Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53387

immediate family) who is admitted

temporarily to the United States as a

nonimmigrant under section

101(a)(15)(F) or (M) (relating to the

admission of students into the United

States) or as a student under section

101(a)(15)(J) (relating to the admission

of teachers and trainees into the United

States) or section 101(a)(15)(Q) (relating

to the admission of participants in

international cultural exchange

programs) of the Immigration and

Nationality Act (8 U.S.C. 1101(a)(15) (F),

(J), (M), (Q)) who substantially complies

with the requirements of being

admitted. For rules concerning taxation

of certain nonresident students or

trainees, see section 871(c) and § 1.871–

9(a) of this chapter.

* * * * *

Par. 8. Section 301.7701(b)–7 is

amended by:

1. Revising paragraph (c)(1).

2. Adding text for paragraph (c)(2).

The revision and addition read as

follows:

§ 301.7701(b)–7 Coordination with income

tax treaties.

* * * * *

(c) * * * (1) In general—(i) Returns

due after December 15, 1997. The

statement filed by an individual

described in paragraph (a)(1) of this

section, for a return relating to a taxable

year for which the due date (without

extensions) is after December 15, 1997,

must be in the form of a fully completed

Form 8833 (Treaty-Based Return

Position Disclosure Under Section 6114

or 7701(b)) or appropriate successor

form. See section 6114 and § 301.6114–

1 for rules relating to other treaty-based

return positions taken by the same

taxpayer.

(ii) Earlier returns. For returns relating

to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

statement filed by the individual

described in paragraph (a)(1) of this

section must contain the information in

accordance with paragraph (c)(1) of this

section in effect prior to December 15,

1997 (see § 301.7701(b)–7(c)(1) as

contained in 26 CFR part 301, revised

April 1, 1997).

(2) Controlled foreign corporation

shareholders. If the taxpayer who claims

a treaty benefit as a nonresident of the

United States is a United States

shareholder in a controlled foreign

corporation (CFC), as defined in section

957 or section 953(c), and there are no

other United States shareholders in that

CFC, then for purposes of paragraph

(c)(1) of this section, the approximate

amount of subpart F income (as defined

in section 952) that would have been

included in the taxpayer’s income may

be determined based on the audited

foreign financial statements of the CFC.

* * * * *

Par. 9. Section 301.7701(b)–8 is

amended by revising paragraphs (b)(1)

and (b)(2) to read as follows:

§ 301.7701(b)–8 Procedural rules.

* * * * *

(b) * * * (1) Closer connection

exception—(i) Returns due after

December 15, 1997. The statement filed

by an individual described in paragraph

(a)(1) of this section, for a return relating

to a taxable year for which the due date

(without extensions) is after December

15, 1997, must be in the form of a fully

completed Form 8840 (Closer

Connection Exception Statement) or

appropriate successor form.

(ii) Earlier returns. For returns relating

to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

statement filed by the individual

described in paragraph (a)(1) of this

section must contain the information in

accordance with paragraph (b)(1) of this

section in effect prior to December 15,

1997 (see § 301.7701(b)–8(b)(1) as

contained in 26 CFR Part 301, revised

April 1, 1997).

(2) Exempt individuals and

individuals with a medical condition—

(i) Returns due after December 15, 1997.

The statement filed by an individual

described in paragraph (a)(2) of this

section, for a return relating to a taxable

year for which the due date (without

extensions) is after December 15, 1997,

must be in the form of a fully completed

Form 8843 (Statement for Exempt

Individuals and Individuals with a

Medical Condition) or appropriate

successor form.

(ii) Earlier returns. For returns relating

to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

statement filed by the individual

described in paragraph (a)(2) of this

section must contain the information in

accordance with paragraph (b)(2) of this

section in effect prior to December 15,

1997 (see § 301.7701(b)–8(b)(2) as

contained in 26 CFR Part 301, revised

April 1, 1997).

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 10. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 11. In § 602.101, paragraph (c) is

amended by adding an entry in

numerical order to the table and

revising the entry for 301.7701(b)–7 to

read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

301.6114–1 ............................... 1545–1126

* * * * *

301.7701(b)–7 ........................... 1545–0089

1545–1126

* * * * *

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–25997 Filed 10–6–97; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, 35a, 301, 502, 503,

509, 513, 514, 516, 517, 520, 521, and

602

[TD 8734]

RIN 1545–AU43; 1545–AT77

General Revision of Regulations

Relating to Withholding of Tax on

Certain U.S. Source Income Paid to

Foreign Persons and Related

Collection, Refunds, and Credits;

Revision of Information Reporting and

Backup Withholding Regulations; and

Removal of Regulations Under Part

35a and of Certain Regulations Under

Income Tax Treaties

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document contains final

regulations relating to the withholding

of income tax under sections 1441,

1442, and 1443 on certain U.S. source

income paid to foreign persons, the

related tax deposit and reporting

requirements under section 1461, and

the related requirements governing

collection, refunds, and credits of

withheld amounts under sections 1461

through 1463 and sections 6402 and

6413. Additionally, this document

contains final regulations relating to the

statutory exemption under sections

871(h) and 881(c) for portfolio interest.
53388 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

This document removes temporary

employment tax regulations under the

Interest and Dividend Compliance Act

of 1983 and amends existing regulations

under sections 6041A and 6050N. This

document finalizes changes to the

proposed regulations contained in

project number INTL–52–86, published

on February 29, 1988, under sections

6041, 6042, 6044, 6045, and 6049. This

document also finalizes proposed

regulations contained in project number

IA–33–95, published on December 21,

1995 , relating to the effective date of

certain temporary employment tax

regulations. This document finalizes

related changes to the regulations under

sections 163(f), 165(j), 3401, 3406, 6109,

6114, 6413, and 6724. This document

removes certain regulations under

income tax treaties.

EFFECTIVE DATES: These regulations are

effective January 1, 1999, except the

addition of § 31.9999–0, the removal of

§ 35a.9999–0T and the addition of

§ 35a.9999–0, which are effective

October 14, 1997.

FOR FURTHER INFORMATION CONTACT: Lilo

Hester or Teresa Burridge Hughes,

telephone (202) 622–3840 (not a toll-free

number), for questions on the

regulations generally; Carl Cooper,

telephone (202) 622–3840 (not a toll-free

number), for questions on portfolio

interest and qualified intermediary

agreements; Renay France, telephone

(202) 622–4940 (not a toll-free number),

for questions on the regulations relating

to chapter 61 of the Internal Revenue

Code or section 3406.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in these final regulations have

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507)

under control number 1545–1484.

Responses to these collections of

information are required to obtain a

benefit (to claim an exemption to, or a

reduction in, the withholding tax), and

to facilitate tax compliance (to verify

entitlement to an exemption or a

reduced rate).

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid OMB control number.

The estimate of the reporting burden

in these final regulations will be

reflected in the burdens of Forms W–8,

1042, 1042S, 8233, 8833, and the

income tax return of a foreign person

filed for purposes of claiming a refund

of tax.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing the burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

This document contains final

amendments to the Income Tax

Regulations (CFR parts 1, 31, 35a and

301) under sections 163(f), 165(j), 871,

881, 1441, 1442, 1443, 1461, 1462, 1463,

3401, 3406, 6041, 6041A, 6042, 6045,

6049, 6050A, 6050N, 6109, 6114, 6402,

6413, and 6724 of the Internal Revenue

Code (Code) . This document also

removes certain regulations under

income tax treaties.

On April 15, 1996, (61 FR 17614) the

IRS and Treasury published a notice of

proposed rulemaking under a number of

sections of the Code, dealing with the

withholding of tax under section 1441,

1442, or 1443 on amounts paid to

foreign persons, procedures for claiming

foreign status to avoid backup

withholding under section 3406 on

certain payments, and the reporting to

the IRS of payments to foreign persons.

Reporting to the IRS may be required

under sections 6011 and 1461 or under

the reporting provisions of chapter 61 of

the Code, such as sections 6041, 6041A,

6042, 6044, 6045, 6049, 6050A, or

6050N, (the Form 1099 reporting

provisions). Comments responding to

the notice were received and a public

hearing was held on July 24, 1996. After

considering the comments submitted in

writing and at the hearings, the

proposed regulations are adopted as

revised by this Treasury decision. The

revisions are discussed below.

Payments to domestic and foreign

persons create a number of withholding

and information reporting obligations

for both the payor and the recipient of

these payments under various

provisions of the Code. These

procedures are important to the

operation of IRS matching systems.

Those systems are part of a compliance

program that allows the IRS to match

information provided by payors with

income reported on a payee’s income

tax return and help detect U.S.

taxpayers that fail to file returns or

underreport income. The withholding of

tax at source and the reporting of

payments to foreign persons are also

important to insure that foreign persons

comply with their U.S. tax obligations.

The final regulations contained in this

document deal mostly with payments to

foreign persons, and the U.S. income tax

liability resulting from such payments.

Under sections 871(a) and 881(a) of

the Code, nonresident alien individuals

and foreign corporations are subject to

a 30-percent tax on most items of

income they receive from sources

within the United States that are not

effectively connected with the conduct

of a trade or business in the United

States. Income taxable under these

provisions includes interest, dividends,

royalties, compensation, other fixed or

determinable annual or periodical

(FDAP) income and certain gains. The

tax liability imposed under sections

871(a) and 881(a) is generally collected

by way of withholding at source under

chapter 3 of the Code pursuant to

section 1441(a) (for payments to

nonresident alien individuals and

foreign partnerships), section 1442(a)

(for payments to foreign corporations),

or section 1443(a) (for payments of

certain income to foreign tax-exempt

entities). Other special withholding

provisions apply under section 1443(b)

(dealing with the withholding of the 4-

percent tax imposed under section

4948), section 1445 (dealing with gains

from the disposition of U.S. real

property) and section 1446 (dealing

with effectively connected income of

foreign partners in a partnership). The

tax liability imposed under sections

871, 881, 1441, 1442, and 1443 also

extends to payments to other foreign

persons, including foreign trusts and

estates.

The 30-percent rate is often reduced

under the Code or an income tax treaty.

Under current regulations, a

withholding agent may generally rely on

a statement furnished by, or for, the

beneficial owner certifying eligibility for

a reduced rate. The procedural

requirements for claiming a reduced rate

of withholding may vary depending

upon the type of income, the status of

the taxpayer, or whether an income tax

treaty applies. For example, the

portfolio interest exception under

sections 871(h) and 881(c) for U.S.

interest on an obligation in registered

form is conditioned upon the beneficial

owner of the interest providing a

statement of foreign status to the U.S.

withholding agent, which can be
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53389

provided on a Form W–8. See

§ 35a.9999–5(b), A–9. If a reduction is

claimed under an income tax treaty, the

withholding agent may generally rely on

a Form 1001 provided by, or for, the

beneficial owner claiming residence in

a treaty country. For dividends,

however, the current rules do not

require certification of foreign status in

order to obtain a reduced rate of

withholding at source under an income

tax treaty. Instead, the withholding

agent may generally rely on the address

of the payee and grant a reduced rate of

withholding at source if the recipient’s

address is in a treaty country.

A withholding agent is generally

required to file an annual income tax

return on Form 1042 to report amounts

upon which an amount was actually

withheld under chapter 3 of the Code or

would have been required to be

withheld but for an exemption under

the regulations, or an income tax treaty.

An information return on a Form 1042–

S must be attached to the Form 1042

and must report each recipient’s name

and address, amounts paid, and

amounts withheld, if any. See § 1.1461–

2 (b) and (c).

A payor making payments to foreign

persons must also be aware of the

information reporting provisions under

chapter 61 of the Code and of other

withholding regimes, such as section

3406 (backup withholding), section

3402 (wage withholding), and section

3405 (withholding on pensions,

annuities, etc.). Payors subject to these

reporting and withholding rules include

both U.S. persons and foreign persons,

subject to certain exceptions. Under

chapter 61 of the Code, many types of

payments, such as interest, dividends,

royalties, broker proceeds, etc.

(reportable payments) must be reported

on a Form 1099 if paid to certain U.S.

persons. The form is filed with the IRS

and a copy is furnished to the recipient

of the payment. In addition, section

3406 requires those same U.S. payees to

furnish a taxpayer identifying number

(TIN) to the payor, generally on a Form

W–9, and, for reportable interest and

dividends, a certification that the payee

is not subject to notified payee

underreporting. Failure to provide a TIN

would generally require the payor to

backup withhold on the payment at the

rate of 31-percent. A payor that fails to

obtain a TIN or other required

information in the manner required or

to backup withhold when required

under section 3406 may also be liable,

under section 3403, for interest and

penalties, in addition to any amount

that should have been withheld under

section 3406.

Payments to foreign persons are

exempt from Form 1099 information

reporting and backup withholding.

However, the exemption is generally

conditioned upon the recipient

furnishing a certificate supporting its

foreign status. The existing regulations

under the information reporting

provisions of chapter 61 contain

guidance to help payors determine

when payments are made to a foreign

person. Generally, depending upon the

type of payment involved, a payor may

rely on a certification of foreign status

made on Form W–8, Form 1001, Form

4224, or, in the case of certain payments

outside the United States, on alternative

evidence of foreign status. See, for

example, § 35a.9999–3, A–34. Therefore,

even if an amount paid to a foreign

person is exempt from withholding

under chapter 3 of the Code (e.g., gain

from the sale of securities), a payor must

nevertheless comply with specified

certification procedures in order to

avoid being subject to penalties for

failure to comply with the information

reporting and the backup withholding

procedures (only amounts subject to

reporting under the Form 1099 reporting

provisions are subject to backup

withholding under section 3406; see

section 3406(b) and § 31.3406(a)–1(a)

and, for example, § 31.3406(b)(2)–1(a)).

As explained in the preamble to the

proposed regulations, the IRS and

Treasury have reviewed the current

withholding and reporting procedures

applicable to cross-border payment

flows and have concluded that changes

are necessary to accommodate the size

and growth of international financial

markets. The IRS and Treasury have

concluded that allowing the benefit of

the reduced rate at source, rather than

through a refund procedure, continues

to be desirable. A regime based on

reduction of withholding at source

avoids the administrative costs and

delays that can occur when applying for

a refund of overwithheld amounts. This

regime, however, depends on

withholding agents performing

important compliance functions. They

must obtain documentation

substantiating claims of foreign status

and of reduced rates of withholding and

must provide information to the IRS.

One of the important objectives of the

revisions is to eliminate unnecessary

burdens that the lack of standardization

and coordination of current procedures

may impose on withholding agents.

While it is unavoidable that different

information be required for different

types of income or recipients, the forms

currently in use apply different

standards of proof and are not uniform

in the manner in which the information

is furnished to withholding agents. The

final regulations unify the

documentation requirements and seek

to facilitate compliance by clarifying

uncertainties that may exist under

current rules (e.g., the scope of due

diligence standards imposed on

withholding agents).

These regulations also address

important issues relating to payments to

intermediaries (e.g., nominees, agents,

etc.), including whether intermediaries

should certify status on behalf of

beneficial owners and, if so, how.

Intermediary procedures under current

rules have proved difficult to implement

in a number of cases. In particular, U.S.

source interest on obligations in

registered form do not qualify as

portfolio interest under sections 871(h)

and 881(c) unless the U.S. withholding

agent receives a statement that the

beneficial owner of the obligation is not

a U.S. person (see section

871(h)(2)(B)(ii)). When the payment is

made to a foreign person acting as an

intermediary on behalf of the beneficial

owner or of other intermediaries, the

current regulations require that the

beneficial owner certification be passed

up through the chain of intermediaries

to the U.S. withholding agent. See

§ 35a.9999–5(b), A–9. The final

regulations offer alternative procedures

and respond to the concerns expressed

by various representatives of the

financial community regarding

compliance costs.

The final regulations are also

responsive to the Congressional

mandate in section 342 of the Tax

Equity and Fiscal Responsibility Act of

1982 (TEFRA) that Treasury consider a

range of options for replacing the

address/self-certification method of

administering income tax treaty

benefits. The IRS and Treasury have

studied several options for improving

the withholding procedures to respond

to this mandate, including a system of

certification of residence in a treaty

country and refund systems. At hearings

held in February of 1985 on proposed

regulations issued in 1984 under section

1441, comments from the public and

several U.S. treaty partners made it

apparent that certification requirements,

as proposed, would create too many

administrative problems for payments

made through nominees. The final

regulations reflect these comments. The

procedures adopted for documenting

eligibility for benefits under tax treaties

are similar to those applicable to

portfolio interest on obligations in

registered form.

Streamlining the current procedures

and implementing workable

intermediary certification procedures
53390 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

represent a substantial simplification

and reduction of burden. The IRS and

Treasury expect that this, in turn,

should result in greater compliance and

improve the ability of withholding

agents and the IRS to detect abusive

claims of foreign status or of benefits

under U.S. income tax treaties or under

the Code.

On December 21, 1995, at 60 FR

66243, a notice of proposed rulemaking

(IA–33–95) was published proposing to

add § 31.9999–0. This document

finalizes the proposed regulations. The

effective date of this addition is October

14, 1997.

Explanation of Provisions and

Revisions

A. Comments and Changes to § 1.871–

14 and Related Reporting Requirements

Under Section 6049

Consistent with the proposed

regulations, the final regulations

incorporate without substantive changes

the relevant provisions from the existing

temporary regulations implementing the

repeal of the 30-percent tax on portfolio

interest (Questions and Answers

Relating to the Repeal of 30-percent

Withholding by Section 127 of the Tax

Reform Act of 1984 and to the

Application of Information Reporting

and Backup Withholding in Light of

such Repeal). These provisions deal

with bearer obligations, convertible

obligations, and pass-through

certificates. Section 1.871–14(b)(1)

incorporates the provisions in

§ 35a.9999–5(a), A–1 and the rules in

§ 5f.103–1(c) defining a bearer

obligation. It also reflects the rules in

§ 5f.103–1(c) regarding obligations in

registered form that are convertible into

bearer form. At the request of

commentators, the definition of an

obligation in registered form contained

in § 5f.103–1(c) is restated in § 1.871–

14(c)(1)(i). The definition restates the

rules in § 35a.9999–5(c), A–18,

regarding the effect of convertibility

features on the status of an obligation as

an obligation in bearer or registered

form. Further, at the request of

commentators, the provisions in

§ 35a.9999–5(b), A–12 through 15

regarding obligations issued in

registered form and targeted to foreign

markets are retained without

substantive changes. Comments

received from U.S. agencies and

instrumentalities indicate that they have

relied on these procedures in the past

and that they plan to do so again.

One commentator requested

additional clarifications under § 1.165–

12(c). In response to these comments,

the $1 million minimum denomination

requirement under § 1.165–12(c)(1)(ii) is

eliminated in order to conform that

provision to § 1.165–12(c)(3)(iii). In

addition, in § 1.165–12(c), the term

United States is replaced with the term

United States and its possessions to

coordinate the provisions with § 1.163–

5(c)(2)(i) (C) and (D). In § 1.165–

12(c)(1)(iii), a provision was added to

explain that a holder delivering a bearer

obligation to a financial institution or

exempt organization may rely on a

written statement furnished by the

institution or organization. Further,

although the commentator suggested

adding a sentence to § 1.165–12(c)(1) to

clarify that each of paragraphs (i)

through (iii) must be satisfied in order

to avoid holder sanctions, this change is

unnecessary because the need to meet

all of the requirements in each of these

clauses is sufficiently clear. The

commentator proposed various changes

to the rules governing the foreign

targeting of bearer obligations on

original issuance. However, the final

regulations do not address these

changes which are outside the scope of

this project.

The proposed regulations regarding

the certification requirements for

obligations in registered form are

finalized without substantive changes.

As in the proposed regulations, a TIN is

not required to be stated on a Form W–

8 used to claim the benefit of the

portfolio interest exemption, regardless

of whether the debt obligation is

publicly traded.

Several commentators have asked

that, in the case of portfolio interest on

obligations in registered form, the

provisions dealing with late-received

documentation be conformed to similar

provisions under proposed § 1.1441–

1(f)(5). Under proposed §§ 1.871–

14(c)(3) and 1.1441–1(f)(5), the failure to

timely receive appropriate

documentation (i.e., in most cases, a

Form W–8) may be cured by obtaining

the documentation later. Under the

proposed regulations, the cure

procedures apply for purposes of

withholding under section 1441 and for

purposes of meeting the requirement

under sections 871(h) and 881(d) that

the U.S. withholding agent receive a

statement. However, proposed § 1.871–

14(c)(3) requires that the documentation

be received before the expiration of the

limitations period of the beneficial

owner. In contrast, proposed § 1.1441–

1(f)(5) requires that the documentation

be received before the expiration of the

limitations period of the withholding

agent. Commentators have asked that

the relevant limitations period for

qualifying interest as portfolio interest

under sections 871(h) and 881(d) be that

of the withholding agent and not of the

beneficial owner. This comment is not

adopted because of the special

conditions for interest to qualify as

portfolio interest. Under section

871(h)(2)(B)(ii), interest on an obligation

in registered form is portfolio interest

only if the U.S. withholding agent

receives a statement that the beneficial

owner of the obligation is not a U.S.

person. The legislative history to the

amended provisions (see section

1810(d)(3)(B) of the Tax Reform Act of

1986 (Public Law 99–514)) specifies that

the statement may be received late, but

no later than the expiration of the

beneficial owner’s statute of limitation.

This indicates that, if the required

statement is received after the beneficial

owner’s statute of limitation has

expired, the interest can no longer

qualify as portfolio interest. Although

the withholding agent is permitted to

receive documentation at any time

within its own limitations period and

establish an applicable reduction in the

withholding rate after the fact (e.g.,

under an income tax treaty), such cure

procedure is not effective to confer

portfolio interest status to the interest if

it occurs after the beneficial owner’s

statute of limitations has expired. A

cross-reference to § 1.1441–1(b)(7) (i.e.,

proposed § 1.1441–1(f)(5) as

renumbered under the final regulations)

is included in § 1.871–14(c)(3) to clarify

the difference between the two cure

procedures.

B. Comments and Changes to

§ 1.1441–1

1. Coordination With Other

Withholding and Information Reporting

Provisions

Commentators noted that withholding

and information reporting requirements

applicable to payments to foreign

persons are governed by a complex web

of statutory provisions and that the

relationship of these provisions among

themselves may be difficult to

understand. In response to these

comments, a number of changes have

been made to help payors and their

advisers locate relevant guidance.

As suggested, the table of contents in

§ 1.1441–0 has been expanded. Section

1.1441–1(b) (4) and (5) has been added

to provide an overview of how the

withholding and reporting procedures

under chapter 3 of the Code relate to the

information reporting provisions under

chapter 61 of the Code and other

withholding regimes under sections

3402 (wage withholding), 3405

(withholding on pensions, annuities,

etc.), and 3406 (backup withholding).

Provisions explaining the interaction of
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53391

applicable withholding and reporting

provisions in the case of payments to

foreign intermediaries or foreign

partnerships have been added also. See

explanation of those rules, under the

heading ‘‘Clarification of Reporting and

Withholding Obligations for Payments

to and by Foreign Intermediaries’’ of

this preamble. Where appropriate,

additional cross references to chapter 61

and to sections 3402, 3405, and 3406

have been added in § 1.1441–1 and

cross-references in regulations under

sections 3402, 3405 and 3406 have also

been added.

As a general matter, a withholding

agent (whether U.S. or foreign) must

ascertain whether the payee is a U.S. or

a foreign person. If the payee is a U.S.

person, the withholding provisions

under chapter 3 of the Code do not

apply; however, information reporting

under chapter 61 of the Code may

apply; further, if a TIN is not furnished

in the manner required under section

3406, backup withholding may also

apply. If the payee is a foreign person,

however, the withholding provisions

under chapter 3 of the Code apply

instead. To the extent withholding is

required under chapter 3 of the Code, or

is excused based on documentation that

must be provided, none of the

information reporting provisions under

chapter 61 of the Code apply, nor do the

provisions under section 3406. If,

however, withholding under chapter 3

of the Code does not apply irrespective

of documentation (e.g., in the case of

foreign source income or gross proceeds

dealt with under section 6045),

documentation may nevertheless have

to be furnished to the withholding agent

under the provisions of chapter 61 of

the Code in order to be excused from

Form 1099 information reporting and,

possibly, from backup withholding

under section 3406. Determinations of

payee’s status are generally made at

each level of the chain of payment,

until, ultimately, the payment is made

to the beneficial owner. The following

example illustrates how these rules

interact under the final regulations.

For example, assume that a U.S. bank

acting as a paying agent of a U.S. issuer

of an obligation pays interest to a U.S.

brokerage firm. Chapter 3 withholding

does not apply to that payment because

the payee is a U.S. person. Form 1099

information reporting under section

6049 is not required because the

brokerage firm is an exempt recipient

(i.e., a securities dealer), meaning that it

is exempt from having the payment

reported on a Form 1099. See § 1.6049–

4(c)(1)(i). The U.S. brokerage firm may

or may not have to provide a Form W–

9 to the U.S. bank to establish its

exempt recipient status depending on

whether it meets one of the ‘‘eyeball’’

tests under § 1.6049–4(c)(1)(ii). Assume

further that the U.S. brokerage firm

credits the interest to the account of a

customer. If the brokerage firm does not

hold a Form W–9 (or a Form W–8) and

cannot otherwise ascertain the exempt

recipient status of the customer under

§ 1.6049–4(c)(1)(ii), it is required to

backup withhold 31-percent under

section 3406. See § 31.3406(a)–1(b). If it

determines that the customer is a U.S.

person (e.g., the firm holds a Form

W–9 for the customer), then chapter 3

does not govern the payment. Instead,

the payment is governed by sections

3406 and 6049. If, however, the U.S.

brokerage firm determines that the

customer is a foreign person (e.g., it

holds a valid Form W–8), then chapter

3 governs the payment and the payment

is not reportable for purposes of section

6049, meaning that it is also not subject

to backup withholding under section

3406. Thus, Form 1042 reporting and

withholding at a 30-percent rate are

required unless the income is exempt

under the Code or an income tax treaty.

For example, if the interest is of a kind

that may qualify as portfolio interest,

then withholding is excused if the

brokerage firm holds a valid Form W–

8 from the customer (but would still be

reportable on Form 1042–S).

If the payment to the customer is an

amount exempt from withholding under

chapter 3 of the Code without the need

to furnish documentation (e.g., foreign

source interest income), documentation

may nevertheless be required for

purposes of chapter 61 of the Code. In

this example, the U.S. brokerage firm

must report the payment of foreign

source interest on a Form 1099 unless

the customer is an exempt recipient or

is a foreign person. If the customer’s

status as an exempt recipient cannot be

ascertained on an ‘‘eyeball’’ basis under

§ 1.6049–4(c)(1)(ii), the brokerage firm

must obtain a Form W–9 or a Form W–

8 from the customer. If the

documentation that the brokerage firm

receives reliably indicates an exempt

recipient or foreign status, no

information reporting or withholding is

required. If documentation is not

obtained or is not reliable, Form 1099

information reporting is required under

section 6049 and backup withholding is

required under section 3406.

Assume, however, that the customer

is not the beneficial owner of the

payment of U.S. and foreign source

interest income. Instead, it is a foreign

bank acting on behalf of the beneficial

owner. With respect to the payment that

is U.S. source interest, the brokerage

firm would be permitted to pay the

interest free of withholding (assuming it

would qualify as portfolio interest if

appropriate documentation were

received) if it held a Form W–8 (or

alternative documentary evidence) from

the ultimate beneficial owner that is

transmitted by the foreign bank or if it

held a Form W–8 from the foreign bank

as a qualified intermediary who, under

the final regulations, is permitted to

certify on behalf of its own customer.

See § 1.1441–1(e)(5). In either case, the

brokerage firm must report the payment

on a Form 1042 and must also make an

information return on Form 1042–S.

The Form 1042–S must state the name

of the beneficial owner as shown on the

Form W–8 (or alternative documentary

evidence) or the name of the foreign

bank if the bank is a qualified

intermediary.

Continuing with the same example,

the foreign bank also has obligations

under sections 1441, 6049, and 3406

when it, in turn, makes a payment to its

own customer. However, to the extent it

received a valid Form W–8 (or

alternative documentary evidence) from

the beneficial owner and furnished a

copy to the U.S. brokerage firm (or

complied with the documentation

requirements as a qualified

intermediary), it would meet its

obligation under applicable withholding

and reporting provisions and,

accordingly, would be exempt from

withholding any amount from the

payment and from reporting the

payment. See §§ 1.1441–1(b)(6) and

1.6049–5(b)(14).

With respect to the foreign source

interest paid to the foreign bank acting

as an intermediary, the only

requirement imposed on the U.S.

brokerage firm is to obtain the Form

W–8 of the foreign bank (and not of the

beneficial owner). Because the

exemption sought by the foreign bank is

an exemption from Form 1099

information reporting and backup

withholding, the foreign bank may do so

by establishing its foreign status with a

Form W–8 or by establishing its status

as an exempt recipient. Under the final

regulations, a foreign bank’s status as an

exempt recipient can be established on

an ‘‘eyeball’’ test basis if the bank s

name reasonably indicates that it is a

bank. However, as is the case for U.S.

income subject to chapter 3

withholding, the foreign bank, acting as

an agent for its own customer, may be

required to report the foreign source

payment under section 6049 and to

backup withhold under 3406 when it, in

turn, pays the amount to its customer if

the foreign bank is a U.S. payor (e.g., it

is a controlled foreign corporation). If it

is not a U.S. payor or a U.S. middleman,
53392 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

it has no withholding or reporting

obligations under chapter 3 of the Code

due to the nature of the payment (i.e.,

foreign source income), unless it makes

the payment in the United States. If the

foreign bank makes a payment to its

customer in the United States, then the

payment is reportable under section

6049 and the bank must obtain a Form

W–8 or a Form W–9 from its customer,

unless the exempt status of the customer

can be established on an ‘‘eyeball’’

basis. If the customer is a U.S. person

who is not an exempt recipient, the

bank must report the payment on a

Form 1099 and, if the customer has not

provided a Form W–9 as required under

section 3406, backup withholding is

required. The provisions of § 1.6049–

5(b)(14) do not apply to exempt the

foreign bank from its reporting and

withholding obligations because it has

not provided the required

documentation to the U.S. withholding

agent or certified on behalf of the

beneficial owner.

These examples are illustrative only.

Different rules may apply depending

upon a number of factors, the most

significant being the nature of the

payment (FDAP or not FDAP, U.S.

source or foreign source), the status of

the payor (U.S. or foreign), the status of

the payee (U.S. or foreign, beneficial

owner or intermediary), where the

payment is made (in the U.S. or outside

the U.S.), and where the account is held

(on-shore or offshore).

2. U.S. Agent of Foreign Person

Under the proposed regulations, a

payment to a U.S. person gives rise to

withholding liability if the payor has

actual knowledge that the U.S. person is

acting as an agent for a foreign person.

Commentators suggested that the

withholding liability should be imposed

on the last U.S. person who makes the

payment to a foreign person. At a

minimum, commentators asked that the

final regulations limit the obligation to

withhold to situations where the

withholding would seem jeopardized.

This comment is accepted. Under the

final regulations, a U.S. person making

a payment to a U.S. financial institution

is not required to withhold even if it

knows that the payee is collecting the

payment for a foreign person, if the U.S.

person has no reason to believe that the

financial institution will not comply

with its obligation to withhold when it

makes the payment to the foreign

person. See § 1.1441–1(b)(2)(ii).

3. Payments to Wholly-Owned Entities

The final regulations under § 1.1441–

1(b)(2)(iii) provide guidance on

applicable withholding procedures for

payments to a domestic or foreign

wholly-owned entity that is disregarded

for federal tax purposes (i.e., treated as

a branch of its single owner) under

§ 301.7701–1(c)(2). As a general rule, a

payment to a disregarded wholly-owned

entity is treated as a payment to its

owner. Thus, for example, if a foreign

person owns a domestic disregarded

entity, a person making a payment to

the disregarded entity is treated as the

withholding agent because the owner is

a foreign person. However, because the

fact that the entity is disregarded for tax

purposes generally may not be apparent

to a person making a payment to the

entity, the person making the payment

can rely on documentation received

from the recipient to determine its

withholding and reporting obligations.

