When requesting a Form W-8BEN-E from a foreign entity, most of the form does not need to be completed when the payments are for services performed outside the U.S.
U.S. businesses that make payments to foreign contractors for services may be familiar with Form W-8BEN (Rev. February 2006) (the “Old” W-8BEN). In general, the Old W-8BEN allows a foreign individual or entity to certify its foreign status. A U.S. payor with a valid W-8BEN in hand generally does not need to withhold or report such payments on a Form 1099 if the payments are for services performed outside the U.S. See our prior blog post (Form 1099 for Payments to Foreign Contractors for Services).
This year the IRS released an updated version of Form W-8BEN (Rev. February 2014) (the “New” W-8BEN), and also released a new form, Form W-8BEN-E (the “BEN-E”). The forms were updated in order to address the requirements of the Foreign Account Tax Compliance Act (“FATCA”).
In the past, the Old W-8BEN could be used by foreign individuals or foreign entities receiving payments from U.S. persons. Now, foreign individuals use the New W-8BEN (still one page long and relatively simple) and foreign entities must use the BEN-E.
The BEN-E form is 8 pages long and contains 30 parts. Line 5 of the BEN-E contains 31 different “FATCA Statuses” (also known as “Chapter 4 Statuses”).
Characterizing an entity’s FATCA Status can be challenging. Fortunately, not all foreign entities need to complete Line 5 of the BEN-E. The instructions to Line 5 of the form provide in part:
[Y]ou are only required to provide a chapter 4 status if you are the payee of a withholdable payment or are documenting the status of an account you hold with an FFI requesting this form.
Thus, if there is no withholdable payment and you are not documenting the status of an account you hold with a foreign financial institution (“FFI”), you do not need to complete Line 5. This blog post focuses on withholdable payments and does not address accounts held with FFIs.
Code §1473(1)(A) provides that the term “withholdable payment” means:
(i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and
(ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.
See also Treas. Reg. §1.1473-1(a)(1).
Under both the statute and the regulations, in order for a payment to be a withholdable payment, it must be “from sources within the United States” or gross proceeds from the sales of certain assets. Payments for services are not considered gross proceeds from the sales of assets.
As described in our earlier post, services performed outside the U.S. are not considered U.S. source income. Code §861(a)(3) and Treas. Reg. §1.861-4. See also Treas. Reg. §1.1473-1(a)(2)(i)(B). Consequently, payments for services performed outside the United States should not be “withholdable payments.”
The FATCA regulations further provide that services payments, other than certain financial services payments, are not “withholdable payments.” Treas. Reg. §1.1473-1(a)(4)(iii). However, it is important to note that U.S. source payments for services (financial or nonfinancial) may be subject to withholding under Chapters 3 or 61 of the Internal Revenue Code.
How to Fill Out BEN-E for Foreign-Performed Services
When payments are being made for foreign-performed services, the payments are not “withholdable payments” and the foreign entity does not need to complete Line 5 of the BEN-E. Further, the foreign entity does not need to complete Parts 2 through 28 or Part 30 of the form. Instead, in this circumstance the foreign entity must only complete the following:
- Part I, Lines 1-4, 6 & 7 (perhaps also Line 9b), and
- Part XXIX (an authorized individual signs and dates, and checks the certification box).
By signing the BEN-E, the authorized individual of the entity is certifying that (i) the entity is the beneficial owner of the income (ii) the entity is not a U.S. person, and (iii) the income is not effectively connected income (“ECI”).