The purpose of a W-8ECI form is to allow an eligible foreign person to get an exemption from tax withholding on income effectively connected with conducting a trade or business in the United States. A foreign person submitting Form W-8ECI to a withholding agent or payer (not the IRS) must file an annual U.S. income tax return to report income connected with a U.S. trade or business.
What is the W-8ECI Form Used For?
W-8ECI form is a U.S. Internal Revenue Service (IRS) form titled Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. The purpose of Form W-8ECI is to exempt eligible foreign persons with applicable types of gross income from 30% withholding of income tax or backup withholding.
The withholding exemption applies to income effectively connected with a trade or business in the United States included in their gross income. ECI means effectively connected income.
According to IRS Form W-8ECI instructions, the Form W-8ECI withholding exemption doesn’t apply to:
• personal services income
• income subject to withholding under section 1445, which is dispositions of U.S. real property interests or
• income subject to withholding under section 1446, which is the foreign partner’s share of effectively connected income.
For personal services income of non-resident aliens, IRS Form 8233 applies instead of Form W-8ECI.
Use the line 12 checkbox of Form W-8ECI to report that you are a transferor of an interest in a publicly traded partnership (PTP) claiming an exemption from withholding and any gain from the transfer of the PTP interest is effectively connected with the conduct of a trade or business within the United States. Effective with transfers beginning on January 1, 2023, The Tax Cut and Jobs Act (TCJA) requires 10% withholding of the amount realized on the disposition (see What’s New in Instructions for Form W-8ECI).
What is the Difference Between Effectively Connected Income (ECI) and FDAP Income Taxation for Non-Alien Residents?
The IRS differentiates effectively connected income (ECI) and fixed or determinable, annual or periodical (FDAP income) in this IRS FDAP overview document. The overview describes how each type of income is taxed differently for non-resident aliens.
The U.S. taxes its citizens and resident aliens on worldwide income when they file their tax returns. However, for non-resident aliens, the U.S. taxes are based on whether it’s FDAP income or ECI.
In its FDAP overview document, the IRS describes how FDAP income and ECI are taxed for non-resident aliens:
“FDAP income is income which is not effectively connected with a trade or business, and it is taxed at a flat 30% rate (unless a lesser rate is available via income tax treaty or other allowable reductions). The 30% tax on FDAP income is on the gross amount and is not reduced by deductions and/or credits.”
“Alternatively, ECI or trade or business income is taxed at the normal graduated tax rates, and allowable deductions and/or credits are permitted.”
Who Needs to Fill Out Form W-8ECI?
The IRS Form W-8ECI specifies which foreign persons and organizations should not use Form W-8ECI and which type of IRS W-8 form they should use instead, if applicable. U.S. persons who are not employees (filing a W-4 form) should use the IRS W-9 form instead of Form W-8ECI.
Form substitutions are shown in the table below, using W 8ECI instructions from the IRS website at irs.gov.
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|Appropriate Form to Use Instead of W-8ECI
|A beneficial owner solely claiming foreign status or treaty benefits
|W-8BEN or W-8BEN-E
|A foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U.S. possession claiming the applicability of section(s) 115(2), 501(c), 892, 895, or 1443(b)
Except use Form W-8ECI if: They received effectively connected income and are not eligible to claim an exemption for chapter 3 or 4 purposes on Form W-8EXP.
|A foreign partnership or a foreign trust (unless claiming an exemption from U.S. withholding on income effectively connected with the conduct of a trade or business in the United States)
|W-8BEN-E or W-8IMY
|A person acting as an intermediary
Where Do You Submit a W-8ECI Form?
Submit a W-8ECI form to each withholding agent (payer) that will make a payment to you (the payee) or credit your account, or if a partnership, will allocate income to your account. A withholding agent may request that you fill out and submit IRS Form W-8ECI to them. Don’t submit your W-8ECI tax form to the IRS.
How Often Do You Need to Submit a Form W-8ECI?
Submit a new Form W-8ECI whenever the information included on the form changes or becomes incorrect. Otherwise, the IRS Form W-8ECI will be valid for about three years. The W-8ECI form doesn’t expire until the last day of the calendar year, which is the third year after the date you sign the W-8ECI form.
For example, a Form W-8ECI signed on April 25, 2023 with no changes making it incorrect, remains valid until December 31, 2026.
What is a Beneficial Owner?