Thus, if the person receives a Form W–

9 from the entity representing that the

recipient is a domestic corporation, the

person may rely on the form to treat the

entity as a U.S. person unless it has

actual knowledge or reason to know that

the representation is incorrect. If the

entity is a wholly-owned entity

disregarded for federal tax purposes,

then it must furnish documentation

representing the status of its owner. For

example, if the disregarded domestic

entity is owned by a foreign person, it

must furnish a Form W–8 from its single

owner. In that case, a person making a

payment to the entity may rely on the

Form W–8 that the entity provides for

its foreign owner and comply with

withholding and reporting requirements

accordingly. A domestic disregarded

entity that does not furnish a certificate

is subject to Form 1099 information

reporting on payments that are

reportable and subject to backup

withholding under section 3406

because, lacking the words ‘‘inc.’’,

‘‘incorporated’’, ‘‘corp.’’ or

‘‘corporation’’ in its name, it could not

be treated as an exempt recipient on an

‘‘eyeball’’ basis. If the entity had one of

these words in its name, it would be a

per se corporation for U.S. tax purposes

because any of these words would

indicate that the entity is organized

under a corporate statute; thus, it could

not be a disregarded entity. The TIN to

be stated on the Form W–9 or the Form

W–8, if required, is that of the single

owner and not that of the disregarded

entity.

Different documentation procedures

apply if the benefit of a reduced rate is

claimed under an income tax treaty and

the entity is not treated as fiscally

transparent in the applicable treaty

jurisdiction. See §§ 1.1441–6(b)(4) and

1.894–1T(d).

4. Payments to U.S. Branches of Foreign

Institutions

Commentators also suggested that a

payment to a U.S. branch of a foreign

bank or other financial institution

should not be subject to withholding.

Instead, the U.S. branch should be

responsible for withholding when it

makes the payment to the foreign

person. In addition, commentators have

asked that the regulations eliminate the

requirement for a U.S. branch to furnish

a certificate representing that the

payment it receives is effectively

connected with the conduct of a U.S.

trade or business. In response to these

comments, the rules governing

payments to the U.S. branch of certain

foreign financial institutions have been

modified to alleviate the certification

burden for those U.S. branches that

operate in a manner equivalent to U.S.

companies.

Therefore, § 1.1441–4(a)(2)(ii) of the

final regulations provides that a

payment to a U.S. branch of either a

foreign financial institution that is

registered with the Federal Reserve

Board or of a foreign insurance company

that is required to file an annual

‘‘NAIC’’ statement with a State

Insurance Commissioner is presumed to

be a payment of effectively connected

income for withholding purposes.

Section 1.1441–1(b)(2)(iv) has been

added to provide that a U.S. branch may

rebut this presumption by furnishing a

Form W–8 to the withholding agent

certifying that the payment that it

receives is not effectively connected

with its conduct of a U.S. trade or

business. For a description of the form

that a U.S. branch must furnish, see

§ 1.1441–1(e)(3)(v). Under the final

regulations, the U.S. branch that

furnishes a Form W–8 may agree with

the withholding agent to assume

responsibility for all withholding and

reporting obligations for the payments it

receives from the withholding agent. In

the absence of such an agreement, the

withholding agent remains responsible

for the withholding and reporting

obligations associated with the

payment. This means, for example, that,

if the U.S. branch receives the payment

on behalf of its home office and the

home office is covered by a qualified

intermediary agreement that the IRS has

concluded with the foreign financial

institution, the U.S. branch must give to

the withholding agent the home office’s

Form W–8. If the branch receives the

payment for its own customers, it must

give to the withholding agent all of the

required certificates for its customers.

Similar withholding procedures are

available to other U.S. branches to the
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53393

extent permitted by the district director

or the Assistant Commissioner

(International). Procedures for obtaining

such permission existed under prior

regulations under § 1.1441–4(f). These

provisions are restated in § 1.1441–

1(b)(2)(iv)(E) of the final regulations.

The final regulations do not eliminate

the requirement to report on a Form

1042 or 1042–S payments to these

branches, including payments for which

the branch has assumed withholding

and reporting responsibility. In such a

case, however, the reporting is made to

the branch as recipient of the amount

for which it has assumed withholding

responsibility rather than to the

beneficial owner. See § 1.1461–

1(b)(2)(vi) and (c)(4)(v). Although

commentators asked that these reporting

requirements be eliminated for

payments of effectively connected

income, the IRS and Treasury believe

that the reporting serves an important

compliance function.

5. Beneficial Owner

The definition of the term beneficial

owner is clarified to indicate that

ownership is determined on the basis of

existing principles governing the

determination of tax ownership,

including substance-over-form

principles, such as those reflected in

section 7701(l) dealing with conduit

transactions. The special definition of

beneficial owner in proposed § 1.1441–

1(c)(6)(ii)(B) for purposes of tax treaties

has been eliminated. See the

explanation below under § 1.1441–6 for

claims of tax treaty-reduced rates for

payments to entities that are treated as

fiscally transparent in the U.S. or in the

applicable treaty jurisdiction, or both.

6. Forms

a. Format and Design. Many

comments were received regarding the

format and design of the revised Form

W–8. In particular, several

commentators suggested that the IRS

retain separate forms for effectively

connected income and payments to

foreign governments. The IRS is

considering these comments and agrees

that it may be more convenient to keep

certain forms separate from the basic

beneficial owner Form W–8. The

revised forms will be released for public

comments before they are finalized.

b. Content of Forms. The final

regulations are modified in several

respects regarding the Form W–8. A

Form W–8 furnished by the beneficial

owner is generally payee-specific and

applies to all income received from the

withholding agent to whom furnished,

except to the extent provided in forms

and instructions (e.g., effectively

connected income). See § 1.1441–

1(e)(2)(i). Entitlement to different types

of reduced rates may require different

types of information or representations

on a Form W–8. For example,

entitlement to exemption from

withholding on portfolio interest

requires only proof of foreign status.

Claims of treaty benefits may require a

certified TIN (that is, a TIN that the IRS

has certified as belonging to a person

who is a resident of a country with

which the U.S. has an income tax treaty

in effect; see § 1.1441–6(c) for

procedures to have a TIN certified by

the IRS). A withholding agent is

responsible for making sure that the

information or representations relevant

to a particular type of income or

applicable rate appear on the form and

for requesting a new form where an

existing form fails to support a claim of

reduced rate for a different type of

income. For example, a beneficial owner

who furnishes a Form W–8 for portfolio

interest (and therefore, does not

complete the information on the form

relating to claims of treaty benefits)

would be required to furnish a new form

to the withholding agent if it receives

from the same withholding agent other

income for which it claims a reduced

rate of withholding under a tax treaty.

The new form could serve both for

portfolio interest and the other income

for which treaty benefits are claimed.

In response to comments, the final

regulations clarify that, where a person,

other than an individual, does not have

a tax residence in any country, the

required permanent residence address is

the address of the person’s principal

office, even though the principal office

is not in its country of incorporation (as

was required in the proposed

regulations). Because of this change, the

final regulations require that the entity’s

country of organization or incorporation

be stated on the form. See § 1.1441–

1(e)(2)(ii).

c. Signature of Forms under Power of

Attorney. Some commentators have

asked that custodians be permitted to

execute the Form W–8 on behalf of their

customers, based upon a power of

attorney. This suggestion is not adopted.

Like a tax return, a Form W–8 must be

signed under penalties of perjury. As

such, the IRS and Treasury view the

signature of a Form W–8 as governed by

the same rules that govern the signature

of a tax return. Therefore, the final

regulations clarify in § 1.1441–1(e)(4)(i)

that a withholding certificate may be

signed by any person authorized to sign

a declaration under penalties of perjury

on behalf of the person issuing the

certificate as provided under section

6061 (for individuals), 6062 (for

corporations), or 6063 (for partnerships).

d. Facsimile and Electronic

Transmission. Commentators have

asked that withholding agents be

allowed to rely on a faxed copy or

electronically transmitted Form W–8 as

if they were original forms. The

proposed regulations permit a faxed

Form W–8 to indicate foreign status for

purposes of the grace period under

proposed § 1.1441–1(f)(2)(i)(B), but do

not allow it to be used for other

purposes. The question of whether and

to what extent a faxed certificate ought

to be allowed instead of an original

certificate arises because, under current

law, a faxed document (like a

photocopy) has weaker evidentiary

value than an original document. This

question is not unique to the Form W–

8 and is currently under study by the

IRS. Pending completion of the study,

the final regulations allow a

withholding agent to rely on a faxed

form only for purposes of presuming

foreign status in order to reduce the rate

of withholding during a 90-day grace

period. However, an original form must

be provided before the grace period

expires.

On the other hand, the proposed

regulations provide general authority for

the electronic transmission of Forms W–

8, subject to procedures issued by the

IRS. The final regulations retain this

rule and, regulations issued together

with these final regulation propose to

amend § 1.1441–1(e)(4)(iv) of the final

regulations by prescribing the standards

that electronic systems must meet in

order to effect an acceptable

transmission of Forms W–8. The IRS

believes that the evidentiary value of

documents transmitted with electronic

systems meeting these standards would

equate with that of an original

document. See project REG–107872–97,

published elsewhere in this issue of the

Federal Register. The option to use

electronic transmission systems should

help alleviate the burden of having to

mail original Forms W–8 in paper form.

e. Single Form for Related

Withholding Agents. Commentators

have asked that several withholding

agents be allowed to rely on a single

Form W–8. In response to this comment,

a number of changes were made to the

final regulations. First, under § 1.1441–

1(e)(4)(ix)(A), a withholding agent may

rely on the Form W–8 furnished for

another account at the same branch

location, at a different branch location

of the same entity, or at a different

branch location of a related person if the

entity or group of entities uses a

universal account system or uses

another type of coordinated account
53394 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

information system that allows the

withholding agent to easily access

information regarding the nature of the

certificate furnished, the information on

the certificate, and its validity status.

In addition, the system must allow the

withholding agent to keep a record of

how and when it accesses the

information and, if applicable, of how

and when it communicates relevant

facts affecting the reliability of the

certificate to the location where the

certificate is kept. Second, the rule in

proposed § 1.1441–1(e)(2)(i) allowing

the beneficial owner to provide a single

Form W–8 with respect to a family of

mutual funds is extended to investors in

affiliated partnerships and corporations

under § 1.1441–1(e)(4)(ix)(B) of the final

regulations. Further, the final

regulations also adopt a suggestion that

a withholding agent be able to rely on

representations from a broker that it

holds a valid withholding certificate

from a beneficial owner. See § 1.1441–

1(e)(4)(ix)(C). The final regulations

clarify that a withholding agent has

knowledge of all information in the

system. See § 1.1441–7(b)(3).

f. Forms from Foreign Partnerships. In

response to comments, the provisions

under proposed § 1.1441–1(e)(3)(iii)

dealing with withholding certificates

furnished by a foreign partnership have

been moved to § 1.1441–5(c), which

contains most of the withholding

provisions governing payments to

foreign partnerships (see explanation of

the changes under § 1.1441–5).

g. Forms from Non-Qualified

Intermediaries. In response to

comments, provisions have been added

to clarify the manner in which a non-QI

must transmit documentation to the

withholding agent and the information

that it must contain. Proposed § 1.1441–

1(e)(3)(iv) (renumbered as § 1.1441–

1(e)(3)(iii) in the final regulations) is

expanded to explain the manner in

which withholding certificates or other

appropriate documentation is passed up

a chain of non-QIs. The final regulations

allow the intermediary to furnish copies

of an original Form W–8 so as to avoid

requesting multiple originals for

different accounts that the intermediary

may hold on behalf of the same

beneficial owner. See § 1.1441–

1(e)(3)(iii).

Also, proposed § 1.1441–1(e)(3)(iv) (C)

and (D) (renumbered as § 1.1441–

1(e)(3)(iii) (C) and (D) in the final

regulations) has been modified and

paragraph (e)(3)(iv) has been added in

response to comments that the

regulations should explain the

information required from a nonqualified intermediary to insure proper

withholding by a withholding agent

making a payment to a non-qualified

intermediary. In particular, if different

withholding rates apply to different

owners of the payment flowing through

an intermediary, the withholding agent

must know which rate applies to each

portion of the payment. Where such

information is necessary, the final

regulations provide that the

intermediary must, in a statement

attached to the withholding certificate

from the non-qualified intermediary,

provide (and update as often as is

necessary) sufficient information for the

withholding agent or payor to determine

the proportion of each payment subject

to withholding that is attributable to

each person to whom the intermediary

certificate relates, including persons for

whom the intermediary has not attached

a withholding certificate or other

appropriate documentation. Such

statement is not necessary, however, if

the allocation information is known to

the withholding agent due to the

account structure that it uses (for

example, the withholding agent uses

separate accounts for different

categories of income and applicable

withholding rates).

h. Validity Period. Comments were

received under § 1.1441–1(e)(4)(ii)

regarding the period of validity of a

properly executed Form W–8.

Commentators requested that,

irrespective of whether a Form W–8

includes a TIN, all forms should be

valid indefinitely, or at least those

furnished for a claim of effectively

connected income. Some commentators

suggested that a Form W–8 should not

expire where a payor continues to send

all correspondence to a mailing address

that is also the permanent address on a

Form W–8. These suggestions are not

adopted because the IRS and Treasury

believe that it is important for taxpayers

to re-certify status periodically. Similar

re-certification is also important for

effectively connected income, since

income may cease to be effectively

connected due to a change in the

taxpayer’s business structure, without

the withholding agent becoming aware

of such changes. However, the final

regulations provide relief by presuming

that payments made to certain U.S.

branches are effectively connected

income, thereby avoiding the need to

provide a certificate in such a case. See

§ 1.1441–4(a)(2)(ii).

Also, § 1.1441–1(e)(4)(ii)(B) is

modified to make all intermediary

certificates and certificates for nonwithholding foreign partnerships valid

indefinitely. (The indefinite validity

period does not apply to the

withholding certificates or documentary

evidence required to be attached to a

certificate from a non-qualified

intermediary, a U.S. branch of a foreign

institution, or a foreign non-withholding

partnership.) In addition, Forms W–8

furnished by an integral part of a foreign

government, a foreign central bank of

issue, or the Bank for International

Settlements are valid indefinitely. For

these certificates, the information

required is likely to change only

infrequently. What may change more

frequently is the withholding rate

information that an intermediary or

foreign partnership may have to furnish

to a withholding agent on a separate

statement, which the intermediary or

partnership must update as often as is

necessary to insure that the withholding

agent withholds at the proper rates. See

§ 1.1441–1(e) (3)(iv) and (5)(v) for a

description of the statement and

§ 1.1441–1(e)(4)(ii)(D) for related

validity rules.

i. Effect of Changes in Circumstances.

Proposed § 1.1441–1(e)(4)(ii)(D), dealing

with changes in circumstances affecting

the validity of a Form W–8, is revised

to clarify the due diligence imposed on

a non-qualified intermediary who

becomes aware of a change in the

circumstances affecting the validity of a

withholding certificate that it has

received and transmitted to the U.S.

withholding agent or another

intermediary. The final regulations

provide that, in such a case, the nonqualified intermediary must inform the

person to whom it provided the affected

withholding certificate (i.e., the U.S.

withholding agent or the other

intermediary). It must also obtain a new

withholding certificate or other

documentation to replace the certificate

or documentation that is no longer valid

due to changes in circumstances. The

same rules apply to foreign partnerships

that are not withholding foreign

partnerships and to a U.S. branch that

passes through documentation to a U.S.

withholding agent.

The final regulations also clarify that

a withholding agent does not have a

duty to inquire into possible changes of

circumstances. In other words, a

withholding agent may assume that

circumstances have not changed unless

it knows of facts suggesting that changes

in circumstances have occurred that

may affect the validity of

documentation. Changes in

circumstances relevant to the

information and certification provided

on a withholding certificate, a

statement, or in documentary evidence

affect the validity of the certificate,

statement, or documentary evidence as

of the date that the withholding agent

has actual knowledge or reason to know

of the changes. The final regulations are
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53395

revised to clarify that point and give

withholding agents the same 90-day

period as is given for a new account for

perfecting documentation (i.e., inquire

into the change of circumstances and

obtain a new certificate, if necessary).

See §§ 1.1441–1(b)(3)(iv) and 1.6049–

5(d)(2)(ii).

j. Acceptable Substitute Form. In

addition, proposed § 1.1441–1(e)(4)(vi)

is modified in response to comments

that asked that the meaning of the crossreference to § 31.3406(h)–3(c)(1)

defining an acceptable substitute form

be clarified. The revised provisions

enumerate the type of information and

certifications that must appear on any

substitute form for purposes of the

regulations under chapter 3 of the Code.

The rules are similar to the rules

contained in § 31.3406(h)–3(c)(1). Under

the final regulations, a withholding

agent must provide a copy of the

instructions to the recipient only to the

extent specified in the form and in the

instructions to the official form. As is

the case for the Form W–9, the IRS

expects that the form instructions will

waive the obligation to furnish the

official Form W–8 instructions to

customers. Further, withholding agents

are also authorized to develop

customized substitute Forms W–8 and

incorporate them as part of account

opening documents.

k. Guidance Regarding Reliance on

Withholding Certificates. Several

commentators asked for clearer

guidance on the extent to which

withholding agents may rely on forms

and the extent of their duty to inquire

into the truthfulness of information

stated on forms. In response to these

comments, the final regulations contain

a number of clarifications. Section

1.1441–1(e)(4)(viii) has been added to

provide that a withholding agent may

rely on a foreign entity’s certification of

corporate (or other) status on a Form W–

8. In the case of a withholding

certificate by or for a foreign entity

whose name is on the list of per se

foreign corporations described in

§ 301.7701–2(b)(8)(i) that claims to be a

partnership, the certificate must

represent that the entity’s partnership

status was grandfathered under the

regulations and has not been

terminated. Further, a withholding

agent that receives a beneficial owner

certificate from a foreign financial

institution may rely on such certificate

to treat the institution as the beneficial

owner unless it has information in its

records that would indicate otherwise,

or unless the certificate contains

information that would contradict such

claim (e.g., sub-account numbers or

names). If a foreign intermediary

receives payments both in its capacity

as an intermediary and for its own

account, it must furnish two certificates

in order to allow the withholding agent

to apply the proper withholding rate

and report the amounts accordingly.

Additional reliance guidance has been

added regarding claims of benefits

under a tax treaty (see explanation

under § 1.1441–6, below). Further, the

provisions dealing with a withholding

agent’s due diligence are also expanded

and clarified (see explanation under

§ 1.1441–7, below).

7. Non-Qualified Intermediaries

Some commentators requested that

the regulations eliminate the

requirement that non-qualified

intermediaries (non-QIs) pass through

Forms W–8 to the U.S. withholding

agent because investors and

intermediaries will not disclose

customer information to third parties. In

particular, some commentators

recommended that the regulations

eliminate any reference to the

intermediary procedures currently

applicable under § 35a.9999–5(b), A–9,

dealing with certification required in

order for interest to qualify as portfolio

interest. These suggestions are not

adopted. The qualified intermediary

regime is designed to provide these

benefits, but only where the

intermediary follows procedures to

insure adequate withholding

compliance. In addition, as explained in

the preamble to the proposed

regulations, the intermediary

procedures provided in § 35a.9999–5(b),

A–9 are retained because, if the

qualified intermediary regime does not

apply to the intermediary, these

procedures may be useful.

The final regulations also do not

adopt a suggestion that, for income for

which no TIN needs to be provided, the

intermediary only reports the aggregate

amount on Form 1042 without having to

report individual amounts for each

beneficial owner on a Form 1042–S.

Commentators have suggested that a

financial institution acting as an

intermediary should be required to

indicate only the proportion of a

payment subject to withholding and the

applicable rate. Should the proportion

change, the certificate furnished by the

intermediary would have to be modified

to reflect the change in circumstances.

This suggestion is not adopted because

permission to report aggregate amounts

is limited to payments made to qualified

intermediaries. In the case of a qualified

intermediary, the IRS may rely on audit

procedures in the qualified intermediary

agreement described in § 1.1441–

1(e)(5)(iii) to determine whether the

intermediary has properly advised the

U.S. withholding agent regarding each

portion of a payment to which different

withholding rates should apply. The

IRS’ ability to check the representations

made by a non-QI is limited,

particularly if the non-QI is not owned

by U.S. persons. In that case, it must

rely on reconciling the amounts paid as

reported on Forms 1042–S, disclosure of

the identity of beneficial owners (or

further intermediaries), and exchanges

of information under tax treaties. In that

context, disclosure of the exact amounts

allocated to each beneficial owner (or

further intermediary) is important to the

compliance regime applicable to nonQIs.

8. Qualified Intermediaries

a. Scope of Qualified Intermediary

Provisions. Under the proposed

regulations, a withholding agent may

rely on the certification of a foreign

person made on behalf of others to

reduce the rate of withholding. If the

foreign person has a qualified

intermediary agreement with the IRS,

the intermediary may certify without

having to furnish the certificates or

other documentation of the persons for

whom it acts. Many comments were

received regarding the proposal, which

are discussed below.

In response to comments, the final

regulations are modified to allow a

foreign branch of a U.S. financial

institution to be a qualified

intermediary (QI) in the same manner as

a foreign financial institution. However,

U.S. branches of U.S. or foreign

financial institutions are not permitted

to obtain QI status. Such difference in

treatment conforms to the distinction in

the final regulations between accounts

maintained outside the United States

and accounts maintained on-shore. See

§ 1.1441–1(e)(5)(ii) (A) and (B). This

distinction is appropriate because it

reflects the policy that the Form W–8

(signed under penalties of perjury) is the

preferred means of establishing foreign

status for transactions in the United

States. On the other hand, documentary

evidence provides appropriate evidence

of foreign status for transactions outside

the United States, especially in those

countries where financial institutions

must document the identity of

customers opening new accounts or for

whom they process certain transactions.

At the request of commentators, the

definition of a clearing organization for

purposes of § 1.1441–1(e)(5)(ii)(A) is

revised so that clearing organizations

that, as members of other clearing

organizations, do not hold physical

securities, are nevertheless considered

to hold obligations for members and,
53396 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

therefore, qualify for QI status. Further,

the final regulations allow QI status for

foreign corporations that receive U.S.

income for which the benefit of a

reduced rate is claimed under an

income tax treaty by their shareholders

(because the shareholders derive the

income as residents of an applicable

treaty jurisdiction within the meaning of

§ 1.894–1T(d)(1)). By allowing these

corporate entities to be QIs, the

regulations intend to facilitate the

processing of treaty benefits claims by

reverse hybrid entities with large

shareholdings. See discussion under

§ 1.1441–6, below. Also at the request of

commentators, a transition rule is added

to § 1.1441–1(e)(5)(i) whereby

institutions that are otherwise eligible

for QI status and that satisfy certain

criteria (as will be published by the IRS)

are permitted to act as QIs while

awaiting confirmation of their QI status.

Commentators were divided on

whether the regulations should allow a

QI to assume primary withholding

responsibility as proposed in § 1.1441–

1(e)(5)(iv). In view of these comments,

the final regulations retain the

provisions that permit the shifting of

primary responsibility for withholding

and reporting under chapter 3 of the

Code. However, because of IRS concerns

regarding compliance and comments

received from foreign institutions, the

final regulations provide that the

responsibility for Form 1099

information reporting and related

backup withholding under section 3406

may not be assigned to a QI, unless the

QI is a foreign branch of a U.S. bank or

another U.S. person or establishes that

the obligations related to information

reporting and backup withholding can

adequately be carried out by a U.S.

branch of the QI (even though the

branch itself cannot be a QI). Some

commentators suggested that, if a QI is

allowed to assume primary withholding

responsibility, it should be allowed to

do so only for all the payments that it

receives from a payor with respect to a

particular account. Permitting a QI to

assume withholding responsibility with

respect to some but not all payments to

an account would make it difficult for

payors to determine the correct amount

of withholding on payments to a single

account. This comment has been

adopted and the final regulations are

modified accordingly to provide that if

a QI assumes primary withholding

responsibility for an account, it must do

so for all payments to the account. The

decision to assume or not assume

withholding responsibility may be made

on an account-by-account basis. See

§ 1.1441–1(e)(5)(iv).

As is the case for non-QIs, the

regulations describe in greater detail the

information that must be provided by a

QI in order for the withholding agent or

payor to comply with applicable

reporting and withholding obligations.

Section 1.1441–1(e)(3)(ii)(C) requires an

allocation statement to be attached to

the intermediary withholding

certificate, if necessary to provide

sufficient information to allow the

withholding agent to determine the

applicable withholding rate or rates on

payments to the QI. Such a statement

may not be necessary if the withholding

agent allocates the assets among

separate accounts for each type of

income and applicable withholding

rates, as directed by the intermediary at

the time that the assets are acquired.

The assets with respect to which

payments of reportable amounts are

received must be allocated to one of the

three categories described below. If the

withholding agent maintains a system of

separate accounts to keep track of

different withholding rates for different

classes of income or payees, it would

maintain at least three separate accounts

corresponding to the three categories of

assets. For this purpose, a reportable

amount is defined in § 1.1441–1(e)(3)(vi)

as income subject to withholding under

chapter 3 of the Code. For reasons

explained under the heading ‘‘U.S.

Source Bank Deposit Interest and Shortterm OID’’ of this preamble, U.S. bank

deposit interest and U.S. short-term OID

amounts are also included in the

definition of reportable amount.

However, reportable amounts do not

otherwise include amounts that are not

subject to chapter 3 withholding (e.g.,

foreign source income, broker proceeds).

The three categories of assets are

described in § 1.1441–1(e)(5)(v). They

are (1) assets related to documented

non-U.S. payees; (2) assets related to

documented U.S. payees (whether or

not exempt recipients); and (3) assets

related to undocumented payees (i.e.,

payees for whom the QI holds no

documentation or holds documentation

that is unreliable). Reportable amounts

paid with respect to assets in category

1 (documented non-U.S. payees) may

benefit from a reduced rate of

withholding under the Code (e.g.,

portfolio interest) or under a treaty (i.e.,

to the extent the QI further indicates

subcategories of assets associated with

different withholding rates under an

applicable treaty).

Reportable amounts paid with respect

to category 2 (documented U.S. payees)

are not subject to withholding or

reporting under chapter 3 of the Code.

However, the payor must report the

payment on a Form 1099 by treating the

payment of a reportable amount as made

directly to any U.S. person for whom it

receives a Form W–9 to the extent the

U.S. person is not an exempt recipient.

The final regulations clarify that a QI

must agree to disclose the identity of

these U.S. persons, regardless of local

secrecy laws. The identity of U.S.

payees that are exempt recipients under

an applicable provision of the

regulations under chapter 61 of the

Code need not be disclosed to the

withholding agent. If a Form W–9

furnished by the QI to the payor on

behalf of a U.S. payee that is not an

exempt recipient is not reliable (e.g.,

missing information or obviously

incorrect TIN), the U.S. payor must

backup withhold under section 3406.

Reportable amounts paid with respect

to assets in category 3 (undocumented

owners) are treated as amounts paid to

a foreign person if the payment is an

amount subject to chapter 3

withholding. See § 1.1441–1(b) (2)(v)

and (3)(v)(B). Therefore, withholding

applies at the unreduced 30-percent

rate. Reportable amounts that are U.S.

bank deposit interest or U.S. short-term

original issue discount paid with

respect to asserts in category 3 are

treated as paid to a U.S. person who is

not an exempt recipient. Therefore, 31-

percent backup withholding applies to

those amounts and reporting on Form

1099 is required. See § 1.6049–

5(d)(3)(iii) and explanation below under

paragraph 10 (U.S. source bank deposit

interest and short-term OID).

If a QI assumes primary withholding

responsibility, it must also attach a

statement to its withholding certificate

if necessary for the U.S. withholding

agent to determine how much of each

payment is allocable to U.S. payees. All

assets are presumed allocable to foreign

persons unless the QI indicates that it is

acting for U.S. persons. The QI must

provide the same information about U.S.

payees that are not exempt recipients as

is required in the case of a QI that has

not assumed primary withholding

responsibility.

b. Agreements with Qualified

Intermediaries. The IRS intends to

finalize the revenue procedure

published in Announcement 96–23

(1996–18 I.R.B. 7) dealing with

agreements between the IRS and certain

institutions that wish to be a qualified

intermediary for purposes of the U.S.

tax withholding and reporting

provisions (including the provisions of

the Announcement regarding the

documentation of beneficial ownership

or foreign payee status (section 4.03)). A

preliminary review of applicable knowyour-customer procedures in several

countries indicates that these
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53397

procedures will generally provide

adequate information regarding the

nationality and residence status of

account holders and their status as

owners or intermediaries. The IRS

intends that the documentation

requirements imposed on QIs under

their agreements with the IRS will not

be more burdensome than those

imposed on withholding agents, payors,

or middlemen under applicable

withholding and reporting regulations.

The Announcement provides that a QI

would generally be subject to the same

Form 1042 and 1042–S reporting

requirements as apply to withholding

agents under § 1.1461–1 (b) and (c).

After further review, the IRS intends to

finalize the rules so that a QI will be

required to file an annual Form 1042

return with the IRS. Generally, a Form

1042–S will not be required if a

schedule in the form described below is

attached to the Form 1042.

Reporting on a Form 1042 would

consist of providing the following

information to the IRS: the amount of

reportable U.S. source income received

by the QI during the calendar year,

identified by pool, listing each payor’s

name, address, EIN, income type and

rate of withholding; information

regarding overpayments or balance due;

a statement regarding the audit

conducted by the QI’s internal auditor,

providing a description of the audit

conducted and including the auditor’s

opinion and summary of findings. The

audit statement should define the scope

and objective of the audit and report on

the QI’s compliance with the terms of

the QI agreement.

In addition, the Form 1042 must

attach a schedule providing information

on payments of reportable U.S. source

income made by the QI and allocated to

specified pools. Under a pool reporting

system, separate pools would generally

be required for each type of income

(e.g., interest, dividends, etc.). These

pools may have to be further subdivided

into pools consisting of income

allocable to one of the three assets

categories identified in the regulations

under § 1.1441–1(e)(5)(v)(B). Additional

pools may be required for other

purposes, including differentiating

among applicable withholding rates. For

example, assume that a QI pays

portfolio interest and U.S. source

dividends in a calendar year. The rates

applicable to portfolio interest are zero

(interest allocable to pool of

documented foreign owners), zero

(interest allocable to pool of U.S. owners

who are exempt recipients), and 30%

(interest allocable to pool of

undocumented owners), and the rates

applicable to dividends are 30%

(dividends allocable to pool of residents

in non-treaty countries), 15%

(dividends allocable to pool of residents

in treaty country eligible for this rate),

zero (dividends allocable to pool of U.S.

owners that are exempt recipients), and

zero (dividends allocable to pool of

foreign pension fund owners claiming

an exemption under a tax treaty). In

such a case, the QI may have to report

the interest and dividend income in

seven different pools.

The IRS will not require a QI to report

beneficial ownership information if this

information is otherwise reasonably

available in appropriate cases, either

under exchange of information

provisions, under income tax treaties or

under other procedures stated in the

agreement to verify compliance with

conditions for benefits claimed under

income tax treaties. Appropriate cases

for which the IRS may require beneficial

ownership information include cases in

which the IRS needs to verify

compliance with conditions under an

applicable tax treaty for reduced rates.

This includes, for example, whether an

entity claiming benefits under a tax

treaty is a resident of the applicable

treaty country, derives the income

(within the meaning of the regulations

under § 1.894–1T(d)), and meets any

applicable conditions imposed under

limitation on benefits provisions in the

treaty. The IRS intends to limit requests

for beneficial owner s identity to cases

where compliance concerns are

significant due to the size of

investments involved or the extent of

bank secrecy laws in effect in the local

jurisdiction.

The QI will not be required to provide

a Form 1042–S to its account holders. In

fact, providing such a form would not

be consistent with the collective-type

refund procedures which the IRS

intends to develop. These procedures

will allow QIs to request refunds of

overwithheld amounts on behalf of their

customers. In such a system, a Form

1042–S, which can also serve as proof

of tax withheld at source, would have to

be monitored by the IRS in order to

insure that refunds are not claimed

twice for the same amount. Collectivetype refund procedures are intended to

be the exclusive means by which

taxpayers can obtain refund of

overwithheld amounts that they have

received through a QI. Special

procedures will have to be developed in

order to reconcile this regime with

regular refund procedures applicable to

U.S. taxpayers that receive U.S. source

investment income in an account with

a QI.

With respect to audits, the proposed

regulations provide that the IRS may, in

appropriate cases, agree to rely on an

audit of a QI performed by an approved

auditor where, for example, under an

income tax treaty or local laws, the IRS

would be given access to appropriate

auditors records to verify compliance.

Records may include workpapers of,

reports prepared by, and methodology

employed by, the approved external

auditors. An auditor is approved if it is

subject to regulatory supervision under

the laws of the country in which a

significant part of the QI s activities are

expected to occur, its internal

procedures must require it to verify that

the financial institution complies with

the terms of the QI agreement and to

report non-compliance findings under

the QI agreement in the same manner as

it is required to report other findings of

non-compliance with applicable local

laws and regulatory requirements, and

its relevant records (i.e., workpapers

and reports) must be available to the

IRS.

