A withholding agent is generally required to report amounts paid to foreign persons that are subject to non-resident alien withholding. Payments of U.S.-source “fixed and determinable annual or periodic” (“FDAP”) income—including interest, dividends, and numerous other types of income—that are made to foreign persons are subject to U.S. withholding tax at a 30-percent rate, unless the withholding agent can establish that the beneficial owner of the payment is eligible for an exemption from withholding or a reduced rate of withholding under an income tax treaty.
Notably, reporting is required on such payments even if no amount is withheld from the payment—e.g., because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee.
Who is a Withholding Agent?
A withholding agent is any person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. The term “withholding agent” also includes a qualified intermediary (QI), a nonqualified intermediary (NQI), a withholding foreign partnership (WP), a withholding foreign trust (WT), a flow-through entity, a U.S. branch that is treated as a U.S. person, a territory FI, a nominee under section 1446, and an authorized agent.
Withholding Agent Liability
A withholding agent has personal liability for any tax required to be withheld. That liability is independent of the tax liability of the foreign person to whom the payment is made. Thus, if a withholding agent fails to withhold where required and the foreign payee fails to satisfy their U.S. tax liability, then both the withholding agent and the foreign person may be held liable for the tax, as well as any applicable penalties and interest.
Effectively Connected Income
Effectively Connected Income is defined as income that is effectively connected with the conduct of a trade or business in the United States. See our post on effectively connected income for more detail on the categories of income that fall within its scope. Foreign persons are subject to tax at graduated rates on effectively connected income.
Effectively connected income is generally not subject to NRA withholding, although it may be subject to reporting requirements. Partnerships, however, are required to withhold on effectively connected income that is allocated to foreign partners.
Amounts generally subject to reporting are amounts from sources within the United States that constitute (a) FDAP income (including deposit interest); (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. A payment is also subject to reporting if withholding is required under chapter 4.
Examples of common reportable payments include:
- Interest on deposits paid to certain nonresident aliens.
- Interest on deposits subject to chapter 4 withholding.
- Corporate distributions.
- Compensation for independent personal services performed in the United States.
- Compensation for dependent personal services performed in the United States (but only if the beneficial owner is claiming treaty benefits).
- Pension distributions and other deferred income.
- Most gambling winnings.
The withholding requirements applicable to FDAP income are based on self-certification rules, under which exemptions and reductions in withholding tax are generally available only if recipients certify their status to the payor. Under this system, foreign persons receiving U.S.-source income are asked to certify to payors certain identifying information.
Under the withholding tax rules applicable to payments to foreign persons, if a foreign payee fails to provide the required identifying information, withholding exemptions and tax-treaty-based reductions in tax rate are not available, and payors of U.S.-source amounts generally are required to withhold tax at a 30-percent rate.
The United States is a signatory to more than 60 income tax treaties. While a non-U.S. person is generally subject to withholding on U.S.-source FDAP income, such income may be subject to a reduced rate of tax, or entirely exempt from tax, under the Code or a bilateral income tax treaty.
Our Freeman Law interactive tax treaty map provides a link to tax treaty materials for each U.S. treaty partner:
Need help with tax issues? Contact us as soon as possible to discuss your rights and the ways we can assist in your defense. We handle all types of cases, including complex international & offshore tax compliance. Schedule a consultation or call (214) 984-3000 to discuss your international tax concerns or questions.