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Www h&rblock Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Www h&rblock Property not disposed of or abandoned. Www h&rblock Special rule for normal retirements from item accounts. Www h&rblock Abandoned property. Www h&rblock Single item accounts. Www h&rblock Multiple property account. Www h&rblock Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Www h&rblock If your property qualified for MACRS, you must depreciate it under MACRS. Www h&rblock See Publication 946. Www h&rblock However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Www h&rblock Also, you can elect to exclude certain property from being depreciated under MACRS. Www h&rblock Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Www h&rblock Intangible property. Www h&rblock   You cannot depreciate intangible property under ACRS or MACRS. Www h&rblock You depreciate intangible property using any other reasonable method, usually, the straight line method. Www h&rblock Note. Www h&rblock The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Www h&rblock For more information, see chapter 12 of Publication 535. Www h&rblock Public utility property. Www h&rblock   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Www h&rblock This type of property is subject to depreciation under a special rule. Www h&rblock Videocassettes. Www h&rblock   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Www h&rblock You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Www h&rblock The straight line method, salvage value, and useful life are discussed later under Methods To Use. Www h&rblock You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Www h&rblock How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Www h&rblock These methods are straight line and declining balance. Www h&rblock To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Www h&rblock They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Www h&rblock The amount of the deduction in any year also depends on which method of depreciation you choose. Www h&rblock Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Www h&rblock The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Www h&rblock Your original basis is usually the purchase price. Www h&rblock However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Www h&rblock Adjusted basis. Www h&rblock   Events will often change the basis of property. Www h&rblock When this occurs, the changed basis is called the adjusted basis. Www h&rblock Some events, such as improvements you make, increase basis. Www h&rblock Events such as deducting casualty losses and depreciation decrease basis. Www h&rblock If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Www h&rblock   Publication 551 explains how to figure basis for property acquired in different ways. Www h&rblock It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Www h&rblock Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Www h&rblock It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Www h&rblock It is how long it will continue to be useful to you, not how long the property will last. Www h&rblock Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Www h&rblock The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Www h&rblock Consider all these factors before you arrive at a useful life for your property. Www h&rblock The useful life of the same type of property varies from user to user. Www h&rblock When you determine the useful life of your property, keep in mind your own experience with similar property. Www h&rblock You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Www h&rblock Change in useful life. Www h&rblock   You base your estimate of useful life on certain facts. Www h&rblock If these facts change significantly, you can adjust your estimate of the remaining useful life. Www h&rblock However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Www h&rblock Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Www h&rblock You generally cannot depreciate property below a reasonable salvage value. Www h&rblock Determining salvage value. Www h&rblock   Salvage value is the estimated value of property at the end of its useful life. Www h&rblock It is what you expect to get for the property if you sell it after you can no longer use it productively. Www h&rblock You must estimate the salvage value of a piece of property when you first acquire it. Www h&rblock   Salvage value is affected both by how you use the property and how long you use it. Www h&rblock If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Www h&rblock However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Www h&rblock Changing salvage value. Www h&rblock   Once you determine the salvage value for property, you should not change it merely because prices have changed. Www h&rblock However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Www h&rblock When you redetermine the salvage value, take into account the facts that exist at the time. Www h&rblock Net salvage. Www h&rblock   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Www h&rblock You can choose either salvage value or net salvage when you figure depreciation. Www h&rblock You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Www h&rblock However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Www h&rblock Your salvage value can never be less than zero. Www h&rblock Ten percent rule. Www h&rblock   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Www h&rblock You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Www h&rblock If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Www h&rblock Methods To Use Two methods of depreciation are the straight line and declining balance methods. Www h&rblock If ACRS or MACRS does not apply, you can use one of these methods. Www h&rblock The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Www h&rblock Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Www h&rblock One of these methods was the straight line method. Www h&rblock This method was also used for intangible property. Www h&rblock It lets you deduct the same amount of depreciation each year. Www h&rblock To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Www h&rblock Subtract the salvage value, if any, from the adjusted basis. Www h&rblock The balance is the total amount of depreciation you can take over the useful life of the property. Www h&rblock Divide the balance by the number of years remaining in the useful life. Www h&rblock This gives you the amount of your yearly depreciation deduction. Www h&rblock Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Www h&rblock If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Www h&rblock Example. Www h&rblock In April 1994, Frank bought a franchise for $5,600. Www h&rblock It expires in 10 years. Www h&rblock This property is intangible property that cannot be depreciated under MACRS. Www h&rblock Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Www h&rblock He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Www h&rblock He must prorate the $560 for his 9 months of use in 1994. Www h&rblock This gives him a deduction of $420 ($560 ÷ 9/12). Www h&rblock In 1995, Frank can deduct $560 