered to be outside the United States under
paragraph (e)(3) of this section.
Example 2. The facts are the same as in Example 1 except that A
presents the coupon to FB at its office outside the United States
with instructions to transfer funds in payment to a bank account
maintained by A in the United States. FB transfers the funds in
accordance with A's instructions. Even though the amount is credited
to an account in the United States, the place of payment of interest
on the FC bonds is considered to be outside the United States under
paragraph (e)(3) of this section because the coupon is presented for
payment outside the United States; because FC is a foreign person
that is not a U.S. payor or U.S. middleman, as defined in paragraph
(d)(1) of this section; because FB is not acting as A's agent; and
because the obligation is not registered under the Securities Act of
1933 (15 U.S.C. 77a), listed on a securities exchange that is
registered as a national securities exchange in the United States,
or included in an interdealer quotation system.
Example 3. FC is a foreign corporation that is not a U.S. payor
or U.S. middleman, as defined in paragraph (d)(1) of this section.
B, a United States citizen, holds a bond issued by FC in registered
form under section 163(f) and the regulations thereunder and
registered under the Securities Act of 1933 (15 U.S.C. 77a). The
bond is not a foreign-targeted registered obligation as defined in
Sec. 1.871-14(e)(2). DB, a United States branch of a
[[Page 53491]]
foreign corporation engaged in the commercial banking business, is
the registrar of the bonds issued by FC. DB supplies FC with a list
of the holders of the FC bonds. Interest on the FC bonds is paid to
B and other bondholders by checks prepared by FC at its principal
office outside the United States, and B's check is mailed from there
to his designated address in the United States. The bond is
described in paragraph (e)(1)(i)(B) of this section. The place of
payment to B by FC of the interest on the FC bonds is considered to
be inside the United States under paragraph (e)(1) of this section.
Example 4. The facts are the same as in Example 3 except that
the checks are prepared and mailed in the United States by DC, a
U.S. corporation engaged in the commercial banking business that is
the designated paying agent with respect to the bonds issued by FC,
and B's check is mailed to his designated address outside the United
States. For purposes of section 6049, the place of payment by DC of
the interest on the FC bonds is considered to be within the United
States under paragraph (e)(1) of this section.
Example 5. Individual C deposits funds in an account with FB, a
foreign country X branch of DB, a U.S. corporation engaged in the
commercial banking business. FB maintains an office and employees in
foreign country X, accepts deposits, and conducts one or more of the
other activities listed in Sec. 1.864-4(c)(5)(i). The terms of C's
deposit provide that it will be payable in six months with accrued
interest. On the day that the interest is credited to C's account
with FB, C telephones DB from inside the United States and asks DB
to direct FB to transfer the funds in his account with FB to an
account C maintains in the United States with DB. Transmissions from
the United States concerning this account have taken place in
isolated and infrequent circumstances. Under paragraph (e)(2) of is
section, FB is considered to have paid the interest on C's deposit
outside the United States.
Example 6. The facts are the same as in Example 5 except that C
has placed his deposit with FB for an indefinite period of time.
Interest will be credited to C's account daily. C has instructed FB
to wire the interest at 90-day intervals to C's account with DB
within the United States. FB is considered to have paid the interest
credited to A's account within the United States under paragraph
(e)(2) of this section because the regular crediting of the account
disqualifies the transmission from being isolated or infrequent.
Example 7. DC, a U.S. corporation engaged in the commercial
banking business, maintains FB, a branch in foreign country X. FB
has an office and employees in foreign country X, accepts deposits,
and engages in one or more of the other activities listed in
Sec. 1.864-4(c)(5)(i). D, a United States citizen, purchases a
certificate of deposit issued in 1980 by FB. The certificate of
deposit has a maturity of 20 years and has detachable interest
coupons payable at six-month intervals. D presents some of the
coupons at the U.S. office of DC and receives payment in cash.
Because the coupon is presented to DC for payment within the United
States, DC is considered to have made the payment within the United
States under paragraph (e)(3) of this section.
Example 8. FB is recognized by both foreign country X and by the
Federal Reserve Bank as a foreign country X branch of DC, a U.S.
corporation engaged in the commercial banking business. A local
foreign country X bank serves as FB's resident agent in Country X.
FB maintains no physical office or employees in foreign country X.
All the records, accounts, and transactions of FB are handled at the
United States office of DC. E deposits funds in an amount maintained
with FB. Interest earned on the deposit is periodically credited to
E's account with FB by employees of DC. For purposes of section
6049, the place of payment of the interest on E's deposit with FB is
considered to be within the United States by reason of paragraphs
(e)(1) and (2) of this section.
Example 9. DC is a U.S. corporation. a holds bonds that were
issued by DC in registered form under section 163(f) and the
regulations thereunder and that are foreign-targeted registered
obligations as defined in Sec. 1.871-14(e)(2). DB, a commercial
banking business, is the registrar of bonds issued by DC. Interest
on the DC bonds is paid to a and other bondholders by check prepared
by DB at its principal office inside the United States and mailed
from there to a's address outside the United States. The check is
drawn on a United States account maintained by DC with DB within the
United States. The place of payment to a by DB of the interest on
the DC bonds is considered to be outside the United States under
paragraph (e)(4) of this section.
* * * * *
(g) Effective date--(1) General rule. The provisions of paragraphs
(b)(6) through (15), (c), (d), and (e) of this section apply to
payments made after December 31, 1998.
(2) Transition rules. A payor that, on December 31, 1998, holds a
valid Form W-8 or other form upon which it is permitted to rely to hold
the payee as a foreign person pursuant to the regulations in effect
prior to January 1, 1999 (see 26 CFR parts 1 and 35a, revised April 1,
1997), may treat it as a valid certificate until its validity expires
under those regulations or, if earlier, until December 31, 1999.
Further, the validity of a Form W-8 or other form that is dated prior
to January 1, 1998, is valid on January 1, 1998, and would expire at
any time during 1998, is extended until December 31, 1998 (and is not
extended after December 31, 1998 by reason of the immediately preceding
sentence). The rule in this paragraph (g)(2), however, does not apply
to extend the validity period of a withholding certificate that expires
in 1998 solely by reason of changes in the circumstances of the person
whose name is on the certificate. Notwithstanding the three preceding
sentences, a payor may choose not to take advantage of the transition
rule in this paragraph (g)(2) with respect to one or more withholding
certificates and, therefore, may require new withholding certificates
conforming to the requirements described in this section.