Several comments were received

asking that audits be performed solely

by internal auditors. The IRS, however,

does not believe that it is appropriate to

rely solely on internal auditors to

perform compliance checks. The IRS

intends to permit internal auditors to

certify that appropriate procedures,

internal controls, and systems are in

effect and are sufficient to insure the

QI’s compliance with the agreement,

such as procedures to obtain

documentation upon opening of

accounts, to monitor that the address on

an account does not change to a U.S.

address or to an address outside the

treaty country (if treaty benefits are

claimed), to organize and process such

information in a way relevant to U.S. tax

withholding and reporting, to

communicate the information to

withholding agents timely and updating

the pool information when necessary;

procedures by which underwithholding

and overwithholding are identified and

addressed; and the existence of

adequate manuals and programs for

training and advising appropriate

personnel in standard operating

procedures. However, it is important

that compliance with these procedures

be verified periodically by persons who

are not also employed by the QI. The

IRS does not believe that internal

auditors provide sufficient assurances

that audits will be performed with

required impartiality, even if internal

auditors are required to operate

independently and to report exclusively

to the QI’s board of directors. However,

the IRS intends to use external audits

only periodically, either when it

becomes aware (e.g., based on a Form
53398 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

1042 or an internal audit report) that

there may be compliance problems or as

part of its regular audit program.

In addition, with respect to collection

of taxes due, the IRS intends to waive

the requirement of a bond in

appropriate cases, particularly where

the QI has assets in the United States

from which tax can be collected or

where occurrences of underwithholding

are expected to be minimal due to the

nature of the QI’s established

procedures.

In QI agreements, the IRS intends to

address the manner in which a QI may

pay to, or receive a payment from,

another intermediary. A QI making a

payment to another intermediary must

normally obtain the underlying

beneficial owner information from the

intermediary, unless the intermediary is

itself a QI. In the alternative, the QI may

agree to a private arrangement with the

intermediary that would be identical to

a QI agreement, except that it would not

be concluded with the IRS and the

intermediary would have no reporting

obligations to the IRS. Under this

regime, similar to that described for

authorized foreign agents in § 1.1441–

7(c)(2), the QI assumes responsibility for

failures by the intermediary to comply

with the documentation and

withholding procedures. The

intermediary would agree, under its

private arrangement with the QI, to be

audited in the same manner as if it were

a QI. Auditors reports would be

furnished to the QI and be available for

inspection by the IRS. A QI would

normally obtain an indemnification

from the intermediary as a protection

against its own U.S. tax liability arising

from failures by the intermediary.

Further, the IRS will permit QIs that

assume primary withholding

responsibility to be combined in a chain

of payment with QIs that do not assume

primary withholding responsibility. For

example, a U.S. withholding agent may

pay to a QI that assumes primary

withholding responsibility (QI1) and

withhold no amount. QI1 may, in turn,

pay a customer that is a QI that does not

assume primary withholding

responsibility (QI2). In such a case, QI1

must withhold on payments to QI2 in

the same manner that a U.S.

withholding agent would have had to

withhold if it were paying the amount

to QI2. QI2 may also be dealing with a

third tier, QI3, that assumes primary

withholding responsibility. In such a

case, QI2 would inform QI1 that the

portion of the payment allocable to QI3

(without having to disclose QI3’s

identity to QI1) is allocable to a QI that

has assumed primary withholding

responsibility. Accordingly, neither QI1

nor QI2 would withhold on the portion

of the payment allocable to QI3.

9. Clarification of Reporting and

Withholding Obligations for Payments

to and by Foreign Intermediaries

Commentators have asked for

clarification of how the procedures

applicable to payments to foreign

intermediaries relate to the exempt

recipient rules under chapter 61 and to

a foreign intermediary’s reporting and

withholding obligations under chapter

61 of the Code and section 3406.

Under chapter 61 of the Code and

section 3406, the reporting and backup

withholding requirements depend, in

part, upon the status of the payee as an

exempt recipient. Generally, exempt

recipients include corporations and

financial institutions. See § 1.6049–

4(c)(1)(ii). The category of persons

treated as exempt recipients may vary

depending upon the type of income

being paid. For this purpose, the payee

is generally identified as the person to

whom the payment is actually made.

This person is not necessarily the

beneficial owner of the income. For

example, a custodian receiving a

payment may be a payee for purposes of

chapter 61 of the Code, even though it

is not the beneficial owner of the

amounts that it receives on behalf of a

customer. Under the final regulations, a

payment to a nominee or agent is treated

as a payment to an exempt recipient,

which, as a result, is exempt from

information reporting and backup

withholding. See § 1.6049–4(c)(1)(ii)(O).

Treating a U.S. intermediary as an

exempt recipient avoids multiple

information reporting and insures that

the liability for information reporting

and, if applicable, backup withholding,

falls upon the last person in a chain of

intermediaries, that is the intermediary

that has the direct relationship with the

customer.

When a payment is made to a foreign

intermediary, however, the IRS may not

be able to obtain information and, thus,

collect the tax that may be due from the

ultimate owner if the payment to the

foreign intermediary is exempt from

information reporting (assuming that the

intermediary is an exempt recipient). If

the payment to the foreign intermediary

involves amounts subject to

withholding under chapter 3 of the

Code (e.g., U.S. source dividends, U.S.

source interest on obligations in

registered form, or U.S. source

royalties), a U.S. tax is collected at

source at a 30-percent rate (assuming

that the intermediary has furnished no

reliable information concerning the

beneficial owners of those payments;

see applicable presumptions rules, as

revised). If, however, the payment is not

subject to chapter 3 withholding (e.g.,

broker proceeds or foreign source

income) and the beneficial owner is a

U.S. person, the lack of information

regarding the beneficial owner is of

greater concern to the IRS.

The regulations proposed in 1988 and

in 1996 set forth procedures for

payments to intermediaries that are, in

part, designed to address some of these

concerns (see, for example, the 1996

proposal to apply 30-percent

withholding to U.S. source bank deposit

interest unless beneficial owner

documentation is obtained). The final

regulations clarify how withholding and

reporting under chapter 3 of the Code

interacts with Form 1099 reporting and

backup withholding.

Under § 1.1441–1(b)(2)(v)(A), a

payment to a foreign intermediary (if

reliably identified as such by the payor)

that has not assumed primary

withholding responsibility, is treated as

a payment made directly to the person

or persons for whom the intermediary

(whether or not a QI) collects the

payment. If that person is

undocumented (i.e., has not furnished a

reliable withholding certificate or other

appropriate documentation), the person

is presumed to be foreign under § 1.144–

1(b)(3)(v)(B) to the extent the payment

consists of an amount subject to chapter

3 withholding. Therefore, for example,

if a U.S. source dividend is paid to a

foreign intermediary that furnishes a

Form W–9 for another person and such

U.S. person is not an exempt recipient,

the payor must treat the U.S. person as

the payee for purposes of the Form 1099

reporting provisions under section 6042

and backup withholding under section

3406. If the U.S. person is not an exempt

recipient, the payment is reportable

even though the person who actually

receives the payment is the foreign

intermediary. The foreign intermediary

is an exempt person by virtue of being

a foreign person and a nominee.

However, as clarified under the final

regulations, the fact that the

intermediary may be an exempt person

is not relevant because, under the final

rules, it is not a payee with respect to

a payment associated with underlying

documentation attached to the

certificate. See §§ 1.6049–5(d)(3)(i) and

1.1441–1(b)(3)(v)(B).

If, however, the amount paid to the

person identified as a foreign

intermediary is not of a type that is

subject to chapter 3 withholding (e.g.,

foreign source income, broker proceeds),

then § 1.6049–5(d)(3)(ii) provides that

the amount is treated as paid to an

exempt recipient and, as such, exempt

from reporting and backup withholding
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53399

under section 3406. This rule is subject

to two exceptions. First, a U.S. payor

with actual knowledge that the person

for whom the intermediary collects the

payment (including broker proceeds and

foreign source income) is a U.S. person

is required to report the payment (and

backup withhold in the absence of a

TIN) if the U.S. person is not an exempt

recipient. See § 1.6049–5(d)(3)(iv),

Example 7. A second exception is made

for U.S. source bank deposit interest and

short-term OID. Because these amounts

are not subject to withholding, this

exception appears under § 1.6049–

5(d)(3)(iii) and not under section 1441.

As explained under the heading ‘‘U.S.

Source Bank Deposit Interest and Shortterm OID’’ of this preamble, a payment

of such amounts to a foreign

intermediary (or certain foreign

partnerships) is reportable unless the

intermediary establishes that the payee

(other than an intermediary or a flowthrough entity) is a foreign person or an

exempt recipient.

Further, provisions have been added

to explain how the U.S. withholding

and reporting requirements apply to

payments made by a foreign

intermediary, certain U.S. branches, or

certain foreign partnerships. A foreign

intermediary that furnishes a valid

intermediary withholding certificate to

the withholding agent is considered to

have complied with its own reporting

and withholding obligations under

chapters 3 and 61 of the Code and

sections 3402, 3405, or 3406. See, for

example, § 1.1441–1(b)(6) applicable to

payments of amounts subject to chapter

3 withholding by a foreign intermediary

or a U.S. branch and corresponding

provisions in § 1.6049–5(b)(14) for

interest and § 1.6042–3(b)(1)(vi) for

dividends. Similar provisions are made

under § 1.1441–5(c)(3)(v) for payments

by foreign partnerships that are not

withholding foreign partnerships. For

example, a foreign custodian bank that

is not a qualified intermediary and acts

as an agent for a nonresident alien

individual who holds U.S. publicly

traded obligations in registered form is

not required to withhold under section

1441 when it credits the customer’s

account if it has furnished the

individual’s Form W–8 (or alternative

documentary evidence) to the U.S.

withholding agent in compliance with

§ 1.1441–1(e)(3)(iii). If, however, the

foreign custodian bank knows that the

Form W–8 (or alternative documentary

evidence) is not reliable and has not so

informed the U.S. withholding agent

who, as a result, has not withheld, then

the bank is not relieved from its

obligation to withhold under section

3406 because it has not acted in

compliance with the regulations under

section 1441.

These rules apply when the

withholding agent/payor holds a valid

intermediary withholding certificate.

The final regulations add provisions to

clarify applicable presumptions when

the status of the intermediary is not

reliably established or parts of the

intermediary withholding certificate are

not reliable. See a description of these

provisions under the heading

‘‘Presumptions—Payments to Foreign

Intermediaries’’ of this preamble.

10. U.S. Source Bank Deposit Interest

and Short-Term OID

Some commentators objected to the

requirement that eligibility for the

exemption from U.S. tax on U.S. source

bank deposit interest be subject to the

same beneficial ownership

documentation requirements that apply

to portfolio interest, suggesting lack of

statutory authority and an increase in

burden in the context of interbank

financing transactions.

In view of these comments, the final

regulations do not require a withholding

agent to withhold 30-percent on bank

deposit interest under section 1441 in

the absence of beneficial owner

documentation. Instead, documentation

regarding the beneficial owner is

required under sections 6049 and 3406

for purposes of avoiding information

reporting and backup withholding. This

documentation requirement also applies

to short-term OID. See § 1.6049–

5(d)(3)(iii). Therefore, the final

regulations provide that a payment to a

foreign intermediary of U.S. source

short-term OID or of U.S. source interest

on deposits with U.S. banks and other

financial institutions described in

sections 871(i)(2)(A) and 881(d) is

treated as made to a foreign payee or an

exempt recipient only to the extent that

the payor can treat the payment as made

to a foreign beneficial owner under

§ 1.1441–1 (d)(4) or (e)(1)(ii) or if the

payment is made to a qualified

intermediary that has assumed primary

withholding responsibility or to a

withholding foreign partnership. In all

other cases, the foreign intermediary is

not treated as an exempt recipient and

its certification that it is a foreign person

is not sufficient to make the payment

non-reportable under § 1.6049–5(b)(12).

Under § 1.6049–5(d)(3)(iii), the payment

is treated as made directly to the

unidentified owners for whom the

intermediary receives the payment and,

as such, is treated as made to a U.S.

payee who is not an exempt recipient.

The regulations provide special rules

to help a payor determine whether the

person to whom it makes the payment

is a foreign or a U.S. person, and, if

presumed to be a foreign person under

these rules, whether it is an

intermediary or is acting for its own

account. These presumptions are

helpful if the payment is to a foreign

person that qualifies as an exempt

recipient on an ‘‘eyeball’’ basis (e.g., a

foreign bank with the word ‘‘bank’’ in

its name). In such a case, no

documentation is required to be

provided by such person and the payor

may have no ability to determine

whether the person is U.S. or foreign

and whether it is acting as an

intermediary or for its own account. A

person receiving a payment is presumed

to be a foreign person for the purpose

of these rules if the payor has actual

knowledge of the payee’s employer

identification number and that number

begins with the two digits ‘‘98,’’ if the

payor’s communications with the payee

are mailed to an address in a foreign

country, or if the name indicates that

the payee is a per se corporation under

§ 301–7701–2(b)(8)(i), or the payment is

made outside the United States. The

final regulations under § 1.6049–

5(d)(4)(iii) presume that a person

receiving a payment of U.S. bank

deposit interest or U.S. short-term OID

is not acting for its own account (note

that this presumption is different from

the general presumption under

§ 1.1441–1(b)(3)(v)(A) that presumes a

foreign person to be acting for its own

account unless it furnishes certain

documentation establishing its status as

an intermediary). Thus, in the absence

of documentation and any evidence that

the foreign person is acting for its own

account, a payor would presume that

the payment is made to unidentified

owners for whom the person receives

the payment, required to be reported

under section 6049 and subject to 31-

percent backup withholding under

section 3406.

A payee may rebut this presumption

by furnishing an indication of beneficial

ownership to the payor. Such indication

may be provided in any manner as the

parties may choose, but must be

reflected in the payor’s records. An

indication by a foreign person that it is

not an intermediary does not have to be

made under penalties of perjury.

In order to minimize disruptions to

high-volume wholesale banking

transactions and to the sale and

repurchase (repo) market, the final

regulations exempt from these

documentation requirements deposits

with banks and other financial

institutions that remain on deposit for a

period of two weeks or less, and

amounts of original issue discount
53400 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

arising from any repo transaction that is

completed within a period of two weeks

or less. Further, amounts paid with

respect to certain bearer obligations are

also exempt.

11. Presumptions—In General

Proposed § 1.1441–1(f), dealing with

presumptions of U.S. or foreign status in

the absence of reliable documentation,

is restated with a number of

clarifications, in §§ 1.1441–1(b)(3) and

1.6049–5(d) (2) through (5). The

presumptions in § 1.1441–1(b)(3) apply

to amounts that are subject to chapter 3

withholding. The same presumptions

apply under § 1.6049–5(d)(2) to

payments that are not subject to chapter

3 withholding (e.g., foreign source

income, sales proceeds), with a few

differences. As under the proposed

regulations, payments that a payor or

withholding agent cannot reliably

associate with documentation are

presumed to be made to a U.S. payee

who is not an exempt recipient, in

which case 31-percent backup

withholding applies if the payment is

otherwise a reportable payment (within

the meaning of the applicable

information reporting provisions under

chapter 61 of the Code). As an exception

to this rule, a payee is presumed to be

foreign if it is an exempt recipient for

whom indicia of foreign status exist.

Special rules are also provided for

scholarships and pensions, for which no

backup withholding applies under

section 3406, and for certain payments

to offshore accounts. See § 1.1441–

1(b)(3)(iii).

In determining the extent to which

the withholding agent can consider that

it can rely on documentation to

determine the extent of its withholding

obligations, the final regulations rely on

a concept of ‘‘reliable association’’ of a

payment with withholding certificates

or other documentation. This concept

replaces the requirement under

§ 1.1441–1(f)(1)(ii) of the proposed

regulations that the withholding agent

hold required documentation. The

definition of ‘‘reliable association’’ is set

forth in § 1.1441–1(b)(2)(vii). As in the

proposed regulations, a withholding

agent cannot reliably associate a

payment with documentation if the

documentation is lacking or is

unreliable. These provisions apply

regardless of whether documentation is

otherwise required. For example, a

payment of U.S. source royalties to a

corporation with the word ‘‘Inc.’’ in its

name requires no documentation from

the payee under section 6050N because

the payee’s status as an exempt

recipient is inferred from its name (i.e.,

on an ‘‘eyeball’’ basis) under § 1.6049–

4(c)(1)(ii)(A)(1). In such a case, the

payor must consider that there is a per

se lack of documentation. Therefore,

under § 1.1441–1(b)(3)(iii)(A), a

payment to such an exempt recipient is

presumed made to a foreign person if

certain indicia of foreign status are

present. If these indicia are present, the

payor, if also a withholding agent, must

withhold 30-percent from the payment

under section 1441.

The final regulations modify the

presumptions for certain payments to

offshore accounts. Under the proposed

regulations, a payment to a foreign

account is presumed to be made to a

U.S. person. Thus, the payor must file

a Form 1099 for the payee, but the

payment is not subject to backup

withholding. See proposed §§ 1.1441–

1(f)(2)(ii) and 31.3406(g)–1(e). The final

regulations provide that, in the case of

a payment to a foreign account of an

amount subject to chapter 3

withholding, the payment is presumed

to be made to a foreign person and not

to a U.S. person. Thus, the withholding

agent must withhold on the payment at

a 30-percent rate. In that case, the

foreign status presumption insures that

a tax is paid on such amounts since,

under § 31.3406(g)–1(e), no backup

withholding would apply to an

undocumented account if the account

holder were presumed to be a U.S.

person. See § 1.1441–1(b)(3)(iii)(D). The

final regulations adopt the rule in the

proposed regulations for payments

involving amounts that are not subject

to chapter 3 withholding (i.e., payee is

presumed to be a U.S. person who is not

an exempt recipient, subject to Form

1099 reporting but not to backup

withholding). See §§ 1.1441–1(b)(3)(iii)

and 1.6049–5(d)(2)(i).

The final regulations include

presumptions regarding the

characteristics of a payee so that a payor

or withholding agent may determine

whether to treat the payee as an owner

of an account or as an intermediary (see

§ 1.1441–1(b)(3)(v)(A)), and as an

individual, a trust, an estate, a

corporation or a partnership. See

§ 1.1441–1(b)(3)(ii). The final

regulations also make a number of

clarifications to the presumption

provisions in response to comments.

First, the revised rules clarify that the

presumptions are mandatory. A payor

that withholds a lesser amount or does

not report a payment contrary to what

the presumptions would require may be

liable for the amount of the tax in

addition to interest and penalties, even

if the withholding agent acted on the

basis of actual knowledge. Although the

liability for the tax may be eliminated if

the withholding agent establishes that it

withheld the proper amount (based on

its actual knowledge or otherwise),

liability for interest and penalties may

be assessed. This rule is consistent with

the requirement under the regulations to

provide documentation before a

payment is made so that a withholding

agent may not rely on actual knowledge

to reduce a withholding or reporting

obligation. Treating the presumptions as

mandatory rather as mere safe harbors is

necessary to avoid undermining the

requirement that withholding agents

obtain documentation prior to the time

of a payment.

On the other hand, a withholding

agent or payor may not rely on the

presumptions if it has actual knowledge

(or, in the case of amounts subject to

chapter 3 withholding, reason to know)

of facts that would require it to

withhold an amount greater than would

otherwise be required based upon an

applicable presumption or to report a

payment that would be exempt from

reporting under an applicable

presumption. See § 1.1441–1(b)(3)(ix)

and (b)(7).

The final regulations clarify that if,

under the rules, a payment is presumed

to be made to a U.S. payee, the

determination of whether to report on a

Form 1099 or backup withhold is

governed by the provisions under

chapter 61 of the Code and section 3406

and not by chapter 3 of the Code. See

§ 1.1441–1(b)(3)(i). Also, the final

regulations clarify that a withholding

agent that withholds in accordance with

an applicable presumption is not liable

under another withholding provision for

that payment, even if the payee is

subsequently determined to have a

status different from its presumed

status. See § 1.1441–1(b)(3)(ix)(A).

12. Presumptions—Grace Period

Several comments were received

regarding the grace period provisions

under proposed § 1.1441–1(f)(2)(ii).

Under the proposed rules, a

withholding agent or payor may

presume that an account holder for

whom specified indicia of foreign status

exist at the time that a payment is first

credited to the account may be treated

as a foreign person, even if no

documentation has been received before

the account is first credited. This

presumption has two consequences:

first, backup withholding is deferred

until the end of the grace period (and

may never be required if foreign status

documentation is provided when or

before the grace period terminates);

second, an amount must be withheld

under chapter 3 of the Code without the

benefit of a reduced rate under the Code

or an income tax treaty if the amount is
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53401

income subject to chapter 3

withholding. At the expiration of the

grace period, the account holder is

treated as a U.S. or foreign person,

depending upon whether

documentation is furnished, and, if so,

what type of documentation is

furnished.

Commentators argued that a

withholding agent should be allowed to

rely on the apparent status of the

beneficial owner to grant a reduced rate

of withholding for payments made

during the grace period. They point to

the prohibition against depleting the

account below 31-percent of the

amounts paid and argue that this

prohibition protects the government’s

interest that the proper amount of tax be

collected upon expiration of the grace

period if entitlement to a reduced rate

is not confirmed. This comment is

accepted but only if the withholding

agent has received a faxed Form W–8.

Thus, for example, a reduced rate of

withholding for portfolio interest or

under a tax treaty can apply to amounts

credited during the grace period based

on a faxed Form W–8.

Commentators also argued that any

backup withholding should not be

retroactively imposed after the

expiration of the 90-day grace period

when documentation is still lacking at

that time, because of the difficulty to

deduct and deposit a tax after the fact.

In response to these comments, the final

regulations are revised to impose

backup withholding only to payments

credited to the account after the

expiration of the grace period if, at that

time, documentation is still lacking or

unreliable. The presumption that the

account holder was a foreign person

during the grace period is not reversed.

Thus, if amounts credited during the

grace period were subject to

withholding at less than the full 30-

percent rate, and, at the end of the grace

period, the documentation is still

lacking or unreliable, then the payor

must make an adjustment in order to

correct the underwithholding, so that all

amounts credited during the grace

period are withheld upon at the full 30-

percent rate (to the extent they are

amounts subject to chapter 3

withholding). Under the final

regulations, amounts credited to the

account during the grace period could

be subject to no or reduced withholding

if the withholding agent receives a faxed

Form W–8. Consistent with the 30-day

grace period under § 31.3406(d)–3(c),

the provisions are revised to treat

reinvestment as withdrawals. The grace

period is terminated if withdrawals or

other events leave a balance in the

account that is insufficient to cover

potential backup withholding liability.

See § 1.6049–5(d)(2)(ii) and § 1.1441–

1(b)(3)(iv) of the final regulations, as

renumbered.

For purposes of withholding under

chapter 3 of the Code, the 90-day grace

period applies to all payments that are

exempted from the TIN requirement

under § 1.1441–6(b)(2)(ii). For purposes

of information reporting on amounts not

subject to withholding, the 90-day grace

period applies to all payments

reportable as dividends, interest,

royalties, and broker proceeds.

Although comments were received

asking that the grace period be extended

to existing accounts, the final

regulations do not do so. A grace period

should not be necessary for existing

accounts where the expiration of

withholding certificates is a predictable

event for which withholding agents and

payors can plan accordingly. On the

other hand, the grace period is extended

to situations where the validity of

documentation expires because of a

change of circumstances. In such a case,

it is reasonable to allow time to obtain

new or corrected documentation to

account for changes affecting the

validity of documentation in an

unexpected manner. The final

regulations also extend the availability

of a grace period for purposes of

payments for which a Form 8233 is

required (i.e., claim of treaty benefits for

compensation to nonresident alien for

personal services). This benefit is

intended to facilitate withholding on

these payments to beneficial owners

who are awaiting their social security

number or ITIN. The final regulations

clarify that the grace period provisions

apply at the option of the payor or

withholding agent. Therefore, a payor or

withholding agent is not required to

implement procedures offering a grace

period to its customers.

13. Presumptions—Payments to Foreign

Intermediaries

At the request of commentators, the

final regulations clarify how the

presumptions apply to payments to

foreign intermediaries in the absence of

reliable documentation both for

purposes of chapter 3 and chapter 61

information, and sections 3402, 3405,

and 3406. Under § 1.1441–1(b)(3)(v)(A),

a payee who has not provided a valid

intermediary withholding certificate or

whose intermediary withholding

certificate is defective because, for

example, the information on the

certificate regarding the intermediary is

lacking or unreliable, must generally be

treated as an undocumented owner of

the payment. Under § 1.1441–1(b)(3)(ii),

an undocumented owner is presumed to

be an individual, a trust, or an estate, if

the payee appears to be such a person.

In the absence of reliable indication that

the payee is an individual, a trust, or an

estate, the payee is presumed to be a

corporation if it can be treated as a

corporation under the ‘‘eyeball’’ test

described in § 1.6049–4(c)(1)(ii)(A)(1) or

is presumed to be one of the persons

enumerated under § 1.6049–4(c)(1)(ii)

(B) through (Q) if it can be so treated

under an ‘‘eyeball’’ test basis. If it

cannot be so treated, then it is presumed

to be a partnership.

If the payee is presumed to be an

individual, a trust, an estate, or a

partnership, it is presumed under

§ 1.1441–1(b)(3)(iii) to be a U.S. person

who is not an exempt recipient and the

information reporting provisions under

chapter 61 of the Code and section 3406

would govern the payor’s reporting and

withholding obligations with respect to

the payment. If the payee is presumed

to be a corporation or another exempt

recipient under § 1.6049–4(c)(1)(ii) (B)

through (Q), then it is also presumed to

be a U.S. person. However, if the

amount paid consists of an amount that

is subject to withholding under chapter

3 of the Code (e.g., U.S. source interest

or dividends), the payee is presumed to

be a foreign person if there are indicia

of foreign status, in which case

withholding at the 30-percent rate is

required under chapter 3 of the Code.

See § 1.1441–1(b)(3)(iii)(A).

If the payment can be treated as made

to a foreign intermediary but the

intermediary’s withholding certificate is

unreliable either because the

withholding agent or payor has not been

given sufficient information to

determine the proper amount of

withholding or because some or all of

the underlying certificates that are

required to be attached are lacking or

are unreliable, the payment is presumed

made to a foreign nominee acting for an

undocumented owner. Therefore, the

payment is subject to withholding under

chapter 3 of the Code at the unreduced

30-percent rate to the extent it consists

of income subject to such withholding

under chapter 3 of the Code. See

§ 1.1441–1(b)(3)(v)(B). Additional

presumptions are provided under

§ 1.1441–1(b)(3)(v) (C) and (D) to deal

with lacking or unreliable information

regarding the allocation of a payment

among beneficial owners or other

payees and lacking or unreliable

information regarding whether the

intermediary’s certificate identifies all

of the persons to whom the payment

relates. Section 1.6049–5(d)(3)(ii)

clarifies, however, that if the payment is

not an amount subject to chapter 3

withholding, then the payment is
53402 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

presumed to be made to an exempt

recipient not reportable under section

6042, 6045, or 6049 (except for certain

payments of U.S. bank deposit interest

or U.S. short-term OID under § 1.6049–

5(d)(3)(iii)).

The lack of reliable information

regarding beneficial owners or the

allocation of the payments among them

raise an issue as to how the amounts

should be reported on a Form 1099 (if,

for example, the withholding agent has

a Form W–9 from a beneficial owner but

has no or unreliable information

regarding how much the payment is

allocable to such person) or on a Form

1042–S. The final regulations under

§ 1.1461–1(c)(4)(iv) provide that

payments to an intermediary or foreign

partnership for the account of

undocumented owners or partners are

reportable on a single Form 1042–S

made out to the intermediary, and

bearing the mention ‘‘unknown

owners.’’ The final regulations,

however, do not contain guidance for

situations where the withholding agent

or payor is lacking reliable allocation

information. This matter is under

consideration by the IRS and comments

are solicited regarding appropriate

procedures before guidance is issued.

The final regulations contain similar

provisions for payments to foreign

partnerships under § 1.1441–5(d). See

the explanation under § 1.1441–5,

below.

15. Late-Received Form W–8—Cure

Procedures

Generally, a Form W–8 or other

applicable documentation must be

furnished to the withholding agent or

payor prior to the time of payment. The

proposed regulations in § 1.1441–1(f)(5)

prescribe procedures allowing a Form

W–8 or other documentation to be

furnished late (i.e., after the 90-day

grace period), subject to interest and

penalties. They also contemplate the

possibility that, upon examination, the

IRS might require the withholding agent

or payor to furnish additional proof in

support of the claim of foreign status or

eligibility for a reduced rate of

withholding under the Code or a tax

treaty. Commentators asked for an

exemption from interest and penalties

when it is determined that there is no

underlying tax liability once the

documentation has been provided or, at

least, that the liability be abated where

the withholding agent has acted in good

faith.

The final regulations do not eliminate

the possibility that interest and

penalties may apply because the

liability for those items is clearly

contemplated under section 1463.

However, several revisions are made to

relieve liability in certain cases. See

§ 1.1441–1(b)(7), restating the provisions

of proposed § 1.1441–1(f)(5). First, in

order to eliminate the possibility of a

double interest charge when the

respective unsatisfied tax liabilities of

the withholding agent and of the

beneficial owner run concurrently, the

regulations are modified to limit

collection to one amount of interest

only. In that regard, interest will not be

assessed against the withholding agent

if it otherwise is assessed or collected

against the beneficial owner. Next, in

order to clarify that the cure rules apply

to all cases for which documentation

must be provided to the withholding

agent, cross references have been added

under §§ 1.1441–4(f), 1.1441–5(f),

1.1441–6(f), 1.1441–8(e), 1.1441–9(c),

and 1.1443–1(b)(3). In addition, the final

regulations make this relief available on

a retroactive basis for all open years.

This action is intended to eliminate any

ongoing controversy with the IRS

regarding an issue that is unclear under

current law. The final regulations clarify

that the period for calculating penalties

and interest is limited to the time that

the liability remains outstanding, i.e.,

starting with the due date for filing the

return under section 6601 (i.e., March

15 of the year following the year in

which the payment was made) and

ending with the date that the tax is

considered paid (i.e., the time that the

documentation is furnished establishing

the proper amount of tax due or that the

tax is actually paid, whichever is

earlier). Also, commentators asked for a

clarification of how late deposit

penalties would apply when the

withholding agent fails to withhold.

This issue remains under consideration.

16. Due Diligence With Respect to

Information Returns Required Under

Chapter 61 of the Code

The Interest and Dividend Tax

Compliance Act of 1983 provided that

the penalty for the failure to file an

information return, furnish a copy of it

to a payee, or supply a TIN can be

waived if it is shown that the filer

exercised due diligence in filing the

return, furnishing it to a payee, or

supplying the payee’s TIN. The due

diligence standard applied to failures on

information returns reporting dividends

under section 6042, patronage

dividends under section 6044, and

interest or OID under section 6049. The

IRS issued regulations in question and

answer form providing the prerequisites

to establish due diligence. See

§§ 35a.9999–1 through 35a.9999–5.

The Omnibus Budget Reconciliation

Act of 1989, Public Law 101–239, 103

Stat. 2393, repealed sections 6676 and

6678 with the enactment of uniform

information reporting penalties under

sections 6721 through 6724 and

replaced due diligence with a

reasonable cause standard under newly

enacted section 6724. However,

Congress provided that the separate and

higher due diligence waiver standard for

returns filed under sections 6042, 6044,

and 6049 be considered to meet

reasonable cause. H. Rep. No. 247,

101st. Cong., 1st. Sess., at 1385 (1989).

These final regulations remove the Q/

As under Part 35a, effective January 1,

1999. Because due diligence will remain

in effect, the IRS will retain the relevant

Q/As set forth in Part 35a. These final

regulations redesignate the relevant Q/

As under § 301.6724–1(g).

17. Effective Dates

Many comments were received

regarding the effective dates of the final

regulations. Commentators argued that

the January 1, 1998 effective date in the

proposed regulations should be

extended because of the anticipated

time required to complete QI

agreements and for withholding agents

to make the administrative and

operating systems changes that will be

necessary to comply with the

regulations. However, commentators

have argued that provision should also

be made for a financial institution to

elect earlier adoption of the new

requirements where possible.

The final regulations accommodate

these concerns. The effective date is

changed to January 1, 1999. In view of

the later effective date and comments

that staggered effective dates make

system adjustments more difficult and

costly, all special delayed effective dates

rules are eliminated. Also, transition

rules are modified for existing

certificates. Valid withholding

certificates that are held on December

31, 1998, remain valid until the earlier

of December 31, 1999 or the due date of

expiration of the certificate under rules

currently in effect (unless otherwise

invalidated due to changes in the

circumstances of the person whose

name is on the certificate). Further,

certificates dated prior to January 1,

1998 that are valid as of January 1, 1998,

remain valid until the end of 1998,

irrespective of the fact that their validity

expires during 1998 (other than by

reason of changes in the circumstances

of the person whose name is on the

certificate).