for the full year. Www h&rblock Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Www h&rblock The rate cannot be more than twice the straight line rate. Www h&rblock Rate of depreciation. Www h&rblock   Under this method, you must determine your declining balance rate of depreciation. Www h&rblock The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Www h&rblock (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Www h&rblock ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Www h&rblock Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Www h&rblock Depreciation deductions. Www h&rblock   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Www h&rblock This gives you the amount of your deduction. Www h&rblock For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Www h&rblock To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Www h&rblock Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Www h&rblock Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Www h&rblock Your depreciation deduction for the second year is $1,600. Www h&rblock   As you can see from this example, your adjusted basis in the property gets smaller each year. Www h&rblock Also, under this method, deductions are larger in the earlier years and smaller in the later years. Www h&rblock You can make a change to the straight line method without consent. Www h&rblock Salvage value. Www h&rblock   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Www h&rblock However, you cannot depreciate the property below its reasonable salvage value. Www h&rblock Determine salvage value using the rules discussed earlier, including the special 10% rule. Www h&rblock Example. Www h&rblock If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Www h&rblock But if your estimate of salvage value was $900, you can only deduct $100. Www h&rblock This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Www h&rblock Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Www h&rblock You can group the videocassettes by title for making this projection. Www h&rblock You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Www h&rblock The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Www h&rblock For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Www h&rblock How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Www h&rblock If you change your method of depreciation, it is generally a change in your method of accounting. Www h&rblock You must get IRS consent before making the change. Www h&rblock However, you do not need permission for certain changes in your method of depreciation. Www h&rblock The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Www h&rblock For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Www h&rblock Change to the straight line method. Www h&rblock   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Www h&rblock However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Www h&rblock When the change is made, figure depreciation based on your adjusted basis in the property at that time. Www h&rblock Your adjusted basis takes into account all previous depreciation deductions. Www h&rblock Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Www h&rblock   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Www h&rblock You cannot make the change on an amended return filed after the due date of the original return (including extensions). Www h&rblock   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Www h&rblock   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Www h&rblock Changes that require permission. Www h&rblock   For most other changes in method of depreciation, you must get permission from the IRS. Www h&rblock To request a change in method of depreciation, file Form 3115. Www h&rblock File the application within the first 180 days of the tax year the change is to become effective. Www h&rblock In most cases, there is a user fee that must accompany Form 3115. Www h&rblock See the instructions for Form 3115 to determine if a fee is required. Www h&rblock Changes granted automatically. Www h&rblock   The IRS automatically approves certain changes of a method of depreciation. Www h&rblock But, you must file Form 3115 for these automatic changes. Www h&rblock   However, IRS can deny permission if Form 3115 is not filed on time. Www h&rblock For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Www h&rblock B. Www h&rblock 420. Www h&rblock Changes for which approval is not automatic. Www h&rblock   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Www h&rblock   You must request and receive permission for these changes. Www h&rblock To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Www h&rblock Change from an improper method. Www h&rblock   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Www h&rblock You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Www h&rblock If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Www h&rblock However, you must file the amended return before the filing date for the next tax year. Www h&rblock Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Www h&rblock You can do this by selling, exchanging, or abandoning the item of property. Www h&rblock You can also withdraw it from use without disposing of it. Www h&rblock For example, you could place it in a supplies or scrap account. Www h&rblock Retirements can be either normal or abnormal depending on all facts and circumstances. Www h&rblock The rules discussed next do not apply to MACRS and ACRS property. Www h&rblock Normal retirement. Www h&rblock   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Www h&rblock A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Www h&rblock Abnormal retirement. Www h&rblock   A retirement can be abnormal if you withdraw the property early or under other circumstances. Www h&rblock For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Www h&rblock Gain or loss on retirement. Www h&rblock   There are special rules for figuring the gain or loss on retirement of property. Www h&rblock The gain or loss will depend on several factors. Www h&rblock These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Www h&rblock A single property account contains only one item of property. Www h&rblock A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Www h&rblock Sale or exchange. Www h&rblock   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Www h&rblock See Publication 544. Www h&rblock Property not disposed of or abandoned. Www h&rblock   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Www h&rblock You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Www h&rblock However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Www h&rblock   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Www h&rblock Special rule for normal retirements from item accounts. Www h&rblock   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Www h&rblock However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Www h&rblock   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Www h&rblock Abandoned property. Www h&rblock   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Www h&rblock However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Www h&rblock Basis of property retired. Www h&rblock   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Www h&rblock Single item accounts. Www h&rblock   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Www h&rblock This is generally the cost or other basis of the item of property less depreciation. Www h&rblock See Publication 551. Www h&rblock Multiple property account. Www h&rblock   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Www h&rblock If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Www h&rblock   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Www h&rblock The method of depreciation used for the multiple property account is used. Www h&rblock You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Www h&rblock Prev  Up  Next   Home   More Online Publications