Par. 43. Section 1.6049-6 is amended by:
1. Removing the language, ``a reasonable facsimile thereof'' in the
first sentence of paragraph (d) and adding ``an acceptable substitute''
in its place.
2. Revising paragraph (e)(3).
The revision reads as follows:
Sec. 1.6049-6 Statements to recipients of interest payments and
holders of obligations for attributed original issue discount.
* * * * *
(e) * * *
(3) Cross-reference to penalty. For provisions relating to the
penalty provided for failure to furnish timely a correct payee
statement required under section 6049(c) and Sec. 1.6049-6(a), see
Sec. 301.6722-1 of this chapter (Procedure and Administration
Regulations). See Sec. 301.6724-1 of this chapter for the waiver of a
penalty if the failure is due to reasonable cause and is not due to
willful neglect.
* * * * *
Par. 44. Section 1.6049-7 is amended by revising paragraph (c)(4)
to read as follows:
Sec. 1.6049-7 Returns of information with respect to REMIC regular
interests and collateralized debt obligations.
* * * * *
(c) * * *
(4) A foreign central bank of issue (as defined in Sec. 1.895-
1(b)(1)) or the Bank for International Settlements;
* * * * *
Par. 45. In Sec. 1.6049-8, paragraph (a) is amended by removing the
last two sentences and adding four sentences in their place to read as
follows:
Sec. 1.6049-8 Interest and original issue discount paid to residents
of Canada.
(a) Interest subject to reporting requirement. * * * The payor or
middleman may rely upon the permanent residence address (as defined in
Sec. 1.1441-1(e)(2)(ii)) as stated on the Form W-8 described in
Sec. 1.1441-1(e)(2)(i) in order to determine whether the payment is
made to a Canadian nonresident alien individual. If the permanent
residence address stated on the certificate is in Canada, or if the
payor has actual knowledge of the individual's residence address in
Canada, the payor must presume that the individual resides in Canada.
Amounts described in this paragraph (a) are not subject to backup
withholding
[[Page 53492]]
under section 3406. See Sec. 31.3406(g)-1(d) of this chapter.
* * * * *
Par. 46. Section 1.6050A-1 is amended by
1. Removing the language ``Form 1099F'' each place it appears and
adding ``Form 1099-MISC'' in its place in paragraphs (a) introductory
text, (a) concluding text, (b) and (c)(1) first and second sentences.
2. Adding paragraph (d) to read as follows:
Sec. 1.6050A-1 Reporting requirements of certain fishing boat
operators.
* * * * *
(d) Cross-reference to penalties. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6050A(a) and Sec. 1.6050A-1(a), see
Sec. 301.6721-1 of this chapter (Procedure and Administration
Regulations). For provisions relating to the penalty provided for
failure to furnish timely a correct payee statement required under
section 6050A(b) and Sec. 1.6050A-1(c), see Sec. 301.6722-1 of this
chapter. See Sec. 301.6724-1 of this chapter for the waiver of a
penalty if the failure is due to reasonable cause and is not due to
willful neglect.
Sec. 1.6050H-1 [Amended]
Par. 47. Section 1.6050H-1 is amended by:
1. Removing the language Sec. 35a.9999-4T, Q/A-5(iii) and adding
Sec. 1.6049-5(c) in its place in paragraph (d)(2)(ii)(A).
2. Removing the language ``Sec. 1.6049-5(b)(2)(iv) and adding
Sec. 1.1441-1(e)(1) in its place in paragraph (d)(2)(ii)(B).
Par. 48. Section 1.6050N-1 is amended by:
1. Revising the section heading.
2. Revising paragraphs (c) and (d).
3. Adding paragraph (e).
The addition and revisions read as follows:
Sec. 1.6050N-1 Statement to recipients of royalties paid after
December 31, 1986.
* * * * *
(c) Exempted foreign-related items--(1) In general. No return shall
be required under paragraph (a) of this section for payments of the
items described in paragraphs (c)(1)(i) through (iv ) of this section.
(i) Returns of information are not required for payments of
royalties that a payor can, prior to payment, associate with
documentation upon which it may rely to treat as made to a foreign
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made
to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed
to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or
(5). However, such payments may be reportable under Sec. 1.1461-1(b)
and (c).
For purposes of this paragraph (c)(1)(i), the provisions in
Sec. 1.6049-5(c) (regarding rules applicable to documentation of
foreign status and definition of U.S. payor and non-U.S. payor) shall
apply. See Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules
regarding scholarships, grants, pensions, annuities, etc. The
provisions of Sec. 1.1441-1 shall apply by substituting the term payor
for the term withholding agent and without regard to the fact that the
provisions apply only to amounts subject to withholding under chapter 3
of the Internal Revenue Code.
(ii) Returns of information are not required for payments of
royalties from sources outside the United States (determined under Part
I of subchapter N and the regulations under these provisions) made
outside the United States by a non-U.S. payor or non-U.S. middleman.
For a definition of non-U.S. payor or non-U.S. middleman, see
Sec. 1.6049-5(c)(5). For circumstances in which a payment is considered
to be made outside the United States, see Sec. 1.6049-5(e).
(iii) Returns of information are not required for payments made by
a foreign intermediary described in Sec. 1.1441-1(e)(3)(i) that it has
received in its capacity as an intermediary and that are associated
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign
bank or of a foreign insurance company described in Sec. 1.1441-
1(b)(2)(iv) that are associated with a valid withholding certificate
described in Sec. 1.1441-1(e)(3)(v), which certificate the intermediary
or branch has furnished to the payor or middleman from whom it has
received the payment, unless, and to the extent, the intermediary or
branch knows that the payments are required to be reported and were not
so reported.
(2) Definitions--(i) Payor. For purposes of this section, the term
payor shall have the meaning ascribed to it under Sec. 1.6049-4(a).