The final regulations do not accelerate

the effective date of certain provisions

as had been requested by several

commentators. Although doing so

would provide relief to a number of
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53403

taxpayers, it would also complicate the

many system adjustments that

withholding agents, particularly

financial institutions with large volume

of cross-border payments, must

implement before the effective date of

these regulations. The IRS and Treasury

feel that the benefits of accelerating

certain provisions would not

sufficiently outweigh the added costs

and burdens to many withholding

agents.

C. Comments and Changes to § 1.1441–

2

1. Amounts Subject to Withholding

Under § 1.1441–1 of current

regulations, an amount is subject to

withholding only if it is from sources

within the United States. The final

regulations under § 1.1441–2(a) clarify

that an amount can be sourced within

the United States irrespective of the fact

that the source is undetermined at the

time of payment. This clarification

addresses the Tax Court’s ruling in

Albert J. Miller v. Commissioner, T.C.

Memo 1997–134, 73 T.C.M. (CCH) 2319,

that an amount whose source cannot be

determined at the time paid is sourced

outside the United States for purposes

of sections 871(a) or 881(a) and the

withholding provisions of chapter 3 of

the Code.

2. Fixed or Determinable Annual or

Periodical Income

The definition of the term fixed or

determinable annual or periodical

(FDAP) income under existing

regulations under section 1441 is

retained in the final regulations and

clarified. In particular, § 1.1441–

2(b)(1)(iii) addresses three types of

uncertainties that a withholding agent

may encounter: (1) The proportion of

the payment that constitutes income

cannot be determined when a payment

is made (e.g., a payment made on an

obligation that may include interest, but

the exact amount of interest cannot be

determined because the determination

is contingent upon future events); (2)

the proportion of the payment that

constitutes U.S. source income cannot

be determined at the time of payment;

or (3) the fact that the payment may be

income in the future cannot be

anticipated at the time of payment. Only

in the third case would the payment not

constitute FDAP income. In the first two

cases, income is actually being paid.

The only uncertainty is the amount that

the recipient should include in income

and this uncertainty does not prevent

the payment from constituting fixed or

determinable annual or periodical

income for purposes of section 871(a) or

881(a) and the withholding provisions

of chapter 3 of the Code. See also the

additional provisions under §§ 1.1441–

2(b)(1)(iii) and 1.1441–3(d)(1) dealing

with determinability and rules of

withholding for items whose source

cannot be determined at the time of

payment.

3. Original Issue Discount

In response to comments, the final

regulations regarding withholding on

original issue discount (OID) are

simplified. As a general principle,

withholding is required on a payment

that is treated as taxable OID under

section 871(a)(1)(C) or 881(a)(3)(A) to

the extent the withholding agent knows

the amount that is OID. That amount is

known to the withholding agent if it

knows how long the beneficial owner

has held the obligation on which a

payment is made, the terms of the

obligation, and the extent to which the

beneficial owner purchased the

obligation at a premium. A withholding

agent has knowledge if the information

is obtainable upon exercising reasonable

efforts. The information is not

considered obtainable in the case of

payments with respect to publicly

traded securities where the withholding

agent, consistent with normal industry

practices, does not have a direct

customer relationship with the person

who has actual knowledge of the

relevant information or has no access to

this information in the normal course of

its business due to the manner in which

the obligation is held (e.g., in street

name or through intermediaries). In the

case of a withholding agent maintaining

a direct customer relationship with the

beneficial owner, knowledge regarding

the owner’s holding period and

acquisition premium is considered to be

reasonably available to the withholding

agent. Because of the complexities that

may be involved in calculating the

amount taxable to the owner and, thus,

subject to withholding, withholding

agents may rely on the most recently

published ‘‘List of OID Instruments’’ or

similar list published by the IRS

(currently contained in IRS Publication

1212 (available from the IRS Forms

Distribution Centers)).

Notwithstanding the rules described

in the preceding paragraph, withholding

is required with respect to OID that

would qualify as portfolio interest

except for the fact that documentation

required under section 871(h)(5) is not

furnished to the withholding agent. In

the absence of information regarding the

amount of OID, the withholding agent

may rely on IRS Publication 1212. The

final regulations clarify that no

withholding applies to amounts that are

not otherwise subject to chapter 3

withholding (e.g., OID on obligations in

bearer form that qualifies as portfolio

interest).

3. Securities Lending Transactions

The final regulations add paragraph

(b)(4) to cross-reference the regulations

under sections 871 and 881 dealing with

securities lending transactions and

equivalent transactions. Thus, the

character of the income arising from

these transactions applies for purposes

of determining the amount of

withholding under chapter 3 of the

Code. Similar rules apply for purposes

of information reporting and backup

withholding on interest and dividends.

See §§ 1.6042–3(a)(2) and 1.6049–

5(a)(5). See § 1.1441–1(b)(4)(i) for

documenting interest equivalent

amounts for which the beneficial owner

claims a portfolio interest exemption.

4. Relief for Deemed Payments of

Income

Several comments were received

regarding the difficulty for a

withholding agent to withhold on an

amount of income that is not

represented by cash or property (i.e.,

deemed payments of income). The final

regulations in § 1.1441–2(d) provide

relief in cases in which the withholding

agent does not have custody of, or

control over, property of the taxpayer

who is deemed to receive income under

section 871(a) or 881(a) or does not have

knowledge of the events that give rise to

the deemed payment. Relief, however,

does not apply for deemed payments

arising between related parties or as part

of a pre-arranged plan to avoid

withholding. Therefore, a withholding

obligation arising out of a deemed

payment resulting from an allocation of

income under section 482 is not

eliminated because the parties are

related. Examples are provided for

cancellation of debt and constructive

income arising from correcting prior

underwithholding by paying the amount

of tax due to the IRS. Withholding on

deemed distributions with respect to

stock is not excused under these rules.

For these amounts, the IRS and Treasury

believe that an exemption from

withholding would be inappropriate in

view of the ongoing investment or

business relationship between the

parties. Under the final regulations,

withholding is required at the time of

the deemed distribution even if the

income from the distribution is prorated

over time (such as a redemption

premium under section 305(c)). The IRS

and Treasury considered comments

asking that withholding be deferred

until income is includable in the
53404 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

shareholder’s income but concluded

that the withholding procedures

necessary to implement such an

exception and insure proper

withholding would be too complex.

D. Comments and Changes to § 1.1441–

3

1. Withholding on Interest Payments

No obligation to withhold is imposed

under current law on the payment of

stated interest on an obligation that was

purchased between interest payment

dates. Under § 1.61–7(c), interest

received on the interest payment date is

treated as a return of basis to the extent

it represents accrued unpaid interest as

of the date of purchase as reflected in

the new holder’s basis for the obligation.

Therefore, when the new holder

receives a payment of the stated interest,

the holder s tax liability is limited to the

amount of interest accrued after the date

of purchase (subject to additional

adjustments reflecting possible

acquisition premiums or market

discounts). Because of the difficulty for

a withholding agent to determine the

amount accrued to the holder and other

adjustments affecting the actual amount

taxable to the holder, withholding on

the entire amount of stated interest is

permitted under the regulations.

Although commentators have asked that

the withholding agent be permitted to

withhold on the amount that it knows

is taxable, the final regulations do not

modify the proposed regulations on this

point because the IRS and Treasury

consider that withholding on the entire

amount is justified to the extent that,

under existing rules, withholding on

sales of obligations between interest

payment dates is not required.

This comment is taken into account,

however, in regulations that are

proposed together with these final

regulations to require withholding on

sales of obligations between interest

payment dates. These proposed

regulations are intended to conform the

withholding regime for sale of bonds

between interest payment dates to that

implemented for OID obligations under

the final regulations. See project REG–

114000–97 published elsewhere in this

issue of the Federal Register.

2. Withholding on Distributions

The proposed regulations regarding

withholding on corporate distributions

are expanded and clarified in view of

comments. Section 1.1441–3(c)(1) and

(2)(i) are revised to clarify that the

withholding procedures are elective. In

other words, a distributing corporation

or the custodian or nominee may choose

to withhold on the entire amount

distributed and, thus, to not take

advantage of the election to limit

withholding to the estimated earnings

and profits amount. An election by the

distributing corporation to determine

withholding based on the estimated

earnings and profits amount for

distributions it makes directly to a

foreign person does not mean that a

custodian or nominee who receives

payments of distributions for the

account of foreign investors must do the

same when it makes a payment of these

distributions to the foreign investors.

Instead, the custodian may choose to

disregard the estimate of earnings and

profits and to withhold on the entire

distribution. The revisions reflect the

fact that each withholding agent must be

able to make this decision

independently because of its own

potential tax liability under section

1461 in the event of underwithholding.

The final regulations clarify that the

amounts of tax that the withholding

agent pays to satisfy the tax liability

under section 1461 if underwithholding

has occurred is not subject to

withholding even if it constitutes a

constructive dividend. This rule applies

irrespective of the fact that the

satisfaction of the tax liability may be

additional income to the shareholder

unless the additional payment results

from a contractual arrangement between

the parties regarding the shareholder’s

satisfaction of its tax liability by the

distributing corporation. With this rule,

the final regulations eliminate, for this

situation, the question as to whether a

taxpayer realizes income when the

withholding agent satisfies a tax liability

under section 1461.

Further, proposed § 1.1441–3(c)(2)(iii)

(renumbered as § 1.1441–3(c)(2)(ii)(C) in

the final regulations) is revised so that

an erroneous estimate by the

distributing corporation is imputed to

an intermediary not only in situations in

which the IRS challenges the estimate

but also in situations in which the

distributing corporation unilaterally

determines that its estimate is in error.

Some commentators questioned

whether a reference to interest in

§ 1.1441–3(c)(3)(ii)(B) regarding

consequences in the event of

underwithholding had been omitted in

error. Interest is not mentioned in the

provision because, to the extent

underwithholding is corrected by the

due date of filing the annual return

under § 1.1461–1(b), no interest charge

applies. On the other hand, if the

withholding agent corrects the

underwithholding as part of an

amended return filed after the due date

for filing the annual return, then an

interest charge would apply, as reflected

in § 1.1441–3(c)(3)(ii)(B)(2)(ii).

In response to another comment,

§ 1.1441–3(c)(3)(ii) is added to allow

custodians and nominees to rely on

estimates made by mutual funds

regarding their capital gain dividends

and exempt interest dividends. Some

commentators also asked that § 1.1441–

3(c)(3)(ii) be revised to provide that an

adjustment to the amount of

withholding is not a distribution for all

purposes and not just for purposes of

section 562(c). This comment is not

accepted because there are

circumstances in which the adjustment

may constitute a distribution—such

would be the case, if, for example, the

adjustment cannot be made by adjusting

the withholding on a subsequent

distribution because the affected

shareholder is no longer a shareholder

or the adjustment occurs after the end

of the taxable year.

Finally, § 1.1441–3(c)(4) has been

added to coordinate the general

distribution provisions with the

regulations under section 1445. Under

§ 1.1445–5(b)(1), no withholding is

required under section 1445 on a

distribution from a U. S. real property

holding corporation (USRPHC) if the

distribution is subject to withholding

under section 1441 or 1442. Given the

change in the withholding procedures

applicable to corporate distributions,

the exemption from withholding under

section 1445 may now lead to

underwithholding on distributions from

a USRPHC. In order to correct this

situation, the final regulations give

taxpayers a choice between two

withholding regimes. A USRPHC may

choose to withhold under section 1441,

provided it withholds on the entire

amount of the distribution, regardless of

estimated earnings or profits. However,

the rate of withholding may be reduced

under income tax treaty provisions,

although not below the 10-percent rate

applicable under section 1445 (unless

the treaty provides otherwise for

distributions from USRPHCs). For

purposes of applying the treaty, the

entire amount of the distribution is

treated as a dividend. Alternatively, the

USRPHC may withhold under a mixed

regime. Under this regime, withholding

applies under section 1441 on the

portion of the distribution that

represents estimated earnings and

profits and under section 1445 on the

remainder of the distribution. The

mixed withholding regime is mandatory

for distributions from publicly-traded

real estate investment trusts (REITs). In

other words, a REIT may not, with

respect to its distributions, choose to

apply the withholding regime of section
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53405

1441 to the entire distribution. Instead,

the REIT must withhold under section

1441 on the portion of the distribution

that is not designated as a capital gain

dividend or a return of basis.

Withholding under section 1445 is also

required on the portion of the

distribution that the REIT designates as

a capital gain dividend in accordance

with § 1.1445–8.

3. Withholding on Undetermined

Amounts

The final regulations also address the

practical difficulties of withholding on

an amount when, at the time of

payment, there is not sufficient

information to calculate which portion,

if any, is taxable or to determine the

source of the income. For these

purposes, provisions have been added

under § 1.1441–3(d)(1) that require a

withholding agent to withhold on the

entire amount when such uncertainties

exist. This requirement in part reflects

the policy that withholding generally

should apply to payments that leave the

U.S. taxing jurisdiction. The

requirement to withhold in the event of

uncertainty is similar to the provisions

under existing regulations under

§ 1.1441–3(d)(1) (restated as § 1.1441–

3(d)(2) of the final regulations) requiring

withholding of an amount sufficient to

assure that the tax withheld is no less

than 30 percent of the recognized gain.

In order to minimize overwithholding,

the final regulations provide an

alternative to withholding on the entire

amount when uncertainties exist.

Instead, the withholding agent may

make a reasonable estimate of the

amount from U.S. sources or of the

taxable amount and set aside a

corresponding portion in escrow until

the amount subject to withholding can

be determined. Under this alternative,

setting aside an amount is not an event

of withholding for purposes of § 1.1461–

1(a) that would give rise to the

requirement to pay the tax. Instead, the

payment of the tax can be postponed

until a determination can be made of the

amount of withholding liability under

this section. The provisions under

§ 1.1441–1(d)(1) do not apply to

uncertainties that are specifically

addressed under other provisions of the

regulations, such as lack of information

regarding the identity or status of the

beneficial owner or payee (see § 1.1441–

1(b)(3) for applicable presumptions in

those cases and the grace period

provisions set forth in § 1.1441–

1(b)(3)(iv)) or withholding on original

issue discount amounts (see § 1.1441–

2(b)(3)).

E. Comments and Changes to

§ 1.1441–4

1. Notional Principal Contracts

Commentators have questioned

whether it is appropriate to treat income

from notional principal contracts as

FDAP income, particularly since it is

unclear at the outset whether the

arrangement will generate any income.

The IRS and Treasury believe that the

statute contemplates very few

exceptions to the concept of FDAP, and

the only clear exception is for gain from

the disposition of property. Income from

notional principal contracts is not gain

from the disposition of property, nor is

it the equivalent of gain. However, the

final regulations minimize the burden

associated with characterizing the

income as FDAP because the liability for

withholding under chapter 3 of the

Code is eliminated for such income. See

§ 1.1441–4(a)(3). Reporting under

section 1461 or 6041, however,

continues to be required under the final

regulations. However, in response to

comments, the reporting burden has

been reduced and clarified (see

§§ 1.1441–4(a)(3), 1.1461–1(c)(2)(i)(C)

and (ii)(D), 1.6041–1(d)(5) and 1.6041–

4(a)(4) of the final regulations).

Under the final regulations, notional

principal contract payments are exempt

from withholding. However, if paid to a

foreign person, they are presumed

effectively connected income and, as

such, are required to be reported on a

Form 1042–S. The effectively connected

income presumption under § 1.1441–

4(a)(3) can be rebutted by providing to

the withholding agent a valid

withholding certificate representing that

the payments are not effectively

connected with the conduct of a U.S.

trade or business. In such a case, no

reporting is required on a Form 1042–

S for these amounts. A financial

institution (as defined in § 1.165–

12(c)(1)(iv)) may, instead of a

withholding certificate, represent in a

master agreement that governs the

transactions in notional principal

contracts between the parties (such as

an International Swaps and Derivatives

Association (ISDA) Agreement,

including the Schedule thereto) or in

the confirmation on the particular

notional principal contract transaction,

that the counterparty is a U.S. person or

is a non-U.S. office of a foreign person.

These representations are not required

to be made under penalties of perjury.

In the final regulations, swap

payments include payments on notional

principal contracts described in § 1.988–

2(e), dealing with foreign currency

swaps. Also, income on notional

principal contracts does not, for

purposes of these rules, include

amounts characterized as embedded

interest under § 1.446–3(g)(4). Such

amounts, if not effectively connected

with the conduct of a U.S. trade or

business and from U.S. sources, are

subject to chapter 3 withholding and are

reportable on a Form 1042 and 1042–S.

Under § 1.6041–1(d)(5), a payment on

a notional principal contract, including

embedded interest, is a reportable

payment, unless paid to an exempt

recipient (i.e., a person described in

§ 1.6049–4(c)(1)(ii)), paid outside the

United States (unless the payor has

actual knowledge that the payee is a

U.S. person), treated as effectively

connected with a U.S. trade or business

under § 1.1441–4(a)(3), or paid by a nonU.S. payor or a non-U.S. middleman. If

none of these exceptions applies, and

the payor does not hold a Form W–9,

then a payment is presumed under

§ 1.6049–5(d)(2)(i) to be made to a U.S.

person that is not an exempt recipient,

in which case backup withholding

would be required under section 3406.

The final regulations under

§§ 1.6041–1(d)(5) and 1.1461–

1(c)(2)(i)(C) adopt the suggestion that

nonperiodic payments are reportable

only at the time that an actual payment

is made. The final regulations require

reporting of net income rather than

gross amounts from notional principal

contracts. Further, in response to

comments, the final regulations in

§§ 1.1441–4(a)(3) and 1.6041–1(d)(5)

specify that the reporting requirements

apply only prospectively, i.e., to

payments made after December 31,

1998.

2. Form 8233 Procedures

The current regulations prescribe a

procedure by which a withholding agent

may grant a reduced rate under an

income tax treaty on payments to

nonresident aliens for services rendered

in the U.S., generally in connection with

a sporting, cultural, scientific, or artistic

event. The procedure involves

submitting a Form 8233 to the IRS for

review and approval as instructed under

§ 1.1441–4(b)(2). The regulations

provide, in effect, that the withholding

agent may not grant an exemption from

withholding until after a 10-day period

beginning with the date that the Form

8233, as reviewed and approved by the

withholding agent, is mailed by the

withholding agent to the IRS. The

proposed regulations extend the 10-day

period to 20 days.

Commentators objected to the 20-day

period and asked for the retention of the

10-day period. In addition, they

suggested that, instead of making the

treaty exemption effective only after the
53406 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

submission of Form 8233, the

exemption should be retroactive to the

date of first payment covered by the

certificate if the completed Form 8233

contains the nonresident alien’s TIN,

and if the withholding agent is not

subsequently notified by the IRS within

the 20-day period that the exemption is

not valid. After further consideration,

the comments are adopted. The 10-day

waiting period is continued and the

approval of the Form 8233 is made

retroactive to the date of first payment

covered by the certificate. However, the

final regulations clarify that the IRS

review process does not exonerate the

withholding agent from liability for

underwithholding. In its review, the IRS

simply insures that the form contains all

of the requested information, that the

country of residence stated on the form

is a country with which the U.S. has an

income tax treaty, that the reduced rate

that the withholding agent plans to

apply is the proper rate under the

applicable treaty, and that, based solely

on information contained on the form,

the reduced rate appears applicable. The

IRS approval of the form makes no

determination regarding whether the

withholding agent’s reliance on the form

is reasonable, based on facts that the

withholding agent knows or has reason

to know at the time of the payment and

that are not disclosed to the IRS as part

of the review process. In addition, the

final regulations allow the 90-day grace

period to apply to payments covered by

a Form 8233, in order to allow time for

foreign persons who come to the United

States for the first time and must

complete a Form 8233 shortly after

arrival to apply for and obtain an

individual taxpayer identifying number.

See § 1.1441–1(b)(3)(iv).

The final regulations modify the

proposed rule under § 1.1441–1(b)(6)

reducing the amount of certain

compensation income by the personal

exemption under section 151. The

proposed regulations allowed a

reduction for the full amount of the

exemption. Commentators noted that

allowing a reduction for the full amount

of the allowable personal exemption

may lead to inappropriate claims of

multiple exemptions for nonresident

aliens who come to the U.S. frequently

for short-term events or assignments

with different organizations.

Commentators were concerned that they

would have no ability to keep track of

prior claims of the personal exemption.

For this reason, the proration rule now

currently in effect, is continued in the

final regulations.

3. Reimbursed Expenses

Commentators asked that the

regulations provide an exemption from

withholding for reimbursed expenses

paid to a nonresident alien individual in

relation to performance of services in

the U.S. as an independent contractor.

A change to the regulations is not

necessary, however. If the payments are

exempt from tax under the Code, they

are exempt from withholding under

§ 1.1441–4(b)(1)(iv). If, on the other

hand, those payments are not exempt

under the Code, then it would be

inappropriate to provide for an

exemption from withholding under

section 1441.

F. Comments and Changes to

§ 1.1441–5

In response to comments, many

partnership provisions have been

consolidated in this section. A new

paragraph (a) has been added to

describe the steps necessary to

determine the status of the payee for

withholding purposes. The withholding

procedures applicable to domestic

partnerships are stated in paragraph (b).

The withholding procedures applicable

to foreign partnerships are stated in

paragraph (c). Paragraph (d) describes

applicable presumptions in the absence

of documentation. Paragraph (e) is

reserved for rules applicable to estates

and trusts. Paragraph (f) contains the

effective date provisions. Corresponding

provisions have been added in § 1.6049–

5(d)(4), dealing with payments of

reportable amounts under chapter 61 of

the Code to address reporting of

payments of amounts that are not

subject to chapter 3 withholding.

Paragraph (c)(1) provides guidance for

identifying the payee in the case of a

payment to a foreign partnership. As a

general rule, a payment to a foreign

partnership is treated as a payment

directly to the partners, whether or not

documentation has been provided for

the partners, with two exceptions: a

payment to a ‘‘withholding foreign

partnership’’ and a payment to a foreign

partnership that has furnished a

certificate upon which the withholding

agent can rely to treat the payment as

effectively connected with the conduct

of a U.S. trade or business are treated as

a payment to the foreign partnership

and not to the partners.

Paragraph (c)(2) restates the rule

proposed under § 1.1441–1(e)(5),

dealing with qualified intermediaries,

for foreign partnerships that are

withholding foreign partnerships. In

order to avoid confusion, a withholding

foreign partnership is no longer named

a qualified intermediary.

Paragraph (c)(3) deals with foreign

partnerships that are not withholding

partnerships. Paragraph (c)(3)(iii)

incorporates the withholding certificate

provisions that were in proposed

§ 1.1441–1(e)(3)(iii). Those rules parallel

the rules applicable to non-QIs under

§ 1.1441–1(e)(3)(iii) of the final

regulations. In particular, the

regulations require that a statement be

attached to the withholding certificate if

necessary to provide information

sufficient for the withholding agent to

determine each partner’s distributive

share of income subject to withholding.

The rules governing the statement are

stated in paragraph (c)(3)(iv) and

parallel similar rules in § 1.1441–

1(e)(3)(iv) of the final regulations

applicable to non-QIs. At the request of

commentators, paragraph (c)(3)(iii)

clarifies that a foreign partnership

receiving income that is effectively

connected with the conduct of a U.S.

trade or business is not required to

furnish separate certificates for each of

its partners. Instead, it may furnish one

single withholding certificate, even

though the partnership is not a

withholding foreign partnership. See

also paragraph (c)(1)(ii)(C). This

procedure is reasonable because, in

such a case, the partnership is subject to

withholding procedures under section

1446.

Paragraph (d) describes the

presumptions upon which a

withholding agent can rely when

making payments to a partnership for

which certain documentation is lacking

or unreliable. First, under paragraph

(d)(2), a recipient that is presumed to be

a partnership (based on presumptions

set forth in § 1.1441–1(b)(3)(ii)) is

presumed to be a foreign partnership if

certain indicia of foreign status are

present. If, based on such a

presumption, the withholding agent has

determined that the payment is made to

a foreign partnership (presumably acting

for the account of its partners since

intermediary status generally cannot be

presumed in the absence of valid

documentation), uncertainties may

remain regarding the status of the

partners, the allocation of a payment

among them, or whether all the partners

have been accounted for. Under the

final regulations, a payment that cannot

be reliably associated with a

withholding certificate from a partner is

presumed made to a foreign payee. As

a result, the withholding agent is

required to withhold 30-percent from

the payment, without a reduction. Also,

any part of a payment that it is not

reliably allocated to a partner is

presumed allocable to the partner with
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53407

the highest withholding rate or the

highest U.S. tax liability (as the

withholding agent can best estimate) if

the withholding rates are equal. Third,

if the withholding agent does not have

a reliable certification that all the

partners are accounted for, and, as a

result, the withholding agent cannot

reliably determine the distributive share

of any one or more partners, then none

of the payment can be reliably

associated with any one partner and the

entire payment is presumed made to a

foreign payee.

These procedures parallel those

applicable to foreign intermediaries

under § 1.1441–1(b)(3)(v). They differ

from the presumptions stated in the

proposed regulations under § 1.1441–

1(f)(4)(ii) which provided that the

amounts were paid to a U.S. payee that

is not an exempt recipient. Thus, the

final regulations, by presuming that the

amounts are paid to a foreign payee,

require that a 30-percent amount be

withheld on amounts subject to

withholding under chapter 3 of the

Code rather than a 31-percent amount

under the backup withholding

provisions of section 3406. However, for

amounts that are not subject to chapter

3 withholding, § 1.16049–5(d)(4) retains

the provisions in the proposed

regulations that the payments are

presumed made to a non-exempt

recipient U.S. payee. In such a case, 31-

percent backup withholding applies

instead of 30-percent withholding.

The final regulations under § 1.1441–

5(d)(3)(iv) clarify that a foreign

partnership that is a withholding foreign

partnership determines who the payee

is and the status of the payee, based on

the provisions of § 1.1441–1(b)(2) and

§ 1.1441–5 (c) and (d) in the same

manner as if it were making payments

directly to the partners other than in

their capacity as partners. In the absence

of documentation regarding the

partners, the partners are presumed to

be foreign persons rather than U.S.

persons, including for amounts that are

not subject to chapter 3 withholding. A

presumption of U.S. status for amounts

not subject to chapter 3 withholding

would not be meaningful because a

foreign partnership is not a payor for

purposes of chapter 61 of the Code and

backup withholding under section 3406

when making payments to its partners.

Therefore, payments made by a foreign

partnership to its partners are not

reportable under chapter 61 and are not

subject to backup withholding. Instead,

a foreign partnership must file an

annual return on Form 1065 and report

each partner’s distributive share on

Forms K–1, which forms are filed with

the IRS with a copy to each partner.

Such filing requirements apply in all

cases in which the foreign partnership

derives U.S. income, irrespective of

whether the tax liability has been

satisfied by withholding at source or

whether all the partners are foreign. See

section 6031 and §§ 1.6031–1(c) and

1.6031(b)–1T. However, in order to

reduce the burden on foreign

partnerships that are not withholding

foreign partnerships, the IRS and

Treasury are planning to issue

regulations under section 6031 that

would eliminate the filing requirement

under section 6031 for foreign

partnerships that are not engaged in a

U.S. trade or business, that furnish

appropriate documentation for each of

their partners, and whose partners’ U.S.

tax liability has been fully satisfied at

source.

Commentators asked that foreign

partnerships be allowed to certify under

penalties of perjury that all the partners

are foreign and to use the same subaccounting procedures that qualified

intermediaries may use. In particular,

where a partner is entitled to reduced

withholding under the regulations

without providing a TIN, commentators

argue that there should not be a

requirement that the partnership’s

intermediary withholding certificate

specify that partner’s distributive share

of the item of income paid to the

partnership. Also, they argue that there

should not be a requirement that a

separate Form 1042–S be filed under the

partner’s name. Instead, the

partnership’s intermediary withholding

certificate should indicate the aggregate

distributive shares of all members

entitled to a single rate, and reporting

should be done on the aggregate amount

under the partnership’s account. These

comments are similar to those received

for non-QIs and are not adopted for the

same reasons that they are rejected for

non-QIs. It is important to retain the

distinction between foreign partnerships

that qualify as withholding agents (i.e.,

those that are withholding foreign

partnerships or are subject to section

1446) and those that are not qualified to

act as withholding agents. If a foreign

partnership is not a withholding foreign

partnership, it should not be permitted

to certify the status of its partners on

their behalf.

Commentators asked that a foreign

entity holding a passive investment for

its own account be allowed to use the

withholding procedures applicable to

foreign corporate entities, irrespective of

its actual classification for tax purposes.

It is argued that, in many cases,

investments are structured using

organizations that, under the default

classification rules of the check-the-box

regulations would be classified as

partnerships. In order to avoid more

onerous withholding procedures, these

entities would normally prefer a

corporate classification. It is argued that

the need to make an election for this

purpose is an unnecessary step that

should be eliminated. This comment is

not accepted because the election

procedure to insure corporate

classification is simple and serves an

important compliance role.

At the request of commentators, the

final regulations in § 1.1441–7(a) clarify

that, if a nominee holds an interest in

a domestic or foreign partnership on

behalf of a partner and provides the

partnership with the information

required under § 1.6031(c)–1T(a) with

respect to the partner, the nominee is

deemed to have satisfied its obligations

as a withholding agent under chapter 3

of the Code and has no liability for

underwithholding on the partner’s

distributive share of the amounts to

which the furnished information

pertains. This rule reflects the fact that

a custodian holding a partnership

interest for an investor often lacks the

information needed to determine which

withholding regime applies to income

from the partnership. The necessary

information to correctly withhold on

partnership income is often only known

to the partnership and is not easily

accessible to the custodian. On the other

hand, the partnership, which is also a

withholding agent, or has withholding

responsibilities, has the information

necessary to determine how

withholding should apply. It is also

responsible for filing the partnership

return and furnishing the Forms K–1 to

the partners.

Some commentators requested that a

withholding agent should be permitted

to rely on a withholding certificate

provided directly by a partner, without

a withholding certificate from the

partnership. The commentators argue

that this reliance rule would permit

partners to claim a reduced rate of

withholding even though the

partnership refuses to cooperate and to

submit the proper documentation. This

suggestion is not accepted because it

would, in effect, read the partnership

withholding certification rules out of

the regulations. It may also become a

source of confusion for withholding

agents who would not always know

how reliable the partner’s information

is. The IRS and Treasury believe that the

partnership withholding certificate

provides important information to the

withholding agent, such as each

partner’s distributive share of the

payment. In addition, in the absence of

a partnership withholding certificate,
53408 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

the withholding agent would lack

information required to be stated on the

Form 1042–S (e.g., the partnership’s

EIN) and compliance may be weakened

as a result.

G. Comments and Changes to

§ 1.1441–6

1. Address Rule

Comments were received asking

reconsideration of the proposal to

eliminate the address rule for dividends.

The IRS and Treasury believe, however,

that there is no longer a justification for

the address rule as in effect under

current law. When the payment is made

directly to a foreign beneficial owner,

there is no justification for not requiring

a Form W–8 from the owner in the same

manner that is required for payments on

debt obligations. In the case of payments

of dividends to foreign intermediaries,

the proposed and final regulations

provide for new intermediary

procedures that are more adapted to the

monitoring of abusive claims of treaty

benefits than is the address rule. For

these reasons, the address rule is not

reinstated.

2. Reliance on Withholding Certificate

In response to comments, § 1.1441–

6(b)(1) clarifies, by cross-reference to

§ 1.1441–1(e)(4)(viii) dealing with

reliance on withholding certificates, that

a withholding agent may rely on

information and certifications in a

certificate without having to inquire

into the truthfulness thereof, absent

actual knowledge or reason to know

otherwise. Therefore, absent actual

knowledge or reason to know that such

claims are false, a withholding agent

may rely on claims on a Form W–8 of

beneficial ownership and residence by a

person claiming benefits under a tax

treaty. Under these principles, a

withholding agent may rely on

representations from a foreign person

regarding the application of foreign tax

laws or certifications regarding the

circumstances of the recipient or of the

transaction. In particular, a withholding

agent may rely on the recipient’s

representation made by furnishing a

beneficial owner withholding certificate

that it is a beneficial owner of the

income. If the address on a withholding

certificate comports with a claim of

residence in a particular country, a

withholding agent may also rely on such

address as indicative of residence, even

though the determination of residence

for tax treaty purposes may be far more

complex than establishing an address in

the treaty country and is likely to

involve the application of foreign tax

laws, particularly in the case of a person

other than an individual. However, if

the withholding agent knows that the

representations on a Form W–8 are

inconsistent with foreign laws or with

the recipient’s or the transaction’s

circumstances, then the withholding

agent must question the basis for the

representations.

