Do you or your clients take advantage of reduced withholding rates by collecting Form W-8BEN-E from foreign vendors? If so, you should be aware of proposed changes that would require taxpayers to identify the limitation of benefits clause they meet in order to qualify for the benefit.
Before we discuss proposed changes to Form W-8BEN-E, let’s start by discussing when and why a company would benefit from it. The United States generally imposes a 30 percent withholding tax rate on most U.S. sourced payments to non-resident recipients. Foreign recipients can use a network of over 60 income tax treaties negotiated by the U.S. and its trading partners to reduce or eliminate this withholding in certain cases. To potentially use a reduced withholding rate from a treaty, U.S. withholding agents are generally required to obtain Form W-8 (W-8BEN-E, W-BEN, W-8IMY, etc.) from their foreign payees.
One important article included in almost every U.S. treaty is the limitation on benefits, which lays out qualifying criteria. When filling out the existing Form W-8BEN-E, foreign entities navigate through a variety of clauses or “tests” to confirm they met the criteria. In the new draft version of the form, this section has been expanded, requiring taxpayers to identify which specific limitation of benefits clause they meet.
For non-public companies, the limitation of benefits articles can be complicated, making it hard to determine which clause should be used to qualify for the tax treaty benefits. While the treaty should be read closely to determine which clauses are included, typically, most private companies will qualify by relying on the derivative benefits, ownership and base erosion, or the active trade or business tests.
If the final version of Form W-8BEN-E reflects changes proposed in the draft, foreign recipients who prepare and review these forms should expect the process to take additional time. Also note that the IRS has not indicated how long certifications on the previous version of the form will be valid if the draft is finalized — so taxpayers should pay close attention to ensure all required documentation is updated timely.