(ii) Joint owners. Amounts paid to joint owners for which a
certificate or documentation is required as a condition for being
exempt from reporting under this paragraph (c) of this section are
presumed made to U.S. payees who are not exempt recipients if, prior to
payment, the payor cannot reliably associate the payment either with a
Form W-9 furnished by one of the joint owners in the manner required in
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with
documentation described in paragraph (c)(1)(i) of this section
furnished by each joint owner upon which it can rely to treat each
joint owner as a foreign payee or foreign beneficial owner. For
purposes of applying this paragraph (c)(2)(ii), the grace period
described in Sec. 1.6049-5(d)(2)(ii) shall apply only if each payee
qualifies for such grace period.
(d) Cross-reference to penalties. For provisions relating to the
penalty provided for failure to file timely a correct information
return required under section 6050N(a), see Sec. 301.6721-1 of this
chapter (Procedure and Administration Regulations). For provisions
relating to the penalty provided for failure to furnish timely a
correct payee statement required under section 6050N(b) and
Sec. 1.6050N-1(a), see Sec. 301.6722-1 of this chapter. See
Sec. 301.6724-1 of this chapter for the waiver of a penalty if the
failure is due to reasonable cause and is not due to willful neglect.
(e) Effective date--This section, except paragraph (c) , is applies
to payee statements due after December 31, 1995, without regard to
extensions. For further guidance regarding the substantially similar
statement mailing requirements that apply with respect to forms
required to be filed after October 22, 1986, and before January 1, 1996
(see Rev. Proc. 84-70 (1984-2 C.B. 716) and Sec. 601.601(d)(2) of this
chapter). The provisions of paragraph (c) of this section apply to
payments made after December 31, 1998.
Par. 49. Section 1.6071-1, is amended by revising paragraphs
(c)(7), (c)(8),(c)(11), (c)(13), and (c)(15) to read as follows:
Sec. 1.6071-1 Time for filing returns and other documents.
* * * * *
(c) * * *
(7) For provisions relating to the time for filing information
returns by persons making certain payments, see Sec. 1.6041-2(a)(3) and
Sec. 1.6041-6.
(8) For provisions relating to the time for filing information
returns regarding payments of dividends, see Sec. 1.6042-2(c).
* * * * *
(11) For provisions relating to the time for filing information
returns with respect to payments of patronage dividends, see
Sec. 1.6044-2(d).
* * * * *
(13) For provisions relating to the time for filing information
returns regarding certain payments of interest, see Sec. 1.6049-4(g).
* * * * *
(15) For provisions relating to the time for filing the annual
information
[[Page 53493]]
return on Form 1042-S of the tax withheld under chapter 3 of the Code
(relating to withholding of tax nonresident aliens and foreign
corporations and tax-free covenant bonds), see Sec. 1.1461-1(c).
* * * * *
Par. 50. In Sec. 1.6091-1, paragraph (b)(15) is revised to read as
follows:
Sec. 1.6091-1 Place for filing returns or other documents.
* * * * *
(b) * * *
(15) For the place for filing information returns on Forms 1042-S
with respect to certain amounts paid to foreign persons, see
instructions to the form.
* * * * *
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Par. 51. The authority for part 31 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 31.3401(a)(6)-1 also issued under 26 U.S.C. 1441(c)(4) and
26 U.S.C. 3401(a)(6). * * *
Par. 52. Section 31.3401(a)(6)-1 is amended by:
1. Revising the section heading.
2. Revising the paragraph heading and first sentence of paragraph
(e).
3. Adding paragraph (f).
4. Removing the authority citation at the end of the section.
The addition and revisions read as follows:
Sec. 31.3401(a)(6)-1 Remuneration for services of nonresident alien
individuals.
* * * * *
(e) Exemption from income tax for remuneration paid for services
performed before January 1, 1999. Remuneration paid for services
performed within the United States by a nonresident alien individual
before January 1, 1999, is excepted from wages and hence is not subject
to withholding if such remuneration is, or will be, exempt from income
tax imposed by chapter 1 of the Internal Revenue Code by reason of a
provision of the Internal Revenue Code or an income tax convention to
which the United States is a party. * * *
(f) Exemption from income tax for remuneration paid for services
performed after December 31, 1998. Remuneration paid for services
performed within the United States by a nonresident alien individual
after December 31, 1998, is excepted from wages and hence is not
subject to withholding if such remuneration is, or will be, exempt from
the income tax imposed by chapter 1 of the Internal Revenue Code by
reason of a provision of the Internal Revenue Code or an income tax
convention to which the United States is a party. An employer may rely
on a claim that the employee is entitled to an exemption from tax if it
complies with the requirements of Sec. 1.1441-1(e)(1)(ii) of this
chapter (for a claim based on a provision of the Internal Revenue Code)
or Sec. 1.1441-4(b)(2) of this chapter (for a claim based on an income
tax convention).
Sec. 31.3406-0 [Amended]
Par. 53. Section 31.3406-0 is amended by removing the entries in
the table for Sec. 31.3406(h)-2, paragraphs (e)(1) and (e)(2).
Par. 54. Section 31.3406(d)-3 is amended by:
1. Adding two sentences at the end of paragraph (a).
2. Removing the words ``30-day'' in the first sentence, revising
the word ``these'' to ``the 30-day'', and adding the word ``may''
immediately before the words ``apply only if'' in the second sentence,
and revising the word ``those'' to ``the'' in the third sentence in
paragraph (b).
3. Revising paragraph (c).
The addition and revision read as follows:
Sec. 31.3406(d)-3 Special 30-day rules for certain reportable
payments.
(a) * * * For payments made after December 31, 1998, see
Sec. 1.6049-5(d)(2)(ii) of this chapter for the application of a 90-day
grace period in lieu of the 30-day grace period described in this
paragraph (a) if, at the beginning of the 90-day grace period, certain
conditions are satisfied. If the grace period provisions of
Sec. 1.6049-5(d)(2)(ii) or Sec. 1.1441-1(b)(3)(iv) of this chapter are
applied with respect to a new account, the grace period provisions of
this paragraph (a) shall not apply to that account.
