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Section 1288.—Treatment of SUMMARY: This document contains Responses to these collections of infor-
Original Issue Discounts on Tax- amendments to final regulations relating mation are required to obtain a benefit (to
Exempt Obligations to the withholding of income tax under claim an exemption to, or a reduction in,
sections 1441, 1442, and 1443 on certain withholding), and to facilitate tax compli-
The adjusted applicable federal short-term, mid- U.S. source income paid to foreign per- ance (to verify entitlement to an exemp-
term, and long-term rates are set forth for the month
sons and related requirements governing tion or a reduced rate). The likely respon-
of June 2000. See Rev. Rul. 2000–28, page 1157.
collection, deposit, refunds, and credits of dents are individuals, businesses, and
withheld amounts under sections 1461 other for-profit organizations.
through 1463. Additionally, this docu- Comments on the collections of infor-
Section 1441.—Withholding of
ment contains amendments under sections mation should be sent to the Office of
Tax On Nonresident Aliens
6041, 6041A, 6042, 6045, 6049, and Management and Budget, Attn: Desk
26 CFR 1.1441–1: Requirements for the deduction 3406. This regulation affects persons Officer for the Department of the Trea-
and withholding of tax on payments to foreign making payments of U.S. source income sury, Office of Information and Regula-
persons. to foreign persons. tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
T.D. 8881 DATES: These regulations are effective
Attn: IRS Reports Clearance Officer,
January 1, 2001.
DEPARTMENT OF THE TREASURY OP:FS:FP, Washington, DC 20224.
Internal Revenue Service FOR FURTHER INFORMATION CON- The estimated average annual burden
26 CFR Parts 1 and 31 TACT: Carl Cooper, Laurie Hatten-Boyd, per respondent and/or recordkeeper are
or Kate Hwa (202) 622-3840 (not a toll reflected in the burdens of Forms W-8,
Revisions to Regulations free number). 1042, 1042-S, 1099, and the income tax
Relating to Withholding of Tax return of a foreign person filed for pur-
SUPPLEMENTARY INFORMATION:
on Certain U.S. Source Income poses of claiming a refund.
Paid to Foreign Persons and Paperwork Reduction Act An agency may not conduct or sponsor,
Revisions of Information and a person is not required to respond to,
Reporting Regulations The collections of information in these a collection of information unless the col-
final regulations have been reviewed and lection of information displays a valid
AGENCY: Internal Revenue Service approved by the Office of Management control number assigned by the Office of
(IRS), Treasury. and Budget in accordance with the Paper- Management and Budget.
ACTION: Final regulations. work Reduction Act of 1995 (44 U.S.C. Books or records relating to a collec-
3507) under control number 1545 -1484. tion of information must be retained as
long as their contents may become mater- enue Code. The regulation itself, how- the payment with valid documentation if,
ial in the administration of any internal ever, does not treat a U.S. branch as a prior to the payment, it has received a
revenue law. Generally, tax returns and U.S. person for all purposes under chapter valid nonqualified intermediary withhold-
tax return information are confidential, as 3 of the Internal Revenue Code. For ex- ing certificate on Form W-8IMY; it can
required by 26 U.S.C. 6103. ample, a U.S. branch of a foreign bank or determine the portion of the payment that
insurance company provides a withhold- relates to valid documentation associated
Background ing certificate on a Form W-8, which is with the Form W-8IMY from a payee
In Treasury Decision 8734 (1997–2 used only by foreign persons. Further, (i.e., a person other than a nonqualified
C.B. 109 [62 F.R. 53387]), the Treasury under §1.1461–1(c), payments to such a intermediary, flow-through entity, or U.S.
Department and the IRS issued compre- branch are reportable as payments to a branch); and the nonqualified intermedi-
hensive regulations (final regulations) foreign person on Form 1042-S. There- ary, flow-through entity, or U.S. branch
under chapter 3 (sections 1441- 1464) and fore, §1.1441–1(b)(2)(iv) has been has provided sufficient information for
subpart G of Subchapter A of chapter 61 amended to state that, notwithstanding the the withholding agent to report the pay-
(sections 6041-6050S) of the Internal agreement between the withholding agent ment on Form 1042-S or Form 1099, if
Revenue Code. Those final regulations and a U.S. branch to the treat the U.S. reporting is required.
were amended by TD 8804 (1999–12 branch as a U.S. person, the branch is not Paragraph (b)(2)(vii)(C) provides rules
I.R.B. 5 [63 F.R. 72183]) which delayed treated as a U.S. person for purposes of for a withholding agent that makes a pay-
the effective date of the final regulations providing documentation or for reporting ment to a qualified intermediary that does
to payments made after December 31, payments to the branch. not assume primary withholding responsi-
1999. The effective date of the regulations bility under chapter 3 of the Internal Rev-
2. Rules for Reliably Associating a Pay-
was again extended by TD 8856 (2000–3 enue Code or primary Form 1099 report-
ment With a Withholding Certificate or
I.R.B. 298 [64 F.R. 73408]) to payments ing and backup withholding responsibility
Other Appropriate Documentation
made after December 31, 2000. under chapter 61 and section 3406 of the
Section 1.1441–1(b)(2)(vii) contains Internal Revenue Code. The payment can
Need for Changes rules to determine whether a payment can be reliably associated with valid docu-
be reliably associated with valid docu- mentation if, prior to the payment, the
Since the publication of TD 8734, the mentation. A payment that cannot be reli- withholding agent receives a valid quali-
IRS and Treasury of have received nu- ably associated with valid documentation fied intermediary withholding certificate
merous comments relating to technical er- is subject to the presumption rules in on Form W-8IMY and a withholding
rors in the regulations and ways to ease §§1.1441–1(b)(3), 1.1441–4(a)(2)(ii) and statement that allocates the payment
compliance while keeping the objectives (3)(i), 1.1441–5(d) and (e)(6), among withholding rate pools, including
of the regulations in place. In Notice 99–8 1.1441–9(b)(3), and 1.6049–5(d). Para- withholding rate pools for each U.S. non-
(1999–5 I.R.B. 26), the IRS and Treasury graph (b)(2)(vii) did not adequately ad- exempt recipient for which the qualified
announced amendments that would be dress when a payment made to a nonqual- intermediary has provided a valid Form
made to the regulations. This TD imple- ified intermediary, a flow-through entity, W-9 (or other information if a Form W-9
ments Notice 99–8 and contains addi- or a U.S. branch of certain foreign banks has not been provided).
tional changes made in response to com- and insurance companies (other than a For a payment made to a qualified in-
ments as well as the IRS and Treasury’s branch that acts as a U.S. person) would termediary that assumes primary with-
further analysis of the regulations. be treated as reliably associated with doc- holding responsibility under chapter 3 of
Explanation of Revisions umentation. These entities provide a the Internal Revenue Code with respect to
withholding certificate for themselves and the payment, but does not assume primary
A. Changes to §1.1441–1 withholding certificates, documentary ev- Form 1099 reporting and backup with-
idence, or other information for the per- holding responsibility under chapter 61
1. Payments to a U.S. Branch of Certain sons on whose behalf they act. Therefore, and section 3406 of the Internal Revenue
Foreign Banks or Foreign Insurance the payment must be reliably associated Code, paragraph (b)(2)(vii)(D) provides
Companies. not only with a withholding certificate that a withholding agent can reliably asso-
Generally, a payment to a U.S. branch from the intermediary, flow-through en- ciate the payment with valid documenta-
of a foreign person is a payment to a for- tity, or U.S. branch, but also with docu- tion if, prior to the payment, it receives a
eign person. Under §1.1441–1(b)(2)(iv), mentation from, or information relating valid Form W-8IMY and the withholding
however, a U.S. branch of certain foreign to, the payee on whose behalf the entity statement associated with the Form W-
banks or insurance companies and a with- acts. 8IMY allocates the payment between a
holding agent may agree to treat the U.S. Paragraph (b)(2)(vii) has been single withholding rate pool for which the
branch as a U.S. person for purposes of amended to provide more detailed reliable qualified intermediary assumes primary
chapter 3 of the Internal Revenue Code. association rules. For a payment made to withholding responsibility and separate
The regulation as initially drafted re- a nonqualified intermediary, a flow- withholding rate pools for each U.S. non-
quired a withholding agent to treat such a through entity, or a U.S. branch, new exempt recipient.
U.S. branch as a U.S. person for all pur- paragraph (b)(2)(vii)(B) provides that a Paragraph (b)(2)(vii)(E) provides rules
poses under chapter 3 of the Internal Rev- withholding agent can reliably associate for a withholding agent that makes a pay-
ment to a qualified intermediary that as- case it would be treated as an association, tary evidence indicates that it is a bank,
sumes primary Form 1099 reporting and or so that one or more of its members broker, custodian, intermediary, or other
backup withholding responsibility under have unlimited liability, in which case it agent unless the entity provides a state-
chapter 61 and section 3406 of the Internal would be treated as a partnership. The ment that it is the beneficial owner of the
Revenue Code, but does not assume pri- determination of classification can be crit- income. For example, documentary evi-
mary withholding responsibility under ical because if the entity is a flow-through dence that indicates that the payee is a
chapter 3 of the Internal Revenue Code. entity, it is not the beneficial owner of the bank does not permit a withholding agent
The payment can be reliably associated payment and its documentary evidence to apply the portfolio interest exception to
with valid documentation if, prior to the cannot be relied upon to grant a reduced payments of interest made to the bank. In
payment, the withholding agent can asso- rate of withholding. addition, even though a foreign entity is
ciate the payment with a valid Form W- Section 1.1441–1(b)(3)(ii)(C) has been treated as a beneficial owner for purposes
8IMY and the withholding statement asso- added to permit a withholding agent to of the exceptions to withholding under the
ciated with the Form W-8IMY allocates treat an entity that has provided documen- Internal Revenue Code and regulations, it
the payment among the withholding rate tary evidence as a corporation if the clas- is not necessarily entitled to claim treaty
pool or pools for which withholding re- sification of the entity cannot be deter- benefits. Whether treaty benefits may be
sponsibility is not assumed and the portion mined from documentary evidence or by claimed by an entity depend on whether it
of payment for which the qualified inter- reference to the exempt recipient rules meets the requirements under the income
mediary assumes Form 1099 reporting under §1.6049–4(c)(1)(ii). This presump- tax treaty and section 894.
and backup withholding responsibility. tion rule will reduce burdens on withhold-
4. Changes to presumption rules
Finally, for a payment made to a quali- ing agents that are permitted to use docu-
fied intermediary that assumes both pri- mentary evidence, such as foreign Several simplifying and clarifying
mary withholding responsibility under intermediaries and flow-through entities, changes have been made to the presump-
chapter 3 of the Internal Revenue Code which would otherwise have to request tion rules in §1.1441–1(b)(3). First, the
and primary Form 1099 reporting and from payees additional information re- presumption rule applicable to pensions
backup withholding responsibility under garding U.S. tax classification. The pre- and annuities contained in
chapter 61 and section 3406 of the Inter- sumption rule is not, however, intended to §1.1441–1(b)(3)(iii)(C) has been expanded
nal Revenue Code, paragraph allow foreign entities to avoid making the to apply to individual retirement accounts
(b)(2)(vii)(F) provides that a withholding correct determination of their classifica- and individual retirement annuities. Sec-
agent can reliably associate the payment tion and to provide the correct documen- ond, §1.1441–1(b)(3)(iii)(D), which con-
with valid documentation if, prior to the tation. Thus, a foreign entity must make a tains presumption rules applicable to off-
payment, it can associate the payment determination about its classification and shore accounts, was revised to state the
with a valid Form W-8IMY. In this case, if it determines that it is an intermediary, applicable rule more clearly. In addition,
no withholding rate pool allocation infor- partnership, foreign simple trust, or for- the restriction on applying the presumption
mation is required. This same rule ap- eign grantor trust under U.S. tax law prin- rule of paragraph (b)(3)(iii)(D) to amounts
plies for payments made to a withholding ciples, it must provide an intermediary or that are not subject to withholding has
foreign partnership. flow-through withholding certificate on been moved from that paragraph to
Form W-8IMY together with the appro- §1.6049–5(d)(2). This change eliminates a
3. Presumptions of Classification as Indi-
priate information relating to its cus- conflict with §1.6049–5(d)(2), as previ-
vidual, Corporation, Partnership, etc.
tomers, partners, beneficiaries, owners, or ously drafted, which applied the paragraph
As initially drafted, §1.1441–1(b)(3)(ii) other payees. Further, a withholding (b)(3)(iii)(D) rule to amounts not subject to
provided a withholding agent with pre- agent cannot treat an entity as a corpora- withholding.
sumption rules to determine a payee’s tion if it knows, or should know, that the Section 1.1441–1(b)(3)(iv) contains a
classification (e.g., individual, corpora- entity is a flow-through entity or interme- grace period presumption rule that per-
tion, partnership) if it could not reliably diary. For example, if a particular type of mits a withholding agent to treat a payee
associate a payment with valid documen- collective investment vehicle provides as a foreign person in certain situations
tation. Paragraph (b)(3)(ii) did not, how- documentary evidence that does not es- where the withholding agent would pre-
ever, provide a presumption rule if a with- tablish that it is a corporation, partnership, sume the payee to be a U.S. person. Al-
holding agent could reliably associate a or trust, but the withholding agent knows, though the grace period rule generally
payment with documentary evidence (i.e., or has reason to know, that the investment does not permit a withholding agent to
documentation other than a withholding vehicle is classified as a partnership for apply any exceptions to withholding, it
certificate) from which it could not deter- U.S. tax purposes, it must request a part- does permit a withholding agent to apply
mine the payee’s classification. For ex- nership withholding certificate from the a reduced rate of withholding for 90 days
ample, documentary evidence may indi- entity. to a payee that provides a withholding
cate that a payee (other than an entity that An entity that is presumed to be a for- certificate that would have been valid ex-
is treated as a per se corporation under eign corporation under new paragraph cept that it was transmitted by facsimile.
§301.7701–2(b)(8)(i)) is a type of entity (b)(2)(ii)(C) cannot be treated as the ben- One commentator noted that because the
that can be organized so that all of its eficial owner entitled to a reduced rate of facsimile rule applied only to payees that
members have limited liability, in which withholding to the extent the documen- a withholding agent could, “in its discre-
tion” treat as a foreign person, the rule reported to an unknown owner on Form termediary because the nonqualified inter-
was limited to those situations where the 1042-S. Thus, a payment can no longer mediary failed to provide documentation
presumption rules would have treated the be subject to a reduced rate of withhold- or allocation information relating to the
payee as a U.S. person and the withhold- ing because it can be allocated to a group persons for whom it acted, the rule re-
ing agent was exercising its discretion to of documented payees all of whom are lieved the nonqualified intermediary from
treat the payee as foreign. Therefore, the subject to the same reduced rate of with- any obligation to report the payment to
commentator argued, the rule arguably holding. Similar changes have been made those persons. Foreign intermediaries and
could not be applied to payees that were to the presumption rules that applied to U.S. branches, however, are withholding
required to be treated as foreign persons foreign partnerships under former agents under §1.1441–7(a) and, as stated
under the presumption rules, e.g., an ex- §1.1441–5(d)(3)(ii). in Notice 99–8, it is inappropriate to re-
empt recipient with indicia of foreign sta- Paragraph (b)(3)(vi), as originally lieve them of any reporting responsibility
tus. The regulation has been modified by drafted, was in error. It stated that the unless they have provided another with-
removing the phrase “in its discretion” presumption rules that applied to foreign holding agent with all of the information
thereby permitting the facsimile rule to intermediaries also applied to U.S. that the withholding agent needs to report
apply to payees that are treated as foreign branches of foreign banks and insurance amounts paid to the appropriate recipients
payees under the presumption rules. companies that assumed withholding re- of the income. In addition, paragraph
Paragraph (b)(3)(v), as promulgated in sponsibility. The rule should have pro- (b)(6) should not have included qualified
TD 8734, provided several presumption vided that the intermediary presumption intermediaries, because a qualified inter-
rules that applied if a withholding agent rules also apply to U.S. branches of for- mediary has reporting responsibilities
did not receive from a nonqualified inter- eign banks and insurance companies that whether or not another withholding agent
mediary the withholding certificates or do not agree to be treated as U.S. persons. properly reported the payment made to the
documentary evidence of the persons on Those branches are generally treated in qualified intermediary.
whose behalf the nonqualified intermedi- the same manner as nonqualified interme- The regulation has been revised to pro-
ary acted or did not receive information diaries under chapter 3 of the Internal vide that a nonqualified intermediary or
allocating the payment to each person. Revenue Code. Therefore, paragraph U.S. branch (other than a U.S. branch
Under paragraph (b)(3)(v)(C), if the with- (b)(3)(vi) has been revised to apply only treated as a U.S. person) is not required to
holding agent could associate a payment to those branches that are not treated as withhold and report if the nonqualified in-
with a group of beneficial owners or pay- U.S. persons. Finally, paragraph termediary or U.S. branch (i) has pro-
ees, it could treat the payment as being (b)(3)(vii), which applies to payments to vided a valid nonqualified intermediary or
made in its entirety to the person in the joint payees, has been amended to clarify U.S. branch withholding certificate, (ii)
group that was subject to the highest with- the treatment of payments made to joint has provided all of the information re-
holding rate or, if the rates were equal, to accounts. quired to be included in a withholding
the payee in the group with the highest statement associated with its withholding
5. Rules for Withholding and Reporting
U.S. tax liability. If a nonqualified inter- certificate so that another withholding
of Payments by a Foreign Intermediary
mediary grouped persons subject to simi- agent can do the required reporting on
and Certain U.S. Branches
lar withholding and tax rates together and Form 1042-S or Form 1099, and (iii) does
allocated the payment to the group, the Section 1.1441–1(b)(6) sets forth the not know, and has no reason to know, that
nonqualified intermediary could achieve a withholding obligations of a foreign inter- the other withholding agent did not with-
reduced rate of withholding for its cus- mediary and certain U.S. branches. The hold the correct amount or did not report
tomers without reliably associating the regulation, as originally drafted, stated the payment correctly. A qualified inter-
payment to each of the customers that that a qualified intermediary, a nonquali- mediary’s obligations to withhold and re-
would be entitled to the payment. Trea- fied intermediary, or a U.S. branch of a port are determined in accordance with its
sury and the IRS stated in Notice 99-8 foreign bank or insurance company was qualified intermediary agreement.
that affording a reduced rate of withhold- deemed to have satisfied any obligation it
6. Definitions
ing under these circumstances was inap- had to withhold and report an amount it
propriate. Further, it was inappropriate to paid if it did not know that the correct Section 1.1441–1(c) contains the defin-
report the entire payment as if it were amount had not been withheld. The rule itions of terms used in the regulations
made to a single documented payee who did not, however, require a foreign inter- under chapter 3 of the Internal Revenue
was not entitled to receive the entire mediary or U.S. branch to report a pay- Code. The section has been significantly
amount of income. ment if it knew that the withholding agent expanded and certain definitions have
Paragraph (b)(3)(v) has been revised so from whom it received the payment had been consolidated in this section. New
that whenever a payment to a nonquali- not reported the payment to the persons on definitions, or cross-references to defini-
fied intermediary cannot be reliably asso- whose behalf the foreign intermediary or tions, have been provided for the terms
ciated with valid documentation from a U.S. branch acted as long as the correct beneficial owner, payee, intermediary,
specific payee, the payment is treated as amount was withheld. For example, if a nonqualified intermediary, qualified inter-
made to an undocumented foreign payee U.S. withholding agent withheld 30 per- mediary, withholding certificate, docu-
and is subject to 30 percent withholding. cent from a payment of an amount subject mentary evidence, documentation, payor,
Under §1.1461–1(c), such payments are to withholding made to a nonqualified in- exempt recipient, non-exempt recipient,
reportable amounts, flow-through entity, flow-through entity includes a nonwith- ing agent could treat such person as a U.S.
foreign simple trust, foreign complex holding foreign partnership, a foreign beneficial owner. A customer of a foreign
trust, foreign grantor trust, partnership, simple trust, a foreign grantor trust, or an intermediary could also be treated as a
nonwithholding foreign partnership, and entity that is fiscally transparent under U.S. beneficial owner if it provided a U.S.
withholding foreign partnership. section 894 to the extent it provides docu- branch withholding certificate that evi-
Paragraph (c)(6)(i) has been changed to mentation on behalf of its interest holders. denced its agreement to be treated as a
state specifically that the definition of A withholding foreign partnership and a U.S. person. A Form W-9 and a U.S.
beneficial owner does not apply in cases withholding foreign trust are not flow- branch withholding certificate, however,
where a reduced rate of withholding is through entities. The term flow-through do not establish beneficial ownership.
being claimed under an income tax treaty. entity has replaced the term partnership in Further, it is not necessary under the regu-
This change has been made to clarify that numerous places throughout the regula- lations to determine whether a U.S. payee
a person who is a beneficial owner of an tion. is a beneficial owner because a payment
item of income for purposes of these reg- to a U.S. payee is not subject to withhold-
7. Withholding Certificates
ulations would not necessarily benefi- ing under chapter 3 of the Internal Rev-
cially own the item of income for pur- enue Code whether or not the payee is the
a. Forms W-9
poses of an income tax treaty. beneficial owner of the income. Thus, the
Paragraph (c)(6), as originally drafted, Section 1.1441–1(d) contains rules for paragraph has been modified to provide
did not include rules to determine the ben- a payee to establish its status as a U.S. that the withholding agent may treat the
eficial owner of a payment made to a for- payee. Under paragraph (d), a payee that payee of a payment made to a foreign in-
eign trust or estate. In general, the regula- provides a Form W-9 may be treated as a termediary or a flow-through entity as a
tions retained the rules for foreign trusts U.S. payee that is not subject to withhold- U.S. payee if the payee provides a Form
and estates that existed prior to the publi- ing under section 1441. Commentators W-9 or a U.S. branch withholding certifi-
cation of TD 8734. The paragraph has have noted that under current law, there is cate that evidences the branch’s agree-
been revised to provide specific rules for no prohibition against a foreign person ment to be treated as a U.S. person.
payments to foreign trusts and estates. providing a Form W-9 to establish status
b. Intermediary and flow-through with-
Generally, the beneficial owners of a pay- as an exempt recipient. They therefore
holding certificates
ment to a foreign simple trust are the ben- suggest that the regulations should be
eficiaries of the trust. The beneficial clarified to specifically state that provid- Section 1.1441–1(e)(3)(i) provides def-
owners of a payment made to a foreign ing a Form W-9 serves as a representation initions for the terms intermediary with-
grantor trust are the owners of the trust. of U.S. status and should only be fur- holding certificate, flow-through with-
Foreign complex trusts and foreign es- nished by a U.S. person. In response to holding certificate, and U.S. branch
tates are considered to be the beneficial these comments, paragraph (d)(2) has withholding certificate. That section orig-
owners of income paid to such entities. been amended to state that furnishing a inally defined a flow-through withholding
Paragraph (c)(12) has been added to Form W-9 serves as a statement that the certificate as a Form W-8 furnished by a
clarify the term payee. It provides cross- person providing the form is a U.S. per- partnership (other than a withholding for-
references to those sections under which son. Therefore, a foreign person, includ- eign partnership) or a trust or estate. The
the payee of income is determined, and ing a U.S. branch of a foreign person, paragraph has been revised to conform to
emphasizes that foreign intermediaries should not provide a Form W-9 to a with- the definition of flow-through entity con-
and flow-through entities are generally holding agent. The instructions to Form tained in §1.1441–1(c)(23) and the new
not considered the payees of income. A W-9 will also be modified to make clear rules contained in §1.1441–5(e) regarding
qualified intermediary is, however, a that providing a Form W-9 is a declara- foreign trusts and foreign estates, dis-
payee to the extent it assumes primary tion of U.S. status. cussed in section E of this Explanation of
withholding responsibility with respect to Paragraph (d)(3) is revised to eliminate Provisions. Under paragraph (e)(3)(i), as
a payment, and a flow-through entity is a the requirement for a permanent residence revised, a flow-through withholding cer-
payee if it is receiving income that is, or is address. Permanent residence address is a tificate is defined as a withholding certifi-
treated as, effectively connected with the term defined in §1.1441–1(e)(2)(ii) and is cate on Form W-8 furnished by a non-
conduct of a U.S. trade or business. generally the address of a foreign person withholding foreign partnership, a foreign
The definition of a flow-through entity in the country in which the person is a res- simple trust, a foreign grantor trust, or a
has been moved from §1.1441–1(e)(3)(i) ident for tax purposes. The term is inap- foreign entity presenting claims on behalf
to paragraph (c)(23). The definition has plicable, and potentially misleading, as of its interest holders for a reduced rate of
also been expanded and clarified. The applied to the address a U.S. person withholding under an income tax treaty.
term flow- through entity refers to any en- should provide on Form W-9. Foreign complex trusts and foreign es-
tity which has an obligation to transmit Paragraph (d)(4), as originally drafted, tates generally provide beneficial owner
documentation to another withholding provided rules to determine whether a withholding certificates.
agent. Therefore, an entity may be a payment was made to a U.S. beneficial Section 1.1441–1(e)(3)(ii) provides the
flow-through entity whether or not the in- owner. Generally, the regulation provided requirements for a valid withholding cer-
come paid to the entity is includible in the that if a customer of a foreign intermedi- tificate provided by a qualified intermedi-
gross income of the entity’s owners. A ary provided a Form W-9, the withhold- ary. The paragraph has been modified to
reflect the procedures applicable to quali- agent is required to derive information qualified intermediary should obtain
fied intermediaries as set forth in Rev. from the withholding certificates or other waivers from non-disclosure provisions
Proc. 2000–12 (2004–4 I.R.B. 1). documentary evidence and report pay- from U.S. non-exempt recipients. To the
Section §1.1441–1(e)(3)(iii) provides ments to each specific payee on whose extent payee information is not provided,
rules relating to a nonqualified intermedi- behalf the nonqualified intermediary acts. whether for a U.S. non-exempt recipient
ary withholding certificate. Paragraph However, the regulations were silent on or any other payee, the regulation has
(e)(3)(iii) generally provided that payee how a withholding agent was to deter- been clarified to state explicitly that a
documentation provided with a nonquali- mine the status (U.S. or foreign) or classi- withholding agent must withhold under
fied intermediary withholding certificate fication (e.g., corporate, partnership, trust, the presumption rules. Further, the non-
needed to be attached to the certificate. or estate) and other information required qualified intermediary remains liable for
Similar requirements existed for flow- to report payments on Form 1042-S from any tax not withheld by a withholding
through withholding certificates and U.S. documentary evidence, particularly when agent and, unless the nonqualified inter-
branch withholding certificates. The reg- that documentary evidence was in a for- mediary itself files information returns,
ulations have been revised to require that eign language. Further, although the reg- will also be held liable for penalties im-
payee documentation be associated with, ulations require a nonqualified intermedi- posed for failure to file information re-
rather than attached to, a nonqualified in- ary to allocate payments to each payee on turns under sections 6721 and 6722.
termediary, flow-through, or U.S. branch whose behalf it acts so that a withholding Many commentators have argued that it
certificate to obviate the need for a new agent can report payments to each payee is not practical to provide information al-
withholding certificate each time payee on Form 1042-S or Form 1099, the regu- locating a payment to each payee prior to
documentation is provided to a withhold- lations provided no detail on how the allo- each payment because the customers of
ing agent. The regulations do not set forth cation information was to be provided. nonqualified intermediaries are constantly
specific requirements for associating doc- The regulations have been revised to acquiring and disposing of investments.
umentation. Any reasonable method may take these considerations into account. Several commentators made suggestions
be used to associate documentation with Under §1.1441–1(e)(3)(iv) as revised, a on how the regulations might ease com-
its intermediary withholding certificate. nonqualified intermediary must associate pliance burdens. One commentator sug-
Paragraph (e)(3)(iii), as originally with its nonqualified intermediary with- gested that no allocation information
drafted, required a certification that the holding certificate a withholding state- should be required except in the case of
withholding certificates or other appropri- ment which sets forth the information a income subject to reduced rates of with-
ate documentation attached to a nonquali- withholding agent needs to allocate a pay- holding under an income tax treaty and
fied intermediary withholding certificate ment to each payee on whose behalf the payments made to U.S. non-exempt recip-
represented all of the persons to whom the nonqualified intermediary acts and to re- ients. This suggestion was rejected. The
intermediary withholding certificate re- port the payment. Specifically, the with- IRS has provided a mechanism for aggre-
lated or that the amounts of income allo- holding statement must contain for each gate reporting of payments in the model
cable to persons for whom no documenta- payee the payee’s name, address, country qualified intermediary agreement in Rev.
tion was provided was separately stated. of residence, TIN (if any), the payee’s re- Proc. 2000–12 (2000–4 I.R.B. 387). It is
A similar requirement applied to nonwith- cipient type for Form 1042-S reporting, inappropriate to extend such treatment to
holding foreign partnership withholding the applicable rate of withholding, the nonqualified intermediaries without the
certificates in §1.1441–5(c)(3)(iii)(D). type of withholding exception applied (if safeguards contained in a qualified inter-
The requirement for this certification has any), and the name of any other interme- mediary agreement. Other commentators
been eliminated. The persons on whose diary or flow-through entity from whom suggested that a withholding agent should
behalf a nonqualified intermediary acts the payee directly receives the income. withhold the difference between 30 per-
will frequently change as persons open Additional information is required if a re- cent of a payment and the claimed re-
and close accounts with the intermediary. duced rate of withholding under an in- duced rate of withholding in escrow and
Thus, any such certification may be true come tax treaty is claimed. The withhold- release the amounts when allocation in-
at the time made, but false at a later point, ing statement may be provided in any formation is provided. This suggestion
necessitating a new withholding certifi- manner that the withholding agent and was also not accepted. Such a system
cate. The elimination of the certification nonqualified intermediary agree, includ- would leave the escrow funds out of the
is not an elimination, however, of the re- ing electronically. It must be updated as control of both the IRS and the beneficial
quirement to provide payee withholding frequently as necessary to remain accu- owners of the payments. Further, because
certificates to a withholding agent prior to rate prior to each payment. The regula- the nonqualified intermediary would have
a payment. The certification requirement tion does not require a nonqualified inter- to provide frequent allocations as soon as
has also been eliminated for nonwithhold- mediary to provide information for a possible after the time of payment to have
ing foreign partnerships. payee unless the payee is a U.S. non-ex- the escrow funds released, it appeared to
Section 1.1441–1(e)(3)(iii) permits a empt recipient. Information regarding provide little relief from the pressures in-
nonqualified intermediary to provide U.S. non-exempt recipients must be pro- herent in providing allocation information
payee documentation either in the form of vided irrespective of any local laws that prior to a payment. Other commentators
withholding certificates or in the form of prohibit disclosure of an account holder argued that a reduced rate of withholding
documentary evidence. The withholding or account information. Therefore, a non- should be provided at the time of payment
2000–23 I.R.B. 1163 June 5, 2000
with allocation information to follow after other payees on whose behalf the non- diary, flow-through entity, or U.S. branch
the close of the year with various disin- qualified intermediary is acting are not fails to pay a tax due or is not applying
centives provided for failure to furnish the entitled to a reduced rate of withholding. the rules of the regulations in good faith.
allocation information. The regulations Therefore, the nonqualified intermediary
c. Reportable amounts
generally adopt this approach. shall remain liable under section 1461 for
Paragraph (e)(3)(iv)(D) provides alter- the difference between the amount, if any, Foreign intermediaries, flow-through
native procedures that permit a nonquali- withheld by the withholding agent and the entities, and U.S. branches of foreign banks
fied intermediary to provide information amount that should have been withheld and insurance companies (other than U.S.
allocating reportable amounts to payees under the presumption rules. Any tax due branches treated as U.S. persons) are re-
(including U.S. exempt recipients) by because of an allocation failure will be as- quired to provide information with respect
January 31 of the year following the cal- sessed against the nonqualified intermedi- to reportable amounts, as defined in
endar year of payment. The alternative ary and, if necessary, collected from the §1.1441–1(e)(3)(vi). Prior to its revision,
procedures do not apply to payments assets that the nonqualified intermediary paragraph (e)(3)(vi) included in the defini-
made to U.S. non-exempt recipients. has with the withholding agent. Interest tion of reportable amounts original issue
Therefore, allocation information for and penalties may also be assessed discount or interest (OID) paid on short-
those persons must be provided prior to a against the nonqualified intermediary. In term instruments. This definition appeared
payment. Under the alternative proce- particular, paragraph (e)(3)(iv)(7) states to include interest and OID regardless of
dures, only allocation information may be that a failure to provide allocation infor- whether those amounts were paid on the re-
provided after a payment is made: all mation will be presumed to be an inten- demption of an obligation or from the sale
other information that is required to be in- tional failure to file information returns or exchange of an obligation in a transac-
cluded in a withholding statement and ap- and payee statements under sections 6721 tion other than a redemption. Under the
propriate payee documentation must be and 6722. The IRS will not, however, presumption rules, if a withholding agent
provided prior to a payment. The non- hold the withholding agent liable for any makes a payment to a foreign intermediary
qualified intermediary may have reduced tax, interest, or penalties, that are due of interest and OID on a short-term obliga-
rates of withholding apply by identifying solely to the failure of the nonqualified in- tion and it lacks documentation for such
pools of income subject to a particular termediary to provide allocation informa- amounts, it must presume that the payee is
withholding rate (withholding rate pools) tion. a U.S. non-exempt recipient and report the
and identifying the payees with the appro- The withholding statement rules and al- income on Form 1099 and backup with-
priate withholding rate pools. ternative allocation procedures have also hold on the payment. See
Various penalties apply if a nonquali- been made applicable to U.S. branches of §1.6049–5(d)(3)(iii). These rules proved to
fied intermediary fails to provide infor- certain foreign banks and insurance com- be impractical for sales of short-term oblig-
mation to allocate payments in a with- panies and flow-through entities. This ations outside the United States. Foreign
holding rate pool to a withholding agent change, together with certain other intermediaries have contended that they do
by January 31. First, the withholding changes discussed in this Explanation of not have the appropriate systems to report
agent must commence withholding on all Provisions, generally results in nonquali- gains from sales transactions on Forms
payments in accordance with the pre- fied intermediaries, U.S. branches, and 1099 or to provide the proper allocation in-
sumption rules. Therefore, 30 percent flow-through entities being treated simi- formation to U.S. payors. Moreover, treat-
withholding applies to amounts subject to larly. ing the sale or exchange of short-term OID
withholding and 31 percent backup with- Paragraph (e)(3)(iv)(E) has been added instruments as reportable interest on Form
holding applies to payments of deposit in- to permit the IRS to provide a withhold- 1099 was inconsistent with rules that treat
terest and original issue discount on origi- ing agent with a notice prohibiting the amounts paid on the sale or exchange,
nal issue discount obligations of 183 days withholding agent from applying the al- other than redemptions, of such obligations
or less. Under a cure provision, the with- ternative procedures of paragraph as gross proceeds. See §§1.6045–1(d)(3)
held amounts may be returned, and the al- (e)(3)(iv)(D) to an identified nonqualified and 31.3406(b)(2)–2. Because it is more
ternative procedures may continue to be intermediary (or to a flow-through entity appropriate to treat sales, other than re-
used, if the nonqualified intermediary or a U.S. branch of a foreign bank or for- demptions, of short-term OID instruments
provides allocation information by Febru- eign insurance company) thereby requir- as gross proceeds rather than payments of
ary 14. If the nonqualified intermediary ing allocation information prior to a pay- interest or original issue discount, the regu-
fails to provide allocation information by ment to have a reduced rate of lation has been amended to provide that re-
that date, withholding continues for the withholding apply. In addition, the IRS portable amounts do not include amounts
taxable year, and all subsequent taxable may, in appropriate circumstances issue a representing interest or OID on the sale or
years, unless the withholding agent pro- notice to a withholding agent prohibiting exchange, other than a redemption, of a
vides allocation information prior to a the withholding agent from applying a re- short-term OID instrument. Therefore, a
payment. Further, because no allocation duced rate of withholding under any cir- foreign intermediary, flow-through entity,
information has been provided, the pay- cumstances, even if allocation informa- or U.S. branch is not required to provide in-
ments are considered never to have been tion is provided prior to a payment. The formation regarding these transactions to a
reliably associated with valid documenta- IRS contemplates issuing these notices in withholding agent as part of its withhold-
tion and the foreign beneficial owners and situations where a nonqualified interme- ing statement.
June 5, 2000 1164 2000–23 I.R.B.
d. Period of validity withholding certificates or documentary such a beneficial owner. The regulation, as
evidence. originally drafted, however, contained the
Section 1.1441–1(e)(4)(ii)(A) states
requirement only in §1.1441–9. The re-
that documentary evidence (i.e., docu- e. Electronic transmission of information
quirement of a TIN has been repeated in this
mentation other than a withholding cer-
These regulations finalize the regula- paragraph for convenience. Finally, com-
tificate) remains valid until “the earlier of
tions proposed in REG–107872–97 mentators noted that there was a conflict be-
the last day of the third calendar year fol-
(1997–2 C.B. 658 [62 F.R. 53504]) relat- tween paragraph (e)(4)(vii), which did not
lowing the year in which the documentary
ing to the electronic submission of Forms require a TIN on a withholding certificate
evidence is created . . . .“ Commentators
W-8 and make them applicable beginning from a nonwithholding foreign partnership,
have stated that it is not clear if a docu-
January 1, 2000. Like the proposed regu- and §1.1441–5(c)(3)(iii)(A), which stated
ment is “created” when it comes into
lations, the final regulations apply only to that a TIN was required. It was never in-
being or when it is provided to a with-
situations where there is a direct relation- tended that a nonwithholding foreign part-
holding agent. They also stated that bas-
ship between the withholding agent or nership withholding certificate used to
ing the validity period on the date a docu-
payor and the beneficial owner or payee. transmit documentation and information re-
ment came into being would be more
The final regulations reserve on applica- lating to its partners have a TIN. Section
difficult to administer because they would
ble standards for transmitting forms 1.1441–5(c)(3)(iii)(A) has been modified
have to calculate the expiration date in
through tiers of intermediaries. Com- accordingly. TINs are required, however, if
every case rather than assuming that it
ments were solicited on this matter in the the withholding foreign partnership is pro-
was valid for three years after it had been
preamble to the proposed regulations but viding a withholding certificate on which it
received by the withholding agent. In re-
none were received. The IRS and Trea- claims an exemption from withholding be-
sponse to these comments, the rule has
sury recognize the benefits of allowing cause the income is effectively connected
been amended to permit the validity pe-
the electronic transmission of Forms W-8 with the conduct of a trade or business or
riod to be measured from the date docu-
through one or more intermediaries and when it is entitled to claim treaty benefits
mentation is provided to the withholding
continue to solicit comments regarding under section 894 on income for which a
agent.
requirements to ensure the integrity, accu- TIN is required under §1.1441–6(b)(1).
Section 1.1441–1(e)(4)(ii)(B) sets
racy, and reliability of electronically
forth the circumstances in which a Form g. Requirement to furnish certificates for
transmitted forms through tiers of inter-
W-8 has an indefinite validity period. each account
mediaries.
Paragraph (e)(4)(ii)(B)(1), as originally
Generally, each withholding agent that
drafted, provided that a Form W-8 that f. Requirement of taxpayer identifying
makes a payment to a beneficial owner
contained a TIN was valid indefinitely number
must obtain a separate withholding cer-
“if the income for which such certificate
Section 1.1441–1(e)(4)(vii) provides tificate. In addition, a withholding agent
is furnished is required to be reported”
guidance for when a TIN is required on a that is a financial institution must obtain
on Form 1042-S. Commentators noted
Form W-8. Paragraph (e)(4)(vii), as orig- withholding certificates or other appropri-
that a strict reading of this language
inally drafted, required TINs on withhold- ate documentation on an account-by-ac-
could preclude the indefinite validity of
ing certificates from all trusts or estates or count basis from its customers. Under
a Form W-8 with respect to income that
the fiduciaries thereof. A number of com- paragraph (e)(4)(ix)(A)(3) of the regula-
was not subject to reporting, even though
mentators stated that the TIN requirement tions, a withholding agent may rely on a
other income paid to the same beneficial
was burdensome and unreasonable when withholding certificate held at another
owner by the withholding agent was sub-
applied to pension trusts and large invest- branch of the same withholding agent or
ject to reporting. The regulation has
ment trusts. In addition, commentators of a person related to the withholding
been amended to provide that if there is
noted that nonwithholding foreign part- agent if there is a system in place that per-
annual reporting of at least one item of
nerships, which are treated similarly to mits a withholding agent to access data
income paid by a withholding agent to a
foreign simple trusts and foreign grantor regarding the withholding certificate and
beneficial owner, the Form W-8 remains
trusts, are not required to have a TIN. In to transmit data that affects the validity of
valid even for payments that are not sub-
response to these comments, the regula- the documentation into the system. A
ject to reporting. However, if a with-
tions have been amended by eliminating commentator noted that the regulations do
holding agent has a Form W-8 with a
the TIN requirement for foreign trusts not contain provisions, however, to let un-
TIN but does not make any payments of
other than foreign grantor trusts with 5 or related withholding agents utilize such a
an amount subject to withholding, for
fewer owners. system that they maintain in common or
example the withholding agent pays only
Paragraph (e)(4)(vii) has also been modi- that is maintained by another person.
deposit interest, the form remains valid
fied to state that a TIN is required on a with- New paragraph (e)(4)(ix)(A)(4) has been
only for 3 calendar years after the year of
holding certificate from a beneficial owner added to permit unrelated withholding
receipt. In addition, paragraph
that is claiming an exemption based on its agents to rely on such a system.
(e)(4)(ii)(B)(8) has been added to pro-
claim of tax exempt status under section
vide an indefinite validity period for a h. Special rules for brokers
501(c) or private foundation status. This
withholding certificate provided by a
does not represent a change in the require- Section 1.1441–1(e)(4)(ix)(C) pro-
foreign simple trust or foreign grantor
ments for a withholding certificate from vided that a withholding agent may rely
trust for the purposes of transmitting
2000–23 I.R.B. 1165 June 5, 2000
on the certification of a broker acting as language stating that disclosure is re- assume reporting and withholding respon-
the agent of a beneficial owner if the bro- quired “irrespective of local secrecy sibility under chapter 61 of the Internal
ker held a valid beneficial owner with- laws” has been deleted to avoid creating Revenue Code and section 3406. For ex-
holding certificate or other documentation an inconsistency between the model qual- ample, where payments are made through
for that beneficial owner. As originally ified intermediary agreement and the reg- clearing organizations, it may be imprac-
drafted, the intention of this provision ulation. tical to require a qualified intermediary to
was unclear. It also appeared to be overly The provisions in paragraph (e)(5) re- provide information regarding U.S. non-
broad because it would have permitted a garding the terms of the withholding exempt recipients to a U.S. withholding
foreign broker to retain beneficial owner agreement a qualified intermediary must agent. The language that generally lim-
documentation and not transmit the docu- enter with the IRS have also been ited the ability to assume reporting and
mentation to a U.S. withholding agent. changed to more generally conform with withholding responsibility under chapter
Paragraph (e)(4)(ix)(C) has been re- the qualified intermediary agreement as 61 of the Internal Revenue Code and sec-
drafted to clarify, and appropriately limit, set forth in Rev. Proc. 2000–12. The reg- tion 3406 has been eliminated. Whether a
its application. As redrafted, it applies ulation clarifies the consequences of a qualified intermediary may assume such
only to a U.S. broker. It permits such a qualified intermediary’s assumption of responsibility is left to the terms of the
broker that is acting as an introducing or primary withholding responsibility. Sec- qualified intermediary agreement. See
corresponding broker to provide a clear- tion 1.1441–1(e)(5)(iv), as originally section 3 of the model qualified interme-
ing broker with a certification that it holds drafted, stated that a withholding agent diary agreement in Rev. Proc. 2000–12.
a valid withholding certificate or other ap- making a payment to a qualified interme- Section 1.1441–1(e)(5)(v), as origi-
propriate documentation. Without this diary was required to presume full with- nally drafted, required a qualified inter-
rule, an introducing or corresponding bro- holding responsibility for that payment mediary to associate a payment with one
ker would have to obtain multiple Forms unless the qualified intermediary assumed of three categories of assets: (i) assets as-
W-8 and provide them to each clearing primary withholding responsibility. The sociated with documented foreign per-
broker with whom the introducing or cor- regulation was potentially misleading be- sons, (ii) assets associated with docu-
responding broker executes transactions. cause it could have been interpreted to mented U.S. payees, and (iii) assets
In addition, paragraph (e)(4)(ix)(C) has mean that if a qualified intermediary did associated with undocumented payees.
been amended to apply only to readily not assume primary withholding responsi- These three asset categories were subdi-
tradeable instruments, as provided in bility, only the U.S. withholding agent vided into classes of assets based on with-
§31.3406(h)–3(d), on which it is mod- was responsible for withholding. Rev. holding rates and reporting requirements.
eled. An example has been added to illus- Proc. 2000–12 makes clear, however, that The asset categories did not provide the
trate the paragraph. qualified intermediaries are required to needed flexibility sought by qualified in-
withhold in certain circumstances even termediaries. For example, information
8. Qualified Intermediary Withholding
though they have not assumed primary regarding U.S. exempt recipient payees,
Certificates
withholding responsibility. The rule that who are not subject to withholding under
Section 1.1441–1(e)(5) provides rules was initially in paragraph (e)(5)(iv) was section 1441, could not be combined with
regarding qualified intermediaries. The intended to relieve a withholding agent information regarding foreign beneficial
rules have been redrafted to more closely making a payment to a qualified interme- owner payees subject to a zero rate of
conform with the model qualified inter- diary that assumed primary withholding withholding. The model qualified inter-
mediary agreement published as part of responsibility from the obligation to with- mediary agreement, as published in Rev.
Rev. Proc. 2000–12. The regulation, as hold, not to relieve the qualified interme- Proc. 2000–12, substituted the withhold-
originally drafted, contained a require- diary of any withholding requirement. ing rate pool concept for asset classes and
ment that a qualified intermediary dis- The paragraph has been amended to re- this concept has been reflected in the re-
close U.S. non-exempt recipients “irre- flect this intent. vised regulation. A withholding rate pool
spective of local secrecy laws.” The Paragraph (e)(5)(iv) also stated that a is a payment of a single type of income,
model qualified intermediary agreement qualified intermediary generally would determined in accordance with the cate-
has specific provisions contained in sec- not be permitted to assume withholding gories of income reported on Form 1042-
tion 6.04 of the agreement, as well as and reporting responsibility under section S or Form 1099, as applicable, that is sub-
other sections, that govern the treatment 3406 and chapter 61 of the Internal Rev- ject to a single rate of withholding.
of U.S. persons whenever foreign law, enue Code on a payment made to a U.S. Finally, the regulations permit, in ac-
whether or not a “secrecy” provision, may person unless the qualified intermediary cordance with Rev. Proc. 2000–12, a
preclude disclosure of a U.S. non-exempt was a foreign branch of a U.S. person or a qualified intermediary and a U.S. with-
recipient. Very generally, those provi- foreign person that had a branch in the holding agent to use a single withholding
sions require a qualified intermediary to United States capable of performing such rate pool for U.S. non-exempt recipients
disinvest a U.S. non-exempt recipient reporting and withholding. In developing for whom no backup withholding is re-
who does not waive its local law non-dis- the model qualified intermediary agree- quired and a single withholding rate pool
closure privileges and to collect backup ment, it became apparent that it was desir- for U.S. non-exempt recipients that are
withholding on income and sales pro- able to permit certain qualified intermedi- subject to backup withholding provided
ceeds paid to such person. Therefore, the aries that did not meet those criteria to that the qualified intermediary agreement
June 5, 2000 1166 2000–23 I.R.B.
permits such an arrangement and suffi- rule that no withholding was required on sible for paying the owner or crediting its
cient information is provided to the with- accrued interest and replaced it with a rule account. The notice would have pre-
holding agent no later than January 15 that conformed with the rule applicable to vented intermediaries other than the inter-
following the year of payment that allo- OID on the theory that, from a withholding mediary with the direct account relation-
cates the reportable payments to each perspective, the two payments were equiv- ship with the beneficial owner from
U.S. non-exempt recipient account alent. The withholding rules applicable to having to obtain a Form W-8 by stating
holder. Failure to provide the allocation OID and accrued interest would have re- that any withholding agent that effected a
information timely may result in penalties quired withholding whenever a payment transaction for a broker was generally not
imposed on the qualified intermediary of interest or OID was not subject to an ex- required to obtain a Form W-8. A broker
and the termination of its qualified inter- ception, such as the portfolio interest ex- was defined by reference to §1.6045–1(a)
mediary agreement. Unlike qualified in- ception, or a payment of OID or accrued and generally included a person that
termediaries, nonqualified intermediaries interest was presumed made to a foreign makes sales of securities for customers in
and flow-through entities are not permit- person and the withholding agent could the ordinary course of that person’s trade
ted to pool payments to U.S. non-exempt not reliably associate the payment with or business. In addition, the notice pro-
recipients. Therefore, information suffi- beneficial owner documentation. Such posed to eliminate the rule that presumed
cient to allocate the payment to each U.S. payments were subject to reporting on knowledge of the amount of OID or inter-
non-exempt recipient must be provided Form 1042-S whether or not withholding est accrued between interest payment
before a payment is made or the withhold- was imposed. dates merely because there was a direct
ing agent must treat the payment as made In Notice 99–8, Treasury and the IRS an- account relationship with the beneficial
to a U.S. payee that has failed to provide a nounced that they would make modifica- owner of an obligation.
