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Determining payee and U.S. foreign status under sec. 1441.

The IRS issued final regulations in October 1997 that changed existing rules on withholding on payments to foreign persons under Sec. 1441. These regulations (effective Jan. 1,2000) apply to any person who is a withholding agent. One of the most significant changes was the issuance of new procedures that a withholding agent must follow to avoid liability for failure to withhold the correct amount under Sec. 1441. The regulations specify the documentation types that a withholding agent must rely on for these purposes. The regulations also provide a set of presumptions that apply when there is no or unreliable documentation.

The presumptions' purpose is to give withholding agents guidance on avoiding liability. The complexity of the new rules and the exceptions may somewhat undercut this objective. Although this item in no way attempts to address every issue imbedded within the hundreds of pages of the final regulations, it seeks to give an overview of the documentation required and the presumptions applied in the absence of documentation. More importantly, by providing an overview of the presumptions, this item may assist practitioners who feel trapped in the maze of rules for withholding on payments to foreign persons.

Documentation Under Regs. Sec. 1.1441-1

To determine a payee's status, a withholding agent must rely (absent actual knowledge or reason to know otherwise) on Form W-9, Request for Taxpayer Identification Number and Certification, Form W-8, Certificate of Foreign Status, or Form 8233, Exception From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, that the payee provides. However, if the payee provides no or unreliable documentation, the following rules apply.

No or Unreliable Documentation

When a payee does not provide the appropriate documentation, the withholding agent must rely on the presumptions specified in Regs. Sec. 1.1441-1 (b) (3) to determine beneficial owner status and the payee's status as either a U.S. or foreign person.

Determination of payee status. A withholding agent must apply the presumptions in the following order. First, the agent presumes the payee is an individual, trust or estate, if the payee's name or other indications reasonably suggest such status. Second, if the payee's name or other indications do not reasonably suggest such status, the withholding agent must determine whether the payee is a corporation or other exempt recipient.

A withholding agent presumes a payee is a corporation if the payee meets the "eyeball test" or has on file a corporate resolution or similar document clearly indicating corporate status. (This includes Form 8832, Entity Classification Election, that the entity files to elect classification as an association.) A corporation meets the eyeball test if its name contains an unambiguous expression of corporate status, such as the words "Incorporated," "Inc.," "Corporation," "Corp." or "EC." (but not terms such as "Co." or "Company"). A withholding agent presumes a payee is an exempt recipient if the payee falls within any of the Regs. Sec. 1.6049-4(c)(1) (iii) (A)-(Q) definitions for an exempt recipient (e.g., an international organization, the U.S. or a foreign government, a foreign central issue bank, a securities or commodities dealer, a financial institution or a broker). Finally, if the payee is not a corporation or other exempt recipient, the agent presumes the payee is a partnership.

Determination of U.S. or foreign status. If the withholding agent presumes the payee is an individual, trust or estate, in most circumstances the payee will be considered to be a U.S. person. One exception is when the payment consists of a taxable scholarship or grant that is not compensation for services. In this case, if the payee has a U.S. nonimmigrant visa, the agent presumes he is a foreign person. Another exception is for payments made to an offshore account. If a payment to an offshore account is normally subject to tax under Sec. 1441, 1442 or 1443, the agent presumes the payment is made to a foreign person.

If the agent presumes the payee is a corporation or other exempt recipient, the agent considers the payee to be a foreign person if an "indicia of foreign status" exists. An indicia of foreign status exists if." (1) the withholding agent has actual knowledge that the payee's employer identification number begins with the number "98"; (2) all communications between the withholding agent and the payee are mailed to an address in a foreign country; (3) the payee is on the "per se" list of foreign corporations; or (4) the payment is made outside the U.S. In all other circumstances, the agent presumes the corporation or other exempt recipient is a U.S. person.

The indicia status criteria mentioned above also apply to foreign partnerships. Payments to a foreign partnership are treated as made directly to each partner. Unless the withholding agent receives appropriate documentation from each partner, the withholding agent must apply the presumptions to each partner to determine proper treatment of the payments. However, if the partnership fails the indicia test, the withholding agent presumes it is a U.S. partnership. In that case, the withholding agent may treat the payment as made to the partnership and not withhold under Sec. 1441.

Ninety-day grace period for claims of treaty benefits. The presumptions outlined above cannot be used when a payee claims a reduced withholding rate under a treaty; in that case, the withholding agent must rely on appropriate documentation. However, the withholding agent may rely on a faxed copy of Form W-8 to withhold at a reduced rate for 90 days. If the withholding agent then receives a reliable original Form W-8 supporting such a claim within 90 days, the agent makes no adjustment. If the withholding agent does not receive an original Form W-8 or receives an unreliable Form W-8, the agent must make an adjustment to the account. If the withholding agent presumes the payee is a foreign person, the agent must adjust to correct the underwithheld amount credited during the grace period. If the withholding agent presumes the payee is a U.S. person, the agent must backup withhold 31% on amounts credited to the account after the 90-day period.


The rules above provide clues for withholding agents to follow when there is either no or unreliable documentation. However, to exit successfully from the maze of the new withholding rules and avoid penalties, close examination of Regs. Secs. 1.1441-1 through -9 may be required.
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Title Annotation:IRC s. 1441
Author:Hemelt, Jim
Publication:The Tax Adviser
Date:Jul 1, 1998
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