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Www h&rblock Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Www h&rblock S. Www h&rblock Taxpayer Identification NumbersUnexpected payment. Www h&rblock Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Www h&rblock Electronic reporting. Www h&rblock Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Www h&rblock S. Www h&rblock Real Property InterestForeign corporations. Www h&rblock Domestic corporations. Www h&rblock U. Www h&rblock S. Www h&rblock real property holding corporations. Www h&rblock Partnerships. Www h&rblock Trusts and estates. Www h&rblock Domestically controlled QIE. Www h&rblock Late filing of certifications or notices. Www h&rblock Certifications. Www h&rblock Liability of agent or qualified substitute. Www h&rblock Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Www h&rblock Withholding of Tax In most cases, a foreign person is subject to U. Www h&rblock S. Www h&rblock tax on its U. Www h&rblock S. Www h&rblock source income. Www h&rblock Most types of U. Www h&rblock S. Www h&rblock source income received by a foreign person are subject to U. Www h&rblock S. Www h&rblock tax of 30%. Www h&rblock A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Www h&rblock The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Www h&rblock The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Www h&rblock In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Www h&rblock S. Www h&rblock source income. Www h&rblock Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Www h&rblock NRA withholding does not include withholding under section 1445 of the Code (see U. Www h&rblock S. Www h&rblock Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Www h&rblock A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Www h&rblock However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Www h&rblock S. Www h&rblock person is not required to withhold. Www h&rblock In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Www h&rblock Withholding Agent You are a withholding agent if you are a U. Www h&rblock S. Www h&rblock or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Www h&rblock A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Www h&rblock S. Www h&rblock branch of certain foreign banks and insurance companies. Www h&rblock You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Www h&rblock Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Www h&rblock In most cases, the U. Www h&rblock S. Www h&rblock person who pays an amount subject to NRA withholding is the person responsible for withholding. Www h&rblock However, other persons may be required to withhold. Www h&rblock For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Www h&rblock In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Www h&rblock Liability for tax. Www h&rblock   As a withholding agent, you are personally liable for any tax required to be withheld. Www h&rblock This liability is independent of the tax liability of the foreign person to whom the payment is made. Www h&rblock If you fail to withhold and the foreign payee fails to satisfy its U. Www h&rblock S. Www h&rblock tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Www h&rblock   The applicable tax will be collected only once. Www h&rblock If the foreign person satisfies its U. Www h&rblock S. Www h&rblock tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Www h&rblock Determination of amount to withhold. Www h&rblock   You must withhold on the gross amount subject to NRA withholding. Www h&rblock You cannot reduce the gross amount by any deductions. Www h&rblock However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Www h&rblock   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Www h&rblock In no case, however, should you withhold more than 30% of the total amount paid. Www h&rblock Or, you may make a reasonable estimate of the amount from U. Www h&rblock S. Www h&rblock sources and put a corresponding part of the amount due in escrow until the amount from U. Www h&rblock S. Www h&rblock sources can be determined, at which time withholding becomes due. Www h&rblock When to withhold. Www h&rblock   Withholding is required at the time you make a payment of an amount subject to withholding. Www h&rblock A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Www h&rblock A payment is considered made to a person if it is paid for that person's benefit. Www h&rblock For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Www h&rblock A payment also is considered made to a person if it is made to that person's agent. Www h&rblock   A U. Www h&rblock S. Www h&rblock partnership should withhold when any distributions that include amounts subject to withholding are made. Www h&rblock However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Www h&rblock S. Www h&rblock partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Www h&rblock If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Www h&rblock A U. Www h&rblock S. Www h&rblock trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Www h&rblock To the extent a U. Www h&rblock S. Www h&rblock trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Www h&rblock Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Www h&rblock (See Returns Required , later. Www h&rblock ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Www h&rblock Form 1099 reporting and backup withholding. Www h&rblock    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Www h&rblock S. Www h&rblock person. Www h&rblock You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Www h&rblock S. Www h&rblock person that is subject to Form 1099 reporting if any of the following apply. Www h&rblock The U. Www h&rblock S. Www h&rblock person has not provided its taxpayer identification number (TIN) in the manner required. Www h&rblock The IRS notifies you that the TIN furnished by the payee is incorrect. Www h&rblock There has been a notified payee underreporting. Www h&rblock There has been a payee certification failure. Www h&rblock In most cases, a TIN must be provided by a U. Www h&rblock S. Www h&rblock non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Www h&rblock A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Www h&rblock You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Www h&rblock S. Www h&rblock person. Www h&rblock For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Www