* * * * *
(c) Application to foreign payees. The rules of paragraphs (a) and
(b) of this section also apply to a payee from whom the payor is
required to obtain a Form W-8 (or an acceptable substitute) or other
evidence of foreign status (pursuant to relevant regulations under an
applicable Internal Revenue Code section without regard to the
requirement to furnish a taxpayer identifying number, and the
certifications described in Secs. 31.3406(d)-1(b)(3) and 31.3406(d)-2),
provided the payee represents orally or otherwise, before or at the
time of the acquisition or sale of the instrument or the establishment
of the account, that the payee is not a United States citizen or
resident. The 30-day rules described in paragraph (a) or (b) of this
section may apply only if the payee does not qualify for, or the payor
does not apply, the 90-day grace period described in Sec. 1.6049-
5(d)(2)(ii) or Sec. 1.1441-1(b)(3)(iv) of this chapter.
Par. 55. In Sec. 31.3406(g)-1, paragraph (e) is added to read as
follows:
Sec. 31.3406(g)-1 Exception for payments to certain payees and certain
other payments.
* * * * *
(e) Certain reportable payments made outside the United States by
foreign persons, foreign offices of United States banks and brokers,
and others. For reportable payments made after December 31, 1998, a
payor is not required to backup withhold under section 3406 on a
reportable payment that qualifies for the documentary evidence rule
described in Sec. 1.6049-5(c)(1) or (4) of this chapter, whether or not
documentary evidence is actually provided to the payor, unless the
payor has actual knowledge that the payee is a United States person.
Further, no backup withholding is required for payments upon which a
30-percent amount was withheld by another payor in accordance with the
withholding provisions under chapter 3 of the Internal Revenue Code and
the regulations under that chapter. For rules applicable to notional
principal contracts, see Sec. 1.6041-1(d)(5) of this chapter.
Par. 56. Section 31.3406(h)-2 is amended by:
1. Revising paragraph (a)(3)(i).
2. Revising the penultimate sentence in paragraph (d)
3. Removing the heading of paragraph (e)(1).
4. Removing the paragraph designation (e)(1).
5. Removing paragraph (e)(2).
The revisions read as follows:
Sec. 31.3406(h)-2 Special rules.
(a) * * *
(3) Joint foreign payees--(i) In general. If the relevant payee
listed on a jointly owned account or instrument provides a Form W-8 or
documentary evidence described in Sec. 1.1441-1(e)(1)(ii) regarding its
foreign status, withholding under section 3406 applies unless every
joint payee provides the statement regarding foreign status (under the
provisions of chapters 3 or 61 of the Internal Revenue Code and the
regulations under those provisions) or any one of the joint owners who
has not
[[Page 53494]]
established foreign status provides a taxpayer identification number to
the payor in the manner required in Secs. 31.3406(d)-1 through
31.3406(d)-5. See Sec. 1.6049-5(d)(2)(iii) of this chapter for
corresponding joint payees provisions.
* * * * *
(d) * * * If its payee is not subject to withholding under section
3406, the payor must pay or credit the full amount of the payment to
the payee, unless, with respect to payments made after December 31,
1998, the payor chooses to apply prior withholding under section 3406
to an amount required to be withheld under another section of the
Internal Revenue Code (such as under section 1441) to the extent
permitted under procedures prescribed by the Internal Revenue Service
(see Sec. 601.601(d)(2) of this chapter). * * *
* * * * *
Par. 57. Section 31.6413(a)-3 is amended as follows:
1. Paragraph (a)(1)(ii) is amended by removing the language ``or''
at the end of the paragraph.
2. In paragraph (a)(1)(iii), the parenthetical ``(including the
certification relating to foreign status described in Sec. 1.6049-
5(b)(2)(iv) of this chapter or Sec. 1.6045-1(g)(1) of this chapter)''
is removed and ``(including the documentation described in Sec. 1.1441-
1(e)(1)(ii), 1.6045-1(g)(3), or 1.6049-5(c) of this chapter)'' is added
in its place.
3. Paragraph (a)(1)(iii) is further amended by removing the period
at the end of the paragraph and adding ``; or'' in its place.
4. Paragraph (a)(1)(iv) is added.
5. Paragraphs (a)(2) and (b)(2) are revised.
The addition and revisions read as follows:
Sec. 31.6413(a)-3 Repayment by payor of tax erroneously collected from
payee.
(a) * * * (1) * * *
(iv) The amount is withheld because a payor imposed backup
withholding on a payment made to a person because the payee failed to
furnish the documentation described in Sec. 1.1441-1(e)(1)(ii) of this
chapter and the payee subsequently furnishes, completes, or corrects
the documentation. The documentation must be furnished, completed, or
corrected prior to the end of the calendar year in which the payment is
made and prior to the time the payor furnishes a Form 1099 to the payee
with respect to the payment for which the withholding erroneously
occurred.
(2) For purposes of paragraph (a)(1) of this section (other than
erroneous withholding occurring under the circumstances described in
paragraph (a)(1)(iv) of this section), if a payor or broker withholds
because the payor or broker has not received a taxpayer identifying
number or required certification and the payee subsequently provides a
taxpayer identifying number or a required certification to the payor,
the payor or broker may not refund the amount to the payee.
(b) * * *
(2) Adjustment after the deposit of the tax--(i) In general. Except
as provided in paragraph (b)(2)(ii) of this section, if the amount
erroneously withheld has been deposited prior to the time that the
refund is made to the payee, the payor or broker may adjust any
subsequent deposit of the tax collected under chapter 24 of the
Internal Revenue Code that the payor or broker is required to make in
the amount of the tax that has been refunded to the payee.
(ii) Erroneous withholding from a payee that is a foreign person.
Where a payor withholds in error from a payee that is a nonresident
alien or foreign person, as described in paragraph (a)(1)(iv) of this
section, the payor may refund some or all of the amount subject to
backup withholding under section 3406. A refund may be paid in
accordance with the requirements of this paragraph (b)(2)(ii) where the
documentation is furnished, completed, or corrected prior to the end of
the calendar year in which the payment is made and prior to the time
the payor furnishes a Form 1099 to the payee with respect to the
payment for which the withholding erroneously occurred. The amount of
the refund will be the amount erroneously withheld less the amount of
tax required to be withheld, if any, under chapter 3 of the Internal
Revenue Code and the regulations under that chapter. With respect to
the amount of the payment to the foreign person and the amount of tax
required to be withheld under chapter 3 of the Internal Revenue Code
(and the regulations thereunder), returns must be made in accordance
with the requirements of Sec. 1.1461-1 (b) and (c) of this chapter.