TIN and impose backup withholding. tions to the OID and accrued interest rules. Commentators criticized the Notice
The modifications were intended to address 99–8 proposal. They argued that the mul-
B. Changes to §1.1441–2 criticisms by commentators that the OID tiple broker exception did not always ac-
1. Amounts Subject to Withholding and accrued interest rules were unworkable. complish its intended purpose because
Commentators argued that debt obligations certain participants in a transaction for
Section 1.1441–2(a) has been amended are often sold in delivery-versus-payment whom a Form W-8 should not be required
to exclude from the definition of amount transactions which settle quickly and often could not meet the definition of a broker,
subject to withholding interest paid as involve multiple intermediaries. The re- particularly since that definition does not
part of the purchase price of an obligation quirement to withhold in absence of a bene- include non-U.S. payors that effect sales
sold between interest payment dates (ac- ficial owner withholding certificate would of obligations at an office outside the
crued interest) and an amount represent- necessarily inhibit the speed with which United States and certain other persons,
ing original issue discount (OID) paid as sales transactions are normally conducted. such as investment advisors, who might
part of the purchase price of an obligation In addition, they argued that a withholding participate in the transaction but did not
sold in a transaction other than the re- agent does not necessarily know the amount stand ready to effect sales of securities for
demption of such obligation. The exclu- of OID or accrued interest merely because it others. In addition, the Notice did not
sions do not apply, however, if the sale of has a direct account relationship with the ac- solve the problem faced by custodians.
an obligation is part of a plan the principal count holder. In addition, custodians stated In light of these criticisms, Treasury
purpose of which is to avoid tax and the that sales were often accounted for in sys- and the IRS have decided to eliminate the
withholding agent has actual knowledge tems different from those used to report in- requirement for withholding, and report-
or reason to know of such plan. terest and OID and therefore the reporting ing, on accrued interest and an amount
The exclusion of accrued interest and requirement of the regulations would re- representing OID paid on the sale of an
amounts representing OID paid as part of quire significant systems modifications. OID obligation, other than in a redemp-
the purchase price of an obligation sold in They argued that these modifications were tion. This change has been effected by
a transaction other than a redemption were not justified because nearly all accrued in- eliminating those items from the defini-
made in response to comments received on terest and OID would be from instruments tion of amounts subject to withholding.
§1.1441–2(b)(3) of the final regulations that could qualify for the portfolio interest Withholding is required, however, if the
and proposed regulation §1.1441–3(b) exception. withholding agent knows or has reason to
(REG–114000, [1997–2 C.B. 661, 62 F.R. Notice 99–8 proposed rules that were know that a sale is part of a plan to avoid
53503]). Section 1.1441–2(b)(3), as origi- intended to require only the withholding tax. For example, if a holder of a debt
nally drafted, required withholding on agent that had a direct account relation- obligation that pays interest that does not
OID to the extent the withholding agent ship with a beneficial owner to obtain a qualify for the portfolio interest exception
had actual knowledge of the amount of the Form W-8. Thus, the notice proposed a sells the instrument immediately prior to
payment that was taxable to the beneficial rule that would require a withholding an interest payment date and reacquires
owner. A withholding agent was treated as agent to obtain a withholding certificate the same type of security after the interest
having actual knowledge if it had a direct only if it received the proceeds from a payment date and the withholding agent
account relationship with the holder of the sale against delivery of the debt obliga- knows, or has reason to know, of this pat-
obligation. Proposed regulation tion or, in the case of a retirement, the tern of sales, withholding and reporting of
§1.1441–3(b) would have eliminated the withholding agent was the person respon- accrued interest is required.
2000–23 I.R.B. 1167 June 5, 2000
Paragraph (a) has also been amended to of amounts subject to withholding and has reason to know, that an OID obliga-
state that insurance premiums paid on a therefore are reportable on Form 1042-S tion is sold with the principal purpose of
contract subject to the section 4371 excise under section 1461 even though not tax- avoiding tax. Therefore, the rule as origi-
tax are not amounts subject to withholding. able under section 871 or 881. nally contained in paragraph (b)(3)(iii) has
As previously drafted, these amounts were been removed. New paragraph (b)(3)(iii)
3. Original Issue Discount
excluded from the definition of fixed or contains the transition rule formerly found
determinable annual or periodical (FDAP) Section 1.1441–2(b)(3) provides rules in paragraph (b)(3)(iv). The rule has been
income under §1.1441–1(b)(2)(ii) and governing the treatment of original issue modified, however. As previously drafted,
therefore were not included in amounts discount. Paragraph (b)(3)(i) describes the rule appeared to eliminate any with-
subject to withholding. Excluding insur- the amount of OID subject to taxation in holding responsibility by the issuer of an
ance premiums from FDAP is inappropri- the hands of the owner of an OID obliga- OID obligation or its agent, as formerly
ate, however. Insurance premiums fall tion. Minor changes have been made to contained in Rev. Rul. 68–333 (1968–1
within the definition of FDAP provided in this paragraph to clarify the amount of C.B. 390). As revised, issuers and their
paragraph (b)(1). Therefore, the better OID that is taxable to the beneficial agents are subject to any applicable with-
means for exempting premiums subject to owner of the obligation. holding requirements on obligations is-
the section 4371 excise tax from withhold- Paragraph (b)(3)(ii) describes the sued before or after December 31, 2000.
ing is to exclude them from the definition amount of OID subject to withholding. The rule now states, however, that with-
of amounts subject to withholding. To conform paragraph (b)(3)(ii) to the holding on OID obligations is only re-
changes discussed in section B. 1 of this quired by persons other than issuers or
2. Fixed or Determinable Annual or Peri-
Explanation of Provisions, the paragraph their agents with respect to obligations is-
odical Income
has been revised to require a withholding sued after December 31, 2000.
Section 1.1441–2(b)(1)(i) provides the agent to withhold on OID only upon the
C. Changes to §1.1441–3
definition of fixed or determinable an- redemption of the original issue discount
nual or periodical (FDAP) income. Such obligation or in any case where the with- 1. Accrued Interest
income, if from sources within the United holding agent knows that a sale, other Section 1.1441–3 provides rules to de-
States, is generally an amount subject to than a redemption, is being made with the termine the amount subject to withhold-
withholding and therefore also subject to principal purpose of avoiding tax on the ing. In accordance with the change made
reporting on Form 1042-S if paid to a for- obligation. A withholding agent is re- in §1.1441–2(a)(5), which eliminates in-
eign payee. Paragraph (b)(1)(i) states quired to withhold on the actual amount terest accrued between sales dates from
that amounts that are excluded from of OID includible in the gross income of amounts subject to withholding,
gross income under any provision of law the owner of an obligation if it has actual §1.1441–3(b)(2) has been modified to
“without regard to the identity of the knowledge of such amount, or, if actual eliminate the requirement that a withhold-
holder” are not FDAP income. This pro- knowledge is lacking, on the entire ing agent that pays accrued interest must
vision was, in part, intended to exclude amount of OID determined under Publi- report that interest on Form 1042-S.
from FDAP qualified scholarship income cation 1212, “List of Original Issue Dis-
under section 117. The language, how- count Instruments” as if the obligation 2. Coordination With REIT Withholding
ever, failed to accomplish its intended had been held since issuance. As originally drafted, §1.1441–3(c)-
purpose because the section 117 exclu- Paragraph (b)(3)(iii) contained a rule (4)(i)(C) required withholding under sec-
sion is dependent on the identity of the that required a withholding agent to with- tion 1441 on the portion of a Real Estate
person receiving the income—the recipi- hold on interest and OID paid on an OID Investment Trust (REIT) distribution that
ent must be a candidate for a degree at a obligation even though it did not know the is not designated as a capital gain divi-
certain type of educational organization. amount of OID subject to taxation if the dend or return of basis. Therefore,
The paragraph has been revised to state withholding agent could not reliably asso- §1.1441–3(c)(4)(i)(C) inadvertently re-
that amounts that are excluded from ciate the payment with valid documenta- quired withholding under section 1441 on
gross income without regard to the U.S. tion. The rule was designed to eliminate a distribution in excess of basis, which
or foreign status of the owner of the in- an exception to withholding that applied if under section 301(c)(3) is capital gain
come is not FDAP. In addition, the para- a withholding agent did not have actual from the sale or exchange of stock and,
graph has been changed to clarify that knowledge of the amount of OID that ac- therefore, not subject to withholding
amounts excluded from gross income crued to the holder of the obligation up to under section 1441. To correct this error,
under sections 892 (income of foreign the date of sale. If the exception were not paragraph (c)(4)(i)(C) has been amended
governments) and 115 (income of a U.S. eliminated, it was feared that the docu- to provide that withholding under section
possession) are not excluded from the de- mentation requirement for portfolio inter- 1441 is not required on a distribution in
finition of FDAP since the foreign status est could be avoided by selling OID oblig- excess of basis. A distribution in excess
of the owner of the income is determina- ations through intermediaries that had no of basis is, however, subject to withhold-
tive of whether the exclusions provided knowledge of the accrued amount of OID. ing under section 1445 unless the interest
by those sections apply. Amounts subject The rule is no longer necessary. Under in the REIT is not a U.S. real property in-
to the section 892 and section 115 exclu- new §1.1441–2(a)(6), withholding is re- terest (e.g., an interest in a domestically
sions are, therefore, included in the scope quired if a withholding agent knows, or controlled REIT under section 897(h)(2)).
June 5, 2000 1168 2000–23 I.R.B.
D. Changes to §1441–4 1.1441–4(a)(3)(ii) has been amended (in 1. Rules Applicable to U.S. Partnerships,
the table or corrections at the end of the Trusts, and Estates
1. Notional Principal Contracts regulation) to allow any payee, not just a
Section 1.1441–5(b), as originally
financial institution, to provide in a mas-
Section 1.1441–4(a)(3)(i) treats a pay- drafted, provided rules regarding pay-
ter agreement or confirmation statement a
ment of income on a notional principal ments to U.S. partnerships. The rules of
representation that the payee is a U.S. per-
contract made to a foreign person as in- paragraph (b) have been expanded to
son or a non-U.S. branch of a foreign per-
come effectively connected with a trade cover payments to U.S. trusts and U.S. es-
son.
or business within the United States un- tates as well. Under revised paragraph
2. Withholding on Payments From Indi-
less the withholding agent can reliably as- (b)(1), a payment to a U.S. partnership,
vidual Retirement Accounts
sociate a payment with a withholding cer- U.S. trust, or U.S. estate is treated as a
tificate that certifies that the payment is Section 1.1441–4(b)(1)(ii), as origi- payment to a U.S. person and, therefore,
not effectively connected. This rule is nally drafted, provided that section 1441 not subject to withholding under chapter 3
overly broad because it presumes that any applied to distributions from any trust de- of the Internal Revenue Code. United
notional principal contract payment made scribed in section 401(a) made to a non- States partnerships, U.S. trusts, and U.S.
to a foreign person is effectively con- resident alien individual and to certain estates are required, however, to withhold
nected even if the foreign person has no other retirement distributions. The result on payments they make to foreign part-
nexus to the United States. As a result, of this rule is that section 1441, rather ners, foreign beneficiaries, or, in the case
§1.1441–4(a)(3)(i) has been amended to than section 3405, applies to retirement of grantor trusts, foreign owners. Fidu-
limit the presumption that notional princi- distributions. This rule considerably ciaries of U.S. trusts and U.S. estates
pal contract income is effectively con- eases the burdens that would otherwise should take particular note that it is the
nected to a U.S. trade or business to those apply to retirement distributions. trust or the estate that is the withholding
situations in which the income is either Commentators noted that the regula- agent, and Forms 1042 and Forms 1042-S
paid to a U.S. qualified business unit of a tions did not provide the same rule for must be filed using the name and TIN of
foreign person or the withholding agent distributions from individual retirement the U.S. trust or U.S. estate, not the name
otherwise knows, or has reason to know, accounts and annuities described in sec- and TIN of the fiduciary.
that the income is effectively connected tion 408. The regulation has been Under paragraph (b)(2), a U.S. partner-
with the conduct of a U.S. trade or busi- amended so that those distributions will ship is a withholding agent for a foreign
ness. It is not expected that a withholding be subject to section 1441 as well. partner’s distributable share of partner-
agent would be considered to have reason ship income that consists of amounts sub-
E. Changes to §1441–5
to know that a notional principal contract ject to withholding. A U.S. simple trust is
payment is effectively connected with the Section 1.1441–5 of the regulations a withholding agent for the distributable
conduct of a trade or business within the concerns payments made to partnerships, net income (DNI) includible in the gross
United States solely because the foreign trusts, and estates. As originally drafted, income of a foreign beneficiary to the ex-
person receiving the payment has a quali- the regulations contained extensive rules tent the DNI consists of an amount sub-
fied business unit in the United States to for payments made to U.S. and foreign ject to withholding. Similarly, a U.S.
which a portion of the payment may be al- partnerships, but applied the rules of the complex trust is a withholding agent on
located pursuant to proposed regulation regulations prior to the publication of TD DNI includible in the gross income of a
§1.863–3(h) (the global dealing regula- 8734 to trusts and estates. The trust and foreign beneficiary to the extent the DNI
tions). estate rules, however, were inconsistent consists of an amount subject to withhold-
Section 1.1441–4(a)(3)(ii), as origi- with the rules contained in TD 8734 and ing that is, or is required to be, distributed
nally drafted, stated that a payment to a fi- were also incomplete. For example, currently. U.S. simple trusts and complex
nancial institution was not treated as ef- §1.1441–1(c)(6)(ii)(B) required a with- trusts are permitted to make reasonable
fectively connected with the conduct of a holding agent to determine the beneficial estimates of the portion of a distribution
trade or business within the United States owner of income paid to a trust or estate that constitute DNI consisting of amounts
if the financial institution provided a rep- under §1.1441–3(f) and (g) of the regula- subject to withholding. A U.S. grantor
resentation in a master agreement that tions in effect prior to January 1, 2001. trust must withhold on any income in-
governs transactions in notional principal That section, however, did not determine cludible in the taxable income of a foreign
contracts between the parties (for exam- the beneficial owner of income paid to a person that is treated as an owner to the
ple, an International Swaps and Deriva- trust. In addition, §1.1441–1(e)(3)(i) extent the amount includible consists of
tives Association (ISDA) Agreement) or stated that a trust or estate was to use a an amount subject to withholding.
in the confirmation on the particular no- flow–through withholding certificate fur- In the case of a partnership, if amounts
tional principal contract transaction that nished under §1.1441–5(e), but that sec- subject to withholding are not actually
the counter party was a U.S. person or a tion was reserved in the regulation. The distributed, the U.S. partnership must
non-U.S. branch of a foreign person. regulation has been revised to provide withhold at the earlier of the time the
Commentators requested that the mas- complete trust and estate rules. Except as statement required under section 6031(b)
ter agreement and confirmation excep- noted below, the partnership rules remain (Form K-1) is mailed or otherwise pro-
tions be expanded to apply to persons generally unchanged; however, several vided to the partner or the due date for
other than financial institutions. Section changes were made to clarify those rules. furnishing the statement. In addition, if
2000–23 I.R.B. 1169 June 5, 2000
an amount of income is required to be, but hold on payments and therefore must file a with valid documentation. The rule in
is not actually distributed to the foreign Form 1042, which is an income tax return, paragraph (d)(3)(ii), which permitted a re-
beneficiary of a U.S. simple or complex and not merely report the amounts on duced rate of withholding to be applied to
trust, the U.S. trust must withhold at the Form 1065. Also, because the IRS a payment to a nonwithholding foreign
time the income is required to be reported matches amounts reported on Forms partnership if the payment could be asso-
on Form 1042-S. A U.S. grantor trust is 1042-S with amounts reported on Form ciated with a group of documented payees
required to withhold at the time the trust 1042, it was incorrect to substitute Forms all of whom were subject to the same
receives the payment or the payment is K-1 for Forms 1042-S. Therefore, the reg- withholding rate has been removed for the
credited to the trust’s account. ulation has been amended to require a reasons stated in connection with the
withholding foreign partnership to file a changes made to §1.1441–1(b)(3)(v)(C).
2. Payments Made to Foreign Partner-
tax return on Form 1042 and file informa- See section A. 4, of this Explanation of
ships
tion returns on Form 1042-S for amounts Provisions. Under the revised rule, any
Section 1.1441–5(c) provides rules for subject to withholding paid to, or included payment of an amount subject to with-
payments made to foreign partnerships. in the distributive share of, its foreign holding paid to a foreign partnership that
Generally, the payees of a payment made partners. A withholding foreign partner- has not been allocated to a specific payee
to a nonwithholding foreign partnership ship may also be required to file a return is presumed made to an undocumented
are the partners of the partnership. Para- on Form 1065 and make the statements on foreign payee and subject to 30 percent
graph (c)(1)(ii), however, contains rules Form K-1 under section 6031 for its part- withholding.
on when the partnership itself will be re- ners. However, the IRS may agree in the
3. Payments to Foreign Trusts and Es-
garded as the payee of a payment. That withholding agreement to modify infor-
tates
paragraph, as originally drafted, permitted mation reporting requirements to avoid
a partnership to be treated as the payee of double reporting. A rule that was formerly Treasury Decision 8734 did not include
income if the partnership provided a with- contained in §1.1441–7(a), which permit- new provisions regarding withholding on
holding certificate stating that the pay- ted a withholding foreign partnership to payments by and to foreign trusts and for-
ment was effectively connected with the arrange with a withholding agent to have eign estates. The IRS provided interim
conduct of the partnership’s U.S. trade or the withholding agent impose withholding guidance in the instructions to Forms W-
business. A commentator noted that the on a payment has been removed because a 8BEN and W-8IMY so that withholding
paragraph did not treat the partnership as withholding foreign partnership is re- agents could replace documentation that
the payee, however, to the extent the in- quired to assume withholding responsibil- was expiring under the withholding regu-
come was treated as being effectively ity. lations with documentation that would
connected under the presumption rules in Section 1.1441–5(c)(3) provides rules meet the requirements of TD 8734. In ad-
the absence of a withholding certificate. relating to nonwithholding foreign part- dition, Notice 99-8 announced that Trea-
The paragraph has been revised to treat nerships. Paragraph (c)(3)(iv) has been sury and the IRS intended to issue regula-
the partnership as the payee if the income revised to require a nonwithholding for- tions that would clarify the withholding
is presumed to be effectively connected in eign partnership to provide a withholding obligations of income paid to trusts and
the absence of documentation. For exam- statement in the same manner as a non- estates. Under the instructions and the
ple, if a nonwithholding foreign partner- qualified intermediary. In addition, para- notice, a payment to a foreign fiduciary
ship is receiving income on a notional graph (c)(3)(v) has been revised to con- was treated as a payment to a foreign in-
principal contract and the income is form with revised §1.1441–1(b)(6), termediary and, therefore, the foreign
treated as effectively connected income discussed in section A. 5 of this Explana- fiduciary was required to furnish an inter-
under the presumption rule of tion of Provisions. Thus, the regulation mediary withholding certificate on Form
§1.1441–4(b)(3)(i), the nonwithholding has been changed to make clear that a W-8IMY. If the trust was a trust de-
foreign partnership, and not the partners, nonwithholding foreign partnership has scribed in section 651(a) or a trust, all or a
is treated as the payee. In addition, the an obligation to report payments even portion of which was treated as owned by
example in paragraph (c)(1)(iv) has been though another withholding agent has the grantor or other persons under sec-
replaced with several less complex exam- withheld the appropriate amount if the tions 671 through 679, the fiduciary was
ples that better illustrate the operation of nonwithholding partnership has failed to required to attach Forms W-8BEN, Forms
the rules of paragraph (c)(1). provide adequate information for a with- W-8EXP, or Forms W-9, from the benefi-
Section 1.1441–5(c)(2) contains rules holding agent to report the payments ap- ciaries or owners of the trust. In all other
relating to withholding foreign partner- propriately on Form 1042-S and Form cases, the foreign trustee or executor was
ships. Section 1.1441–5(c)(2)(ii)(A), to- 1099 or the nonwithholding foreign part- required to attach a Form W-8BEN, Form
gether with §1.1461–1(c)(2)(ii)(A), re- nership knows, or has reason to know, W-8EXP, or if required, Form W-9, com-
quired a withholding foreign partnership that the payments were not correctly re- pleted on behalf of the trust or estate.
to file a Form 1065 and Forms K-1 and ported. Several commentators objected to the
exempted the partnership from having to Paragraph (d) of §1.1441–5 provides requirement that a foreign fiduciary of a
file Form 1042 and Forms 1042-S. The presumption rules that apply to determine complex trust or a foreign estate provide
rule was incorrect. A withholding foreign the status of a partnership and its partners an intermediary withholding certificate.
partnership is generally required to with- if a payment cannot be reliably associated They requested that a withholding certifi-
June 5, 2000 1170 2000–23 I.R.B.
cate be required only from the trust or es- cate a withholding statement identical to would not implement the procedures for
tate itself. Requiring documentation from that provided by foreign partnerships and obtaining certified TINs until January 1,
a fiduciary also was not consistent with nonqualified intermediaries. The IRS 2002.
the rules under chapter 61, which gener- may permit a foreign trust to function as a The certified TIN procedures have
ally require a Form W-9 from a trust or withholding foreign trust. A withholding been removed. New paragraph (b)(3),
estate and ignore the status of the fidu- foreign trust would generally be subject to however, provides authority for the IRS to
ciary. Finally, Notice 99–8 did not pro- the same provisions as a withholding for- issue guidance on requirements that a
vide any presumption rules for payments eign partnership. treaty claimant must follow to establish
to foreign trusts and foreign estates. Section 1.1441–1(e)(6) provides pre- residency and compliance with other re-
The regulations now contain a compre- sumption rules for payments of amounts quirements imposed by treaties and the
hensive set of rules for payments made to subject to withholding to foreign trusts Internal Revenue Code, such as limitation
foreign trusts and foreign estates in and estates. Whether a payee is a trust or on benefits provisions and the require-
§1.1441–5(e). A foreign complex trust estate is determined under the general ment that the claimant derive the income
(as defined in paragraph (c)(25)) and a presumption rules of §1.1441–1(b)(3)(ii). under section 894. Treasury and the IRS
foreign estate are generally considered A trust or estate is presumed to be U.S. fully intend to implement such proce-
beneficial owners of income under unless there are indicia of foreign status. dures. However, Treasury and the IRS
§1.1441–1(c)(6). Therefore, under If a payee is presumed to be a foreign determined that it was appropriate to
§1.1441–5(e)(2), a foreign complex trust trust, but its status as a complex, simple, delay implementation of the requirement
or a foreign estate may provide a benefi- or grantor trust is unknown, it will be while withholding agents and beneficial
cial owner withholding certificate or other treated as a complex trust. If the trust is owners implement other requirements
beneficial owner documentation for pay- known to be a foreign simple or grantor under the regulation. In addition, the IRS
ments for which a reduced rate of with- trust, its beneficiaries or owners will gen- will examine ways to more effectively
holding is not claimed under a treaty. erally be presumed to be foreign with re- implement the certified TIN requirement.
Whether such a trust or estate can provide spect to payments of amounts subject to Paragraphs (c)(3) and (4) prescribe the
a beneficial owner withholding certificate withholding. types of documentation that can be used
to claim a reduced rate of withholding to claim treaty benefits for income from
F. Changes to §1441–6
under an income tax treaty will depend on marketable instruments paid outside the
whether the trust or estate can claim to be Section 1.1441–6 contains the provi- United States to offshore accounts. For-
a resident of a treaty country, whether it sions for claiming a reduced rate of with- mer paragraph (b)(2) stated that docu-
derives the income under section 894, and holding under an income tax treaty. Sec- mentary evidence could be used, in cer-
the regulations thereunder, and whether tion 1.1441–6(b) has been revised to tain cases, to claim treaty benefits if the
treaty benefits are denied under a limita- clarify the requirements for claiming documentary evidence was accompanied
tion on benefits provision. treaty benefits. Specifically, the provi- by the certifications required in paragraph
Foreign simple trusts and foreign sions of paragraph (b)(2), as originally (c)(5). Paragraph (c)(5) contained a re-
grantor trusts are not payees or beneficial drafted, which related to use of documen- quirement that a beneficial owner apply-
owners under §1.1441–5(e)(3), unless the tary evidence, have been moved to newly ing for a certified TIN provide the IRS
payment is an amount that is treated as ef- revised paragraphs (c)(1) and (2) so that with certifications, made in an affidavit
fectively connected with the conduct of a all the documentary evidence rules appear signed under penalties of perjury, that the
U.S. trade or business. The payees of in the same paragraph. Paragraph (b)(2) beneficial owner was in compliance with
payments to a foreign simple trust or a now contains the provisions relating to any applicable limitation on benefits pro-
foreign grantor trust are generally the treaty claims made by interest holders of visions contained in a treaty and that the
beneficiaries or owners of the trust. This fiscally transparent entities. Clarifying beneficial owner derives the income for
is similar to the treatment accorded to changes to those rules, which appeared in which treaty benefits will be claimed. It
payments to foreign partnerships, where former paragraph (b)(4), have also been was unclear from the regulations, as
the partners, rather than the partnership, made. drafted, whether the certifications that
are generally considered the payees of in- Section 1.1441–6(c)(1) and (2), as orig- were provided to withholding agents were
come paid to the partnership. Therefore, inally drafted, required a foreign person required to be made in affidavits signed
the documentation rules applicable to for- to establish residency by obtaining a certi- under penalties of perjury or whether the
eign simple trusts and foreign grantor fied taxpayer identification number (certi- affidavit requirement only applied to ob-
trusts generally accord with those applica- fied TIN) from the IRS. Those provisions taining certified TINs. Although Treasury
ble to foreign partnerships. The trust it- required a person claiming a reduced rate and the IRS believe it is important that
self provides a flow-through withholding of withholding to submit either a certifi- statements regarding compliance with
certificate with which it associates the cate of residency or certain other pre- limitation on benefits provisions and sec-
withholding certificates or, if permitted, scribed documentation, plus affidavits re- tion 894 be given in conjunction with
documentary evidence of its beneficiaries garding compliance with the limitation on documentary evidence provided to a with-
or owners. The foreign simple trust or benefits provisions of a treaty and with holding agent, a penalties of perjury re-
foreign grantor trust must also associate the regulations under section 894. In No- quirement would impose a burden that
with its flow-through withholding certifi- tice 99–8, the IRS announced that it undermines the use of documentary evi-
2000–23 I.R.B. 1171 June 5, 2000
dence. One reason for permitting use of cluding U.S. branches of foreign persons. Form W-8 will be regarded as unreliable
documentary evidence is to eliminate, as to establish a beneficial owner’s claim of
much as possible, the need for a penalties 2. Reason to Know treaty benefits and applicable cure provi-
of perjury statement. Thus, the affidavit Section 1.1441–7(b)(2)(ii), as origi- sions. Paragraph (b)(7) provides general
and penalties of perjury requirements nally drafted, provided the exclusive rules rules relating to documentary evidence.
have been eliminated with respect to doc- for determining when a withholding agent Paragraphs (b)(8) and (b)(9) contain rules
umentary evidence provided to a with- that is a financial institution making a regarding documentary evidence that is
holding agent. The IRS may, however, payment of income from marketable se- unreliable to establish a beneficial
require an affidavit in connection with the curities has reason to know that documen- owner’s status as a foreign person or a
certified TIN procedures that it will estab- tation provided to the withholding agent resident of a treaty country, respectively.
lish. The affidavit requirement in para- is unreliable. Commentators noted that Paragraph (b)(10) provides rules re-
graph (c)(4), stating that the information the language of paragraph (b)(2)(ii) was garding due diligence standards for docu-
on documentary evidence is true and inconsistent about whether the rules ap- mentation from payees received through
complete, has also been eliminated. plied only to withholding certificates (i.e., nonqualified intermediaries, flow-through
Forms W-8) or also to documentary evi- entities, and certain U.S. branches of for-
G. Changes to §1.1441–7 eign banks and insurance companies.
dence. In addition, many commentators
Section 1.1441–7 defines the term noted that the rules could not be reason- Under paragraph (b)(10), a withholding
withholding agent and provides various ably applied to documentary evidence re- agent is required to review the informa-
rules relating to the obligations of with- ceived through tiers of intermediaries, be- tion contained in a withholding statement
holding agents, including certain due dili- cause that documentation would often be provided by those entities and may not
gence requirements regarding the docu- in a foreign language. They further ar- rely on the information contained in the
mentation they receive from payees. gued that the rules relating to P.O. box ad- withholding statement to the extent it
dresses were unreasonable because in does not support the claims made for the
1. Withholding Agent Defined payee. A withholding agent must also re-
some countries P.O. box addresses are
§1.1441–7(a) provides the definition of standard. Finally, commentators noted view each withholding certificate to ver-
a withholding agent as well as a withhold- that the means for curing otherwise unre- ify that they support the claims made and
ing agent’s obligation to withhold the ap- liable documentation were, in some in- are consistent with the information on the
propriate amount of taxes and file returns. stances, too restrictive. withholding statement. Under a transition
The section has been revised by removing Section 1.1441–7 (b)(3) through (10) rule, this review process does not apply to
language stating that a withholding for- have been added to address the com- withholding certificates received before
eign partnership does not have to file ments. Some of the changes made to December 31, 2001, if the payment is
Forms 1042–S for payments made to for- paragraph (b) reflect rules in the model made prior to that date. If a withholding
eign partners because it is required to pro- qualified intermediary agreement con- certificate received before December 31,
vide Forms K-1. The reason for this tained in Rev. Proc. 2000–12. Paragraphs 2001, is relevant to a payment made after
change is discussed in section E. 2 of this (b)(4) through (b)(9) relate to the obliga- that date, it must be reviewed for accu-
Explanation of Provisions. tions of a withholding agent for account racy and matched to the information con-
Some U.S. withholding agents com- holders that have a direct account rela- tained in the withholding statement. Fi-
mented that foreign persons, including tionship with the withholding agent. The nally, a withholding agent must review
U.S. branches of foreign persons, were rules are limited to direct account rela- documentary evidence to determine that
taking the position that they were not tionships because they often rely on ac- there is no obvious indication that the
withholding agents for purposes of chap- count information that will exist only if payee is a U.S. non-exempt recipient or
ter 3 of the Internal Revenue Code. Any such a relationship exists. However, no obvious indication that the documen-
person, whether U.S. or foreign, that under the rules of paragraph (b)(10), tary evidence does not establish the iden-
pays, or has control, receipt, custody, or which relate to documentation from per- tity of the person who provided the docu-
disposal of an amount subject to with- sons that are not direct account holders, mentation.
holding is a withholding agent. In addi- the rules in paragraph (b)(4) through (9) H. Changes to §1.1441–9
tion, with respect to a single item of in- apply to the extent that they rely on infor-
come, each person that handles the mation contained on the face of a with- Section 1.1441–9 provides the rules for
payment is a withholding agent. Thus, holding certificate, documentary evi- payments made to foreign tax-exempt en-
there may be more than one withholding dence, or a withholding statement. tities and foreign governments. Para-
agent with respect to a payment of an Paragraph (b)(4) contains general rules graph (b)(2) of that section provided that
amount subject to withholding. Examples regarding the reliability of a withholding if a tax-exempt organization did not have
have been added in new paragraph (a)(2) certificate provided on Form W-8. Para- a determination from the IRS, it could es-
to illustrate these principles. In particular, graph (b)(5) contains rules for when a tablish its exempt status by attaching to its
examples were added to emphasize that Form W-8 will be regarded as unreliable withholding certificate an opinion of
foreign persons that pay, or have control, to establish a beneficial owner’s foreign counsel concluding that the organization
receipt, or custody, of amounts subject to status and applicable cure provisions. is described in section 501(c) of the Inter-
withholding are withholding agents, in- Paragraph (b)(6) contains rules for when a nal Revenue Code. In addition, if the
June 5, 2000 1172 2000–23 I.R.B.
opinion concluded that the organization paragraphs were misleading because they with respect to a notional principal con-
was described in section 501(c)(3) and implied that the general rule was that a tax tract was the net income described in
was not a private foundation, an affidavit return and information returns were not §1.446–3(d). Commentators objected to
regarding the operations and support of required if there was another withholding this requirement because their systems are
the organization was required to be at- agent in the chain of payment required to programmed to report cash payments, not
tached to the organization’s withholding file a tax return and information returns. accrued amounts. New paragraph
certificate as well. The opinion of coun- The exceptions to the rule, however, re- (c)(2)(i)(J) now provides that the amount
sel and affidavit was required to be re- quired every withholding agent that made required to be reported is limited to the
newed whenever the certificate to which payments of an amount subject to with- amount of cash paid from the notional
it was attached was required to be re- holding to a foreign person to file a tax re- principal contract.
newed. turn and information returns in every situ- Finally, the section has been clarified
Commentators stated that the require- ation, except that a nonqualified by separately stating the reporting re-
ment that the opinion of tax-exempt status intermediary or flow-through entity was quirements of U.S. withholding agents,
be provided by an attorney was too nar- not required to file a tax return and infor- qualified intermediaries, nonqualified in-
row and that an opinion from any feder- mation returns for payments that it made termediaries, and flow-through entities.
ally authorized tax practitioner, as defined provided that it furnished to a withholding Withholding agents should note, in partic-
in section 7525(a)(3), should be permit- agent sufficient information for the with- ular, that information regarding nonquali-
ted. In addition, the requirement that the holding agent to correctly withhold and fied intermediaries, flow-through entities,
opinion of counsel and the affidavit be re- report the payment. Section 1.1461–1(b) and U.S. branches (other than U.S.
newed whenever the certificate was re- and (c) have been clarified to state that a branches treated as U.S. persons) in
quired to be renewed was confusing be- withholding agent that makes a payment which a recipient is an account holder or
cause a withholding certificate from a of an amount subject to reporting to a re- an interest holder must be included on
tax-exempt entity requires a TIN and, pro- cipient must file a Form 1042–S and pro- Form 1042-S. Such information is impor-
vided the income paid is subject to report- vide a copy to the recipient. The terms tant to the IRS’s efforts to monitor com-
ing, is valid indefinitely absent a change recipient and amount subject to reporting pliance by such entities and branches with
in circumstances. are defined in paragraphs (c)(1)(ii) and the requirements of the regulations.
Treasury and IRS are currently consid- (c)(2), respectively. A recipient includes a J. Changes to the regulations under
ering whether an opinion issued by a per- beneficial owner (including a foreign section 6041
son other than an attorney authorized to complex trust and estate), a qualified in-
practice before the IRS should suffice. termediary, a withholding foreign partner- Section 1.6041–1(d) has been revised
Although the Treasury and IRS have not ship, a withholding foreign trust, an au- to require that the amount of a notional
yet concluded that a person other than an thorized foreign agent, a U.S. branch principal contract payment reported on
attorney should be permitted to provide treated as a U.S. person, a nonwithhold- Form 1099 is the amount of cash paid on
the opinion, the regulation has been ing foreign partnership or foreign simple the contract for the calendar year. This
amended to permit that possibility in fu- trust receiving income effectively con- change conforms the Form 1099 reporting
ture guidance. In addition, the require- nected with a U.S. trade or business, any rule to that under §1.1461–1(c)(2)(i)(J).
ment to renew the opinion and affidavit payee presumed to be a foreign person, Section 1.6041–4(a)(3) states that a
has been clarified by stating that it must and any other person for whom a Form nonqualified intermediary, a qualified in-
be renewed if there is a change in facts or 1042-S is required by the instructions to termediary, or certain U.S. branches of
circumstances relevant to the organiza- the form. A nonqualified intermediary, a foreign banks and insurance companies
tion’s status under section 501(c)(3). disregarded entity, a flow-through entity, that receive payments reportable under
I. Changes to §1.1461-1 and a U.S. branch that is not treated as a section 6041 (e.g., rents, notional princi-
U.S. person are not recipients. Amounts pal contract income, and other fixed or
Section 1.1461–1 contains require- paid to such entities are reported as paid determinable income) are not required to
ments regarding the payment and deposit to the persons on whose behalf the entity report the payments on Form 1099 when
of tax withheld under chapter 3 of the In- acts or to the interest holders in the entity. they, in turn, make the payment to their
ternal Revenue Code and the filing of a The term amount subject to reporting gen- account holders unless they know the
tax return (Form 1042) and information erally means amount subject to withhold- payments are required to be reported and
returns (Forms 1042-S) by withholding ing as defined under §1.1441–2(a). were not so reported. Similar exceptions
agents. Generally, the paragraph has been The regulation has also been clarified by apply to dividends, gross proceeds from
amended to make a withholding agent’s providing a more extensive, but not ex- sales of securities, and interest under
obligations clearer. haustive, list of those amounts subject to §§1.6042–3(b)(1)(vi), 1.6045–1(g)(v),
Paragraphs (b)(2) and (c)(4), as origi- reporting and those amounts for which and 1.6049–5(b)(14), respectively. These
nally drafted, stated that a withholding there is an exception to reporting. See provisions have been modified to state
agent was not required to file a tax return new §1.1461–1(c)(2). Paragraph that the exception does not apply to a U.S.
or information return if another withhold- (c)(2)(i)(C), as originally drafted, stated branch of a foreign bank or insurance
ing agent had done so. Numerous excep- that the amount of effectively connected company that agrees with a withholding
tions to the rule were provided. These income that was required to be reported agent to be treated as a U.S. person. The
2000–23 I.R.B. 1173 June 5, 2000
exception is inappropriate in this case be- was furnished reasonably expected not to 1042-S. Under the regulation, as revised,
cause such branches do not provide payee be, present in the United States for a pe- accrued interest is treated as an amount
documentation on Form W-9 (or the riod aggregating 183 days or more during that is not subject to withholding. There-
name, address, TIN, and information allo- each calendar year. The regulation did fore, both the gross proceeds, net of ac-
cating the payment to the payee) to a not state whether the a statement was re- crued interest, and the accrued interest are
withholding agent. The exception is also quired if documentary evidence was pro- now presumed paid to a U.S. payee and
inappropriate if a qualified intermediary vided. reported on Form 1099 under the pre-
assumes Form 1099 reporting responsibil- Two clarifying changes have been sumption rule §1.6049–5(d)(2). Two ad-
ity. Therefore, the exception has been made to §1.6045–1(g)(1)(i). First, the ditional examples have been added to
changed to exclude qualified intermedi- regulation has been modified to require paragraph (g)(4) to illustrate the operation
aries that assume Form 1099 reporting. the statement relating to presence in the of the presumption rules on a sale of a
Finally, the exceptions have been United States only from individuals. Sec- short-term original issue discount instru-
amended to state that a nonqualified inter- ond, the regulation states that the state- ment. These examples were added to
mediary, qualified intermediary, or U.S. ment is not required if documentary evi- make clear that a sale of an OID obliga-
branch is deemed to know the required re- dence is provided. The statement is tion outside the United States is a gross
porting was not done in any case where required on a withholding certificate and proceeds transaction and, therefore, under
the intermediary or branch has failed to not on documentary evidence because a the presumption rule of §1.6049–5(d)(2),
provide documentation or other informa- withholding certificate is the documenta- presumed made to a U.S. person.
tion so that another payor can do the re- tion required for an account maintained in Whether the gross proceeds are reportable
porting. the United States. Documentary evidence depends on whether the exception of
can only be used for amounts paid outside §1.6045–1(a) for sales outside the United
K. Changes to §1.6041A–1 the United States to an offshore account States by a non-U.S. payor applies.
Section 1.6041A–1(d)(3)(i)(C) has and, therefore, the likelihood that the per-
M. Changes to §1.6049–5
been added to provide an exception from son may be present in the United States
reporting remuneration for services as a for the relevant period is greatly reduced. Under §1.6049–5(c)(1), a withholding
direct seller paid outside the United Clarifying changes have also been agent or payor may generally rely on doc-
States. Prior to this change, remuneration made to §1.6045–1(g)(3)(iv). The first umentary evidence from a foreign payee
for services was subject to reporting in sentence of that section stated that a bro- instead of a beneficial owner withholding
absence of documentation establishing ker could treat an intermediary, as defined certificate on Form W-8 if an amount is
the direct seller’s status as a foreign per- in §1.1441– 1(c)(13), as an exempt recipi- paid outside the United States to an off-
son because the presumption rules of ent except when the broker had actual shore account. An offshore account is an
§§1.6049–5(d)(2) and 1.1441–1(b)(3)(iii) knowledge or reason to know the interme- account maintained at an office or branch
treated a direct seller as a U.S. non-ex- diary was acting on behalf of a U.S. per- of a U.S. or foreign bank or other finan-
empt recipient. Commentators stated that son. The exception should only apply if cial institution at any location outside the
the presumption was inaccurate because the intermediary is acting on behalf of a United States and outside of a U.S. pos-
most direct sellers abroad are foreign per- U.S. person who is subject to reporting on session. Under §1.6049–5(e), an amount
sons. They also argued that obtaining Form 1099, that is, a U.S. non-exempt re- is considered paid outside the United
documentation from direct sellers to rebut cipient. The regulation has been amended States if the payor completes the acts nec-
the presumption was overly burdensome. to make this clear. An erroneous cite to essary to effect payment outside the
nonwithholding foreign partnerships has United States.
L. Changes to §1.6045–1 also been eliminated. The regulations do not specifically ad-
Section 1.6045–1(g) provides an ex- In paragraph (g)(4) of §1.6045–1, Ex- dress whether partners of a nonwithhold-
ception from Form 1099 reporting for a ample 7 has been amended to reflect the ing foreign partnership, foreign beneficia-
broker if a customer is considered an ex- change to the regulations that now gener- ries of a foreign simple trust, or foreign
empt foreign person under that section. ally treats accrued interest as an amount owners of a foreign grantor trust can use
Under §1.6045–1(g)(1)(i), a broker may that is not subject to withholding. Under documentary evidence to establish their
treat a customer as an exempt foreign per- that example, a foreign bank that is a U.S. status as foreign payees. Paragraph (c)(1)
son if the broker receives a withholding payor effects a sale of an interest bearing has been amended to permit the use of
certificate or documentary evidence that obligation at an office outside the United documentary evidence by foreign part-
establishes the person’s status as a foreign States on behalf of an undocumented ac- ners, beneficiaries, and owners in these
person. As originally drafted, the last sen- count holder. Under the regulation, as situations. Documentary evidence can
tence of §1.6045–1(g)(1)(i) stated that if a originally drafted, the gross proceeds also be used for purposes of chapter 3 of
withholding certificate was provided, a from the sale, net of accrued interest, the Internal Revenue Code by virtue of
withholding agent could rely on the cer- were reported on Form 1099 as paid to a the incorporation of §1.6049–5(c)(1) in
tificate to exempt the customer from re- payee that was presumed to be a U.S. per- §1.1441–1(e)(1)(ii)(A)(2). The use of
porting only if the certificate included a son. However, because the accrued inter- documentary evidence is appropriate be-
statement that the beneficial owner had est was considered an amount subject to cause the regulations generally treat pay-
not been, and at the time the certificate withholding, it was reportable on Form ments to foreign nonwithholding foreign
June 5, 2000 1174 2000–23 I.R.B.
partnerships, foreign simple trusts, and stitution if it became a U.S. citizen or U.S. subject to withholding. Section
foreign grantor trusts similar to payments resident. A commentator argued that the 1.1441–1(b)(3)(iii)(D), however, stated
made to nonqualified intermediaries, and expense of such a requirement was not that it did not apply to amounts that were
the latter are permitted to provide docu- justified. The commentator argued that if not subject to withholding. Revised para-
mentary evidence on behalf of their ac- an account holder legitimately establishes graph (d)(2)(i) eliminates the inconsis-
count holders. foreign status, it is unlikely that the ac- tency. Therefore, payments of deposit in-
Section 1.6049–5(c)(4) provides rules count holder will become a U.S. citizen or terest, and interest or OID arising from
that apply to U.S. payors that make pay- resident and that if it does, there are fac- the redemption of an obligation described
ments outside the United States of tors, such as a change of address, that will in section 871(g)(1)(B)(i) paid to an off-
amounts not subject to withholding (e.g., indicate a change in the person’s status. shore account are presumed paid to a U.S.
foreign source income and gross proceeds Paragraph (c)(4) has been amended to payee. In addition, gross proceeds, which
from the sale of securities) other than de- remove the inconsistency and to take the are not amounts subject to withholding,
posit interest and interest or OID on short- commentators’ comments into account. are also treated as paid to U.S. persons
term OID instruments. Non-U.S. payors Under paragraph (c)(4)(ii), as revised, a under §1.6045–1(g)(1)(i). Under the ex-
are generally exempt from reporting these declaration of foreign status may be used ceptions of §§1.6045–1(a)(1) and
payments. There were several issues only if it is not customary to obtain docu- 1.6045–1(g)(3), however, gross proceeds
under paragraph (c)(4) as originally mentary evidence. The declaration may from the sale of a security by a non-U.S.
drafted. First, the paragraph was inter- be relied upon only if there is no address payor effected outside the United States
nally inconsistent. Paragraph (c)(4)(i) or other indicia of U.S. status. If it is cus- are not subject to reporting.
stated that a bank or other financial insti- tomary in the country where a bank or fi- The grace period rule in
tution could establish a payee’s status as a nancial institution maintains a branch or §1.6049–5(d)(2)(ii), as originally drafted,
foreign person by relying on a written de- office to obtain, but not renew, documen- did not cover the same payments as were
claration made on an account opening tary evidence, then the bank or financial covered under the grace period rule of
statement that the payee was not a U.S. institution may rely on the documentary §1.1441–1(b)(3)(iv) even though the lat-
person in two circumstances: (i) if it was evidence without the need to renew it pro- ter regulation cross-references
not customary in a country to obtain doc- vided that it may rely on the documenta- §1.6049–5(d)(2)(ii). For example, the
umentary evidence to establish a person’s tion to establish foreign status under the rule under the 1441 regulations, but not
identity, or (ii) if it was customary to ob- due diligence rules of §1.1441–7(b)(7) the rule under section 6049, covered divi-
tain documentary evidence but it was not and (8). The restriction on using such dends from any redeemable security is-
customary to renew it. Paragraph documentation in the case of a U.S. based sued by an investment company and
(c)(4)(iv), however, stated that a bank or multinational employee has been re- amounts paid with respect to loans of se-
financial institution could not rely on a moved. If, however, the bank or financial curities. Paragraph 5(d)(2)(ii) has been
declaration if it was customary to obtain institution may rely on the documentary amended to cover the same payments as
documentary evidence but not customary evidence as establishing foreign status are covered by the grace period rule of
to renew it. Second, paragraph (c)(4)(i) even though there are indicia of U.S. sta- §1.1441–1(b)(3)(iv). In addition, para-
did not permit a bank or financial institu- tus, it can rely on the documentary evi- graph (d)(2)(ii) prior to amendment stated
tion to rely on documentary evidence to dence only for a period of three full calen- that the grace period expired on the earlier
establish a person’s foreign status if there dar years after the calendar year in which of the of the 90th day after the grace pe-
was indicia of U.S. status, including em- it is received. Finally, neither the docu- riod began, the date on which documenta-
ployment by a U.S.-based multinational mentation rule of paragraph (c)(4)(i) nor tion is provided, or the last day of the cal-
organization. A commentator noted that the declaration rule of paragraph (c)(4)(ii) endar year. Commentators stated that
prohibiting use of documentary evidence requires a payor to send a negative confir- terminating the grace period at the end of
merely because an account holder worked mation. a calendar year complicated systems pro-
for a U.S.-based multinational organiza- Section 1.6049–5(d) contains presump- gramming because there was a shrinking
tion was overly broad because such orga- tion rules that generally apply for chapter grace period for payments made within 90
nizations commonly employ local em- 61 reporting if a payor lacks required doc- days of the end of the year. The require-
ployees and a withholding agent may not umentation from a payee. Paragraph ment to terminate the grace period as of
know whether a particular multinational (d)(2) governs payments other than pay- the close of a calendar year has been elim-
is U.S. based. Finally, paragraph ments to intermediaries or flow-through inated because it is not necessary.
