Globalization is bringing international commerce to our doorsteps. But doing business with a foreign person and/or entity requires a well-planned process that honors the tax laws of every country involved.
Under U.S. tax regulations, a mandatory 30% must be withheld by any company paying a foreign entity conducting business within the United States.
This happens when a foreign country has an income tax treaty with the United States. Under these treaties, residents (not necessarily citizens) of these countries may be eligible for tax at a reduced rate or exempt from U.S. income taxes on certain items of income received.
If the foreign entity comes from a country with a U.S. tax treaty, they can fill out and submit a W-8BEN-E form. This will exempt them from the 30% withholding (and other applicable American tax laws).
Note that the tax withholding rate for the transfer of an interest in a partnership is 10% instead of 30%, per the Tax Cuts and Jobs Act -TCJA enacted in 2017 unless an exception applies.
Do not rely on this W-8BEN-E guide alone as a source of tax advice. Refer to official IRS instructions on the IRS website and consult your attorney or CPA.
What is a W-8BEN-E Form?
The form W-8BEN-E is also called a Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding and Reporting (Entities). It’s an important document that enables a business operating outside of the U.S. to claim tax exemption on U.S.-sourced income.
The Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), a.k.a. Form W-8BEN-E, is used by a foreign person to establish beneficial ownership and foreign status, and avoid 30% withholding for U.S. taxes.
It’s also used to claim income tax treaty benefits with respect to income (other than compensation for personal services).
The Difference Between a W-8BEN and a W-8BEN-E Form?
These two forms differ in a very specific way: the W-8BEN form is only used for foreign individuals or sole proprietors, while the W-8BEN-E form is for non-US entities, like businesses, companies, and organizations.
The W-8BEN tax form works to:
• Establish that an individual or sole proprietor qualifies as a foreign person subject to the tax rate of 30% on domestic income earned by a foreign entity.
• Claim that an individual or sole proprietor is an NRA (nonresident alien).
While both forms require very similar information, the W-8BEN-E form is longer. It also requires a detailed description of the foreign business entity involved.
What is a W-8BEN-E Form Used For?
The motivation behind filing the W-8BEN-E is to document status for tax reporting purposes. It’s an IRS-mandated form that collects the correct data, including the Nonresident Alien (NRA) taxpayer information for businesses, for the purpose of accurate reporting and collection.
Who Needs to Fill Out a W-8BEN-E?
Any foreign (non-U.S.) company that receives payment from an American business must fill out the W-8BEN-E form and send it to the withholding agent, payer, or FFI (foreign financial institution) requesting the form, but not the Internal Revenue Service (IRS).
According to IRS Form W-8BEN-E Instructions:
“Give Form W-8BEN-E to the person requesting it before the payment is made to you, credited to your account, or allocated.”
Separate Form W-8BEN-E forms must be given to each withholding agent, and a withholding agent may require a separate W-8BEN-E form for each type of income.
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How Do I Fill Out a W-8BEN-E?
Any foreign entity doing business with the United States must fill out a W-8BEN-E form. The document can be downloaded at www.irs.gov and completed online or by hand.
The W8BEN-E form has 30 different parts with multiple pages, so if you’re unsure, it’s best to hire a U.S. tax advisor for solid tax advice. Most foreign entities only need to fill in 4 parts, according to the entity type.
Below are some brief instructions on how to fill in the top required parts of the form in less than 10 minutes:
Part I – Identification of Beneficial Owner
This is the most important section of the W-8BEN-E form. It must be a complete part when turning in the paperwork. Take your time here to ensure all data is accurate and in the right spot.
1. Name of Organization That is the Beneficial Owner
This is the foreign entity name. Instead, for a disregarded entity or branch, enter the legal name of the owner or the entity the branch is a part of. Special Instructions apply to a disregarded entity that is a hybrid entity filing a treaty claim. Account holders providing the form to an FFI solely to document themselves as an account holder should consider the title of line 1 as account holder instead of beneficial owner.
2. Country of Incorporation or Organization
This is the country of residence (where the business is registered). For a corporation, it is the country of incorporation. If you are another type of entity, enter the country under whose laws you are created, organized, or governed.
3. Name of a Disregarded Entity
See form W-8BEN-E Instructions.
4. Chapter 3 Status
In this section, the most commonly checked box is “Corporation”. The majority of foreign entities that are doing business fall under “Corporation” or “Partnership” status. Other options include:
- Foreign government – Controlled Entity
- Foreign government – Integral Part
- Estate
- Simple trust (grantor and complex, too)
- Central Bank of Issue
- Tax-exempt organization
- Private foundation
- International organization
- Disregarded entity
The W8-BEN-E form line 4 section also requires you to check a Yes or No box and complete Part iii if Yes for disregarded entities and certain other types of entities, if it is a hybrid entity making a treaty claim.
5. Chapter 4 Status (FATCA Status)
The most common choice here is Active NFFE. This means the business is an Active Non-Financial Foreign Entity. If none of the other categories fit, Active NFFE is the best option.
Your FATCA (Foreign Account Tax Compliance Act) status will determine which parts of the W8BEN-E form you fill out later.
If you are presenting a Form W-8BEN-E to a Foreign Financial Institution (FFI) (bank, insurance, or investment fund) only to document yourself for chapter 4 as an account holder maintained by the FFI, then you do not need to complete line 4.
6. Permanent Residence Address
This is the foreign company’s permanent resident address. Your permanent residence address is the address in the country where you claim to be a resident for purposes of that country’s income tax. If you are giving Form W-8BEN-E to claim a reduced rate of, or exemption from, withholding under an income tax treaty, you must determine residency in the manner required by the treaty.