Par. 58. Effective October 14, 1997, Sec. 31.9999-0 is added to
read as follows:
Sec. 31.9999-0 Effective dates.
In general, the provisions of Secs. 35a.9999-1, 35a.9999-2,
35a.9999-3, 35a.9999-3A, 35a.9999-4, and 35a.9999-5 of this chapter
apply before January 1, 1997. The provisions of those sections remain
applicable after December 31, 1996, and before January 1, 1999,
however, for purposes of Sec. 301.6724-1 of this chapter, relating to
due diligence safe harbor, and for international transactions,
including transactions involving a foreign payee, a foreign payor, a
foreign office of a U.S. bank or broker, or a payment from sources
without the United States. See Secs. 31.3406-0 through 31.3406(i)-1 of
this chapter for rules that apply to other transactions after December
31, 1996.
Sec. 31.9999-0 [Removed]
Par. 59. Effective January 1, 1999, Sec. 31.9999-0 is removed.
PART 35a--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST
AND DIVIDEND TAX COMPLIANCE ACT OF 1983
Par. 60. The authority for part 35a is amended by removing the
entries for Sec.
Sec. 35a.9999-1, 35a.9999-2, 35a.9999-3, 35a.9999-3A, 35a.9999-4T, and
35a.9999-5 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 35a.9999-0T [Removed]
Par. 60a. Effective October 14, 1997 Sec. 35a.9999-0T is removed.
Par. 61. Effective October 14, 1997 Sec. 35a.9999-0 is added to
read as follows:
Sec. 35a.9999-0 Effective date.
See Sec. 31.9999-0 of this chapter for applicability dates for
Secs. 35a.9999-1 through 35a.9999-5.
Par. 62. Effective January 1, 1999, Secs. 35a.9999-0, 35a.9999-1,
35a.9999-2, 35a.9999-3, 35a.9999-3A, 35a.9999-4T and 35a.9999-5 are
removed.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 63. The authority citation for part 301 is amended by adding
an entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 301.6402-3 also issued under 95 Stat. 357 amending 88 Stat.
2351. * * *
Par. 64. Section 301.6109-1 is amended as follows:
1. Paragraphs (b)(2)(iv) and (b)(2)(v) are revised.
2. Paragraph (b)(2)(vi) is added.
3. Paragraph (c) is revised.
The revisions and addition read as follows:
Sec. 301.6109-1 Identifying numbers.
* * * * *
(b) * * *
(2) * * *
(iv) A foreign person that makes a return of tax (including income,
estate, and gift tax returns), an amended return, or a refund claim
under this title but
[[Page 53495]]
excluding information returns, statements, or documents;
(v) A foreign person that makes an election under Sec. 301.7701-
3(c); and
(vi) A foreign person that furnishes a withholding certificate
described in Sec. 1.1441-1(e)(2) or (3) of this chapter or Sec. 1.1441-
5(c)(2)(iv) or (3)(iii) of this chapter to the extent required under
Sec. 1.1441-1(e)(4)(vii) of this chapter.
(c) Requirement to furnish another's number. Every person required
under this title to make a return, statement, or other document must
furnish such taxpayer identifying numbers of other U.S. persons and
foreign persons that are described in paragraph (b)(2)(i), (ii), (iii),
or (vi) of this section as required by the forms and the accompanying
instructions. The taxpayer identifying number of any person furnishing
a withholding certificate referred to in paragraph (b)(2)(vi) of this
section shall also be furnished if it is actually known to the person
making a return, statement, or other document described in this
paragraph (c). If the person making the return, statement, or other
document does not know the taxpayer identifying number of the other
person, and such other person is one that is described in paragraph
(b)(2)(i), (ii), (iii), or (vi) of this section, such person must
request the other person's number. The request should state that the
identifying number is required to be furnished under authority of law.
When the person making the return, statement, or other document does
not know the number of the other person, and has complied with the
request provision of this paragraph (c), such person must sign an
affidavit on the transmittal document forwarding such returns,
statements, or other documents to the Internal Revenue Service, so
stating. A person required to file a taxpayer identifying number shall
correct any errors in such filing when such person's attention has been
drawn to them.
* * * * *
Par. 65. Section 301.6114-1 is amended by:
1. Revising paragraph (a)(1)(ii).
2. Revising paragraph (b)(4)(ii) introductory text
3. Removing the period at the end of paragraph (b)(4)(ii)(B)(7) and
adding ``; or'' in its place
4. Adding paragraphs (b)(4)(ii)(C) and (b)(4)(ii)(D).
5. Revising paragraph (c)(1)(i).
6. Adding paragraph (c)(6).
The revisions and addition read as follows:
Sec. 301.6114-1 Treaty-based return positions.
(a) * * * (1) * * *
(ii) If a return of tax would not otherwise be required to be
filed, a return must nevertheless be filed for purposes of making the
disclosure required by this section. For this purpose, such return need
include only the taxpayer's name, address, taxpayer identifying number,
and be signed under penalties of perjury (as well as the subject
disclosure). Also, the taxpayer's taxable year shall be deemed to be
the calendar year (unless the taxpayer has previously established, or
timely chooses for this purpose to establish, a different taxable
year). In the case of a disclosable return position relating solely to
income subject to withholding (as defined in Sec. 1.1441-2(a) of this
chapter), however, the statement required to be filed in paragraph (d)
of this section must instead be filed at times and in accordance with
procedures published by the Internal Revenue Service.