(c)(4)(iii) required a bank or financial in- entities. Paragraph (d)(2)(i) has been Paragraph (d)(3) provides presumption
stitution that relied upon a declaration of clarified to state that the presumption rules for payments made to foreign inter-
foreign status or non-renewable docu- rules of §1.1441–1(b)(3)(iii)(D) (pay- mediaries. With exceptions for deposit
mentary evidence to send a negative con- ments to offshore accounts) do not apply interest and interest and OID on short-
firmation statement each year to the ac- to amounts that are not subject to with- term obligations, payments to foreign in-
count holder stating that the account holding. As originally drafted, paragraph termediaries are presumed made to for-
holder was being treated as a foreign (d)(2)(i) stated that the rules of eign payees. Paragraph (d)(4) provided
payee and that the account holder was ob- §1.1441–1(b)(3)(iii) applied to all pay- different presumptions for payments to
ligated to notify the bank or financial in- ments, irrespective of whether they were partnerships. Under that paragraph, pay-
2000–23 I.R.B. 1175 June 5, 2000
ments made to foreign partnerships were amount is attributable to a U.S. non-ex- The changes made by this regulation
generally presumed made to U.S. payees, empt recipient. will require revisions to instructions to the
even if the partnership established its sta- As originally drafted, withholding certificates issued on Form
tus as a foreign partnership. Commenta- §1.6049–5(d)(3)(iii) provided special pre- W-8 and certain minor changes to the
tors argued that the disparate treatment sumption rules for payments of deposit forms themselves. Until Forms W-8, and
between intermediaries and partnerships interest and interest or OID from short- the instructions, are revised withholding
was not justified because they are treated term original issue discount obligations to agents may rely on Forms W-8BEN,
similarly for other purposes under the reg- foreign intermediaries. It was not clear W-8ECI, W-8EXP, and W-8IMY as cur-
ulations. The differences also compli- whether the presumption rule of the para- rently in effect but should take into ac-
cated payors’ information systems. In re- graph applied to the portion of the sale count, particularly with respect to Form
sponse to these comments, the proceeds representing OID from the sale W-8IMY used by intermediaries and
presumption rules of paragraph (d)(3) or exchange of short-term OID instrument flow-through entities, that the instructions
have been revised to apply to payments in a transaction other than a redemption. to the form do not reflect the withholding
made to all flow-through entities (non- Under paragraph (d)(3)(iii) as revised, statement requirements contained in this
withholding foreign partnerships, foreign a payment of deposit interest or interest or regulation. In particular, withholding
simple trusts, and foreign grantor trusts). OID on the redemption of a short-term agents and providers of Form W-8IMY
Paragraph (d)(3)(ii) provides rules for original issue discount obligation paid to should furnish a withholding statement in
payments of amounts that are not subject an intermediary or flow-through entity is connection with the form that conforms to
to withholding (e.g., foreign source in- presumed paid to a U.S. payee. The para- §1.1441–1(e)(3)(iv).
come and gross proceeds from the sales of graph does not apply to sales or ex-
securities) other than deposit interest and changes (other than redemption) of short- Special Analyses
interest and OID on short-term obliga- term OID instruments. Such sales or It has been determined that this Trea-
tions paid to foreign intermediaries and exchanges are treated as gross proceeds sury decision is not a significant regula-
flow-through entities. The paragraph re- transactions, in conformance with the tory action as defined in Executive Order
quired a payor to presume that a payment rules in §§1.6045–1(c) and (d)(3) and 12866. Therefore, a regulatory assess-
was made to an exempt recipient unless 31.3406(b)(2)–2, and are subject to the ment is not required. It has also been de-
the payor had actual knowledge that any general presumption rule for payments termined that section 553(b) of the Ad-
person for whom the intermediary was made to foreign intermediaries under ministrative Procedure Act (5 U.S.C.
collecting the payment was a U.S. non- §1.6049–5(d)(3)(ii). Therefore, gross chapter 5) does not apply to these regula-
exempt recipient. In that case, the pay- proceeds from the sale or exchange (other tions. Finally, it has been determined that
ment was treated as made to the U.S. non- than a redemption) of a short-term OID the Regulatory Flexibility Act (5 U.S.C.
exempt recipient. The last sentence of the instrument will generally be presumed chapter 6) does not apply to these regula-
paragraph, however, also appeared to re- paid as made to an exempt recipient. In- tions because the regulations do not im-
quire a payor to presume that a payment termediaries that are U.S. payors, how- pose a collection of information on small
was made to a U.S. non-exempt recipient ever, may themselves be required to re- entities. Pursuant to 7805(f) of the Inter-
if it appeared that the payment might be port such gross proceeds under nal Revenue Code, the notice of proposed
collected on behalf of a U.S. non-exempt §1.6045–1(c) and (1)(g)(i) and the pre- rulemaking preceding these regulations
payee, because, for example, an interme- sumption rule of §1.6049–5(d)(2), which (61 F.R. 17614) was submitted to the
diary provided Forms W-9 for some pay- applies to payments made to persons Small Business Administration for com-
ees but did not allocate a payment to any other than an intermediary because under ment on its impact on small business.
particular payee. The application of the that section gross proceeds are generally
last sentence of the paragraph, however, considered paid to U.S. payees under that Drafting Information
was uncertain. section.
Paragraph (d)(3)(ii) has been revised to Paragraph (d)(3)(iii)(B) contained a The principal authors of these regula-
generally reflect the principle that a pay- presumption rule for payments made to tions are Carl Cooper, Laurie Hatten-
ment of an amount that is not subject to exempt recipients that had not provided Boyd, and Kate Hwa of the Office of As-
withholding (other than short-term OID documentation that they were acting as sociate Chief Counsel (International).
and deposit interest) made to an interme- intermediaries. The scope and application * * * * *
diary should not be subject to Form 1099 of this rule were unclear. Paragraph Adoption of Amendments to
reporting by a payor if the payment would (d)(3)(iii)(B) has been completely revised Regulations
not be subject to Form 1099 reporting if and now states that a payment made to an
made to a U.S. non-exempt recipient by exempt recipient that the payor knows, or Accordingly, 26 CFR parts 1 and 31 are
an intermediary that is not a U.S. payor. has reason to know, is acting as an inter- amended as follows:
Thus, the general rule is that a payment mediary is subject to the presumptions
covered by the paragraph (i.e., foreign that apply to intermediaries. PART 1—INCOME TAXES
source income or gross proceeds) is pre- Paragraph 1. The authority citation for
sumed paid to an exempt recipient unless N. Withholding Certificate Transitional
Issues part 1 continues to read in part as follows:
the payor has actual knowledge that the Authority: 26 U.S.C. 7805 * * *
June 5, 2000 1176 2000–23 I.R.B.
Par. 2. Effective January 1, 2001, 23. Revising the entries for (2) * * *
§1.1441–0 is amended by: §1.1441–5(c)(3)(iv) and (v). (vii) Rules for reliably associating a pay-
1. Revising the entry for 24. Revising the entry for ment with a withholding certificate or
§1.1441–1(b)(2)(vii). §1.1441–5(d). other appropriate documentation.
2. Adding entries for 25. Removing the entries for (A) Generally.
§1.1441–1(b)(2)(vii)(A) through (F). §1.1441–5(d)(3)(i) through (d)(3)(iv). (B) Special rules applicable to a withhold-
2a. Revising the entry for 26. Revising the entry for ing certificate from a nonqualified inter-
§1.1441–1(b)(3)(ii). §1.1441–5(d)(4). mediary or flow-through entity.
3. Adding entries for 27. Revising the entry for (C) Special rules applicable to a withhold-
§1.1441–1(b)(3)(ii)(A) through (C). §1.1441–5(e). ing certificate provided by a qualified in-
4. Revising the entry for 28. Adding entries for termediary that does not assume primary
§1.1441–1(b)(3)(iv). §1.1441–5(e)(1), (e)(2), (e)(3), (e)(3)(i), withholding responsibility.
5. Revising entry for (e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii), (D) Special rules applicable to a with-
§1.1441–1(b)(3)(v)(B). (e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6), holding certificate provided by a qualified
6. Revising the entry for (e)(6)(i), (e)(6)(ii) and (e)(6)(iii). intermediary that assumes primary with-
§1.1441–1(b)(3)(vi). 29. Revising the entries for holding responsibility under chapter 3 of
7. Adding entries for §1.1441–6(b)(2), (b)(2)(i) and (b)(2)(ii). the Internal Revenue Code.
§1.1441–1(b)(3)(vii)(A) and (B). 30. Adding entries for (E) Special rules applicable to a withhold-
8. Adding entries for §1.1441–6(b)(2)(iii) and (b)(2)(iv). ing certificate provided by a qualified in-
§1.1441–1(b)(6)(i) and (ii). 31. Revising the entry for termediary that assumes primary Form
9. Revising the entries for §1.1441–6(b)(3). 1099 reporting and backup withholding
§1.1441–1(c)(6)(ii), (c)(6)(ii)(B), 32. Revising the entry for responsibility but not primary withhold-
(c)(6)(ii)(C), and adding a new entry for §1.1441–6(b)(4). ing under chapter 3.
§1.1441–1(c)(6)(ii)(D). 33. Removing the entries for (F) Special rules applicable to a with-
10. Adding entries for §1.1441–6(b)(4)(i), (b)(4)(ii), (b)(4)(ii)(A), holding certificate provided by a qualified
§1.1441–1(c)(12) through (29). (b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv). intermediary that assumes primary with-
11. Revising the entry for 34. Removing the entry for holding responsibility under chapter 3 and
§1.1441–1(d)(4). §1.1441–6(b)(5). primary Form 1099 reporting and backup
12. Revising the entry for 35. Revising the entry for withholding responsibility and a with-
§1.1441–1(e)(3)(iii), (e)(3)(iv), and §1.1441–6(c). holding certificate provided by a with-
(e)(3)(iv)(A) through (C). 36. Revising the entry for holding foreign partnership.
13. Adding entries for §1.1441–6(c)(2). (3) * * *
§1.1441–1(e)(3)(iv)(D) and (E). 37. Removing the entries for (ii) Presumptions of classification as indi-
14. Adding entries for §1.1441–6(c)(2)(i), (c)(2)(ii), and vidual, corporation, partnership, etc.
§1.1441–1(e)(4)(iv)(A), (B), and (C). (c)(2)(iii). (A) In general.
15. Revising the entries for 38. Revising the entries for (B) No documentation provided.
§1.1441–1(e)(5)(v) and (e)(5)(v)(B) and §1.1441–6(c)(5), (c)(5)(i) and (c)(5)(ii). (C) Documentary evidence furnished for
(C). 39. Revising the entry for offshore account.
16. Revising the entries for §1.1441–6(e). *****
§1.1441–2(b)(3)(i) and (ii). 40. Adding entries for §1.1441–7(a)(1) (iv) Grace period.
17. Removing the entries for and (2). (v) * * *
§1.1441–2(b)(3)(iii) and (iv). 41. Removing the entries for (B) Beneficial owner documentation or
18. Revising the entry for §1.1441–7(b)(2)(i) and (b)(2)(ii). allocation information is lacking or unre-
§1.1441–5(a). 42. Revising the entry for liable.
19. Revising the entries for §1.1441–7(b)(3). *****
§1.1441–5(b), (b)(1), (b)(2), and (b)(2)(i), 43. Adding entries for (vi) U.S. branches.
adding entries for §1.1441–5(b)(2)(i)(A) §1.1441–7(b)(4), (b)(4)(i), (b)(4)(ii), and (vii) * * *
and (b)(2)(i)(B), and revising entries for (b)(5) through (b)(11). (A) In general.
§1.1441–5(b)(2)(ii), (b)(2)(iii), (b)(2)(iv), The additions and revisions read as fol- (B) Special rule for offshore accounts.
and (b)(2)(v). lows. *****
20. Revising the entry for §1.1441–0 Outline of regulation provi- (6) * * *
§1.1441–5(c)(1)(iv). sions for section 1441. (i) In general.
21. Removing the entries for ***** (ii) Example.
§1.1441–5(c)(2)(ii)(A) and (B). §1.1441–1 Requirement for the deduction *****
21. Revising the entry for and withholding of tax on payments to (c) * * *
§1.1441–5(c)(3). foreign persons. (6) * * *
22. Revising the entries for ***** (ii) Special rules.
§1.1441–5(c)(3)(iii). (b) * * * *****
2000–23 I.R.B. 1177 June 5, 2000
(B) Foreign partnerships. (b) * * * simple trust or foreign grantor trust.
(C) Foreign simple trusts and foreign (3) * * * (iv) Withholding statement provided by a
grantor trusts. (i) Amount subject to tax. foreign simple trust or foreign grantor
(D) Other foreign trusts and foreign es- (ii) Amounts subject to withholding. trust.
tates. ***** (v) Withholding foreign trusts.
***** §1.1441–5 Withholding on payments to (6) Presumption rules
(12) Payee. partnerships trusts, and estates. (i) In general
(13) Intermediary. (a) In general. (ii) Determination of status as U.S. or for-
(14) Nonqualified intermediary. (b) Rules applicable to U.S. partnerships, eign trust or estate in the absence of docu-
(15) Qualified intermediary. trusts, and estates. mentation.
(16) Withholding certificate. (1) Payments to U.S. partnerships, trusts, (iii) Determination of beneficiary or
(17) Documentary evidence; other appro- and estates. owner’s status in the absence of certain
priate documentation. (2) Withholding by U.S. payees. documentation.
(18) Documentation. (i) U.S. partnerships. *****
(19) Payor. (A) In general. §1.1441–6 Claim of reduced withholding
(20) Exempt recipient. (B) Effectively connected income of part- under an income tax treaty.
(21) Non-exempt recipient. ners. *****
(22) Reportable amounts. (ii) U.S. simple trusts. (b) * * *
(23) Flow-through entity. (iii) U.S. complex trusts and U.S. estates. (2) Payment to fiscally transparent entity.
(24) Foreign simple trust. (iv) U.S. grantor trusts (i) In general.
(25) Foreign complex trust. (v) Subsequent distribution (ii) Certification by qualified intermedi-
(26) Foreign grantor trust. (c) * * * ary.
(27) Partnership. (1) * * * (iii) Dual treatment.
(28) Nonwithholding foreign partnership. (iv) Examples. (iv) Examples.
(29) Withholding foreign partnership. ***** (3) Certified TIN.
(d) * * * (3) Nonwithholding foreign partnerships. (4) Claim of benefits under an income tax
(4) When a payment to an intermediary or ***** treaty by a U.S. person.
flow-through entity may be treated as (iii) Withholding certificate from a non- (c) Exemption from requirement to fur-
made to a U.S. payee. withholding foreign partnership. nish a taxpayer identifying number and
(e) * * * (iv) Withholding statement provided by special documentary evidence rules for
(3) * * * nonwithholding foreign partnership. certain income.
(iii) Intermediary withholding certificate (v) Withholding and reporting by a for- *****
from a nonqualified intermediary. eign partnership. (2) Income to which special rules apply.
(iv) Withholding statement provided by (d) Presumption rules. *****
nonqualified Intermediary. ***** (5) Statements regarding entitlement to
(A) In general. (4) Determination by a withholding for- treaty benefits.
(B) General requirements. eign partnership of the status of its part- (i) Statement regarding conditions under a
(C) Content of withholding statement. ners. limitation on benefits provision.
(D) Alternative procedures. (e) Foreign trusts and estates. (ii) Statement regarding whether the tax-
(E) Notice procedures. (1) In general. payer derives the income.
***** (2) Payments to foreign complex trusts *****
(4) * * * and estates. (e) Competent authority.
(iv) * * * (3) Payees of payments to foreign simple *****
(A) In general. trusts and foreign grantor trusts. §1.1441–7 General provisions relating to
(B) Requirements. (i) Payments for which beneficiaries and withholding agents.
(C) Special requirements for transmission owners are payees. (a) * * *
of Forms W-8 by an intermediary. [Re- (ii) Payments for which trust is payee. (1) In general.
served] (4) Reliance on claim of foreign complex (2) Examples.
***** trust or foreign estate status. (b) * * *
(5) * * * (5) Foreign simple trust and foreign (3) Financial institutions—limits on rea-
(v) Withholding statement. grantor trust. son to know.
***** (i) Reliance on claim of foreign simple (4) Rules applicable to withholding cer-
(B) Content of withholding statement. trust or foreign grantor trust status. tificates.
(C) Withholding rate pools. (ii) Reliance on claim of reduced with- (i) In general.
***** holding by a foreign simple trust or for- (ii) Examples.
§1.1441–2 Amounts subject to withhold- eign grantor trust for its beneficiaries or (5) Withholding certificate—establish-
ing. owners. ment of foreign status.
***** (iii) Withholding certificate from foreign (6) Withholding certificate—claim of re-
June 5, 2000 1178 2000–23 I.R.B.
duced rate of withholding under treaty. §1.1441–5(c)(1) and (e)(3), a payee is the of this chapter). See §1.6049–5(c)(5)(vi)
(7) Documentary evidence. person to whom a payment is made, re- for the treatment of U.S. branches as U.S.
(8) Documentary evidence—establish- gardless of whether such person is the payors if they make a payment that is sub-
ment of foreign status. beneficial owner of the amount (as de- ject to reporting under chapter 61 of the
(9) Documentary evidence—claim of re- fined in paragraph (c)(6) of this section). Internal Revenue Code. Also see
duced rate of withholding under treaty. *** §1.6049–5(d)(1)(ii) for the treatment of
(10) Limits on reason to know—indirect ***** U.S. branches as foreign payees under
account holders. (iv) Payments to a U.S. branch of cer- chapter 61 of the Internal Revenue Code.
(11) Additional guidance. tain foreign banks or foreign insurance (B) * * *
***** companies—(A) U.S. branch treated as a (3) As a payment to a foreign person of
Par. 3. Effective January 1, 2001, sec- U.S. person in certain cases. A payment income that is effectively connected with
tion 1.1441–1 is amended by: to a U.S. branch of a foreign person is a the conduct of a trade or business in the
1. Revising the first sentence of payment to a foreign person. However, a United States if the withholding agent
paragraph (b)(2)(i). U.S. branch described in this paragraph cannot reliably associate the payment
2. Revising paragraphs (b)(2)(iv)(A), (b)(2)(iv)(A) and a withholding agent (in- with a withholding certificate from the
(b)(2)(iv)(B)(3), and (b)(2)(iv)(C). cluding another U.S. branch described in U.S. branch or any other certificate or
3. Revising paragraphs (b)(2)(v)(A) this paragraph (b)(2)(iv)(A)) may agree to other appropriate documentation from an-
and (b)(2)(v)(B). treat the branch as a U.S. person for pur- other person. See §1.1441–4(a)(2)(ii).
4. Revising paragraph (b)(2)(vii). poses of withholding on specified pay- (C) Consequences to the U.S. branch
5. Revising the first sentence of ments to the U.S. branch. Notwithstand- A U.S. branch that is treated as a U.S. per-
paragraph (b)(3)(i). ing the preceding sentence, a withholding son under paragraph (b)(2)(iv)(A) of this
6. Revising paragraph (b)(3)(ii). agent making a payment to a U.S. branch section shall be treated as a separate per-
7. Revising paragraphs (b)(3)(iii)(C) treated as a U.S. person under this para- son solely for purposes of section 1441(a)
and (b)(3)(iii)(D). graph (b)(2)(iv)(A) shall not treat the and all other provisions of chapter 3 of the
8. Revising paragraph (b)(3)(iv). branch as a U.S. person for purposes of Internal Revenue Code and the regula-
9. Revising paragraph (b)(3)(v). reporting the payment made to the tions thereunder (other than for purposes
10. Revising paragraphs (b)(3)(vi) branch. Therefore, a payment to such of reporting the payment to the U.S.
and (b)(3)(vii). U.S. branch shall be reported on Form branch under §1.1461–1(c) or for pur-
11. Revising paragraph (b)(6). 1042-S under §1.1461–1(c). Further, a poses of the documentation such a branch
12. Revising paragraph (c)(2). U.S. branch that is treated as a U.S. per- must furnish under paragraph (e)(3)(v) of
13. Revising paragraph (c)(6). son under this paragraph (b)(2)(iv)(A) this section) for any payment that it re-
14. Adding paragraphs (c)(12) shall not be treated as a U.S. person for ceives as such. Thus, the U.S. branch
through (c)(29). purposes of the withholding certificate it shall be responsible for withholding on
15. Revising paragraphs (d)(2) through may provide to a withholding agent. the payment in accordance with the provi-
(d) (4). Therefore, the U.S. branch must furnish a sions under chapter 3 of the Internal Rev-
16. Revising paragraphs (e)(1)(ii) U.S. branch withholding certificate on enue Code and the regulations thereunder
(A)(1), (e)(1)(ii)(A)(3), and (e)(1)(ii)(A)(4). Form W-8 as provided in paragraph and other applicable withholding provi-
17. Revising paragraph (e)(3). (e)(3)(v) of this section and not a Form sions of the Internal Revenue Code. For
18. Revising paragraph (e)(4)(ii)(A). W-9. An agreement to treat a U.S. branch this purpose, it shall obtain and retain
19. Revising paragraphs (e)(4)(ii)(B)(1) as a U. S. person must be evidenced by a documentation from payees or beneficial
through (e)(4)(ii)(B)(4) and (e)(4)(ii)(B) (6), U.S. branch withholding certificate de- owners of the payments that it receives as
and adding paragraph (e)(4)(ii)(B)(8). scribed in paragraph (e)(3)(v) of this sec- a U.S. person in the same manner as if it
20. Revising paragraph (e)(4)(iv). tion furnished by the U.S. branch to the were a separate entity. For example, if a
21. Revising paragraph (e)(4)(vii). withholding agent. A U.S. branch de- U.S. branch receives a payment on behalf
22. Adding paragraph (e)(4)(ix)(A)(4) scribed in this paragraph (b)(2)(iv)(A) is of its home office and the home office is a
and revising paragraph (e)(4)(ix)(C). any U.S. branch of a foreign bank subject qualified intermediary, the U.S. branch
23. Revising paragraph (e)(5)(i) and to regulatory supervision by the Federal must obtain a qualified intermediary with-
(e)(5)(iii) through (e)(5)(v). Reserve Board or a U.S. branch of a for- holding certificate described in paragraph
The additions and revisions read as fol- eign insurance company required to file (e)(3)(ii) of this section from its home of-
lows: an annual statement on a form approved fice. In addition, a U.S. branch that has
§1.1441–1 Requirement for the deduction by the National Association of Insurance not provided documentation to the with-
and withholding of tax on payments to Commissioners with the Insurance De- holding agent for a payment that is, in
foreign persons. partment of a State, a Territory, or the fact, not effectively connected income is a
***** District of Columbia. The Internal Rev- withholding agent with respect to that
(b) * * * enue Service (IRS) may approve a list of payment. See paragraph (b)(6) of this
(2) Determination of payee and payee’s U.S. branches that may qualify for treat- section and §1.1441–4(a)(2)(ii).
status—(i) In general. Except as other- ment as a U.S. person under this para- *****
wise provided in this paragraph (b)(2) and graph (b)(2)(iv)(A) (see §601.601(d)(2) (v) Payments to a foreign
2000–23 I.R.B. 1179 June 5, 2000
intermediary—(A) Payments treated as ably associate a payment with valid docu- cial reliance rules in the case of a payment
made to persons for whom the intermedi- mentation if, prior to the payment, it holds to a flow-through entity.
ary collects the payment. Except as oth- valid documentation (either directly or (B) Special rules applicable to a with-
erwise provided in paragraph (b)(2)(v)(B) through an agent), it can reliably deter- holding certificate from a nonqualified in-
of this section, the payee of a payment to mine how much of the payment relates to termediary or flow-through entity. (1) In
a person that the withholding agent may the valid documentation, and it has no ac- the case of a payment made to a nonquali-
treat as a foreign intermediary in accor- tual knowledge or reason to know that any fied intermediary, a flow-through entity
dance with the provisions of paragraph of the information, certifications, or state- (as defined in paragraph (c)(23) of this
(b)(3)(ii)(C) or (b)(3)(v)(A) of this sec- ments in, or associated with, the documen- section), and a U.S. branch described in
tion is the person or persons for whom the tation are incorrect. Special rules apply paragraph (b)(2)(iv) of this section (other
intermediary collects the payment. Thus, for payments made to intermediaries, than a branch that is treated as a U.S. per-
for example, the payee of a payment that flow-through entities, and certain U.S. son), a withholding agent can reliably as-
the withholding agent can reliably associ- branches. See paragraph (b)(2)(vii)(B) sociate the payment with valid documen-
ate with a withholding certificate from a through (F) of this section. The documen- tation only to the extent that, prior to the
qualified intermediary (defined in para- tation referred to in this paragraph payment, the withholding agent can allo-
graph (e)(5)(ii) of this section) that does (b)(2)(vii) is documentation described in cate the payment to a valid nonqualified
not assume primary withholding responsi- paragraphs (c)(16) and (17) of this section intermediary, flow-through, or U.S.
bility or a payment to a nonqualified in- upon which a withholding agent may rely branch withholding certificate; the with-
termediary are the persons for whom the to treat the payment as a payment made to holding agent can reliably determine how
qualified intermediary or nonqualified in- a payee or beneficial owner, and to ascer- much of the payment relates to valid doc-
termediary acts and not to the intermedi- tain the characteristics of the payee or ben- umentation provided by a payee as deter-
ary itself. See paragraph (b)(3)(v) of this eficial owner that are relevant to withhold- mined under paragraph (c)(12) of this sec-
section for presumptions that apply if the ing or reporting under chapter 3 of the tion (i.e., a person that is not itself an
payment cannot be reliably associated Internal Revenue Code and the regulations intermediary, flow-through entity, or U.S.
with valid documentation. For similar thereunder. For purposes of this para- branch); and the withholding agent has
rules for payments to flow-through enti- graph (b)(2)(vii), documentation also in- sufficient information to report the pay-
ties, see §1.1441–5(c)(1) and (e)(3). cludes the agreement that the withholding ment on Form 1042-S or Form 1099, if
(B) Payments treated as made to for- agent has in effect with an authorized for- reporting is required. See paragraph
eign intermediary. The payee of a pay- eign agent in accordance with (e)(3)(iii) of this section for the require-
ment to a person that the withholding §1.1441–7(c)(2)(i). A withholding agent ments of a nonqualified intermediary
agent may treat as a qualified intermediary that is not required to obtain documenta- withholding certificate, paragraph
is the qualified intermediary to the extent tion with respect to a payment is consid- (e)(3)(v) of this section for the require-
that the qualified intermediary assumes ered to lack documentation for purposes ments of a U.S. branch certificate, and
primary withholding responsibility under of this paragraph (b)(2)(vii). For example, §§1.1441–5(c)(3)(iii) and (e)(5)(iii) for
paragraph (e)(5)(iv) of this section for the a withholding agent paying U.S. source the requirements of a flow-through with-
payment. For example if a qualified inter- interest to a person that is an exempt recip- holding certificate. Thus, a payment can-
mediary assumes primary withholding re- ient, as defined in §1.6049–4(c)(1)(ii), is not be reliably associated with valid docu-
sponsibility under chapter 3 of the Internal not required to obtain documentation from mentation provided by a payee to the
Revenue Code but does not assume pri- that person in order to determine whether extent such documentation is lacking or
mary reporting or withholding responsi- an amount paid to that person is reportable unreliable, or to the extent that informa-
bility under chapter 61 or section 3406 of under an applicable information reporting tion required to allocate and report all or a
the Internal Revenue Code and therefore provision under chapter 61 of the Internal portion of the payment to each payee is
provides Forms W-9 for U.S. non-exempt Revenue Code. The withholding agent lacking or unreliable. If a withholding
recipients, the qualified intermediary is must, however, treat the payment as made certificate attached to an intermediary,
the payee except to the extent the payment to an undocumented person for purposes U.S. branch, or flow-through withholding
is reliably associated with a Form W-9 of chapter 3 of the Internal Revenue Code. certificate is another intermediary, U.S.
from a U.S. non-exempt recipient. Therefore, the presumption rules of para- branch, or flow-through withholding cer-
***** graph (b)(3)(iii) of this section apply to tificate, the rules of this paragraph
(vii) Rules for reliably associating a determine whether the person is presumed (b)(2)(vii)(B) apply by treating the share
payment with a withholding certificate or to be a U.S. person (in which case, no of the payment allocable to the other in-
other appropriate documentation—(A) withholding is required under this sec- termediary, U.S. branch, or flow-through
Generally. The presumption rules of para- tion), or whether the person is presumed to entity as if the payment were made di-
graph (b)(3) of this section and be a foreign person (in which case 30-per- rectly to such other entity. See paragraph
§§1.1441–5(d) and (e)(6) and 1.6049–5(d) cent withholding is required under this (e)(3)(iv)(D) of this section for rules per-
apply to any payment, or portion of a pay- section). See paragraph (b)(3)(v) of this mitting information allocating a payment
ment, that a withholding agent cannot reli- section for special reliance rules in the to documentation to be received after the
ably associate with valid documentation. case of a payment to a foreign intermedi- payment is made.
Generally, a withholding agent can reli- ary and §1.1441–5(d) and (e)(6) for spe- (2) The rules of paragraph (b)(2)(vii)(B)(1)
June 5, 2000 1180 2000–23 I.R.B.
of this section are illustrated by the following mary withholding responsibility. (1) If a ing allocation information with its qualified interme-
examples: payment is made to a qualified intermedi- diary withholding certificate: 40 percent of the pay-
Example 1. WH, a withholding agent, makes a ment is allocable to the 15 percent withholding rate
ary that does not assume primary with- pool, and 20 percent is allocable to each of D and E.
payment of U.S. source interest to NQI, an interme-
holding responsibility under chapter 3 of QI does not provide any allocation information re-
diary that is a nonqualified intermediary. NQI pro-
vides a valid intermediary withholding certificate the Internal Revenue Code or primary garding the remaining 20 percent of the payment.
under paragraph (e)(3)(iii) of this section. NQI does Form 1099 reporting and backup with- WH cannot reliably associate 20 percent of the pay-
not, however, provide valid documentation from the holding responsibility under chapter 61 ment with valid documentation and, therefore, must
persons on whose behalf it receives the interest pay- apply the presumption rules of paragraph (b)(3)(v)
and section 3406 of the Internal Revenue of this section to that portion of the payment. The
ment, and, therefore, the interest payment cannot be
Code for the payment, a withholding 20 percent of the payment allocable to the 15 per-
reliably associated with valid documentation pro-
vided by a payee. WH must apply the presumption agent can reliably associate the payment cent withholding rate pool, and the portion of the
rules of paragraph (b)(3)(v) of this section to the with valid documentation only to the ex- payments allocable to D and E are payments that can
payment. tent that, prior to the payment, the with- be reliably associated with documentation.
Example 2. The facts are the same as in Example holding agent has received a valid quali- (D) Special rules applicable to a with-
1, except that NQI does attach valid beneficial
fied intermediary withholding certificate holding certificates provided by a quali-
owner withholding certificates (as defined in para- fied intermediary that assumes primary
graph (e)(2)(i) of this section) from A, B, C, and D and the withholding agent can reliably de-
termine the portion of the payment that withholding responsibility under chapter
establishing their status as foreign persons. NQI
does not, however, provide WH with any informa- relates to a withholding rate pool, as de- 3 of the Internal Revenue Code. (1) In the
tion allocating the payment among A, B, C, and D fined in paragraph (e)(5)(v)(C) of this case of a payment made to a qualified in-
and, therefore, WH cannot determine the portion of
section. In the case of a withholding rate termediary that assumes primary with-
the payment that relates to each beneficial owner holding responsibility under chapter 3 of
withholding certificate. The interest payment can- pool attributable to a U.S. non-exempt re-
cipient, a payment cannot be reliably as- the Internal Revenue Code with respect to
not be reliably associated with valid documentation
from a payee and WH must apply the presumption sociated with valid documentation unless, that payment (but does not assume pri-
rules of paragraph (b)(3)(v) of this section to the prior to the payment, the qualified inter- mary Form 1099 reporting and backup
payment. See, however, paragraph (e)(3)(iv)(D) of
mediary has provided the U.S. person’s withholding responsibility under chapter
this section providing special rules permitting allo- 61 and section 3406 of the Internal Rev-
cation information to be received after a payment is Form W-9 (or, in the absence of the form,
the name, address, and TIN, if available, enue Code), a withholding agent can reli-
made.
Example 3. The facts are the same as in Example of the U.S. person) and sufficient infor- ably associate the payment with valid
2, except that NQI does provide allocation informa- mation for the withholding agent to report documentation only to the extent that,
tion associated with its intermediary withholding
the payment on Form 1099. See para- prior to the payment, the withholding
certificate indicating that 25 percent of the interest agent has received a valid qualified inter-
payment is allocable to A and 25 percent to B. NQI graph (e)(5)(v)(C)(2) of this section for
special rules regarding allocation of pay- mediary withholding certificate and the
does not provide any allocation information regard-
ing the remaining 50 percent of the payment. WH ments among U.S. non-exempt recipients. withholding agent can reliably determine
may treat 25 percent of the payment as made to A (2) The rules of this paragraph the portion of the payment that relates to
and 25 percent as made to B. The remaining 50 per-
(b)(2)(vii)(C) are illustrated by the fol- the withholding rate pool for which the
cent of the payment cannot be reliably associated qualified intermediary assumes primary
with valid documentation from a payee, however, lowing examples:
Example 1. WH, a withholding agent, makes a withholding responsibility under chapter
since NQI did not provide information allocating the
payment. Thus, the remaining 50 percent of the pay-
payment of U.S. source dividends to QI. QI pro- 3 of the Internal Revenue Code and the
vides WH with a valid qualified intermediary with- portion of the payment attributable to
ment is subject to the presumption rules of para-
holding certificate on which it indicates that it does
graph (b)(3)(v) of this section. withholding rate pools for each U.S. non-
not assume primary withholding responsibility
Example 4. WH makes a payment of U.S. source exempt recipient for whom the qualified
under chapter 3 of the Internal Revenue Code or pri-
interest to NQI1, an intermediary that is not a quali-
mary Form 1099 reporting and backup withholding intermediary has provided a Form W-9
fied intermediary. NQI1 provides WH with a valid
nonqualified intermediary withholding certificate as
responsibility under chapter 61 and section 3406 of (or, in absence of the form, the name, ad-
the Internal Revenue Code. QI does not provide any dress, and TIN, if available, of the U.S.
well a valid beneficial owner withholding certifi-
information allocating the dividend to withholding
cates from A and B and a valid nonqualified inter- non-exempt recipient). See paragraph
rate pools. WH cannot reliably associate the pay-
mediary withholding certificate from NQI2. NQI2 (e)(5)(v)(C)(2) of this section for alterna-
ment with valid payee documentation and therefore
has provided valid beneficial owner documentation
must apply the presumption rules of paragraph tive allocation procedures for payments
from C sufficient to establish C’s status as a foreign
person. Based on information provided by NQI1,
(b)(3)(v) of this section. made to U.S. persons that are not exempt
Example 2. WH makes a payment of U.S. source recipients.
WH can allocate 20 percent of the interest payment
dividends to QI. QI has 5 customers: A, B, C, D,
to A, and 20 percent to B. Based on information that (2) Examples. The following examples
and E. QI has obtained documentation from A and B
NQI2 provided NQI1 and that NQI1 provides to illustrate the rules of paragraph
establishing their entitlement to a 15 percent rate of
WH, WH can allocate 60 percent of the payment to
tax on U.S. source dividends under an income tax (b)(2)(vii)(D)(1) of this section:
NQI 2, but can only allocate one half of that pay-
treaty. C is a U.S. person that is an exempt recipient Example 1. WH makes a payment of U.S. source
ment (30 percent) to C. Therefore, WH cannot reli-
as defined in paragraph (c)(20) of this section. D interest to QI, a qualified intermediary. QI provides
ably associate 30 percent of the payment made to
and E are U.S. non-exempt recipients who have pro- WH with a withholding certificate that indicates that
NQI2 with valid documentation and must apply the
vided Forms W-9 to QI. A, B, C, D, and E are each QI will assume primary withholding responsibility
presumption rules of paragraph (b)(3)(v) of this sec-
entitled to 20 percent of the dividend payment. QI under chapter 3 of the Internal Revenue Code with
tion to that portion of the payment.
provides WH with a valid qualified intermediary respect to the payment. In addition, QI attaches a
(C) Special rules applicable to a with- withholding certificate as described in paragraph Form W-9 from A, a U.S. non-exempt recipient, as
holding certificate provided by a qualified (e)(2)(ii) of this section with which it associates the defined in paragraph (c)(21) of this section, and pro-
intermediary that does not assume pri- Forms W-9 from D and E. QI associates the follow- vides the name, address, and TIN of B, a U.S. person
2000–23 I.R.B. 1181 June 5, 2000
that is also a non-exempt recipient but who has not percent of the dividend is subject to a 30 percent rate documentary evidence must apply the
provided a Form W-9. QI associates a withholding of withholding, 75 percent of the dividend is subject rules of this paragraph (b)(3)(ii) to deter-
statement with its qualified intermediary withhold- to a 15 percent rate of withholding, and that QI as-
ing certificate indicating that 10 percent of the pay- sumed primary Form 1099 reporting and backup
mine the payee’s classification as an indi-
ment is attributable to A, and 10 percent to B, and withholding for the remaining 10 percent of the pay- vidual, trust, estate, corporation, or part-
that QI will assume primary withholding responsi- ment. The entire payment can be reliably associated nership. The fact that a payee is
bility with respect to the remaining 80 percent of the with valid documentation. presumed to have a certain status under
payment. WH can reliably associate the entire pay- (F) Special rules applicable to a with- the provisions of this paragraph (b)(3)(ii)
ment with valid documentation. Although under the
presumption rule of paragraph (b)(3)(v) of this sec-
holding certificate provided by a qualified does not mean that it is excused from fur-
tion, an undocumented person receiving U.S. source intermediary that assumes primary with- nishing documentation if documentation
interest is generally presumed to be a foreign person, holding responsibility under chapter 3 is otherwise required to obtain a reduced
WH has actual knowledge that B is a U.S. non-ex- and primary Form 1099 reporting and rate of withholding under this section.
empt recipient and therefore must report the pay- backup withholding responsibility and a For example, if, for purposes of this para-
ment on Form 1099 and backup withhold on the in-
terest payment under section 3406.
withholding certificate provided by a graph (b)(3)(ii), a payee is presumed to be
Example 2. The facts are the same as in Example withholding foreign partnership. If a pay- a tax-exempt organization based on
1, except that no Forms W-9 or other information ment is made to a qualified intermediary §1.6049–4(c)(1)(ii)(B), the withholding
have been provided for the 20 percent of the pay- that assumes both primary withholding agent cannot rely on this presumption to
ment that is allocable to A and B. Thus, QI has ac- responsibility under chapter 3 of the Inter- reduce the rate of withholding on pay-
cepted withholding responsibility for 80 percent of
the payment, but has provided no information for the
nal Revenue Code and primary Form ments to such person (if such person is
remaining 20 percent. In this case, 20 percent of the 1099 reporting and backup withholding also presumed to be a foreign person
payment cannot be reliably associated with valid responsibility under chapter 61 and sec- under paragraph (b)(3)(iii)(A) of this sec-
documentation, and WH must apply the presump- tion 3406 of the Internal Revenue Code tion) because a reduction in the rate of
tion rule of paragraph (b)(3)(v) of this section. for the payment, a withholding agent can withholding for payments to a foreign
(E) Special rules applicable to a with- reliably associate a payment with valid tax-exempt organization generally re-
holding certificate provided by a qualified documentation provided that it receives a quires that a valid Form W–8 described in
intermediary that assumes primary Form valid qualified intermediary withholding §1.1441–9(b)(2) be furnished to the with-
1099 reporting and backup withholding certificate as described in paragraph holding agent.
responsibility but not primary withhold- (e)(3)(ii) of this section. In the case of a (B) No documentation provided. If the
ing under chapter 3. (1). If a payment is payment made to a withholding foreign withholding agent cannot reliably associ-
made to a qualified intermediary that as- partnership, the withholding agent can re- ate a payment with a valid withholding
sumes primary Form 1099 reporting and liably associate the payment with valid certificate or valid documentary evidence,
backup withholding responsibility for the documentation to the extent it can associ- it must presume that the payee is an indi-
payment (but does not assume primary ate the payment with a valid withholding vidual, a trust, or an estate, if the payee ap-
withholding responsibility under chapter certificate described in §1.1441- pears to be such person (e.g., based on the
3 of the Internal Revenue Code), a with- 5(c)(2)(iv). payee’s name or other indications). In the
holding agent can reliably associate the (3) Presumptions regarding payee’s absence of reliable indications that the
payment with valid documentation only status in the absence of documentation— payee is an individual, trust, or an estate,
to the extent that, prior to the payment, (i) General rules. A withholding agent the withholding agent must presume that
the withholding agent has received a valid that cannot, prior to the payment, reliably the payee is a corporation or one of the per-
qualified intermediary withholding cer- associate (within the meaning of para- sons enumerated under §1.6049–4(c)-
tificate and the withholding agent can re- graph (b)(2)(vii) of this section) a pay- (1)(ii)(B) through (Q) if it can be so treated
liably determine the portion of the pay- ment of an amount subject to withholding under §1.6049–4(c)(1)(ii)(A)(1) or any one
ment that relates to a withholding rate (as described in §1.1441–2(a)) with valid of the paragraphs under §1.6049–4(c)-
pool or pools provided as part of the qual- documentation may rely on the presump- (1)(ii)(B) through (Q) without the need to
ified intermediary’s withholding state- tions of this paragraph (b)(3) to determine furnish documentation. If the withholding
ment and the portion of the payment for the status of the payee as a U.S. or a for- agent cannot treat a payee as a person de-
which the qualified intermediary assumes eign person and the payee’s other relevant scribed in §1.6049–4(c)(1)(ii)(A)(1)
primary Form 1099 reporting and backup characteristics (e.g., as an owner or inter- through (Q), then the payee shall be pre-
withholding responsibility. mediary, as an individual, trust, partner- sumed to be a partnership. If such a part-
(2) The following example illustrates ship, or corporation). * * * nership is presumed to be foreign, it is not
the rules of paragraph (b)(2)((vii)(D)(1) the beneficial owner of the income paid to
(ii) Presumptions of classification as
of this section: it. See paragraph (c)(6) of this section. If
Example. WH makes a payment of U.S. source
individual, corporation, partnership, etc.
dividends to QI, a qualified intermediary. QI has (A) In general. A withholding agent that such a partnership is presumed to be do-
provided WH with a valid qualified intermediary cannot reliably associate a payment with a mestic, it is a U.S. non-exempt recipient
withholding certificate. QI states on its withholding valid withholding certificate or that has for purposes of chapter 61 of the Internal
statement accompanying the certificate that it as- received valid documentary evidence Revenue Code.
sumes primary Form 1099 reporting and backup
withholding responsibility but does not assume pri-
under §§1.1441–1(e)(1)(ii)(2) and (C) Documentary evidence furnished
mary withholding responsibility under chapter 3 of 1.6049–5(c)(1) or (4) but cannot deter- for offshore account. If the withholding
the Internal Revenue Code. QI represents that 15 mine a payee’s classification from the agent receives valid documentary evi-
June 5, 2000 1182 2000–23 I.R.B.
dence, as described in §1.6049–5(c)(1) or son with authority to sign the statement, graph (b)(3) (by applying the term with-
(4), with respect to an offshore account that is attached to the documentary evi- holding agent instead of the term payor)
from an entity but the documentary evi- dence stating it is the beneficial owner of to amounts described in §1.1441–6(c)(2)
dence does not establish the entity’s clas- the income. and to amounts covered by a Form 8233
sification as a corporation, trust, estate, or (iii) * * * described in §1.1441–4(b)(2)(ii). Thus,
partnership, the withholding agent may (C) Pensions, annuities, etc. A pay- for these amounts, a withholding agent
presume (in the absence of actual knowl- ment from a trust described in section may choose to treat an account holder as a
edge otherwise) that the entity is the type 401(a), an annuity plan described in sec- foreign person and withhold under chap-
of person enumerated under tion 403(a), a payment with respect to any ter 3 of the Internal Revenue Code (and
§1.6049–4(c)(1)(ii)(B) through (Q) if it annuity, custodial account, or retirement the regulations thereunder) while await-
can be so treated under any one of those income account described in section ing documentation. For purposes of de-
paragraphs without the need to furnish 403(b), or a payment from an individual termining the rate of withholding under
documentation. If the withholding agent retirement account or individual retire- this section, the withholding agent must
cannot treat a payee as a person described ment annuity described in section 408 that withhold at the unreduced 30-percent rate
in §1.6049–4(c)(1)(ii)(B) through (Q), a withholding agent cannot reliably asso- at the time that the amounts are credited
then the payee shall be presumed to be a ciate with documentation is presumed to to an account. However, a withholding
corporation unless the withholding agent be made to a U.S. person only if the with- agent who can reliably associate the pay-
knows, or has reason to know, that the en- holding agent has a record of a Social Se- ment with a withholding certificate that is
tity is not classified as a corporation for curity number for the payee and relies on otherwise valid within the meaning of the
U.S. tax purposes, the withholding agent a mailing address described in the follow- applicable provisions except for the fact
is required to presume the payee is a U.S. ing sentence. A mailing address is an ad- that it is transmitted by facsimile may rely
person under paragraph (b)(3)(iii) of this dress used for purposes of information re- on that facsimile form for purposes of
section, or there are indicia of U.S. status. porting or otherwise communicating with withholding at the claimed reduced rate.
If the withholding agent must presume the the payee that is an address in the United For reporting of amounts credited both
payee is a U.S. person, or there are indicia States or in a foreign country with which before and after the grace period, see
of U.S. status, the withholding agent shall the United States has an income tax treaty §1.1461–1(c)(4)(i)(A). The following ad-
treat the entity as a partnership, and there- in effect and the treaty provides that the justments shall be made at the expiration
fore as a U.S. non-exempt recipient for payee, if an individual resident in that of the grace period:
purposes of chapter 61 of the Internal country, would be entitled to an exemp- (A) If, at the end of the grace period,
Revenue Code; however backup with- tion from U.S. tax on amounts described the documentation is not furnished in the
holding under section 3406 shall not in this paragraph (b)(3)(iii)(C). Any pay- manner required under this section and
apply if backup withholding is not re- ment described in this paragraph the account holder is presumed to be a
quired under §31.3406(g)–1(e) of this (b)(3)(iii)(C) that is not presumed to be U.S. non-exempt recipient, then backup
chapter. Indicia of U.S. status exists if made to a U.S. person is presumed to be withholding applies to amounts credited
payments are regularly made to a payee in made to a foreign person. A withholding to the account after the expiration of the
the United States, the payee has an ac- agent making a payment to a person pre- grace period only. Amounts credited to
count with the same withholding agent in sumed to be a foreign person may not re- the account during the grace period shall
the United States, or the payee has a U.S. duce the 30-percent amount of withhold- be treated as owned by a foreign payee
address. If a payee is, or is presumed to ing required on such payment unless it and adjustments must be made to correct
be, a corporation under this paragraph receives a withholding certificate de- any underwithholding on such amounts in
(b)(3)(ii)(C) and a foreign person under scribed in paragraph (e)(2)(i) of this sec- the manner described in §1.1461–2.
paragraph (b)(3)(iii) of this section, a tion furnished by the beneficial owner. (B) If, at the end of the grace period,
withholding agent shall not treat the For reduction in the 30-percent rate, see the documentation is not furnished in the
payee as the beneficial owner of income if §§1.1441–4(e) or 1.1441–6(b). manner required under this section, or if
the withholding agent knows, or has rea- (D) Certain payments to offshore ac- documentation is furnished that does not
son to know, that the payee is not the ben- counts. A payment is presumed made to a support the claimed rate reduction, and
eficial owner of the income. For this pur- foreign payee if the payment is made out- the account holder is presumed to be a
pose, a withholding agent shall have side the United States (as defined in foreign person then adjustments must be
reason to know that the payee is not a §1.6049–5(e)) to an offshore account (as made to correct any underwithholding on
beneficial owner if the documentary evi- defined in §1.6049–5(c)(1)) and the with- amounts credited to the account during
dence indicates that the payee is a bank, holding agent does not have actual knowl- the grace period, based on the adjustment
broker, intermediary, custodian, or other edge that the payee is a U.S. person. See procedures described in §1.1461–2.
agent, or is treated under §1.6049–5(d)(2) and (3) for exceptions to (v) Special rules applicable to pay-
§1.6049–4(c)(1)(ii)(B) through (Q) as this rule. ments to foreign intermediaries—(A) Re-
such a person. A withholding agent may, (iv) Grace period. A withholding liance on claim of status as foreign inter-
however, treat such a person as a benefi- agent may choose to apply the provisions mediary. The presumption rules of
cial owner if the foreign person provides a of §1.6049–5(d)(2)(ii) regarding a 90- paragraph (b)(3)(v)(B) of this section
statement, in writing and signed by a per- day grace period for purposes of this para- apply to a payment made to an intermedi-
2000–23 I.R.B. 1183 June 5, 2000
ary (whether the intermediary is a quali- treating the share of the payment alloca- agent has not withheld the full amount re-
fied or nonqualified intermediary) that ble to the other intermediary or flow- quired) and report such payment under
has provided a valid withholding certifi- through entity as if it were made directly chapter 3 of the Internal Revenue Code
cate under paragraph (e)(3)(ii) or (iii) of to the other intermediary or flow-through and the regulations thereunder except as
this section (or has provided documentary entity. Any payment of an amount subject otherwise provided in this paragraph
evidence described in paragraph to withholding that is presumed made to (b)(6). A nonqualified intermediary or
(b)(3)(ii)(C) of this section that indicates an undocumented foreign person must be U.S. branch described in paragraph
it is a bank, broker, custodian, intermedi- reported on Form 1042-S. See (b)(2)(iv) of this section (other than a
ary, or other agent) to the extent the with- §1.1461–1(c). See §1.6049–5(d) for pay- branch that is treated as a U.S. person)
holding agent cannot treat the payment as ments that are not subject to withholding. shall not be required to withhold or report
being reliably associated with valid docu- (vi) U.S. branches. The rules of para- if it has provided a valid nonqualified in-
mentation under the rules of paragraph graph (b)(3)(v)(B) of this section shall termediary withholding certificate or a
(b)(2)(vii) of this section. For this pur- apply to payments to a U.S. branch de- U.S. branch withholding certificate, it has
pose, a U.S. person’s foreign branch that scribed in paragraph (b)(2)(iv)(A) of this provided all of the information required
is a qualified intermediary defined in section that has not agreed to be treated as by paragraph (e)(3)(iv) of this section
paragraph (e)(5)(ii) of this section shall be a U.S. person. (withholding statement), and it does not
treated as a foreign intermediary. A payee (vii) Joint payees—(A) In general. Ex- know, and has no reason to know, that an-
that the withholding agent may not reli- cept as provided in paragraph other withholding agent failed to withhold
ably treat as a foreign intermediary under (b)(3)(vii)(B) of this section, if a with- the correct amount or failed to report the
this paragraph (b)(3)(v)(A) is presumed to holding agent makes a payment to joint payment correctly under §1.1461–1(c). A
be a payee other than an intermediary payees and cannot reliably associate a qualified intermediary’s obligations to
whose classification as an individual, cor- payment with valid documentation from withhold and report shall be determined
poration, partnership, etc., must be deter- all payees, the payment is presumed made in accordance with its qualified interme-
mined in accordance with paragraph to an unidentified U.S. person. However, diary withholding agreement.