3. Requirement of a TIN

Commentators have suggested that the

final regulations require a TIN only for

related party transactions subject to

treaty rate withholding. This would

eliminate the need to provide a specific

list of payments exempt from a TIN

requirement. This suggestion is not

adopted because the IRS and Treasury

believe that the TIN requirement is

useful in monitoring claims of reduced

rates under tax treaties for all

transactions. Because the procedures for

obtaining a TIN are simple, the TIN

requirement for non-market based

transactions is not viewed as overly

burdensome relative to the compliance

benefits.

Section 1.1441–1(e)(4)(vii)

enumerates the instances in which a

TIN must be furnished on a withholding

certificate. Under the proposed rules, a

TIN is required to obtain the benefit of

reduced withholding under an income

tax treaty, unless the payment consists

of dividends paid on publicly traded

stocks. Commentators have requested

that the exemption from having to

furnish a TIN be extended to other

securities, including pre-1984 bonds

and other debt obligations, payments on

any mutual fund investment (e.g., an

open-end mutual fund), interests in

publicly-traded grantor trusts generating

royalty income, interest- and dividendequivalent payments on the loan of

exempted publicly traded stocks or

securities, income from repurchase

agreements involving exempted

publicly traded stocks or securities,

dividends on non-publicly traded

stocks, interest on syndicated or bank

loans, income from publicly-traded

grantor trusts, contingent interest, and

amounts paid on private placements of

stocks or securities.

In response to these comments, the

final regulation are amended to expand

the categories of income for which a TIN

is not required to be furnished. Under

the final regulations, the categories are

dividends and interest on publicly

traded securities, dividends on

redeemable securities issued by an

investment company registered under

the Investment Company Act of 1940

(15 U.S.C. 80a–1), income related to

loans of publicly traded securities, and

dividends, interest, or royalties from

units of beneficial interest in a publicly

offered and registered unit investment

trusts. See § 1.1441–6(b)(2)(ii). The

covered securities extend to foreign

securities as well as U.S. securities.

Also, in response to comments that the

regulations should provide a reliable

source to determine whether or not a

stock (or other security) is publicly

traded, the regulations clarify that

section 1092(d) and § 1.1092(d)–1 apply

to determine whether a stock or security

is publicly traded for this purpose. An

exception is not made for other

securities because the IRS and Treasury

believe that the TIN exemptions should

be limited to income arising from

securities that are publicly traded and

should not extend to securities held and

transacted as part of a private business

relationship. Also, an exception is not

made for sale-repurchase transactions

(repos) because repos completed within

a 6-month period give rise to income

that is treated as short-term OID for tax

purposes. Such income, if earned by a

foreign person, is exempt from chapter

3 withholding. Because the type of repo

transaction that would be equivalent to

the type of TIN-exempted market

transactions would generally be of

substantially shorter duration, the IRS

and Treasury believe that it is not

appropriate to provide an exemption for

more than 6-month repo transactions.

Comments suggested that requiring

TINs on intermediary certificates is an

undue compliance burden when

reporting is not done to the

intermediary’s account, especially if the

Form W–8 of any underlying beneficial

owner is not required to bear a TIN.

Commentators argue that any IRS

compliance concerns can be met

without the requirement for a TIN from

a non-qualified intermediary since U.S.

withholding agents would, in any event,

supply the identification and address of

the beneficial owners to the IRS on

Form 1042–S. The final regulations

eliminate the need for a TIN on a nonqualified intermediary certificate and on

a certificate from a foreign partnership

that is not a withholding foreign

partnership. However, a TIN continues

to be required in the case of a qualified

intermediary certificate or in the case of

a certificate from a foreign partnership.

Some commentators asked that the

TIN requirement be made optional.

They argue that this would provide a

reasonable accommodation to foreign

investors who only occasionally or

rarely enter into financial transactions

involving U.S. securities. This comment

is not adopted; instead, the final

regulations broaden the types of

transactions exempt from the

requirement to provide a TIN. This

change should alleviate the concern
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53409

expressed by these commentators. Also,

commentators asked that the final

regulations provide an exemption for

intermediaries with a small number of

foreign accounts (500 or less). This

suggestion is also not adopted in light

of the fact that the burden of manually

processing account information for

complying with these regulations

should be outweighed by the substantial

compliance benefits.

With regard to documentary evidence

required to validate a TIN used to

support a claim of treaty benefits,

commentators asked that the

documentary evidence remain valid

indefinitely rather than expire after

three years as provided in the proposed

regulations. See § 1.1441–6(c). This

comment is not adopted. The

withholding certificates, and the TIN

showing on that certificate, are used to

represent many facts, including the

foreign status of the owner and his

residence for tax treaty benefit purposes.

These facts may change frequently,

particularly for individuals, and it is

important that beneficial owners

recertify their status periodically to the

IRS. This recertification is also

important because withholding agents

cannot monitor the continued validity

of the original residence claim, since the

TIN on the certificate does not indicate

which country of residence has been

represented to the IRS as part of the

certification process.

The final regulations do not adopt a

comment that some organizations

claiming tax-exempt status under

section 501(c) should be exempt from

the requirement to obtain and furnish a

TIN if the organization is a universally

recognized charitable organization, such

as a church or religious order. As

previously stated, TINs are used by the

IRS to electronically process and match

tax information. Any exception to the

TIN requirement precludes such

electronic processing. In light of the

ease with which such organizations can

obtain an EIN, the IRS and Treasury

believe that no change to the proposed

regulations is justified. However, the

regulations clarify that a TIN is required

from a foreign exempt organization or

foreign private foundation only to the

extent it claims a reduced rate of

withholding solely based upon its

exempt status or if a TIN is otherwise

required from non-tax exempt taxpayers

in order to claim a reduced rate of

withholding (e.g., under an income tax

treaty). Also, a foreign private

foundation is not required to furnish a

TIN for income subject to the 4-percent

tax under section 4948(a) if such income

would otherwise be exempt from tax

under the Code if paid to a foreign

person that is not a private foundation.

4. Certification and Electronic Matching

of TINs

The final regulations are revised to

specify that a taxpayer must provide the

IRS with a certificate of residence to

enable it to certify a TIN if that

procedure is available in the country of

residence. Documentary evidence is

permitted as an alternative means of

establishing residence in a treaty

country only if a certificate of residence

is not reasonably available from the tax

administration in the country of

residence. This change reflects the view

that a certificate of residence is more

reliable evidence of tax residence in a

treaty country than is documentary

evidence. The obligation to furnish a

certificate of residence if one is

available does not apply to corporate

bodies who may, instead, furnish

incorporation documents establishing

their status as a corporate body in the

applicable treaty jurisdiction.

The final regulations retain the

provision in the proposed regulations

regarding the electronic confirmation by

a withholding agent of a TIN under

procedures to be prescribed by the IRS.

The IRS has undertaken a TIN-matching

prototype in the past. See 60 FR 66243

(December 21, 1995). More recently, the

IRS and Treasury issued a regulation

under § 31.3406(j)–1 (1997–26 I.R.B. 4)

and Rev. Proc. 97–31 (1997–26 I.R.B. 6)

making a TIN-matching program

available to Federal agency payors of

reportable payments under section

3406. TIN-matching, however, will not

apply for chapter 3 withholding

purposes until specifically implemented

by the IRS.

5. Treaty Benefits for Payments to

Hybrids

The proposed regulations provide

guidance on procedures for claiming

reduced withholding rates under an

income tax treaty. For this purpose, the

proposed regulations define the term

beneficial owner under foreign law

principles. See proposed §§ 1.1441–

1(c)(6)(i)(B) and 1.1441–6(b)(4).

Commentators were divided on whether

the proposed rule is a correct

interpretation of the treaty. In particular,

several commentators noted that the

term beneficial owner is meant to be

defined under the source country’s

domestic law. Also, commentators

asked whether the proposed rules were

solely for withholding purposes or were

meant to define a foreign beneficial

owner’s eligibility for treaty benefits for

purposes of section 894.

In part in response to these

comments, temporary regulations have

been issued under section 894 (62 FR

35673, published July 2, 1997) that are

largely consistent with the principles

contained in the proposed withholding

regulations. Under these temporary

regulations, a reduced withholding rate

applies under an income tax treaty only

to the extent that the income is treated

as derived by a resident of the

applicable treaty jurisdiction. Income is

treated as being so derived only to the

extent it is taxed in the hands of the

resident as income of a resident of the

applicable treaty jurisdiction. The final

withholding regulations have been

modified to reflect these temporary

regulations.

The regulations under § 1.1441–

6(b)(4)(ii) finalize the rules regarding the

type of withholding certificates that

must be furnished in situations

involving hybrid entities where the

payment is made to the entity but the

benefit is determined by the status of

the interest holder. Generally, a

partnership Form W–8 would have to be

provided by the interest holder, which

form must be presented by the entity on

behalf of the interest holder. In order to

reduce the burden in the case of reverse

foreign hybrid entities (e.g., foreign

mutual funds treated as corporations for

U.S. tax purposes but as fiscally

transparent entities for foreign

countries’ law purposes), the final

regulations allow those entities to

become qualified intermediary, so that,

like foreign partnerships and entities

acting as intermediaries for others, they

may present a global Form W–8 to a

U.S. withholding agent instead of

furnishing individual forms for each of

their shareholders who claim a benefit

under an income tax treaty. See

§ 1.1441–1(e)(5)(ii)(C).

The preamble to the temporary

regulations under section 894 indicates

that withholding agents should consider

the effect of the regulations on their

withholding obligations, including the

need to obtain new withholding

certificates to confirm claims of treaty

benefits for payments made on or after

the effective date of § 1.894–1T(d). Until

the final regulations under section 1441

are effective (i.e., until 1999),

withholding agents may continue to rely

on Forms 1001 regarding claims of

reduced rates under income tax treaties.

In addition, with respect to dividends,

no Form 1001 is generally required due

to the alternative ‘‘address’’ rule.

However, withholding agents that are

making payments in 1998 should

require new Forms 1001 for payments

that they believe are affected by the

provisions of § 1.894–1T(d) in order to
53410 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

insure that representations regarding

entitlement to a reduced rate under an

income tax treaty are given in light of

the provisions of § 1.894–1T(d). For this

purpose, withholding agents may rely

on Forms 1001 that are prepared and

furnished in accordance with the

procedures described in § 1.1441–

6(b)(4)(ii), even though these procedures

are not effective until 1999. Thus, for

example, if the withholding agent pays

to a foreign reverse hybrid entity, it may

rely on a Form 1001 furnished by the

entity even though the name of the

beneficial owner is that of the entity’s

interest holder. Implicit in the entity’s

presentation of a Form 1001 from its

interest holder is a representation that

the interest holder is a resident of an

applicable treaty country and derives

the income paid to the entity within the

meaning of § 1.894–1T(d)(1). A Form

1001 obtained in 1998 is valid until

December 31, 1999 (except to the extent

that circumstances change affecting its

validity). Payments made after 1998 to

persons for whom the withholding agent

does not hold a certificate will require

a new Form W–8.

In view of the temporary regulations

under § 1.894–1T(d), several

commentators have asked for guidance

on how to apply the ‘‘reason-to-know’’

standard to self-certifications of

entitlement to treaty benefits in

situations involving hybrid entities. The

regulations do not include special

guidance on this point, because the IRS

and Treasury believe that the due

diligence issues in this context are not

different from those arising in other

contexts. Therefore, withholding agents

may rely on the general principles in

§ 1.1441–1(e)(4)(viii) (that, absent actual

knowledge or reason to know otherwise,

a withholding agent may rely on

information and certifications without

having to inquire into the truthfulness

thereof) and in § 1.1441–6(b)(4)(ii) (that

a withholding agent may rely on

representations that the beneficial

owner derives the income within the

meaning of § 1.894–T(d) and is a

resident of the treaty country without

inquiring into the truthfulness thereof or

researching foreign law). For example, if

a withholding agent knows that a person

whose name is on a Form 1001 or a

Form W–8 is an interest holder in an

entity and that the treaty country where

the person claims residence generally

treats the entity as a non-fiscally

transparent entity, the withholding

agent would have reason to know that

a claim of reduced rate by such person

may not be reliable and should make

further inquiries. Generally, any claim

of treaty benefits by interest holders in

a U.S. LLC should be scrutinized based

on many published indications that

foreign countries generally regard U.S.

LLC’s as corporate entities.

6. Certification of Entitlement to

Benefits Under an Income Tax Treaty

The proposed regulations do not

contain special procedures regarding the

manner in which a foreign person can

establish that it satisfies the conditions

under applicable limitation on benefits

provisions of an income tax treaty. This

matter is indirectly addressed in

§ 1.1441–6(b)(1) for foreign persons

claiming benefits under an income tax

treaty that are required to file a

disclosure statement under section 6114

if they are related to the withholding

agent and the amounts received during

the calendar year that exceed $500,000.

After further consideration, the IRS

and Treasury have determined that

certification procedures, as had been

suggested in Notice 94–85 (1994–2 CB

511), issued under the U.S.-Dutch tax

treaty, are not procedures that could

realistically be extended to all tax

treaties within a reasonable time frame,

if at all. Instead, the IRS and Treasury

believe that an approach relying on selfcertification and proper disclosure to

the IRS is more practical. Therefore, the

final regulations provide in § 1.1441–

6(c)(5)(i) that those persons who are

required to furnish an IRS-certified TIN

must, as part of the TIN certification

process, certify that they satisfy the

conditions of an applicable limitation

on benefits provision. For this purpose,

the person must attach an affidavit to

the request for certification, describing

sufficient facts for the IRS to determine

the basis upon which such conditions

are satisfied. The IRS review of a foreign

person’s affidavit does not constitute an

audit of the taxpayer on this issue. In

view of these new procedures, Notice

94–85 is withdrawn.

The final regulations also provide

under § 1.1441–6(c)(5)(ii) that a taxpayer

(other than an individual) applying for

IRS certification of its TIN must certify

to the IRS that any income for which it

intends to claim benefits under an

applicable income tax treaty is income

that will properly be treated as derived

by itself within the meaning of § 1.894–

1T(d)(1).

7. Reporting Under Section 6114

Under proposed § 1.1441–6(b)(1), a

taxpayer receiving income benefitting

from a reduced rate under an income tax

treaty is required to file an information

return under section 6114 if it is related

to the withholding agent and the

amounts ‘‘paid’’ during the taxable year

exceed $500,000. The final regulations

modify the $500,000 condition by

providing that the requirement to file an

information return applies only to

amounts ‘‘received’’ during the calendar

year that, in the aggregate, exceed

$500,000. The revision clarifies that the

test is not intended to be applied on a

per-withholding agent basis. Rather, the

$500,000 threshold is intended to

measure the total amount received by

the taxpayer, whether from one or

several related withholding agents.

The final regulations under section

6114 are also revised to allow the IRS

to eliminate duplicate reporting

requirements for payments received by

a foreign taxpayer that must be reported

both on a Form 5472 under section

6038A and under section 6114. See

§ 301.6114–1(c)(6). Such change is to be

reflected in the applicable forms and

instructions.

8. Joint Owners

One commentator suggested that since

a joint owner can get a separate Form

1042–S, the final regulations under

§ 1.1441–6 should let each joint owner

claim its own treaty rate (if different) on

its pro-rata share of the income. This

suggestion is not adopted because of the

difficulties, generally, for each joint

owner to present reliable representation

of its pro-rata share of the income being

paid.

9. Claim of Treaty Benefits by U.S.

Taxpayer

A commentator noted that the existing

regulations under § 1.1441–4(b)(2) fail to

address the situation of a foreign

national who is a resident alien of the

United States under section 7701(b) and

under a treaty tie-breaker rule, but who

is entitled to treaty benefits under a

treaty saving clause exception. The

commentator indicated that procedures

are needed to allow such persons to

submit proper forms and

documentation. According to the

commentator, such persons entitled to

treaty benefits often are not currently

residents of a treaty country, do not

have a permanent residence address in

the foreign country of which they are

claiming benefits, and are not able to

obtain certification or documentation to

satisfy the three-year rule under

§ 1.1441–6(c)(4). Further, the

commentator argued that the regulations

should specify which form such persons

can file to claim treaty benefits (under

the proposed regulations neither Form

W–8 nor W–9 would accommodate this

claim). In response to this suggestion,

paragraph (b)(5) is added to allow a U.S.

taxpayer to claim benefits under an

income tax treaty on a Form W–9 or
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53411

such other form as the IRS may

prescribe.

H.Comments and Changes to §1.1441–

7

1. Withholding Agent’s Due Diligence

Standards

Section 1.1441–7(b)(1) is restated to

clarify that a withholding agent is under

a general due diligence standard to

determine its withholding obligations

based on its actual knowledge or reason

to know, if based on such knowledge or

reason to know, it appears that the

obligation to withhold or report the

payment is greater than would

otherwise be the case. This due

diligence standard applies generally, not

just in the context of determining the

extent to which a withholding agent can

rely on a withholding certificate.

Therefore, for example, if a withholding

agent has reasons to believe that a

foreign beneficial owner of interest

income is related to the debtor, so that

the portfolio interest exemption may not

be available, the withholding agent

should make an inquiry in order to

ascertain whether the portfolio interest,

in fact, applies. The fact that the Form

W–8 is not required to certify lack of

relationship does not mean that the

withholding agent can ignore what it

knows or otherwise suspects if such

knowledge or reason to know affects the

tax liability of the beneficial owner

which withholding under chapter 3 of

the Code is intended to satisfy.

2. Due Diligence Safe Harbors

Some commentators asked that the

standard of care governing the

withholding agent’s liability should be

actual knowledge rather than reason to

know, especially in the context of highvolume commercial transactions where

there is not necessarily a pre-existing

client relationship. In response to this

comment, the final regulations define

reason to know so that certain

circumstances described in paragraphs

(b)(2)(ii) (A) through (F) are the only

circumstances that require the

withholding agent to exercise due

diligence (other than actual knowledge).

Further, examples are added regarding

the documentation that a withholding

agent may rely on in order to correct a

defective Form W–8. This limitation

only applies to payments made by a

financial institution with which a

customer may open an account that

consists of portfolio interest, payments

on publicly traded securities described

in § 1.1441–6(b)(2)(ii), deposit interest

with banks or other financial

institutions as described in sections

871(i)(2)(a) and 881(d), or original issue

discount (or interest) on obligations

with a maturity of 183 days or less from

the date of original issue.

The final regulations eliminate the

need to inquire further when the

customer directs the financial

institution to make a payment to

another U.S. financial institution. While

such direction may indicate that the

account holder is, in fact, residing in the

U.S., the burden of this due diligence

requirement outweighs the compliance

benefits.

However, the final regulations impose

a duty to inquire when a payment is

directed to a P.O. box or an in-care-of

address where the withholding agent

has a permanent address on file for the

payee that is neither a P.O. box or an incare-of address. Contrary to the

comments, the IRS and Treasury believe

that how a payment is directed may

indicate that the beneficial owner

wishes not to disclose his or her place

of residence. As stated above, the

beneficial owner may be treated as a

foreign person despite a P.O. box

address; however, such treatment would

require that the withholding agent

obtain evidence of foreign status in

addition to the Form W–8.

The final regulations add a due

diligence item. A withholding agent

may not rely on a claim of partnership

status on a Form W–8 if the name of the

person on the form indicates that the

entity may be the type of entity that is

on the per se list of foreign corporations

included in § 301.7701–2(b)(8)(i), unless

the form explains that the entity is a

grandfathered partnership.

2. Authorized Foreign Agents

The proposed regulations would

modify the current rules governing

foreign agents of U.S. withholding

agents by allowing a foreign agent to file

Forms 1042 and 1042–S returns on

behalf of the U.S. withholding agent.

Some commentators have pointed out

that the inability to tier authorized

foreign agents limits the usefulness of

the procedure. However, after further

consideration, the IRS and Treasury

have decided to leave the proposed

rules unchanged. The authorized foreign

agent procedure relies on the IRS’

ability to audit the agent. Any

compliance failure of the agent is

imputed to the U.S. withholding agent.

If the U.S. withholding agent acts

through several layers of agents, the IRS

would have to audit all of the agents in

the chain of payment to determine the

compliance of the U.S. withholding

agent. Such audits are impractical. The

procedure is retained, however, because

it may still be useful in its proposed

form in cases not involving tiers of

intermediaries.

I.Comments and Changes to §1.1441–8

The final regulations are revised to

take into account comments that the

proposed documentation requirements

for payments to foreign governments

and international organizations are

unnecessarily cumbersome. The

documentation requirement is

eliminated entirely for payments to

international organizations and for

interest on bankers’ acceptances paid to

central banks of issue. This exception is

appropriate because the withholding

exemption is not conditioned on any

representation of the beneficial owner,

other than its status as such (see

§ 1.6049–4(c)(1)(ii) (G) and (H) for an

‘‘eyeball’’ test for ascertaining the status

of the payee as an international

organization or a foreign central bank of

issue). Payments to foreign governments

and to the Bank for International

Settlements must be documented,

however, because a withholding

exemption applies only if the

government’s or the Bank’s income is

not associated with a commercial

activity. However, if a person represents

that it is an integral part of a foreign

government, the documentation remains

valid permanently. If, on the other hand,

the person claiming to be a foreign

government represents that it is a

controlled entity, then the certificate

must be renewed every three years. A

certificate furnished by the Bank for

International Settlements is also valid

permanently. In view of these simplified

documentation requirements, the final

regulations require that all payments to

foreign governments, international

organizations, and the Bank for

International Settlements be reported on

a Form 1042 and 1042–S, to the extent

reportable if paid to a foreign person.

J. Comments and Changes to §§ 1.1441–

9 and 1.1443–1

1. Foreign Tax-exempt Organization and

Foreign Private Foundations

Several comments were received

regarding withholding on the income of

foreign tax-exempt organizations and

applicable procedures for documenting

the foreign organization’s exempt status.

The commentators questioned whether

section 1443(a) should apply to items of

passive income that would not be

unrelated business income but for

section 514 (relating to debt-financed

property), and whether section 4948

should apply to impose a 4-percent tax

on U.S. source portfolio interest and

bank deposit interest so that a 4-percent

withholding applies under section
53412 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

1443(b) to payments of such income to

foreign foundations.

Commentators argued that a foreign

organization meeting the description of

section 501(c)(3) should be permitted to

claim tax-exempt status even if it has

not first obtained an IRS determination.

They argued that the IRS determination

letter is required for domestic

organizations because contributions to a

domestic section 501(c)(3) organization

are deductible. No such deduction is

permitted for a contributions to a

foreign organization and, therefore, a

foreign organization described in

section 501(c)(3) should be treated like

any other organization described under

section 501(c). Also, commentators

argued that the regulations should not

require an opinion of counsel to be

attached to the withholding certificate.

The final regulations, however, do not

accept most of these comments. As in

the proposed regulations, foreign

organizations that are required to obtain

an IRS determination letter in order to

qualify as a tax-exempt organization

under section 501(c)(3) (i.e., those

organizations that obtain a substantial

portion of their support from U.S.

sources) must obtain such a

determination letter and attach it to the

Form W–8. Other foreign organizations

that may qualify for tax-exempt status

under section 501(c)(3) without an IRS

determination letter (i.e., organizations

that receive substantially all of their

support from sources outside the United

States; see section 4948(b)) may

establish their exempt status on the

basis of an opinion of counsel. Also,

they clarify that the opinion must be

from U.S. counsel, meaning an attorney

admitted to, and in good standing with,

the bar in one of the fifty States or the

District of Columbia. In addition, the

final regulations under § 1.1441–9(b)(2)

provide that tax-exempt organizations

that claim that they are tax-exempt

under section 501(c)(3) and not private

foundations and do not have an IRS

determination letter must attach an

affidavit to their Form W–8 in addition

to the opinion of counsel. Thus, the

final regulations relieve those

organizations from the obligation under

the proposed regulations to provide an

opinion of counsel regarding their nonprivate foundation status. The IRS and

Treasury view the IRS certification

procedure for section 501(c)(3)

organizations as an important

compliance measure. They do not

believe that self-certification procedures

should be substituted where the Code

clearly requires an IRS determination

letter.

The final regulations under § 1.1441–

9(a) also clarify that a foreign

organization that does not rely on its

tax-exempt qualification to claim

reduced withholding on a payment need

not comply with the special procedures

in § 1.1441–9. Instead, it may follow the

same procedures that apply to taxable

entities. In particular, the final

regulations clarify that a foreign taxexempt organization or foreign private

foundation that claims a benefit under

an income tax treaty must follow the

procedures described under § 1.1441–6

rather than rely on the procedures

described under §§ 1.1441–9 or 1443–1.

The final regulations do not make a

special exception for debt-financed

income that, under section 512, is

treated as unrelated business income. In

addition, the final regulations do not

eliminate the 4-percent tax imposed

under section 4948(a) on any items of

investment income of a private foreign

foundation and required to be withheld

under section 1443(b). The IRS and

Treasury believe that they have no

authority to eliminate a tax that is

clearly imposed by statute. Therefore, it

would be inappropriate to eliminate the

requirement to withhold such tax. A

foreign private foundation claiming a

reduced rate of 4-percent is subject to

the same documentation requirements

as apply to tax-exempt foreign

organizations, meaning that a Form W–

8 must be furnished, to which the

appropriate determination letter or

opinion of U.S. counsel must be

attached. The final regulations restate

the existing regulations under section

1443 in an effort to eliminate

unnecessary provisions. The

elimination of several provisions does

not indicate that the procedures do not

apply (e.g., requirement to file Forms

1042 and 1042–S), but, simply that

these provisions are not necessary.

K. Comments and Changes to §§ 1.1461–

1 and 1.1461–2

1. Form 1042–S Reporting

In response to comments, the

deadline for filing Forms 1042 and

1042–S has been moved from February

28 to March 15. Regarding joint

accounts, the final regulations do not

adopt the suggestion that only one Form

1042–S be required for a joint account

even where the other joint owner

requests another statement.

Commentators argued that subdividing

payments made to a single account and

providing multiple Forms 1042–S

would significantly increase

administrative burden. However, joint

owners should be able to obtain a proof

of tax payment in case one of them

wishes to apply for a refund of tax or

needs to substantiate the payment of tax

for any reason and it does not have

access to the form issued to one of the

joint owners. The fact that the obligation

to issue more than one Form 1042–S is

only on request by one of the joint

owners should minimize the burden on

withholding agents.

The proposed regulations require that

a financial institution with actual

knowledge of the payee’s TIN report the

TIN on Form 1042–S even though a TIN

did not have to be provided in

connection with the payment. In

response to comments, the final

regulations clarify in § 1.1461–1(c)(3)(v)

that, in the case of a financial institution

dealing with customers through a

system of accounts, actual knowledge

exists only if such TIN was reported on

a Form W–8 provided with respect to

another payment made through the

same account or through another

account, the information with respect to

which can be retrieved through a

centralized account information system

(including a universal account system)

containing both accounts.

Commentators requested a

clarification that Form 1042–S reporting

is not required with respect to interest

on deposits paid by any U.S. bank

(including its foreign branches or

subsidiaries), except in the limited

situation where the interest is paid to a

Canadian resident. This point is

clarified under § 1.1461–1(c)(2)(i),

which limits reporting to amounts

subject to withholding, as defined in

§ 1.1441–2(a). However, § 1.1461–

1(c)(2)(i)(D) contains an exception for

interest paid to Canadian residents. In

addition, § 1.1461–1(c)(2)(ii)(F) is added

to clarify that interest or OID accrued on

an obligation is not required to be

reported on a Form 1042–S to the extent

the interest or OID is not required to be

withheld upon under § 1.1441–2(b)(3)

due to the lack of knowledge by the

withholding agent. On the other hand,

§ 1.1461–1(c)(2)(i)(E) clarifies that, as is

the case under existing regulations,

amounts representing interest on an

obligation sold between interest

payment dates is reportable on a Form

1042 and 1042–S, even though it is not

subject to withholding.

2. Adjustments for Overwithholding or

Underwithholding of Tax

Commentators asked that withholding

agents be permitted to process refund

claims for nonresident alien payees.

Since refund claims will now require

TINs, duplication of claims can be

avoided. Commentators point to the fact

that this procedure should be more

efficient as it may require the IRS to

process only a single refund claim from

a withholding agent for all of its foreign
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53413

clients rather than dealing with claims

filed by each individual foreign client.

This comment is accepted in the context

of qualified intermediary arrangements.

However, in other situations, a

procedure allowing refunds on behalf of

customers is impractical because of the

risk that customers would

independently file for refunds based on

their form 1042–S.

Withholding agents also made a

number of points regarding authority to

rectify any underwithholding situation

discovered after the due date for filing

Form 1042 but before actual filing,

streamlining current refund procedures

by, for example, providing for a

‘‘quickie’’ refund form, and the

reporting of adjustments to withholding

during the calendar year. Those points,

however, should be addressed in the

context of forms and administrative

procedures, rather than in the

regulations. The IRS will continue to

work with the industry to find ways to

improve and streamline the information

and return filing procedures.

L. Comments and Changes to

Information Reporting Provisions Under

Chapter 61 and Section 3406 of the

Code

1. Information Reporting—Exempt

Recipient

Commentators asked that the

proposed changes to the exempt

recipient rules for corporations be

eliminated. Under § 1.6049–

4(c)(1)(ii)(A) of the proposed

regulations, the ‘‘eyeball’’ test for

corporations with an account

relationship with the payor would be

required to be supplemented by an EIN

or a corporate resolution. Commentators

suggested that, instead, payors should

be allowed to rely on the per se list

provided in the check the box

regulations under § 301.7701–3.

In response to these comments, the

final regulations eliminate the proposed

corporate resolution requirement and,

therefore, reinstate the ‘‘eyeball’’ test for

corporate payees. Foreign corporations

are able to establish their corporate

payee status based on the per se list in

§ 301.7701–2(b)(8)(i). In addition, a

payee may establish corporate status

with a copy of the Form 8832, if the

entity has filed one with the IRS in

order to elect corporate classification.

See § 1.6049–4(c)(1)(ii)(A) (1) and (2).

Section 1.6049–4(c)(1)(ii) of the 1988

proposed regulations delete nominees,

custodians, and brokers from the list of

exempt recipients. Some commentators

objected to this change. The final

regulations re-instate nominees,

custodians, and brokers as exempt

recipients. Additionally, swap dealers

are included in the list of exempt

recipients, and the description of

financial institutions that are exempt

recipients has been clarified to include

clearing organizations.

Comments were received requesting

that the list of international

organizations be re-instated in the

regulations. The final regulations do not

contain such a list because frequent

changes in the status of such

organizations would make it too

burdensome for the IRS to keep current.

Instead, the IRS intends to issue

guidance indicating that withholding

agents and payors may rely on the list

published by the Department of State.

Commentators asked that the list of

exempt recipients under sections 6041

and 6045 be conformed to that under

section 6049 and, in the case of section

6041, be extended to banks and

financial institutions. The final

regulations apply the same exempt

recipient rules to interest under section

6049, dividends under section 6042,

and notional principal contracts under

section 6041. The exempt recipient

rules under section 6045 remain

unchanged, except that a foreign central

bank of issue is added to the list for

substitute payments under § 1.6045–

2(b)(2)(i)(G).

2. Information Reporting for Offshore

Accounts—Documentary Evidence

The proposed regulations make a

number of changes to the existing

procedures applicable to deposits with

foreign branches of U.S. banks. The

proposed regulations modify the

documentary evidence standard in

§ 35a.9999–3, A–34, as part of an effort

to subject all off-shore accounts to a

uniform documentary evidence

standard, whether the account is with a

foreign branch of a U.S. bank, with a

foreign branch of a domestic institution

other than a bank, or with a foreign

branch of a foreign financial institution.

As a result, foreign branches of U.S.

banks would become subject to more

stringent documentary evidence

requirements to the extent they would

no longer be able to rely on an

indication of foreign status from a

customer. Instead, the proposed

regulations require a foreign banking

branch to obtain actual documentary

evidence from the customer and keep a

record of it. Some commentators

questioned whether the proposed

regulations eliminate the possibility of

relying on a statement of foreign status

incorporated in the account opening

form. In addition, the proposed

regulations impose a three-year renewal

of the documentary evidence, a

requirement that does not currently

apply to foreign banking branches.

Further, the proposed regulations

eliminate the $600 threshold under the

current regulations (by making foreign

branch bank deposit interest subject to

reporting under section 6041 rather than

section 6049). They impose new backup

withholding requirements for accounts

actually known to the branch as being

owned by a U.S. person. In addition, the

provisions under § 1.1441–1(f) create a

presumption of U.S. status for

undocumented accounts. Although a

presumption of U.S. status is not

sufficient for triggering an obligation to

backup withhold (because the bank has

no actual knowledge), it is sufficient to

require the interest to be reported on a

Form 1099.

After further consideration, and based

on comments received, the final

regulations are revised. Consistent with

the regulations proposed in 1988 and in

1996, the requirement to document

owners of accounts maintained at

offshore branches of U.S. banks is

imposed under section 6049 rather than

section 6041. Therefore, the $600 limit

will no longer apply to those accounts.

