Withholding Agent

Chapter 3 Withholding Requirements

You are a withholding agent if you are a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount subject to chapter 3 withholding. A withholding agent may be an

941 941 Employer’s QUARTERLY Federal Tax Return

945 945 Annual Return of Withheld Federal Income Tax

1042 1042 Annual Withholding Tax Return for U.S. Source

Income of Foreign Persons

1042-S 1042-S Foreign Person’s U.S. Source Income

Subject to Withholding

1042-T 1042-T Annual Summary and Transmittal of Forms

1042-S

13930

13930 Central Withholding Agreement Application

8233 8233 Exemption From Withholding on

Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

8288 8288 U.S. Withholding Tax Return for Certain

Dispositions by Foreign Persons

8288-A 8288-A Statement of Withholding on Certain

Dispositions by Foreign Persons

8288-B 8288-B Application for Withholding Certificate for

Dispositions by Foreign Persons of U.S. Real Property Interests

8288-C 8288-C Statement of Withholding Under Section

1446(f)(4) on Disposition by Foreign Persons of Partnership Interests

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individual, corporation, partnership, trust, association, nominee (under section 1446), or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment.

Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. In most cases, the U.S. person who pays an amount subject to chapter 3 withholding is the person responsible for withholding. However, other persons may be required to withhold. For example, a payment made by a flow-through entity or nonqualified intermediary (NQI) that knows, or has reason to know, that the full amount of chapter 3 withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. In addition, withholding must be done by any qualified intermediary (QI), withholding foreign partnership (WP), or withholding foreign trust (WT) in accordance with the terms of its withholding agreement, discussed later.

Liability for tax. As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties.

The applicable tax will be collected only once. If the foreign person satisfies its U.S. tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold.

Determination of amount to withhold. You must withhold on the gross amount subject to chapter 3 withholding. You cannot reduce the gross amount by any deductions.

If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. In no case, however, should you withhold more than 30% of the total amount paid. You may elect to hold 30% of the payment in escrow until the earlier of the date that the amount of income from U.S. sources or the taxable amount can be determined or 1 year from the date the amount is placed in escrow, at which time the withholding becomes due, or, to the extent that withholding is not required, the escrowed amount must be paid to the payee.

When to withhold. Withholding is required at the time you make a payment of an amount subject to withholding. A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. A payment is considered made to a person if it is paid for that person’s benefit. For example, a payment made to a creditor of a person in satisfaction of that

person’s debt to the creditor is considered made to the person. A payment is also considered made to a person if it is made to that person’s agent.

A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. However, if a foreign partner’s distributive share of income subject to withholding is not actually distributed, the U.S. partnership must withhold on the foreign partner’s distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is furnished or mailed to the partner or the due date for furnishing that schedule.

Note: If the foreign distributive share of income includes effectively connected income (ECI), see Partner- ship Withholding on ECTI , later.

A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust’s distributable net income consists of an amount subject to withholding. To the extent a U.S. trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary’s allocable share at the time the income is required to be reported on Form 1042-S.

Note: Proposed regulations issued on December 18, 2018 (83 FR 64757) would allow partnerships or trusts that are permitted to withhold in a subsequent year, with respect to a foreign partner’s or beneficiary’s share of income for the prior year, to designate the deposit of the withholding as attributable to the preceding year. In such a case, the partnership or trust will be required to report the associated amount and tax withheld on Forms 1042 and 1042-S for the preceding year. See the Instructions for Form 1042 and the Instructions for Form 1042-S for additional information.

Chapter 4 Withholding Requirements

You are a withholding agent for purposes of chapter 4 if you are a U.S. or foreign person, in whatever capacity you are acting, that has control, receipt, custody, disposal, or payment of a withholdable payment. Similar rules for determining who is a withholding agent as those described in Chapter 3 Withholding Requirements , earlier, also apply for chapter 4. For purposes of chapter 4, a withholding agent includes a participating foreign financial institution (FFI) (including a reporting Model 2 FFI) or registered deemed-compliant FFI to the extent such FFI makes a withholdable payment.

Under chapter 4, a withholding agent that makes a withholdable payment to a payee that is an FFI must withhold 30% on the payment unless the withholding agent is able to treat the FFI as a participating FFI, deemed-com- pliant FFI, or exempt beneficial owner. A withholding agent must also withhold 30% on a withholdable payment made to a payee that is a foreign entity other than an FFI (that is, a nonfinancial foreign entity, or NFFE) that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners) unless the payment is excepted from withholding under the regulations to

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section 1472. A participating FFI is a withholding agent under chapter 4 and is required to withhold on a withholdable payment to the extent required under the FFI agreement, including on a payment made to an account holder that the FFI is required to treat as a recalcitrant account holder. A reporting Model 1 FFI is required to withhold under chapter 4 to the extent required in the applicable intergovernmental agreement (IGA). A registered deemed-compliant FFI (other than a reporting Model 1 FFI) is required to withhold under chapter 4 to the extent required under the conditions applicable to its registered deemed-compliant FFI status. See Regulations section 1.1471-5(f)(1) for a description of the types of registered deemed-compliant FFIs that may have withholding requirements.

Generally, a withholdable payment is a payment of U.S. source fixed or determinable annual or periodical (FDAP) income. Specific exceptions to withholdable payments apply instead of the exemptions from withholding or taxation provided under chapter 3. See Income Subject to With- holding, later, for more information on payments of U.S. source FDAP income that are excepted from the definition of withholdable payment.

If a withholding agent makes a payment subject to both chapter 4 withholding and chapter 3 withholding, the withholding agent must apply the withholding provisions of chapter 4, and need not withhold on the payment under chapter 3 to the extent that it has withheld under chapter 4.

Similar rules for withholding agent liability for tax, determination of amount to withhold, and when to withhold as those described in chapter 3 withholding requirements, earlier, also apply for chapter 4.