(b)(3)(ii) of this section to the extent rele- if one of the joint payees provides a Form (ii) Examples. The following examples
vant. In addition, such payee is presumed W-9 furnished in accordance with the pro- illustrate the rules of paragraph (b)(6)(i)
to be a U.S. or a foreign payee based upon cedures described in §§31.3406(d)–1 of this section:
the presumptions described in paragraph through 31.3406(d)–5 of this chapter, the Example 1. FB, a foreign bank, acts an interme-
diary for five different persons, A, B, C, D, and E,
(b)(3)(iii) of this section. The provisions payment shall be treated as made to that
each of whom owns U.S. securities that generate
of paragraph (b)(3)(v)(B) of this section payee. See §31.3406(h)–2 of this chapter U.S. source dividends. The dividends are paid by
are not relevant to a withholding agent for rules to determine the relevant payee USWA, a U.S. withholding agent. FB furnished
that can reliably associate a payment with if more than one Form W–9 is provided. USWA with a nonqualified intermediary withhold-
a withholding certificate from a person For purposes of applying this paragraph ing certificate, described in paragraph (e)(3)(iii) of
this section, to which it attached the withholding
representing to be a qualified intermedi- (b)(3), the grace period rules in paragraph
certificates of each of A, B, C, D, and E. The with-
ary to the extent the qualified intermedi- (b)(3)(iv) of this section shall apply only holding certificates from A and B claim a 15 percent
ary has assumed primary withholding re- if each payee meets the conditions de- reduced rate of withholding under an income tax
sponsibility in accordance with paragraph scribed in paragraph (b)(3)(iv) of this sec- treaty. C, D, and E claim no reduced rate of with-
(e)(5)(iv) of this section. tion. holding. FB provides a withholding statement that
meets all of the requirements of paragraph (e)(3)(iv)
(B) Beneficial owner documentation or (B) Special rule for offshore accounts.
of this section, including information allocating 20
allocation information is lacking or unre- If a withholding agent makes a payment percent of each dividend payment to each of A, B, C,
liable. Any portion of a payment that the to joint payees and cannot reliably associ- D, and E. FB does not have actual knowledge or rea-
withholding agent may treat as made to a ate a payment with valid documentation son to know that USWA did not withhold the correct
foreign intermediary (whether a nonquali- from all payees, the payment is presumed amounts or report the dividends on Forms 1042-S to
each of A, B, C, D, and E. FB is not required to
fied or a qualified intermediary) but that made to an unknown foreign payee if the
withhold or to report the dividends to A, B, C, D,
the withholding agent cannot treat as reli- payment is made outside the United and E.
ably associated with valid documentation States (as defined in §1.6059–5(e)) to an Example 2. The facts are the same as in Example
under the rules of paragraph (b)(2)(vii) of offshore account (as defined in 1, except that FB did not provide any information
this section is presumed made to an un- §1.6049–5(c)(1)). for USWA to determine how much of the dividend
payments were made to A, B, C, D, and E. Because
known, undocumented foreign payee. As *****
USWA could not reliably associate the dividend
a result, a withholding agent must deduct (6) Rules of withholding for payments payments with documentation under paragraph
and withhold 30 percent from any pay- by a foreign intermediary or certain U.S. (b)(2)(vii) of this section, USWA applied the pre-
ment of an amount subject to withhold- branches—(i) In general. A foreign inter- sumption rules of paragraph (b)(3)(v) of this section
ing. If a withholding certificate attached mediary described in paragraph (e)(3)(i) and withheld 30 percent from all dividend payments.
In addition, USWA filed a single Form 1042-S re-
to an intermediary certificate is another of this section or a U.S. branch described
porting the payment to an unknown foreign payee.
intermediary withholding certificate or a in paragraph (b)(2)(iv) of this section that FB is deemed to know that USWA did not report the
flow-through withholding certificate, the receives an amount subject to withholding payment to A, B, C, D, and E because it did not pro-
rules of this paragraph (b)(3)(v)(B) (or (as defined in §1.1441–2(a)) shall be re- vide all of the information required on a withholding
§1.1441–5(d)(3) or (e)(6)(iii)) apply by quired to withhold (if another withholding statement under paragraph (e)(3)(iv) of this section
(i.e., allocation information). Although FB is not re-
June 5, 2000 1184 2000–23 I.R.B.
quired to withhold on the payment because the full come. In the case of a scholarship, the *****
30 percent withholding was imposed by USWA, it is student receiving the scholarship is the (12) Payee. For purposes of chapter 3
required to report the payments on Forms 1042-S to
A, B, C, D, and E. FB’s intentional failure to do so
beneficial owner of that scholarship. In of the Internal Revenue Code, the term
will subject it to intentional disregard penalties the case of a payment of an amount that is payee of a payment is determined under
under sections 6721 and 6722. not income, the beneficial owner determi- paragraph (b)(2) of this section,
***** nation shall be made under this paragraph §1.1441–5(c)(1) (relating to partner-
(c) * * * (c)(6) as if the amount were income. ships), and §1.1441–5(e)(2) and (3) (relat-
(2) Foreign and U.S. person. The term (ii) Special rules—(A) General rule. ing to trusts and estates) and includes for-
foreign person means a nonresident alien The beneficial owners of income paid to eign persons, U.S. exempt recipients, and
individual, a foreign corporation, a for- an entity described in this paragraph U.S. non-exempt recipients. A nonquali-
eign partnership, a foreign trust, a foreign (c)(6)(ii) are those persons described in fied intermediary and a qualified interme-
estate, and any other person that is not a paragraphs (c)(6)(ii)(B) through (D) of diary (to the extent it does not assume pri-
U.S. person described in the next sen- this section. mary withholding responsibility) are not
tence. Solely for purposes of the regula- (B) Foreign partnerships. The benefi- payees if they are acting as intermediaries
tions under chapter 3 of the Internal Rev- cial owners of income paid to a foreign and not the beneficial owner of income.
enue Code, the term foreign person also partnership (whether a nonwithholding or In addition, a flow-through entity is not a
means, with respect to a payment by a a withholding foreign partnership) are the payee unless the income is (or is deemed
withholding agent, a foreign branch of a partners in the partnership, unless they to be) effectively connected with the con-
U.S. person that furnishes an intermediary themselves are not the beneficial owners duct of a trade or business in the United
withholding certificate described in para- of the income under this paragraph (c)(6). States. See §1.6049–5(d)(1) for rules to
graph (e)(3)(ii) of this section. Such a For example, a partnership (first tier) that determine the payee for purposes of chap-
branch continues to be a U.S. payor for is a partner in another partnership (second ter 61 of the Internal Revenue Code. See
purposes of chapter 61 of the Internal tier) is not the beneficial owner of income §§1.1441–1(b)(3), 1.1441–5(d), and
Revenue Code. See §1.6049–5(c)(4). A paid to the second tier partnership since (e)(6) and 1.6049–5(d)(3) for presump-
U.S. person is a person described in sec- the first tier partnership is not the owner tion rules that apply if a payee’s identity
tion 7701(a)(30), the U.S. government of the income under U.S. tax principles. cannot be determined on the basis of valid
(including an agency or instrumentality Rather, the partners of the first tier part- documentation.
thereof), a State (including an agency or nership are the beneficial owners (to the (13) Intermediary. An intermediary
instrumentality thereof), or the District of extent they are not themselves persons means, with respect to a payment that it re-
Columbia (including an agency or instru- that are not beneficial owners under this ceives, a person that, for that payment, acts
mentality thereof). paragraph (c)(6)). See §1.1441–5(b) for as a custodian, broker, nominee, or other-
***** applicable withholding procedures for wise as an agent for another person, regard-
(6) Beneficial owner—(i) General rule. payments to a domestic partnership. See less of whether such other person is the ben-
This paragraph (c)(6) defines the term also §1.1441–5(c)(3)(ii) for applicable eficial owner of the amount paid, a
beneficial owner for payments of income withholding procedures for payments to a flow-through entity, or another intermediary.
other than a payment for which a reduced foreign partnership where one of the part- (14) Nonqualified intermediary. A
rate of withholding is claimed under an ners (at any level in the chain of tiers) is a nonqualified intermediary means any in-
income tax treaty. The term beneficial domestic partnership. termediary that is not a qualified interme-
owner means the person who is the owner (C) Foreign simple trusts and foreign diary, as defined in paragraph (e)(5)(ii) of
of the income for tax purposes and who grantor trusts. The beneficial owners of this section, or a qualified intermediary
beneficially owns that income. A person income paid to a foreign simple trust, as that is not acting in its capacity as a quali-
shall be treated as the owner of the in- described in paragraph (c)(23) of this sec- fied intermediary with respect to a pay-
come to the extent that it is required under tion, are the beneficiaries of the trust, un- ment. For example, to the extent an entity
U.S. tax principles to include the amount less they themselves are not the beneficial that is a qualified intermediary provides
paid in gross income under section 61 owners of the income under this para- another withholding agent with a foreign
(determined without regard to an exclu- graph (c)(6). The beneficial owners of in- beneficial owner withholding certificate
sion or exemption from gross income come paid to a foreign grantor trust, as as defined in paragraph (e)(2)(i) of this
under the Internal Revenue Code). Bene- described in paragraph (c)(26) of this sec- section, the entity is not acting in its ca-
ficial ownership of income is determined tion, are the persons treated as the owners pacity as a qualified intermediary.
under the provisions of section 7701(l) of the trust, unless they themselves are Notwithstanding the preceding sentence,
and the regulations under that section and not the beneficial owners of the income a qualified intermediary is acting as a
any other applicable general U.S. tax under this paragraph (c)(6). qualified intermediary to the extent it pro-
principles, including principles governing (D) Other foreign trusts and foreign es- vides another withholding agent with
the determination of whether a transaction tates. The beneficial owner of income Forms W-9, or other information regard-
is a conduit transaction. Thus, a person paid to a foreign complex trust as defined ing U.S. non-exempt recipients pursuant
receiving income in a capacity as a nomi- in paragraph (c)(25) of this section or to a to its qualified intermediary agreement
nee, agent, or custodian for another per- foreign estate is the foreign complex trust with the IRS.
son is not the beneficial owner of the in- or estate itself. (15) Qualified intermediary. The term
2000–23 I.R.B. 1185 June 5, 2000
qualified intermediary is defined in para- 3406. This latter rule does not preclude ship means any entity treated as a partner-
graph (e)(5)(ii) of this section. the intermediary, flow-through entity, or ship under §301.7701–2 or –3 of this
(16) Withholding certificate. The term U.S. branch from also being a payor. chapter.
withholding certificate means a Form (20) Exempt recipient. The term ex- (28) Nonwithholding foreign partner-
W-8 described in paragraph (e)(2)(i) of empt recipient means a person that is ex- ship. A nonwithholding foreign partner-
this section (relating to foreign beneficial empt from reporting under chapter 61 of ship is a foreign partnership that is not a
owners), paragraph (e)(3)(i) of this sec- the Internal Revenue Code and backup withholding foreign partnership, as de-
tion (relating to foreign intermediaries), withholding under section 3406 and that fined in §1.1441–5(c)(2)(i).
§1.1441–5(c)(2)(iv), (c)(3)(iii), and is described in §§1.6041–3(q), (29) Withholding foreign partnership.
(e)(3)(iv) (relating to flow-through enti- 1.6045–2(b)(2)(i), and 1.6049–4(c)(1)(ii), A withholding foreign partnership is de-
ties), a Form 8233 described in §1.1441– and §5f.6045–1(c)(3)(i)(B) of this chap- fined in §1.1441–5(c)(2)(i).
4(b)(2), a Form W-9 as described in para- ter. Exempt recipients are not exempt (d) * * *
graph (d) of this section, a statement de- from withholding under chapter 3 of the (2) Payments for which a Form W-9 is
scribed in §1.871–14(c)(2)(v) (relating to Internal Revenue Code unless they are otherwise required. A withholding agent
portfolio interest), or any other certifi- U.S. persons or foreign persons entitled to may treat as a U.S. payee any person who
cates that under the Internal Revenue an exemption from withholding under is required to furnish a Form W-9 and
Code or regulations certifies or estab- chapter 3. who furnishes it in accordance with the
lishes the status of a payee or beneficial (21) Non-exempt recipient. A non-ex- procedures described in §§31.3406(d)–1
owner as a U.S. or a foreign person. empt recipient is any person that is not an through 31.3406(d)–5 of this chapter (in-
(17) Documentary evidence; other ap- exempt recipient under paragraph (c)(20) cluding the requirement that the payee
propriate documentation. The terms docu- of this section. furnish its taxpayer identifying number
mentary evidence or other appropriate doc- (22) Reportable amounts. Reportable (TIN)) if the withholding agent meets all
umentation refer to documents other than a amounts are defined in paragraph the requirements described in
withholding certificate that may be pro- (e)(3)(vi) of this section. §31.3406(h)–3(e) of this chapter regard-
vided for payments made outside the (23) Flow-through entity. A flow- ing reliance by a payor on a Form W–9.
United States to offshore accounts or any through entity means any entity that is de- Providing a Form W–9 or valid substitute
other evidence that under the Internal Rev- scribed in this paragraph (c)(23) and that form shall serve as a statement that the
enue Code or regulations certifies or estab- may provide documentation on behalf of person whose name is on the form is a
lishes the status of a payee or beneficial others to a withholding agent. The enti- U.S. person. Therefore, a foreign person,
owner as a U.S. or foreign person. See ties described in this paragraph are a for- including a U.S. branch treated as a U.S.
§§1.1441–6(b)(2), (c)(3) and (4) (relating eign partnership (other than a withholding person under paragraph (b)(2)(iv) of this
to treaty benefits), and 1.6049–5(c)(1) and foreign partnership), a foreign simple section, shall not provide a Form W-9. A
(4) (relating to chapter 61 reporting). Also trust (other than a withholding foreign U.S. branch of a foreign person may es-
see §1.1441–4(a)(3)(ii) regarding docu- trust) that is described in paragraph tablish its status as a foreign person ex-
mentary evidence for notional principal (c)(24) of this section, a foreign grantor empt from reporting under chapter 61 and
contracts. trust (other than a withholding foreign backup withholding under section 3406
(18) Documentation. The term docu- trust) that is described in paragraph by providing a withholding certificate on
mentation refers to both withholding cer- (c)(25) of this section, or, for any pay- Form W-8.
tificates, as defined in paragraph (c)(16) ments for which a reduced rate of with- (3) Payments for which a Form W-9 is
of this section, and documentary evidence holding under an income tax treaty is not otherwise required. In the case of a
or other appropriate documentation, as claimed, any entity to the extent the entity payee who is not required to furnish a
defined in paragraph (c)(17) of this sec- is considered to be fiscally transparent Form W-9 under section 3406 (e.g., a per-
tion. under section 894 with respect to the pay- son exempt from reporting under chapter
(19) Payor. The term payor is defined ment by an interest holder’s jurisdiction. 61 of the Internal Revenue Code), the
in §31.3406(a)–2 of this chapter and (24) Foreign simple trust. A foreign withholding agent may treat the payee as a
§1.6049– 4(a)(2) and generally includes a simple trust is a foreign trust that is de- U.S. payee if the payee provides the with-
withholding agent, as defined in scribed in section 651(a). holding agent with a Form W-9 or a sub-
§1.1441–7(a). The term also includes any (25) Foreign complex trust. A foreign stitute form described in
person that makes a payment to an inter- complex trust is a foreign trust other than §31.3406(h)–3(c)(2) of this chapter (relat-
mediary, flow-through entity, or U.S. a trust described in section 651(a) or sec- ing to forms for exempt recipients) that
branch that is not treated as a U.S. person tions 671 through 679. contains the payee’s name, address, and
to the extent the intermediary, flow- (26) Foreign grantor trust. A foreign TIN. The form must be signed under
through, or U.S. branch provides a Form grantor trust is a foreign trust but only to penalties of perjury by the payee if so re-
W-9 or other appropriate information re- the extent all or a portion of the income of quired by the form or by §31.3406(h)–3 of
lating to a payee so that the payment can the trust is treated as owned by the grantor this chapter. Providing a Form W-9 or
be reported under chapter 61 of the Inter- or another person under sections 671 valid substitute form shall serve as a state-
nal Revenue Code and, if required, sub- through 679. ment that the person whose name is on the
ject to backup withholding under section (27) Partnership. The term partner- certificate is a U.S. person. A Form W-9
June 5, 2000 1186 2000–23 I.R.B.
or valid substitute form shall not be pro- has not been notified by the IRS that any with respect to a payment and not the ben-
vided by a foreign person, including any of the information on the withholding cer- eficial owner. See paragraphs (e)(3)(ii)
U.S. branch of a foreign person whether or tificate or other documentation is incor- and (iii) of this section. A flow-through
not the branch is treated as a U.S. person rect or unreliable. In the case of a Form withholding certificate is a Form W-8
under paragraph (b)(2)(iv) of this section. W-9 that is required to be furnished for a used by a flow-through entity as defined
See paragraph (e)(3)(v) of this section for reportable payment that may be subject to in paragraph (c)(23) of this section. See
withholding certificates provided by U.S. backup withholding, the withholding §1.1441–5(c)(3)(iii) (a nonwithholding
branches described in paragraph (b)(2)(iv) agent may be notified in accordance with foreign partnership), §1.1441–5(e)(5)(iii)
of this section. The procedures described section 3406(a)(1)(B) and the regulations (a foreign simple trust or foreign grantor
in §31.3406(h)–2(a) of this chapter shall under that section. See applicable proce- trust) or §1.1441–6(b)(2) (foreign entity
apply to payments to joint payees. A with- dures under section 3406(a)(1)(B) and the presenting claims on behalf of its interest
holding agent that receives a Form W-9 to regulations under that section for payors holders for a reduced rate of withholding
satisfy this paragraph (d)(3) must retain who have been notified with regard to under an income tax treaty). A U.S.
the form in accordance with the provisions such a Form W-9. Withholding agents branch certificate is a Form W-8 fur-
of §31.3406(h)–3(g) of this chapter, if ap- who have been notified in relation to nished under paragraph (e)(3)(v) of this
plicable, or of paragraph (e)(4)(iii) of this other Forms W-9, including under section section by a U.S. branch described in
section (relating to the retention of with- 6724(b) pursuant to section 6721, may paragraph (b)(2)(iv) of this section. See
holding certificates) if §31.3406(h)–3(g) rely on the withholding certificate or paragraph (e)(4)(viii) of this section for
of this chapter does not apply. The rules other documentation only to the extent applicable reliance rules.
of this paragraph (d)(3) are only intended provided under procedures as prescribed (ii) Intermediary withholding certifi-
to provide a method by which a withhold- by the IRS (see §601.601(d)(2) of this cate from a qualified intermediary. A
ing agent may determine that a payee is a chapter). qualified intermediary shall provide a
U.S. person and do not otherwise impose a (e) * * * (1) * * * qualified intermediary withholding cer-
requirement that documentation be fur- (ii) * * * (A) * * * tificate for reportable amounts received
nished by a person who is otherwise (1) That the withholding agent can reli- by the qualified intermediary. See para-
treated as an exempt recipient for purposes ably associate the payment with a benefi- graph (e)(3)(vi) of this section for the def-
of the applicable information reporting cial owner withholding certificate de- inition of reportable amount. A qualified
provisions under chapter 61 of the Internal scribed in paragraph (e)(2) of this section intermediary withholding certificate is
Revenue Code (e.g., §1.6049–4(c)(1)(ii) furnished by the person whose name is on valid only if it is furnished on a Form
for payments of interest). the certificate or attached to a valid for- W-8, an acceptable substitute form, or
(4) When a payment to an intermediary eign intermediary, flow-through, or U.S. such other form as the IRS may prescribe,
or flow-through entity may be treated as branch withholding certificate; it is signed under penalties of perjury by a
made to a U.S. payee. A withholding ***** person with authority to sign for the qual-
agent that makes a payment to an interme- (3) That the withholding agent can reli- ified intermediary, its validity has not ex-
diary (whether a qualified intermediary or ably associate the payment with a valid pired, and it contains the following infor-
nonqualified intermediary), a flow- qualified intermediary withholding cer- mation, statement, and certifications—
through entity, or a U.S. branch described tificate, as described in paragraph (A) The name, permanent residence ad-
in paragraph (b)(2)(iv) of this section may (e)(3)(ii) of this section, and the qualified dress (as described in paragraph (e)(2)(ii)
treat the payment as made to a U.S. payee intermediary has provided sufficient in- of this section), qualified intermediary
to the extent that, prior to the payment, formation for the withholding agent to al- employer identification number (QI-
the withholding agent can reliably associ- locate the payment to a withholding rate EIN), and the country under the laws of
ate the payment with a Form W-9 de- pool other than a withholding rate pool or which the intermediary is created, incor-
scribed in paragraph (d)(2) or (3) of this pools established for U.S. non-exempt re- porated, or governed. A qualified inter-
section attached to a valid intermediary, cipients; mediary that does not act in its capacity as
flow-through, or U.S. branch withholding (4) That the withholding agent can reli- a qualified intermediary must not use its
certificate described in paragraph (e)(3)(i) ably associate the payment with a with- QI-EIN. Rather the intermediary should
of this section or to the extent the with- holding certificate described in provide a nonqualified intermediary with-
holding agent can reliably associate the §1.1441–5(c)(3)(iii) or (e)(5)(iii) from a holding certificate, if it is acting as an in-
payment with a Form W-8 described in flow-through entity claiming the income termediary, and should use the taxpayer
paragraph (e)(3)(v) of this section that ev- is effectively connected income; identification number, if any, that it uses
idences an agreement to treat a U.S. ***** for all other purposes;
branch described in paragraph (b)(2)(iv) (3) Intermediary, flow-through, or U.S. (B) A certification that, with respect to
of this section as a U.S. person. In addi- branch withholding certificate—(i) In accounts it identifies on its withholding
tion, a withholding agent may treat the general. An intermediary withholding statement (as described in paragraph
payment as made to a U.S. payee only if it certificate is a Form W-8 by which a (e)(5)(v) of this section), the qualified in-
complies with the electronic confirmation payee represents that it is a foreign person termediary is not acting for its own ac-
procedures described in paragraph and that it is an intermediary (whether a count but is acting as a qualified interme-
(e)(4)(v) of this section, if required, and it qualified or nonqualified intermediary) diary;
2000–23 I.R.B. 1187 June 5, 2000
(C) A certification that the qualified in- own withholding certificate the other non- eral. A nonqualified intermediary shall
termediary has provided, or will provide, qualified intermediary withholding certifi- provide a withholding statement required
a withholding statement as required by cate or the flow-through withholding cer- by this paragraph (e)(3)(iv) to the extent
paragraph (e)(5)(v) of this section; and tificate and separately identify all of the the nonqualified intermediary is required
(D) Any other information, certifica- withholding certificates and other appro- to furnish, or does furnish, documentation
tions, or statements as may be required by priate documentation that are associated for payees on whose behalf it receives re-
the form or accompanying instructions in with the withholding certificate of the portable amounts (as defined in para-
addition to, or in lieu of, the information other nonqualified intermediary or flow- graph (e)(3)(vi) of this section) or to the
and certifications described in this para- through entity. Nothing in this paragraph extent it otherwise provides the documen-
graph (e)(3)(ii) or paragraph (e)(3)(v) of (e)(3)(iii) shall require an intermediary to tation of such payees to a withholding
this section. See paragraph (e)(5)(v) of furnish original documentation. Copies of agent. A nonqualified intermediary is not
this section for the requirements of a certificates or documentary evidence may required to disclose information regarding
withholding statement associated with the be transmitted to the U.S. withholding persons for whom it collects reportable
qualified intermediary withholding cer- agent, in which case the nonqualified in- amounts unless it has actual knowledge
tificate. termediary must retain the original docu- that any such person is a U.S. non-exempt
(iii) Intermediary withholding certifi- mentation for the same time period that recipient as defined in paragraph (c)(21)
cate from a nonqualified intermediary. A the copy is required to be retained by the of this section. Information regarding
nonqualified intermediary shall provide a withholding agent under paragraph U.S. non-exempt recipients required
nonqualified intermediary withholding (e)(4)(iii) of this section and must provide under this paragraph (e)(3)(iv) must be
certificate for reportable amounts received it to the withholding agent upon request. provided irrespective of any requirement
by the nonqualified intermediary. See For purposes of this paragraph (e)(3)(iii), under foreign law that prohibits the dis-
paragraph (e)(3)(vi) of this section for the a valid intermediary withholding certifi- closure of the identity of an account
definition of reportable amount. A non- cate also includes a statement described in holder of a nonqualified intermediary or
qualified intermediary withholding certifi- §1.871–14(c)(2)(v) furnished for interest financial information relating to such ac-
cate is valid only to the extent it is fur- to qualify as portfolio interest for purposes count holder. Although a nonqualified in-
nished on a Form W-8, an acceptable of sections 871(h) and 881(c). The infor- termediary is not required to provide doc-
substitute form, or such other form as the mation and certifications required on a umentation and other information
IRS may prescribe, it is signed under Form W-8 described in this paragraph required by this paragraph (e)(3)(iv) for
penalties of perjury by a person authorized (e)(3)(iii) are as follows— persons other than U.S. non-exempt re-
to sign for the nonqualified intermediary, (A) The name and permanent resident cipients, a withholding agent that does not
it contains the information, statements, address (as described in paragraph receive documentation and such informa-
and certifications described in this para- (e)(2)(ii) of this section) of the nonquali- tion must apply the presumption rules of
graph (e)(3)(iii) and paragraph (e)(3)(iv) fied intermediary, and the country under paragraph (b) of this section,
of this section, its validity has not expired, the laws of which the nonqualified inter- §§1.1441–5(d) and (e)(6) and
and the withholding certificates and other mediary is created, incorporated, or gov- 1.6049–5(d) or the withholding agent
appropriate documentation for all persons erned; shall be liable for tax, interest, and penal-
to whom the certificate relates are associ- (B) A certification that the nonqualified ties. A withholding agent must apply the
ated with the certificate. Withholding cer- intermediary is not acting for its own ac- presumption rules even if it is not re-
tificates and other appropriate documenta- count; quired under chapter 61 of the Internal
tion consist of beneficial owner (C) If the nonqualified intermediary Revenue Code to obtain documentation to
withholding certificates described in para- withholding certificate is used to transmit treat a payee as an exempt recipient and
graph (e)(2)(i) of this section, intermedi- withholding certificates or other appropri- even though it has actual knowledge that
ary and flow-through withholding certifi- ate documentation for more than one per- the payee is a U.S. person. For example,
cates described in paragraph (e)(3)(i) of son on whose behalf the nonqualified in- if a nonqualified intermediary fails to pro-
this section, withholding foreign partner- termediary is acting, a withholding vide a withholding agent with a Form W-
ship certificates described in statement associated with the Form W-8 9 for an account holder that is a U.S. ex-
§1.1441–5(c)(2)(iv), documentary evi- that provides all the information required empt recipient, the withholding agent
dence described in §§1.1441–6(c)(3) or by paragraph (e)(3)(iv) of this section; must presume (even if it has actual
(4) and 1.6049–5(c)(1), and any other and knowledge that the account holder is a
documentation or certificates applicable (D) Any other information, certifica- U.S. exempt recipient), that the account
under other provisions of the Internal Rev- tions, or statements as may be required by holder is an undocumented foreign person
enue Code or regulations that certify or es- the form or accompanying instructions in with respect to amounts subject to with-
tablish the status of the payee or beneficial addition to, or in lieu of, the information, holding. See paragraph (b)(3)(v) of this
owner as a U.S. or a foreign person. If a certifications, and statements described in section for applicable presumptions.
nonqualified intermediary is acting on be- this paragraph (e)(3)(iii) or paragraph Therefore, the withholding agent must
half of another nonqualified intermediary (e)(3)(iv) of this section. withhold 30 percent from the payment
or a flow-through entity, then the nonqual- (iv) Withholding statement provided by even though if a Form W-9 had been pro-
ified intermediary must associate with its nonqualified intermediary—(A) In gen- vided, no withholding or reporting on the
June 5, 2000 1188 2000–23 I.R.B.
payment attributable to a U.S. exempt re- there must be sufficient safeguards to en- (b) of this section and §§1.1441–5(d) and
cipient would apply. Further, a nonquali- sure that the information received by the (e)(6) and 1.6049–5(d). For this purpose,
fied intermediary that fails to provide the withholding agent is the information sent a type of income is determined by the
documentation and the information under by the nonqualified intermediary and all types of income required to be reported
this paragraph (e)(3)(iv) for another with- occasions of user access that result in the on Forms 1042–S or 1099, as appropriate.
holding agent to report the payments on submission or modification of the with- Notwithstanding the preceding sentence,
Forms 1042-S and Forms 1099 is not re- holding statement information must be deposit interest (including original issue
lieved of its responsibility to file informa- recorded. In addition, an electronic sys- discount) described in section
tion returns. See paragraph (b)(6) of this tem must be capable of providing a hard 871(i)(2)(A) or 881(d) and interest or
section. Therefore, unless the nonquali- copy of all withholding statements pro- original issue discount on short-term
fied intermediary itself files such returns vided by the nonqualified intermediary. obligations as described in section
and provides copies to the payees, it shall A withholding agent will be liable for tax, 871(g)(1)(B) or 881(e) is only required to
be liable for penalties under sections 6721 interest, and penalties in accordance with be allocated to the extent it is required to
(failure to file information returns), and paragraph (b)(7) of this section to the ex- be reported on Form 1099 or Form 1042-
6722 (failure to furnish payee state- tent it does not follow the presumption S. See §1.6049–8 (regarding reporting of
ments), including the penalties under rules of paragraph (b)(3) of this section or bank deposit interest to certain foreign
those sections for intentional failure to §§1.1441–5(d) and (e)(6), and persons). If a payee receives income
file information returns. In addition, fail- 1.6049–5(d) for any payment of a re- through another nonqualified intermedi-
ure to provide either the documentation or portable amount, or portion thereof, for ary, flow-through entity, or U.S. branch
the information required by this para- which it does not have a valid withhold- described in paragraph (e)(2)(iv) of this
graph (e)(3)(iv) results in a payment not ing statement prior to making a payment. section (other than a U.S. branch treated
being reliably associated with valid docu- (C) Content of withholding statement. as a U.S. person), the withholding certifi-
mentation. Therefore, the beneficial own- The withholding statement provided by a cate must also state, with respect to the
ers of the payment are not entitled to re- nonqualified intermediary must contain payee, the name, address, and TIN, if
duced rates of withholding and if the full the information required by this para- known, of the other nonqualified interme-
amount required to be held under the pre- graph (e)(3)(iv)(C). diary or U.S. branch from which the
sumption rules is not withheld by the (1) The withholding statement must payee directly receives the payment or the
withholding agent, the nonqualified inter- contain the name, address, TIN (if any) flow-through entity in which the payee
mediary must withhold the difference be- and the type of documentation (documen- has a direct ownership interest. If another
tween the amount withheld by the with- tary evidence, Form W-9, or type of Form nonqualified intermediary, flow-through
holding agent and the amount required to W-8) for every person from whom docu- entity, or U.S. branch fails to allocate a
be withheld. Failure to withhold shall re- mentation has been received by the non- payment, the name of the nonqualified in-
sult in the nonqualified intermediary qualified intermediary to the withholding termediary, flow-through entity, or U.S.
being liable for tax under section 1461, agent and whether that person is a U.S. branch that failed to allocate the payment
interest, and penalties, including penalties exempt recipient, a U.S. non-exempt re- shall be provided with respect to such
under section 6656 (failure to deposit) cipient, or a foreign person. See para- payment.
and section 6672 (failure to collect and graphs (c)(2), (20), and (21) of this sec- (3) If a payee is identified as a foreign
pay over tax). tion for the definitions of foreign person, person, the nonqualified intermediary
(B) General requirements. A withhold- U.S. exempt recipient, and U.S. non-ex- must specify the rate of withholding to
ing statement must be provided prior to empt recipient. In the case of a foreign which the payee is subject, the payee’s
the payment of a reportable amount and person, the statement must indicate country of residence and, if a reduced rate
must contain the information specified in whether the foreign person is a beneficial of withholding is claimed, the basis for
paragraph (e)(3)(iv)(C) of this section. owner or an intermediary, flow-through that reduced rate (e.g., treaty benefit, port-
The statement must be updated as often as entity, or U.S. branch described in para- folio interest, exempt under section
required to keep the information in the graph (b)(2)(iv) of this section and in- 501(c)(3), 892, or 895). The allocation
withholding statement correct prior to clude the type of recipient, based on re- statement must also include the taxpayer
each subsequent payment. The withhold- cipient codes used for filing Forms identification numbers of those foreign
ing statement forms an integral part of the 1042-S, if the foreign person is a recipient persons for whom such a number is re-
withholding certificate provided under as defined in §1.1461–1(c)(1)(ii). quired under paragraph (e)(4)(vii) of this
paragraph (e)(3)(iii) of this section, and (2) The withholding statement must al- section or §1.1441–6(b)(1) (regarding
the penalties of perjury statement pro- locate each payment, by income type, to claims for treaty benefits). In the case of
vided on the withholding certificate shall every payee (including U.S. exempt re- a claim of treaty benefits, the nonquali-
apply to the withholding statement. The cipients) for whom documentation has fied intermediary’s withholding statement
withholding statement may be provided in been provided. Any payment that cannot must also state whether the limitation on
any manner the nonqualified intermediary be reliably associated with valid docu- benefits and section 894 statements re-
and the withholding agent mutually agree, mentation from a payee shall be treated as quired by §1.1441–6(c)(5) have been pro-
including electronically. If the withhold- made to an unknown payee in accordance vided, if required, in the beneficial
ing statement is provided electronically, with the presumption rules of paragraph owner’s Form W-8 or associated with
2000–23 I.R.B. 1189 June 5, 2000
such owner’s documentary evidence. paragraph (e)(3)(iv)(B) of this section. section 871(i)(2)(A) or 881(d) and inter-
(4) The withholding statement must Further, each payee listed in the withhold- est or original issue discount on short-
also contain any other information the ing statement must be assigned to an iden- term obligations as described in section
withholding agent reasonably requests in tified withholding rate pool. To the extent 871(g)(1)(B) or 881(e) is not required to
order to fulfill its obligations under chap- a nonqualified intermediary is required to, be allocated to a U.S. exempt recipient or
ter 3, chapter 61 of the Internal Revenue or does provide, documentation, the alter- a foreign payee, except as required under
Code, and section 3406. native procedures do not relieve the non- §1.6049–8 (regarding reporting of deposit
(D) Alternative procedures—(1) In qualified intermediary from the require- interest paid to certain foreign persons).
general. Under the alternative procedures ment to provide documentation prior to (4) Failure to provide allocation infor-
of this paragraph (e)(3)(iv)(D), a nonqual- the payment being made. Therefore, mation. If a nonqualified intermediary
ified intermediary may provide informa- withholding certificates or other appropri- fails to provide allocation information, if
tion allocating a payment of a reportable ate documentation and all information re- required, by January 31 for any withhold-
amount to each payee (including U.S. ex- quired by paragraph (e)(3)(iv)(B) of this ing rate pool, a withholding agent shall
empt recipients) otherwise required under section (other than allocation informa- not apply the alternative procedures of
paragraph (e)(3)(iv)(B)(2) of this section tion) must be provided to a withholding this paragraph (e)(3)(iv)(D) to any pay-
after a payment is made. To use the alter- agent before any new payee receives a re- ments of reportable amounts paid after
native procedure of this paragraph portable amount. In addition, the with- January 31 in the taxable year following
(e)(3)(iv)(D), the nonqualified intermedi- holding statement must be updated by as- the calendar year for which allocation in-
ary must inform the withholding agent on signing a new payee to a withholding rate formation was not given and any subse-
a statement associated with its nonquali- pool prior to the payment of a reportable quent taxable year. Further, the alterna-
fied intermediary withholding certificate amount. A withholding rate pool is a pay- tive procedures shall be unavailable for
that it is using the procedure under this ment of a single type of income, deter- any other withholding rate pool even
paragraph (e)(3)(iv)(D) and the withhold- mined in accordance with the categories though allocation information was given
ing agent must agree to the procedure. If of income used to file Form 1042-S, that for that other pool. Therefore, the with-
the requirements of the alternative proce- is subject to a single rate of withholding. holding agent must withhold on a pay-
dure are met, a withholding agent, includ- A withholding rate pool may be estab- ment of a reportable amount in accor-
ing the nonqualified intermediary using lished by any reasonable method to which dance with the presumption rules of
the procedures, can treat the payment as the nonqualified intermediary and a with- paragraph (b)(3) of this section, and
reliably associated with documentation holding agent agree (e.g., by establishing §§1.1441–5(d) and (e)(6) and
and, therefore, the presumption rules of a separate account for a single withhold- 1.6049–5(d), unless the nonqualified in-
paragraph (b)(3) of this section and ing rate pool, or by dividing a payment termediary provides all of the informa-
§§1.1441-5(d) and (e)(6) and 1.6049–5(d) made to a single account into portions al- tion, including information sufficient to
do not apply even though information al- locable to each withholding rate pool). allocate the payment to each specific
locating the payment to each payee has The nonqualified intermediary shall de- payee, required by paragraph
not been received prior to the payment. termine withholding rate pools based on (e)(3)(iv)(A) through (C) of this section
See paragraph (e)(3)(iv)(D)(7) of this sec- valid documentation or, to the extent a prior to the payment. A nonqualified in-
tion, however, for a nonqualified interme- payment cannot be reliably associated termediary must allocate at least 90 per-
diary’s liability for tax and penalties if the with valid documentation, the presump- cent of the income required to be allo-
requirements of this paragraph tion rules of paragraph (b)(3) of this sec- cated for each withholding rate pool or
(e)(3)(iv)(D) are not met. These alterna- tion and §§1.1441–5(d) and (e)(6) and the nonqualified intermediary will be
tive procedures shall not be used for pay- 1.6049–5(d). treated as having failed to provide alloca-
ments that are allocable to U.S. non-ex- (3) Allocation information. The non- tion information for purposes of this para-
empt recipients. Therefore, a qualified intermediary must provide the graph (e)(3)(iv)(D). See paragraph
nonqualified intermediary is required to withholding agent with sufficient infor- (e)(3)(iv)(D)(7) of this section for liability
provide a withholding agent with infor- mation to allocate the income in each for tax and penalties if a nonqualified in-
mation allocating payments of reportable withholding rate pool to each payee (in- termediary fails to provide allocation in-
amounts to U.S. non-exempt recipients cluding U.S. non-exempt recipients) formation in whole or in part.
prior to the payment being made by the within the pool no later than January 31 of (5) Cure provision. A nonqualified in-
withholding agent. the year following the year of payment. termediary may cure any failure to pro-
(2) Withholding rate pools. In place of Any payments that are not allocated to vide allocation information by providing
the information required in paragraph payees for whom documentation has been the required allocation information to the
(e)(3)(iv)(B)(2) of this section allocating provided shall be allocated to an undocu- withholding agent no later than February
payments to each payee, the nonqualified mented payee in accordance with the pre- 14 following the calendar year of pay-
intermediary must provide a withholding sumption rules of paragraph (b)(3) of this ment. If the withholding agent receives
agent with withholding rate pool informa- section and §§1.1441–5(d) and (e)(6) and the allocation information by that date, it
tion prior to the payment of a reportable 1.6049–5(d). Notwithstanding the pre- may apply the adjustment procedures of
amount. The withholding statement must ceding sentence, deposit interest (includ- §1.1461–2 to any excess withholding for
contain all other information required by ing original issue discount) described in payments made on or after February 1 and
June 5, 2000 1190 2000–23 I.R.B.
on or before February 14. Any nonquali- diligence requirements of a withholding U.S. branch, or a flow-through entity
fied intermediary that fails to cure by Feb- agent. Because failure by the nonquali- even if the nonqualified intermediary,
ruary 14, may request the ability to use fied intermediary to provide allocation in- U.S. branch or flow-through entity pro-
the alternative procedures of this para- formation results in a payment not being vides allocation information prior to the
graph (e)(3)(iv)(D) by submitting a re- reliably associated with valid documenta- payment. A withholding agent that re-
quest, in writing, to the Assistant Com- tion, the beneficial owners for whom the ceives a notice under this paragraph
missioner (International). The request nonqualified intermediary acts are not en- (e)(3)(iv)(E) must commence withholding
must state the reason that the nonqualified titled to a reduced rate of withholding. in accordance with the presumption rules
intermediary did not comply with the al- Therefore, the nonqualified intermediary, within 30 days of the date of the notice.
ternative procedures of this paragraph as a withholding agent, shall be liable for The IRS may withdraw its prohibition
(e)(3)(iv)(D) and steps that the nonquali- any tax not withheld by the withholding against using the alternative procedures of
fied intermediary has taken, or will take, agent in accordance with the presumption paragraph (e)(3)(iv)(D) of this section, or
to ensure that no failures occur in the fu- rules, interest on the under withheld tax if its requirement to follow the presumption
ture. If the Assistant Commissioner (In- the nonqualified intermediary fails to pay rules, if the nonqualified intermediary,
ternational) determines that the alterna- the tax timely, and any applicable penal- U.S. branch, or flow-through entity can
tive procedures of this paragraph ties, including the penalties under sec- demonstrate to the satisfaction of the As-
(e)(3)(iv)(D) may apply, a determination tions 6656 (failure to deposit), 6721 (fail- sistant Commissioner (International) or
to that effect will be issued by the IRS to ure to file information returns) and 6722 his delegate that it is capable of comply-
the nonqualified intermediary. (failure to file payee statements). Failure ing with the rules under chapter 3 of the
(6) Form 1042-S reporting in case of to provide allocation information for Internal Revenue Code and any other con-
allocation failure. If a nonqualified inter- more than 10 percent of the payments ditions required by the Assistant Commis-
mediary fails to provide allocation infor- made to a particular withholding rate pool sioner (International).
mation by February 14 following the year will be presumed to be an intentional fail- (v) Withholding certificate from cer-
of payment for a withholding rate pool, ure within the meaning of sections tain U.S. branches. A U.S. branch certifi-
the withholding agent must file Forms 6721(e) and 6722(c). The nonqualified cate is a withholding certificate provided
1042-S for payments made to each payee intermediary may rebut the presumption. by a U.S. branch described in paragraph
in that pool (other than U.S. exempt recip- (8) Applicability to flow-through enti- (b)(2)(iv) of this section that is not the
ients) in the prior calendar year by pro rat- ties and certain U.S. branches. See para- beneficial owner of the income. The
ing the payment to each payee (including graph (e)(3)(v) of this section and withholding certificate is provided with
U.S. exempt recipients) listed in the with- §1.1441–5(c)(3)(iv) and (e)(5)(iv) for the respect to reportable amounts and must
holding statement for that withholding applicability of this paragraph (e)(3)(iv) state that such amounts are not effectively
rate pool. If the nonqualified intermedi- to U.S. branches described in paragraph connected with the conduct of a trade or
ary fails to allocate10 percent or less of an (b)(2)(iv) of this section (other than U.S. business in the United States. The with-
amount required to be allocated for a branches treated as U.S. persons) and holding certificate must either transmit
withholding rate pool, a withholding flow-through entities. the appropriate documentation for the
agent shall report the unallocated amount (E) Notice procedures. The IRS may persons for whom the branch receives the
as paid to a single unknown payee in ac- notify a withholding agent that the alter- payment (i.e., as an intermediary) or be
cordance with the presumption rules of native procedures of paragraph provided as evidence of its agreement
paragraph (b) of this section and (e)(3)(iv)(D) of this section are not ap- with the withholding agent to be treated
§§1.1441–5(d) and (e)(6) and plicable to a specified nonqualified inter- as a U.S. person with respect to any pay-
1.6049–5(d). The portion of the payment mediary, a U.S. branch described in para- ment associated with the certificate. A
that can be allocated to specific recipi- graph (b)(2)(iv) of this section, or a U.S. branch withholding certificate is
ents, as defined in §1.1461–1(c)(1)(ii), flow-through entity. If a withholding valid only if it is furnished on a Form W-
shall be reported to each recipient in ac- agent receives such a notice, it must com- 8, an acceptable substitute form, or such
cordance with the rules of §1.1461–1(c). mence withholding in accordance with other form as the IRS may prescribe, it is
(7) Liability for tax, interest, and the presumption rules of paragraph (b)(3) signed under penalties of perjury by a per-
penalties. If a nonqualified intermediary of this section and §§1.1441–5(d) and son authorized to sign for the branch, its
fails to provide allocation information by (e)(6) and 1.6049–5(d) unless the non- validity has not expired, and it contains
February 14 following the year of pay- qualified intermediary, U.S. branch, or the information, statements, and certifica-
ment for all or a portion of the payments flow-through entity complies with the tions described in this paragraph
made to any withholding rate pool, the procedures in paragraphs (e)(3)(iv)(A) (e)(3)(v). If the certificate is furnished to
withholding agent from whom the non- through (C) of this section. In addition, transmit withholding certificates and
qualified intermediary received payments the IRS may notify a withholding agent, other documentation, it must contain the
of reportable amounts shall not be liable in appropriate circumstances, that it must information, certifications, and statements
for any tax, interest, or penalties, due apply the presumption rules of paragraph described in paragraphs (e)(3)(v)(A)
solely to the errors or omissions of the (b)(3) of this section and §§1.1441–5(d) through (C) of this section and in para-
nonqualified intermediary. See and (e)(6) and 1.6049–5(d) to payments graphs (e)(3)(iii) and (iv) (alternative pro-
§1.1441–7(b)(2) through (10) for the due made to a nonqualified intermediary, a cedures) of this section, applying the term
2000–23 I.R.B. 1191 June 5, 2000
U.S. branch for the term nonqualified in- to amounts of original issue discount aris- 2001 from a beneficial owner with respect
termediary. If the certificate is furnished ing from a sale and repurchase transaction to an account that contains bonds, the in-
pursuant to an agreement to treat the U.S. that is completed within a period of two terest on which must be reported on Form
branch as a U.S. person, the information weeks or less, or to amounts described in 1042-S under §1.1461–1(c). The Form
and certifications required on the with- §1.6049–5(b)(7), (10) or (11) (relating to W-8 contains a valid TIN and the with-
holding certificate are limited to the fol- certain obligations issued in bearer form). holding agent reports on Forms 1042-S
lowing— While short–term OID and bank deposit interest to the beneficial owner for 2001
(A) The name of the person of which interest are not subject to withholding through 2005. In 2005, the beneficial
the branch is a part and the address of the under chapter 3 of the Internal Revenue owner sells some of the bonds. For pur-
branch in the United States; Code, such amounts may be subject to in- poses of the exemption from Form 1099
(B) A certification that the payments formation reporting under section 6049 if reporting under §1.6045–1(g), the with-
associated with the certificate are not ef- paid to a U.S. person who is not an ex- holding agent may consider the Form W-8
fectively connected with the conduct of empt recipient described in §1.6049- as valid, even though the payment of the
its trade or business in the United States; 4(c)(1)(ii) and to backup withholding sales proceeds is not reportable on Form
and under section 3406 in the absence of doc- 1042-S under §1.1461–1(c) and even
(C) Any other information, certifica- umentation. See §1.6049–5(d)(3)(iii) for though the Form W-8 was provided more
tions, or statements as may be required by applicable procedures when such amounts than three years previously.
the form or accompanying instructions in are paid to a foreign intermediary. (2) A certificate described in paragraph
addition to, or in lieu of, the information (4) * * * (e)(3)(ii) of this section (a qualified inter-
and certification described in this para- (ii) Period of validity—(A) Three-year mediary withholding certificate) but not
graph (e)(3)(v). period. A withholding certificate de- including the withholding certificates,
(vi) Reportable amounts. For purposes scribed in paragraph (e)(2)(i) of this sec- documentary evidence, statements or
of chapter 3 of the Internal Revenue tion, or a certificate described in §1.871- other information associated with the cer-
Code, a nonqualified intermediary, quali- 14(c)(2)(v) (furnished to qualify interest tificate.
fied intermediary, flow-through entity, as portfolio interest for purposes of sec- (3) A certificate described in paragraph
and U.S. branch described in paragraph tions 871(h) and 881(c)), shall remain (e)(3)(iii) of this section (a nonqualified
(b)(2)(iv) of this section (other than a U.S. valid until the earlier of the last day of the intermediary certificate), but not includ-
branch that agrees to be treated as a U.S. third calendar year following the year in ing the withholding certificates, docu-
person) must provide a withholding cer- which the withholding certificate is mentary evidence, statements or other in-
tificate and associated documentation and signed or the day that a change in circum- formation associated with the certificate.
other information with respect to re- stances occurs that makes any informa- (4) A certificate described in paragraph
portable amounts. For purposes of the tion on the certificate incorrect. For ex- (e)(3)(v) of this section (a U.S. branch
regulations under chapter 3 of the Internal ample, a withholding certificate signed on withholding certificate), but not including
Revenue Code, the term reportable September 30, 2001, remains valid the withholding certificates, documentary
amount means an amount subject to with- through December 31, 2004, unless cir- evidence, statements or other information
holding within the meaning of cumstances change that make the infor- associated with the certificate.