h&rblock S. Www h&rblock person subject to Form 1099 reporting. Www h&rblock See Identifying the Payee , later, for more information. Www h&rblock Also see Section S. Www h&rblock Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Www h&rblock Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Www h&rblock Wages paid to employees. Www h&rblock   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Www h&rblock See Pay for Personal Services Performed , later. Www h&rblock Effectively connected income by partnerships. Www h&rblock   A withholding agent that is a partnership (whether U. Www h&rblock S. Www h&rblock or foreign) is also responsible for withholding on its income effectively connected with a U. Www h&rblock S. Www h&rblock trade or business that is allocable to foreign partners. Www h&rblock See Partnership Withholding on Effectively Connected Income , later, for more information. Www h&rblock U. Www h&rblock S. Www h&rblock real property interest. Www h&rblock   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Www h&rblock S. Www h&rblock real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Www h&rblock S. Www h&rblock real property interest to a shareholder, partner, or beneficiary that is a foreign person. Www h&rblock See U. Www h&rblock S. Www h&rblock Real Property Interest , later. Www h&rblock Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Www h&rblock It does not apply to payments made to U. Www h&rblock S. Www h&rblock persons. Www h&rblock Usually, you determine the payee's status as a U. Www h&rblock S. Www h&rblock or foreign person based on the documentation that person provides. Www h&rblock See Documentation , later. Www h&rblock However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Www h&rblock Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Www h&rblock However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Www h&rblock U. Www h&rblock S. Www h&rblock agent of foreign person. Www h&rblock   If you make a payment to a U. Www h&rblock S. Www h&rblock person and you have actual knowledge that the U. Www h&rblock S. Www h&rblock person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Www h&rblock However, if the U. Www h&rblock S. Www h&rblock person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Www h&rblock   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Www h&rblock S. Www h&rblock person and not as a payment to a foreign person. Www h&rblock You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Www h&rblock Disregarded entities. Www h&rblock   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Www h&rblock The payee of a payment made to a disregarded entity is the owner of the entity. Www h&rblock   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Www h&rblock   If the owner is a U. Www h&rblock S. Www h&rblock person, you do not apply NRA withholding. Www h&rblock However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Www h&rblock You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Www h&rblock Flow-Through Entities The payees of payments (other than income effectively connected with a U. Www h&rblock S. Www h&rblock trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Www h&rblock This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Www h&rblock Income that is, or is deemed to be, effectively connected with the conduct of a U. Www h&rblock S. Www h&rblock trade or business of a flow-through entity is treated as paid to the entity. Www h&rblock All of the following are flow-through entities. Www h&rblock A foreign partnership (other than a withholding foreign partnership). Www h&rblock A foreign simple or foreign grantor trust (other than a withholding foreign trust). Www h&rblock A fiscally transparent entity receiving income for which treaty benefits are claimed. Www h&rblock See Fiscally transparent entity , later. Www h&rblock In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Www h&rblock You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Www h&rblock You must determine whether the owners or beneficiaries of a flow-through entity are U. Www h&rblock S. Www h&rblock or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Www h&rblock You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Www h&rblock If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Www h&rblock See Documentation and Presumption Rules , later. Www h&rblock Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Www h&rblock Foreign partnerships. Www h&rblock    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Www h&rblock If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Www h&rblock However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Www h&rblock If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Www h&rblock Example 1. Www h&rblock A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Www h&rblock S. Www h&rblock citizen. Www h&rblock You make a payment of U. Www h&rblock S. Www h&rblock source interest to the partnership. Www h&rblock It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Www h&rblock S. Www h&rblock citizen. Www h&rblock The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Www h&rblock You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Www h&rblock Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Www h&rblock Report the payment to the U. Www h&rblock S. Www h&rblock citizen on Form 1099-INT. Www h&rblock Example 2. Www h&rblock A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Www h&rblock The second partnership has two partners, both nonresident alien individuals. Www h&rblock You make a payment of U. Www h&rblock S. Www h&rblock source interest to the first partnership. Www h&rblock It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Www h&rblock In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Www h&rblock The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Www h&rblock Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Www h&rblock Example 3. Www h&rblock You make a payment of U. Www h&rblock S. Www h&rblock source dividends to a withholding foreign partnership. Www h&rblock The partnership has two partners, both foreign corporations. Www h&rblock You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Www h&rblock You must treat the partnership as the payee of the dividends. Www h&rblock Foreign simple and grantor trust. Www h&rblock   A trust is foreign unless it meets both of the following tests. Www h&rblock A court within the United States is able to exercise primary supervision over the administration of the trust. Www h&rblock One or more U. Www h&rblock S. Www h&rblock persons have the authority to control all substantial decisions of the trust. Www h&rblock   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Www h&rblock A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Www h&rblock   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Www h&rblock The payees of a payment made to a foreign grantor trust are the owners of the trust. Www h&rblock However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Www h&rblock If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Www h&rblock Example. Www h&rblock A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Www