Form W-8

Understanding the Different Types of W-8 Forms: Why Do They Matter?

Foreign individuals and entities that generate income from U.S. sources must submit the appropriate Form W-8 in order to comply with U.S. regulatory requirements. In general, W-8 forms are used by non-U.S. individuals and entities to certify their foreign status and to ensure that withholding tax is applied at the correct U.S. withholding rate.

There are five different types of W-8 forms, each intended for a different purpose and/or a different type of entity: individuals generally use Form W-8BEN or Form W-8ECI, while entities generally use Form W-8BEN-E or Form W-8ECI. Tax-exempt organizations, such as foreign governments or nonprofit organizations, use Form W-8EXP, and intermediaries use Form W-8IMY.

This article explains how to determine which W-8 form is required, and how to make use of the benefits available under each form

What Is Income Effectively Connected with a U.S. Trade or Business?

According to the Internal Revenue Service (IRS), income that is effectively connected with a U.S. business (Effectively Connected Income – ECI) is taxed at the rates applicable to U.S. citizens and residents. By contrast, fixed, determinable, annual, or periodical income (Fixed, Determinable, Annual, or Periodical – FDAP) is generally subject to withholding tax at a fixed rate of 30%. This rate may be reduced where a relevant tax treaty applies. The tax treaty between the U.S. and Israel, for example, includes several provisions that may reduce the standard 30% withholding tax rate for Israeli residents who meet the treaty conditions.

Choosing the Correct W-8 Form

As noted above, there are five different types of W-8 forms, which apply to different types of taxpayers. In order to determine which form should be completed, it is important to understand the characteristics of each of these forms.

• Form W-8BEN Used by any individual who generates income from U.S. sources and is a resident of a foreign country. Typically, a person who generates passive income from investments in the U.S. will use Form W-8BEN. This form, like all W-8 forms, must be submitted to the withholding agent or payer. Through the form, the taxpayer effectively certifies their foreign status for U.S. tax purposes, making it possible to claim certain tax exemptions or reductions under the relevant tax treaty.

• Form W-8BEN-E Serves a similar purpose, but is intended for foreign entities, as opposed to individuals, including corporations, partnerships, trusts, and other non-U.S. business structures. Similar to Form W-8BEN, it is used to certify foreign status and claim treaty benefits, where applicable, with respect to certain U.S.-source income. However, it is not merely a different version of Form W-8BEN, as Form W-8BEN-E also includes additional classifications and certifications that apply specifically to entities, including under the U.S. Foreign Account Tax Compliance Act (FATCA) regime. Foreign entities that receive income effectively connected with a U.S. business may submit Form W-8ECI. This form certifies that the income is ECI and is therefore not subject to the default 30% withholding tax rate. Instead, the income is taxed on a net basis at the applicable U.S. tax rates. For corporations, this generally means a federal corporate tax rate of 21%, in addition to state taxes that may apply depending on the tax rates in the specific state. Foreign corporations may also be subject to branch profits tax, which is generally imposed at a rate of 30%, but may be lower under an applicable tax treaty. For example, the tax treaty between the U.S. and Israel reduces, in appropriate cases, the withholding tax rate on branch profits to 12.5%.

• Form W-8EXP Applies to governments, international organizations, foreign central banks, and foreign tax-exempt organizations. These entities use the form to claim an exemption from the standard U.S. 30% withholding tax on certain types of income.

• Form W-8IMY Used by intermediaries, including flow-through entities, withholding agents, and certain partnerships or trusts. This form informs the withholding agent that the person submitting the form is not the beneficial owner of the relevant income, but is acting only as an intermediary or conduit for the transfer of funds. Importantly, the beneficial owner of that income will also be required to submit the appropriate form, usually Form W-8BEN or Form W-8BEN-E.

When choosing the appropriate form, the following steps may help guide the process:

• Identify whether you are acting as an individual or as an entity.
• Check whether your income is effectively connected with a U.S. trade or business.
• Check whether a relevant tax treaty exists.
• Choose the appropriate Form W-8.
• Submit it to your withholding agent before payment is made.

The Effect of Tax Treaties on W-8 Forms and Withholding Tax

The U.S. has entered into tax treaties with many countries, which reduce withholding tax rates or provide exemptions. The purpose of tax treaties is to promote cooperation between the two countries and create a favorable tax environment for commercial activity in one country by a resident of the other. The list of tax treaties signed by the U.S. appears here.

Israeli residents operating in the U.S. may also claim benefits under the tax treaty between the U.S. and Israel. For example, the withholding tax rate on royalties under the treaty between the U.S. and Israel may be reduced to 10% or 15%, depending on the type of royalty.

As a general rule, a U.S. withholding agent is required to withhold tax at a rate of 30% from certain types of U.S.-source income paid to foreign individuals or entities, unless a W-8 form certifies eligibility for a reduced rate or exemption. The appropriate W-8 form must be submitted to the withholding agent so that the correct withholding rate can be applied.

TaxLink – Our Story

To avoid paying unnecessary tax where reliefs or exemptions are available, it is advisable to consult a professional. Our team specializes in U.S. taxation and can assist with the submission of the various types of W-8 forms.

TaxLink is a CPA firm with a team that specializes in both U.S. taxation and Israeli taxation. Our practical experience working with the Internal Revenue Service (IRS) and the Israel Tax Authority, together with an in-depth understanding of the interface between the two systems, allows us to build a tailored end-to-end solution for your specific case.

Most clients who contact us do so because they are required to file reports in the U.S. – whether Form 1040, FATCA reports, Foreign Bank Account Report (FBAR) filings, or reports relating to investments in U.S. real estate. We manage the process as one coordinated cross-border matter, with the aim of reducing errors, avoiding duplication, and helping to reduce double taxation, all within the framework of U.S. law, Israeli law, and the tax treaty between the U.S. and Israel.

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