§1.1441–2(a), bank deposit interest (in- mation on the form no longer correct. *****
cluding original issue discount) and simi- Documentary evidence described in (6) A certificate described in §1.1441-
lar types of deposit interest described in §§1.1441-6(c)(3) or (4) or 1.6049–5(c)(1) 5(c)(3)(iii) (a withholding certificate from
section 871(i)(2)(A) or 881(d) that are shall remain valid until the earlier of the a nonwithholding foreign partnership) but
from sources within the United States, last day of the third calendar year follow- not including the withholding certificates,
and any amount of interest or original ing the year in which the documentary ev- documentary evidence, statements or
issue discount from sources within the idence is provided to the withholding other information required to be associ-
United States on the redemption of certain agent or the day that a change in circum- ated with the certificate.
short-term obligations described in sec- stances occurs that makes any informa- *****
tion 871(g)(1)(B) or 881(e). Reportable tion on the documentary evidence incor- (8) A withholding certificate described
amounts shall not include amounts re- rect. in §1.1441–5(e)(5)(iii) provided by a for-
ceived on the sale or exchange (other than (B) * * * eign simple trust or a foreign grantor trust
a redemption) of an obligation described (1) A withholding certificate described to transmit documentation of beneficia-
in section 871(g)(1)(B) or 881(e) that is in paragraph (e)(2)(ii) of this section that ries or owners, but not including the with-
effected at an office outside the United is furnished with a TIN, provided that the holding certificates, documentary evi-
States. See §1.6045–1(g)(3) to determine withholding agent reports at least one dence, statements or other information
whether a sale is effected at an office out- payment annually to the beneficial owner associated with the certificate.
side the United States. Reportable under §1.1461–1(c) or the TIN furnished *****
amounts also do not include payments on the certificate is reported to the IRS (iv) Electronic transmission of infor-
with respect to deposits with banks and under the procedures described in mation—(A) In general. A withholding
other financial institutions that remain on §1.1461–1(d). For example, assume a agent may establish a system for a benefi-
deposit for a period of two weeks or less, withholding agent receives a Form W-8 in cial owner or payee to electronically fur-
June 5, 2000 1192 2000–23 I.R.B.
nish a Form W-8, an acceptable substitute tronic signature must be the final entry in person representing to be a foreign
Form W-8, or such other form as the In- the person’s Form W-8 submission. grantor trust with 5 or fewer grantors;
ternal Revenue Service may prescribe. (4) Requests for electronic Form W-8 (H) A withholding certificate provided
The system must meet the requirements data. Upon request by the Internal Rev- by a foreign organization that is described
described in paragraph (e)(4)(iv)(B) of enue Service during an examination, the in section 501(c);
this section. A withholding agent may ac- withholding agent must supply a hard (I) A withholding certificate from a per-
cept Forms W-8 that are furnished elec- copy of the electronic Form W-8 and a son representing to be a U.S. branch de-
tronically on or after January 1, 2000, statement that, to the best of the withhold- scribed in paragraph (b)(2)(iv) of this sec-
provided the requirements of paragraph ing agent’s knowledge, the electronic tion.
(e)(4)(iv)(B) of this section are met. Form W-8 was filed by the person whose *****
(B) Requirements—(1) In general. The name is on the form. The hard copy of (ix) * * *
electronic system must ensure that the in- the electronic Form W-8 must provide ex- (A) * * *
formation received is the information actly the same information as, but need (4) A withholding agent may rely on
sent, and must document all occasions of not be identical to, the paper Form W-8. documentation furnished by a beneficial
user access that result in the submission (C) Special requirements for transmis- owner or payee to an agent of the with-
renewal, or modification of a Form W-8. sion of Forms W-8 by an intermediary. holding agent. The agent may retain the
In addition, the design and operation of [Reserved] documentation as part of an information
the electronic system, including access ***** system maintained for a single or multiple
procedures, must make it reasonably cer- (vii) Requirement of taxpayer identify- withholding agents provided that the sys-
tain that the person accessing the system ing number. A TIN must be stated on a tem permits any withholding agent that
and furnishing Form W-8 is the person withholding certificate when required by uses the system to easily access data re-
named in the Form. this paragraph (e)(4)(vii). A TIN is re- garding the nature of the documentation,
(2) Same information as paper Form quired to be stated on— the information contained in the docu-
W-8. The electronic transmission must (A) A withholding certificate on which mentation, and its validity, and must
provide the withholding agent or payor a beneficial owner is claiming the benefit allow the withholding agent to easily
with exactly the same information as the of a reduced rate under an income tax transmit data into the system regarding
paper Form W-8. treaty (other than for amounts described any facts of which it becomes aware that
(3) Perjury statement and signature re- in §1.1441–6(c)(2); may affect the reliability of the documen-
quirements. The electronic transmission (B) A withholding certificate on which tation. The withholding agent must be
must contain an electronic signature by a beneficial owner is claiming exemption able to establish how and when it has ac-
the person whose name is on the Form W- from withholding because income is ef- cessed the data regarding the documenta-
8 and the signature must be under penal- fectively connected with a U.S. trade or tion and, if applicable, how and when it
ties of perjury in the manner described in business; has transmitted data regarding any facts
this paragraph (e)(4)(iv)(B)(3). (C) A withholding certificate on which of which it became aware that may affect
(i) Perjury statement. The perjury a beneficial owner is claiming exemption the reliability of the documentation. In
statement must contain the language that from withholding under section 871(f) for addition, the withholding agent must be
appears on the paper Form W-8. The certain annuities received under qualified able to establish that any data it has trans-
electronic system must inform the person plans; mitted to the information system has been
whose name is on the Form W-8 that the (D) A withholding certificate on which processed and appropriate due diligence
person must make the declaration con- a beneficial owner is claiming an exemp- has been exercised regarding the validity
tained in the perjury statement and that tion based solely on a foreign organiza- of the documentation.
the declaration is made by signing the tion’s claim of tax exempt status under *****
Form W-8. The instructions and the lan- section 501(c) or private foundation status (C) Special rule for brokers—(1) In
guage of the perjury statement must im- (however, a TIN is not required from a general. A withholding agent may rely on
mediately follow the person’s certifying foreign private foundation that is subject the certification of a broker that the bro-
statements and immediately precede the to the 4-percent tax under section 4948(a) ker holds a valid beneficial owner with-
person’s electronic signature. on income if that income would be ex- holding certificate described in paragraph
(ii) Electronic signature. The act of the empt from withholding but for section (e)(2)(i) of this section or other appropri-
electronic signature must be effected by 4948(a) (e.g., portfolio interest)); ate documentation for that beneficial
the person whose name is on the elec- (E) A withholding certificate from a owner with respect to any readily tradable
tronic Form W-8. The signature must also person representing to be a qualified in- instrument, as defined in
authenticate and verify the submission. termediary described in paragraph §31.3406(h)–1(d) of this chapter, if the
For this purpose, the terms authenticate (e)(5)(ii) of this section; broker is a United States person (includ-
and verify have the same meanings as (F) A withholding certificate from a ing a U.S. branch treated as a U.S. person
they do when applied to a written signa- person representing to be a withholding under paragraph (b)(2)(iv) of this section)
ture on a paper Form W-8. An electronic foreign partnership described in that is acting as the agent of a beneficial
signature can be in any form that satisfies §1.1441–5(c)(2)(i)); owner and the U.S. broker has been pro-
the foregoing requirements. The elec- (G) A withholding certificate from a vided a valid Form W-8 or other appropri-
2000–23 I.R.B. 1193 June 5, 2000
ate documentation. The certification must diary that is fiscally transparent under the agreement shall specify if, and to what
be in writing or in electronic form and regulations under section 894. Although extent, the qualified intermediary may as-
contain all of the information required of the qualified intermediary is required to sume primary withholding responsibility
a nonqualified intermediary under para- obtain withholding certificates or other in accordance with paragraph (e)(5)(iv) of
graphs (e)(3)(iv)(B) and (C) of this sec- appropriate documentation from benefi- this section. It shall also specify the ex-
tion. If a U.S. broker chooses to use this cial owners, payees, or interest holders tent to which applicable return filing and
paragraph (e)(4)(ix)(C), that U.S. broker pursuant to its agreement with the IRS, it information reporting requirements are
will be solely responsible for applying the is generally not required to attach such modified so that, in appropriate cases, the
rules of §1.1441–7(b) to the withholding documentation to the intermediary with- qualified intermediary may report pay-
certificates or other appropriate documen- holding certificate. Notwithstanding the ments to the IRS on an aggregated basis,
tation. For purposes of this paragraph preceding sentence a qualified intermedi- without having to disclose the identity of
(c)(4)(ix)(C), the term broker means a ary must provide a withholding agent beneficial owners and payees. However,
person treated as a broker under with the Forms W-9, or disclose the the qualified intermediary may be re-
§1.6045–1(a). names, addresses, and taxpayer identify- quired to provide to the IRS the name and
(2) The following example illustrates ing numbers, if known, of those U.S. non- address of those foreign customers who
the rules of this paragraph (e)(4)(ix)(C): exempt recipients for whom the qualified benefit from a reduced rate under an in-
Example. SCO is a U.S. securities clearing orga- intermediary receives reportable amounts come tax treaty pursuant to the qualified
nization that provides clearing services for corre- (within the meaning of paragraph intermediary arrangement for purposes of
spondent broker, CB, a U.S. corporation. Pursuant (e)(3)(vi) of this section) to the extent re- verifying entitlement to such benefits,
to a fully disclosed clearing agreement, CB fully dis- quired in the qualified intermediary’s particularly under an applicable limitation
closes the identity of each of its customers to SCO. agreement with the IRS. A person may on benefits provision. Under the agree-
Part of SCO’s clearing duties include the crediting claim qualified intermediary status before ment, a qualified intermediary may agree
of income and gross proceeds of readily tradeable an agreement is executed with the IRS if to act as an acceptance agent to perform
instruments (as defined in §31.3406(h)–1(d)) to each it has applied for such status and the IRS the duties described in
customer’s account. For each disclosed customer authorizes such status on an interim basis §301.6109–1(d)(3)(iv)(A) of this chapter.
that is a foreign beneficial owner, CB provides SCO under such procedures as the IRS may The agreement may specify the manner in
with information required under paragraphs prescribe. which applicable procedures for adjust-
(e)(3)(iv)(B) and (C) of this section that is necessary ***** ments for underwithholding and over-
to apply the correct rate of withholding and to file (iii) Withholding agreement—(A) In withholding, including refund procedures,
Forms 1042-S. SCO may use the representations general. The IRS may, upon request, apply in the context of a qualified inter-
and beneficial owner information provided by CB to enter into a withholding agreement with a mediary arrangement and the extent to
determine the proper amount of withholding and to foreign person described in paragraph which applicable procedures may be
file Forms 1042-S. CB is responsible for determin- (e)(5)(ii) of this section pursuant to such modified. In particular, a withholding
ing the validity of the withholding certificates or procedures as the IRS may prescribe in agreement may allow a qualified interme-
other appropriate documentation under §1.1441- published guidance (see §601.601(d)(2) diary to claim refunds of overwithheld
1(b). of this chapter). Under the withholding amounts. If relevant, the agreement shall
***** agreement, a qualified intermediary shall specify the manner in which the qualified
(5) Qualified intermediaries—(i) Gen- generally be subject to the applicable intermediary may deal with payments to
eral rule. A qualified intermediary, as de- withholding and reporting provisions ap- other intermediaries and flow-through en-
fined in paragraph (e)(5)(ii) of this sec- plicable to withholding agents and payors tities. In addition, the agreement shall
tion, may furnish a qualified intermediary under chapters 3 and 61 of the Internal specify the manner in which the IRS will
withholding certificate to a withholding Revenue Code, section 3406, the regula- verify compliance with the agreement. In
agent. The withholding certificate pro- tions under those provisions, and other appropriate cases, the IRS may agree to
vides certifications on behalf of other per- withholding provisions of the Internal rely on audits performed by an intermedi-
sons for the purpose of claiming and veri- Revenue Code, except to the extent pro- ary’s approved auditor. In such a case, the
fying reduced rates of withholding under vided under the agreement. IRS’s audit may be limited to the audit of
section 1441 or 1442 and for the purpose (B) Terms of the withholding agree- the auditor’s records (including work pa-
of reporting and withholding under other ment. Generally, the agreement shall pers of the auditor and reports prepared
provisions of the Internal Revenue Code, specify the type of certifications and doc- by the auditor indicating the methodology
such as the provisions under chapter 61 umentation upon which the qualified in- employed to verify the entity’s compli-
and section 3406 (and the regulations termediary may rely to ascertain the clas- ance with the agreement). For this pur-
under those provisions). Furnishing such sification (e.g., corporation or pose, the agreement shall specify the au-
a certificate is in lieu of transmitting to a partnership) and status (i.e., U.S. or for- ditor or class of auditors that are
withholding agent withholding certifi- eign) of beneficial owners and payees approved. Generally, an auditor will not
cates or other appropriate documentation who receive payments collected by the be approved if the auditor is not subject to
for the persons for whom the qualified in- qualified intermediary and, if necessary, laws, regulations, or rules that impose
termediary receives the payment, includ- entitlement to the benefits of a reduced sanctions for failure to exercise its inde-
ing interest holders in a qualified interme- rate under an income tax treaty. The pendence and to perform the audit compe-
June 5, 2000 1194 2000–23 I.R.B.
tently. The agreement may include provi- mine that the qualified intermediary submission or modification of withhold-
sions for the assessment and collection of agreement actually permits the qualified ing statement information. In addition, the
tax in the event that failure to comply intermediary to assume primary withhold- electronic system must be capable of pro-
with the terms of the agreement results in ing responsibility. A qualified intermedi- viding a hard copy of all withholding
the failure by the withholding agent or the ary that assumes primary withholding re- statements provided by the qualified inter-
qualified intermediary to withhold and sponsibility under chapter 3 of the mediary. The withholding statement shall
deposit the required amount of tax. Fur- Internal Revenue Code or primary report- be updated as often as necessary for the
ther, the agreement may specify the pro- ing and backup withholding responsibility withholding agent to meet its reporting
cedures by which deposits of amounts under chapter 61 and section 3406 is not and withholding obligations under chap-
withheld are to be deposited, if different required to assume primary withholding ters 3 and 61 of the Internal Revenue Code
from the deposit procedures under the In- responsibility for all accounts it has with a and section 3406. A withholding agent
ternal Revenue Code and applicable regu- withholding agent but must assume pri- will be liable for tax, interest, and penal-
lations. To determine whether to enter a mary withholding responsibility for all ties in accordance with paragraph (b)(7) of
qualified intermediary withholding agree- payments made to any one account that it this section to the extent it does not follow
ment and the terms of any particular with- has with the withholding agent. A quali- the presumption rules of paragraph (b)(3)
holding agreement, the IRS will consider fied intermediary may agree with the of this section, §§1.1441–5(d) and (e)(6),
appropriate factors including whether or withholding agent to assume primary and 1.6049–5(d) for any payment, or por-
not the foreign person agrees to assume withholding responsibility under chapter tion thereof, for which it does not have a
primary withholding responsibility, the 3 and section 3406, only if expressly per- valid withholding statement prior to mak-
type of local know-your-customer laws mitted to do so under its agreement with ing a payment.
and practices to which it is subject, the the IRS. (B) Content of withholding statement.
extent and nature of supervisory and regu- (v) Withholding statement—(A) In gen- The withholding statement must contain
latory control exercised under the laws of eral. A qualified intermediary must pro- sufficient information for a withholding
the foreign country over the foreign per- vide each withholding agent from which it agent to apply the correct rate of with-
son, the volume of investments in U.S. se- receives reportable amounts, as defined in holding on payments from the accounts
curities (determined in dollar amounts paragraph (e)(3)(vi) of this section, as a identified on the statement and to prop-
and number of account holders), the fi- qualified intermediary with a written state- erly report such payments on Forms
nancial condition of the foreign person, ment (the withholding statement) contain- 1042-S and Forms 1099, as applicable.
and whether the qualified intermediary is ing the information specified in paragraph The withholding statement must—
a resident of a country with which the (e)(5)(v)(B) of this section. A withholding (1) Designate those accounts for which
United States has an income tax treaty. statement is not required, however, if all the qualified intermediary acts as a quali-
(iv) Assignment of primary withholding of the information a withholding agent fied intermediary;
responsibility. Any person who meets the needs to fulfill its withholding and report- (2) Designate those accounts for which
definition of a withholding agent under ing requirements is contained in the with- qualified intermediary assumes primary
§1.1441–7(a) (whether a U.S. person or a holding certificate. The qualified interme- withholding responsibility under chapter
foreign person) is required to withhold diary agreement may require, in 3 of the Internal Revenue Code and/or
and deposit any amount withheld under appropriate circumstances, the qualified primary reporting and backup withhold-
§1.1461–1(a) and to make the returns pre- intermediary to include information in its ing responsibility under chapter 61 and
scribed by §1.1461–1(b) and (c). If per- withholding statement relating to pay- section 3406; and
mitted by its qualified intermediary agree- ments other than payments of reportable (3) Provide information regarding
ment, a qualified intermediary agreement amounts. The withholding statement withholding rate pools, as described in
may, however, inform a withholding forms an integral part of the qualified in- paragraph (e)(5)(v)(C) of this section.
agent from which it receives a payment termediary’s qualified intermediary with- (C) Withholding rate pools—(1) In
that it will assume the primary obligation holding certificate and the penalties of general. Except to the extent it has as-
to withhold, deposit, and report amounts perjury statement provided on the with- sumed both primary withholding respon-
under chapter 3 of the Internal Revenue holding certificate shall apply to the with- sibility under chapter 3 of the Internal
Code and/or under chapter 61 of the Inter- holding statement as well. The withhold- Revenue Code and primary reporting and
nal Revenue Code and section 3406. If a ing statement may be provided in any backup withholding responsibility under
withholding agent makes a payment of an manner, and in any form, to which quali- chapter 61 and section 3406 with respect
amount subject to withholding, as defined fied intermediary and the withholding to a payment, a qualified intermediary
in §1.1441–2(a), or a reportable payment, agent mutually agree, including electroni- shall provide as part of its withholding
as defined in section 3406(b), to a quali- cally. If the withholding statement is pro- statement the withholding rate pool infor-
fied intermediary that represents to the vided electronically, there must be suffi- mation that is required for the withhold-
withholding agent that it has assumed pri- cient safeguards to ensure that the ing agent to meet its withholding and re-
mary withholding responsibility for the information received by the withholding porting obligations under chapters 3 and
payment, the withholding agent is not re- agent is the information sent by qualified 61 of the Internal Revenue Code and sec-
quired to withhold on the payment. The intermediary and must also document all tion 3406. A withholding rate pool is a
withholding agent is not required to deter- occasions of user access that result in the payment of a single type of income, deter-
2000–23 I.R.B. 1195 June 5, 2000
mined in accordance with the categories paying any reportable payments. If a United States if the source of the amount
of income reported on Form 1042-S or qualified intermediary chooses the alter- cannot be determined at the time of pay-
Form 1099, as applicable, that is subject native procedure of this paragraph ment. See §1.1441–3(d)(1) for determin-
to a single rate of withholding. A with- (e)(5)(v)(C)(2), the qualified intermediary ing the amount to be withheld from a pay-
holding rate pool may be established by must provide sufficient information to the ment in the absence of information at the
any reasonable method on which the qual- withholding agent no later than January time of payment regarding the source of
ified intermediary and a withholding 15 of the year following the year in which the amount. Amounts subject to with-
agent agree (e.g., by establishing a sepa- the reportable payments are paid that allo- holding include amounts that are not fixed
rate account for a single withholding rate cates the reportable payments to each or determinable annual or periodical in-
pool, or by dividing a payment made to a U.S. non-exempt recipient account come and upon which withholding is
single account into portions allocable to holder. Failure to provide such informa- specifically required under a provision of
each withholding rate pool). To the extent tion will result in the application of penal- this section or another section of the regu-
a qualified intermediary does not assume ties to the qualified intermediary under lations under chapter 3 of the Internal
primary reporting and backup withhold- sections 6721 and 6722, as well as any Revenue Code (such as corporate distrib-
ing responsibility under chapter 61 and other applicable penalties, and may result utions upon which withholding is re-
section 3406, a qualified intermediary’s in the termination of the qualified inter- quired under §1.1441–3(c)(1) that do not
withholding statement must establish a mediary’s withholding agreement with constitute dividend income). Amounts
separate withholding rate pool for each the IRS. A withholding agent shall not be subject to withholding do not include—
U.S. non-exempt recipient account holder liable for tax, interest, or penalties for (1) Amounts described in
that the qualified intermediary has dis- failure to backup withhold or report infor- §1.1441–1(b)(4)(i) to the extent they in-
closed to the withholding agent unless the mation under chapter 61 of the Internal volve interest on obligations in bearer
qualified intermediary uses the alternative Revenue Code due solely to the errors or form or on foreign-targeted registered
procedures in paragraph (e)(5)(v)(C)(2) omissions of the qualified intermediary. obligations (but, in the case of a foreign-
of this section. A qualified intermediary If a qualified intermediary fails to provide targeted registered obligation, only to the
shall determine withholding rate pools the allocation information required by this extent of those amounts paid to a regis-
based on valid documentation that it ob- paragraph (e)(5)(v)(C)(2), the withhold- tered owner that is a financial institution
tains under its withholding agreement ing agent shall report the entire amount within the meaning of section
with the IRS, or if a payment cannot be paid from the withholding rate pool to an 871(h)(5)(B) or a member of a clearing
reliably associated with valid documenta- unknown recipient, or otherwise in accor- organization which member is the benefi-
tion, under the applicable presumption dance with the appropriate Form 1099 cial owner of the obligation);
rules. If a qualified intermediary has an and the instructions accompanying the (2) Amounts described in
account holder that is another intermedi- form. §1.1441–1(b)(4)(ii) (dealing with bank
ary (whether a qualified intermediary or a ***** deposit interest and similar types of inter-
nonqualified intermediary) or a flow- Par 4. Effective January 1, 2001, est (including original issue discount) de-
through entity, the qualified intermediary §1.1441–2 is amended by: scribed in section 871(i)(2)(A) or 881(d));
may combine the account holder informa- 1. Revising paragraph (a). (3) Amounts described in
tion provided by the intermediary or flow- 2. Revising paragraph (b)(1)(i). §1.1441–1(b)(4)(iv) (dealing with interest
through entity with the qualified interme- 3. Removing paragraph (b)(2)(ii), or original issue discount on certain short-
diary’s direct account holder information redesignating paragraph (b)(2)(iii) as term obligations described in section
to determine the qualified intermediary’s paragraph (b)(2)(ii), and adding the word 871(g)(1)(B) or 881(e));
withholding rate pools. “and” after the semicolon in paragraph (4) Amounts described in
(2) Alternative procedure for U.S. non- (b)(2)(i). §1.1441–1(b)(4)(xx) (dealing with in-
exempt recipients. If permitted under its 4. Revising paragraph (b)(3). come from certain gambling winnings ex-
agreement with the IRS, a qualified inter- The revisions read as follows: empt from tax under section 871(j));
mediary may, by mutual agreement with a §1.1441–2 Amounts subject to withhold- (5) Amounts paid as part of the pur-
withholding agent, establish a single ing. chase price of an obligation sold or ex-
withholding rate pool (not subject to (a) In general. For purposes of the reg- changed between interest payment dates,
backup withholding) for all U.S. non-ex- ulations under chapter 3 of the Internal unless the sale or exchange is part of a
empt recipient account holders for whom Revenue Code, the term amounts subject plan the principal purpose of which is to
the qualified intermediary has provided to withholding means amounts from avoid tax and the withholding agent has
Forms W-9 prior to the withholding agent sources within the United States that con- actual knowledge or reason to know of
paying any reportable payments, as de- stitute either fixed or determinable annual such plan;
fined in section 3406(b), and a separate or periodical income described in para- (6) Original issue discount paid as part
withholding rate pool (subject to 31-per- graph (b) of this section or other amounts of the purchase price of an obligation sold
cent withholding) for all U.S. non-exempt subject to withholding described in para- or exchanged in a transaction other than a
recipient account holders for whom a graph (c) of this section. For purposes of redemption of such obligation, unless the
qualified intermediary has not provided this paragraph (a), an amount shall be purchase is part of a plan the principal
Forms W-9 prior to the withholding agent treated as being from sources within the purpose of which is to avoid tax and the
June 5, 2000 1196 2000–23 I.R.B.
withholding agent has actual knowledge discount that was taken into account prior *****
or reason to know of such plan; and to that time (due to a payment made on (b) * * *
(7) Insurance premiums paid with re- the obligation). In the case of a payment (2) No withholding between interest
spect to a contract that is subject to the made on the obligation, the tax due on the payment dates—(i) In general. A with-
section 4371 excise tax. amount of original issue discount may not holding agent is not required to withhold
(b) Fixed or determinable annual or exceed the amount of the payment re- under §1.1441–1 upon interest accrued on
periodical income—(1) In general—(i) duced by the tax imposed on any portion the date of a sale or exchange of a debt
Definition. For purposes of chapter 3 of of the payment that is qualified stated in- obligation when that sale occurs between
the Internal Revenue Code and the regula- terest. two interest payment dates (even though
tions thereunder, fixed or determinable (ii) Amounts subject to withholding. A the amount is treated as interest under
annual or periodical income includes all withholding agent must withhold on the §1.61–7(c) or (d) and is subject to tax
income included in gross income under taxable amount of original issue discount under section 871 or 881). See
section 61 (including original issue dis- paid on the redemption of an original §1.6045–1(c) for reporting requirements
count) except for the items specified in issue discount obligation unless an excep- by brokers with respect to sale proceeds.
paragraph (b)(2) of this section. Items of tion to withholding applies (e.g., portfolio See §1.61–7(c) regarding the character of
income that are excluded from gross in- interest or treaty exception). In addition, payments received by the acquirer of an
come under a provision of law without re- withholding is required on the taxable obligation subsequent to such acquisition
gard to the U.S. or foreign status of the amount of original issue discount upon (that is, as a return of capital or interest
owner of the income, such as interest ex- the sale or exchange of an original issue accrued after the acquisition). Any ex-
cluded from gross income under section discount obligation, other than in a re- emption from withholding pursuant to
103(a) or qualified scholarship income demption, to the extent the withholding this paragraph (b)(2)(i) applies without a
under section 117, shall not be treated as agent has actual knowledge or reason to requirement that documentation be fur-
fixed or determinable annual or periodical know that the sale or exchange is part of a nished to the withholding agent. How-
income under chapter 3 of the Internal plan the principal purpose of which is to ever, documentation may have to be fur-
Revenue Code. Income excluded from avoid tax. If a withholding agent cannot nished for purposes of the information
gross income under section 892 (income determine the taxable amount of original reporting provisions under section 6045
of foreign governments) or section 115 issue discount on the redemption of an or 6049 and backup withholding under
(income of a U.S. possession) is fixed or original issue discount obligation (or on section 3406. The exemption from with-
determinable annual or periodical income the sale or exchange of such an obligation holding granted by this paragraph (b)(2)
since the exclusion from gross income if the principal purpose of the sale is to is not a determination that the accrued in-
under those sections is dependent on the avoid tax), then it must withhold on the terest is not fixed or determinable annual
foreign status of the owner of the income. entire amount of original issue discount or periodical income under section 871(a)
See §1.306-3(h) for treating income from accrued from the date of issue until the or 881(a).
the disposition of section 306 stock as date of redemption (or the date the obliga- *****
fixed or determinable annual or periodical tion is sold or exchanged) determined on (c) Corporate distributions—(1) Gen-
income. the basis of the most recently published eral rule. A corporation making a distrib-
***** “List of Original Issue Discount Instru- ution with respect to its stock or any inter-
(3) Original issue discount—(i) ments” (IRS Publication 1212, available mediary (described in §1.1441–1(c)(13))
Amount subject to tax. An amount repre- from the IRS Forms Distribution Center) making a payment of such a distribution
senting original issue discount is fixed or or similar list published by the IRS as if is required to withhold under section
determinable annual or periodical income the beneficial owner of the obligation had 1441, 1442, or 1443 on the entire amount
that is subject to tax under sections held the obligation since its original issue. of the distribution, unless it elects to re-
871(a)(1)(C) and 881(a)(3) to the extent (iii) Exceptions to withholding. To the duce the amount of withholding under the
provided in those sections and this para- extent that this paragraph (b)(3) applies to provisions of this paragraph (c). Any ex-
graph (b)(3) if not otherwise excluded require withholding by a person other ceptions from withholding provided by
under paragraph (a) of this section. An than an issuer of an original issue dis- this paragraph (c) apply without any re-
amount of original issue discount is sub- count obligation, or the issuer’s agent, it quirement to furnish documentation to the
ject to tax with respect to a foreign benefi- shall apply only to obligations issued after withholding agent. However, documenta-
cial owner of an obligation carrying origi- December 31, 2000. tion may have to be furnished for pur-
nal issue discount upon a sale or exchange ***** poses of the information reporting provi-
of the obligation or when a payment is Par. 5. Effective January 1, 2001, sions under section 6042 or 6045 and
made on such obligation. The amount §1.1441–3 is amended by: backup withholding under section 3406.
taxable is the amount of original issue dis- 1. Revising paragraph (b)(2)(i). See §1.1461–1(c) to determine whether
count that accrued while the foreign per- 2. Revising paragraph (c)(1). amounts excepted from withholding
son held the obligation up to the time that 3. Revising paragraph (c)(4)(i)(C). under this section are considered amounts
the obligation is sold or exchanged or that The revisions read as follows: that are subject to reporting.
a payment is made on the obligation, re- §1.1441–3 Determination of amounts to *****
duced by any amount of original issue be withheld. (4) * * * (i) * * *
2000–23 I.R.B. 1197 June 5, 2000
(C) Coordination with REIT withhold- conduct of a trade or business within the ing presumption rules, that apply to a
ing. Withholding is required under sec- United States. Income on a notional prin- withholding agent that makes a payment
tion 1441 (or 1442 or 1443) on the portion cipal contract does not include the amount to a foreign trust or foreign estate.
of a distribution from a REIT that is not characterized as interest under the provi- (b) Rules applicable to U.S. partner-
designated as a capital gain dividend, a sions of §1.446–3(g)(4). ships, trusts, and estates—(1) Payments
return of basis, or a distribution in excess ***** to U.S. partnerships, trusts, and estates.
of a shareholder’s adjusted basis in the (b) * * * (1) * * * No withholding is required under section
stock of the REIT that is treated as a capi- (ii) Such compensation would be sub- 1.1441–1(b)(1) on a payment of an
tal gain under section 301(c)(3). A distri- ject to withholding under section 3402 but amount subject to withholding (as defined
bution in excess of a shareholder’s ad- for the provisions of section 3401(a) (not in §1.1441–2(a)) that a withholding agent
justed basis in the stock of the REIT is, including section 3401(a)(6)) and the reg- may treat as made to a U.S. payee. There-
however, subject to withholding under ulations under that section. This para- fore, if a withholding agent can reliably
section 1445, unless the interest in the graph (b)(1)(ii) does not apply to pay- associate (within the meaning of
REIT is not a U.S. real property interest ments to a nonresident alien individual §1.1441–2(b)(vii)) a Form W-9 provided
(e.g., an interest in a domestically con- from any trust described in section in accordance with §1.1441–1(d)(2) or (4)
trolled REIT under section 897(h)(2)). In 401(a), any annuity plan described in sec- by a U.S. partnership, U.S. trust, or a U.S.
addition, withholding is required under tion 403(a), any annuity, custodial ac- estate the withholding agent may treat the
section 1445 on the portion of the distrib- count, or retirement income account de- payment as made to a U.S. payee and the
ution designated by a REIT as a capital scribed in section 403(b), or an individual payment is not subject to withholding
gain dividend. See §1.1445–8. retirement account or individual retire- under section 1441 even though the part-
***** ment annuity described in section 408. nership, trust, or estate may have foreign
Par. 6. Effective January 1, 2001, Instead, these payments are subject to partners, beneficiaries, or owners. A
§1.1441–4 is amended by: withholding under this section to the ex- withholding agent is also not required to
1. Revising paragraph (a)(3)(i). tent they are exempted from the definition withhold under section 1441 on a pay-
2. Revising paragraph (b)(1)(ii). of wages under section 3401(a)(12) or to ment it makes to an entity presumed to be
The revisions read as follows: the extent they are from an annuity, custo- a U.S. payee under paragraphs (d)(2) and
§1.1441–4 Exemptions from withholding dial account, or retirement income ac- (e)(6)(ii) of this section.
for certain effectively connected income count described in section 403(b), or an (2) Withholding by U.S. payees—(i)
and other amounts. individual retirement account or individ- U.S. partnerships—(A) In general. A
(a) * * * ual retirement annuity described in sec- U.S. partnership is required to withhold
(3) Income on notional principal con- tion 408. Thus, for example, payments to under §1.1441–1 as a withholding agent
tracts—(i) General rule. A withholding a nonresident alien individual from a trust on an amount subject to withholding (as
agent that pays amounts attributable to a described in section 401(a) are subject to defined in §1.1441–2(a)) that is includible
notional principal contract described in withholding under section 1441 and not in the gross income of a partner that is a
§1.863–7(a) or 1.988–2(e) shall have no under section 3405 or section 3406. foreign person. Subject to paragraph
obligation to withhold on the amounts ***** (b)(2)(v) of this section, a U.S. partner-
paid under the terms of the notional prin- Par. 7. Effective January 1, 2001, in ship shall withhold when any distribu-
cipal contract regardless of whether a §1.1441–5 paragraphs (a) through (e) are tions that include amounts subject to
withholding certificate is provided. How- revised to read as follows: withholding (including guaranteed pay-
ever, a withholding agent must file returns §1.1441–5 Withholding on payments to ments made by a U.S. partnership) are
under §1.1461–1(b) and (c) reporting the partnerships, trusts, and estates. made. To the extent a foreign partner’s
income that it must treat as effectively (a) In general. This section describes distributive share of income subject to
connected with the conduct of a trade or the rules that apply to payments made to withholding has not actually been distrib-
business in the United States under the partnerships, trusts, and estates. Para- uted to the foreign partner, the U.S. part-
provisions of this paragraph (a)(3). Ex- graph (b) of this section prescribes the nership must withhold on the foreign part-
cept as otherwise provided in paragraph rules that apply to a withholding agent ner’s distributive share of the income on
(a)(3)(ii) of this section, a withholding making a payment to a U.S. partnership, the earlier of the date that the statement
agent must treat the income as effectively trust, or estate. It also prescribes the required under section 6031(b) is mailed
connected with the conduct of a U.S. obligations of a U.S. partnership, trust, or or otherwise provided to the partner or the
trade or business if the income is paid to, estate that makes a payment to a foreign due date for furnishing the statement.
or to the account of, a qualified business partner, beneficiary, or owner. Paragraph (B) Effectively connected income of
unit of a foreign person located in the (c) of this section prescribes rules that partners. Withholding on items of in-
United States or, if the payment is paid to, apply to a withholding agent that makes a come that are effectively connected in-
or to the account of, a qualified business payment to a foreign partnership. Para- come in the hands of the partners who are
unit of a foreign person located outside graph (d) of this section provides pre- foreign persons is governed by section
the United States, the withholding agent sumption rules that apply to payments 1446 and not by this section. In such a
knows, or has reason to know, the pay- made to foreign partnerships. Paragraph case, partners in a domestic partnership
ment is effectively connected with the (e) of this section prescribes rules, includ- are not required to furnish a withholding
June 5, 2000 1198 2000–23 I.R.B.
certificate in order to claim an exemption tributable net income consists of an provided in paragraph (c)(1)(ii) of this
from withholding under section amount subject to withholding (as defined section, the payees of a payment to a per-
1441(c)(1) and §1.1441–4. in §1.1441–2(a)) that is, or is required to son that the withholding agent may treat
(ii) U.S. simple trusts. A U.S. trust that be, distributed currently. The U.S. com- as a nonwithholding foreign partnership
is described in section 651(a) (a U.S. sim- plex trust shall withhold when a distribu- under paragraph (c)(3)(i) or (d)(2) of this
ple trust) is required to withhold under tion is made to a foreign beneficiary. The section are the partners (looking through
chapter 3 of the Internal Revenue Code as trust may use the same procedures regard- partners that are foreign intermediaries or
a withholding agent on the distributable ing an estimate of the amount subject to flow-through entities) as follows—
net income includible in the gross income withholding as a U.S. simple trust under (A) If the withholding agent can reli-
of a foreign beneficiary to the extent the paragraph (b)(2)(ii) of this section. To ably associate a partner’s distributive
distributable net income is an amount the extent an amount subject to withhold- share of the payment with a valid Form
subject to withholding (as defined in ing is required to be, but is not actually W-9 provided under §1.1441–1(d), the
§1.1441–2(a)). A U.S. simple trust shall distributed, the U.S. complex trust must partner is a U.S. payee;
withhold when a distribution is made to a withhold on the foreign beneficiary’s allo- (B) If the withholding agent can reli-
foreign beneficiary. The U.S. trust may cable share at the time the income is re- ably associate a partner’s distributive
make a reasonable estimate of the portion quired to be reported on Form 1042-S share of the payment with a valid Form
of the distribution that constitutes distrib- under §1.1461–1(c), without extension. W-8, or other appropriate documentation,
utable net income consisting of an amount A U.S. estate is required to withhold provided under §1.1441-1(e)(1)(ii), the
subject to withholding and apply the ap- under chapter 3 of the Internal Revenue partner is a payee that is a foreign benefi-
propriate rate of withholding to the esti- Code on the distributable net income in- cial owner;
mated amount. If, at the end of the tax- cludible in the gross income of a foreign (C) If the withholding agent can reli-
able year in which the distribution is beneficiary to the extent the distributable ably associate a partner’s distributive
made, the U.S. simple trust determines net income consists of an amount subject share of the payment with a qualified in-
that it underwithheld under section 1441 to withholding (as defined in termediary withholding certificate under
or 1442, the trust shall be liable as a with- §1.1441–2(a)) that is actually distributed. §1.1441–1(e)(3)(ii), a nonqualified inter-
holding agent for the amount under with- A U.S. estate may also use the reasonable mediary withholding certificate under
held under section 1461. No penalties estimate procedures of paragraph §1.1441–1(e)(3)(iii), or a U.S. branch cer-
shall be imposed for failure to withhold (b)(2)(ii) of this section. However, those tificate under §1.1441–1(e)(3)(v), then
and deposit the tax if the U.S. simple procedures apply to an estate that has a the rules of §1.1441–1(b)(2)(v) shall
trust’s estimate was reasonable and the taxable year other than a calendar year apply to determine who the payee is in the
trust pays the underwithheld amount on or only if the estate files an amended return same manner as if the partner’s distribu-
before the due date of Form 1042 under on Form 1042 for the calendar year in tive share of the payment had been paid
section 1461. Any payment of underwith- which the distribution was made and pays directly to such intermediary or U.S.
held amounts by the U.S. simple trust the underwithheld tax and interest within branch;
shall not be treated as income subject to 60 days after the close of the taxable year (D) If the withholding agent can reli-
additional withholding even if that in which the distribution was made. ably associate the partner’s distributive
amount is treated as additional income to (iv) U.S. grantor trusts. A U.S. trust share with a withholding foreign partner-
the foreign beneficiary, unless the addi- that is described in section 671 through ship certificate under paragraph (c)(2)(iv)
tional amount is income to the foreign 679 (a U.S. grantor trust) must withhold of this section or a nonwithholding for-
beneficiary as a result of a contractual on any income includible in the gross in- eign partnership certificate under para-
arrangement between the parties regard- come of a foreign person that is treated as graph (c)(3)(iii) of this section, then the
ing the satisfaction of the foreign benefi- an owner of the grantor trust to the extent rules of this paragraph (c)(1)(i) or para-
ciary’s tax liability. To the extent a U.S. the amount includible consists of an graph (c)(1)(ii) of this section shall apply
simple trust is required to, but does not, amount that is subject to withholding (as to determine whether the payment is
distribute such income to a foreign bene- described in §1.1441–2(a)). The with- treated as made to the partners of the
ficiary, the U.S. trust must withhold on holding must occur at the time the income higher-tier partnership under this para-
the foreign beneficiary’s allocable share is received by, or credited to, the trust. graph (c)(1)(i) or to the higher-tier part-
at the time the income is required (with- (v) Subsequent distribution. If a U.S. nership itself (under the rules of para-
out extension) to be reported on Form partnership or U.S. trust withholds on a graph (c)(1)(ii) of this section) in the
1042–S under §1.1461–1(c). foreign partner, beneficiary, or owner’s same manner as if the partner’s distribu-
(iii) U.S. complex trusts and U.S. es- share of an amount subject to withholding tive share of the payment had been paid
tates. A U.S. trust that is not a trust de- before the amount is actually distributed directly to the higher-tier foreign partner-
scribed in section 651(a) (a U.S. complex to the partner, beneficiary, or owner, with- ship;
trust) is required to withhold under chap- holding is not required when the amount (E) If the withholding agent can reli-
ter 3 of the Internal Revenue Code as a is subsequently distributed. ably associate the partner’s distributive
withholding agent on the distributable net (c) Foreign partnerships—(1) Determi- share with a withholding certificate de-
income includible in the gross income of nation of payee—(i) Payments treated as scribed in paragraph (e) of this section re-
a foreign beneficiary to the extent the dis- made to partners. Except as otherwise garding a foreign trust or estate, then the
2000–23 I.R.B. 1199 June 5, 2000
rules of paragraph (e) of this section shall (c)(1)(i) of this section, the payees of the interest cates or other appropriate documentation
apply to determine who the payees are; payment are FC and USP. from its partners pursuant to its agreement
Example 2. The facts are the same as in Example
and 1, except that FP1, a nonwithholding foreign part-
with the IRS, it will generally not be re-
(F) If the withholding agent cannot reli- nership, is a partner in FP rather than USP. FP1 has quired to attach such documentation to its
ably associate the partner’s distributive two partners, A and B, both foreign persons. FP pro- withholding foreign partnership withhold-
share with a withholding certificate or vides USWH with a valid nonwithholding foreign ing certificate. A foreign partnership may
other appropriate documentation, the partnership certificate, as described in paragraph act as a qualified intermediary under
(c)(3)(iii) of this section, with which it associates a
partners are considered to be the payees beneficial owner withholding certificate from FC
§1.1441–1(e)(5) with respect to payments
and the presumptions described in para- and a nonwithholding foreign partnership certificate it makes to persons other than its partners.
graph (d)(3) of this section shall apply to from FP1. In addition, foreign beneficial owner In addition, the IRS may permit a foreign
determine their classification and status. withholding certificates from A and B are associated partnership to act as a qualified intermedi-
(ii) Payments treated as made to the with the nonwithholding foreign partnership with- ary under §1.1441–1(e)(5)(ii)(D) with re-
holding certificate from FP1. FP also provides the
partnership. A payment to a person that withholding statement required by paragraph
spect to its partners in appropriate circum-
the withholding agent may treat as a for- (c)(3)(iv) of this section. USWH can reliably asso- stances.
eign partnership is treated as a payment to ciate the interest payment with the withholding cer- (ii) Withholding agreement. The IRS
the foreign partnership and not to its part- tificates provided by FC, A, and B. Therefore, under may, upon request, enter into a withhold-
ners only if— paragraph (c)(1)(i) of this section, the payees of the ing agreement with a foreign partnership
interest payment are FC, A, and B.
(A) The withholding agent can reliably Example 3. USWH makes a payment of U.S.
pursuant to such procedures as the IRS
associate the payment with a withholding source dividends to WFP, a withholding foreign may prescribe in published guidance (see
certificate described in paragraph partnership. WFP has two partners, FC1 and FC2, §601.601(d)(2) of this chapter). Under
(c)(2)(iv) of this section (withholding cer- both foreign corporations. USWH can reliably asso- the withholding agreement, a foreign
tificate of a withholding foreign partner- ciate the payment with a valid withholding foreign partnership shall generally be subject to
partnership withholding certificate from WFP.
ship); Therefore, under paragraph (c)(1)(ii)(A) of this sec-
the applicable withholding and reporting
(B) The withholding agent can reliably tion, WFP is the payee of the dividends. provisions applicable to withholding
associate the payment with a withholding Example 4. USWH makes a payment of U.S. agents and payors under chapters 3 and 61
certificate described in paragraph source royalties to FP, a foreign partnership. USWH of the Internal Revenue Code, section
(c)(3)(iii) of this section (nonwithholding can reliably associate the royalties with a valid with- 3406, the regulations under those provi-
holding certificate from FP on which FP certifies
foreign partnership) certifying that the that the income is effectively connected with the
sions, and other withholding provisions of
payment is income that is effectively con- conduct of a trade or business in the United States. the Internal Revenue Code, except to the
nected with the conduct of a trade or busi- Therefore, under paragraph (c)(1)(ii)(B) of this sec- extent provided under the agreement.
ness in the United States; or tion, FP is the payee of the royalties. Under the agreement, a foreign partner-
(C) The withholding agent can treat the (2) Withholding foreign partnerships— ship may agree to act as an acceptance
income as effectively connected income (i) Reliance on claim of withholding for- agent to perform the duties described in
under the presumption rules of eign partnership status. A withholding §301.6109–1(d)(3)(iv)(A) of this chapter.
