Many of our NGOs and grantmaker members ask about the Form W-8. In this post we’ll explain the purpose of this form as well as the meaning of “withholding” for U.S. tax purposes. Generally, all non-U.S. residents and entities that receive payments from sources in the U.S. are subject to U.S. tax. This standard tax rate is set at 30 percent of income received. Income items that are subject to this tax include dividends on U.S. securities as well as grants or payments for services from U.S. entities, including businesses and foundations.
Because the U.S. tax authority (the Internal Revenue Service, or IRS) does not have an easy mechanism to collect tax from non-U.S. taxpayers, it shifts the burden of collecting it to the U.S. payer. U.S. payers must therefore retain the tax owed from their payments to non-U.S. payees and send it to the IRS on behalf of the non-U.S. payees. This is known as "withholding."
For a U.S. payer to demonstrate to the IRS that it is properly meeting its withholding obligations, it must ask its non-U.S. payees to complete a Form W-8. Form W-8 asks non-U.S. payees to certify their legal and tax status to help U.S. payers determine the correct amount to withhold. For example, governments and charities can claim an exemption from withholding, whereas most other non-U.S. residents or entities are subject to the 30 percent tax. Form W-8 also allows non-U.S. payees to certify their qualification for reduced tax rates under tax treaties.
The U.S. payer must pay the taxes before the non-U.S. payee receives payments. For example, if a U.S. payer wants to make a payment of $100,000 to a non-U.S. payee and does not have a Form W-8 on file certifying that the non-U.S. payee is exempt from withholding, then the non-U.S. payee should receive $70,000 ($100,000 less 30 percent withholding). If, however, the U.S payer has a Form W-8 certifying that the non-U.S. payee is exempt as a government or charity, the payee should receive the full $100,000.
As noted above, Form W-8 asks non-U.S. payees to certify their legal and tax status to help U.S. payers determine the correct amount to withhold. Different versions of Form W-8 apply based on the kind of exemption or reduction in withholding that the non-U.S. payee is claiming. For example, Form W-8BEN and Form W-8BEN-E (both PDF) allow non-U.S. residents and entities to claim benefits on the basis of a tax treaty.
The most common version of Form W-8 that NGOsource encounters is Form W-8EXP. Form W-8EXP verifies that a charity is tax-exempt under U.S. law and therefore exempt from the 30 percent withholding tax. The IRS instructions for Form W-8EXP state that "certain foreign governments, foreign central banks, international organizations, and foreign entities described in section 501(c) … are not subject to withholding. … A withholding agent may request this Form W-8EXP to … avoid withholding."
Form W-8EXP starts with requesting identifying information under Part I. Under line 3, entities provide their classification under U.S. law. Options they may select include "Foreign government," "Foreign tax-exempt organization," and "Foreign private foundation." Notably, though non-U.S. payees may qualify as tax-exempt organizations in other countries, Form W-8EXP requests that a non-U.S. payee identify its classification under U.S. law. Form W-8EXP allows an entity to claim status as a tax-exempt organization based on a determination by the IRS or on an opinion that is prepared by outside counsel.
Part II of Form W-8EXP requests the basis for a reduction in or exemption from withholding tax. This includes lines 10 to 14. Each line addresses a classification that a non-U.S. payee may claim. Boxes 13a to 13c allow non-U.S. payees to claim status under U.S. law as tax-exempt organizations. The instructions further require the non-U.S. payees to attach a determination letter from the IRS or a determination of U.S. counsel as the basis for exemption from withholding.
NGOsource grantmaker members often ask whether having an equivalency determination on file for a grantee permits them to treat the grantee as exempt from withholding on the basis that it is a foreign government or charity. An equivalency determination is a legal determination by U.S. counsel. Therefore, it is our position that an equivalency determination may generally be relied on for these purposes. However, for specific advice on a grantmaker's or grantee's obligations, we encourage you to seek the advice of your own tax advisors or counsel.
- Instructions for the Requester of Forms W–8 BEN, W–8 BEN–E, W–8 ECI, W–8 EXP, and W–8 IMY (IRS)
- IRS Reporting for a Foreign Charity (HodgsonRuss, for Canadian charities)
- Planning for Contributions to Foreign Charities by Individuals and Foundations (Planned Giving Design Center)
This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.