Yes, you must obtain documentation from a foreign person to support its claim of foreign status or treaty eligibility. The documentation required includes a Form W-8 or Form 8233, which certifies the foreign person's non-U.S. status and, if applicable, their eligibility for treaty benefits.
Legal Reasoning and Rationale:
- Requirement to Withhold on Payments to Foreign Persons:
- According to Treasury Regulation § 1.1441-1(b)(1), a withholding agent must withhold 30% of any payment of an amount subject to withholding made to a foreign person unless it can reliably associate the payment with documentation that allows it to treat the payment as made to a U.S. person or a foreign person entitled to a reduced rate of withholding.
- Documentation for Foreign Status or Treaty Benefits:
- Treasury Regulation § 1.1441-1(b)(2)(i) specifies that the determination of the U.S. or foreign status of a payee and its other relevant characteristics is made on the basis of a withholding certificate, which is a Form W-8 or Form 8233.
- The IRS FAQ (Question 22) confirms that to reduce the amount required to be withheld on a payment of U.S. sourced FDAP income to a foreign person or to exempt such a payment from withholding tax, the withholding agent must have documentation from the foreign vendor to certify its non-U.S. status and, if applicable, its eligibility for the treaty benefits claimed.
- Forms Used for Certification:
- Form W-8BEN (for individuals) and Form W-8BEN-E (for entities) are used to certify foreign status and claim treaty benefits.
- Form W-8ECI is used to certify that the income is effectively connected with the conduct of a trade or business in the United States.
- Form 8233 is used by non-resident alien individuals to claim exemption from withholding on compensation for independent (and certain dependent) personal services performed in the United States.
- Validity and Reliance on Documentation:
- Treasury Regulation § 1.1441-1(b)(2)(vii) outlines the rules for reliably associating a payment with a withholding certificate or other appropriate documentation. The documentation must be valid and the withholding agent must not have actual knowledge or reason to know that the information provided is incorrect.
- The IRS FAQ (Question 27) emphasizes that in order to rely on the documentation, it must meet the requirements of Treasury Regulation § 1.1441 and be completed in accordance with the applicable form instructions.
- Presumption Rules:
- If the withholding agent cannot reliably associate a payment with valid documentation, it must apply the presumption rules as per Treasury Regulation § 1.1441-1(b)(3). This means treating the payee as a foreign person and applying the 30% withholding rate unless documentation is provided.
In summary, to support a foreign person's claim of foreign status or treaty eligibility, the withholding agent must obtain and rely on valid documentation, such as Form W-8 or Form 8233, which certifies the foreign status and eligibility for treaty benefits.
Sources:
§ 1.1441-1. Requirement for the deduction and withholding of tax on payments to foreign persons.
Publication 515 (2024)
Publication 1281 (12/2023)
IRM Part 21. Customer Account Services. Chapter 8. International. Section 2. BMF International Adjustments
IRM Part 3. Submission Processing. Chapter 21. International Returns and Documents Analysis. Section 110. Processing Form 1042 Withholding Returns
Instructions for the Requester of Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY (06/2022)
