W-8BEN-E Form Explained: Uses and Instructions

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 that’s 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).

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 the Organization

This is the foreign entity name. 

2. Country of Incorporation  

This is the country of residence (where the business is registered). 

3. Name of a Disregarded Entity 

This is only filled out when a third party is receiving payment. When payment is not made directly to the foreign entity and goes through foreign or U.S. sources, like an accounting institution, then this section should not be skipped.

*If there is a third party, Part ii will need to be filled out as well. This section simply asks you to elaborate on the Disregarded Entity or Branch Receiving Payment. This includes:

• Chapter 4 status
• Address (no P.O. box)
• GIIN (if any)

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
• Estate
• Simple trust (grantor and complex too)
• Central Bank of Issue
• Tax-exempt organization
• Private foundation
• International organization

If nothing seems to fit, it’s best to check “Corporation” if the business is solely owned, or “Partnership” if it’s owned by several people.

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 the company is not a Foreign Financial Institution (FFI) (bank, insurance, or investment fund), then all the options containing FFI can be ignored. 

6. Permanent Residence Address

Same as above. This is the foreign company’s address.

7. Mailing Address

Skip this section if it is the same as the permanent residence address.

8-10. Tax Identification Information (foreign TIN)

As a non-US entity, chances are there is no U.S. taxpayer identification number. In this case, the number local tax authorities use to identify the business should be filled in. The vendor must find this on their own foreign tax returns or paperwork. 

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
• 14b – check the box only

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 signature. Here, in writing, there needs to be a first name, last name, and date (in which the form was signed).

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. 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. 

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, it ensures 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 early 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. Download our “Executive Summary: KPMG on AP Tax Compliance.”