Changes to Form W-8BEN-E: Enhanced LOB and QI Requirements

Form W-8BEN-E was revised in April 2016 to require a foreign entity claiming treaty benefits to identify which provisions of a treaty’s Limitation on Benefits (LOB) article it satisfies. In addition, Form 1042-S was also updated to add an LOB reporting code (BOX 13j).

In October 2016, the IRS stated that February 2014 versions would acceptable through January 1, 2017. Taxpayers obtaining Form(s) W-8BEN-E after January 1, 2017, can only accept the most recent version of Form W-8BEN-E (April 2016) including the new question.

Generally, Forms W-8 are valid for three years. Any Form W-8 signed more than three years ago needs to be updated with the most recent form.

LOB

The LOB article in treaties provides guidance on who may assert the benefit of treaty, including the benefit of reduced withholding.

The IRS saw a benefit in the addition of the treaty questions for the 2014 version of the W-8BEN-E. Requiring payees to answer a question regarding which article of the treaty they asserted increased compliance with the withholding regime. Building on the success of these questions the IRS has added the question on LOB.

Part III of the revised Form W-8BEN-E (April 2016) now includes checkboxes for each of the main tests that can be met to satisfy the LOB provision. The payee completing the form must now indicate which of these criteria it meets. Effective January 1, 2017 withholding agents can no longer accept the 2014 version of the W-8BEN-E, only the newer version with the LOB question may be accepted.

Withholding agents must review the form to insure that question 14b regarding LOB is completed for W-8BEN-Es with a treaty claim. Payees may only check a box on this line if the LOB article in the treaty they are relying on includes a provision which corresponds to that check box.

Starting January 1, 2017, in addition to requiring the new form, if a treaty claim is made the withholding agent should also verify that the LOB provision asserted corresponds to the language in the particular treaty.

QI

A Qualified Intermediary (QI) is a foreign intermediary that assumes Chapter 3 and Chapter 4 withholding responsibilities by submitting an application with the Internal Revenue Service. Notice 2016-42 contains a QI agreement which would require the collection of new LOB information for entity account holders claiming treaty rates of withholding.

The requirements are generally required for accounts opened or documented on or after January 1, 2017. In the case of preexisting accounts, Forms W-8 on file may be relied upon until the normal expiration period. The new LOB info may be supplied by submitting an up-to-date Form W-8BEN-E by the foreign payee or a treaty statement containing LOB certification language. Finally, a QI cannot rely on LOB claim if it has actual knowledge or reason to know the claim is incorrect. For instance, a treaty under which benefits are claimed does not exist or is not in force.

The changes in documentation requirements for Form W-8BEN-E and QI in respect to LOB are in line with the U.S. Model Income Tax Convention issued in February 2016. This document has enhanced language in Article 22 that further restricts treaty country “shopping” by multinational businesses.

For questions or to discuss LOB and QI requirements, please reach out to a member of Withum’s International Services Team at international@withum.com.

Darko Naumoski Darko Naumoski, CPA
T (609) 520 1188
dnaumoski@withum.com

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