h&rblock S. Www h&rblock citizen. Www h&rblock You make a payment of interest to the foreign trust. Www h&rblock It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Www h&rblock S. Www h&rblock citizen. Www h&rblock The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Www h&rblock You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Www h&rblock Report the payment to the nonresident aliens on Forms 1042-S. Www h&rblock Report the payment to the U. Www h&rblock S. Www h&rblock citizen on Form 1099-INT. Www h&rblock Fiscally transparent entity. Www h&rblock   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Www h&rblock The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Www h&rblock ). Www h&rblock The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Www h&rblock An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Www h&rblock Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Www h&rblock   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Www h&rblock Example. Www h&rblock Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Www h&rblock A has two interest holders, B and C. Www h&rblock B is a corporation organized under the laws of country Y. Www h&rblock C is a corporation organized under the laws of country Z. Www h&rblock Both countries Y and Z have an income tax treaty in force with the United States. Www h&rblock A receives royalty income from U. Www h&rblock S. Www h&rblock sources that is not effectively connected with the conduct of a trade or business in the United States. Www h&rblock For U. Www h&rblock S. Www h&rblock income tax purposes, A is treated as a partnership. Www h&rblock Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Www h&rblock The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Www h&rblock Accordingly, A is fiscally transparent in its jurisdiction, country X. Www h&rblock B and C are not fiscally transparent under the laws of their respective countries of incorporation. Www h&rblock Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Www h&rblock Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Www h&rblock S. Www h&rblock source royalty income for purposes of the U. Www h&rblock S. Www h&rblock -Y income tax treaty. Www h&rblock Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Www h&rblock Therefore, A is not treated as fiscally transparent under the laws of country Z. Www h&rblock Accordingly, C is not treated as deriving its share of the U. Www h&rblock S. Www h&rblock source royalty income for purposes of the U. Www h&rblock S. Www h&rblock -Z income tax treaty. Www h&rblock Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Www h&rblock This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Www h&rblock You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Www h&rblock An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Www h&rblock A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Www h&rblock In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Www h&rblock You must determine whether the customers or account holders of a foreign intermediary are U. Www h&rblock S. Www h&rblock or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Www h&rblock You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Www h&rblock If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Www h&rblock See Documentation and Presumption Rules , later. Www h&rblock Nonqualified intermediary. Www h&rblock   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Www h&rblock The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Www h&rblock Example. Www h&rblock You make a payment of interest to a foreign bank that is a nonqualified intermediary. Www h&rblock The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Www h&rblock S. Www h&rblock person for whom the bank is collecting the payments. Www h&rblock The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Www h&rblock The account holders are the payees of the interest payment. Www h&rblock You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Www h&rblock S. Www h&rblock person on Form 1099-INT. Www h&rblock Qualified intermediary. Www h&rblock   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Www h&rblock S. Www h&rblock intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Www h&rblock You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Www h&rblock In this situation, the QI is required to withhold the tax. Www h&rblock You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Www h&rblock   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Www h&rblock If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Www h&rblock S. Www h&rblock person. Www h&rblock Branches of financial institutions. Www h&rblock   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Www h&rblock The countries with approved KYC rules are listed on IRS. Www h&rblock gov. Www h&rblock QI withholding agreement. Www h&rblock   Foreign financial institutions and foreign branches of U. Www h&rblock S. Www h&rblock financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Www h&rblock   A QI is entitled to certain simplified withholding and reporting rules. Www h&rblock In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Www h&rblock   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Www h&rblock These forms, and the procedures required to obtain a QI withholding agreement are available at www. Www h&rblock irs. Www h&rblock gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Www h&rblock Documentation. Www h&rblock   A QI is not required to forward documentation obtained from foreign account holders to the U. Www h&rblock S. Www h&rblock withholding agent from whom the QI receives a payment of U. Www h&rblock S. Www h&rblock source income. Www h&rblock The QI maintains such documentation at its location and provides the U. Www h&rblock S. Www h&rblock withholding agent with withholding rate pools. Www h&rblock A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Www h&rblock   A QI is required to provide the U. Www h&rblock S. Www h&rblock withholding agent with information regarding U. Www h&rblock S. Www h&rblock persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Www h&rblock   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Www h&rblock This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Www h&rblock Form 1042-S reporting. Www h&rblock   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Www h&rblock Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Www h&rblock Collective refund procedures. Www h&rblock   A QI may seek a refund on behalf of its direct account holders. Www h&rblock The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Www h&rblock U. Www h&rblock S. Www h&rblock branches of foreign banks and foreign insurance companies. Www h&rblock   Special rules apply to a U. Www h&rblock S. Www h&rblock branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Www h&rblock If you agree to treat the branch as a U. Www h&rblock S. Www h&rblock person, you may treat the branch as a U. Www h&rblock S. Www h&rblock payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Www h&rblock S. Www h&rblock branch on which the agreement is evidenced. Www h&rblock If you treat the branch as a