The IRS defines beneficial owner in the W 8ECI instructions, as follows:
“For payments other than those for which a reduced rate of withholding is claimed under an income tax treaty, the beneficial owner of income is generally the person who is required under U.S. tax principles to include the income in gross income on a tax return. A person is not a beneficial owner of income, however, to the extent that person is receiving the income as a nominee, agent, or custodian, or to the extent the person is a conduit whose participation in a transaction is disregarded. In the case of amounts paid that do not constitute income, beneficial ownership is determined as if the payment were income.”
How Do You Fill Out a W-8ECI Form?
After you know that you’re eligible to use a W-8ECI form by reading the top of the form and the IRS instructions relating to Form W-8ECI, fill out the identification information required in Part I and Certification in Part II, including a signature, printed name, and date.
Part I – Identification of Beneficial Owner
Line 1 – Name of individual or organization that is the beneficial owner
Line 2 – Country of incorporation or organization
Line 3 – Name of disregarded entity receiving the payments (if applicable)
To understand the term “disregarded entity,” see the IRS definition in the What is a Beneficial Owner section of this article. Information about a disregarded entity only belongs on optional line 3 or on line 9 to help the withholding agent paying you request additional information like your account number.
Line 4 – Type of entity (check the appropriate box):
|☐ Simple trust
|☐ Complex trust
|☐ Tax-exempt organization
|☐ Foreign Government – Controlled Entity
|☐ Grantor trust
|☐ Central bank of issue
|☐ Foreign Government – Integral Part
|☐ International Organization
|☐ Private foundation
Line 5 – Permanent residence address (street, apt. or suite no., or rural route).
City or town, state or province. (Include postal code where appropriate.) Country.
For lines 5 and 6, do not use a P.O. Box or in-care-of address, and include a postal code where appropriate.
Line 6 – Business address in the United States (street, apt. or suite no., or rural route).
City or town, state, and ZIP code
Line 7 – U.S. taxpayer identification number (required—see instructions) ☐ SSN or ITIN ☐ EIN
For line 7, SSN is a Social Security Number issued by the Social Security Administration. ITIN is an Individual Taxpayer Identification Number issued by the IRS and assigned to non-resident aliens, resident aliens, and their spouses and dependents if they can’t get a Social Security Number. EIN is an Employer Identification Number issued by the IRS to a business entity, estate, or trust.
A U.S. taxpayer identification number (TIN) must be included in a withholding certificate if the beneficial owner is claiming effectively connected income (ECI) and also on their tax return. To apply for an ITIN, file Form W-7 with the IRS and expect to receive the ITIN in four to six weeks.
Line 8a – Foreign tax identifying number
Line 8b – Check box if FTIN is not legally required
Line 9 – Reference number(s) (see instructions)
On line 9, you or the withholding agent can include reference information like the name and account number to which this Form W-8ECI applies.
Line 10 – Date of birth (MM-DD-YYYY)
On line 10, include the date of birth for individuals documenting that they are an account holder at a U.S. office of a financial institution (including a U.S. branch of a Foreign Financial Institution (FFI).
Line 11 – Specify each item of income that is, or is expected to be, received from the payer that is effectively connected with the conduct of a trade or business in the United States (attach statement if necessary).
Line 12 – Check box for effectively connected gain on the transfer of an interest in a publicly traded partnership (PTP)
Part II – Certification
The signed certification of a foreign person in Part II of Form W-8ECI states that the form’s information is true, correct, and complete. The beneficial owner or individual authorized to sign for the beneficial owner agrees that they will submit a new W-8ECI form within 30 days if the certification becomes incorrect. The signer agrees that the form will be submitted to the withholding agent.
As part of the certification, the beneficial owner or authorized signer on behalf of the beneficial owner certifies under penalties of perjury that:
- “I am the beneficial owner (or I am authorized to sign for the beneficial owner) of all the payments to which this form relates,
- The amounts for which this certification is provided are effectively connected with the conduct of a trade or business in the United States,
- The income for which this form was provided is includible in my gross income (or the beneficial owner’s gross income) for the taxable year, and
- The beneficial owner is not a U.S. person.”
Non-resident aliens use the W-8ECI form to get an exemption from United States tax withholding on U.S. source income effectively connected to a trade or business (called ECI). The foreign person who’s a beneficial owner completes the form, certifies its accuracy and completeness, and signs the form (or an authorized person signs on behalf of the beneficial owner). The beneficial owner must submit a new Form W-8ECI within 30 days of their information and certificate becoming incorrect.
The beneficial owner needs a U.S. taxpayer identification number (TIN) issued by the IRS to complete the W-8ECI form. Receiving a TIN may take four to six weeks from the application date. The beneficial owner also files a U.S. income tax return. To understand foreign supplier tax compliance, access the white paper.