§1.1441–4(a)(2)(ii) or (3)(i). foreign partnership is a foreign partner- The agreement may specify the manner in
(iii) Rules for reliably associating a ship that has entered into an agreement which applicable procedures for adjust-
payment with documentation. For rules with the Internal Revenue Service (IRS), ments for underwithholding and over-
regarding the reliable association of a as described in paragraph (c)(2)(ii) of this withholding, including refund procedures,
payment with documentation, see section, with respect to distributions and apply to the withholding foreign partner-
§1.1441–1(b)(2)(vii). In the absence of guaranteed payments it makes to its part- ship and its partners and the extent to
documentation, see §§1.1441–1(b)(3) and ners. A withholding agent that can reli- which applicable procedures may be
1.6049–5(d) and paragraphs (d) and (e)(6) ably associate a payment with a certificate modified. In particular, a withholding
of this section for applicable presump- described in paragraph (c)(2)(iv) of this agreement may allow a withholding for-
tions. section may treat the person to whom it eign partnership to claim refunds of over-
(iv) Examples. The rules of paragraphs makes the payment as a withholding for- withheld amounts on behalf of its cus-
(c)(1)(i) and (ii) of this section are illus- eign partnership for purposes of withhold- tomers. In addition, the agreement must
trated by the following examples: ing under chapter 3 of the Internal Rev- specify the manner in which the IRS will
Example 1. FP is a nonwithholding foreign part- enue Code, information reporting under audit the foreign partnership’s books and
nership organized in Country X. FP has two part- chapter 61 of the Internal Revenue Code, records in order to verify the partnership’s
ners, FC, a foreign corporation, and USP, a U.S.
backup withholding under section 3406, compliance with its agreement. A with-
partnership. USWH, a U.S. withholding agent,
makes a payment of U.S. source interest to FP. FP and withholding under other provisions of holding foreign partnership must file a re-
has provided USWH with a valid nonwithholding the Internal Revenue Code. Furnishing turn on Form 1042 and information re-
foreign partnership certificate, as described in para- such a certificate is in lieu of transmitting turns on Form 1042-S. The withholding
graph (c)(3)(iii) of this section, with which it associ- to a withholding agent withholding cer- foreign partnership agreement may also
ates a beneficial owner withholding certificate from
tificates or other appropriate documenta- require a withholding foreign partnership
FC and a Form W-9 from USP together with the
withholding statement required by paragraph tion for its partners. Although the with- to file a partnership return under section
(c)(3)(iv) of this section. USWH can reliably asso- holding foreign partnership generally will 6031(a) and partner statements under
ciate the payment of interest with the withholding be required to obtain withholding certifi- 6031(b).
certificates from FC and USP. Under paragraph
June 5, 2000 1200 2000–23 I.R.B.
(iii) Withholding responsibility. A agreement with the IRS or the form or ac- withholding. A withholding certificate or
withholding foreign partnership must as- companying instructions in addition to, or other appropriate documentation that es-
sume primary withholding responsibility in lieu of, the information, statements, tablishes entitlement to a reduced rate of
under chapter 3 of the Internal Revenue and certifications described in this para- withholding is a beneficial owner with-
Code. It is not required to provide infor- graph (c)(2)(iv). holding certificate described in
mation to the withholding agent regarding (3) Nonwithholding foreign partner- §1.1441–1(e)(2)(i), documentary evi-
each partner’s distributive share of the ships—(i) Reliance on claim of foreign dence described in §1.1441–6(c)(3) or (4)
payment. The withholding foreign part- partnership status. A withholding agent or 1.6049–5(c)(1) (for a partner claiming
nership will be responsible for reporting may treat a person as a nonwithholding to be a foreign person and a beneficial
the payments under §1.1461–1(c) and foreign partnership if it receives from that owner, determined under the provisions
chapter 61 of the Internal Revenue Code. person a nonwithholding foreign partner- of §1.1441–1(c)(6)), a Form W–9 de-
A withholding agent making a payment to ship withholding certificate as described scribed in §1.1441–1(d) (for a partner
a withholding foreign partnership is not in paragraph (c)(3)(iii) of this section. A claiming to be a U.S. payee), or a with-
required to withhold any amount under withholding agent that does not receive a holding foreign partnership withholding
chapter 3 of the Internal Revenue Code on nonwithholding foreign partnership with- certificate described in paragraph
a payment to the withholding foreign holding certificate, or does not receive a (c)(2)(iv) of this section. Unless a non-
partnership, unless it has actual knowl- valid withholding certificate, from an en- withholding foreign partnership withhold-
edge or reason to know that the foreign tity it knows, or has reason to know, is a ing certificate is provided for income
partnership is not a withholding foreign foreign partnership, must apply the pre- claimed to be effectively connected with
partnership. The withholding foreign sumption rules of §§1.1441–1(b)(3) and the conduct of a trade or business in the
partnership shall withhold the payments 1.6049–5(d) and paragraphs (d) and (e)(6) United States, a claim must be presented
under the same procedures and at the of this section. In addition, to the extent a for each portion of the payment that rep-
same time as prescribed for withholding withholding agent cannot, prior to a pay- resents an item of income includible in
by a U.S. partnership under paragraph ment, reliably associate the payment with the distributive share of a partner as re-
(b)(2) of this section, except that, for pur- valid documentation from a payee that is quired under paragraph (c)(3)(iii)(C) of
poses of determining the partner’s status, associated with the nonwithholding for- this section. When making a claim for
the provisions of paragraph (d)(4) of this eign partnership withholding certificate or several partners, the partnership may pre-
section shall apply. has insufficient information to report the sent a single nonwithholding foreign part-
(iv) Withholding certificate from a payment on Form 1042-S or Form 1099, nership withholding certificate to which
withholding foreign partnership. The to the extent reporting is required, must the partners’ certificates or other appro-
rules of §1.1441–1(e)(4) shall apply to also apply the presumption rules. See priate documentation are associated.
withholding certificates described in this §1.1441–1(b)(2)(vii)(A) and (B) for rules Where the nonwithholding foreign part-
paragraph (c)(2)(iv). A withholding cer- regarding reliable association. See para- nership withholding certificate is pro-
tificate furnished by a withholding for- graph (c)(3)(iv) of this section and vided for income claimed to be effec-
eign partnership is valid with regard to §1.1441–1(e)(3)(iv) for alternative proce- tively connected with the conduct of a
any partner on whose behalf the certifi- dures permitting allocation information to trade or business in the United States
cate is furnished only if it is furnished on be received after a payment is made. under paragraph (c)(3)(iii)(D) of this sec-
a Form W-8, an acceptable substitute (ii) Reliance on claim of reduced with- tion, the claim may be presented without
form, or such other form as the IRS may holding by a partnership for its partners. having to identify any partner’s distribu-
prescribe, it is signed under penalties of This paragraph (c)(3)(ii) describes the tive share of the payment.
perjury by a partner with authority to sign manner in which a withholding agent may (iii) Withholding certificate from a non-
for the partnership, its validity has not ex- rely on a claim of reduced withholding withholding foreign partnership. A non-
pired, and it contains the information, when making a payment to a nonwith- withholding foreign partnership shall pro-
statement, and certifications described in holding foreign partnership. To the extent vide a nonwithholding foreign partnership
this paragraph (c)(2)(iv) as follows— that a withholding agent treats a payment withholding certificate with respect to re-
(A) The name, permanent residence ad- to a nonwithholding foreign partnership portable amounts received by the non-
dress (as described in as a payment to the nonwithholding for- withholding foreign partnership. A non-
§1.1441–1(e)(2)(ii)), and the employer eign partnership’s partners (whether di- withholding foreign partnership
identification number of the partnership, rect or indirect) in accordance with para- withholding certificate is valid only to the
and the country under the laws of which graph (c)(1)(i) of this section, it may rely extent it is furnished on a Form W-8 (or
the partnership is created or governed; on a claim for reduced withholding by the an acceptable substitute form or such
(B) A certification that the partnership partner if, prior to the payment, the with- other form as the IRS may prescribe), it is
is a withholding foreign partnership holding agent can reliably associate the signed under penalties of perjury by a
within the meaning of paragraph (c)(2)(i) payment (within the meaning of partner with authority to sign for the part-
of this section; and §1.1441–1(b)(2)(vii)) with a valid with- nership, its validity has not expired, and it
(C) Any other information, certifica- holding certificate or other appropriate contains the information, statements, and
tions or statements as may be required by documentation from the partner that es- certifications described in this paragraph
the withholding foreign partnership tablishes entitlement to a reduced rate of (c)(3)(iii) and paragraph (c)(3)(iv) of this
2000–23 I.R.B. 1201 June 5, 2000
section, and the withholding certificates identification number of the partnership, under §1.1461–1(c). A withholding for-
and other appropriate documentation for if any, and the country under the laws of eign partnership’s obligations to withhold
all the persons to whom the certificate re- which the partnership is created or gov- and report shall be determined in accor-
lates are associated with the certificate. erned; dance with its withholding foreign part-
The rules of §1.1441–1(e)(4) shall apply (B) A certification that the person nership agreement.
to withholding certificates described in whose name is on the certificate is a for- (d) Presumption rules—(1) In general.
this paragraph (c)(3)(iii). No withholding eign partnership; This paragraph (d) contains the applicable
certificates or other appropriate documen- (C) A withholding statement associated presumptions for a withholding agent (in-
tation from persons who derive income with the nonwithholding foreign partner- cluding a partnership) to determine the
through a partnership (whether or not ship withholding certificate that provides classification and status of a partnership
U.S. exempt recipients) are required to be all of the information required by para- and its partners in the absence of docu-
associated with the nonwithholding for- graph (c)(3)(iv) of this section and mentation. The provisions of
eign partnership withholding certificate if §1.1441–1(e)(3)(iv). No withholding §1.1441–1(b)(3)(iv) (regarding the 90-
the certificate is furnished solely for in- statement is required, however, for a non- day grace period) and
come claimed to be effectively connected withholding foreign partnership withhold- §1.1441–1(b)(3)(vii) through (ix) shall
with the conduct of a trade or business in ing certificate furnished for income apply for purposes of this paragraph (d).
the United States. Withholding certifi- claimed to be effectively connected with (2) Determination of partnership status
cates and other appropriate documenta- the conduct of a trade or business in the as U.S. or foreign in the absence of docu-
tion that may be associated with the non- United States; mentation. In the absence of a valid rep-
withholding foreign partnership (D) A certification that the income is resentation of U.S. partnership status in
withholding certificate consist of benefi- effectively connected with the conduct of accordance with paragraph (b)(1) of this
cial owner withholding certificates under a trade or business in the United States, if section or of foreign partnership status in
§1.1441–1(e)(2)(i), intermediary with- applicable; and accordance with paragraph (c)(2)(i) or
holding certificates under (E) Any other information, certifica- (3)(i) of this section, the withholding
§1.1441–1(e)(3)(i), withholding foreign tions, or statements required by the form agent shall determine the classification of
partnership withholding certificates under or accompanying instructions in addition the payee under the presumptions set
paragraph (c)(2)(iv) of this section, non- to, or in lieu of, the information and certi- forth in §1.1441–1(b)(3)(ii). If the with-
withholding foreign partnership withhold- fications described in this paragraph holding agent treats the payee as a part-
ing certificates under this paragraph (c)(3)(iii). nership under §1.1441–1(b)(3)(ii), the
(c)(3)(iii), withholding certificates from (iv) Withholding statement provided by withholding agent shall presume the part-
foreign trusts or estates under paragraph nonwithholding foreign partnership. The nership to be a U.S. partnership unless
(e) of this section, documentary evidence provisions of §1.1441–1(e)(3)(iv) (re- there are indicia of foreign status. If there
described in §1.1441–6(c)(3) or (4) or garding a withholding statement) shall are indicia of foreign status, the withhold-
documentary evidence described in apply to a nonwithholding foreign part- ing agent may presume the partnership to
§1.6049–5(c)(1), and any other documen- nership by substituting the term nonwith- be foreign. Indicia of foreign status exist
tation or certificates applicable under holding foreign partnership for the term only if the withholding agent has actual
other provisions of the Internal Revenue nonqualified intermediary. knowledge of the payee’s employer iden-
Code or regulations that certify or estab- (v) Withholding and reporting by a for- tification number and that number begins
lish the status of the payee or beneficial eign partnership. A nonwithholding for- with the two digits “98,” the withholding
owner as a U.S. or a foreign person. eign partnership described in this para- agent’s communications with the payee
Nothing in this paragraph (c)(3)(iii) shall graph (c)(3) that receives an amount are mailed to an address in a foreign
require a nonwithholding foreign partner- subject to withholding (as defined in country, or the payment is made outside
ship to furnish original documentation. §1.1441–2(a)) shall be required to with- the United States (as defined in
Copies of certificates or documentary evi- hold and report such payment under chap- §1.6049–5(e)). For rules regarding reli-
dence may be transmitted to the U.S. ter 3 of the Internal Revenue Code and the able association with a withholding cer-
withholding agent, in which case the non- regulations thereunder except as other- tificate from a domestic or a foreign part-
withholding foreign partnership must re- wise provided in this paragraph (c)(3)(v). nership, see §1.1441–1(b)(2)(vii).
tain the original documentation for the A nonwithholding foreign partnership (3) Determination of partners’ status in
same time period that the copy is required shall not be required to withhold and re- the absence of certain documentation. If
to be retained by the withholding agent port if it has provided a valid nonwith- a nonwithholding foreign partnership has
under §1.1441–1(e)(4)(iii) and must pro- holding foreign partnership withholding provided a nonwithholding foreign part-
vide it to the withholding agent upon re- certificate, it has provided all of the infor- nership withholding certificate under
quest. The information, statement, and mation required by paragraph (c)(3)(iv) of paragraph (c)(3)(iii) of this section that
certifications required on the withholding this section (withholding statement), and would be valid except that the withhold-
certificate are as follows— it does not know, and has no reason to ing agent cannot reliably associate all or a
(A) The name, permanent residence ad- know, that another withholding agent portion of the payment with valid docu-
dress (as described in failed to withhold the correct amount or mentation from a partner of the partner-
§1.1441–1(e)(2)(ii)), and the employer failed to report the payment correctly ship, then the withholding agent may
June 5, 2000 1202 2000–23 I.R.B.
apply the presumption rule of this para- be the beneficial owner of income paid to (D) If the withholding agent can reli-
graph (d)(3) with respect to all or a por- the foreign complex trust or foreign es- ably associate a payment with a withhold-
tion of the payment for which documenta- tate. See paragraph (e)(4) of this section ing foreign partnership withholding cer-
tion has not been received. See for rules describing when a withholding tificate under paragraph (c)(2)(iv) of this
§1.1441–1(b)(2)(vii)(A) and (B) for rules agent may treat a payment as made to a section or a nonwithholding foreign part-
regarding reliable association. The pre- foreign complex trust or a foreign estate. nership withholding certificate under
sumption rule of this paragraph (d)(3) (3) Payees of payments to foreign sim- paragraph (c)(3)(iii) of this section, then
also applies to a person that is presumed ple trusts and foreign grantor trusts—(i) the rules of paragraph (c)(1)(i) or (ii) of
to be a foreign partnership under the rule Payments for which beneficiaries and this section shall apply to determine the
of paragraph (d)(2) of this section. Any owners are payees. For purposes of the payee;
portion of a payment that the withholding regulations under chapters 3 and 61 of the (E) If the withholding agent can reli-
agent cannot treat as reliably associated Internal Revenue Code and section 3406, ably associate the payment with a foreign
with valid documentation from a partner a foreign simple trust is not a beneficial simple trust withholding certificate or a
may be presumed made to a foreign owner or a payee of a payment. Also, a foreign grantor trust withholding certifi-
payee. As a result, any payment of an foreign grantor trust (or a portion of a cate (both described in paragraph
amount subject to withholding is subject trust that is a foreign grantor trust) is not (e)(5)(iii) of this section) from a second or
to withholding at a rate of 30 percent. considered a beneficial owner or a payee higher-tier foreign simple trust or foreign
Any payment that is presumed to be made of a payment. Except as otherwise pro- grantor trust, then the rules of this para-
to an undocumented foreign payee must vided in paragraph (e)(3)(ii) of this sec- graph (e)(3)(i) or paragraph (e)(3)(ii) of
be reported on Form 1042-S. See tion, the payees of a payment made to a this section shall apply to determine
§1.1461–1(c). person that the withholding agent may whether the payment is treated as made to
(4) Determination by a withholding treat as a foreign simple trust or a foreign a beneficiary or owner of the higher-tier
foreign partnership of the status of its grantor trust (or a portion of a trust that is trust or to the trust itself in the same man-
partners. A withholding foreign partner- a foreign grantor trust) are determined ner as if the payment had been made di-
ship shall determine whether the partners under the rules of this paragraph (e)(3)(i). rectly to the higher-tier trust; and
or some other persons are the payees of The payees shall be treated as the benefi- (F) If the withholding agent cannot reli-
the partners’ distributive shares of any cial owners if they may be so treated ably associate a payment with a withhold-
payment made by a withholding foreign under §1.1441–1(c)(6)(ii)(C) and they ing certificate or other appropriate docu-
partnership by applying the rules of provide documentation supporting their mentation, the payees shall be determined
§1.1441–1(b)(2), paragraph (c)(1) of this status as the beneficial owners. The pay- by applying the presumptions described
section (in the case of a partner that is a ees of a payment to a foreign simple trust in paragraph (e)(6) of this section.
foreign partnership), and paragraph (e)(3) or foreign grantor trust are determined as (ii) Payments for which trust is payee.
of this section (in the case of a partner that follows— A payment to a person that the withhold-
is a foreign estate or a foreign trust). Fur- (A) If the withholding agent can reli- ing agent may treat as made to a foreign
ther, the provisions of paragraph (d)(3) of ably associate a payment with a valid trust under paragraph (e)(5)(iii) of this
this section shall apply to determine the Form W-9 provided under §1.1441–1(d) section is treated as a payment to the trust,
status of partners and the applicable with- from a beneficiary or owner of the foreign and not to a beneficiary of the trust, only
holding rates to the extent that, at the time trust, then the beneficiary or owner is a if—
the foreign partnership is required to U.S. payee; (A) The withholding agent can reliably
withhold on a payment, it cannot reliably (B) If the withholding agent can reli- associate the payment with a foreign com-
associate the amount with documentation ably associate a payment with a valid plex trust withholding certificate under
for any one or more of its partners. Form W-8, or other appropriate documen- paragraph (e)(4) of this section;
(e) Foreign trusts and estates—(1) In tation, provided under §1.1441–1(e)(1)(ii) (B) The withholding agent can reliably
general. This paragraph (e) provides from a beneficiary or owner of the foreign associate the payment with a foreign sim-
rules applicable to payments of amounts trust, then the beneficiary or owner is a ple trust withholding certificate under
subject to withholding (as defined in payee that is a foreign beneficial owner; paragraph (e)(5)(iii) of this section certi-
§1.1441–2(a)) that a withholding agent (C) If the withholding agent can reli- fying that the payment is income that is
may treat as made to any foreign trust or a ably associate a payment with a qualified treated as effectively connected with the
foreign estate. For rules relating to pay- intermediary withholding certificate conduct of a trade or business in the
ments to a U.S. trust or a U.S. estate, see under §1.1441–1(e)(3)(ii), a nonqualified United States; or
paragraph (b) of this section. For the def- intermediary withholding certificate (C) The withholding agent can treat the
initions of foreign simple trust, foreign under §1.1441–1(e)(3)(ii), or a U.S. income as effectively connected income
complex trust, and foreign grantor trust, branch withholding certificate under under the presumption rules of
see §1.1441–1(c)(24), (25), and (26). §1.1441–1(e)(3)(v), then the rules of §1.1441–4(a)(3)(i).
(2) Payments to foreign complex trusts §1.1441–1(b)(2)(v) shall apply to deter- (4) Reliance on claim of foreign com-
and foreign estates. Under §1.1441– mine the payee in the same manner as if plex trust or foreign estate status. A with-
1(c)(6)(ii)(D), a foreign complex trust or the payment had been paid directly to holding agent may treat a payment as
foreign estate is generally considered to such intermediary or U.S. branch; made to a foreign complex trust or a for-
2000–23 I.R.B. 1203 June 5, 2000
eign estate if the withholding agent can prior to the payment, the withholding §1.1441–1(e)(3)(iv), and the withholding
reliably associate the payment with a ben- agent can reliably associate the payment certificates or other appropriate documen-
eficial owner withholding certificate de- (within the meaning of tation for all of the payees (as determined
scribed in §1.1441–1(e)(2)(i) or other §1.1441–1(b)(2)(vii)) with a valid with- under paragraph (e)(3)(i) of this section)
documentary evidence under holding certificate or other appropriate to whom the certificate relates are associ-
§1.1441–6(c)(3) or (4) (regarding a claim documentation from a payee or beneficial ated with the foreign simple trust or for-
for treaty benefits) or §1.6049–5(c)(1) owner that establishes entitlement to a re- eign grantor trust withholding certificate.
(regarding documentary evidence to es- duced rate of withholding. A withholding The rules of §1.1441–1(e)(4) shall apply
tablish foreign status for purposes of certificate or other appropriate documen- to withholding certificates described in
chapter 61 of the Internal Revenue Code) tation that establishes entitlement to a re- this paragraph (e)(5)(iii). No withholding
that establishes the foreign complex trust duced rate of withholding is a beneficial certificates or other appropriate documen-
or foreign estate’s status as a beneficial owner withholding certificate described tation from persons who derive income
owner. See paragraph (e)(6) of this sec- in §1.1441–1(e)(2)(i) or documentary evi- through a foreign simple trust or a foreign
tion for presumption rules if documenta- dence described in §1.1441–6(c)(3) or(4) grantor trust (whether or not U.S. exempt
tion is lacking. or in §1.6049–5(c)(1) (for a beneficiary or recipients) are required to be associated
(5) Foreign simple trust and foreign owner claiming to be a foreign person and with the foreign simple trust or foreign
grantor trust—(i) Reliance on claim of for- a beneficial owner, determined under the grantor trust withholding certificate if the
eign simple trust or foreign grantor trust provisions of §1.1441–1(c)(6)), a Form certificate is furnished solely for income
status. A withholding agent may treat a W–9 described in §1.1441–1(d) (for a that is treated as effectively connected
person as a foreign simple trust or foreign beneficiary or owner claiming to be a with the conduct of a trade or business in
grantor trust if it receives from that person a U.S. payee), or a withholding foreign the United States. Withholding certifi-
foreign simple trust or foreign grantor trust partnership withholding certificate de- cates and other appropriate documenta-
withholding certificate as described in para- scribed in paragraph (c)(2)(iv) of this sec- tion (as determined under paragraph
graph (e)(5)(iii) of this section. A withhold- tion. Unless a foreign simple trust or for- (e)(3)(i) of this section) that may be asso-
ing agent must apply the presumption rules eign grantor trust withholding certificate ciated with a foreign simple trust or for-
of §§1.1441–1(b)(3) and 1.6049–5(d) and is provided for income treated as income eign grantor trust withholding certificate
paragraphs (d) and (e)(6) of this section to effectively connected with the conduct of consist of beneficial owner withholding
the extent it cannot, prior to the payment, a trade or business in the United States, a certificates under §1.1441–1(e)(2)(i), in-
reliably associate a payment (within the claim must be presented for each payee’s termediary withholding certificates under
meaning of §1.1441–1(b)(2)(vii)) with a portion of the payment. When making a §1.1441–1(e)(3)(i), withholding foreign
valid foreign simple trust or foreign grantor claim for several payees, the trust may partnership withholding certificates under
trust withholding certificate, it cannot reli- present a single foreign simple trust or paragraph (c)(2)(iv) of this section, non-
ably determine how much of the payment foreign grantor trust withholding certifi- withholding foreign partnership withhold-
relates to valid documentation provided by cate with which the payees’ certificates or ing certificates under paragraph (c)(3)(iii)
a payee (e.g., a person that is not itself a other appropriate documentation are asso- of this section, withholding certificates
nonqualified intermediary, flow-through ciated. Where the foreign simple trust or from foreign trusts or estates under para-
entity, or U.S. branch) associated with the foreign grantor trust withholding certifi- graph (e)(4) or (5)(iii) of this section, doc-
foreign simple trust or foreign grantor trust cate is provided for income that is treated umentary evidence described in
withholding certificate, or it does not have as effectively connected with the conduct §§1.1441–6(c)(3) or (4), or
sufficient information to report the payment of a trade or business in the United States 1.6049–5(c)(1), and any other documen-
on Form 1042-S or Form 1099, if reporting under paragraph (e)(5)(iii)(D) of this sec- tation or certificates applicable under
is required. See §1.1441–1(b)(2)(vii)(A) tion, the claim may be presented without other provisions of the Internal Revenue
and (B). having to identify any partner’s distribu- Code or regulations that certify or estab-
(ii) Reliance on claim of reduced with- tive share of the payment. lish the status of the payee or beneficial
holding by a foreign simple trust or for- (iii) Withholding certificate from for- owner as a U.S. or a foreign person.
eign grantor trust for its beneficiaries or eign simple trust or foreign grantor trust. Nothing in this paragraph (e)(5)(iii) shall
owners. This paragraph (e)(5)(ii) de- A withholding certificate furnished by a require a foreign simple trust or foreign
scribes the manner in which a withhold- foreign simple trust or a foreign grantor grantor trust to provide original documen-
ing agent may rely on a claim of reduced trust that is not a withholding foreign trust tation. Copies of certificates or documen-
withholding when making a payment to a (within the meaning of paragraph tary evidence may be passed up to the
foreign simple trust or foreign grantor (e)(5)(v) of this section) is valid only if it U.S. withholding agent, in which case the
trust. To the extent that a withholding is furnished on a Form W-8, an acceptable foreign simple trust or foreign grantor
agent treats a payment to a foreign simple substitute form, or such other form as the trust must retain the original documenta-
trust or foreign grantor trust as a payment IRS may prescribe, it is signed under tion for the same time period that the copy
to payees other than the trust in accor- penalties of perjury by a trustee, its valid- is required to be retained by the withhold-
dance with paragraph (e)(3)(i) of this sec- ity has not expired, it contains the infor- ing agent under §1.1441–1(e)(4)(iii) and
tion, it may rely on a claim for reduced mation, statements, and certifications re- must provide it to the withholding agent
withholding by a beneficiary or owner if, quired by this paragraph (e)(5)(iii) and upon request. The information, state-
June 5, 2000 1204 2000–23 I.R.B.
ment, and certifications required on a for- priate circumstances. See (e)(5)(iii) of this section but the payment
eign simple trust or foreign grantor trust §1.1441–1(e)(5)(ii)(D). to such trust cannot be reliably associated
withholding certificate are as follows— (6) Presumption rules—(i) In general. with valid documentation from a specific
(A) The name, permanent residence ad- This paragraph (e)(6) contains the applic- beneficiary or owner of the trust, then any
dress (as described in able presumptions for a withholding agent portion of a payment that a withholding
§1.1441–1(e)(2)(ii)), and the employer (including a trust or estate) to determine agent cannot treat as reliably associated
identification number, if required, of the the classification and status of a trust or with valid documentation from a benefi-
trust and the country under the laws of estate and its beneficiaries or owners in ciary or owner may be presumed made to
which the trust is created; the absence of valid documentation. The a foreign payee. As a result, any payment
(B) A certification that the person provisions of §1.1441–1(b)(3)(iv) (re- of an amount subject to withholding is
whose name is on the certificate is a for- garding the 90-day grace period) and subject to withholding at a rate of 30 per-
eign simple trust or a foreign grantor §1.1441–1(b)(3)(vii) through (ix) shall cent. Any such payment that is presumed
trust; apply for purposes of this paragraph to be made to an undocumented foreign
(C) A withholding statement associated (e)(6). person must be reported on Form 1042–S.
with the foreign simple trust or foreign (ii) Determination of status as U.S. or See §1.1461–1(c).
grantor trust withholding certificate that foreign trust or estate in the absence of *****
provides all of the information required documentation. In the absence of valid Par. 8. Effective January 1, 2001,
by paragraph (e)(5)(iv) of this section. documentation that establishes the U.S. §1.1441–6 is amended by:
No withholding statement is required, status of a trust or estate under paragraph 1. Revising paragraphs (b)(1),
however, for a foreign simple trust with- (b)(1) of this section and of documenta- (b)(2), and (b)(3).
holding certificate furnished for income tion that establishes the foreign status of a 2. Removing paragraph (b)(4) and
that is treated as effectively connected trust or estate under paragraph (e)(4) or redesignating paragraph (b)(5) as new
with the conduct of a trade or business in (5)(iii) of this section, the withholding paragraph (b)(4).
the United States; agent shall determine the classification of 3. Revising paragraphs (c) and (e).
(D) A certification on a foreign simple the payee based upon the presumptions The revisions read as follows:
trust withholding certificate that the in- set forth in §1.1441–1(b)(3)(ii). If, based §1.1441–6 Claim of reduced withholding
come is treated as effectively connected upon those presumptions, the withholding under an income tax treaty.
with the conduct of a trade or business in agent classifies the payee as a trust or es- *****
the United States, if applicable; and tate, the trust or estate shall be presumed (b) Reliance on claim of reduced with-
(E) Any other information, certifica- to be a U.S. trust or U.S. estate unless holding under an income tax treaty—(1)
tions, or statements required by the form there are indicia of foreign status, in In general. The withholding imposed
or accompanying instructions in addition which case the trust or estate shall be pre- under section 1441, 1442, or 1443 on any
to, or in lieu of, the information, certifica- sumed to be foreign. Indicia of foreign payment to a foreign person is eligible for
tions, and statements described in this status exists if the withholding agent has reduction under the terms of an income
paragraph (e)(5)(iii); actual knowledge of the payee’s employer tax treaty only to the extent that such pay-
(iv) Withholding statement provided by identification number and that number be- ment is treated as derived by a resident of
a foreign simple trust or foreign grantor gins with the two digits “98,” the with- an applicable treaty jurisdiction, such res-
trust. The provisions of holding agent’s communications with the ident is a beneficial owner, and all other
§1.1441–1(e)(3)(iv) (regarding a with- payee are mailed to an address in a for- requirements for benefits under the treaty
holding statement) shall apply to a foreign eign country, or the payment is made out- are satisfied. See section 894 and the reg-
simple trust or foreign grantor trust by side the United States (as defined in ulations thereunder to determine whether
substituting the term foreign simple trust §1.6049–5(e)). If an undocumented a resident of a treaty country derives the
or foreign grantor trust for the term non- payee is presumed to be a foreign trust it income. Absent actual knowledge or rea-
qualified intermediary. shall be presumed to be a foreign complex son to know otherwise, a withholding
(v) Withholding foreign trusts. The trust. If a withholding agent has docu- agent may rely on a claim that a beneficial
IRS may enter an agreement with a for- mentary evidence that establishes that an owner is entitled to a reduced rate of with-
eign trust to treat the trust or estate as a entity is a foreign trust, but the withhold- holding based upon an income tax treaty
withholding foreign trust. Such an agree- ing agent cannot determine whether the if, prior to the payment, the withholding
ment shall generally follow the same prin- foreign trust is a complex trust, a simple agent can reliably associate the payment
ciples as an agreement with a withholding trust, or foreign grantor trust, the with- with a beneficial owner withholding cer-
foreign partnership under paragraph holding agent may presume that the trust tificate, described in §1.1441–1(e)(2),
(c)(2)(ii) of this section. A withholding is a foreign complex trust. that contains the information necessary to
agent may treat a payment to a withhold- (iii) Determination of beneficiary or support the claim, or, in the case of a pay-
ing foreign trust in the same manner the owner’s status in the absence of certain ment of income described in paragraph
withholding agent would treat a payment documentation. If a foreign simple trust (c)(2) of this section made outside the
to a withholding foreign partnership. The or foreign grantor trust has provided a for- United States with respect to an offshore
IRS may also enter an agreement to treat a eign simple trust or foreign grantor trust account, documentary evidence described
trust as a qualified intermediary in appro- withholding certificate under paragraph in paragraphs (c)(3), (4) and (5) of this
2000–23 I.R.B. 1205 June 5, 2000
section. See §§1.6049–5(e) for the defini- holding agent. The provisions of of claiming a reduced rate of withholding
tion of payments made outside the United §1.1441–1(b)(3)(iv) dealing with a 90- under an income tax treaty for its interest
States and 1.6049–5(c)(1) for the defini- day grace period shall apply for purposes holders (who are deriving the income paid
tion of offshore account. For purposes of of this section. to the entity as residents of an applicable
this paragraph (b)(1), a beneficial owner (2) Payment to fiscally transparent en- treaty jurisdiction) may furnish a single
withholding certificate described in tity—(i) In general. If the person claiming qualified intermediary withholding cer-
§1.1441–1(e)(2)(i) contains information a reduced rate of withholding under an in- tificate, as described in
necessary to support the claim for a treaty come tax treaty is the interest holder of an §1.1441–1(e)(3)(ii), for amounts for
benefit only if it includes the beneficial entity that is considered to be fiscally trans- which it claims a reduced rate of with-
owner’s taxpayer identifying number (ex- parent (as defined in the regulations under holding under an income tax treaty on be-
cept as otherwise provided in paragraph section 894) by the interest holder’s juris- half of its interest holders.
(c)(1) of this section) and the representa- diction with respect to an item of income, (iii) Dual treatment. Under paragraph
tions that the beneficial owner derives the then, with respect to such income derived (b)(2)(i) of this section, a withholding
income under section 894 and the regula- by that person through the entity, the entity agent may make a payment to a foreign
tions thereunder, if required, and meets shall be treated as a flow-through entity and entity that is simultaneously claiming to
the limitation on benefits provisions of may provide a flow-through withholding be the beneficial owner of a portion of the
the treaty, if any. The withholding certifi- certificate with which the withholding cer- income (whether or not it is also claiming
cate must also contain any other represen- tificate or other documentary evidence of a reduced rate of tax on its own behalf)
tations required by this section and any the interest holder that supports the claim and a reduced rate on behalf of persons in
other information, certifications, or state- for treaty benefits is associated. For pur- their capacity as interest holders in the en-
ments as may be required by the form or poses of the preceding sentence, interest tity with respect to the same, or a differ-
accompanying instructions in addition to, holders do not include any direct or indirect ent, portion of the income. If the same
or in place of, the information and certifi- interest holders that are themselves treated portion of a payment may be reliably as-
cations described in this section. Absent as fiscally transparent entities with respect sociated with both the entity’s claim and
actual knowledge or reason to know that to that income by the interest holder’s juris- an interest holder’s claim, the withholding
the claims are incorrect (and subject to the diction. See §1.1441–1(c)(23) and (e)(3)(i) agent may choose to reject both claims
standards of knowledge in §1.1441–7(b)), for the definition of flow-through entity and and request new documentation and infor-
a withholding agent may rely on the flow-through withholding certificate. The mation allocating the payment among the
claims made on a withholding certificate entity may provide a beneficial owner with- beneficial owners of the payment or the
or on documentary evidence. A withhold- holding certificate, or beneficial owner withholding agent may choose which
ing agent may also rely on the informa- documentation, with respect to any remain- claim to apply. If the entity and the inter-
tion contained in a withholding statement ing portion of the income to the extent the est holder’s claims are reliably associated
provided under §§1.1441–1(e)(3)(iv) and entity is receiving income and is not treated with separate portions of the payment, the
1.1441–5(c)(3)(iv) and (e)(5)(iv) to deter- as fiscally transparent by its own jurisdic- withholding agent may, at its option, ac-
mine whether the appropriate statements tion. Further, the entity may claim a re- cept such dual claims based on withhold-
regarding section 894 and limitation on duced rate of withholding with respect to ing certificates or other appropriate docu-
benefits have been provided in connection the portion of a payment for which it is not mentation furnished by the entity and its
with documentary evidence. If the bene- treated as fiscally transparent if it meets all interest holders with respect to their re-
ficial owner is a person related to the the requirements to make such a claim and, spective shares of the payment even
withholding agent within the meaning of in the case of treaty benefits, it provides the though this will result in the withholding
section 482, the withholding certificate documentation required by paragraph agent treating the entity differently with
must also contain a representation that the (b)(1) of this section. If dual claims, as de- respect to different portions of the same
beneficial owner will file the statement scribed in paragraph (b)(2)(iii) of this sec- payment. Alternatively, the withholding
required under §301.6114–1(d) of this tion, are made, multiple withholding certifi- agent may choose to apply only the claim
chapter (if applicable). The requirement cates may have to be furnished. Multiple made by the entity, provided the entity
to file an information statement under withholding certificates may also have to may be treated as a beneficial owner of
section 6114 for income subject to with- be furnished if the entity receives income the income. If the withholding agent does
holding applies only to amounts received for which a reduction of withholding is not accept claims for a reduced rate of
during the calendar year that, in the ag- claimed under a provision of the Internal withholding presented by any one or more
gregate, exceed $500,000. See Revenue Code (e.g., portfolio interest) and of the interest holders, or by the entity,
§301.6114–1(d) of this chapter. The In- income for which a reduction of withhold- any interest holder or the entity may sub-
ternal Revenue Service (IRS) may apply ing is claimed under an income tax treaty. sequently claim a refund or credit of any
the provisions of §1.1441–1(e)(1)(ii)(B) (ii) Certification by qualified interme- amount so withheld to the extent the inter-
to notify the withholding agent that the diary. Notwithstanding paragraph est holder’s or entity’s share of such with-
certificate cannot be relied upon to grant (b)(2)(i) of this section, a foreign entity holding exceeds the amount of tax due.
benefits under an income tax treaty. See that is fiscally transparent, as defined in (iv) Examples. The following exam-
§1.1441–1(e)(4)(viii) regarding reliance the regulations under section 894, that is ples illustrate the rules of this paragraph
on a withholding certificate by a with- also a qualified intermediary for purposes (b)(2):
June 5, 2000 1206 2000–23 I.R.B.
Example 1. (i) Facts. Entity E is a business or- Country X, E’s country of organization, treats E as payments of income described in para-
ganization formed under the laws of country Y. an entity that is not fiscally transparent with respect graph (c)(2) of this section made outside
Country Y has an income tax treaty with the United to items of income under the regulations under sec-
States. The treaty contains a limitation on benefits tion 894. Under the U.S.-X income tax treaty, royal-
the United States (as defined in
provision. E receives U.S. source royalties from ties are subject to 5 percent rate of withholding. §1.6049–5(e)) with respect to an offshore
withholding agent W and claims a reduced rate of Country Y, H1’s country of organization, treats E as account (as defined in §1.6049–5(c)(1)), a
withholding under the U.S.-Y tax treaty on its own fiscally transparent with respect to items of income withholding agent may, as an alternative
behalf (rather than on behalf of its interest holders). under section 894 and H1 as not fiscally transparent to a withholding certificate described in
E furnishes a beneficial owner withholding certifi- with respect to items of income. Under the country
cate described in paragraph (b)(1) of this section that Y-U.S. income tax treaty, royalties are exempt from
paragraph (b)(1) of this section, rely on a
represents that E is a resident of country Y (within U.S. tax. Country Z, H2’s country of organization, certificate of residence described in para-
the meaning of the U.S.-Y tax treaty), is the benefi- treats E as not fiscally transparent under section 894 graph (c)(3) of this section or documen-
cial owner of the income, derives the income under with respect to items of income. E provides W with tary evidence described in paragraph
section 894 and the regulations thereunder, and is a flow-through beneficial owner withholding certifi- (c)(4) of this section, relating to the bene-
not precluded from claiming benefits by the treaty’s cate with which it associates a beneficial owner
limitation on benefits provision. withholding certificate from H1. H1’s withholding
ficial owner, that the withholding agent
(ii) Analysis. Absent actual knowledge or reason certificate states that H1 is a resident of country Y, has reviewed and maintains in its records
to know otherwise, W may rely on the representa- derives the royalty income under section 894, meets in accordance with §1.1441–1(e)(4)(iii).
tions made by E to apply a reduced rate of withhold- the applicable limitations on benefits provisions of In the case of a payment to a person other
ing. the U.S.-Y treaty, and is the beneficial owner of the than an individual, the certificate of resi-
Example 2. (i) Facts. The facts are the same as income. The withholding statement attached to E’s
under Example 1, except that one of E’s interest flow-through withholding certificate allocates one-
dence or documentary evidence must be
holders, H, is an entity organized in country Z. The half of the royalty payment to H1. E also provides accompanied by the statements described
U.S.-Z tax treaty reduces the rate on royalties to zero W with a beneficial owner withholding certificate in paragraphs (c)(5)(i) and (ii) of this sec-
whereas the rate on royalties under the U.S.-Y tax for the interest income and the remaining one-half of tion regarding limitation on benefits and
treaty applicable to E is 5 percent. H is not fiscally the royalty income. The withholding certificate whether the amount paid is derived by
transparent under country Z’s tax law with respect to states that E is a resident of country X, derives the
such income. H furnishes a beneficial owner with- royalty income under section 894, meets the limita-
such person or by one of its interest hold-
holding certificate to E that represents that H de- tion on benefits provisions of the U.S.-X treaty, and ers. The withholding agent maintains the
rives, within the meaning of section 894 and the reg- is the beneficial owner of the income. reviewed documents by retaining either
ulations thereunder, its share of the royalty income (ii) Analysis. Absent actual knowledge or reason the documents viewed or a photocopy
paid to E as a resident of country Z, is the beneficial to know that the claims are incorrect, W may treat thereof and noting in its records the date
owner of the royalty income, and is not precluded one-half of the royalty derived by E as subject to a 5
from claiming treaty benefits by virtue of the limita- percent withholding rate and one-half of the royalty
on which, and by whom, the documents
tion on benefits provision in the U.S.-Z treaty. E as derived by H1 and subject to no withholding. were received and reviewed. This para-
furnishes to W a flow-through withholding certifi- Further, it may treat all of the interest as being paid graph (c)(1) shall not apply to amounts
cate described in §1.1441-1(e)(3)(i) to which it at- to E and as qualifying for the portfolio interest ex- that are exempt from withholding based
taches H’s beneficial owner withholding certificate ception. W can, at its option, treat the entire royalty on a claim that the income is effectively
and a withholding statement for the portion of the as paid to E and subject it to withholding at a 5 per-
payment that H claims as its distributive share of the cent rate of withholding. In that case, H1 would be
connected with the conduct of a trade or
royalty income. E also furnishes to W a beneficial entitled to claim a refund with respect to its one-half business in the United States.
owner withholding certificate for itself for the por- of the royalty. (2) Income to which special rules
tion of the payment that H does not claim as its dis- (3) Certified TIN. The IRS may issue apply. The income to which paragraph
tributive share. (c)(1) of this section applies is dividends
guidance requiring a foreign person claim-
(ii) Analysis. Absent actual knowledge or reason
to know otherwise, W may rely on the documenta- ing treaty benefits and for whom a TIN is and interest from stocks and debt obliga-
tion furnished by E to treat the royalty payment to a required to establish with the IRS, at the tions that are actively traded, dividends
single foreign entity (E) as derived by different resi- time the TIN is requested or after the TIN is from any redeemable security issued by
dents of tax treaty countries as a result of the claims issued, that the person is a resident in a an investment company registered under
presented under different treaties. W may, at its op- the Investment Company Act of 1940 (15
treaty country and meets other conditions
tion, grant dual treatment, that is, a reduced rate of
zero percent under the U.S.-Z treaty on the portion (such as limitation on benefits provisions) U.S.C. 80a–1), dividends, interest, or roy-
of the royalty payment that H claims to derive as a of the treaty. See §601.601(d)(2) of this alties from units of beneficial interest in a
resident of country Z and a reduced rate of 5 percent chapter. unit investment trust that are (or were
under the U.S.-Y treaty for the balance. However, ***** upon issuance) publicly offered and are
under paragraph (b)(2)(iii) of this section, W may, at registered with the Securities and Ex-
(c) Exemption from requirement to fur-
its option, treat E as the only relevant person deriv-
ing the royalty and grant benefits under the U.S.-Y nish a taxpayer identifying number and change Commission under the Securities
treaty only. special documentary evidence rules for Act of 1933 (15 U.S.C. 77a) and amounts
Example 3. (i) Facts. E is a business organiza- certain income—(1) General rule. In the paid with respect to loans of securities de-
tion formed under the laws of country X. Country X case of income described in paragraph scribed in this paragraph (c)(2). For pur-
has an income tax treaty with the United States. E poses of this paragraph (c)(2), a stock or
(c)(2) of this section, a withholding agent
has two interest holders, H1, organized in country Y,
and H2, organized in country Z. E receives from W, may rely on a beneficial owner withhold- debt obligation is actively traded if it is
a U.S. withholding agent, U.S. source royalties and ing certificate described in paragraph actively traded within the meaning of sec-
interest that is eligible for the portfolio interest ex- (b)(1) of this section without regard to the tion 1092(d) and §1.1092(d)–1 when doc-
ception under sections 871(h) and 881(c), provided requirement that the withholding certifi- umentation is provided.
W receives the appropriate beneficial owner state- cate include the beneficial owner’s tax- (3) Certificate of residence. A certifi-
ment required under section 871(h)(5). E is classi-
fied as a corporation under U.S. tax law principles.
payer identifying number. In the case of cate of residence referred to in paragraph
2000–23 I.R.B. 1207 June 5, 2000
(c)(1) of this section is a certification is- ual must provide a statement that it meets under §1.1461–1(a) and to make the re-
sued by an appropriate tax official of the one or more of the conditions set forth in turns prescribed by §1.1461–1(b) and (c),
treaty country of which the taxpayer the limitation on benefits article (if any, or except as otherwise may be required by a
claims to be a resident that the taxpayer in a similar provision) contained in the qualified intermediary withholding agree-
has filed its most recent income tax return applicable tax treaty. ment, a withholding foreign partnership
as a resident of that country (within the (ii) Statement regarding whether the agreement, or a withholding foreign trust
meaning of the applicable tax treaty). The taxpayer derives the income. A taxpayer agreement. When several persons qualify
certificate of residence must have been is- that is not an individual must also pro- as withholding agents with respect to a sin-
sued by such official within three years vide, in addition to the documentary evi- gle payment, only one tax is required to be
prior to its being presented to the with- dence and the statement described in withheld and deposited. See §1.1461–1.
holding agent, or such other period as the paragraph (c)(5)(i) of this section, a state- A person who, as a nominee described in
IRS may prescribe in published guidance ment that any income for which it intends §1.6031(c)–1T, has furnished to a partner-
(see §601.601(d)(2) of this chapter). See to claim benefits under an applicable in- ship all of the information required to be
§1.1441–1(e)(4)(ii)(A) for the period dur- come tax treaty is income that will prop- furnished under §1.6031(c)–1T(a) shall not
ing which a withholding agent may rely erly be treated as derived by itself as a be treated as a withholding agent if it has
on a certificate of residence. The compe- resident of the applicable treaty jurisdic- notified the partnership that it is treating
tent authorities may agree to a different tion within the meaning of section 894 the provision of information to the partner-
procedure for certifying residence, in and the regulations thereunder. This re- ship as a discharge of its obligations as a
which case such procedure shall govern quirement does not apply if the taxpayer withholding agent.
for payments made to a person claiming furnishes a certificate of residence that (2) Examples. The following examples
to be a resident of the country with which certifies that fact. illustrate the rules of paragraph (a)(1) of
such an agreement is in effect. ***** this section:
(4) Documentary evidence establishing (e) Competent authority. The proce- Example 1. USB is a broker organized in the
residence in the treaty country—(i) Indi- United States. USB pays U.S. source dividends and
dures described in this section may be
interest, which are amounts subject to withholding
viduals. For an individual, the documen- modified to the extent the U.S. competent under §1.1441-2(a), to FC, a foreign corporation that
tary evidence referred to in paragraph authority may agree with the competent has an investment account with USB. USB is a
(c)(1) of this section is any documentation authority of a country with which the withholding agent as defined in paragraph (a)(1) of
that includes the individuals name, ad- United States has an income tax treaty in this section.
Example 2. USB is a bank organized in the
dress, and photograph, is an official docu- effect.
United States. FB is a bank organized in country X.
ment issued by an authorized governmen- ***** X has an omnibus account with USB through which
tal body (i.e., a government or agency Par. 9. Effective January 1, 2001, FB invests in debt and equity instruments that pay
thereof, or a municipality), and has been §1.1441–7 is amended by: amounts subject to withholding as defined in
issued no more than three years prior to 1. Revising paragraphs (a), (b)(2) §1.1441–2(a). FB is a nonqualified intermediary, as
defined in §1.1441–1(c)(14). Both USB and FB are
presentation to the withholding agent. A and (b)(3).
withholding agents as defined in paragraph (a)(1) of
document older than three years may be 2. Adding paragraphs (b)(4) this section.
relied upon as proof of residence only if it through (b)(11). Example 3. The facts are the same as in Example
is accompanied by additional evidence of The revisions and additions read as fol- 2, except that FB is a qualified intermediary. Both
the person’s residence in the treaty coun- lows: USB and FB are withholding agents as defined in
paragraph (a)(1) of this section.
try (e.g., a bank statement, utility bills, or §1.1441–7 General provisions relating to
Example 4. FB is a bank organized in country X.
medical bills). Documentary evidence withholding agents. FB has a branch in the United States. FB’s branch
must be in the form of original documents (a) Withholding agent defined—(1) In has customers that are foreign persons who receive
or certified copies thereof. general. For purposes of chapter 3 of the amounts subject to withholding, as defined in
(ii) Persons other than individuals. For Internal Revenue Code and the regulations §1.1441–2(a). FB is a withholding agent under
paragraph (a)(1) of this section and is required to
a person other than an individual, the doc- under such chapter, the term withholding
withhold and report payments of amounts subject to
umentary evidence referred to in para- agent means any person, U.S. or foreign, withholding in accordance with chapter 3 of the In-
graph (c)(1) of this section is any docu- that has the control, receipt, custody, dis- ternal Revenue Code.
mentation that includes the name of the posal, or payment of an item of income of Example 5. X is a foreign corporation. X pays
entity and the address of its principal of- a foreign person subject to withholding, in- dividends to shareholders who are foreign persons.
