If your U.S. based company is currently—or is considering—conducting business internationally, it is important to understand the tax requirements that payments made to foreign corporations, partnerships, and other entities initiate. Most payments received from a U.S. source by a foreign party are subject to 30% tax rate of withholding while others may have tax treaty benefits that eliminate or mitigate the taxes. To help your business—and the IRS—determine the status of foreign entities receiving U.S. source income, these businesses are required to provide form W-8BEN-E. Let’s take a look at what this form is, how it is used, and best practices for acquiring information for tax withholding purposes.
What is a W-8BEN-E form?
The IRS keeps a close watch on business being conducted with any international organization to ensure that federal income taxes are being accurately collected. Form W-8BEN-E, or Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), is a United States tax form that documents information relevant to withholding by U.S. companies who conduct business with foreign entities. The follow are forms of payment made to foreign entities that are subject to withholding:
- Compensation for, or in expectation of, services performed
- Substitute payments in a securities lending transaction
- Other fixed or determinable annual or periodical gains, profits, or income.
What is a W-8BEN-E form used for?
The form is used to document the chapter 3 and chapter 4 status of foreign entities who receive income from U.S. sources. Generally speaking, U.S. source income is subject to 30% withholding according to U.S. tax standards. Foreign entities must provide a form W-8BEN-E to the withholding agent who represents the U.S. source to document their status, identifying to what withholding they are subject.
W-8BEN-E is very similar to other payee IRS forms like a W-4 or W-9. All of these forms are collected prior to the first payment made and identify tax-related information for a hiring business so that the withholding agent knows how to manage payments to the payee, clearly identifying if an exemption, credit, or any additional conditions apply.
The main differences between a W-8BEN and W-8BEN-E forms
Unlike either the form W-4 or W-9 which are provided by U.S. resident employees or independent contractors, form W-8BEN-E is specifically for foreign entities. Further, while form W-8BEN-E is for foreign entities, W-8BEN is specifically for individuals.
For example, if your U.S. based company establishes a foreign partnership with a marketing firm, they would provide your withholding agent form W-8BEN-E. However, if your company hires a foreign independent contractor to write blog content, they would provide your withholding agent with IRS form W-8BEN.
In all, there are five different W-8 forms. In addition to the W-8BEN and W-8BEN-E there are forms W-8ECI, W-8EXP, and W-8IMY. Each has a unique use-case for foreign persons or entities who receive income from a U.S. source.
Who has to fill out a W-8BEN-E?
Any non-US, or foreign, company or entity that conducts business with a US-based company or entity must file a W-8BEN-E with a payer’s withholding agent before the first payment is ever received or collected. This form is not sent to the IRS, rather it is used by the withholding agent for purposes of payment and withholding regulations.
How long is a W-8BEN-E valid for?
According to the form instructions, it is valid for “a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect.”
For example, if you have initiated a contract for a foreign entity and receive the form W-8BEN-E on September 1st, 2021, that form is valid until December 31st, 2024. However, if any information relevant to form W-8BEN-E changes during that time frame, the form is considered invalid and must be resubmitted.
What happens if you don't fill out a W-8BEN-E form?
Failure to provide an accurate form W-8BEN-E to a withholding agent may result in a 30% tax rate on gross income being applied even if the foreign entity has a claim of tax treaty benefits.
How to fill out a W-8BEN-E?
Completing form W-8BEN-E requires knowledge of business and tax identifying information. It is a longer form, separated into thirty parts. Although some parts must be completed by all entities, many are specific to Chapter 3 and Chapter 4 status entities. For complete, detailed instructions, refer to the IRS instructions for form W-8BEN-E.
Part I: Identification of Beneficial Owner
Here's how to fill out Part 1 of form W-8BEN-E.
Line 1: Name of organization
Enter the full legal name of the owner or legal name of the company conducting business.
Line 2: Country of incorporation
For corporations, the country where they are incorporated is entered here. For all other entities, the country where the business is governed is entered.
Line 3: Name of a disregarded entity
A “disregarded entity” is a single business owner who is not separate from the owner for tax purposes. Single-member LLCs are an example of a disregarded entity.
Line 4: Select the Chapter 3 status that applies to your entity
Options for Chapter 3 status include: simple trust, corporation, partnership, etc. Only one box should be selected.
Line 5: Select the Chapter 4 status that applies to your entity
This refers to a Foreign Account Tax Compliance Act (FATCA status). The box selected in Line 5 initiates which other parts (IV-XXIX) must be completed to verify the selected status. Categories for Chapter 4 status include: participating Foreign Financial Institution (FFI), 501(c) (nonprofit), direct reporting National Federation of Federal Employees (NFFE), active NFFE, etc. Only one box should be selected.
Line 6: Permanent residence address
This is the permanent address where the organization identified in Line 1 has residency for tax purposes. A PO Box number would not be correct. Be sure to include a postal code where appropriate.
Line 7: Mailing address
If there is a mailing address different from Line 6, enter it here.
Line 8: U.S. Tax Identification Information (TIN) or Employer Identification Number (EIN)
If you do not have an EIN, acquiring it is simplified through IRS.gov/EIN. Not all foreign entities are required to have an EIN. Refer to IRS instructions for specifics.
Line 9a and 9b: Foreign tax identification number
These numbers include the Global Intermediary Identifying Number (GIIN) and foreign TIN.
This section is only completed if the reporting entity is a disregarded entity or branch of a FFI receiving withholdable payments. A Chapter 4 Status (Line 11), Address (Line 12), and GIIN (Line 13) are required.
Complete Part III if the country of residence has an income tax treaty claim with the U.S. government to determine what benefits provisions may apply. These include: foreign tax-exempt organizations, publicly traded corporations and subsidiaries, tax-exempt pension, etc.
Part IV-Part XXIX
These parts are initiated by the box selected Part I, Line 5. If one of these parts are required, it is indicated in the description of the box selected in Line 5. If the Line 5 description does not indicate one of these parts, they can be ignored.
Part XXX - Certification
This section is the certification that the information reported in form W-8BEN-E is accurate. It should be signed by an authorized representative or officer of the beneficial owner.
Best Practices for collecting W-8BEN-E forms
It goes without saying that collecting this information—and ensuring its accuracy—is vital to remaining compliant for purposes of U.S. income taxes. Here are some best practices for companies who wish to hire foreign entities:
Collect digital forms instead of paper forms
Paper forms are problematic for a few reasons. First, manually completed forms can be difficult to read, resulting in missed or incomplete data. Further, paper forms are a liability because they can be lost, misplaced, or damaged.
Using digital forms is the best way to go to ensure that the information is secure and legible. Further, digital forms can be stored and referenced without having to dig through hardcopy files. Anything that helps your finance team have a successful tax season is a benefit to all.
Leverage automation tools
Having the ability to acquire digital documents through automation means processes are completed faster and more efficiently. Hiring companies who request tax information can use automation tools as leverage for long-term vendor engagement. Vendors are able to provide their tax-sensitive information in a secure environment, not passing documents via email attachments. Hiring companies are able to process digital documents and store information so that income tax forms are provided in a timely manner.
Establish data validation for digital forms to ensure fields aren't missed
Don’t let important information go undocumented. The best forms are those that are completed accurately during the on-boarding process. Using digital forms means that incomplete information can flag error messages, catching missed data right when it happens, rather than discovering it when it’s too late.
Moving your company into a global business landscape is an exciting time! Set yourself up for success now by introducing best practices for all tax documentation—like knowing how to request and complete form W-BEN-E—so that you don’t run into hurdles down the road.