Just over three years ago the I.R.S. released a first draft of Form W-8BEN-E. We had blogged how the draft form was unnecessarily complex because the foreign entity had to certify that it was either an “excepted” non-financial foreign entity (“NFFE”) or a “passive” NFFE. There are various types of excepted NFFEs, including an “active” NFFE.
To determine whether a NFFE is active or passive, a complex income statement and balance sheet analysis must be performed. It may even be necessary to wholly or partially consolidate subsidiaries to complete this analysis.
If an entity was an active NFFE, it did not need to report whether it had substantial U.S. owners (“SUSOs”). On the other hand, if an entity was a passive NFFE, it did need to report if it had SUSOs. Many foreign entities would prefer to simply report whether they have SUSOs rather than perform the complex income statement and balance sheet analysis.
The final Form W-8BEN-E, when it was released, changed the language in the section titled “Passive NFFE” (Part XXVI of the form) to eliminate the need to do the complex income statement and balance sheet analysis.
You would think that the section titled “Passive NFFE” would only be for Passive NFFEs. However, this is not the case. The language on Line 40a in Part XXVI of the form now provides:
I certify that the entity identified in Part I is a foreign entity that is not a financial institution (other than an investment entity organized in a possession of the United States) and is not certifying its status as a publicly traded NFFE (or affiliate), excepted territory NFFE, active NFFE, direct reporting NFFE, or sponsored direct reporting NFFE.
Thus, the person signing the form is certifying (i) that the foreign entity is not a financial institution and (ii) that nothing else is being certified. Certifying that you are not certifying is superfluous. In other words, there is only one certification being made: the foreign entity is not a financial institution.
The instructions to the form are consistent with this. The instructions to Line 40a provide in part:
If you are an NFFE that may qualify as an active NFFE (or other NFFE described in another part of this form), you may still check line 40a and disclose your substantial U.S. owners or certify that you have no substantial U.S. owners (see instructions to lines 40b and 40c below).
Therefore, foreign entities that are not financial institutions can avoid any analysis as to whether they are active or passive NFFEs. They just complete Part XXVI of the form and then disclose their SUSOs or certify that they have no SUSOs.
Interestingly, the purpose of including the SUSOs on the form is to notify the I.R.S. when certain foreign entities have SUSOs. However, the Form W-8BEN-E (disclosing the SUSOs) is never sent to the I.R.S. The only time that the I.R.S. would see the W-8BEN-E is if they audit the U.S. payor and request to see a copy of the form. It might make more sense for the I.R.S. to ask the U.S. payors to send a copy of the form to them if the foreign entity lists any SUSOs. The I.R.S. could even go further, by eliminating the active NFFE status and having a copy of the Form W-8BEN-E sent to them for all active and passive NFFEs that have SUSOs.