U. Www h&rblock S. Www h&rblock payee, you are not required to withhold. Www h&rblock Even though you agree to treat the branch as a U. Www h&rblock S. Www h&rblock person, you must report the payment on Form 1042-S. Www h&rblock   A financial institution organized in a U. Www h&rblock S. Www h&rblock possession is treated as a U. Www h&rblock S. Www h&rblock branch. Www h&rblock The special rules discussed in this section apply to a possessions financial institution. Www h&rblock   If you are paying a U. Www h&rblock S. Www h&rblock branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Www h&rblock S. Www h&rblock person for amounts subject to NRA withholding. Www h&rblock Consequently, amounts not subject to NRA withholding that are paid to a U. Www h&rblock S. Www h&rblock branch are not subject to Form 1099 reporting or backup withholding. Www h&rblock   Alternatively, a U. Www h&rblock S. Www h&rblock branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Www h&rblock In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Www h&rblock See Nonqualified Intermediaries under  Documentation, later. Www h&rblock   If the U. Www h&rblock S. Www h&rblock branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Www h&rblock Withholding foreign partnership and foreign trust. Www h&rblock   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Www h&rblock A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Www h&rblock   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Www h&rblock A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Www h&rblock You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Www h&rblock WP and WT withholding agreements. Www h&rblock   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Www h&rblock Also see the following items. Www h&rblock Revenue Procedure 2004-21. Www h&rblock Revenue Procedure 2005-77. Www h&rblock Employer identification number (EIN). Www h&rblock   A completed Form SS-4 must be submitted with the application for being a WP or WT. Www h&rblock The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Www h&rblock Documentation. Www h&rblock   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Www h&rblock The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Www h&rblock The Form W-8IMY must contain the WP-EIN or WT-EIN. Www h&rblock Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Www h&rblock A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Www h&rblock S. Www h&rblock person. Www h&rblock It also includes a foreign branch of a U. Www h&rblock S. Www h&rblock financial institution if the foreign branch is a qualified intermediary. Www h&rblock In most cases, the U. Www h&rblock S. Www h&rblock branch of a foreign corporation or partnership is treated as a foreign person. Www h&rblock Nonresident alien. Www h&rblock   A nonresident alien is an individual who is not a U. Www h&rblock S. Www h&rblock citizen or a resident alien. Www h&rblock A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Www h&rblock Married to U. Www h&rblock S. Www h&rblock citizen or resident alien. Www h&rblock   Nonresident alien individuals married to U. Www h&rblock S. Www h&rblock citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Www h&rblock However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Www h&rblock Wages paid to these individuals are subject to graduated withholding. Www h&rblock See Wages Paid to Employees—Graduated Withholding . Www h&rblock Resident alien. Www h&rblock   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Www h&rblock Green card test. Www h&rblock An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Www h&rblock This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Www h&rblock Substantial presence test. Www h&rblock An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Www h&rblock Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Www h&rblock   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Www h&rblock This exception is for a limited period of time. Www h&rblock   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Www h&rblock Note. Www h&rblock   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Www h&rblock For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Www h&rblock Resident of a U. Www h&rblock S. Www h&rblock possession. Www h&rblock   A bona fide resident of Puerto Rico, the U. Www h&rblock S. Www h&rblock Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Www h&rblock S. Www h&rblock citizen or a U. Www h&rblock S. Www h&rblock national is treated as a nonresident alien for the withholding rules explained here. Www h&rblock A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Www h&rblock   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Www h&rblock S. Www h&rblock Possessions. Www h&rblock Foreign corporations. Www h&rblock   A foreign corporation is one that does not fit the definition of a domestic corporation. Www h&rblock A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Www h&rblock Guam or Northern Mariana Islands corporations. Www h&rblock   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Www h&rblock Note. Www h&rblock   The provisions discussed below under U. Www h&rblock S. Www h&rblock Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Www h&rblock U. Www h&rblock S. Www h&rblock Virgin Islands and American Samoa corporations. Www h&rblock   A corporation created or organized in, or under the laws of, the U. Www h&rblock S. Www h&rblock Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Www h&rblock S. Www h&rblock Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Www h&rblock S. Www h&rblock Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Www h&rblock Foreign private foundations. Www h&rblock   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Www h&rblock Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Www h&rblock Other foreign organizations, associations, and charitable institutions. Www h&rblock   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Www h&rblock In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Www h&rblock   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Www h&rblock   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Www h&rblock U. Www h&rblock S. Www h&rblock branches of foreign persons. Www h&rblock   In most cases, a payment to a U. Www h&rblock S. Www h&rblock branch of a foreign person is a payment made to the foreign person. Www h&rblock However, you may treat payments to U. Www h&rblock S. Www h&rblock branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Www h&rblock S. Www h&rblock regulatory supervision as payments made to a U. Www h&rblock S. Www h&rblock person, if you and the U. Www h&rblock S. Www h&rblock branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Www h&rblock For this purpose, a financial institution organized under the laws of a U. Www h&rblock S. Www h&rblock possession is treated as a U. Www h&rblock S. Www h&rblock branch. Www h&rblock Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Www h&rblock The payee is a U. Www h&rblock S. Www h&rblock person. Www h&rblock The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Www h&rblock In most cases, you must get the documentation