Under section 861(a)(2)(B), a portion of the divi-
fice in the treaty country, and is an official cluding (but not limited to) a foreign inter-
dends are from sources within the United States and
document issued by an authorized gov- mediary described in §1.1441–1(e)(3)(i), a constitute amounts subject to withholding within the
ernmental body (e.g., a government or foreign partnership, or a U.S. branch de- meaning of §1.1441–2(a). The dividends are not
agency thereof, or a municipality). scribed in §1.1441–1(b)(2)(iv)(A) or (E). subject to tax under section 884(a). See 884(e)(3).
(5) Statements regarding entitlement to See §§1.1441–1(b)(2) and (3) and X is a withholding agent under paragraph (a)(1) of
this section.
treaty benefits—(i) Statement regarding 1.1441–5(c), (d), and (e), for rules to deter-
conditions under a limitation on benefits mine whether a payment is considered (b) * * *
provision. In addition to the documentary made to a foreign person. Any person who (2) Reason to know. A withholding
evidence described in (c)(4)(ii) of this meets the definition of a withholding agent agent shall be considered to have reason
section, a taxpayer that is not an individ- is required to deposit any tax withheld to know if its knowledge of relevant facts
or of statements contained in the with-
June 5, 2000 1208 2000–23 I.R.B.
holding certificates or other documenta- agent has other account information that ment of foreign status. A withholding
tion is such that a reasonably prudent per- is inconsistent with the direct account agent has reason to know that a beneficial
son in the position of the withholding holder’s claim, or the withholding certifi- owner withholding certificate (as defined
agent would question the claims made. cate lacks information necessary to estab- in §1.1441–1(e)(2)) provided by a direct
(3) Financial institutions—limits on lish entitlement to a reduced rate of with- account holder in connection with a pay-
reason to know. For purposes of this holding. A withholding agent shall also ment of an amount described in
paragraph (b)(3) and paragraphs (b)(4) treat a withholding certificate as unreli- §1.1441–6(c)(2) is unreliable or incorrect
through (b)(10) of this section, the terms able or incorrect if the name of the person for purposes of establishing the account
withholding certificate, documentary evi- on the withholding certificate indicates holder’s status as a foreign person if the
dence, and documentation are defined in that the person is a corporation, partner- certificate is described in paragraph
§1.1441–1(c)(16), (17) and (18). Except ship, trust, estate, or an individual, and the (b)(5)(i) or (ii) of this section.
as otherwise provided in paragraphs person’s claim of classification (e.g. indi- (i) A withholding certificate is unreli-
(b)(4) through (b)(9) of this section, a vidual, partnership, corporation) is not able or incorrect if the withholding certifi-
withholding agent that is a financial insti- consistent with such indication and a dif- cate has a permanent residence address
tution (including a regulated investment ference in classification would result in a (as defined in §1.1441–1(e)(2)(ii)) in the
company) that has a direct account rela- different rate of withholding or a differ- United States, the withholding certificate
tionship with a beneficial owner (a direct ence in the person or persons to whom the has a mailing address in the United States,
account holder) has a reason to know, payment is reported under §1.1461–1(c) the withholding agent has a residence or
with respect to amounts described in or chapter 61 of the Internal Revenue mailing address as part of its account in-
§1.1441–6(c)(2), that documentation pro- Code. For purposes of establishing a di- formation that is an address in the United
vided by the direct account holder is unre- rect account holder’s status as a foreign States, or the direct account holder noti-
liable or incorrect only if one or more of person or resident of a treaty country a fies the withholding agent of a new resi-
the circumstances described in paragraphs withholding certificate shall be consid- dence or mailing address in the United
(b)(4) through (b)(9) of this section exist. ered unreliable or inconsistent with an ac- States (whether or not provided on a with-
If a direct account holder has provided count holder’s claims only if it is not reli- holding certificate). A withholding agent
documentation that is unreliable or incor- able under the rules of paragraph (b)(5) may, however, rely on the beneficial
rect under the rules of paragraph (b)(4) and (6) of this section. A withholding owner withholding certificate as estab-
through (b)(9) of this section, the with- agent that relies on an agent to review and lishing the account holder’s foreign status
holding agent may require new documen- maintain a withholding certificate is con- if it may do so under the provisions of
tation. Alternatively, the withholding sidered to know or have reason to know paragraph (b)(5)(i)(A) or (B) of this sec-
agent may rely on the documentation the facts within the knowledge of the tion.
originally provided if the rules of para- agent. (A) A withholding agent may treat a di-
graphs (b)(4) through (b)(9) of this sec- (ii) Examples. The rules of paragraph rect account holder as a foreign person if
tion permit such reliance based on addi- (b)(4) of this section are illustrated by the the beneficial owner withholding certifi-
tional statements and documentation. following examples: cate has been provided by an individual
Paragraph (b)(10) of this section provides Example 1. F, a foreign person that has a direct and—
account relationship with USB, a bank that is a U.S.
limits on reason to know for financial in- (1) The withholding agent has in its
person, provides USB with a beneficial owner with-
stitutions that receive beneficial owner holding certificate for the purpose of claiming a re- possession or obtains documentary evi-
documentation from persons (indirect ac- duced rate of withholding on U.S. source dividends. dence (which does not contain a U.S. ad-
count holders) that have an account rela- F resides in a treaty country that has a limitation on dress) that is no more than three years old,
tionship with, or an ownership interest in, benefits provision in its income tax treaty with the the documentary evidence supports the
United States. The withholding certificate, however,
a direct account holder. For rules regard- claim of foreign status, and the direct ac-
does not contain a statement regarding limitations
ing reliance on Form W-9, see on benefits or deriving the income under section 894 count holder provides the withholding
§31.3406(g)–3(e)(2) of this chapter. as required by §1.1441–6(b)(1). USB cannot rely on agent with a reasonable explanation, in
(4) Rules applicable to withholding the withholding certificate to grant a reduced rate of writing, supporting the account holder’s
certificates—(i) In general. A withhold- withholding because it is incomplete with respect to foreign status; or
the claim made by F.
ing agent has reason to know that a bene- (2) The account is maintained at an of-
Example 2. F, a foreign person that has a direct
ficial owner withholding certificate pro- account relationship with USB, a broker that is a fice of the withholding agent outside the
vided by a direct account holder in U.S. person, provides USB with a withholding cer- United States and the withholding agent is
connection with a payment of an amount tificate for the purpose of claiming the portfolio in- required to report annually a payment to
described in §1.1441–6(c)(2) is unreliable terest exception under section 881(c), which applies the direct account holder on a tax infor-
to foreign corporations. F indicates on its withhold-
or incorrect if the withholding certificate mation statement that is filed with the tax
ing certificate, however, that it is a partnership.
is incomplete with respect to any item on USB may not treat F as a beneficial owner of the in- authority of the country in which the of-
the certificate that is relevant to the claims terest for purposes of the portfolio interest exception fice is located and that country has an in-
made by the direct account holder, the because F has indicated on its withholding certifi- come tax treaty in effect with the United
withholding certificate contains any infor- cate that it is a foreign partnership, and therefore States.
under §1.1441–1(c)(6)(ii) it is not the beneficial
mation that is inconsistent with the direct (B) A withholding agent may treat an
owner of the interest payment.
account holder’s claim, the withholding account holder as a foreign person if the
(5) Withholding certificate—establish-
2000–23 I.R.B. 1209 June 5, 2000
beneficial owner withholding certificate under an income tax treaty if the direct ac- ment to treaty benefits.
has been provided by an entity that the count holder provides a reasonable expla- (iii) A beneficial owner withholding
withholding agent does not know, or does nation for the permanent residence ad- certificate is unreliable or incorrect to es-
not have reason to know, is a flow- dress outside the treaty country (e.g., the tablish entitlement to a reduced rate of
through entity and— address is the address of a branch of the withholding under an income tax treaty if
(1) The withholding agent has in its beneficial owner located outside the the direct account holder has standing in-
possession, or obtains, documentation treaty country in which the entity is a resi- structions for the withholding agent to
that substantiates that the entity is actually dent) or the withholding agent has in its pay amounts from its account to an ad-
organized or created under the laws of a possession, or obtains, documentary evi- dress or an account outside the treaty
foreign country; or dence that establishes residency in a country unless the direct account holder
(2) The account is maintained at an of- treaty country. provides a reasonable explanation, in
fice of the withholding agent outside the (ii) A beneficial owner withholding cer- writing, establishing the direct account
United States and the withholding agent is tificate is unreliable or incorrect if the holder’s residence in the applicable treaty
required to report annually a payment to permanent residence address on the with- country.
the direct account holder on a tax infor- holding certificate is in the applicable (7) Documentary evidence. A with-
mation statement that is filed with the tax treaty country but the withholding certifi- holding agent shall not treat documentary
authority of the country in which the of- cate contains a mailing address outside evidence provided by a direct account
fice is located and that country has an in- the treaty country or the withholding holder as valid if the documentary evi-
come tax treaty in effect with the United agent has a mailing address as part of its dence does not reasonably establish the
States. account information that is outside the identity of the person presenting the docu-
(ii) A beneficial owner withholding cer- treaty country. A mailing address that is a mentary evidence. For example, docu-
tificate is unreliable or incorrect if it is P.O. Box, in-care-of address, or address at mentary evidence is not valid if it is pro-
provided with respect to an offshore ac- a financial institution (if the financial in- vided in person by a direct account holder
count (as defined in §1.6049–5(c)(1)) and stitution is not a beneficial owner) shall that is a natural person and the photo-
the direct account holder has standing in- not preclude a withholding agent from graph or signature on the documentary
structions directing the withholding agent treating the direct account holder as a res- evidence, if any, does not match the ap-
to pay amounts from its account to an ad- ident of a treaty country if such address is pearance or signature of the person pre-
dress or an account maintained in the in the treaty country. If a withholding senting the document. A withholding
United States. The withholding agent agent has a mailing address (whether or agent shall not rely on documentary evi-
may treat the direct account holder as a not contained on the withholding certifi- dence to reduce the rate of withholding
foreign person, however, if the direct ac- cate) outside the applicable treaty coun- that would otherwise apply under the pre-
count holder provides a reasonable expla- try, the withholding agent may neverthe- sumption rules of §§1.1441–1(b)(3),
nation in writing that supports its foreign less treat a direct account holder as a 1.1441–5(d) and (e)(6), and 1.6049–5(d)
status. resident of an applicable treaty country if the documentary evidence contains in-
(6) Withholding certificate—claim of if— formation that is inconsistent with the di-
reduced rate of withholding under treaty. (A) The withholding agent has in its rect account holder’s claim of a reduced
A withholding agent has reason to know possession, or obtains, additional docu- rate of withholding, the withholding agent
that a withholding certificate (other than mentation supporting the direct account has other account information that is in-
Form W-9) provided by a direct account holder’s claim of residence in the applica- consistent with the direct account holder’s
holder in connection with a payment of an ble treaty country (and the additional doc- claim, or the documentary evidence lacks
amount described in §1.1441–6(c)(2) is umentation does not contain an address information necessary to establish entitle-
unreliable or incorrect for purposes of es- outside the treaty country); ment to a reduced rate of withholding.
tablishing that the direct account holder is (B) The withholding agent has in its For example, if a direct account holder
a resident of a country with which the possession, or obtains, documentation provides documentary evidence to claim
United States has an income tax treaty if it that establishes that the direct account treaty benefits and the documentary evi-
is described in paragraphs (b)(6)(i) holder is an entity organized in a treaty dence establishes the direct account
through (iii) of this section. country (or an entity managed and con- holder’s status as a foreign person and a
(i) A beneficial owner withholding cer- trolled in a treaty country, if the applica- resident of a treaty country, but the ac-
tificate is unreliable or incorrect if the ble treaty so requires); count holder fails to provide the treaty
permanent residence address on the bene- (C) The withholding agent knows that statements required by §1.1441–6(c)(5),
ficial owner withholding certificate is not the address outside the applicable treaty the documentary evidence does not estab-
in the country whose treaty is invoked, or country (other than a P.O. box, or in-care- lish the direct account holder’s entitle-
the direct account holder notifies the of address) is a branch of a bank or insur- ment to a reduced rate of withholding.
withholding agent of a new permanent ance company that is a resident of the ap- For purposes of establishing a direct ac-
residence address that is not in the treaty plicable treaty country; or count holder’s status as a foreign person
country. A withholding agent may, how- (D) The withholding agent obtains a or resident of a country with which the
ever, treat a direct account holder as enti- written statement from the direct account United States has an income tax treaty
tled to a reduced rate of withholding holder that reasonably establishes entitle- with respect to income described in
June 5, 2000 1210 2000–23 I.R.B.
§1.1441–6(c)(2), documentary evidence provisions of paragraph (b)(8)(ii)(A) or United States and the withholding agent is
shall be considered unreliable or incorrect (B) of this section. required to report annually a payment to
only if it is not reliable under the rules of (A) A withholding agent may treat a di- the direct account holder on a tax infor-
paragraph (b)(8) and (9) of this section. rect account holder that is an individual as mation statement that is filed with the tax
(8) Documentary evidence—establish- a foreign person even if it has a mailing or authority of the country in which the of-
ment of foreign status. A withholding residence address for the direct account fice is located and that country has an in-
agent has reason to know that documen- holder in the United States if the with- come tax treaty in effect with the United
tary evidence provided in connection with holding agent— States.
a payment of an amount described in (1) Has in its possession or obtains ad- (iii) Documentary evidence is unreli-
§1.1441–6(c)(2) is unreliable or incorrect ditional documentary evidence (which able or incorrect if the direct account
for purposes of establishing the direct ac- does not contain a U.S. address) support- holder has standing instructions directing
count holder’s status as a foreign person if ing the claim of foreign status and a rea- the withholding agent to pay amounts
the documentary evidence is described in sonable explanation in writing supporting from its account to an address or an ac-
paragraphs (b)(8)(i), (ii), (iii) or (iv) of the account holder’s foreign status; count maintained in the United States.
this section. (2) Has in its possession or obtains a The withholding agent may treat the di-
(i) A withholding agent shall not treat valid beneficial owner withholding cer- rect account holder as a foreign person,
documentary evidence provided by an ac- tificate on Form W-8 and the Form W-8 however, if the account holder provides a
count holder after December 31, 2000, as contains a permanent residence address reasonable explanation in writing that
valid for purposes of establishing the di- outside the United States and a mailing supports its foreign status.
rect account holder’s foreign status if the address outside the United States (or if a (9) Documentary evidence—claim of
only mailing or residence address that is mailing address is inside the United States reduced rate of withholding under treaty.
available to the withholding agent is an the direct account holder provides a rea- A withholding agent has reason to know
address at a financial institution (unless sonable explanation in writing supporting that documentary evidence provided in
the financial institution is a beneficial the direct account holder’s foreign status); connection with a payment of an amount
owner of the income), an in-care-of ad- or described in §1.1441–6(c)(2) is unreliable
dress, or a P.O. box. In this case, the (3) The account is maintained at an of- or incorrect for purposes of establishing
withholding agent must obtain additional fice of the withholding agent outside the that a direct account holder is a resident of
documentation that is sufficient to estab- United States and the withholding agent is a country with which the United States
lish the direct account holder’s status as a required to report annually a payment to has an income tax treaty if it is described
foreign person. A withholding agent shall the direct account holder on a tax infor- in paragraph (b)(9)(i) or (ii) of this sec-
not treat documentary evidence provided mation statement that is filed with the tax tion.
by an account holder before January 1, authority of the country in which the of- (i) Documentary evidence is unreliable
2001, as valid for purposes of establishing fice is located and that country has an in- or incorrect if the withholding agent has a
a direct account holder’s status as a for- come tax treaty in effect with the United mailing or residence address for the direct
eign person if it has actual knowledge that States. account holder (whether or not on the
the direct account holder is a U.S. person (B) A withholding agent may treat a di- documentary evidence) that is outside the
or if it has a mailing or residence address rect account holder that is an entity (other applicable treaty country, or the only ad-
for the direct account holder in the United than a flow-through entity) as a foreign dress that the withholding agent has
States. If a withholding agent has an ad- person even if it has a mailing or resi- (whether in or outside of the applicable
dress for the direct account holder in the dence address for the direct account treaty country) is a P.O. box, an in-care-of
United States, the withholding agent may holder in the United States if the with- address, or the address of a financial insti-
nevertheless treat the direct account holding agent— tution (if the financial institution is not the
holder as a foreign person if it can so treat (1) Has in its possession, or obtains, beneficial owner). If a withholding agent
the direct account holder under the rules documentation that substantiates that the has a mailing or residence address for the
of paragraph (b)(8)(ii) of this section. entity is actually organized or created direct account holder outside the applica-
(ii) Documentary evidence is unreliable under the laws of a foreign country; ble treaty country, the withholding agent
or incorrect to establish a direct account (2) Obtains a valid beneficial owner may nevertheless treat a direct account
holder’s status as a foreign person if the withholding certificate on Form W-8 and holder as a resident of an applicable treaty
withholding agent has a mailing or resi- the Form W-8 contains a permanent resi- country if the withholding agent—
dence address (whether or not on the doc- dence address outside the United States (A) Has in its possession, or obtains,
umentation) for the direct account holder and a mailing address outside the United additional documentary evidence support-
in the United States or if the direct ac- States (or if a mailing address is inside the ing the direct account holder’s claim of
count holder notifies the withholding United States the direct account holder residence in the applicable treaty country
agent of a new address in the United provides additional documentary evi- (and the documentary evidence does not
States. A withholding agent may, how- dence sufficient to establish the direct ac- contain an address outside the applicable
ever, rely on documentary evidence as es- count holder’s foreign status); or treaty country, a P.O. box, an in-care-of
tablishing the direct account holder’s for- (3) The account is maintained at an of- address, or the address of a financial insti-
eign status if it may do so under the fice of the withholding agent outside the tution);
2000–23 I.R.B. 1211 June 5, 2000
(B) Has in its possession, or obtains, flow-through entity, or U.S. branch sup- published guidance (see §601.601(d)(2)
documentary evidence that establishes the porting the payee’s foreign status or the of this chapter).
direct account holder is an entity orga- foreign person’s residency in a treaty *****
nized in a treaty country (or an entity country. Par. 10. Effective January 1, 2001,
managed and controlled in a treaty coun- (ii) The withholding agent must review §1.1441–9 is amended by revising para-
try, if the applicable treaty so requires); or each withholding certificate in accor- graph (b)(2) to read as follows:
(C) Obtains a valid beneficial owner dance with the requirements of para- §1.1441–9 Exemption from withholding
withholding certificate on Form W-8 that graphs (b)(5) and (6) of this section and on exempt income of a foreign tax-exempt
contains a permanent residence address verify that the information on the with- organization, including foreign private
and a mailing address in the applicable holding certificate is consistent with the foundations.
treaty country. information on the withholding statement *****
(ii) Documentary evidence is unreliable required under §1.1441–1(e)(3)(iv). If (b) * * *
or incorrect if the direct account holder there is a discrepancy between the with- (2) Withholding certificate. A with-
has standing instructions directing the holding certificate and the withholding holding certificate under this paragraph
withholding agent to pay amounts from statement, the withholding agent may (b)(2) is valid only if it is a Form W-8 and
its account to an address or an account choose to rely on the withholding certifi- if, in addition to other applicable require-
maintained outside the treaty country un- cate, if valid, and instruct the nonqualified ments, the Form W-8 includes the tax-
less the direct account holder provides a intermediary, flow-through entity, or U.S. payer identifying number of the organiza-
reasonable explanation, in writing, estab- branch to correct the withholding state- tion whose name is on the certificate, and
lishing the direct account holder’s resi- ment or apply the presumption rules of it certifies that the Internal Revenue Ser-
dence in the applicable treaty country. §§1.1441–1(b), 1.1441–5(d) and (e)(6), vice (IRS) has issued a favorable determi-
(10) Limits on reason to know—indi- and 1.6049–5(d) to the payment allocable nation letter (and the date thereof) that is
rect account holders. A financial institu- to the payee who provided the withhold- currently in effect, what portion, if any, of
tion that receives documentation from a ing certificate relates. A withholding the amounts paid constitute income in-
payee through a nonqualified intermedi- agent that receives a withholding certifi- cludible under section 512 in computing
ary, a flow-through entity, or a U.S. cate before December 31, 2001, is not re- the organization’s unrelated business tax-
branch described in §1.1441–1(b)(2)(iv) quired to review the information on with- able income, and, if the organization is
(other than a U.S. branch that is treated as holding certificates or determine if it is described in section 501(c)(3), whether it
a U.S. person) with respect to a payment consistent with the information on the is a private foundation described in sec-
of an amount described in withholding statement until December 31, tion 509. Notwithstanding the preceding
§1.1441–6(c)(2) has reason to know that 2001. A withholding agent may withhold sentence, if the organization cannot cer-
the documentation is unreliable or incor- and report in accordance with a withhold- tify that it has been issued a favorable de-
rect if a reasonably prudent person in the ing statement until December 31, 2001, termination letter that is still in effect, its
position of a withholding agent would unless it has actually performed the verifi- withholding certificate is nevertheless
question the claims made. This standard cation procedures required by this para- valid under this paragraph (b)(2) if the or-
requires, but is not limited to, a withhold- graph (b)(10)(ii) and determined that the ganization attaches to the withholding
ing agent’s compliance with the rules of withholding statement is inaccurate with certificate an opinion that is acceptable to
paragraphs (b)(10)(i) through (iii). respect to a particular payee. the withholding agent from a U.S. counsel
(i) The withholding agent must review (iii) The withholding agent must re- (or any other person as the IRS may pre-
the withholding statement described in view the documentary evidence provided scribe in published guidance (see
§1.1441–1(e)(3)(iv) and may not rely on by the nonqualified intermediary, flow- §601.601(d)(2) of this chapter)) conclud-
information in the statement to the extent through entity, or U.S. branch to deter- ing that the organization is described in
the information does not support the mine that there is no obvious indication section 501(c). If the determination letter
claims made for any payee. For this pur- that the payee is a U.S. non-exempt recip- or opinion of counsel to which the with-
pose, a withholding agent may not treat a ient or that the documentary evidence holding certificate refers concludes that
payee as a foreign person if an address in does not establish the identity of the per- the organization is described in section
the United States is provided for such son who provided the documentation 501(c)(3), and the certificate further certi-
payee and may not treat a person as a res- (e.g., the documentary evidence does not fies that the organization is not a private
ident of a country with which the United appear to be an identification document). foundation described in section 509, an
States has an income tax treaty if the ad- (11) Additional guidance. The IRS affidavit of the organization setting forth
dress for that person is outside the applic- may prescribe other circumstances for sufficient facts concerning the operations
able treaty country. Notwithstanding a which a withholding certificate or docu- and support of the organization for the In-
U.S. address or an address outside a treaty mentary evidence is unreliable or incor- ternal Revenue Service (IRS) to deter-
country, the withholding agent may treat a rect in addition to the circumstances de- mine that such organization would be
payee as a foreign person or a foreign per- scribed in paragraph (b) of this section to likely to qualify as an organization de-
son as a resident of a treaty country if a establish an account holder’s status as a scribed in section 509(a)(1), (2), (3), or
reasonable explanation is provided, in foreign person or a beneficial owner enti- (4) must be attached to the withholding
writing, by the nonqualified intermediary, tled to a reduced rate of withholding in certificate. An organization that provides
June 5, 2000 1212 2000–23 I.R.B.
an opinion of U.S. counsel or an affidavit shall be filed with a transmittal form as §301.7701–2(c)(2) of this chapter as an
may provide the same opinion or affidavit provided in the instructions to the Form entity separate from its owner;
to more than one withholding agent pro- 1042-S and to the transmittal form. With- (3) A flow-through entity, as defined in
vided that the opinion is acceptable to holding certificates, documentary evi- §1.1441–1(c)(23) (to the extent it is re-
each withholding agent who receives it in dence, or other statements or documenta- ceiving amounts subject to reporting other
conjunction with a withholding certifi- tion provided to a withholding agent are than income effectively connected with
cate. Any such opinion of counsel or affi- not required to be attached to the form. the conduct of a trade or business in the
davit must be renewed whenever there is Another copy of the Form 1042-S must be United States); and
a change in facts or circumstances that are furnished to the recipient for whom the (4) A U.S. branch described in
relevant to determine the organization’s form is prepared (or any other person, as §1.1441–1(b)(2)(iv) that is not treated as
status under section 501(c) or, if relevant, required under this paragraph (c) or the a U.S. person under that section.
that the organization is or is not a private instructions to the form) on or before (2) Amounts subject to reporting—(i)
foundation described in section 509. March 15 of the calendar year following In general. Subject to the exceptions de-
***** the year in which the amount subject to scribed in paragraph (c)(2)(ii) of this sec-
Par. 12. Effective January 1, 2001, reporting was paid. The withholding tion, amounts subject to reporting on
§1.1461–1 is amended by: agent must retain a copy of each Form Form 1042–S are amounts paid to a for-
1. Removing the last sentence of 1042-S for the statute of limitations on as- eign payee (including persons presumed
paragraph (a)(1). sessment and collection applicable to the to be foreign) that are amounts subject to
2. Removing paragraphs (b)(2) and Form 1042 to which the Form 1042-S re- withholding as defined in §1.1441–2(a).
(b)(3) and redesignating paragraph (b)(4) lates. Amounts subject to reporting include
as new paragraph (b)(2). (ii) Recipient—(A) Defined. For pur- amounts subject to withholding even if no
3. Revising paragraphs (c)(1), poses of this section, the term recipient amount is deducted and withheld from the
(c)(2), (c)(3), and (c)(4). means— payment because of a treaty or Internal
4. Removing paragraphs (c)(5), (1) A beneficial owner as defined in Revenue Code exception to taxation or
(c)(6), and (c)(7), and redesignating para- paragraph (c)(6) of this section, including because an amount withheld was reim-
graph (c)(8) as new paragraph (c)(5). a foreign estate or a foreign complex bursed to the payee under the adjustment
The revisions read as follows: trust, as defined in §1.1441–1(c)(25); procedures of §1.1461–2. In addition,
§1.1461–1 Payment and returns of tax (2) A qualified intermediary as defined amounts subject to reporting include any
withhold. in §1.1441–1(e)(5)(ii); amounts paid to a foreign payee on which
***** (3) A withholding foreign partnership a withholding agent withheld an amount
(c) Information returns—(1) Filing re- as defined in §1.1441–5(c)(2) or a with- (either under chapter 3 of the Internal
quirement—(i) In general. A withholding holding foreign trust under Revenue Code or section 3406) whether
agent (other than an individual who is not §1.1441–5(e)(5)(v); or not the amount is subject to withhold-
acting in the course of a trade or business (4) An authorized foreign agent as de- ing. Amounts subject to reporting in-
with respect to a payment) must make an fined in §1.1441–7(c); clude, but are not limited to, the following
information return on Form 1042-S (or (5) A U.S. branch that is treated as a items—
such other form as the IRS may prescribe) U.S. person under §1.1441–1(b)- (A) The entire amount of a corporate
to report the amounts subject to reporting, (2)(iv)(A); distribution (whether actual or deemed)
as defined in paragraph (c)(2) of this sec- (6) A nonwithholding foreign partner- irrespective of any estimate of the portion
tion, that were paid during the preceding ship or a foreign simple trust as defined in of the distribution that represents a tax-
calendar year. Notwithstanding the pre- §1.1441–1(c)(24), but only to the extent able dividend;
ceding sentence, any person that with- the income is (or is treated as) effectively (B) Interest, including the portion of a
holds or is required to withhold an connected with the conduct of a trade or notional principal contract payment that is
amount under sections 1441, 1442, or business in the United States by such en- characterized as interest. Interest shall
1443 must file a Form 1042-S for the pay- tity; also be reported on Form 1042-S if it is
ment withheld upon whether or not that (7) A payee, as defined in bank deposit interest paid to nonresident
person is engaged in a trade or business §1.1441–1(b)(2) that is presumed to be a alien individuals as required under
and whether or not the payment is an foreign person under the presumption §1.6049–8;
amount subject to reporting. A Form rules of §1.1441–1(b)(3); 1.1441–5(d) or (C) Rents;
1042-S shall be prepared for each recipi- (e)(6), or 1.6049–5(d); and (D) Royalties;
ent of an amount subject to reporting. (8) Any other person as required on (E) Compensation for dependent and
The Form 1042-S shall be prepared in Form 1042-S or the instructions to the independent personal services performed
such manner as the form and accompany- form. in the United States;
ing instructions prescribe. One copy of (B) Persons that are not recipients. A (F) Annuities;
the Form 1042-S shall be filed with the recipient does not include— (G) Pension distributions and other de-
IRS on or before March 15 of the calendar (1) A nonqualified intermediary; ferred income;
year following the year in which the (2) A payment to a wholly-owned en- (H) Gambling winnings that are not ex-
amount subject to reporting was paid. It tity that is disregarded under empt from tax under section 871(j);
2000–23 I.R.B. 1213 June 5, 2000
(I) Income from the cancellation of in- are not required to be reported on Form (H) Interest on a registered obligation
debtedness unless the withholding agent 1042-S— that is targeted to foreign markets and
is unrelated to the debtor and does not (A) Interest (including original issue qualifies as portfolio interest to the extent
have knowledge of the facts that give rise discount) that is deposit interest under it is paid to a registered owner that is a fi-
to the payment (see §1.1441–2(d)); sections 871(i)(2)(A) and 881(d) and that nancial institution or member of a clear-
(J) Amounts that are (or are presumed is not effectively connected with the con- ing organization that has provided the
to be) effectively connected with the con- duct of a trade or business in the United proper withholding certificates (see
duct of a trade or business in the United States, unless reporting is required under §§1.1441–1(b)(4)(i) and 1.1441–2(a));
States (including deposit interest as de- §1.6049–8 (regarding payments to certain (I) Interest on a foreign targeted bearer
fined in sections 871(i)(2)(A) and 881(d)) foreign residents) or is interest that is ef- obligation (see §§1.1441–1(b)(4)(i) and
even if no withholding certificate is re- fectively connected with the conduct of a 1.1441–2(a));
quired to be furnished by the payee or trade or business in the United States; (J) Gain described in section 301(c)(3);
beneficial owner. In the case of amounts (B) Interest or original issue discount and
paid on a notional principal contract de- on certain short-term obligations, de- (K) Amounts described in
scribed in §1.1441–4(a)(3) that are pre- scribed in section 871(g)(1)(B) or §1.1441–1(b)(4)(xviii) (dealing with certain
sumed to be effectively connected with 881(a)(3); amounts paid by the U.S. government).
the conduct of a trade or business in the (C) Interest paid on obligations sold be- (3) Required information. The informa-
United States, the amount required to be tween interest payment dates and the por- tion required to be furnished under this para-
reported is limited to the amount of cash tion of the purchase price of an OID graph (c)(3) shall be based upon the infor-
paid from the notional principal contract; obligation that is sold or exchanged in a mation provided by or on behalf of the
(K) Scholarship, fellowship, or grant transaction other than a redemption, un- recipient of an amount subject to reporting
income and compensation for personal less the sale or exchange is part of a plan, (as corrected and supplemented based on the
services that is not excludible from gross the principal purpose of which is to avoid withholding agent’s actual knowledge) or
income under section 117 (whether or not tax and the withholding agent has actual the presumption rules of §§1.1441–1(b)(3),
the taxable scholarship, fellowship, grant knowledge or reason to know of such plan 1.1441– 4(a); 1.1441–5(d) and (e);
income, or compensation for personal ser- (see §1.1441–2(a)(5) and (6)); 1.1441–9(b)(3) or 1.6049–5(d). The Form
vices is exempt from tax under an income (D) Any item required to be reported on 1042–S must include the following informa-
tax treaty) paid to foreign students, a Form W-2, including an item required to tion, if applicable—
trainees, teachers, or researchers; be shown on Form W-2 solely by reason (i) The name, address, and taxpayer
(L) Amounts paid to foreign govern- of §1.6041–2 (relating to return of infor- identifying number of the withholding
ments, international organizations, or the mation for payments to employees) or agent;
Bank for International Settlements, §1.6052–1 (relating to information re- (ii) A description of each category of
whether or not documentation must be garding payment of wages in the form of income paid based on the income codes
provided; group-term life insurance); provided on the form (e.g., interest, divi-
(M) Interest (including original issue dis- (E) Any item required to be reported on dends, royalties, etc.) and the aggregate
count) paid with respect to foreign-targeted Form 1099, and such other forms as are amount in each category expressed in
registered obligations described in prescribed pursuant to the information re- U.S. dollars;
§1.871–14(e)(2) to the extent the documen- porting provisions of sections 6041 (iii) The rate of withholding applied or
tation requirements described in through 6050P and the regulations under the basis for exempting the payment from
§1.871–14(e)(3) and (4) are required to be those sections; withholding (based on exemption codes
satisfied (taking into account the provisions (F) Amounts paid on a notional princi- provided on the form);
of §1.871–14(e)(4)(ii), if applicable); and pal contract described in (iv) The name and address of the recip-
(N) Original issue discount paid on the §1.1441–4(a)(3)(i) that are not effectively ient;
redemption of an OID obligation. The connected with the conduct of a trade or (v) The name and address of any non-
amount to be reported is the amount of business in the United States (or not qualified intermediary, flow–through en-
OID includible in the gross income of the treated as effectively connected pursuant tity, or U.S. branch as described in
holder of the obligation, if known, or, if to §1.1441–4(a)(3)(ii)); §1.1441–1(b)(2)(iv) (other than a branch
not known, the total amount of original (G) Amounts required to be reported on that is treated as a U.S. person) to which
issue discount determined as if the holder Form 8288 (U.S. Withholding Tax Return the payment was made;
held the obligation from its original is- for Dispositions by Foreign Persons of (vi) The taxpayer identifying number
suance. A withholding agent may deter- U.S. Real Property Interests) or Form of the recipient if required under
mine the total amount of OID by using the 8804 (Annual Return for Partnership §1.1441–1(e)(4)(vii) or if actually known
most recently published ”List of Original Withholding Tax (section 1446)). A with- to the withholding agent making the re-
Issue Discount Instruments,” (Publication holding agent that must report a distribu- turn;
1212, available from the IRS Forms Dis- tion partly on a Form 8288 or 8804 and (vii) The taxpayer identifying number
tribution Centers). partly on a Form 1042-S may elect to re- of a nonqualified intermediary or flow-
(ii) Exceptions to reporting. The port the entire amount on a Form 8288 or through entity (to the extent it is not a re-
amounts listed in this paragraph (c)(2)(ii) 8804; cipient) or other flow-through entity to
June 5, 2000 1214 2000–23 I.R.B.
the extent it is known to the withholding holding. If, however, any one of the own- branch of a foreign person described in
agent; ers requests its own Form 1042-S, the §1.1441–1(b)(2)(iv) shall complete Form
(viii) The country (based on the coun- withholding agent must furnish a Form 1042-S as follows—
try codes provided on the form) of the re- 1042-S to the person who requests it. If (1) If the branch has provided the U.S.
cipient and of any nonqualified intermedi- more than one Form 1042-S is issued for withholding agent with a withholding cer-
ary or flow-through entity the name of a single payment, the aggregate amount tificate that evidences its agreement with
which appears on the form; and paid and tax withheld that is reported on the withholding agent to be treated as a
(ix) Such information as the form or all Forms 1042-S cannot exceed the total U.S. person, the U.S. withholding agent
the instructions may require in addition amounts paid to joint owners and the tax files Forms 1042-S treating the U.S.
to, or in lieu of, information required withheld thereon. branch as the recipient;
under this paragraph (c)(3). (B) Payments to a qualified intermedi- (2) If the branch has provided the U.S.
(4) Method of reporting—(i) Payments ary, a withholding foreign partnership, or withholding agent with a withholding cer-
by U.S. withholding agents to recipients. a withholding foreign trust. A U.S. with- tificate that transmits information regard-
A withholding agent that is a U.S. person holding agent that makes payments to a ing beneficial owners, qualified interme-
(other than a foreign branch of a U.S. per- qualified intermediary (whether or not the diaries, withholding foreign partnerships,
son that is a qualified intermediary as de- qualified intermediary assumes primary or other recipients, the U.S. withholding
fined in §1.1441–1(e)(5)(ii)) and that withholding responsibility), a withhold- agent must complete a separate Form
makes payments of amounts subject to re- ing foreign partnership, or a withholding 1042-S for each recipient whose docu-
porting on Form 1042-S must file a sepa- foreign trust shall complete Forms 1042-S mentation is associated with the U.S.
rate Form 1042-S for each recipient who treating the qualified intermediary or branch’s withholding certificate; or
receives such amount. For purposes of withholding foreign partnership as the re- (3) If the U.S. withholding agent can-
this paragraph (c)(4), a U.S. person in- cipient. The U.S. withholding agent must not reliably associate a payment with a
cludes a U.S. branch described in complete a separate Form 1042-S for each valid withholding certificate from the
§1.1441–1(e)(2)(iv)(A) or (E) that agrees withholding rate pool. A withholding rate U.S. branch, it shall treat the U.S. branch
to be treated as a U.S. person. Except as pool is a payment of a single type of in- as the recipient and report the income as
may otherwise be required on Form 1042- come (determined by the income codes on effectively connected with the conduct of
S or the instructions to the form, only Form 1042-S) that is subject to a single a trade or business in the United States.
payments for which the income code, ex- rate of withholding. A qualified interme- (D) Amounts paid to an authorized for-
emption code, withholding rate and recip- diary that does not assume primary with- eign agent. If a U.S. withholding agent
ient code are the same may be reported on holding responsibility on all payments it makes a payment to an authorized foreign
a single Form 1042-S. See paragraph receives provides information regarding agent, the withholding agent files Forms
(c)(4)(ii) of this section for reporting of the proportions of income subject to a 1042-S treating the authorized foreign
payments made to a person that is not a particular withholding rate to the with- agent as the recipient, provided that the
recipient. holding agent on a withholding statement authorized foreign agent reports the pay-
(A) Payments to beneficial owners. If associated with a qualified intermediary ments on Forms 1042-S to each recipient
a U.S. withholding agent makes a pay- withholding certificate. A qualified inter- to which it makes payments. If the autho-
ment directly to a beneficial owner it must mediary may provide a U.S. withholding rized foreign agent fails to report the
complete Form 1042-S treating the bene- agent with information regarding with- amounts paid on Forms 1042-S for each
ficial owner as the recipient. Under the holding rate pools for U.S. non-exempt recipient to which the payment is made,
grace period rule of §1.1441–1(b)(3)(iv), recipients (as defined under the U.S. withholding agent remains re-
a U.S. withholding agent may, under cer- §1.1441–1(c)(21)). Amounts paid with sponsible for such reporting.
tain circumstances, treat a payee as a for- respect to such withholding rate pools (E) Dual Claims. A U.S. withholding
eign person while the withholding agent must be reported on Form 1099 com- agent may make a payment to a foreign
awaits a valid withholding certificate. A pleted for each U.S. non-exempt recipient entity that is simultaneously claiming a
U.S. withholding agent who relies on the to the extent they are subject to Form reduced rate of tax on its own behalf for a
grace period rule to treat a payee as a for- 1099 reporting. These amounts must not portion of the payment and a reduced rate
eign person must file a Form 1042-S to be reported on Form 1042-S. In addition, on behalf of persons in their capacity as
report all payments on Form 1042-S dur- the qualified intermediary may provide interest holders in that entity on the re-
ing the period that person was presumed the U.S. withholding agent information maining portion. See §1.1441–6(b)-
to be foreign even if that person is later regarding withholding rate pools for U.S. (2)(iii). If the claims are consistent and
determined to be a U.S. person based on persons that are exempt recipients as de- the withholding agent accepts the multi-
appropriate documentation or is presumed fined under §1.1441–1(c)(20). If such in- ple claims, the withholding agent must
to be a U.S. person after the grace period formation is provided, a U.S. withholding file a separate Form 1042-S for those pay-
ends. In the case of joint owners, a with- agent should not report such withholding ments for which the entity is treated as the
holding agent may provide a single Form rate pools on Form 1042-S. beneficial owner and Forms 1042-S for
1042-S made out to the owner whose sta- (C) Amounts paid to U.S. branches each of the interest holder in the entity for
tus the U.S. withholding agent relied upon treated as U.S. persons. A U.S. withhold- which the interest holder is treated as the
to determine the applicable rate of with- ing agent making a payment to a U.S. recipient. For those payments for which
2000–23 I.R.B. 1215 June 5, 2000
the interest holder in an entity is treated as the withholding agent must report the amount that should be withheld from
the recipient, the U.S. withholding agent payments as made to an unknown recipi- such payment has been withheld. A non-
shall prepare the Form 1042-S in the same ent in accordance with the appropriate qualified intermediary, flow-through en-
manner as a payment made to a nonquali- presumption rules for that payment. tity, or U.S. branch must report payments
fied intermediary or flow-through entity Thus, if under the presumption rules the made to recipients to the extent it has
as set forth in paragraph (c)(4)(ii) of this payment is presumed to be made to a for- failed to provide the appropriate docu-
section. If the claims are consistent but eign person, the withholding agent must mentation to another withholding agent
the withholding agent has not chosen to generally withhold 30 percent of the pay- together with the information required
accept the multiple claims, or if the ment and report the payment on Form for that withholding agent to reliably as-
claims are inconsistent, the withholding 1042-S made out to an unknown recipient sociate the payment with the recipient
agent must file a separate Form 1042-S and shall also include the name of the documentation or to the extent it knows,
for the person or persons it has chosen to nonqualified intermediary or flow- or has reason to know, that less than the
treat as the recipients. through entity that received the payment required amount has been withheld. A
(ii) Payments made by U.S. withhold- on behalf of the unknown recipient. If, nonqualified intermediary or flow-
ing agents to persons that are not recipi- however, the recipient is presumed to be a through entity that is required to report a
ents—(A) Amounts paid to a nonqualified U.S. non-exempt recipient (as defined in payment on Form 1042-S must follow
intermediary, a flow-through entity, and §1.1441–1(c)(21)), the withholding agent the same rules as apply to a U.S. with-
certain U.S. branches. If a U.S. with- must withhold on the payment as required holding agent under paragraph (c)(4)(i)
holding agent makes a payment to a non- under section 3406 and report the pay- and (ii) of this section.
qualified intermediary, a flow-through en- ment as made to an unknown recipient on (v) Pro rata reporting for allocation
tity, or a U.S. branch described in the appropriate Form 1099 as required failures. If a nonqualified intermediary,
§1.1441–1(b)(2)(iv) (other than a branch under chapter 61 of the Internal Revenue flow- through entity, or U.S. branch de-
that agrees to be treated as a U.S. person), Code. scribed in §1.1441–1(b)(2)(iv) (other than
it must complete a separate Form 1042-S (B) Disregarded entities. If a U.S. with- a branch treated as a U.S. person) that
for each recipient to the extent the with- holding agent makes a payment to a disre- uses the alternative procedures of
holding agent can reliably associate a garded entity but receives a valid with- §1.1441–1(e)(3)(iv)(D) fails to provide
payment with valid documentation holding certificate or other documentary information sufficient to allocate the
(within the meaning of evidence from a foreign person that is the amount subject to reporting paid to a
§1.1441–1(b)(2)(vii)) from the recipient single owner of a disregarded entity, the withholding rate pool to the payees identi-
which is associated with the withholding withholding agent must file a Form 1042- fied for that pool, then the withholding
certificate provided by the nonqualified S treating the foreign single owner as the agent shall report the payment in accor-
intermediary, flow-through entity, or U.S. recipient. The taxpayer identifying num- dance with the rule provided in
branch. If a payment is made through ber on the Form 1042-S, if required, must §1.1441–1(e)(3)(iv)(D)(6).
tiers of nonqualified intermediaries or be the foreign single owner’s TIN. (vi) Other withholding agents. Any
flow-through entities, the withholding (iii) Reporting by qualified intermedi- person that is a withholding agent not de-
agent must nevertheless complete Form aries, withholding foreign partnerships, scribed in paragraph (c)(4)(i), (iii), or (iv)
1042-S for the recipients to the extent it and withholding foreign trusts. A quali- of this section (e.g., a foreign person that
can reliably associate the payment with fied intermediary, a withholding foreign is not a qualified intermediary, flow-
documentation from the recipients. A partnership, and a withholding foreign through entity, or U.S. branch) shall file
withholding agent that is completing a trust shall report payments on Form 1042- Form 1042-S in the same manner as a
Form 1042-S for a recipient that receives S as provided in their agreements with the U.S. withholding agent and in accordance
a payment through a nonqualified inter- IRS and the instructions to the form. with the instructions to the form.
mediary, a flow-through entity, or a U.S. (iv) Reporting by a nonqualified inter- *****
branch must include on the Form 1042-S mediary, flow-through entity, and certain Par. 11. Effective January 1, 2001,
the name of the nonqualified intermediary U.S. branches. A nonqualified intermedi- §1.6041–1 is amended by revising para-
or flow-through entity from which the re- ary, flow-through entity, or U.S. branch graph (d)(5) to read as follows:
cipient directly receives the payment. If a described in §1.1441–1(e)(2)(iv) (other § 1.6041–1 Return of information as to
U.S. withholding agent cannot reliably as- than a U.S. branch that is treated as a payments of $600 or more.
sociate the payment, or any portion of the U.S. person) is a withholding agent and *****
payment, with valid documentation from must file Forms 1042-S for amounts paid (d) * * *
a recipient either because no such docu- to recipients in the same manner as a U.S. (5) Notional principal contracts. Ex-
mentation has been provided or because withholding agent. A Form 1042-S will cept as provided in paragraphs (b)(5)(i)
the nonqualified intermediary, flow- not be required, however, if another with- and (ii) of this section, amounts paid after
through entity, or U.S. branch has failed holding agent has reported the same December 31, 2000, with respect to no-
to provide sufficient allocation informa- amount to the same recipient for which tional principal contracts referred to in
tion so that the withholding agent can as- the nonqualified intermediary, flow- §1.863–7 or 1.988–2(e) to persons who
sociate the payment, or any portion through entity, or U.S. branch would be are not described in §1.6049–4(c)(1)(ii)
thereof, with valid documentation, then required to file a return and the entire are required to be reported in returns of
June 5, 2000 1216 2000–23 I.R.B.
information under this section. The (a) * * * are made outside the United States by a
amount required to be reported under this (3) Returns of information are not re- non-U.S. payor or non U.S. middleman.
paragraph (d)(5) is limited to the amount quired for amounts paid by a foreign in- For a definition of non U.S. payor or non-
of cash paid from the notional principal termediary described in §1.1441–1(c)(13) U.S. middleman, see §1.6049–5(c)(5).
contract as described in §1.446–3(d). A that it has received in its capacity as an in- For circumstances in which a payment is
non-periodic payment is reportable for the termediary and that are associated with a considered to be made outside the United
year in which an actual payment is made. valid withholding certificate described in States, see §1.6049–5(e).
Any amount of interest determined under §1.1441–1(e)(3)(ii) or (iii) and payments (C) Returns of information are not re-
the provisions of §1.446–3(g)(4) (dealing made by a U.S. branch of a foreign bank quired under sections 6041 or 6041A for
with interest in the case of a significant or of a foreign insurance company de- amounts paid outside of the United States
non-periodic payment) is reportable under scribed in §1.1441–1(b)(2)(iv) (other than (within the meaning of §1.6049–5(e)) as
this paragraph (d)(5) and not under sec- a U.S. branch that is treated as a U.S. per- remuneration for services as a direct seller
tion 6049 (see §1.6049–5(b)(15)). See son) that are associated with a valid with- (within the meaning of section 3508) per-
§1.6041–4(a)(4) for reporting exceptions holding certificate described in formed outside of the United States or for
regarding payments to foreign persons. §1.1441–1(e)(3)(v), which certificate the sales described in section 6041A(b) made
See, however, §1.1461–1(c)(1) for report- intermediary or branch has furnished to outside of the United States of consumer
ing amounts described under this para- the payor or middleman from whom it has products for resale outside of the United
graph (d)(5) that are paid to foreign per- received the payment, unless, and to the States.
sons. The provisions of §1.6049–5(d) extent, the intermediary or branch knows *****
shall apply for determining whether a that the payments are required to be re- Par. 14. Effective January 1, 2001,
payment with respect to a notional princi- ported under §1.6041–1 and were not so §1.6042–3 is amended by revising para-
pal contract is made to a foreign person. reported. For example, if a foreign inter- graph (b)(1)(vi) to read as follows:
See §1.6049–4(a) for a definition of mediary or U.S. branch described in §1.6042–3 Dividends subject to report-
payor. For purposes of this paragraph §1.1441–1(b)(2)(iv) fails to provide infor- ing.