On the other hand, the documentation

requirements are substantially

simplified. If the customer’s address is

in the country where the branch is

located and it is not customary in that

location that banks request documentary

evidence from customers when opening

an account, then the bank or other

financial institution may rely on a

declaration of foreign status, contained

in an account opening form, that does

not have to be signed under penalties of

perjury. The declaration does not expire

unless circumstances change that would

indicate that the account holder has

become a U.S. person or the payor is so

notified. The payor must send a yearend reminder to the account holder to

notify the payor of change of status, if

applicable.

These alternative documentary

evidence procedures are extended to all

offshore accounts for payments that are

not subject to withholding under

chapter 3 of the Code and are not U.S.

source bank deposit interest. These

amounts include foreign source income

and gross proceeds.

The alternative documentary evidence

rules apply to accounts opened on or

after the effective date of the regulations

(i.e., on or after January 1, 1999).

However, existing accounts as of that

date are required to comply with the

due diligence requirements, including

inserting a negative confirmation

statement in the annual year-end

statement provided to the customer.
53414 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

In response to comments, the final

regulations under § 1.6049–5(b)(10) are

revised to incorporate a waiver from the

certification requirement of regulations

§ 1.163–5(c)(2)(i)(D)(3) for debt

instruments with a maturity of 183 days

or less from the date of issue. In

addition, § 1.6049–4(d)(3) is modified to

clarify that the same conversion rules

are applicable to all foreign currencydenominated obligations for purposes of

section 6049.

3. Reporting Obligations of Non-U.S.

Payors or Middlemen

Under the regulations under section

6045, dealing with broker proceeds,

non-U.S. payors are exempt from

reporting if the payment is made outside

the United States. See § 1.6045–1(a)(1).

In contrast, non-U.S. payors and

middlemen making payments of U.S.

source interest or dividends are required

to report these payments on a Form

1099, unless they receive

documentation supporting the payee’s

foreign status (or the payee is an exempt

recipient). Commentators requested that

non-U.S. payors of U.S. interest and

dividends be similarly exempt from

information reporting if the payments

are made outside the United States. This

change is not appropriate, at least for

amounts that are subject to withholding

under chapter 3 of the Code. To the

extent the U.S. interest or dividends are

subject to U.S. 30-percent withholding,

and documentation is received for

reducing the withholding rate, the

foreign payee exemption would apply

under sections 6042 and 6049 and the

payment would not be reportable.

Under the final regulations, however, a

payor making a payment of U.S. source

dividends or interest (whether inside or

outside the U.S.) to a payee who has

provided no documentation is not

exempt from Form 1099 information

reporting, even if another payor

‘‘upstream’’ has withheld an amount

under chapter 3 of the Code. However,

a payor is exempt from backup

withholding on the payment if an

‘‘upstream’’ withholding agent has

withheld a full 30-percent amount from

the payment. The payor, however, is not

relieved from making a return on Form

1099 under section 6042 or 6049 if it

has actual knowledge that the payee is

a U.S. person who is not an exempt

recipient. See § 31.3406(g)–1(e). These

rules also apply to U.S. source royalties

reportable under section 6050N.

Further, the regulations under section

3406 are amended to authorize the IRS

to establish procedures by which an

amount backup withheld under section

3406 from a payee that subsequently

establish that it is a foreign person

exempt from information reporting and

backup withholding can be credited

toward amounts required to be withheld

under chapter 3 of the Code. Such

‘‘cross-crediting’’ procedures are not

available at present and would require

the IRS to modify its systems.

4. Information Reporting for Capital

Gain Dividends

Under the proposed regulations,

capital gain dividends as defined under

section 852(b)(3)(C) would no longer be

reportable on Form 1099–DIV.

Commentators objected that, absent

such reporting, shareholders could not

easily ascertain the amount of capital

gain dividends paid for the calendar

year for purposes of calculating their

income tax liability. Accordingly, the

final regulations eliminate the proposed

exclusion of capital gain dividends

under § 1.6042–3(b)(3).

Effect on Other Documents

The following publications are

obsolete as of October 14, 1997:

Rev. Rul. 55–106, 1955–1 CB 102.

Rev. Rul. 57–391, 1957–2 CB 606.

Rev. Rul. 60–288, 1960–2 CB 265.

Rev. Rul. 65–86, 1965–1 CB 538.

Rev. Rul 68–173, 1968–1 CB 626.

Rev. Rul. 68–237, 1968–1 CB 391.

Rev. Rul. 68–333, 1968–1 CB 390.

Rev. Rul. 69–41, 1969–1 CB 214.

Rev. Rul. 69–244, 1969–1 CB 215.

Rev. Rul. 70–175, 1970–1 CB 184.

Rev. Rul. 70–250, 1970–1 CB 182.

Rev. Rul. 70–251, 1970–1 CB 183.

Rev. Rul. 70–616, 1970–2 CB 174.

Rev. Rul. 72–87, 1972–1 CB 274.

Rev. Rul. 80–222, 1980–2 CB 211.

Rev. Rul. 83–175, 1983–2 CB 109.

Rev. Rul. 84–158, 1984–2 CB 262.

Rev. Rul. 85–61, 1985–1 CB 355.

Rev. Rul. 89–17, 1989–1 CB 268.

Rev. Rul. 89–33, 1989–1 CB 269.

Rev. Rul. 89–91, 1989–2 CB 129.

Rev. Proc. 65–2, 1965–1 CB 715.

Rev. Proc. 67–24, 1967–1 CB 625.

Notice 94–85, 1994–2 CB 511.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations.

This Treasury decision finalizes

notices of proposed rulemaking

published February 29, 1988 (53 FR

5991), December 21, 1995 (60 FR

66243), and April 15, 1996 (61 FR

17614), respectively. It has been

determined that a final regulatory

flexibility analysis is required under 5

U.S.C. § 604 for the collections of

information contained in this Treasury

decision with respect to the notice of

proposed rulemaking published on

April 15, 1996. An initial regulatory

flexibility analysis was not required

because the notice of proposed

rulemaking was issued prior to the

effective date (June 27, 1996) of the

amendments to the Regulatory

Flexibility Act (5 U.S.C. chapter 6) made

by the Small Business Regulatory

Enforcement Fairness Act (SBREFA)

(Public Law 104–121). It also has been

determined that a regulatory flexibility

analysis is not required for the notice of

proposed rulemaking published on (1)

December 21, 1995 because the notice

does not impose any collection of

information on a small entity, and was

published prior to the March 29, 1996

enactment date of SBREFA, and (2) on

February 29, 1988 because the notice

was published prior to the enactment of

SBREFA.

Final Regulatory Flexibility Act Analysis

The major objective of the final

regulations is to prescribe new

procedures to eliminate unnecessary

burdens created by the lack of

standardization and coordination of the

current withholding and information

reporting procedures with respect to

amounts paid to foreign persons. To this

effect, the regulations facilitate

compliance and reduce taxpayer burden

by simplifying the documentation

requirements, unifying the certification

procedures and clarifying reliance

standards in an effort to streamline the

processing of U.S. source payments to

foreign persons.

The economic impact of collection of

information contained in these

regulations on any small entity would

result primarily from the entity being

required either (1) to provide a Form W–

8 as the beneficial owner or payee of

U.S. source income, or (2) to receive a

Form W–8 as the withholding agent or

payor (and eventually, file a Form 1042

and Forms 1042–S). In both situations,

these regulations generally impose

minimal additional reporting or

recordkeeping requirements beyond

those already imposed under current

law. In fact, the regulations significantly

reduce the withholding and reporting

burdens associated with Form W–8 by,

for example, consolidating the current

withholding certificates (Forms 1001,

1078, 4224, 8709 and W–8) into a Form

W–8 format, permitting certain foreign

intermediaries to certify on behalf of

their customers, permitting the

electronic transmission of the form

(subject to IRS prescribed procedures),
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53415

clarifying the standards for an

acceptable substitute form, permitting a

90-day grace period for actual receipt of

the form, and providing cure procedures

for a late-received form.

For a small entity in the role of the

beneficial owner, the new collection of

information contained in these

regulations is the extension of the Form

W–8 requirement to claims for a treatybased reduction in the withholding rate

with respect to dividend income;

thereby, subjecting dividends to the

same documentation requirements as

other income types. This change

imposes no recordkeeping requirements

beyond those necessary (and currently

required for all other income types) to

ensure proper entitlement to treaty

benefits, and is illustrative of IRS efforts

to eliminate unnecessary procedural

differences in order to reduce the

burden on withholding agents.

Although there is no estimate of the

number of beneficial owners or payees

of U.S. source income payments, the

number of cross border payments have

steadily increased over the years (over

80 billion dollars paid in 1995). The IRS

and Treasury believe that most of these

payments are made to individuals, large

financial institutions and large

corporations.

For a small entity in the role of the

withholding agent, the most significant

change of the regulations that impacts

the collection of information is the

establishment of the wholly-elective

qualified intermediary regime which

will impose, but only pursuant to an

agreement with the IRS, additional

reporting and recordkeeping

requirements in exchange for the benefit

of furnishing a single Form W–8 for

multiple beneficiary owners or payees.

The IRS and Treasury believe that this

alternative will be adopted primarily by

large foreign financial institutions that

maintain numerous accounts for large

numbers of customers, and it is unlikely

that a substantial number of small

entities would find it necessary or

useful to agree to act as a qualified

intermediary. Of the approximately

25,000 tax returns (Form 1042) filed by

withholding agents per year, the IRS

estimates that 95 percent of such returns

are filed by large financial institutions.

A summary of the significant issues

raised by the public comments in

response to the proposed regulations

and IRS’ views on such issues, and

changes made as a result of the

comments is set forth above in the

section of the preamble to the

regulations entitled ‘‘Explanation of

Provisions and Revisions.’’

The IRS and Treasury Department are

not aware of any federal rules that

duplicate, overlap, or conflict with the

regulations.

These regulations will affect small

entities such as small banks, small

businesses paying interest and

dividends, small private foundations,

and small tax-exempt organizations

(including colleges and charities). The

IRS and Treasury believe that most of

these small entities will have a direct

relationship with the foreign person and

therefore, will not act as, or have

transactions through, an intermediary

(i.e., nominee, custodian, or agent). The

professional competence necessary to

comply with these regulations is no

greater than that already necessary to

handle the day-to-day business

operations of a small entity because

much of the recordkeeping and

reporting requirements under the

regulations can be easily (if not already

done under the existing regulations)

incorporated into the existing or

customary recordkeeping and reporting

obligations of the small entity (e.g., an

account opening form of a bank, the

registration form of a college, etc.).

None of the significant alternatives

considered in drafting these regulations

would have significantly altered the

economic impact of these regulations on

small entities. A detailed description of

the measures taken to minimize the

economic impact of the collections of

information on small entities, consistent

with the stated objectives of applicable

statutes is set forth above in the section

of the preamble to the regulations

entitled ‘‘Explanation of Provisions and

Revisions.’’ In considering alternatives,

the IRS and Treasury have concluded

that a withholding system (based on

reduction of withholding at source)

rather than a refund system avoids the

administrative burdens (including costs

and delays) that can occur when

applying for a refund of overwithheld

amounts. Ensuring compliance under a

withholding system, however, requires

documentation substantiating claims of

foreign status and of exemptions from,

or reduced rates of, withholding, and

submission of proper information to the

IRS.

Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes,

Penalties, Pensions, Railroad retirement,

Reporting and recordkeeping

requirements, Social security,

Unemployment compensation.

26 CFR Part 35a

Employment taxes, Income taxes,

Reporting and recordkeeping

requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 502

Greece, Reporting and recordkeeping

requirements, Tax treaties.

26 CFR Part 503

Germany, Reporting and

recordkeeping requirements, Tax

treaties.

26 CFR Part 509

Switzerland, Reporting and

recordkeeping requirements, Tax

treaties.

26 CFR Part 513

Ireland, Reporting and recordkeeping

requirements, Tax treaties.

26 CFR Part 514

France, Reporting and recordkeeping

requirements, Tax treaties.

26 CFR Part 516

Austria, Reporting and recordkeeping

requirements, Tax treaties.

26 CFR Part 517

Pakistan, Reporting and

recordkeeping requirements, Tax

treaties.

26 CFR Part 520

Sweden, Reporting and recordkeeping

requirements, Tax treaties.

26 CFR Part 521

Denmark, Reporting and

recordkeeping requirements, Tax

treaties.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, under the authority of

26 U.S.C. 7805, 26 CFR parts 1, 31, 35a,

301, 502, 503, 509, 513, 514, 516, 517,

520, 521, and 602 are amended as

follows:
53416 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by removing the

entry for Section 1.1441–4T, revising

the entries for Sections 1.1441–3,

1.1441–4, 1.1441–5, 1.1441–7, 1.6049–4

and 1.6049–5 adding entries in

numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1441–2 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

Section 1.1441–3 also issued under 26

U.S.C. 1441(c)(4), 26 U.S.C. 3401(a)(6) and 26

U.S.C. 7701(l).

Section 1.1441–4 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

Section 1.1441–5 also issued under 26

U.S.C. 1441(c)(4), 26 U.S.C. 3401(a)(6) and 26

U.S.C. 7701(b)(11).

Section 1.1441–6 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

Section 1.1441–7 also issued under 26

U.S.C. 1441(c)(4), 26 U.S.C. 3401(a)(6) and 26

U.S.C. 7701(l).

Section 1.1443–1 also issued under 26

U.S.C. 1443(a). * * *

Section 1.1461–1 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

Section 1.1461–2 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

Section 1.1462–1 also issued under 26

U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).

* * *

Section 1.6042–3 also issued under 26

U.S.C. 6045. * * *

Section 1.6049–4 also issued under 26

U.S.C. 6049 (a), (b), and (d).

Section 1.6049–5 also issued under 26

U.S.C. 6049 (a), (b), and (d). * * *

§ 1.163–5 [Amended]

Par. 2. In § 1.163–5, paragraph

(c)(2)(i)(B)(5) is amended by removing

the language ‘‘subdivision (iii) of A–5 of

§ 35a.9999–4T’’ in the last sentence and

adding ‘‘§ 1.6049–5(c)(1)’’ in its place.

Par. 3. Section 1.165–12 is amended

by:

1. Adding a sentence at the end of

paragraph (a).

2. Removing the language ‘‘(c)(1)(v)’’

and adding ‘‘(c)(1)(iv)’’ in its place in

paragraph (c)(1)(i).

3. Removing paragraph (c)(1)(iii) and

redesignating paragraphs (c)(1)(iv) and

(c)(1)(v) as paragraphs (c)(1) (iii) and

(iv).

4. Revising paragraphs (c)(1)(ii) and

newly redesignated paragraph (c)(1)

(iii).

5. Removing the language (c)(1) (ii)

and (iv) and adding (c)(1) (ii) and (iii)

in its place in paragraphs (c)(2)(iv) and

(c)(3)(iv).

The addition and revisions read as

follows:

§ 1.165–12 Denial of deduction for losses

on registration-required obligations not in

registered form.

(a) * * * For purposes of this section,

the term United States means the United

States and its possessions within the

meaning of § 1.163–5(c)(2)(iv).

* * * * *

(c) * * *

(1) * * *

(ii) The holder must offer to sell, sell

and deliver the obligation in bearer form

only outside of the United States except

that a holder that is a registered brokerdealer as described in paragraph (c)(1)(i)

of this section may offer to sell and sell

the obligation in bearer form inside the

United States to a financial institution

as defined in paragraph (c)(1)(iv) of this

section for its own account or for the

account of another financial institution

or of an exempt organization as defined

in section 501(c)(3).

(iii) The holder may deliver an

obligation in bearer form that is offered

or sold inside the United States only if

the holder delivers it to a financial

institution that is purchasing for its own

account, or for the account of another

financial institution or of an exempt

organization, and the financial

institution or organization that

purchases the obligation for its own

account or for whose account the

obligation is purchased represents that

it will comply with the requirements of

section 165(j)(3) (A), (B), or (C). Absent

actual knowledge that the

representation is false, the holder may

rely on a written statement provided by

the financial institution or exempt

organization, including a statement that

is delivered in electronic form. The

holder may deliver a registrationrequired obligation in bearer form that

is offered and sold outside the United

States to a person other than a financial

institution only if the holder has

evidence in its records that such person

is not a U.S. citizen or resident and does

not have actual knowledge that such

evidence is false. Such evidence may

include a written statement by that

person, including a statement that is

delivered electronically. For purposes of

this paragraph (c), the term deliver

includes a transfer of an obligation

evidenced by a book entry including a

book entry notation by a clearing

organization evidencing transfer of the

obligation from one member of the

organization to another member. For

purposes of this paragraph (c), the term

deliver does not include a transfer of an

obligation to the issuer or its agent for

cancellation or extinguishment. The

record-retention provisions in § 1.1441–

1(e)(4)(iii) shall apply to any statement

that a holder receives pursuant to this

paragraph (c)(1)(iii).

* * * * *

Par. 4. Section 1.871–6 is revised to

read as follows:

§ 1.871–6 Duty of withholding agent to

determine status of alien payees.

For the obligation of a withholding

agent to withhold the tax imposed by

this section, see chapter 3 of the Internal

Revenue Code and the regulations

thereunder.

§ 1.871–7 [Amended]

Par. 5. In § 1.871–7, paragraph (b), the

third sentence is amended by removing

the words ‘‘see paragraph (a) of

§ 1.1441–2’’ and adding ‘‘see § 1.1441–

2(b)’’ in its place.

Par. 6. Section 1.871–14 is added to

read as follows:

§ 1.871–14 Rules relating to repeal of tax

on interest of nonresident alien individuals

and foreign corporations received from

certain portfolio debt investments.

(a) General rule. No tax shall be

imposed under section 871(a)(1)(A),

871(a)(1)(C), 881(a)(1) or 881(a)(3) on

any portfolio interest as defined in

sections 871(h)(2) and 881(c)(2) received

by a foreign person. But see section

871(b) or 882(a) if such interest is

effectively connected with the conduct

of a trade or business within the United

States.

(b) Rules concerning obligations in

bearer form—(1) In general. Interest

(including original issue discount) with

respect to an obligation in bearer form

is portfolio interest within the meaning

of section 871(h)(2)(A) or 881(c)(2)(A)

only if it is paid with respect to an

obligation issued after July 18, 1984,

that is described in section 163(f)(2)(B)

and the regulations under that section

and an exception under section 871(h)

or 881(c) does not apply. Any obligation

that is not in registered form as defined

in paragraph (c)(1)(i) of this section is an

obligation in bearer form.

(2) Coordination with withholding

and reporting rules. For an exemption

from withholding under section 1441

with respect to obligations described in

this paragraph (b), see § 1.1441–

1(b)(4)(i). For rules relating to an

exemption from Form 1099 reporting

and backup withholding under section

3406, see section 6049 and § 1.6049–

5(b)(8) for the payment of interest and

§ 1.6045–1(g)(1)(ii) for the redemption,

retirement, or sale of an obligation in

bearer form.

(c) Rules concerning obligations in

registered form—(1) In general—(i)

Obligation in registered form. For

purposes of this section, an obligation is

in registered form only as provided in

this paragraph (c)(1)(i). The conditions

for an obligation to be considered in

registered form are identical to the

conditions described in § 5f.103–1 of

this chapter. Therefore, an obligation
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53417

that would be an obligation in registered

form except for the fact that it can be

converted at any time in the future into

an obligation that is not in registered

form shall not be an obligation in

registered form. An obligation that is not

in registered form by reason of the

preceding sentence may nevertheless be

in registered form, but only after the

possibility of conversion is terminated.

An obligation that is not in registered

form and can be converted into an

obligation that would meet the

requirements of this paragraph (c)(1)(i)

for being in registered form shall be

considered in registered form only after

the conversion is effected. For purposes

of this section, an obligation is

convertible if the obligation can be

transferred by any means not described

in § 5f.103–1(c) of this chapter. An

obligation is treated as an obligation in

registered form if—

(A) The obligation is registered as to

both principal and any stated interest

with the issuer (or its agent) and transfer

of the obligation may be effected only by

surrender of the old instrument, and

either the reissuance by the issuer of the

old instrument to the new holder or the

issuance by the issuer of a new

instrument to the new holder;

(B) The right to the principal of, and

stated interest on, the obligation may be

transferred only through a book entry

system maintained by the issuer (or its

agent) described in this paragraph

(c)(1)(i)(B). An obligation shall be

considered transferable through a book

entry system if the ownership of an

interest in the obligation, is required to

be reflected in a book entry, whether or

not physical securities are issued. A

book entry is a record of ownership that

identifies the owner of an in interest in

the obligation; or

(C) It is registered as to both principal

and any stated interest with the issuer

(or its agent) and may be transferred by

way of either of the methods described

in paragraph (c)(1)(i) (A) or (B) of this

section.

(ii) Requirements for portfolio interest

qualification in the case of an obligation

in registered form. Interest (including

original issue discount) received on an

obligation that is in registered form

qualifies as portfolio interest only if—

(A) The interest is paid on an

obligation issued after July 18, 1984;

(B) The interest would be subject to

tax under section 871(a)(1)(A),

871(a)(1)(C), 881(a)(1) or 881(a)(3) but

for section 871(h) or 881(c);

(C) A United States (U.S.) person

otherwise required to deduct and

withhold tax under chapter 3 of the

Internal Revenue Code (Code) receives a

statement that meets the requirements of

section 871(h)(5) that the beneficial

owner of the obligation is not a U.S.

person; and

(D) An exception under section 871(h)

or 881(c) does not apply.

(2) Required statement. For purposes

of paragraph (c)(1)(ii)(C) of this section,

a U.S. person will be considered to have

received a statement that meets the

requirements of section 871(h)(5) if

either it complies with one of the

procedures described in this paragraph

(c)(2) and does not have actual

knowledge or reason to know that the

beneficial owner is a U.S. person or it

complies with the procedures described

in paragraph (d) or (e) of this section.

(i) The U.S. person (or its authorized

foreign agent described in § 1.1441–

7(c)(2)) can reliably associate the

payment with documentation upon

which it can rely to treat the payment

as made to a foreign beneficial owner in

accordance with § 1.1441–1(e)(1)(ii). See

§ 1.1441–1(b)(2)(vii) for rules regarding

reliable association with

documentation.

(ii) The U.S. person (or its authorized

foreign agent described in § 1.1441–

7(c)(2)) can reliably associate the

payment with a withholding certificate

described in § 1.1441–5(c)(2)(iv) from a

person claiming to be withholding

foreign partnership and the foreign

partnership can reliably associate the

payment with documentation upon

which it can rely to treat the payment

as made to a foreign beneficial owner in

accordance with § 1.1441–1(e)(1)(ii).

(iii) The U.S. person (or its authorized

foreign agent described in § 1.1441–

7(c)(2)) can reliably associate the

payment with a withholding certificate

described in § 1.1441–1(c)(3)(ii) from a

person representing to be a qualified

intermediary that has assumed primary

withholding responsibility in

accordance with § 1.1441–1(e)(5)(iv) and

the qualified intermediary can reliably

associate the payment with

documentation upon which it can rely

to treat the payment as made to a foreign

beneficial owner in accordance with its

agreement with the Internal Revenue

Service (IRS).

(iv) The U.S. person (or its authorized

foreign agent described in § 1.1441–

7(c)(2)) can reliably associate the

payment with a withholding certificate

described in § 1.1441–1(e)(3)(v) from a

person claiming to be a U.S. branch of

a foreign bank or of a foreign insurance

company that is described in § 1.1441–

1(b)(2)(iv)(A) or a U.S. branch

designated in accordance with § 1.1441–

1(b)(2)(iv)(E) and the U.S. branch can

reliably associate the payment with

documentation upon which it can rely

to treat the payment as made to a foreign

beneficial owner in accordance with

§ 1.1441–1(e)(1)(ii).

(v) The U.S. person receives a

statement from a securities clearing

organization, a bank, or another

financial institution that holds

customers’ securities in the ordinary

course of its trade or business. In such

case the statement must be signed under

penalties of perjury by an authorized

representative of the financial

institution and must state that the

institution has received from the

beneficial owner a withholding

certificate described in § 1.1441–

1(e)(2)(i) (a Form W–8 or an acceptable

substitute form as defined § 1.1441–

1(e)(4)(vi)) or that it has received from

another financial institution a similar

statement that it, or another financial

institution acting on behalf of the

beneficial owner, has received the Form

W–8 from the beneficial owner. In the

case of multiple financial institutions

between the beneficial owner and the

U.S. person, this statement must be

given by each financial institution to the

one above it in the chain. No particular

form is required for the statement

provided by the financial institutions.

However, the statement must provide

the name and address of the beneficial

owner, and a copy of the Form W–8

provided by the beneficial owner must

be attached. The statement is subject to

the same rules described in § 1.1441–

1(e)(4) that apply to intermediary Forms

W–8 described in § 1.1441–1(e)(3)(iii). If

the information on the Form W–8

changes, the beneficial owner must so

notify the financial institution acting on

its behalf within 30 days of such

changes, and the financial institution

must promptly so inform the U.S.

person. This notice also must be given

if the financial institution has actual

knowledge that the information has

changed but has not been so informed

by the beneficial owner. In the case of

multiple financial institutions between

the beneficial owner and the U.S.

person, this notice must be given by

each financial institution to the

institution above it in the chain.

(vi) The U.S. person complies with

procedures that the U.S. competent

authority may agree to with the

competent authority of a country with

which the United States has an income

tax treaty in effect.

(3) Time for providing certificate or

documentary evidence—(i) General rule.

Interest on a registered obligation shall

qualify as portfolio interest if the

withholding certificate or documentary

evidence that must be provided is

furnished before expiration of the

beneficial owner’s period of limitation

for claiming a refund of tax with respect
53418 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

to such interest. See, however, § 1.1441–

1(b)(7) for consequences to a

withholding agent that makes a payment

without withholding even though it

cannot reliably associate the payment

with the documentation prior to the

payment. If a withholding agent

withholds an amount under chapter 3 of

the Code because it cannot reliably

associate the payment with the

documentation for the beneficial owner

on the date of payment, the beneficial

owner may nevertheless claim the

benefit of an exemption from tax under

this section by claiming a refund or

credit for the amount withheld based

upon the procedures described in

§§ 1.1464–1 and 301.6402–3(e) of this

chapter. For this purpose, the taxpayer

must attach a withholding certificate

described in § 1.1441–1(e)(2)(i) to the

income tax filed for claiming a refund

of tax. In the alternative, adjustments to

any amount of overwithheld tax may be

made under the procedures described in

§ 1.1461–2(a) (for example, if the

beneficial owner furnishes

documentation to the withholding agent

before the due date for filing the return

required under § 1.1461–1(b) with

respect to that payment).

(ii) Example. The following example

illustrates the rules of this paragraph

(c)(3) and their coordination with

§ 1.1441–1(b)(7):

Example. A is a withholding agent who, on

October 12, 1999, pays interest on a

registered obligation to B, a foreign

corporation. B is a calendar year taxpayer,

engaged in the conduct of a trade or business

in the United States, and is, therefore,

required to file an annual income tax return

on Form 1120F. The interest, however, is not

effectively connected with B’s U.S. trade or

business. On the date of payment, B has not

furnished, and A cannot associate the

payment with documentation for B.

However, A does not withhold under section

1442, even though, under § 1.1441–

1(b)(3)(iii)(A), A should presume that B is a

foreign person, because A’s communications

with B are mailed to an address in a foreign

country. Assuming that B files a return for its

taxable year ending December 31, 1999, and

that its statute of limitations period with

regard to that year expires on June 15, 2003,

the interest paid on October 12, 1999, may

qualify as portfolio interest only if B provides

appropriate documentation to A on or before

June 15, 2003. If B does not provide the

documentation on or before June 15, 2003,

and does not pay the tax, A is liable for the

tax under section 1463, even if B provides

the documentation to A after June 15, 2003.

Therefore, the provisions in § 1.1441–1(b)(7),

regarding late-received documentation would

not help A avoid liability for tax under

section 1463 even if the documentation is

furnished within the statute of limitations

period of A. This is because, in a case

involving interest, the documentation

received within the limitations period of the

beneficial owner serves as a condition for the

interest to qualify as portfolio interest. When

documentation is received after the

expiration of the beneficial owner’s

limitations period, the interest can no longer

qualify as portfolio interest. On the other

hand, A could rely on documentation that it

receives after the expiration of B’s limitations

period to establish B’s right to a reduced rate

of withholding under an applicable income

tax treaty (since, in such a case, a claim of

treaty benefits is not conditioned upon

providing documentation prior to the

expiration of the beneficial owner’s

limitations period).

(4) Coordination with withholding

and reporting rules. For an exemption

from withholding under section 1441

with respect to obligations described in

this paragraph (c), see § 1.1441–

1(b)(4)(i). For rules applicable to

withholding certificates, see § 1.1441–

1(e)(4). For rules regarding documentary

evidence, see § 1.6049–5(c)(1). For

application of presumptions when the

U.S. person cannot reliably associate the

payment with documentation, see

§ 1.1441–1(b)(3). For standards of

knowledge applicable to withholding

agents, see § 1.1441–7(b). For rules

relating to an exemption from Form

1099 reporting and backup withholding

under section 3406, see section 6049

and § 1.6049–5(b)(8) for the payment of

interest and § 1.6045–1(g)(1)(i) for the

redemption, retirement, or sale of an

obligation in registered form. For rules

relating to reporting on Forms 1042 and

1042–S, see § 1.1461–1 (b) and (c).

(d) Application of repeal of 30-percent

withholding to pass-through

certificates—(1) In general. Interest

received on a pass-through certificate

qualifies as portfolio interest under

section 871(h)(2) or 881(c)(2) if the

interest satisfies the conditions

described in paragraph (b)(1), (c)(1), or

(e) of this section without regard to

whether any obligation held by the fund

or trust to which the pass-through

certificate relates is described in

paragraph (b)(1), (c)(1)(ii), or (e) of this

section. This paragraph (d)(1) applies

only to payments made to the holder of

the pass-through certificate from the

trustee of the pass-through trust and

does not apply to payments made to the

trustee of the pass-through trust. For

example, a mortgage pass-through

certificate in bearer form must meet the

requirements set forth in paragraph

(b)(1) of this section, but the obligations

held by the fund or trust to which the

mortgage pass-through certificate relates

need not meet the requirements set forth

in paragraph (b)(1), (c)(1)(ii), or (e) of

this section. However, for purposes of

paragraphs (b)(1), (c)(1)(ii), and (e) of

this section and section 127 of the Tax

Reform Act of 1984, a pass-through

certificate will be considered as issued

after July 18, 1984, only to the extent

that the obligations held by the fund or

trust to which the pass-through

certificate relates are issued after July

18, 1984.

(2) Interest in REMICs. Interest

received on a regular or residual interest

in a REMIC qualifies as portfolio interest

under section 871(h)(2) or 881(c)(2) if

the interest satisfies the conditions

described in paragraph (b)(1), (c)(1)(ii),

or (e) of this section. For purposes of

paragraph (b)(1), (c)(1)(ii), or (e) of this

section, interest on a regular interest in

a REMIC is not considered interest on

any mortgage obligations held by the

REMIC. The foregoing rule, however,

applies only to payments made to the

holder of the regular interest from the

REMIC and does not apply to payments

made to the REMIC. For purposes of

paragraph (b)(1), (c)(1)(ii), or (e) of this

section, interest on a residual interest in

a REMIC is considered to be interest on

or with respect to the obligations held

by the REMIC, and not on or with

respect to the residual interest. For

purposes of paragraphs (b)(1), (c)(1)(ii),

and (e) of this section and section 127

of the Tax Reform Act of 1984, a

residual interest in a REMIC will be

considered as issued after July 18, 1984,

only to the extent that the obligations

held by the REMIC are issued after July

18, 1984, but a regular interest in a

REMIC will be considered as issued

after July 18, 1984, if the regular interest

was issued after July 18, 1984, without

regard to the date on which the

mortgage obligations held by the REMIC

were issued.

(3) Date of issuance. In general, a

mortgage pass-through certificate will be

considered to have been issued after

July 18, 1984, if all of the mortgages

held by the fund or trust were issued

after July 18, 1984. If some of the

mortgages held by the fund or trust were

issued before July 19, 1984, then the

portion of any interest payment which

represents interest on those mortgages

shall not be considered to be portfolio

interest. The preceding sentence shall

not apply, however, if all of the

following conditions are satisfied:

(i) The mortgage pass-through

certificate is issued after December 31,

1986;

(ii) Payment of the mortgage passthrough certificate is guaranteed by, and

a guarantee commitment has been

issued by, an entity that is independent

from the issuer of the underlying

obligation;

(iii) The guarantee commitment with

respect to the mortgage pass-through

certificate cannot have been issued more

than 14 months prior to the date on
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53419

which the mortgage pass-through

certificate is issued; and

(iv) The fund or trust to which the

mortgage pass-through certificate relates

cannot contain mortgage obligations on

which the first scheduled monthly

payment of principal and interest was

made more than twelve months before

the date on which the guarantee

commitment was made.