* * * * *
(b) * * *
(4) * * *
(ii) A treaty exempts from tax, or reduces the rate of tax on,
fixed or determinable annual or periodical income subject to
withholding under section 1441 or 1442 that a foreign person receives
from a U.S. person, but only if described in paragraphs (b)(4)(ii)(A)
and (B) of this section, or in paragraph (b)(4)(ii)(C) or (D) of this
section as follows--
* * * * *
(C) For payments made after December 31, 1998, with respect to a
treaty that contains a limitation on benefits article, that--
(1) The treaty exempts from tax, or reduces the rate of tax on
income subject to withholding (as defined in Sec. 1.1441-2(a) of this
chapter) that is received by a foreign person (other than a State,
including a political subdivision or local authority) that is the
beneficial owner of the income and the beneficial owner is related to
the person obligated to pay the income within the meaning of sections
267(b) and 707(b), and the income exceeds $500,000; and
(2) A foreign person (other than an individual or a State,
including a political subdivision or local authority) meets the
requirements of the limitation on benefits article of the treaty; or
(D) For payments made after December 31, 1998, with respect to a
treaty that imposes any other conditions for the entitlement of treaty
benefits, for example as a part of the interest, dividends, or royalty
article, that such conditions are met;
* * * * *
(c) * * *
(1) * * *
(i) Notwithstanding paragraph (b)(4) or (5) of this section, that a
treaty has reduced the rate of withholding tax otherwise applicable to
a particular type of fixed or determinable annual or periodical income
subject to withholding under section 1441 or 1442, such as dividends,
interest, rents, or royalties to the extent such income is beneficially
owned by an individual or a State (including a political subdivision or
local authority);
* * * * *
(6) This section does not apply to amounts required to be reported
under section 6038A on a Form 5472 (or successor form) to the extent
permitted under the form or accompanying instructions.
* * * * *
Par. 66. Section 301.6402-3 is amended by:
1. Revising paragraph (e).
2. Removing the authority citation at the end of the section.
The revision reads as follows:
Sec. 301.6402-3 Special rules applicable to income tax.
* * * * *
(e) In the case of a nonresident alien individual or foreign
corporation, the appropriate income tax return on which the claim for
refund or credit is made must contain the tax identification number of
the taxpayer required pursuant to section 6109 and the entire amount of
income of the taxpayer subject to tax, even if the tax liability for
that income was fully satisfied at source through withholding under
chapter 3 of the Internal Revenue Code (Code). Also, if the overpayment
of tax resulted from the withholding of tax at source under chapter 3
of the Code, a copy of the Form 1042-S required to be provided to the
beneficial owner pursuant to Sec. 1.1461-1(c)(1)(i) of this chapter
must be attached to the return. For purposes of claiming a refund, the
Form 1042-S must include the taxpayer identifying number of the
beneficial owner even if not otherwise required. No claim of refund or
credit under chapter 65 of the Code may be made by the taxpayer for any
amount that the payor has repaid to the taxpayer pursuant to
Sec. 1.1461-2(a)(2) of this chapter, that was subject to a set-off
pursuant to Sec. 1.1461-2(a)(3) of this chapter, or in accordance with
the provisions of an agreement that a qualified intermediary described
in Sec. 1.1441-1(e)(5)(ii) has in effect with the Internal Revenue
Service. Upon request, a taxpayer must also submit such documentation
as the Commissioner (or delegate), the District Director, or the
Assistant Commissioner (International),
[[Page 53496]]
may require establishing that the taxpayer is the beneficial owner of
the income for which a claim of refund or credit is being made.
Par. 67. In Sec. 301.6721-0, the table is amended by adding entries
for Sec. 3012.6724-1, paragraphs (g)(1), (g)(2), and (g)(3) to read as
follows:
Sec. 301.6721-0 Table of Contents.
* * * * *
Sec. 301.6724-1 Reasonable cause.
* * * * *
(g) * * *
(1) In general.
(2) Special rules relating to TINs.
(3) Effective dates.
* * * * *
Par. 68. In Sec. 301.6724-1, paragraph (g) is revised to read as
follows:
Sec. 301.6724-1 Reasonable cause.
* * * * *
(g) Due diligence safe harbor--(1) In general. A filer may
establish reasonable cause with respect to a failure relating to an
information reporting requirement as described in paragraph (j) of this
section if the filer exercises due diligence as provided under section
6724(c)(1) with respect to failures described in sections 6721 through
6723.
(2) Special rules relating to TINs. The following questions and
answers provide guidance on the exercise of due diligence for an
exception to a penalty under sections 6721 through 6723 for a failure
to provide a correct TIN on any information return (as defined in
Sec. 301.6721-1(g)), payee statement (as defined in Sec. 301.6722-
1(d)), document (as described in Sec. 301.6723-1(a)(4)), or the failure
merely to provide a TIN as described in Sec. 301.6723-1(a)(4)(ii).
General Rule
Q-1. Is a payor subject to a penalty for a failure to provide a
correct TIN on an information return with respect to a reportable
interest or dividend payment if the payee has certified, under
penalties of perjury, that the TIN furnished to the payor is the
payee's correct number, the payor provided that number on an
information return, and the number is later determined not to be the
payee's correct number?
A-1. A payor is not subject to a penalty for failure to provide the
payee's correct TIN on an information return, if the payee has
certified, under penalties of perjury, that the TIN provided to the
payor was his correct number, and the payor included such number on the
information return before being notified by the Internal Revenue
Service (IRS) (or a broker) that the number is incorrect.
Due Diligence Defined for Accounts Opened and Instruments Acquired
After December 31, 1983
Q-2. In order for a payor of a reportable interest or dividend
payment (other than in a window transaction) to be considered to have
exercised due diligence in furnishing the correct TIN of a payee with
respect to an account opened or an instrument acquired after December
31, 1983, what actions must the payor take?
A-2. (1) In general, the payor of an account or instrument that is
not a pre-1984 account nor a window transaction must use a TIN provided
by the payee under penalties of perjury on information returns filed
with the IRS to satisfy the due diligence requirement. Therefore, if a
payor permits a payee to open an account without obtaining the payee's
TIN under penalties of perjury and files an information return with the
IRS with a missing or an incorrect TIN, the payor will be liable for
the $50 penalty for the year with respect to which such information
return is filed. However, in its administrative discretion, the IRS
will not enforce the penalty with respect to a calendar year if the
certified TIN is obtained after the account is opened and before
December 31 of such year, provided that the payor exercises due
diligence in processing such number, i.e., the payor uses the same care
in processing the TIN provided by the payee that a reasonably prudent
payor would use in the course of the payor's business in handling
account information such as account numbers and balances.