(d)(5), a payor includes a middleman de- mation regarding U.S. persons that are not *****
fined in §1.6049–4(f)(4). exempt from reporting under (b) * * * (1) * * *
(i) An amount paid with respect to a no- §1.6041–3(q) to the person from whom (vi) Payments made by a foreign interme-
tional principal contract is not required to the intermediary or U.S. branch receives diary described in §1.1441–1(c)(13) of
be reported if the payment is made out- the payment, the foreign intermediary or amounts that it has received in its capacity as
side the United States (as defined in U.S. branch must report the payment on an intermediary and that are associated with
§1.6049–5(e)) by a non-U.S. payor or a an information return. The exception of a valid withholding certificate described in
non-U.S. middleman. this paragraph (a)(3) shall not apply to a §1.1441–1(e)(3)(ii) or (iii) and payments
(ii) An amount paid with respect to a qualified intermediary that assumes re- made by a U.S. branch of a foreign bank or
notional principal contract is not required porting responsibility under chapter 61 of of a foreign insurance company described in
to be reported if the payment is made out- the Internal Revenue Code. §1.1441–1(b)(2)(iv) (other than a U.S.
side the United States (as defined in ****** branch that is treated as a U.S. person) that
§1.6049–5(e)) by a payor that has no ac- (6) For rules concerning direct sellers, are associated with a valid withholding cer-
tual knowledge that the payee is a U.S. see §1.6041A–1(d)(3)(i)(C). tificate described in §1.1441–1(e)(3)(v),
person, and the payor is— ***** which certificate the intermediary or branch
(A) A U.S. payor or U.S. middleman Par. 13. Effective January 1, 2001, has furnished to the payor or middleman
that is not a U.S. person (such as a con- §1.6041A–1 is amended by: from whom it has received the payment, un-
trolled foreign corporation defined in sec- 1. Revising paragraph (d)(3)(i)(B). less, and to the extent, the intermediary or
tion 957(a) or certain foreign corporations 2. Adding paragraph (d)(3)(i)(C). branch knows that the payments are required
or foreign partnerships engaged in a U.S. The revision and addition read as fol- to be reported under §1.6042–2 and were not
trade or business); or lows: so reported. For example, if a foreign inter-
(B) A foreign branch of a U.S. bank. §1.6041A–1 Returns regarding payments mediary or U.S. branch described in
See §1.6049–5(c)(5) for a definition of a of remuneration for services and certain §1.1441–1(b)(2)(iv) fails to provide infor-
U.S. payor, a U.S. middleman, a non-U.S. direct sales. mation regarding U.S. persons that are not
payor, and a non-U.S. middleman. ***** exempt from reporting under
***** (d) * * * §1.6049–4(c)(1)(ii) to the person from
Par. 12. Effective January 1, 2001, (3) * * * (i) * * * whom the intermediary or U.S. branch re-
§1.6041–4 is amended by (B) Returns of information are not re- ceives the payment, the amount paid by the
1. Revising paragraph (a)(3). quired for payments of remuneration for foreign intermediary or U.S. branch to such
2. Adding paragraph (a)(6). services from sources outside the United person is a dividend. The exception of this
The revision and addition read as fol- States (determined under the provisions paragraph (b)(1)(vi) shall not apply to a
lows: of part I, subchapter N, chapter 1 of the qualified intermediary that assumes report-
§1.6041–4 Foreign-related items and Internal Revenue Code and the regula- ing responsibility under chapter 61 of the In-
other exceptions. tions under those provisions) if payments ternal Revenue Code.
2000–23 I.R.B. 1217 June 5, 2000
***** the intermediary or U.S. branch is not re- on the payment based on the exemption under
Par. 15. Effective January 1, 2001, quired to report such payment when it, in §31.3406(g)–1(e) of this chapter, unless X has actual
knowledge that A is a U.S. person that is not an ex-
§1.6045–1 is amended by: turn, pays the amount to the person whose empt recipient. X is also required to separately re-
1. Removing the last sentence of name is on the certificate furnished by the port the accrued interest (see paragraph (d)(3) of this
paragraph (g)(1)(i) and adding two new intermediary or U.S. branch to the payor section) on Form 1099 under section 6049 because
sentences in its place. or middleman, unless, and to the extent, A is also presumed to be a U.S. person who is not an
2. Revising paragraph (g)(3)(iv). the intermediary or U.S. branch knows exempt recipient under the presumption rule in
§1.6049–5(d)(2) and §1.1441–1(b)(3)(iii) since ac-
3. Revising paragraph (g)(4), Ex- that the payment is required to be reported crued interest is not an amount subject to reporting
ample 7. under this section and was not so re- and therefore the presumption of foreign status for
4. Adding Examples 8 and 9 to ported. For example, if a foreign interme- offshore accounts under §1.1441–1(b)(3)(iii)(D)
paragraph (g)(4). diary or U.S. branch fails to provide infor- does not apply.
The additions and revisions read as fol- mation regarding U.S. persons that are not Example 8. The facts are the same as in Example
7, except that instead of U.S. corporate bonds that
lows: exempt from reporting under carry stated interest, A owns original issue discount
§1.6045–1 Returns of information of bro- §5f.6045–1(c)(3) of this chapter to the instruments described in section 871(g)(1)(B)(i)
kers and barter exchanges. person from whom the intermediary or (i.e., obligations payable 183 days or less from the
***** U.S. branch receives the payment, the for- date of original issue). In addition, the sale is in a
(g) * * * (1) * * * eign intermediary or U.S. branch must re- transaction other than a redemption.
(i) Y’s obligations to withhold and report. Y is not
(i) * * * For purposes of this paragraph port the payment on an information re- required to report the sales proceeds under the multi-
(g)(1)(i), a broker that is required to ob- turn. The exception of this paragraph ple broker exception under §5f.6045–1(c)(3)(ii) of this
tain, or chooses to obtain, a beneficial (g)(3)(iv) shall not apply to a qualified in- chapter, because X is an exempt recipient.
owner withholding certificate described termediary that assumes reporting respon- (ii) X’s obligations to withhold and report. Al-
in §1.1441–1(e)(2)(i) from an individual sibility under chapter 61 of the Internal though X has effected, within the meaning of para-
graph (a)(1) of this section, the sale of a security at
may rely on the withholding certificate Revenue Code. an office outside the United States under paragraph
only to the extent the certificate includes (4) * * * (g)(3)(iii) of this section, X is treated as a broker,
a certification that the beneficial owner Example 7. Customer A, an individual, owns under paragraph (a)(1) of this section, because as a
has not been, and at the time the certifi- U.S. corporate bonds issued in registered form after wholly-owned subsidiary of a U.S. corporation, X is
July 18, 1984 and carrying a stated rate of interest. a U.S. payor. See §1.6049–5(c)(5). Under the pre-
cate is furnished, reasonably expects not The bonds are held through an account with foreign sumptions described in §1.6049–5(d)(2), X must
to be present in the United States for a pe- bank, X, and are held in street name. X is a wholly- presume that, with respect to the sales proceeds, A is
riod aggregating 183 days or more during owned subsidiary of a U.S. company and is not a a U.S. person who is not an exempt recipient.
each calendar year to which the certificate qualified intermediary within the meaning of Therefore the payment of sales proceeds to A by X is
§1.1441–1(e)(5)(ii). X has no documentation re-
pertains. The certification is not required reportable on a Form 1099 under paragraph (c)(2) of
garding A. A instructs X to sell the bonds. In order this section. X has no obligation to backup withhold
if a broker receives documentary evi- to effect the sale, X acts through its agent in the on the payment based on the exemption under
dence under §1.6049–5(c)(1) or (4). United States, Y. Y sells the bonds and remits the §31.3406(g)–1(e) of this chapter, unless X has actual
***** sales proceeds to X. X credits A’s account in the for- knowledge that A is a U.S. person that is not an ex-
(3) * * * eign country. X does not provide documentation to empt recipient. X is not required to separately report
Y.
(iv) Special rules where the customer is the amount of accrued original issue discount. See
(i) Y’s obligations to withhold and report. Y paragraph (d)(3) of this section.
a foreign intermediary or certain U.S. treats X as the customer, and not A, because Y can- Example 9. The facts are the same as in Example
branches. A foreign intermediary, as de- not treat X as an intermediary because it has re- 8, except that X is a foreign corporation that is not a
fined in §1.1441–1(c)(13), is an exempt ceived no documentation from X. Y is not required U.S. payor under §1.6049–5(c).
foreign person, except when the broker to report the sales proceeds under the multiple bro- (i) Y’s obligations to withhold and report. Y is not
ker exception under §5f.6045–1(c)(3)(ii) of this
has actual knowledge or reason to know required to report the sales proceeds under the multi-
chapter, because X is an exempt recipient. Further, ple broker exception under §5f.6045–1(c)(3)(ii) of this
(within the meaning of §1.6049–5(c)(3)) Y is not required to report the amount of accrued in- chapter, because X is the person responsible for pay-
that the person for whom the intermediary terest paid to X on Form 1042–S under ing the proceeds from the sale to A.
acts is a U.S. person that is not exempt §1.1461–1(c)(2)(ii) because accrued interest is not (ii) X’s obligations to withhold and report. Al-
from reporting under §5f.6045–1(c)(3) of an amount subject to reporting unless the withhold- though A is presumed to be a U.S. payee under the
ing agent knows that the obligation is being sold
this chapter or the broker is required to presumptions of §1.6049–5(d)(2), X is not consid-
with a primary purpose of avoiding tax. ered to be a broker under paragraph (a)(1) of this
presume under §1.6049–5(d)(3) that the (ii) X’s obligations to withhold and report. Al- section because it is a not a U.S. payor under
payee is a U.S. person that is not an ex- though X has effected, within the meaning of para- §1.6049–5(c)(5). Therefore X is not required to re-
empt recipient. If an intermediary, as de- graph (a)(1) of this section, the sale of a security at port the sale under paragraph (c)(2) of this section.
fined in §1.1441–1(c)(13), or a U.S. an office outside the United States under paragraph
*****
(g)(3)(iii) of this section, X is treated as a broker,
branch described in §1.1441–1(b)(2)(iv) Par. 16. Effective January 1, 2001,
under paragraph (a)(1) of this section, because as a
(other than a U.S. branch that is treated as wholly-owned subsidiary of a U.S. corporation, X is §1.6049–4 is amended by revising the in-
a U.S. person) receives a payment from a a U.S. payor . See §1.6049–5(c)(5). Under the pre- troductory text of paragraph (c)(1)(ii) to
payor or middleman, which payment the sumptions described in §1.6049–5(d)(2), X must read as follows:
payor or middleman can associate with a presume that, with respect to the sales proceeds, A is
§1.6049–4 Return of information as to in-
a U.S. person who is not an exempt recipient.
valid withholding certificate described in terest paid and original issue discount in-
Therefore the payment of sales proceeds to A by X is
§1.1441–1(e)(3)(ii), (iii), or (v) furnished reportable on a Form 1099 under paragraph (c)(2) of cludible in gross income after December
by such intermediary or U.S. branch, then this section. X has no obligation to backup withhold 31, 1982.
June 5, 2000 1218 2000–23 I.R.B.
***** §1.6049–5 Interest and original issue (c)(28), the foreign beneficiaries of a for-
(c) * * * (1) * * * discount subject to reporting after De- eign simple trust, as defined in
(ii) Exempt recipient defined. The term cember 31, 1982. §1.1441–1(c)(24), or foreign owners of a
exempt recipient means any person de- ***** foreign grantor trust, as defined in
scribed in paragraphs (c)(1)(ii)(A) through (b) * * * §1.1441–1(c)(26), even though the part-
(Q) of this section. An exempt recipient is (10) * * * nership or trust account is maintained in
generally exempt from information report- (ii) * * * The exemption from reporting the United States.
ing without filing a certificate claiming ex- described in this paragraph (b)(10) shall *****
empt status unless the provisions of this not apply if the payor has actual knowl- (4) Special documentation rules for
paragraph (c)(1)(ii) require a payee to file a edge that the payee is a U.S. person who certain payments. This paragraph (c)(4)
certificate. A payor may, in any case, re- is not an exempt recipient. modifies the provisions of this paragraph
quire a payee that is a U.S. person not oth- (11) * * * The exemption from report- (c) for payments to offshore accounts
erwise required to file a certificate under ing described in this paragraph (b)(11) maintained at a bank or other financial in-
this paragraph (c)(1)(ii) to file a certificate shall not apply if the payor has actual stitution of amounts that are not subject to
in order to qualify as an exempt recipient. knowledge that the payee is a U.S. person withholding under chapter 3 of the Inter-
See §31.3406(h)–3(a)(1)(iii) and (c)(2) of who is not an exempt recipient. nal Revenue Code, other than amounts
this chapter for the certificate that a payee ***** described in paragraph (d)(3)(iii) of this
that is a U.S. person must provide when a (14) Payments made by a foreign inter- section (dealing with U.S. short-term OID
payor requires the certificate to treat the mediary described in §1.1441–1(e)(3)(i) and U.S. bank deposit interest). Amounts
payee as an exempt recipient under this of amounts that it has received in its ca- are not subject to withholding under chap-
paragraph (c)(1)(ii). A payor may treat a pacity as an intermediary and that are as- ter 3 of the Internal Revenue Code if they
payee as an exempt recipient based upon a sociated with a valid withholding certifi- are not included in the definition of
properly completed form as described in cate described in §1.1441–1(e)(3)(ii) or amounts subject to withholding under
§31.3406(h)–3(e)(2) of this chapter, its ac- (iii) and payments made by a U.S. branch §1.1441–2(a) (e.g., deposit interest with
tual knowledge that the payee is a person of a foreign bank or of a foreign insurance foreign branches of U.S. banks, foreign
described in this paragraph (c)(1)(ii), or the company described in §1.1441–1(b)- source income, or broker proceeds).
indicators described in this paragraph (2)(iv) (other than a U.S. branch that is (i) Special rule when non-renewable
(c)(1)(ii). treated as a U.S. person) that are associ- documentary evidence is customary. If it
***** ated with a valid withholding certificate is customary in the country in which a
Par. 17. Effective January 1, 2001, described in §1.1441–1(e)(3)(v), which branch or office of a bank or other finan-
§1.6049–5 is amended by: certificate the intermediary or branch has cial institution is located to obtain docu-
1. Adding a sentence at the end of furnished to the payor or middleman from mentary evidence described in paragraph
paragraph (b)(10)(ii). whom it has received the payment, unless, (c)(1) of this section, but it is not custom-
2. Adding a sentence at the end of and to the extent, the intermediary or ary for such documentary evidence to be
the introductory text language of para- branch knows that the payments are re- renewed, then a payor may, in lieu of ob-
graph (b)(11). quired to be reported under §1.6049–4 taining a withholding certificate, request
3. Revising paragraph (b)(14). and were not so reported. For example, if such documentary evidence for an ac-
4. Adding a sentence at the end of a foreign intermediary or U.S. branch de- count maintained at such branch or office.
paragraph (c)(1). scribed in §1.1441–1(b)(2)(iv) fails to The bank or other financial institution
5. Revising paragraph (c)(4). provide information regarding U.S. per- may rely on such documentary evidence
6. In paragraph (c)(6), removing sons that are not exempt from reporting to treat a person as a foreign person with-
Example 3 and redesignating Examples 4 under §1.6049–4(c)(1)(ii) to the person out renewing such documentary evidence
and 5 as Examples 3 and 4, respectively; from whom the intermediary or U.S. in accordance with paragraph (c)(2) of
in newly designated Example 3, revise branch receives the payment, the amount this section and §1.1441–1(e)(4)(ii) if it
the language “The facts are the same as in paid by the foreign intermediary or U.S. may rely on the documentary evidence as
Example 3” to read “The facts are the branch to such person is interest or origi- sufficient to establish the person’s foreign
same as in Example 2”; in addition, in nal issue discount. The exception of this status under §1.1441–7(b)(7) and (8). If,
newly designated Example 4, revise the paragraph (b)(14) shall not apply to a however, the bank or other financial insti-
language “The facts are the same as in Ex- qualified intermediary that assumes re- tution may, under §1.1441–7(b)(8) treat a
ample 4” to read “The facts are the same porting responsibility under chapter 61 of payee as a foreign person even though it
as in Example 3”. the Internal Revenue Code. has a residence or mailing address for the
7. Revising the first sentence of ***** payee in the United States, or has stand-
paragraph (d)(1) introductory text. (c) * * * (1) * * * A payor may also ing instructions to pay amounts from its
8. Revising paragraphs (d)(2)(i) rely on documentary evidence associated account to an address in the United States
and (d)(2)(ii), (d)(3), and (d)(4). with a flow-through withholding certifi- or an account maintained in the United
9. Removing paragraph (d)(5). cate for payments treated as made to for- States, then the payor shall rely on the
The additions and revisions read as fol- eign partners of a nonwithholding foreign documentary evidence only for a period
lows: partnership, as defined in §1.1441–1- of three full calendar years after the calen-
2000–23 I.R.B. 1219 June 5, 2000
dar year in which the documentary evi- foreign status described in paragraph not apply to treat a partnership as a for-
dence is provided to the payor or, if ear- (c)(4)(ii) of this section does not expire eign partnership with respect to amounts
lier, until the payor is aware of a change unless the bank or financial institution be- that are not subject to withholding unless
of circumstances that affects the validity comes aware of circumstances indicating the payor has actual knowledge of the
of the documentation as establishing the that the customer may be a U.S. person. payee’s employer identification number
payee’s status as a foreign person. (iv) Exception for existing accounts. and that number begins with the two dig-
(ii) Statement in lieu of documentary The rules of paragraphs (c)(4)(i) and (iii) its “98.” The rules of
evidence. If under the local laws, regula- of this section shall apply to accounts §1.1441–1(b)(2)(vii) shall apply for pur-
tions, or practices applicable to a type of opened on or after January 1, 2001. For poses of determining when a payment can
account or transaction it is not customary accounts opened before 2001, a bank or reliably be associated with documenta-
to obtain documentary evidence described other financial institution may rely on the tion, by applying the term payor instead
in paragraph (c)(1) of this section, the rules contained in §§35a.9999–3(ii) Q&A of the term withholding agent. For this
bank or other financial institution may, in- 34 and 35a.9999–4T Q&A 1 and 5 of this purpose, the documentary evidence or
stead of obtaining a beneficial owner chapter in effect prior to January 1, 2001 statement described in paragraph (c)(4) of
withholding certificate described in (see 26 CFR Parts 30–39 revised as of this section can be treated as documenta-
§1.1441–1(e)(2)(i) or documentary evi- April 1, 2000). tion with which a payment can be associ-
dence described in paragraph (c)(1) of ***** ated.
this section, establish a payee’s foreign (d) * * * (1) Identifying the payee. The (ii) Grace period in the case of indicia
status based on the statement described in provisions of §§1.1441–1(b)(2), 1.1441– of a foreign payee. When the conditions
this paragraph (4)(ii) (or such substitute 5(c)(1), (e)(2) and (3) shall apply (by ap- of this paragraph (d)(2)(ii) are satisfied,
statement as the Internal Revenue Service plying the term payor instead of the term the 30–day grace period provisions under
may prescribe) made on an account open- withholding agent) to identify the payee section 3406(e) shall not apply and the
ing form. The statement shall be valid for purposes of this section (and other provisions of this paragraph (d)(2)(ii)
only if the mailing and residence ad- sections of the regulations under this shall apply instead. A payor that, at any
dresses of the payee are outside the chapter to which this paragraph (d)(1) ap- time during the grace period described in
United States and there are not other indi- plies), except to the extent provided in this paragraph (d)(2)(ii), credits an ac-
cia of U.S. status. If reliance is not per- this paragraph (d)(1) in the case of a pay- count with payments described in
mitted because there are indicia of U.S. ment of amounts that are not subject to §1.1441–6(c)(2) that are reportable under
status then the payor must obtain either withholding under chapter 3 of the Inter- sections 6042, 6045, 6049, or 6050N
documentary evidence described in para- nal Revenue Code. * * * may, instead of treating the account as
graph (c)(1) of this section or a Form W-8
***** owned by a U.S. person and applying
described in §1.1441–1(e)(2)(i) to treat
(2) Presumptions of classification and backup withholding under section 3406,
the customer as a foreign payee. In such a
U.S. or foreign status in the absence of if applicable, choose to treat the account
case, the form or documentary evidence
documentation—(i) In general. Except as as owned by a foreign person if, at the be-
must be renewed every three years in ac-
otherwise provided in this paragraph ginning of the grace period, the address
cordance with the renewal procedures set
(d)(2)(i), for purposes of this section (and that the payor has in its records for the ac-
forth in §1.1441–1(e)(4)(ii)(A) for as long
other sections of regulations under this count holder is in a foreign country, the
as indicia of U.S. status continue to be
chapter to which this paragraph (d)(2) ap- payor has been furnished the information
present. The statement referred to in this
plies), the provisions of contained in a withholding certificate de-
paragraph (c)(4)(i) of this section must
§1.1441–1(b)(3)(i), (ii), (iii), (vii), (viii), scribed in §1.1441–1(e)(2)(i) or (3)(i) (by
appear near the signature line and must
and (ix) and 1.1441–5(d) and (e)(6) shall way of a facsimile copy of the certificate
read as follows:
apply (by applying the term payor instead or other non-qualified electronic trans-
By opening this account and signing
of the term withholding agent) to deter- mission of the information required to be
below, the account owner represents
mine the classification (e.g., individual, stated on the certificate), or the payor
and warrants that he/she/it is not a U.S.
corporation, partnership, trust), status holds a withholding certificate that is no
person for purposes of U.S. Federal
(i.e., a U.S. or a foreign person), and other longer reliable other than because the va-
income tax and that he/she/it is not act-
relevant characteristics (e.g., beneficial lidity period as described in §1.1441-
ing for, or on behalf of, a U.S. person.
owner or intermediary) of a payee if a 1(e)(4)(ii)(A) has expired. In the case of
A false statement or misrepresentation
payment cannot be reliably associated a newly opened account, the grace period
of tax status by a U.S. person could
with valid documentation under begins on the date that the payor first
lead to penalties under U.S. law. If
§1.1441–1(b)(2)(vii) irrespective of credits the account. In the case of an ex-
your tax status changes and you
whether the payments are subject to with- isting account for which the payor holds a
become a U.S. citizen or a resident, you
holding under chapter 3 of the Internal Form W-8 or documentary evidence of
must notify us within 30 days.
Revenue Code. The provisions of foreign status, the grace period begins on
§1.1441–1(b)(3)(iii)(D) and (vii)(B) shall the date that the payor first credits the ac-
(iii) Continuous validity of declaration not apply, however, to payments of count after the existing documentation
of foreign status subject to due diligence amounts that are not subject to withhold- held with regard to the account can no
by financial institution. A declaration of ing. In addition, §1.1441–5(d)(2) shall longer be relied upon (other than because
the validity period described in for a definition of the term actively traded that the payor may treat as paid to a for-
§1.1441–1(e)(4)(ii)(A) has expired). A for purposes of this paragraph (d)(2)(ii). eign intermediary or flow-through entity
new account shall be treated as an exist- ***** in accordance with the provisions of
ing account if the account holder already (3) Payments to foreign intermediaries §1.1441–1(b)(3)(ii)(C) or (v)(A) shall be
holds an account at the branch location at or flow-through entities—(i) Payments of treated as paid to an undocumented U.S.
which the new account is opened. It shall amounts subject to withholding under payee that is not an exempt recipient
also be treated as an existing account if an chapter 3 of the Internal Revenue Code. under paragraph §1.6049–4(c) unless the
account is held at another branch location In the case of payments of amounts that payor has documentation from the payees
if the institution maintains a coordinated the payor may treat as made to a foreign of the payment and the payment is allo-
account information system described in intermediary or flow-through entity in ac- cated to foreign payees, as a group, and to
§1.1441–1(e)(4)(ix). The grace period cordance with §§1.1441–1(b)(3)(ii)(C) each U.S. non-exempt recipient payee.
terminates on the earlier of the close of and (b)(3)(v)(A), 1.1441–5(c) or (e) and See §1.1441–1(e)(3)(iv)(C)(2).
the 90th day from the date on which the that are subject to withholding under (B) Payee may be an intermediary. If a
grace period begins or the date that the §1.1441–2(a), the provisions of payment is made to a person described in
documentation is provided. The grace pe- §§1.1441–1(b)(2)(v) and 1.1441–5(c)(1), §1.6049–4(c)(1)(ii) that has not provided
riod also terminates when the remaining (e)(2), and (3) shall apply (by applying an intermediary withholding certificate
balance in the account (due to with- the term payor instead of the term with- under §1.1441–1(e)(3)(i) but the payor
drawals or otherwise) is equal to or less holding agent) to identify the payee. If a knows or has reason to know that the
than 31 percent of the total amounts cred- payment of an amount subject to with- payee may be an intermediary, the payor
ited since the beginning of the grace pe- holding cannot be reliably associated with must apply the rules of paragraph
riod that would be subject to backup with- valid documentation from a payee in ac- (d)(3)(iii)(A) of this section. A payor has
holding if the provisions of this paragraph cordance with §1.1441–1(b)(2)(vii) the reason to know that such a person may be
(d)(2)(ii) did not apply. At the end of the presumption rules of §1.1441–1(b)(3)(v) an intermediary if that person has pro-
grace period, the payor shall treat the and §1.1441–5(d) and (e)(6) shall apply vided documentation under
amounts credited to the account during to determine the payees status for pur- §1.1441–3(b)(ii)(C) or (v)(A) for another
the grace period as paid to a U.S. or for- poses of this section (and other sections of account with the same payor.
eign payee depending upon whether doc- regulations under this chapter to which (iv) Short-term deposits and repur-
umentation has been furnished and the na- this paragraph (d)(3) applies). chase transactions. The provisions of
ture of any such documentation furnished (ii) Payments of amounts not subject to paragraph (d)(3)(ii) of this section and not
upon which the payor may rely to treat the withholding under chapter 3 of the Inter- paragraph (d)(3)(iii) of this section shall
account as owned by a U.S. or foreign nal Revenue Code. Except as provided in apply to deposits with banks and other fi-
payee. If the documentation has not been paragraph (d)(3)(iii) of this section, nancial institutions that remain on deposit
received on or before the date of expira- amounts that are not subject to withhold- for a period of two weeks or less, to
tion of the grace period, the payor may ing under chapter 3 of the Internal Rev- amounts of original issue discount arising
also apply the presumptions described in enue Code that the payor may treat as from a sale and repurchase transaction
this paragraph (d) to amounts credited to paid to a foreign intermediary or flow- that is completed within a period of two
the account after the date on which the through entity shall be treated as made to weeks or less, or to amounts described in
grace period expires (until such time as an exempt recipient described in paragraphs (b)(7), (10) and (11) of this
the payor can reliably associate the docu- §1.6049–4(c) except to the extent that the section (relating to certain obligations is-
mentation with amounts credited). See payor has actual knowledge that any per- sued in bearer form).
§31.6413(a)–3(a)(1)(iv) of this chapter son for whom the intermediary or flow- (4) Examples. The rules of paragraphs
for treating backup withheld amounts through entity is collecting the payment is (d)(1) through (3) of this section are illus-
under section 3406 as erroneously with- a U.S. person who is not an exempt recip- trated by the following examples:
held when the documentation establishing ient. In the case of such actual knowl- Example 1. (i) Facts. USP is a U.S. payor as de-
foreign status is furnished prior to the end edge, the payor shall treat the payment fined in paragraph (c)(5) of this section. USP pays in-
terest from sources within the United States to an ac-
of the calendar year in which backup that it knows is allocable to such U.S. per- count maintained in the United States by X. The
withholding occurs. If the provisions of son as a payment to a U.S. payee who is interest is not deposit interest described in sections
this paragraph (d)(2)(ii) apply, the provi- not an exempt recipient. 871(i)(2)(A) or 881(d). USP does not have a with-
sions of §31.3406(d)–3 of this chapter (iii) Special rule for payments of cer- holding certificate from X as defined in
shall not apply. For purposes of this para- tain short-term original issue discount §1.1441–1(c)(16). Moreover, USP cannot treat X as
an exempt recipient, as defined in §1.6049–4(c)(1)(ii),
graph (d)(2)(ii), an account holder’s rein- and bank deposit interest—(A) General without documentation and there is no indication that
vestment of gross proceeds of a sale into rule. A payment of U.S. source deposit X is an individual, trust, or estate.
other instruments constitutes a with- interest described in section 871(i)(2)(A) (ii) Analysis. The U.S. source interest is an
drawal and a non-qualified electronic or 881(d)(3) or interest or original issue amount subject to withholding as defined in
transmission of information on a with- discount on the redemption of an obliga- §1.1441–2(a). Under paragraph (d)(1) of this sec-
tion, USP must apply the provisions of
holding certificate is a transmission that is tion with a maturity from the date of issue §§1.1441–1(b)(2) and 1.1441–5(c) and (e) to deter-
not in accordance with the provisions of of 183 days or less (short-term OID) de- mine the payee of the interest. Under
§1.1441–1(e)(4)(iv). See §1.1092(d)–1 scribed in section 871(g)(1)(B) or 881(e) §1.1441–1(b)(2)(i), X, the person to whom the pay-
ment is made, is considered to be the payee, unless provisions of §1.1441–1(b)(2) and §1.1441–5(c) and §§1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not
X is determined to be a flow-through entity, in (e) to determine the payee. Under apply to amounts that are not subject to withholding.
which case the rules of §1.1441–5 apply to deter- §1.1441–1(b)(2)(i), X, the person to whom the pay- Therefore, under §§1.1441-1(b)(3)(iii) and 1.1441-
mine the payee. Under paragraph (d)(2)(i) of this ment is made, is considered to be the payee, unless 5(d)(2), X is presumed to be a U.S. partnership be-
section, the rules of §1.1441–1(b)(3)(ii) apply to de- X is determined to be a flow-through entity, in cause it does not have actual knowledge that X’s em-
termine the classification of a payee as an individ- which case the rules of §1.1441–5(c) or (e) apply to ployer identification number begins with the digits
ual, trust, estate, corporation, or partnership. Under determine the payee. Under paragraph (d)(2)(i) of “98.” Therefore, USP must treat X as a U.S. person
§1.1441–1(b)(3)(ii)(B), X is presumed to be a part- this section, the rules of §1.1441–1(b)(3)(ii) apply to that is not an exempt recipient and report the pay-
nership, since X does not appear to be an individual, determine the classification of a payee as an individ- ment on Form 1099 under section 6049. Under
trust or estate, and X cannot be presumed to be an ual, trust, estate, corporation, or partnership. Under §31.3406(g)–1(e) of this chapter, however, USP is
exempt recipient in the absence of documentation. §1.1441–1(b)(3)(ii)(B), X is presumed to be a part- not required to backup withhold on the payment un-
Paragraph (d)(2)(i) of this section requires USP to nership, since X does not appear to be an individual, less it has actual knowledge that X is a U.S. person
apply the provisions of §§1.1441–1(b)(3)(iii) and trust or estate, and X cannot be presumed to be an that is not an exempt recipient.
1.1441–5(d) to determine whether X is presumed to exempt recipient in the absence of documentation. Example 6. (i) Facts. The facts are the same as
be a U.S. or foreign partnership. Under Paragraph (d)(2)(i) of this section requires USP to in Example 5, except that the interest is paid by F, a
§§1.1441–1(b)(3)(iii) and 1.1441–5(d)(2), X is pre- apply the provisions of §§1.1441–1(b)(3)(iii) and non-U.S. payor, as defined under paragraph (c)(5) of
sumed to be a U.S. partnership in absence of any in- 1.1441–5(d) to determine whether, X is presumed to this section.
dicia of foreign partnership status. The U.S. source be a U.S. or foreign partnership. Under (ii) Analysis. The analysis is the same as under
interest paid to X is reportable under section 6049 §§1.1441–1(b)(3)(iii)(D) and 1.1441–5(d)(2), X is Example 5. However, because F is a non-U.S. payor
on Form 1099 and the interest is subject to backup presumed to be a foreign partnership. Therefore, paying foreign source interest outside the United
withholding under section 3406 because X has not under paragraph (d)(1) of this section and States, paragraph (b)(6) of this section exempts the
provided its TIN on a valid Form W-9. §1.1441–5(c)(1)(i)(E), the payees of the interest are payment from reporting under section 6049.
Example 2. (i) Facts. The facts are the same as presumed to be the partners of X. Under Example 7. (i) Facts. USP, a U.S. payor as de-
in Example 1, except that the interest paid by USP is §1.1441–5(d)(3), the partners are presumed to be fined in paragraph (c)(5) of this section, makes a
from sources outside the United States. undocumented foreign persons. Therefore, USP payment of U.S. source interest to NQI, a foreign
(ii) Analysis. Interest from sources outside the must withhold 30 percent of the interest payment corporation and a nonqualified intermediary as de-
United States is not an amount subject to withhold- under §1.1441–1(b)(1) and report the payment on fined in §1.1441–1(c)(14). The interest is not de-
ing, as defined in §1.1441–2(a). Under paragraph Form 1042–S in accordance with §1.1461–1(c). posit interest as defined in sections 871(i)(2)(A) and
(d)(1) of this section, USP must apply the provisions Example 4. (i) Facts. The facts are the same as in 881(d). The interest is paid inside the United States
of §§1.1441–1(b)(2) and 1.1441–5(c) and (e) to de- Example 3, except that the interest is paid by F, a to an account maintained in the United States. NQI
termine the payee. Under §1.1441–1(b)(2)(i), X, the non-U.S. payor. has provided USP with a nonqualified intermediary
person to whom the payment is made, is considered (ii) Analysis. The analysis and result are the withholding certificate, as described in
to be the payee, unless X is determined to be a flow- same as in Example 3. F is a withholding agent §1.1441–1(e)(3)(iii), but has not attached any docu-
through entity, in which case the rules of §1.1441- under §1.1441–7 and its status as a non-U.S. payor mentation from the persons on whose behalf it acts
5(c) or (e) apply to determine the payee. Under under paragraph (c)(5) of this section is irrelevant. or a withholding statement as described in
paragraph (d)(2)(i) of this section, the rules of Example 5. (i) Facts. USP is a U.S. payor as de- §1.1441–1(e)(3)(iv).
§1.1441–1(b)(3)(ii) apply to determine the classifi- fined in paragraph (c)(5) of this section. USP makes a (ii) Analysis. U.S. source interest is an amount sub-
cation of a payee as an individual, trust, estate, cor- payment outside the United States of interest from ject to withholding under §1.1441– 2(a). USP may treat
poration, or partnership. These rules apply irrespec- sources outside the United States to an offshore ac- the payment as made to a foreign intermediary under
tive of whether the payment is an amount subject to count of X. USP does not have a withholding certifi- §1.1441–1(b)(3)(v)(A) because USP has received a
withholding. Under §1.1441–1(b)(3)(ii)(B), X is cate from X as defined in §1.1441–1(c)(16) nor does it nonqualified intermediary withholding certificate from
presumed to be a partnership, since X does not ap- have documentary evidence as described in NQI. Under paragraph (d)(3)(i) of this section, USP
pear to be an individual, trust or estate, and X cannot §§1.1441–1(e)(1)(ii)(A)(2) and 1.6049–5(c)(1). USP must apply §1.1441–1(b)(2)(v) to determine the payees
be presumed to be an exempt recipient in the ab- does not have actual knowledge of an employer identi- of the payment. Under §1.1441–1(b)(2)(v)(A), USP
sence of documentation. Paragraph (d)(2)(i) of this fication number for X. X does not appear to be an in- must treat the persons on whose behalf NQI is acting as
section requires USP to apply the provisions of dividual, trust, or estate and cannot be treated as an ex- the payees. Paragraph (d)(3)(i) of this section also re-
§§1.1441–1(b)(3)(iii) and 1.1441–5(d) to determine empt recipient, as defined in §1.6049–4(c)(1)(ii) in the quires USP to apply the presumption rules of
whether, X is presumed to be a U.S. or foreign part- absence of documentation. §1.1441–1(b)(3)(v) if it cannot reliably associate the
nership. Under §§1.1441–1(b)(3)(iii) and (ii) Analysis. The interest is not an amount sub- payment with valid documentation from a payee. See
1.1441–5(d)(2), X is presumed to be a U.S. partner- ject to withholding as defined in §1.1441–2(a). §1.1441–1(b)(2)(vii). Under §1.1441–1(b)(3)(v)(B),
ship in absence of any indicia of foreign partnership Under paragraph (d)(1) of this section, USP must the interest is treated as paid to an unknown foreign
status. The foreign source interest is a payment sub- apply the rules of §§1.1441–1(b)(2) and 1.1441–5(c) payee because it cannot be reliably associated with doc-
ject to reporting on Form 1099 under §1.6049–5(a). and (e) to determine the payee of the interest. Under umentation under §1.1441–1(b)(2)(vii). Therefore, the
Further, because X is a non-exempt recipient that §1.1441–1(b)(2)(i), X, the person to whom the pay- payment is not subject to reporting on Form 1099 under
has failed to provide its TIN on a valid Form W-9, ment is made, is considered to be the payee, unless X paragraph (b)(12) of this section because the payment is
the foreign source interest is subject to backup with- is determined to be a flow–through entity, in which presumed made to a foreign person. The payment is
holding under section 3406. case the rules of §1.1441–5(c) or (e) apply to deter- subject to withholding, however, under §1.1441–1(b) at
Example 3. (i) Facts. USP is a U.S. payor as de- mine the payee. Under paragraph (d)(2)(i) of this a rate of 30 percent and is subject to reporting on Form
fined in paragraph (c)(5) of this section. USP makes section, §1.1441–1(b)(3)(ii) applies to determine X’s 1042–S under §1.1461–1(c).
a payment of U.S. source interest outside the United classification as an individual, trust, estate, corpora- Example 8. (i) Facts. The facts are the same as
States to an offshore account of X. See paragraphs tion or partnership. Under §1.1441–1(b)(3)(ii)(B), X in Example 7, except that the interest is paid outside
(c)(1) for a definition of offshore account and (e) for is treated as a partnership, since it does not appear to the United States, as defined in paragraph (e) of this
a payment outside the United States. USP does not be an individual, trust, or estate and cannot be treated section to an offshore account, as defined in para-
have a withholding certificate from X as defined in as an exempt recipient without documentation. Para- graph (c)(1) of this section.
§1.1441–1(c)(16) nor does it have documentary evi- graph (d)(2)(i) of this section requires USP to apply (ii) Analysis. The analysis and results are the
dence as described in §1.1441–1(e)(1)(ii)(A)(2) and the provisions of §§1.1441-1(b)(3)(iii) and 1.1441- same as in Example 7. The rules of
1.6049–5(c)(1). 5(d) to determine whether, X is presumed to be a §1.1441–1(b)(3)(v) apply irrespective of where the
(ii) Analysis. The interest is an amount subject to U.S. or foreign partnership. Paragraph (d)(2)(i) also account is maintained or the payment made.
withholding as defined in §1.1441– 2(a). Under states that the presumptions of foreign status for pay- Example 9. (i) Facts. The facts are the same as
paragraph (d)(1) of this section, USP must apply the ments made to offshore accounts contained in in Example 8, except that the interest is paid by F, a
non–U.S. payor, as defined in paragraph (c)(5) of withholding. Example 12, except that P can reliably associate 30
this section. Example 12. (i) Facts. P, a payor, makes a pay- percent of the payment of interest to B, but cannot reli-
(ii) Analysis. The analysis and results are the same ment to NQI of U.S. source interest on debt obliga- ably associate the remaining 70 percent with A or C.
as in Example 7. tions issued prior to July 18, 1984. Therefore, the in- (ii) Analysis. Under paragraph (d)(3)(i) of this sec-
Example 10. (i) USP, a U.S. payor as defined in terest does not qualify as portfolio interest under tion, P applies the rules of §1.1441– 1(b)(2)(v) to de-
paragraph (c)(5) of this section, makes a payment of section 871(h) or 881(d). NQI is a nonqualified for- termine the payees of the interest. Under that section,
foreign source interest to NQI, a foreign corporation eign intermediary, as defined in §1.1441–1(c)(14), and the payees are the persons on whose behalf NQI
and a nonqualified intermediary as defined in has furnished P a valid nonqualified intermediary acts—A, B and C. Because P can reliably associate 30
§1.1441–1(c)(14). NQI has provided USP with a non- withholding certificate described in percent of the payment with B, a foreign pensions
qualified intermediary withholding certificate, as de- §1.1441–1(e)(3)(iii) to which it has attached a valid fund exempt from withholding under an income tax
scribed in §1.1441–1(e)(3)(iii), but has not attached Form W-9 for A, and two valid beneficial owner treaty, P may treat that payment as paid to B and not
any documentation from the persons on whose behalf Forms W-8, one for B and one for C. A is not an ex- subject to reporting on Form 1099 under paragraph
it acts or a withholding statement as described in empt recipient under §1.6049–4(c). NQI furnishes a (b)(12) of this section. P cannot reliably associate the
§1.1441–1(e)(3)(iv). withholding statement, described in remaining 70 percent of the payment with valid docu-
(ii) Analysis. Foreign source interest is not an §1.1441–1(e)(3)(iv), in which it allocates 20 percent mentation under §1.1441–1(b)(2)(vii) and, therefore,
amount subject to withholding under chapter 3 of the of the U.S. source interest to A, but does not allocate under paragraph (d)(3)(i) of this section must apply
Internal Revenue Code. See §1.1441–2(a). Under the remaining 80 percent of the interest between B and the presumption rules of §1.1441–1(b)(3)(v). Under
paragraph (d)(3)(ii)(A) of this section, amounts that C. B’s withholding certificate indicates that B is a for- that section, the interest is presumed paid to an un-
are not subject to withholding under chapter 3 of the eign pension fund, exempt from U.S. tax under the known foreign payee. Under paragraph (b)(12) of this
Internal Revenue Code that a payor may treat as paid U.S. income tax treaty with Country T. C’s withhold- section, P is not required to report the interest pre-
to a foreign intermediary are treated as made to an ex- ing certificate indicates that C is a foreign corporation sumed paid to a foreign person on Form 1099. Under
empt recipient described in §1.6049–4(c). Therefore, not entitled to a reduced rate of withholding. §1.1441–1(b), 80 percent of the interest is subject to
the foreign source interest is not subject to reporting (ii) Analysis. Under paragraph (d)(3)(i) of this sec- 30 percent withholding, however, and the interest is
on Form 1099. tion, P applies the rules of §1.1441– 1(b)(2)(v) to de- reportable on Form 1042–S under §1.1461–1(c).
Example 11. (i) Facts. USP is a U.S. payor as de- termine the payees of the interest. Under that section, Example 14. (i) Facts. The facts are the same as in
fined in paragraph (c)(5) of this section. USP pays the payees are the persons on whose behalf NQI Example 12, except that P also makes a payment of
U.S. source original issue discount from the redemp- acts—A, B and C. Because P can reliably associate 20 foreign source interest to NQI.
tion of an obligation described in section 871(g)(1)(B) percent of the payment with valid documentation pro- (ii) Analysis. Under paragraph (d)(3)(ii)(A), P may
to NQI, a foreign corporation that is a nonqualified in- vided by A, P must treat 20 percent of the interest as treat the foreign source interest as paid to an exempt
termediary as defined in §1.1441–1(c)(14). The re- paid to A, a U.S. person not exempt from reporting, recipient as defined in §1.6049–4(c) and not subject to
demption proceeds are paid to an account NQI has and report the payment on Form 1099. P cannot reli- reporting on Form 1099 even though some or all of the
with USP in the United States. NQI provides a non- ably associate the remaining 80 percent of the pay- foreign source interest may in fact be owned by A, the
qualified intermediary withholding certificate as de- ment with valid documentation under U.S. person that is not exempt from reporting.
scribed in §1.1441–1(e)(3)(iii) but does not attach any §1.1441–1(b)(2)(vii) and, therefore, under paragraph *****
payee documentation or a withholding statement de- (d)(3)(i) of this section must apply the presumption
scribed in §1.1441–1(e)(3)(iv). rules of §1.1441–1(b)(3)(v). Under that section, the Parts 1 and 31 [Amended]
(ii) Analysis. Under paragraph (d)(3)(ii)(A) of this interest is presumed paid to an unknown foreign
section, USP must treat the payment as made to an un- payee. Under paragraph (b)(12) of this section, P is Par. 18. Effective January 1, 2001, in
documented U.S. payee that is not an exempt recipient not required to report the interest presumed paid to a the list below, for each section indicated
and report the payment on Form 1099. Further, be- foreign person on Form 1099. Under §1.1441–1(b),
cause the payment is made inside the United States, 80 percent of the interest is subject to 30 percent with- in the left column remove the language in
the exception to backup withholding for offshore ac- holding, however, and the interest is reportable on the middle column and add the language
counts contained in §31.3406(g)–1(e) of this chapter Form 1042–S under §1.1461–1(c). in the right column:
does not apply and the payment is subject to backup Example 13. (i) Facts. The facts are the same as in
Section Remove Add
1.1441–1(b)(1), first to a beneficial owner to a payee that is a
sentence that is a U.S. person U.S. person
1.1441–1(b)(2)(iii)(A), 1.1441–6(b)(4) 1.1441–6(b)(2)
last sentence
1.1441–1(b)(2)(iii)(B), 1.1441–6(b)(4) 1.1441–6(b)(2)
third sentence
1.1441–1(b)(2)(vi), second 1.6049–5(c)(4) 1.6049–5(c)(1)
sentence
1.1441–1(b)(4)(iii), last §1.6049–5(c)(4) §1.6049–5(c)(1)
sentence
1.1441–1(b)(4)(v), third §1.6049–5(c)(4) §1.6049–5(c)
sentence
1.1441–1(b)(4)(xviii), third is required is not required
sentence
1.1441–1(b)(7)(i)(A) §1.1441–4(a)(2)(i) §1.1441–4(a)(2)(ii)
or (3) or (3)(i)
1.1441–1(b)(7)(iii), first §1.1441–4(a)(2)(i) §1.1441–4(a)(2)(ii)
sentence or (3) or (3)(i)
1.14441–1(b)(9), second a withholding certificate an intermediary or
sentence flow–through withholding
certificate
1.1441–1(b)(9), second a U.S. beneficial owner a U.S. payee
sentence
1.1441–1(e)(1)(ii)(A)(2) with respect to an to an offshore account
offshore account
1.1441–1(e)(2)(i), fifth See §1.1441–6(b)(4)(ii) See §1.1441–6(b)(2)
sentence
1.1441–1(e)(2)(ii), sixth See §1.1441–6(b)(4)(i) See §1.1441–6(b)
sentence
1.1441–1(e)(4)(viii), introductory §1.1441–6(b)(2)(ii) §1.1441–6(c)(2)
text, second sentence
1.1441–1(e)(4)(viii), third §1.1441–6(b)(4)(ii) §1.1441–6(b)(1)
sentence
1.1441–3(c)(2)(i), introductory estimate of earnings estimates under this
text, second sentence and profits, paragraph (c)(2),
1.1441–4(a)(3)(ii) payment to a foreign payment shall
financial institution
(within the meaning of
§1.165–12(c)(1)(iv))
shall
1.1441–4(a)(3)(ii) counterparty payee
1.1441–7(b)(1), first is incorrect. is unreliable or incorrect.
sentence
1.1441–7(b)(1), third contained in, or attached contained in, or associated
sentence to, a withholding with, a withholding
certificate certificate
1.1441–7(b)(1), third are not correct and are incorrect or unreliable
sentence and
1.1461–1(b)(2), first Form 1042X Form 1042
sentence
1.6045–1(j), first the end of the second February 28 of the
sentence calendar month following calendar
following the close of year
the calendar year of
such reporting period
1.6049–4(c)(1)(ii)(A), meets the meets one of the
second sentence
31.3406(h)–3(a), the payee certifies a payee that is a U.S.
introductory text, person certifies
first sentence
Robert E. Wenzel, Section 7520.—Valuation Tables
Deputy Commissioner
The adjusted applicable federal short-term, mid-
of Internal Revenue.
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157 .
Approved May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary Section 7872.—Treatment of
of the Treasury. Loans With Below-Market
(Filed by the Office of the Federal Register on May
Interest Rates
15, 2000, 8:45 a.m., and published in the issue of the The adjusted applicable federal short-term, mid-
Federal Register for May 22, 2000, 65 F.R. 32151) term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
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