(e) Foreign-targeted registered

obligations—(1) General rule. The

statement described in paragraph

(c)(1)(ii)(C) of this section is not

required with respect to interest paid on

a registered obligation that is targeted to

foreign markets in accordance with the

provisions of paragraph (e)(2) of this

section if the interest is paid by a U.S.

person, a withholding foreign

partnership, or a U.S. branch described

in § 1.1441–1(b)(2)(iv) (A) or (E) to a

registered owner at an address outside

the United States, provided that the

registered owner is a financial

institution described in section

871(h)(5)(B). In that case, the U.S.

person otherwise required to deduct and

withhold tax may treat the interest as

portfolio interest if it does not have

actual knowledge that the beneficial

owner is a United States person and if

it receives the certificate described in

paragraph (e)(3)(i) of this section from a

financial institution or member of a

clearing organization, which member is

the beneficial owner of the obligation, or

the documentary evidence or statement

described in paragraph (e)(3)(ii) of this

section from the beneficial owner, in

accordance with the procedures

described in paragraph (e)(4) of this

section.

(2) Definition of a foreign-targeted

registered obligation. An obligation is

considered to be targeted to foreign

markets for purposes of paragraph (e)(1)

of this section if it is sold (or resold in

connection with its original issuance)

only to foreign persons (or to foreign

branches of United States financial

institutions described in section

871(h)(5)(B)) in accordance with

procedures similar to those prescribed

in § 1.163–5(c)(2)(i) (A), (B), or (D).

However, the provisions of that section

that require an obligation to be offered

for sale or resale in connection with its

original issuance only outside the

United States do not apply with respect

to registered obligations offered for sale

through a public auction. Similarly, the

provisions of that section that require

delivery to be made outside the United

States do not apply to registered

obligations offered for sale through a

public auction if the obligations are

considered to be in registered form by

virtue of the fact that they may be

transferred only through a book entry

system. The obligation, if evidenced by

a physical document other than a

confirmation receipt, must contain on

its face a legend indicating that it has

been sold (or resold in connection with

its original issuance) in accordance with

those procedures.

(3) Documentation. A certificate

described in paragraph (e)(3)(i) of this

section is required if the United States

person otherwise required to deduct and

withhold tax (the withholding agent)

pays interest to a financial institution

described in section 871(h)(5)(B) or to a

member of a clearing organization,

which member is the beneficial owner

of the obligation. The documentation

described in paragraph (e)(3)(ii) of this

section is required if a withholding

agent pays interest to a beneficial owner

that is neither a financial institution

described in section 871(h)(5)(B) nor a

member of a clearing organization.

(i) Interest paid to a financial

institution or a member of a clearing

organization—(A) Requirement of a

certificate—(1) If the withholding agent

pays interest to a financial institution

described in section 871(h)(5)(B) or to a

member of a clearing organization,

which member is the beneficial owner

of the obligation, the withholding agent

must receive a certificate which states

that, beginning at the time the last

preceding certificate under this

paragraph (e)(3)(i) was provided and

while the financial institution or

clearing organization member has held

the obligation, with respect to each

foreign-targeted registered obligation

which has been held by the person

providing the certificate at any time

since the provision of such last

preceding certificate, either—

(i) The beneficial owner of the

obligation has not been a United States

person on each interest payment date; or

(ii) If the person providing the

certificate is a financial institution

which is holding or has held an

obligation on behalf of the beneficial

owner, the beneficial owner of the

obligation has been a United States

person on one or more interest payment

dates (identifying such date or dates),

and the person making the certification

has forwarded or will forward the

appropriate United States beneficial

ownership notification to the

withholding agent in accordance with

the provisions of paragraph (e)(4) of this

section.

(2) The person providing the

certificate need not state the foregoing

where no previous certificate has been

required to be provided by the payee to

the withholding agent under this

paragraph (e)(3)(i).

(B) Additional representations.

Whether or not a previous certificate has

been required to be provided with

respect to the obligation, each certificate

furnished pursuant to the provisions in

this paragraph (e)(3)(i) must further state

that, for each foreign-targeted registered

obligation held and every other such

obligation to be acquired and held by

the person providing the certificate

during the period beginning on the date

of the certificate and ending on the date

the next certificate is required to be

provided, the beneficial owner of the

obligation will not be a United States

person on each interest payment date

while the financial institution or

clearing organization member holds the

obligation and that, if the person

providing the certificate is a financial

institution which is holding or will be

holding the obligation on behalf of a

beneficial owner, such person will

provide a United States beneficial

ownership notification to the

withholding agent (and a clearing

organization that is not a withholding

agent where a member organization is

required by this paragraph (e)(3) to

furnish the clearing organization with a

statement) in accordance with

paragraph (e)(4) of this section in the

event such certificate (or statement in

the case of a statement provided by a

member organization to a clearing

organization that is not a withholding

agent) is or becomes untrue with respect

to any obligation. A clearing

organization is an entity which is in the

business of holding obligations for

member organizations and transferring

obligations among such members by

credit or debit to the account of a

member without the necessity of

physical delivery of the obligation.

(C) Obligation must be identified. The

certificate described in paragraph

(e)(3)(ii)(A) of this section must identify

the obligation or obligations with

respect to which it is given, except

where the certification is given with

respect to an obligation that has not

been acquired at the time the

certification is made. An obligation is

identified if it or the larger issuance of

which it is a part is described on a list

(e.g., $5 million principal amount of

12% debentures of ABC Savings and

Loan Association due February 25,

1995, $3 million principal amount of

10% U.S. Treasury notes due May 28,

1990) of all registered obligations

targeted to foreign markets held by or on

behalf of the person providing the

certificate and the list is attached to, and

incorporated by reference into, the

certificate. The certificate must identify
53420 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

and provide the address of the person

furnishing the certificate.

(D) Payment to a depository of a

clearing organization. If the withholding

agent pays interest to a depository of a

clearing organization, then the clearing

organization must provide the certificate

described in this paragraph (e)(3)(i) to

the withholding agent. Any certificate

that is provided by a clearing

organization must state that the clearing

organization has received a statement

from each member which complies with

the provisions of this paragraph (e)(3)(i)

and of paragraph (e)(4) of this section

(as if the clearing organization were the

withholding agent and regardless of

whether the member is a financial

institution described in section

871(h)(5)(B)).

(E) Statement in lieu of Form W–8.

Subject to the requirements set out in

paragraph (e)(4) of this section, a

certificate or statement in the form

described in this paragraph (e)(3)(i), in

conjunction with the next annual

certificate or statement, will serve as the

certificate that may be provided in lieu

of a Form W–8 with respect to interest

on all foreign-targeted registered

obligations held by the person making

the certification or statement and which

is paid to such person within the period

beginning on the date of the certificate

and ending on the date the next

certificate is required to be provided.

(F) Electronic transmission. The

certificate described in this paragraph

(e)(3)(i) may be provided electronically

under the terms and conditions of

§ 1.163–5(c)(2)(i)(D)(3)(ii).

(ii) Payment to a person other than a

financial institution or member of a

clearing organization. If the withholding

agent pays interest to the beneficial

owner of an obligation that is neither a

financial institution described in section

871(h)(5)(B) nor a member of a clearing

organization, then such owner must

provide the withholding agent a

statement described in paragraph

(c)(1)(ii)(C) of this section.

(4) Applicable procedures regarding

documentation—(i) Procedures

applicable to certificates required under

paragraph (e)(3)(i) of this section—(A)

Time for providing certificate. Where no

previous certificate for foreign-targeted

registered obligations has been provided

to the withholding agent by the person

providing the certificate under

paragraph (e)(3)(i) of this section, such

certificate must be provided within the

period beginning 90 days prior to the

first interest payment date on which the

person holds a foreign-targeted

registered obligation. The withholding

agent may, in its discretion, withhold

under section 1441(a), 1442(a), or 1443

if the certificate is not received by the

date 30 days prior to the interest

payment. Thereafter the certificate must

be filed within the period beginning on

January 15 and ending January 31 of

each year. If a certificate provided

pursuant to the first sentence of this

paragraph (e)(4)(i)(A) is provided during

the period beginning on January 15 and

ending on January 31 of any year, then

no other certificate need be provided

during such period in such year.

(B) Change of status notification on

Form W–9. If, on any interest payment

date after the obligation was acquired by

the person making the certification, the

beneficial owner of the obligation is a

U.S. person, then the person to whom

the withholding agent pays interest

must furnish the withholding agent with

a U.S. beneficial ownership notification

within 30 days after such interest

payment date. A U.S. beneficial

ownership notification must include a

statement that the beneficial owner of

the obligation has been a U.S. person on

an interest payment date (identifying

such date), that such owner has

provided to the person providing the

notification a Form W–9 (or a substitute

form that is substantially similar to

Form W–9 and completed under

penalties of perjury), and that the

person providing the notification has

been and will be complying with the

information reporting requirements of

section 6049, if applicable.

(C) Alternative notification statement.

Where the person providing the

notification described in paragraph

(e)(4)(i)(B) of this section is neither a

controlled foreign corporation within

the meaning of section 957(a), nor a

foreign corporation 50-percent or more

of the gross income of which from all

sources for the three-year period ending

with the close of the taxable year

preceding the date of the statement was

effectively connected with the conduct

of trade or business in the United States,

such person must attach to the

notification a copy of the Form W–9 (or

substitute form that is substantially

similar to Form W–9 and completed

under penalties of perjury) provided by

the beneficial owner. When a person

that provides the U.S. beneficial

ownership notification does not attach

to it a copy of such Form W–9 (or

substitute form that is substantially

similar to Form W–9 and completed

under penalties of perjury), such person

must state that it is either a controlled

foreign corporation within the meaning

of section 957(a), or a foreign

corporation 50-percent or more of the

gross income of which from all sources

for the three-year period ending with

the close of its taxable year preceding

the date of the statement was effectively

connected with the conduct of a trade

or business in the United States. A

withholding agent that receives a Form

W–9 (or a substitute form that is

substantially similar to Form W–9 and

completed under penalties of perjury)

must send a copy of such form to the

IRS, at such address as the IRS shall

indicate, within 30 days after receiving

it and must attach a statement that the

Form W–9 or substitute form was

provided pursuant to this paragraph

(e)(4) with respect to a U.S. person that

has owned a foreign-targeted registered

obligation on one or more interest

payment dates.

(D) Failure to provide notification. If

either a Form W–9 (or a substitute form

that is substantially similar to a Form

W–9 and completed under penalties of

perjury) or the statement described in

paragraph (e)(4)(i)(C) of this section is

not attached to the U.S. beneficial

ownership notification provided

pursuant to paragraph (e)(4)(i)(B) of this

section, the withholding agent is

required to withhold under section

1441, 1442, or 1443 on a payment of

interest made after the withholding

agent has received the notification

unless such form or statement (or a

statement that the beneficial owner of

the obligation is no longer a U.S.

person) is received before the interest

payment date from the person who

provided the notification (or transferee).

If, during the period beginning on the

next January 15 and ending on the next

January 31, such person certifies as set

out in paragraph (e)(3)(i) of this section

(subject to paragraph (e)(3)(i)(A)(2) of

this section) then the withholding agent

is not required to withhold during the

year following such certification (unless

such person again provides a U.S.

beneficial ownership notification

without attaching a Form W–9 or

substitute form that is substantially

similar to Form W–9 and completed

under penalties of perjury or the

statement described in paragraph

(e)(4)(i)(C) of this section).

(E) Procedures for clearing

organizations. Within the period

beginning 10 days before the end of the

calendar quarter and ending on the last

day of each calendar quarter, any

clearing organization (including a

clearing organization that is a

withholding agent) relying on annual

certificates or statements from its

member organizations, as set forth in

paragraph (e)(3)(i) of this section, must

send each member organization having

submitted such certificate or statement

a reminder that the member

organization must give the clearing

organization a U.S. beneficial ownership
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53421

notification in the circumstances

described in paragraph (e)(4)(i)(B) of

this section.

(F) Retention of certificates. The

certificate described in paragraph

(e)(3)(i) of this section must be retained

in the records of the withholding agent

for four years from the end of the

calendar year in which it was received.

The statement described in paragraph

(e)(3)(i) of this section that is received

by a clearing organization from a

member organization must be retained

in the records of the clearing

organization for four years from the end

of the calendar year in which it was

received.

(G) No reporting requirement. The

withholding agent who receives the

certificate described in paragraph

(e)(3)(i) of this section is not required to

file Form 1042S to report payments

under § 1.1461–1 (b) or (c) of interest

that are made with respect to foreigntargeted registered obligations held by

the person providing the certificate and

are made within the period beginning

with the certificate date and ending on

the last date for filing the next

certificate.

(ii) Procedures regarding certificates

required under paragraph (e)(3)(ii) of

this section—(A) Time for providing

certificate. The statement described in

paragraph (e)(3)(ii) of this section must

be provided to the withholding agent

within the period beginning 90 days

prior to and ending on the first interest

payment date on which the withholding

agent pays interest to the beneficial

owner. The withholding agent may, in

its discretion, withhold under section

1441(a), 1442(a), or 1443 if the

statement is not received by the date 30

days prior to the interest payment. The

beneficial owner must confirm to the

withholding agent the continuing

validity of the documentary evidence

within the period beginning 90 days

prior to the first day of the third

calendar year following the provision of

such evidence and during the same

period every three years thereafter while

the owner still owns the obligation. The

withholding agent who receives the

statement described in paragraph

(e)(3)(ii) of this section is not required

to report payments of interest under

§ 1.1461–1(b) or (c) if the payments are

made with respect to foreign-targeted

registered obligations held by the person

who provides the statement and are

made within the period beginning with

the date on which the statement is

provided and ending on the last date for

confirming the validity of the statement.

The statement received for purposes of

paragraph (e)(3)(ii) of this section is

subject to the applicable procedures set

forth in § 1.1441–1(e)(4).

(B) Change of status notification on

Form W–9. If on any interest payment

date after the obligation was acquired by

the person providing the statement

described in paragraph (e)(3)(ii) of this

section, the beneficial owner of the

obligation is a U.S. person, then the

beneficial owner must so inform the

withholding agent within 30 days after

such interest payment date and must

provide a Form W–9 (or substitute form

that is substantially similar completed

under penalties of perjury) to the

withholding agent. However, the

beneficial owner is not required to

provide another Form W–9 (or

substitute form that is substantially

similar and completed under penalties

of perjury) if such person has already

provided it to the withholding agent

within the same calendar year.

(iii) Disqualification of

documentation. In accordance with the

provisions of section 871(h)(4), the

Secretary may make a determination in

appropriate cases that a certificate or

statement by any person, or class of

persons, does not satisfy the

requirements of that section. Should

that determination be made, all

payments of interest that otherwise

qualify as portfolio interest to that

person would become subject to 30-

percent withholding under section

1441(a), 1442(a), or 1443.

(iv) Special effective date.

Notwithstanding the foregoing

requirements of this section—

(A) Any certificate that is required to

be filed with the withholding agent

during the period beginning on January

15 and ending on January 31, 1986, is

not required to state that the beneficial

owner of an obligation, prior to the date

of the certificate, either was not a

United States person or was a United

States person if the obligation was

acquired by the person providing the

certificate on or before September 19,

1985; and

(B) All of the requirements of this

paragraph (e), as in effect prior to the

effective date of these amendments,

shall remain effective with respect to

each interest payment prior to the filing

of the certificate described in paragraph

(e)(4)(iv)(A) of this section, except that

the provisions of paragraph (e)(3) of this

section relating to which persons are

required to receive certificates or

statements and paragraph (e)(3)(ii) or

(4)(ii) of this section shall become

effective with respect to each interest

payment after September 20, 1985.

(5) Information reporting. See

§ 1.6049–5(b)(7) for special information

reporting rules applicable to interest on

foreign-targeted registered obligations.

See § 1.6045–1(g)(1)(ii) for information

reporting rules applicable to the

redemption, retirement, or sale of

foreign-targeted registered obligations.

(f) Securities lending transactions. For

applicable rules regarding substitute

interest payments received pursuant to

a securities lending transaction or a

sale-repurchase transaction, see

§§ 1.871–7(b)(2) and 1.881–2(b)(2).

(g) Definitions. For purposes of this

section, the terms U.S. person and

foreign person have the meaning set

forth in § 1.1441–1(c)(2), the term

beneficial owner has the meaning set

forth in § 1.1441–1(c)(6), the term

withholding agent has the meaning set

forth in § 1.1441–7(a); the term payee

has the meaning set forth in § 1.1441–

1(b)(2); and the term payment has the

meaning set forth in § 1.1441–2(e).

(h) Effective date—(1) In general. This

section shall apply to payments of

interest made after December 31, 1998.

(2) Transition rule. For purposes of

this section, a withholding agent that on

December 31, 1998, holds a Form W–8

that is valid under the regulations in

effect prior to January 1, 1999 (see 26

CFR parts 1 and 35a revised April 1,

1997), may treat it as a valid

withholding certificate until its validity

expires under these regulations or, if

earlier, until December 31, 1999.

Further, the validity of a Form W–8 that

is dated prior to January 1, 1998, is valid

on January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (h)(2), however,

does not apply to extend the validity

period of a Form W–8 that expires in

1998 solely by reason of changes in the

circumstances of the person whose

name is on the certificate.

Notwithstanding the three preceding

sentences, a withholding agent or payor

may choose to not take advantage of the

transition rule in this paragraph (h)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

Par. 6. Section 1.1441–0 is added to

read as follows:

§ 1.1441–0 Outline of regulation provisions

for section 1441.

This section lists captions contained

in §§ 1.1441–1 through 1.1441–9.

§ 1.1441–1 Requirement for the deduction

and withholding of tax on payments to

foreign persons.

(a) Purpose and scope.

(b) General rules of withholding.
53422 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(1) Requirement to withhold on payments to

foreign persons.

(2) Determination of payee and payee’s

status.

(i) In general.

(ii) Payments to a U.S. agent of a foreign

person.

(iii) Payments to wholly-owned entities.

(A) Foreign-owned domestic entity.

(B) Foreign entity.

(iv) Payments to a U.S. branch of certain

foreign banks or foreign insurance

companies.

(A) U.S. branch treated as a U.S. person in

certain cases.

(B) Consequences to the withholding agent.

(C) Consequences to the U.S. branch.

(D) Definition of payment to a U.S. branch.

(E) Payments to other U.S. branches.

(v) Payments to a foreign intermediary.

(A) Payments treated as made to persons for

whom the intermediary collects the

payment.

(B) Payments treated as made to foreign

intermediary.

(vi) Other payees.

(vii) Rules for reliably associating a payment

with documentation.

(3) Presumptions regarding payee’s status in

the absence of documentation.

(i) General rules.

(ii) Presumptions of status as individual,

corporation, partnership, etc.

(iii) Presumption of U.S. or foreign status.

(A) Payments to exempt recipients.

(B) Scholarships and grants.

(C) Pensions, annuities, etc.

(D) Certain payments to offshore accounts.

(iv) Grace period in the case of indicia of a

foreign payee.

(v) Special rules applicable to payments to

foreign intermediaries.

(A) Reliance on claim of status as foreign

intermediary.

(B) Beneficial owner documentation is

lacking or unreliable.

(C) Information regarding allocation of

payment is lacking or unreliable.

(D) Certification that the foreign intermediary

has furnished documentation for all of

the persons to whom the intermediary

certificate relates is lacking or unreliable.

(vi) U.S. branches and foreign flow-through

entities.

(vii) Joint payees.

(viii) Rebuttal of presumptions.

(ix) Effect of reliance on presumptions and of

actual knowledge or reason to know

otherwise.

(A) General rule.

(B) Actual knowledge or reason to know that

amount of withholding is greater than is

required under the presumptions or that

reporting of the payment is required.

(x) Examples.

(4) List of exemptions from, or reduced rates

of, withholding under chapter 3 of the

Code.

(5) Establishing foreign status under

applicable provisions of chapter 61 of

the Code.

(6) Rules of withholding for payments by a

foreign intermediary or certain U.S.

branches.

(7) Liability for failure to obtain

documentation timely or to act in

accordance with applicable

presumptions.

(i) General rule.

(ii) Proof that tax liability has been satisfied.

(iii) Liability for interest and penalties.

(iv) Special effective date.

(v) Examples.

(8) Adjustments, refunds, or credits of

overwithheld amounts.

(9) Payments to joint owners.

(c) Definitions.

(1) Withholding.

(2) Foreign and U.S. person.

(3) Individual.

(i) Alien individual.

(ii) Nonresident alien individual.

(4) Certain foreign corporations.

(5) Financial institution and foreign financial

institution.

(6) Beneficial owner.

(i) General rule.

(ii) Special rules for flow-through entities

and arrangements.

(A) General rule.

(B) Trusts and estates.

(C) Definition of a flow-through entity or

arrangement.

(7) Withholding agent.

(8) Person.

(9) Source of income.

(10) Chapter 3 of the Code.

(11) Reduced rate.

(d) Beneficial owner’s or payee’s claim of

U.S. status.

(1) In general.

(2) Payments for which a Form W–9 is

otherwise required.

(3) Payments for which a Form W–9 is not

otherwise required.

(4) Other payments.

(e) Beneficial owner’s claim of foreign status.

(1) Withholding agent’s reliance.

(i) In general.

(ii) Payments that a withholding agent may

treat as made to a foreign person that is

a beneficial owner.

(A) General rule.

(B) Additional requirements.

(2) Beneficial owner withholding certificate.

(i) In general.

(ii) Requirements for validity of certificate.

(3) Intermediary, flow-through, or U.S.

branch withholding certificate.

(i) In general.

(ii) Intermediary withholding certificate from

a qualified intermediary.

(iii) Intermediary withholding certificate

from an intermediary that is not a

qualified intermediary.

(iv) Information to the withholding agent

regarding assets owned by beneficial

owners, etc.

(A) General rule.

(B) Updating the information.

(C) Examples.

(v) Withholding certificate from certain U.S.

branches.

(vi) Reportable amounts.

(4) Applicable rules.

(i) Who may sign the certificate.

(ii) Period of validity.

(A) Three-year period.

(B) Indefinite validity period.

(C) Withholding certificate for effectively

connected income.

(D) Change in circumstances.

(iii) Retention of withholding certificate.

(iv) Electronic transmission of information.

(v) Electronic confirmation of taxpayer

identifying number on withholding

certificate.

(vi) Acceptable substitute form.

(vii) Requirement of taxpayer identifying

number.

(viii) Reliance rules.

(A) Classification.

(B) Status of payee as an intermediary or as

a person acting for its own account.

(ix) Certificates to be furnished for each

account unless exception applies.

(A) Coordinated account information system

in effect.

(B) Family of mutual funds.

(C) Special rule for brokers.

(5) Qualified intermediaries.

(i) General rule.

(ii) Definition of qualified intermediary.

(iii) Withholding agreement.

(A) In general.

(B) Terms of the withholding agreement.

(iv) Assignment of primary withholding

responsibility.

(v) Information to withholding agent

regarding applicable withholding rates.

(A) General rule.

(B) Categories of assets.

(C) Updating the information.

(f) Effective date.

(1) In general.

(2) Transition rules.

(i) Special rules for existing documentation.

(ii) Lack of documentation for past years.

§ 1.1441–2 Amounts subject to withholding.

(a) In general.

(b) Fixed or determinable annual or

periodical income.

(1) In general.

(i) Definition.

(ii) Manner of payment.

(iii) Determinability of amount.

(2) Exceptions.

(3) Original issue discount.

(i) General rule.

(ii) Amounts actually known to the

withholding agent.

(iii) Amounts for which certain

documentation is not furnished.

(iv) Exceptions to withholding.

(4) Securities lending transactions and

equivalent transactions.

(c) Other income subject to withholding.

(d) Exceptions to withholding where no

money or property is paid or lack of

knowledge.

(1) General rule.

(2) Cancellation of debt.

(3) Satisfaction of liability following

underwithholding by withholding agent.

(e) Payment.

(1) General rule.

(2) Income allocated under section 482.

(3) Blocked income.

(4) Special rules for dividends.

(5) Certain interest accrued by a foreign

corporation.

(6) Payments other than in U.S. dollars.

(f) Effective date.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53423

§ 1.1441–3 Determination of amounts to be

withheld.

(a) Withholding on gross amount.

(b) Withholding on payments on certain

obligations.

(1) Withholding at time of payment of

interest.

(2) No withholding between interest payment

dates.

(i) In general.

(ii) Anti-abuse rule.

(c) Corporate distributions.

(1) General rule.

(2) Exception to withholding on

distributions.

(i) In general.

(ii) Reasonable estimate of accumulated and

current earnings and profits on the date

of payment.

(A) General rule.

(B) Procedures in case of underwithholding.

(C) Reliance by intermediary on reasonable

estimate.

(D) Example.

(3) Special rules in the case of distributions

from a regulated investment company.

(i) General rule

(ii) Reliance by intermediary on reasonable

estimate.

(4) Coordination with withholding under

section 1445.

(i) In general.

(A) Withholding under section 1441.

(B) Withholding under both sections 1441

and 1445.

(C) Coordination with REIT withholding.

(ii) Intermediary reliance rule.

(d) Withholding on payments that include an

undetermined amount of income.

(1) In general.

(2) Withholding on certain gains.

(e) Payments other than in U.S. dollars.

(1) In general.

(2) Payments in foreign currency.

(f) Tax liability of beneficial owner satisfied

by withholding agent.

(1) General rule.

(2) Example.

(g) Conduit financing arrangements

(h) Effective date.

§ 1.1441–4 Exemptions from withholding

for certain effectively connected income and

other amounts.

(a) Certain income connected with a U.S.

trade or business.

(1) In general.

(2) Withholding agent’s reliance on a claim

of effectively connected income.

(i) In general.

(ii) Special rules for U.S. branches of foreign

persons.

(A) U.S. branches of certain foreign banks or

foreign insurance companies.

(B) Other U.S. branches.

(3) Income on notional principal contracts.

(i) General rule.

(ii) Exception for certain payments.

(b) Compensation for personal services of an

individual.

(1) Exemption from withholding.

(2) Manner of obtaining withholding

exemption under tax treaty.

(i) In general.

(ii) Withholding certificate claiming

withholding exemption.

(iii) Review by withholding agent.

(iv) Acceptance by withholding agent.

(v) Copies of Form 8233.

(3) Withholding agreements.

(4) Final payments exemption.

(i) General rule.

(ii) Final payment of compensation for

personal services.

(iii) Manner of applying for final payment

exemption.

(iv) Letter to withholding agent.

(5) Requirement of return.

(6) Personal exemption.

(i) In general.

(ii) Multiple exemptions.

(iii) Special rule where both certain

scholarship and compensation income

are received.

(c) Special rules for scholarship and

fellowship income.

(1) In general.

(2) Alternate withholding election.

(d) Annuities received under qualified plans.

(e) Per diem of certain alien trainees.

(f) Failure to receive withholding certificates

timely or to act in accordance with

applicable presumptions.

(g) Effective date.

(1) General rule.

(2) Transition rules.

§ 1.1441–5 Withholding on payments to

partnerships, trusts, and estates.

(a) Rules of withholding applicable to

payments to partnerships.

(b) Domestic partnerships.

(1) Exemption from withholding on payment

to domestic partnerships.

(2) Withholding by a domestic partnership.

(i) In general.

(ii) Determination by the domestic

partnership of partners’ status.

(iii) Reliance on a partner’s claim for reduced

withholding.

(iv) Rules for reliably associating a payment

with documentation.

(v) Coordination with chapter 61 of the

Internal Revenue Code and section 3406.

(c) Foreign partnerships.

(1) Determination of payee.

(i) Payments treated as made to partners.

(ii) Payments treated as made to the

partnership.

(iii) Rules for reliably associating a payment

with documentation.

(iv) Example.

(2) Withholding foreign partnerships.

(i) Reliance on claim of withholding foreign

partnership status.

(ii) Withholding agreement.

(A) In general.

(B) Terms of withholding agreement.

(iii) Withholding responsibility.

(iv) Withholding certificate from a

withholding foreign partnership.

(3) Other foreign partnerships.

(i) Reliance on claim of foreign partnership

status.

(ii) Reliance on claim of reduced withholding

by a partnership for its partners.

(iii) Withholding certificate from a foreign

partnership that is not a withholding

foreign partnership.

(iv) Information to withholding agent

regarding each partner’s distributive

share.

(v) Withholding by a foreign partnership.

(d) Presumptions regarding payee’s status in

the absence of documentation.

(1) In general.

(2) Determination of partnership’s status as

domestic or foreign in the absence of

documentation.

(3) Determination of partners’ status in the

absence of certain documentation.

(i) Documentation regarding the status of a

partner is lacking or unreliable.

(ii) Information regarding the allocation of

payment is lacking or unreliable.

(iii) Certification that the foreign partnership

has furnished documentation for all of

the persons to whom the intermediary

certificate relates is lacking or unreliable.

(iv) Determination by a withholding foreign

partnership of the status of its partners.

(4) Examples.

(e) Trusts and estates. [Reserved]

(f) Failure to receive withholding certificate

timely or to act in accordance with

applicable presumptions.

(g) Effective date.

(1) General rule.

(2) Transition rules.

§ 1.1441–6 Claim of reduced withholding

under an income tax treaty.

(a) In general.

(b) Reliance on claim of reduced withholding

under an income tax treaty.

(1) In general.

(2) Exemption from requirement to furnish a

taxpayer identifying number and special

documentary evidence rules for certain

income.

(i) General rule.

(ii) Income to which special rules apply.

(3) Competent authority agreements.

(4) Eligibility for reduced withholding under

an income tax treaty in the case of a

payment to a person other than an

individual.

(i) General rule.

(ii) Withholding certificates.

(A) In general.

(B) Certification by qualified intermediary.

(iii) Multiple claims of treaty benefits.

(iv) Examples.

(5) Claim of benefits under an income tax

treaty by a U.S. person.

(c) Proof of tax residence in a treaty country

and certification of entitlement to treaty

benefits. (1) In general.

(2) Certification of taxpayer identifying

number.

(i) In general.

(ii) IRS-certified TIN.

(iii) Special rules for qualified

intermediaries.

(3) Certificate of residence.

(4) Documentary evidence establishing

residence in the treaty country.

(i) Individuals.

(ii) Persons other than individuals.

(5) Certifications regarding entitlement to

treaty benefits.

(i) Certification regarding conditions under a

Limitation on Benefits Article.

(ii) Certification regarding whether the

taxpayer is deriving the income.

(d) Joint owners.

(e) Related party dividends under U.S.-

Denmark income tax treaty.
53424 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(f) Failure to receive withholding certificate

timely.

(g) Effective date.

(1) General rule.

(2) Transition rules.

§ 1.1441–7 General provisions relating to

withholding agents.

(a) Withholding agent defined.

(b) Standards of knowledge.

(1) In general.

(2) Reason to know.

(i) In general.

(ii) Limits on reason to know in certain cases.

(3) Coordinated account information systems.

(c) Authorized agent.

(1) In general.

(2) Authorized foreign agent.

(3) Notification.

(4) Liability of U.S. withholding agent.

(5) Filing of returns.

(d) United States obligations.

(e) Assumed obligations.

(f) Conduit financing arrangements.

(g) Effective date.

§ 1.1441–8 Exemption from withholding for

payments to foreign governments,

international organizations, foreign central

banks of issue, and the Bank for

International Settlements.

(a) Foreign governments.

(b) Reliance on claim of exemption by foreign

government.

(c) Income of a foreign central bank of issue

or the Bank for International

Settlements.

(1) Certain interest income.

(2) Bankers’ acceptances.

(d) Exemption for payments to international

organizations.

(e) Failure to receive withholding certificate

timely and other applicable procedures.

(f) Effective date.

(1) In general.

(2) Transition rules.

§ 1.1441–9 Exemption from withholding on

exempt income of a foreign tax-exempt

organization, including foreign private

foundations.

(a) Exemption from withholding for exempt

income.

(b) Reliance on foreign organization’s claim

of exemption from withholding.

(1) General rule.

(2) Withholding certificate.

(3) Presumptions in the absence of

documentation.

(4) Reason to know.

(c) Failure to receive withholding certificate

timely and other applicable procedures.

(d) Effective date.

(1) In general.

(2) Transition rules.

Par. 7. Sections 1.1441–1 and 1.1441–

2 are revised to read as follows:

§ 1.1441–1 Requirement for the deduction

and withholding of tax on payments to

foreign persons.