before you make the payment. Www h&rblock The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Www h&rblock See Standards of Knowledge , later. Www h&rblock If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Www h&rblock For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Www h&rblock The specific types of documentation are discussed in this section. Www h&rblock However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Www h&rblock As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Www h&rblock Section 1446 withholding. Www h&rblock   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Www h&rblock In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Www h&rblock This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Www h&rblock Joint owners. Www h&rblock    If you make a payment to joint owners, you need to get documentation from each owner. Www h&rblock Form W-9. Www h&rblock   In most cases, you can treat the payee as a U. Www h&rblock S. Www h&rblock person if the payee gives you a Form W-9. Www h&rblock The Form W-9 can be used only by a U. Www h&rblock S. Www h&rblock person and must contain the payee's taxpayer identification number (TIN). Www h&rblock If there is more than one owner, you may treat the total amount as paid to a U. Www h&rblock S. Www h&rblock person if any one of the owners gives you a Form W-9. Www h&rblock See U. Www h&rblock S. Www h&rblock Taxpayer Identification Numbers , later. Www h&rblock U. Www h&rblock S. Www h&rblock persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Www h&rblock Form W-8. Www h&rblock   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Www h&rblock Until further notice, you can rely upon Forms W-8 that contain a P. Www h&rblock O. Www h&rblock box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Www h&rblock S. Www h&rblock person and that a street address is available. Www h&rblock You may rely on Forms W-8 for which there is a U. Www h&rblock S. Www h&rblock mailing address provided you received the form prior to December 31, 2001. Www h&rblock   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Www h&rblock You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Www h&rblock S. Www h&rblock possession. Www h&rblock Other documentation. Www h&rblock   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Www h&rblock The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Www h&rblock These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Www h&rblock Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Www h&rblock Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Www h&rblock   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Www h&rblock   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Www h&rblock For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Www h&rblock Claiming treaty benefits. Www h&rblock   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Www h&rblock S. Www h&rblock TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Www h&rblock   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Www h&rblock   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Www h&rblock See Fiscally transparent entity discussed earlier under Flow-Through Entities. Www h&rblock   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Www h&rblock For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Www h&rblock   The exemptions from, or reduced rates of, U. Www h&rblock S. Www h&rblock tax vary under each treaty. Www h&rblock You must check the provisions of the tax treaty that apply. Www h&rblock Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Www h&rblock   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Www h&rblock You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Www h&rblock Exceptions to TIN requirement. Www h&rblock   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Www h&rblock Income from marketable securities (discussed next). Www h&rblock Unexpected payments to an individual (discussed under U. Www h&rblock S. Www h&rblock Taxpayer Identification Numbers ). Www h&rblock Marketable securities. Www h&rblock   A Form W-8BEN provided to claim treaty benefits does not need a U. Www h&rblock S. Www h&rblock TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Www h&rblock For this purpose, income from a marketable security consists of the following items. Www h&rblock Dividends and interest from stocks and debt obligations that are actively traded. Www h&rblock Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Www h&rblock Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Www h&rblock Income related to loans of any of the above securities. Www h&rblock Offshore accounts. Www h&rblock   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Www h&rblock   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Www h&rblock However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Www h&rblock An offshore account is an account maintained at an office or branch of a U. Www h&rblock S. Www h&rblock or foreign bank or other financial institution at any location outside the United States. Www h&rblock   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Www h&rblock This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Www h&rblock In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Www h&rblock Documentary evidence. Www h&rblock   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Www h&rblock To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Www h&rblock Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Www h&rblock Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Www h&rblock In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Www h&rblock Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Www h&rblock   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Www h&rblock (See Effectively Connected Income , later. Www h&rblock )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Www h&rblock   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Www h&rblock S. Www h&rblock trade or business is subject to withholding under section 1446. Www h&rblock If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Www h&rblock    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Www h&rblock Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Www h&rblock   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Www h&rblock S. Www h&rblock possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Www h&rblock   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Www h&rblock   See Foreign Governments and Certain Other Foreign Organizations , later. Www h&rblock Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Www h&rblock The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Www h&rblock The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Www h&rblock Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Www h&rblock S. Www h&rblock Branches for United States Tax Withholding. Www h&rblock   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Www h&rblock S. Www h&rblock branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Www h&rblock S. Www h&rblock branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Www h&rblock S. Www h&rblock person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Www