(2) Once notified by the IRS (or a broker) that a number is
incorrect, a payor is liable for the penalty for all prior years in
which an information return was filed with that particular incorrect
number if the payor has not exercised due diligence with respect to
such years. A pre-existing certified TIN does not constitute an
exercise of due diligence after the IRS or a broker notifies the payor
that the number is incorrect unless the payor undertakes the actions
described in Sec. 31.3406(d)-5(d)(2)(i) of this chapter with respect to
accounts receiving reportable payments described in section 3406(b)(1)
and reported on information returns described in sections 6724(d)(1)(A)
(i) through (iv).
Q-3. Is a payor as described in A-2 liable for the penalty if the
payor obtained a certified TIN from a payee but inadvertently processed
the name or number incorrectly on the information return?
A-3. Yes. The payor is liable for the penalty unless the payor
exercised that degree of care in processing the TIN and name and in
furnishing it on the information return that a reasonably prudent payor
would use in the course of the payor's business in handling account
information, such as account numbers and account balances.
Special Rules
Q-4. With respect to an instrument transferred without the
assistance of a broker, is a payor liable for the penalty for filing an
information return with a missing or an incorrect TIN if the payor
records on its books a transfer of a readily tradable instrument in a
transaction in which the payor was not a party?
A-4. Generally, a payor as described in Q-4 will be considered to
have exercised due diligence with respect to a readily tradable
instrument that is not part of a pre-1984 account with the payor if the
payor records on its books a transfer in which the payor was not a
party. This exception applies until the calendar year in which the
payor receives a certified TIN from the payee.
Q-5. Is the payor described in A-4 required to solicit the TIN of a
payee of an account with a missing TIN in order to be considered as
having exercised due diligence in a subsequent calendar year?
A-5. There is no requirement on the payor to solicit the TIN in
order to be considered to have exercised due diligence in a subsequent
calendar year under the rule set forth in A-4.
Q-6. Is a payor as described in Q-4 considered to have exercised
due diligence if the payee provides a TIN to the payor (whether or not
certified), the payor uses that number on the information return filed
for the payee, and the number is later determined to be incorrect?
A-6. A payor as described in Q-4 who records on its books a
transfer in which it was not a party is considered to have exercised
due diligence under the rule set forth in A-4 where the transfer is
accompanied with a TIN provided that the payor uses the same care in
processing the TIN provided by a payee that a reasonably prudent payor
would use in the course of the payor's business in handling account
information, such as account numbers and account balances. Thus, a
payor will not be liable for the penalty if the payor uses the TIN
provided by the payee on information returns that it files, even if the
TIN provided by the payee is later determined to be incorrect. However,
a payor will not be considered as having exercised due diligence under
A-4 after the IRS or a broker notifies the payor that the
[[Page 53497]]
number is incorrect unless the payor undertakes the required additional
actions described in the second paragraph of A-2.
Q-7. Is a payor liable for a penalty for filing an information
return with a missing or an incorrect TIN with respect to a post-1983
account or instrument if the payor could have met the due diligence
requirements but for the fact that the payor incurred an undue
hardship?
A-7. A payor of a post-1983 account or instrument is not liable for
a penalty under section 6721(a) for filing an information return with a
missing or an incorrect TIN if the IRS determines that the payor could
have satisfied the due diligence requirements but for the fact that the
payor incurred an undue hardship. An undue hardship is an extraordinary
or unexpected event such as the destruction of records or place of
business of the payor by fire or other casualty (or the place of
business of the payor's agent who under a pre-existing written contract
had agreed to fulfill the payor's due diligence obligations with
respect to the account subject to the penalty and there was no means
for the obligations to be performed by another agent or the payor).
Undue hardship will also be found to exist if the payor could have met
the due diligence requirements only by incurring an extraordinary cost.
Q-8. How does a payor obtain a determination from the IRS that the
payor has met the undue hardship exception to the penalty under section
6721(a) for the failure to include the correct TIN on an information
return for the year with respect to which the payor is subject to the
penalty?
A-8. A determination of undue hardship may be established only by
submitting a written statement to the IRS signed under penalties of
perjury that sets forth all the facts and circumstances that make an
affirmative showing that the payor could have satisfied the due
diligence requirements but for the occurrence of an undue hardship.
Thus, the statement must describe the undue hardship and make an
affirmative showing that the payor either was in the process of
exercising or stood ready to exercise due diligence when the undue
hardship occurred. A payor may request an undue hardship determination
from the district director or the director of the Internal Revenue
Service Center where the payor is required to remit the penalty under
section 6721(a).
Q-9. Is a pre-1984 account or instrument of a payor that is
exchanged for an account or instrument of another payor as a result of
a merger of the other payor or acquisition of the accounts or
instruments of such payor transformed into a post-1983 account or
instrument if the merger or acquisition occurs after December 31, 1983?
A-9. No. A pre-1984 account or instrument that is exchanged for
another account or instrument pursuant to a statutory merger or the
acquisition of accounts or instruments is not transformed into a post-
1983 account or instrument because the exchange occurs without the
participation of the payee.
Q-10. May the acquiring taxpayer described in A-9 rely upon the
business records and past procedures of the merged payor or the payor
whose accounts or instruments were acquired in order to establish that
due diligence has been exercised on the acquired pre-1984 and post-1983
accounts or instruments?
A-10. Yes. The acquiring payor may rely upon the business records
and past procedures of the merged payor or of the payor whose accounts
or instruments were acquired in order to establish due diligence to
avoid the penalty under section 6721(a) with respect to information
returns that have been or will be filed.
Q-11. To what extent may a payor rely on the due diligence rules
set forth in Secs. 35a.9999-1, 35a.9999-2, and 35a.9999-3 of this
chapter in effect prior to January 1, 1999 (see Secs. 35a.9999-1,
35a.9999-2, and 35a.9999-3 as contained in 26 CFR part 35a, revised
April 1, 1997).
