New Revisions to W-8BEN-E and LOB
Background
If the foreign person qualifies for benefits under an income tax treaty with the U.S., the withholding tax rate may be reduced. The Form W-8BEN-E is the document used to substantiate a foreign recipient’s entitlement to a reduced rate of withholding pursuant to an income tax treaty.
W-8BEN-E and LOB
The United States is a party to numerous income tax treaties with foreign countries. Most treaties contain strict limitation on benefits (LOB) provisions, among other requirements, that must be met to receive treaty benefits in order to prevent “treaty shopping. The limitation on benefits article provides objective tests to determine whether an entity is appropriately claiming treaty benefits or was merely created to obtain treaty benefits.
The general rule of the limitation on benefits article in many U.S. tax treaties is that a resident of one of the countries that derives income from the other country is only entitled to the benefits of the treaty if the resident is a “qualified person” within the meaning of the treaty and satisfies other conditions for obtaining benefits.
Depending upon the ownership structure, some companies may not be able to satisfy the LOB article under these “qualified person” rules. Alternatively, some treaties contain an active trade or business provision within the LOB article that certain companies may be able to satisfy in order to obtain treaty benefits. Such active trade or business requirements typically require that the resident be engaged in the active conduct of a trade or business in the residence country, and that the income be derived from the source country in connection with or incidental to that trade or business.
Most U.S. income tax treaties, including all modern U.S. income tax treaties, include a LOB article. The revised Form W-8BEN-E (July 2017) 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. The payor should not accept a W-8 Form claiming a treaty benefit unless a selection is made under the LOB section of the form.
If you have any questions or would like to discuss this further, fill out the form below and someone from Withum’s International Tax Services Team will reach out to you.
Ask the Experts
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Chan Patel, CPA, MST T (732) 759 6835 [email protected]
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