7. Mailing Address
Skip this section if it is the same as the permanent residence address.
8-10. Tax Identification Information (if required)
Enter your U.S. employer identification number (EIN). An EIN is a U.S. taxpayer identification number (TIN) for entities. If you do not have a U.S. EIN, apply for one on Form SS-4, Application for Employer Identification Number, if you are required to obtain a U.S. TIN.
In some cases, as a non-US entity, you don’t need a U.S. taxpayer identification number. Read Form W-8BEN-E instructions to determine when you need to provide a U.S. taxpayer identification number and when you provide a foreign TIN (FTIN) instead.
In addition, if you are not using form W-8-BEN-E to document a financial account as an account holder, you may provide the FTIN issued to you by your jurisdiction of tax residence on line 9b for purposes of claiming treaty benefits (rather than providing a U.S. TIN on line 8, if required). In some cases, a GIIN (global intermediary identification number) is provided on line 9a or line 9b.
Part III – Claim of Tax Treaty Benefits
This is for Chapter 3 purposes only. In this section, you simply need to check the appropriate boxes and fill in the country of origin.
- 14a – check the box and fill in the country (where you are a resident for income tax treaty purposes)
- 14b – check the box only
- 14c – check the box – applies only to income tax treaties effective before January 1, 1987, and not renegotiated
- 15 – complete only if special rates and conditions are applicable
Part XXV – Active NFFE
In this part of the form, you simply need to check box 39 to certify that:
- The entity in Part I is a foreign entity that is not a bank or financial institution
- Less than 50% of the gross income for the preceding calendar year is passive income
- Less than 50% of assets held are assets that produce or are held for the production of passive income (calculated as a weighted average of the % of quarterly passive assets).
*It should be noted that Part XXVI deals with Passive NFFE and differs entirely from Part XXV above.
Part XXX – Certification
The most important part of the document is the certification and signature. Here, in writing, there needs to be a first name, last name, and date (on which the form was signed). The person signing the W-8BEN-E form must be authorized to sign for the beneficial owner.
Still have questions?
Click here for full IRS instructions on filling out the W8BEN-E form.
Best Practices for Collecting W-8BEN-E Forms
A crucial role in modern accounts payable is managing the flow of inbound and outbound international payments. Another vital task is ensuring all of those foreign entities have the proper tax paperwork and IRS forms on file.
As the payer and withholding agent, a U.S. person or business has the onus of accuracy. To avoid confusion and any legal risks, there must be keen oversight from AP on any foreign business conducted.
Here are a few ways to streamline the collection of these important documents and ensure all foreign entities are covered.
- Whenever possible, collect all tax and ID forms digitally before the first payment. Manual collection can contribute to inaccuracies and heighten the risk of legal trouble.
- Since the W-8BEN-E is a complex document with many sections, a company should use web-based questionnaires and other digital tools to ensure that all forms are filled out accurately by payees.
- Verify all tax forms and data with automation tools.
- Leverage software that automatically tracks the latest changes to tax laws and any new regulations, laws, or restrictions.
How Long is a W-8BEN-E Valid For?
The simplest answer is three years. It starts on the date the W-8BEN-E is signed and ends three consecutive years from that date. It expires on the last day of the third succeeding calendar year.
You are required to file a new form W-8BEN-E within 30 days if any certification on this form becomes incorrect. It should be noted, if any changes in circumstance cause the data on the form to be incorrect, it will render the entire document invalid.
What Happens if You Don’t Fill Out a W-8BEN-E Form?
The United States government highly incentivizes all foreign entities to fill out a W-8BEN-E form and to do so accurately.
Failure to submit a document (or submitting an inaccurate one) means the foreign company must pay the full 30% tax rate. It can also lead to a different backup withholding rate, as outlined in section 3406, and a limitation on benefits. The W-8BEN-E also applies to (currently 10% TCJA) tax withholding from section 1446(f) relating to gain on disposition of a partnership interest for a non-U.S. transferor.
Clearly, in this case, due diligence is in order.
Automating the W-8BEN-E Process
Automating any AP process these days is a big payoff. Not only does financial technology lead to a higher rate of speed and accuracy, but it also ensures that tax-related documents will not be rejected during an audit.
The manual collection of W8 forms involves a variety of steps that are better off automated, including:
- Performing due diligence on each supplier to determine the proper W8 data
- Accurately capture all required information without the need for manual entry
- Calculate the exact withholding requirements based on entity status
- Ensure accurate and full completion of all W8 forms
The Benefits of W-8BEN-E Automation
Even a little negligence means all of this can snowball into an AP nightmare. An automated solution allows time-strapped staff to focus on growth-oriented tasks and allows for benefits like:
- Take advantage of cloud-based communications with vendors to enhance visibility and streamline workflow. This means better supplier relationships with the possibility of early-payment discounts.
- Cut down on wasted time and resources that can be redistributed to more productive activities.
- Ensure every W-8BEN-E form is filled out correctly so there are no more worries about audit risks or fines from the IRS.
- Avoid vendor payment delays that result from inaccurate W8 forms.
- Automatically deduct the 30% tax rate when making payments, preventing the need for inaccurate withholdings, error corrections, or last-minute adjustments.
Summing it Up
Tax compliance is one of the top issues to devolve quickly into a series of escalating stresses when not handled correctly. The earlier you instill processes for W-8BEN-E collection, management, and compliance, the less likely there will be issues down the road.
The first step in addressing a myriad of potential errors is to consider automating W8 workflows to achieve efficiency and tax compliance. A secure, cloud-based AP solution can save companies valuable time and money that can be invested in the growth of the business. For better foreign supplier tax compliance, read the white paper.