h&rblock For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Www h&rblock 1446-5. Www h&rblock Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Www h&rblock A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Www h&rblock The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Www h&rblock The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Www h&rblock Responsibilities. Www h&rblock   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Www h&rblock However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Www h&rblock Instead, it provides you with a withholding statement that contains withholding rate pool information. Www h&rblock A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Www h&rblock A qualified intermediary is required to provide you with information regarding U. Www h&rblock S. Www h&rblock persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Www h&rblock S. Www h&rblock person unless it has assumed Form 1099 reporting and backup withholding responsibility. Www h&rblock For the alternative procedure for providing rate pool information for U. Www h&rblock S. Www h&rblock non-exempt persons, see the Form W-8IMY instructions. Www h&rblock   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Www h&rblock   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Www h&rblock Primary responsibility not assumed. Www h&rblock   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Www h&rblock Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Www h&rblock S. Www h&rblock person subject to Form 1099 reporting and/or backup withholding. Www h&rblock The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Www h&rblock Primary NRA withholding responsibility assumed. Www h&rblock   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Www h&rblock S. Www h&rblock person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Www h&rblock The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Www h&rblock Primary NRA and Form 1099 responsibility assumed. Www h&rblock   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Www h&rblock It is not necessary to associate the payment with withholding rate pools. Www h&rblock Example. Www h&rblock You make a payment of dividends to a QI. Www h&rblock It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Www h&rblock S. Www h&rblock individual who provides it with a Form W-9. Www h&rblock Each customer is entitled to 20% of the dividend payment. Www h&rblock The QI does not assume any primary withholding responsibility. Www h&rblock The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Www h&rblock S. Www h&rblock individual. Www h&rblock You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Www h&rblock The part of the payment allocable to the U. Www h&rblock S. Www h&rblock individual (20%) is reportable on Form 1099-DIV. Www h&rblock Smaller partnerships and trusts. Www h&rblock   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Www h&rblock It is a foreign partnership or foreign simple or grantor trust. Www h&rblock It is a direct account holder of the QI. Www h&rblock It does not have any partner, beneficiary, or owner that is a U. Www h&rblock S. Www h&rblock person or a pass- through partner, beneficiary, or owner. Www h&rblock   For information on these rules, see section 4A. Www h&rblock 01 of the QI agreement. Www h&rblock This is found in Appendix 3 of Revenue Procedure 2003-64. Www h&rblock Also see Revenue Procedure 2004-21. Www h&rblock Related partnerships and trusts. Www h&rblock    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Www h&rblock It is a foreign partnership or foreign simple or grantor trust. Www h&rblock It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Www h&rblock For information on these rules, see section 4A. Www h&rblock 02 of the QI agreement. Www h&rblock This is found in Appendix 3 of Revenue Procedure 2003-64. Www h&rblock Also see Revenue Procedure 2005-77. Www h&rblock Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Www h&rblock S. Www h&rblock branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Www h&rblock S. Www h&rblock branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Www h&rblock The NQI, flow-through entity, or U. Www h&rblock S. Www h&rblock branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Www h&rblock A withholding statement must be updated to keep the information accurate prior to each payment. Www h&rblock Withholding statement. Www h&rblock   In most cases, a withholding statement must contain the following information. Www h&rblock The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Www h&rblock The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Www h&rblock The status of the person for whom the documentation has been provided, such as whether the person is a U. Www h&rblock S. Www h&rblock exempt recipient (U. Www h&rblock S. Www h&rblock person exempt from Form 1099 reporting), U. Www h&rblock S. Www h&rblock non-exempt recipient (U. Www h&rblock S. Www h&rblock person subject to Form 1099 reporting), or a foreign person. Www h&rblock For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Www h&rblock S. Www h&rblock branch. Www h&rblock The type of recipient the person is, based on the recipient codes used on Form 1042-S. Www h&rblock Information allocating each payment, by income type, to each payee (including U. Www h&rblock S. Www h&rblock exempt and U. Www h&rblock S. Www h&rblock non-exempt recipients) for whom documentation has been provided. Www h&rblock The rate of withholding that applies to each foreign person to whom a payment is allocated. Www h&rblock A foreign payee's country of residence. Www h&rblock If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Www h&rblock ). Www h&rblock In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Www h&rblock The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Www h&rblock S. Www h&rblock branch from which the payee will directly receive a payment. Www h&rblock Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Www h&rblock Alternative procedure. Www h&rblock   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Www h&rblock S. Www h&rblock exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Www h&rblock To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Www h&rblock You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Www h&rblock    This alternative procedure cannot be used for payments to U. Www h&rblock S. Www h&rblock non-exempt recipients. Www h&rblock Therefore, an NQI must always provide you with allocation information for all U. Www h&rblock S. Www h&rblock non-exempt recipients prior to a payment being made. Www h&rblock Pooled withholding information. Www h&rblock   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Www h&rblock A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Www h&rblock For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Www h&rblock The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Www h&rblock Failure to provide allocation information. Www h&rblock   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Www h&rblock You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Www h&rblock An NQI is deemed to have f