A-11. A payor may rely on the due diligence rules set forth in
Secs. 35a.9999-1, 35a.9999-2, and 35a.9999-3 of this chapter in effect
prior to January 1, 1999 (see Secs. 35a.9999-1, 35a.9999-2, and
35a.9999-3 as contained in 26 CFR part 35a, revised April 1, 1997)
solely for the definitions of terms or phrases used in this paragraph
(g)(2).
(3) Effective dates. This paragraph (g) is effective for
information returns (as defined in section 6724(d)(1)) required to be
filed, payee statements (as defined in section 6724(d)(2)) required to
be furnished, and specified information (as described in section
6724(d)(3)) required to be reported after December 31, 1998. See
Sec. 301.6724-1(g) in effect prior to January 1, 1999 (see Sec. 301.
6724-1(g) as contained in 26 CFR part 301, revised April 1, 1997) for
substantially similar rules applicable prior to January 1, 1999.
* * * * *
PART 502--[REMOVED]
Par. 70. Part 502 is removed.
PART 503--[REMOVED]
Par. 71. Part 503 is removed.
PART 509--SWITZERLAND
Par. 72. The authority citation for ``Subpart--General Income Tax''
is removed and a general authority citation for part 509 is added to
read as follows:
Authority: 26 U.S.C. 62, 3791 and 7805.
Par. 73. Part 509 is amended as follows:
Secs. 509.1 through 509.10
[Removed]
1. Subpart--Withholding of Tax consisting of Secs. 509.1 through
509.10 is removed.
Sec. 509.103 [Amended]
2. In Sec. 509.103, paragraph (e) is removed and reserved.
Sec. 509.117 [Amended]
3. In Sec. 509.117, paragraph (a) is removed and reserved.
Sec. 509.119 [Removed]
Sec. 509.122 [Removed]
4. Sections 509.119 and 509.122 are removed.
PART 513--IRELAND
Par. 74. The authority citation for part 513 is revised to read as
follows:
Authority: 26 U.S.C. 62.
Par. 75. Part 513 is amended as follows:
Sec. 513.1 [Removed]
1. Section 513.1 is removed.
2. Sections 513.2, 513.3, 513.4 and 513.5 are revised to read as
follows:
Sec. 513.2 Dividends.
The fact that the payee of the dividend is not required to pay
Irish tax on such dividend because of the application of reliefs or
exemptions under Irish revenue laws does prevent the application of the
reduction in rate of United States tax with respect to such dividend.
If the dividend would have been subject to Irish tax had the payee
thereof derived an income large enough to require payment of tax then
liability to Irish tax exists for the purpose of the reduction in rate
of United State tax. As to what constitutes a permanent establishment,
see Article II(1)(i) of the convention.
Sec. 513.3 Interest.
The provisions of Sec. 513.2 relating to the degree of liability to
Irish tax in the case of dividends are equally applicable with respect
to the income falling within the scope of this section.
[[Page 53498]]
Sec. 513.4 Patent and copyright royalties and film rentals.
The provisions of Sec. 513.2 relating to the degree of liability to
Irish tax in the case of dividends are equally applicable with respect
to the income falling within the scope of this section.
Sec. 513.5 Natural resource royalties and real property rentals.
The provisions of Sec. 513.2 relating to the degree of liability to
Irish tax in the case of dividends are equally applicable with respect
to the income falling within the scope of this section.
PART 514--FRANCE
Par. 76. The authority citation for part 514 is added to read as
set forth below and the authority citation preceding Sec. 514.1 is
removed.
Authority: 26 U.S.C. 7805.
Par. 77. Part 514 is amended as follows:
1. The undesignated centerheading preceding Sec. 514.1 is removed.
Secs. 514.20 and 514.21 [Removed]
2. Sections 514.20 and 514.21 are removed.
Sec. 514.22 [Amended]
3. In Sec. 514.22, paragraph (c) is removed.
Secs. 514.23 through 514.32 [Removed]
4. Sections 514.23 through 514.32 are removed.
Secs. 514.101 through 514.117 [Removed]
5. Subpart--General Income Tax consisting of sections 514.101
through 514.117 is removed.
PART 516--[REMOVED]
Par. 78. Part 516 is removed.
PART 517--[REMOVED]
Par. 79. Part 517 is removed.
PART 520--[REMOVED]
Par. 80. Part 520 is removed.
PART 521--[AMENDED]
Par. 81. The authority citation for part 521 is revised to read as
follows:
Authority: 26 U.S.C. 62, 143, 144, 211, and 231.
Par. 82. Part 521 is amended as follows:
Secs. 521.1-521.8 [Removed]
1. Subpart--Withholding of Tax consisting of Secs. 521.1 through
521.8 is removed.
Sec. 521.103 [Amended]
2. In Sec. 521.103, paragraph (d) is removed and reserved.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 83. The authority for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 84. In Sec. 602.101, paragraph (c) is amended by:
1. Removing the following entries from the table:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1441-8T.................................................. 1545-1053
* * * * *
1.1461-3................................................... 1545-0054
1545-0055
1545-0096
1545-0795
1.1461-4................................................... 1545-0054
1545-0055
1545-0096
* * * * *
35a.9999-3................................................. 545-0112
* * * * *
Part 502................................................... 1545-0844
Part 503................................................... 1545-0837
* * * * *
Part 516................................................... 1545-0841
Part 517................................................... 1545-0849
Part 520................................................... 1545-0833
* * * * *
------------------------------------------------------------------------
2. Adding entries in numerical order to the table to read as
follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1441-1................................................... 1545-1484
1.1441-4................................................... 1545-1484
* * * * *
11.1441-8.................................................. 1545-1484
1545-1053
1.1441-9................................................... 1545-1484
* * * * *
31.3401(a)(6).............................................. 1545-1484
301.6114-1................................................. 1545-1484
* * * * *
------------------------------------------------------------------------
3. Revising entries in the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1441-5................................................... 1545-0096
1545-0795
1545-1484
1.1441-6................................................... 1545-0055
1545-0795
1545-1484
* * * * *
1.1461-1................................................... 1545-0054
1545-0055
1545-0795
1545-1484
* * * * *
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
* * * * *
------------------------------------------------------------------------
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Approved: August 28, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-25998 Filed 10-6-97; 8:45 am]
BILLING CODE 4830-01-U