(a) Purpose and scope. This section,

§§ 1.1441–2 through 1.1441–9, and

1.1443–1 provide rules for withholding

under sections 1441, 1442, and 1443

when a payment is made to a foreign

person. This section provides

definitions of terms used in chapter 3 of

the Internal Revenue Code (Code) and

regulations thereunder. It prescribes

procedures to determine whether an

amount must be withheld under chapter

3 of the Code and documentation that a

withholding agent may rely upon to

determine the status of a payee or a

beneficial owner as a U.S. person or as

a foreign person and other relevant

characteristics of the payee that may

affect a withholding agent’s obligation

to withhold under chapter 3 of the Code

and the regulations thereunder. Special

procedures regarding payments to

foreign persons that act as

intermediaries are also provided.

Section 1.1441–2 defines the income

subject to withholding under section

1441, 1442, and 1443 and the

regulations under these sections.

Section 1.1441–3 provides rules

regarding the amount subject to

withholding. Section 1.1441–4 provides

exemptions from withholding for,

among other things, certain income

effectively connected with the conduct

of a trade or business in the United

States, including certain compensation

for the personal services of an

individual. Section 1.1441–5 provides

rules for withholding on payments

made to flow-through entities and other

similar arrangements. Section 1.1441–6

provides rules for claiming a reduced

rate of withholding under an income tax

treaty. Section 1.1441–7 defines the

term withholding agent and provides

due diligence rules governing a

withholding agent’s obligation to

withhold. Section 1.1441–8 provides

rules for relying on claims of exemption

from withholding for payments to a

foreign government, an international

organization, a foreign central bank of

issue, or the Bank for International

Settlements. Sections 1.1441–9 and

1.1443–1 provide rules for relying on

claims of exemption from withholding

for payments to foreign tax exempt

organizations and foreign private

foundations.

(b) General rules of withholding—(1)

Requirement to withhold on payments

to foreign persons. A withholding agent

must withhold 30-percent of any

payment of an amount subject to

withholding made to a payee that is a

foreign person unless it can reliably

associate the payment with

documentation upon which it can rely

to treat the payment as made to a

beneficial owner that is a U.S. person or

as made to a beneficial owner that is a

foreign person entitled to a reduced rate

of withholding. However, a withholding

agent making a payment to a foreign

person need not withhold where the

foreign person assumes responsibility

for withholding on the payment under

chapter 3 of the Code and the

regulations thereunder as a qualified

intermediary (see paragraph (e)(5) of

this section), as a U.S. branch of a

foreign person (see paragraph (b)(2)(iv)

of this section), as a withholding foreign

partnership (see § 1.1441–5(c)(2)(i)), or

as an authorized foreign agent (see

§ 1.1441–7(c)(1)). This section (dealing

with general rules of withholding and

claims of foreign or U.S. status by a

payee or a beneficial owner), and

§§ 1.1441–4, 1.1441–5, 1.1441–6,

1.1441–8, 1.1441–9, and 1.1443–1

provide rules for determining whether

documentation is required as a

condition for reducing the rate of

withholding on a payment to a foreign

beneficial owner or to a U.S. payee and

if so, the nature of the documentation

upon which a withholding agent may

rely in order to reduce such rate.

Paragraph (b)(2) of this section

prescribes the rules for determining who

the payee is, the extent to which a

payment is treated as made to a foreign

payee, and reliable association of a

payment with documentation.

Paragraph (b)(3) of this section describes

the applicable presumptions for

determining the payee’s status as U.S. or

foreign and the payee’s other

characteristics (i.e., as an owner or

intermediary, as an individual,

partnership, corporation, etc.).

Paragraph (b)(4) of this section lists the

types of payments for which the 30-

percent withholding rate may be

reduced. Because the treatment of a

payee as a U.S. or a foreign person also

has consequences for purposes of

making an information return under the

provisions of chapter 61 of the Code and

for withholding under other provisions

of the Code, such as sections 3402, 3405

or 3406, paragraph (b)(5) of this section

lists applicable provisions outside

chapter 3 of the Code that require

certain payees to establish their foreign

status (e.g., in order to be exempt from

information reporting). Paragraph (b)(6)

of this section describes the withholding

obligations of a foreign person making a

payment that it has received in its

capacity as an intermediary. Paragraph

(b)(7) of this section describes the

liability of a withholding agent that fails

to withhold at the required 30-percent

rate in the absence of documentation.

Paragraph (b)(8) of this section deals

with adjustments and refunds in the

case of overwithholding. Paragraph

(b)(9) of this section deals with

determining the status of the payee
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53425

when the payment is jointly owned. See

paragraph (c)(6) of this section for a

definition of beneficial owner. See

§ 1.1441–7(a) for a definition of

withholding agent. See § 1.1441–2(a) for

the determination of an amount subject

to withholding. See § 1.1441–2(e) for the

definition of a payment and when it is

considered made. Except as otherwise

provided, the provisions of this section

apply only for purposes of determining

a withholding agent’s obligation to

withhold under chapter 3 of the Code

and the regulations thereunder.

(2) Determination of payee and

payee’s status—(i) In general. Except as

otherwise provided in this paragraph

(b)(2), a payee is the person to whom a

payment is made, regardless of whether

such person is the beneficial owner of

the amount (as defined in paragraph

(c)(6) of this section). A foreign payee is

a payee who is a foreign person. A U.S.

payee is a payee who is a U.S. person.

Generally, the determination by a

withholding agent of the U.S. or foreign

status of a payee and of its other

relevant characteristics (e.g., as a

beneficial owner or intermediary, or as

an individual, corporation, or flowthrough entity) is made on the basis of

a withholding certificate that is a Form

W–8 or a Form 8233 (indicating foreign

status of the payee or beneficial owner)

or a Form W–9 (indicating U.S. status of

the payee). The provisions of this

paragraph (b)(2), paragraph (b)(3) of this

section, and § 1.1441–5 (c), (d), and (e)

dealing with determinations of payee

and applicable presumptions in the

absence of documentation, apply only to

payments of amounts subject to

withholding under chapter 3 of the

Code (within the meaning of § 1.1441–

2(a)). Similar payee and presumption

provisions are set forth under § 1.6049–

5(d) for payments of amounts that are

not subject to withholding under

chapter 3 of the Code (or the regulations

thereunder) but that may be reportable

under provisions of chapter 61 of the

Code (and the regulations thereunder).

See paragraph (d) of this section for

documentation upon which the

withholding agent may rely in order to

treat the payee or beneficial owner as a

U.S. person. See paragraph (e) of this

section for documentation upon which

the withholding agent may rely in order

to treat the payee or beneficial owner as

a foreign person. For applicable

presumptions of status in the absence of

documentation, see paragraph (b)(3) of

this section and § 1.1441–5(d). For

definitions of a foreign person and U.S.

person, see paragraph (c)(2) of this

section.

(ii) Payments to a U.S. agent of a

foreign person. A withholding agent

making a payment to a U.S. person

(other than to a U.S. branch that is

treated as a U.S. person pursuant to

paragraph (b)(2)(iv) of this section) and

who has actual knowledge that the U.S.

person receives the payment as an agent

of a foreign person must treat the

payment as made to the foreign person.

However, the withholding agent may

treat the payment as made to the U.S.

person if the U.S. person is a financial

institution and the withholding agent

has no reason to believe that the

financial institution will not comply

with its obligation to withhold. See

paragraph (c)(5) of this section for the

definition of a financial institution.

(iii) Payments to wholly-owned

entities—(A) Foreign-owned domestic

entity. A payment to a wholly-owned

domestic entity that is disregarded for

federal tax purposes under § 301.7701–

2(c)(2) of this chapter as an entity

separate from its owner and whose

single owner is a foreign person shall be

treated as a payment to the owner of the

entity, subject to the provisions of

paragraph (b)(2)(iv) of this section. For

purposes of this paragraph (b)(2)(iii)(A),

a domestic entity means a person that

would be treated as a U.S. person if it

had an election in effect under

§ 301.7701–3(c)(1)(i) of this chapter to

be treated as a corporation. For example,

a limited liability company, A,

organized under the laws of the State of

Delaware, opens an account at a U.S.

bank. Upon opening of the account, the

bank requests A to furnish a Form W–

9 as required under section 6049(a) and

the regulations under that section. A

does not have an election in effect under

§ 301.7701–3(c)(1)(i) of this chapter and,

therefore, is not treated as an

organization taxable as a corporation,

including for purposes of the exempt

recipient provisions in § 1.6049–4(c)(1).

If A has a single owner and the owner

is a foreign person (as defined in

paragraph (c)(2) of this section), then A

may not furnish a Form W–9 because it

may not represent that it is a U.S.

person for purposes of the provisions of

chapters 3 and 61 of the Code, and

section 3406. Therefore, A must furnish

a Form W–8 with the name, address,

and taxpayer identifying number (TIN)

(if required) of the foreign person who

is the single owner in the same manner

as if the account were opened directly

by the foreign single owner. See

§§ 1.894–1T(d) and 1.1441–6(b)(4) for

special rules where the entity’s owner is

claiming a reduced rate of withholding

under an income tax treaty.

(B) Foreign entity. A payment to a

wholly-owned foreign entity that is

disregarded under § 301.7701–2(c)(2) of

this chapter as an entity separate from

its owner shall be treated as a payment

to the single owner of the entity, subject

to the provisions of paragraph (b)(2)(iv)

of this section if the foreign entity has

a U.S. branch in the United States. For

purposes of this paragraph (b)(2)(iii)(B),

a foreign entity means a person that

would be treated as a foreign person if

it had an election in effect under

§ 301.7701–3(c)(1)(i) of this chapter to

be treated as a corporation. See

§§ 1.894–1T(d) and 1.1441–6(b)(4) for

special rules where the foreign entity or

its owner is claiming a reduced rate of

withholding under an income tax treaty.

Thus, for example, if the foreign entity’s

single owner is a U.S. person, the

payment shall be treated as a payment

to a U.S. person. Therefore, based on the

savings clause in U.S. income tax

treaties, such an entity may not claim

benefits under an income tax treaty even

if the entity is organized in a country

with which the United States has an

income tax treaty in effect and treats the

entity as a non-fiscally transparent

entity. See § 1.894–1T(d)(6), Example

10. Unless it has actual knowledge or

reason to know that the foreign entity to

whom the payment is made is

disregarded under § 301.7701–2(c)(2) of

this chapter, a withholding agent may

treat a foreign entity as an entity

separate from its owner unless it can

reliably associate the payment with a

withholding certificate from the entity’s

owner.

(iv) Payments to a U.S. branch of

certain foreign banks or foreign

insurance companies—(A) U.S. branch

treated as a U.S. person in certain cases.

A payment to the U.S. branch of a

foreign person is a payment to the

foreign person. However, a U.S. branch

described in this paragraph (b)(2)(iv)(A)

and a withholding agent (including

another U.S. branch described in this

paragraph (b)(2)(iv)(A)) may agree to

treat the branch as a U.S. person for

purposes of withholding on specified

payments to the U.S. branch. Such

agreement must be evidenced by a U.S.

branch withholding certificate described

in paragraph (e)(3)(v) of this section

furnished by the U.S. branch to the

withholding agent. A U.S. branch

described in this paragraph (b)(2)(iv)(A)

is any U.S. branch of a foreign bank

subject to regulatory supervision by the

Federal Reserve Board or a U.S. branch

of a foreign insurance company required

to file an annual statement on a form

approved by the National Association of

Insurance Commissioner with the

Insurance Department of a State, a

Territory, or the District of Columbia.

The Internal Revenue Service (IRS) may

approve a list of U.S. branches that may
53426 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

qualify for treatment as a U.S. person

under this paragraph (b)(2)(iv)(A) (see

§ 601.601(d)(2) of this chapter).

(B) Consequences to the withholding

agent. Any person that is otherwise a

withholding agent regarding a payment

to a U.S. branch described in paragraph

(b)(2)(iv)(A) of this section shall treat

the payment in one of the following

ways—

(1) As a payment to a U.S. person, in

which case the withholding agent is not

responsible for withholding on such

payment to the extent it can reliably

associate the payment with a

withholding certificate described in

paragraph (e)(3)(v) of this section that

has been furnished by the U.S. branch

under its agreement with the

withholding agent to be treated as a U.S.

person;

(2) As a payment directly to the

persons whose names are on

withholding certificates or other

appropriate documentation forwarded

by the U.S. branch to the withholding

agent when no agreement is in effect to

treat the U.S. branch as a U.S. person for

such payment, to the extent the

withholding agent can reliably associate

the payment with such certificates or

documentation; or

(3) As a payment to a foreign person

of income that is effectively connected

with the conduct by that foreign person

of a trade or business in the United

States if the withholding agent cannot

reliably associate the payment with a

certificate from the U.S. branch or any

other certificate or other appropriate

documentation from another person.

(C) Consequences to the U.S. branch.

A U.S. branch that is treated as a U.S.

person under paragraph (b)(2)(iv)(A) of

this section shall be treated as a person

for purposes of section 1441(a) and all

other provisions of chapter 3 of the

Code and the regulations thereunder for

any payment that it receives as such.

Thus, the U.S. branch shall be

responsible for withholding on the

payment in accordance with the

provisions under chapter 3 of the Code

and the regulations thereunder and

other applicable withholding provisions

of the Code. For this purpose, it shall

obtain and retain documentation from

payees or beneficial owners of the

payments that it receives as a U.S.

person in the same manner as if it were

a separate entity. For example, if a U.S.

branch receives a payment on behalf of

its home office and the home office is

a qualified intermediary, the U.S.

branch must obtain a withholding

certificate described in paragraph

(e)(3)(ii) of this section from its home

office. In addition, a U.S. branch that

has not provided documentation to the

withholding agent for a payment that is,

in fact, not effectively connected income

is a withholding agent with respect to

that payment. See paragraph (b)(6) of

this section.

(D) Definition of payment to a U.S.

branch. A payment is treated as a

payment to a U.S. branch of a foreign

bank or foreign insurance company if

the payment is credited to an account

maintained in the United States in the

name of a U.S. branch of the foreign

person, or the payment is made to an

address in the United States where the

U.S. branch is located and the name of

the U.S. branch appears on documents

(in written or electronic form)

associated with the payment (e.g., the

check mailed or a letter addressed to the

branch).

(E) Payments to other U.S. branches.

Similar withholding procedures may

apply to payments to U.S. branches that

are not described in paragraph

(b)(2)(iv)(A) of this section to the extent

permitted by the district director or the

Assistant Commissioner (International).

Any such branch must establish that its

situation is analogous to that of a U.S.

branch described in paragraph

(b)(2)(iv)(A) of this section regarding its

registration with, and regulation by, a

U.S. governmental institution, the type

and amounts of assets it is required to,

or actually maintain in the United

States, and the personnel who carry out

the activities of the branch in the United

States. In the alternative, the branch

must establish that the withholding and

reporting requirements under chapter 3

of the Code and the regulations

thereunder impose an undue

administrative burden and that the

collection of the tax imposed by section

871(a) or 881(a) on the foreign person

(or its members in the case of a foreign

partnership) will not be jeopardized by

the exemption from withholding.

Generally, an undue administrative

burden will be found to exist in a case

where the person entitled to the income,

such as a foreign insurance company,

receives from the withholding agent

income on securities issued by a single

corporation, some of which is, and some

of which is not, effectively connected

with conduct of a trade or business

within the United States and the criteria

for determining the effective connection

are unduly difficult to apply because of

the circumstances under which such

securities are held. No exemption from

withholding shall be granted under this

paragraph (b)(2)(iv)(E) unless the person

entitled to the income complies with

such other requirements as may be

imposed by the district director or the

Assistant Commissioner (International)

and unless the district director or the

Assistant Commissioner (International)

is satisfied that the collection of the tax

on the income involved will not be

jeopardized by the exemption from

withholding. The IRS may prescribe

such procedures as are necessary to

make these determinations (see

§ 601.601(d)(2) of this chapter).

(v) Payments to a foreign

intermediary—(A) Payments treated as

made to persons for whom the

intermediary collects the payment.

Except as otherwise provided in

paragraph (b)(2)(v)(B) of this section, a

payment to a person that the

withholding agent may treat as a foreign

intermediary in accordance with the

provisions of paragraph (b)(3)(v)(A) of

this section is treated as a payment

made directly to the person or persons

for whom the intermediary collects the

payment. Thus, for example, a payment

that the withholding agent can reliably

associate with a withholding certificate

from a qualified intermediary (defined

in paragraph (e)(5)(ii) of this section)

and that is allocable to the category of

assets described in paragraph

(e)(5)(v)(B)(3) of this section (i.e., assets

allocable to persons for whom the

foreign qualified intermediary does not

hold documentation as specified under

its agreement with the IRS) is treated as

a payment to the persons holding assets

in that category. See paragraph

(b)(3)(v)(B) of this section for applicable

presumptions in such a case. For similar

rules for payments to flow-through

entities, see § 1.1441–5 (c)(1)(i) and (e).

(B) Payments treated as made to

foreign intermediary. A payment to a

person that the withholding agent can

reliably associate with a withholding

certificate described in paragraph

(e)(3)(ii) of this section from a qualified

intermediary that has elected to assume

primary withholding responsibility in

accordance with paragraph (e)(5)(iv) of

this section is treated as a payment to

the qualified intermediary, except to the

extent of the portion of the payment that

the withholding agent can reliably

associate with Forms W–9. See

paragraphs (b)(1) and (e)(5)(iv) of this

section for consequences to the

withholding agent.

(vi) Other payees. A payment to a

person described in § 1.6049–4(c)(1)(ii)

that the withholding agent would treat

as a payment to a foreign person

without obtaining documentation for

purposes of information reporting under

section 6049 (if the payment were

interest) is treated as a payment to a

foreign payee for purposes of chapter 3

of the Code and the regulations

thereunder (or to a foreign beneficial

owner to the extent provided in

paragraph (e)(1)(ii)(A) (6) or (7) of this
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53427

section). Further, payments that the

withholding agent can reliably associate

with documentary evidence described

in § 1.6049–5(c)(4) relating to the payee

is treated as a payment to a foreign

payee. A payment that the withholding

agent may treat as a payment to an

authorized foreign agent (as defined in

§ 1.1441–7(c)(2)) is treated as a payment

to the agent and not to the persons for

whom the agent collects the payment.

See § 1.1441–5 (b)(1) and (c)(1) for payee

determinations for payments to

partnerships. See § 1.1441–5(e) for

payee determinations for payments to

foreign trusts or foreign estates.

(vii) Rules for reliably associating a

payment with documentation.

Generally, a withholding agent can

reliably associate a payment with

documentation if, for that payment, it

holds valid documentation to which the

payment relates, it can reliably

determine how much of the payment

relates to the valid documentation (e.g.,

based on information furnished in

accordance with paragraph (e)(3)(iv) or

(5)(v) of this section in the case of a

payment to a foreign intermediary or in

accordance with § 1.1441–5(c)(3)(iv) in

the case of a payment to a foreign

partnership), and it has no actual

knowledge or reason to know that any

of the information or certifications

stated in the documentation are

incorrect. The documentation referred

to in this paragraph (b)(2)(vii) is

documentation described in paragraph

(d) or (e) of this section upon which a

withholding agent may rely in order to

treat the payment as a payment made to

a payee or beneficial owner that is a

U.S. or a foreign person, and to ascertain

the characteristics of the payee or

beneficial owner, as may be relevant to

withholding or reporting under chapter

3 of the Code and the regulations

thereunder (e.g., beneficial owner or

intermediary, corporation or

partnership). For purposes of this

paragraph (b)(2)(vii), documentation

also includes a withholding certificate

described in paragraph (e)(3)(ii) of this

section from a person representing to be

a qualified intermediary that has

assumed primary withholding

responsibility, a withholding certificate

described in paragraph (e)(3)(v) of this

section from a person representing to be

a U.S. branch described in paragraph

(b)(2)(iv)(A) of this section, a

withholding certificate described in

§ 1.1441–5(c)(2)(iv) from a person

representing to be a withholding foreign

partnership, and the agreement that the

withholding agent has in effect with an

authorized foreign agent in accordance

with § 1.1441–7(c)(2)(i). A withholding

agent that is not required to obtain

documentation with respect to a

payment is considered to lack

documentation for purposes of this

paragraph (b)(2)(vii). For example, a

withholding agent paying U.S. source

interest to a person that is an exempt

recipient, as defined in § 1.6049–

4(c)(1)(ii), is not required to obtain

documentation from that person in

order to determine whether an amount

paid to that person is reportable under

an applicable information reporting

provision under chapter 61 of the Code.

Therefore, the withholding agent may

rely on the provisions of paragraph

(b)(3)(iii)(A) of this section to determine

whether the person is presumed to be a

U.S. person (in which case, no

withholding is required under this

section), or whether the person is

presumed to be a foreign person (in

which case 30-percent withholding is

required under this section). See

paragraph (b)(3)(v)(A) of this section for

special reliance rules in the case of a

payment to a foreign intermediary and

§ 1.1441–5(d)(3) for special reliance

rules in the case of a payment to a

foreign partnership.

(3) Presumptions regarding payee’s

status in the absence of

documentation—(i) General rules. A

withholding agent that cannot reliably

associate a payment with

documentation may rely on the

presumptions of this paragraph (b)(3) in

order to determine the status of the

payee as a U.S. or a foreign person and

the payee’s other relevant characteristics

(e.g., as an owner or intermediary, as an

individual, trust, partnership, or

corporation). The determination of

withholding and reporting requirements

applicable to payments to a person

presumed to be a foreign person is

governed only by the provisions of

chapter 3 of the Code and the

regulations thereunder. For the

determination of withholding and

reporting requirements applicable to

payments to a person presumed to be a

U.S. person, see chapter 61 of the Code,

section 3402, 3405, or 3406, and the

regulations under these provisions. A

presumption that a payee is a foreign

payee is not a presumption that the

payee is a foreign beneficial owner.

Therefore, the provisions of this

paragraph (b)(3) have no effect for

purposes of reducing the withholding

rate if associating the payment with

documentation of foreign beneficial

ownership is required as a condition for

such rate reduction. See paragraph

(b)(3)(ix) of this section for

consequences to a withholding agent

that fails to withhold in accordance

with the presumptions set forth in this

paragraph (b)(3) or if the withholding

agent has actual knowledge or reason to

know of facts that are contrary to the

presumptions set forth in this paragraph

(b)(3). See paragraph (b)(2)(vii) of this

section for rules regarding the extent

which a withholding agent can reliably

associate a payment with

documentation.

(ii) Presumptions of status as

individual, corporation, partnership,

etc. A withholding agent that cannot

reliably associate a payment with

documentation must presume that the

payee is an individual, a trust, or an

estate, if the payee appears to be such

person (i.e., based on the payee’s name

or other indications). In the absence of

reliable indications that the payee is an

individual, estate, or trust, the

withholding agent must presume that

the payee is a corporation or one of the

persons enumerated under § 1.6049–

4(c)(1)(ii) (B) through (Q) if it can be so

treated under § 1.6049–4(c)(1)(ii)(A)(1)

or any one of the paragraphs under

§ 1.6049–4(c)(1)(ii) (B) through (Q)

without the need to furnish

documentation. If the withholding agent

cannot treat a payee as a person

described in § 1.6049–4(c)(1)(ii) (A)(1)

through (Q), then the payee shall be

presumed to be a partnership. The fact

that a payee is presumed to have a

certain status under the provisions of

this paragraph (b)(3)(ii) does not mean

that it is excused from furnishing

documentation, if documentation is

otherwise required in order to obtain a

reduced rate of withholding under this

section. For example, if, for purposes of

this paragraph (b)(3)(ii), a payee is

presumed to be a tax-exempt

organization based on § 1.6049–

4(c)(1)(ii)(B), the withholding agent

cannot rely on this presumption to

reduce the rate of withholding on

payments to such person (if such person

is also presumed to be a foreign person

under paragraph (b)(3)(iii)(A) of this

section) because a reduction in the rate

of withholding for payments to a foreign

tax-exempt organization generally

requires that a valid Form W–8

described in § 1.1441–9(b)(2) be

furnished to the withholding agent.

(iii) Presumption of U.S. or foreign

status. A payment that the withholding

agent cannot reliably associate with

documentation is presumed to be made

to a U.S. person, except as otherwise

provided in this paragraph (b)(3)(iii), in

paragraphs (b)(3) (iv) and (v) of this

section, or in § 1.1441–5 (d) or (e).

(A) Payments to exempt recipients. If

a withholding agent cannot reliably

associate a payment with

documentation from the payee and the
53428 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

payee is an exempt recipient (as

determined under the provisions of

§ 1.6049–4(c)(1)(ii) in the case of

interest, or under similar provisions

under chapter 61 of the Code applicable

to the type of payment involved, but not

including a payee that the withholding

agent may treat as a foreign

intermediary in accordance with

paragraph (b)(3)(v) of this section), the

payee is presumed to be a foreign

person and not a U.S. person—

(1) If the withholding agent has actual

knowledge of the payee’s employer

identification number and that number

begins with the two digits ‘‘98’’;

(2) If the withholding agent’s

communications with the payee are

mailed to an address in a foreign

country;

(3) If the name of the payee indicates

that the entity is the type of entity that

is on the per se list of foreign

corporations contained in § 301.7701–

2(b)(8)(i) of this chapter; or

(4) If the payment is made outside the

United States (as defined in § 1.6049–

5(e)).

(B) Scholarships and grants. A

payment representing taxable

scholarship or fellowship grant income

that does not represent compensation

for services (but is not excluded from

tax under section 117) and that a

withholding agent that cannot reliably

associate with documentation is

presumed to be made to a foreign person

if the withholding agent has a record

that the payee has a U.S. visa that is not

an immigrant visa. See section 871(c)

and § 1.1441–4(c) for applicable tax rate

and withholding rules.

(C) Pensions, annuities, etc. A

payment from a trust described in

section 401(a), an annuity plan

described in section 401(a), an annuity

plan described in section 403(a), or a

payment with respect to any annuity,

custodial account, or retirement income

account described in section 403(b) that

a withholding agent cannot reliably

associate with documentation is

presumed to be made to a U.S. person

only if the withholding agent has a

record of a Social Security number for

the payee and relies on a mailing

address described in the following

sentence. A mailing address is an

address used for purposes of

information reporting or otherwise

communicating with the payee that is

an address in the United States or in a

foreign country with which the United

States has an income tax treaty in effect

that provides that the payee, if an

individual resident in that country,

would be entitled to an exemption from

U.S. tax on amounts described in this

paragraph (b)(3)(iii)(C). Any payment

described in this paragraph (b)(3)(iii)(C)

that is not presumed made to a U.S.

person is presumed to be made to a

foreign person. A withholding agent

making a payment to a person presumed

to be a foreign person may not reduce

the 30-percent amount of withholding

required on such payment unless it

receives a withholding certificate

described in paragraph (e)(2)(i) of this

section furnished by the beneficial

owner. For basis of reduction in the 30-

percent rate, see § 1.1441–4(e) or

§ 1.1441–6(b).

(D) Certain payments to offshore

accounts. A payment that would be

subject to withholding under section

1441, 1442, or 1443 if made to a foreign

person and is exempt from backup

withholding under section 3406 by

reason of § 31.3406(g)–1(e) of this

chapter (relating to exemption from

backup withholding under section 3406

for certain payments to offshore

accounts) is presumed to be made to a

foreign payee.

(iv) Grace period in the case of indicia

of a foreign payee. A withholding agent

may choose, in its discretion, to apply

the provisions of § 1.6049–5(d)(2)(ii)

regarding a 90-day grace period for

purposes of this paragraph (b)(3) (by

substituting the term withholding agent

for the term payor) to amounts

described in § 1.1441–6(b)(2)(ii) and to

amounts covered by a Form 8233

described in § 1.1441–4(b)(2)(ii). Thus,

for these amounts, a withholding agent

may, in its discretion, choose to treat an

account holder as a foreign person and

withhold under chapter 3 of the Code

(and the regulations thereunder) while

awaiting documentation. For purposes

of determining the rate of withholding

under this section, the withholding

agent must withhold at the unreduced

30-percent rate at the time that the

amounts are credited to the account.

However, a withholding agent who can

reliably associate the payment with a

withholding certificate that is otherwise

valid within the meaning of the

applicable provisions except for the fact

that it is transmitted by facsimile may

rely on that facsimile form for purposes

of withholding at the claimed reduced

rate. For reporting of amounts credited

both before and after the grace period,

see § 1.1461–1(c)(7). The following

adjustments shall be made at the

expiration of the grace period:

(A) If, at the end of the grace period,

the documentation is not furnished in

the manner required under this section

and the account holder is presumed to

be a U.S. person who is not an exempt

recipient, then backup withholding

applies to amounts credited to the

account after the expiration of the grace

period only. Amounts credited to the

account during the grace period shall be

treated as owned by a foreign payee and

adjustments must be made to correct

any underwithholding on such amounts

in the manner described in § 1.1461–2.

(B) If, at the end of the grace period,

the documentation is not furnished in

the manner required under this section

and the account holder is presumed to

be a foreign person, or if documentation

is furnished that does not support the

claimed rate reduction, then

adjustments must be made to correct the

underwithholding on amounts credited

to the account during the grace period,

based on adjustment procedures

described in § 1.1461–2.

(v) Special rules applicable to

payments to foreign intermediaries—(A)

Reliance on claim of status as foreign

intermediary. A withholding agent that

can reliably associate a payment with a

withholding certificate described in

paragraph (e)(3)(ii) or (iii) of this section

may treat the payment as made to a

foreign intermediary, as represented in

the certificate. For this purpose, a U.S.

person’s foreign branch that is a

qualified intermediary defined in

paragraph (e)(5)(ii) of this section shall

be treated as a foreign intermediary. For

purposes of this section, a payment that

the withholding agent can reliably

associate with a withholding certificate

described in paragraph (e)(3)(ii) or (iii)

of this section that would be valid

except for the fact that some or all of the

withholding certificates or other

appropriate documentation required to

be attached are lacking or are unreliable

or that information for allocating the

payment among the various persons for

whom the intermediary is acting is

lacking or is unreliable shall

nevertheless be treated as a payment to

a foreign intermediary and the rules of

this paragraph (b)(3)(v) shall apply

accordingly. A payee that the

withholding agent may not reliably treat

as a foreign intermediary under this

paragraph (b)(3)(v)(A) is presumed to be

an owner whose status as an individual,

trust, estate, etc., must be determined in

accordance with paragraph (b)(3)(ii) of

this section, to the extent relevant. In

addition, such payee is presumed to be

a U.S. or a foreign payee based upon the

presumptions described in paragraph

(b)(3)(iii) of this section. The provisions

of paragraphs (b)(3)(v) (B), (C), and (D)

of this section are not relevant to a

withholding agent that can reliably

associate a payment with a withholding

certificate from a person representing to

be a qualified intermediary that has

assumed primary withholding

responsibility in accordance with

paragraph (e)(5)(iv) of this section.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53429

(B) Beneficial owner documentation is

lacking or unreliable. Any portion of a

payment that the withholding agent may

treat as made to a foreign intermediary

in accordance with paragraph

(b)(3)(v)(A) of this section but cannot

reliably associate with a beneficial

owner due to the lack of a withholding

certificate or other appropriate

documentation for that beneficial owner

is presumed to be made to a foreign

payee for whom the foreign

intermediary collects the payment (see

paragraph (b)(2)(v) of this section). For

purposes of this paragraph (b)(2)(v)(B),

any payment that a foreign qualified

intermediary represents to be allocable

to the category of assets described in

paragraph (e)(5)(v)(B)(3) of this section

(i.e., assets allocable to persons for

whom the qualified intermediary does

not hold documentation as specified

under its agreement with the IRS) is

treated as a payment that the

withholding agent cannot reliably

associate with beneficial owners. As a

result, any payment allocable to such

category of assets is presumed to be

made to an unidentified foreign payee.

Under paragraph (b)(1) of this section, a

payment to a foreign payee is subject to

withholding at a 30-percent rate.

(C) Information regarding allocation

of payment is lacking or unreliable. If a

withholding agent can reliably associate

a payment with a group of beneficial

owners or payees but lacks reliable

information to determine how much of

the payment is allocable to one or more

of the beneficial owners or payees in the

group (because, for example, the

statement described in paragraph

(e)(3)(iv) of this section has not been

furnished), the payment, to the extent it

cannot reliably be allocated, is

presumed to be allocable entirely to the

beneficial owner or payee in the group

with the highest applicable withholding

rate or, if the rates are equal, to the

beneficial owner or payee in the group

with the highest U.S. tax liability, as the

withholding agent shall estimate, based

on its knowledge and available

information. If a withholding certificate

attached to an intermediary certificate is

another intermediary certificate or a

certificate from a foreign partnership

described in § 1.1441–5(c)(3)(iii), the

rules of this paragraph (b)(3)(v)(C) apply

by treating the share of the payment

allocable to the other intermediary or to

the foreign partnership as if the

payment were made directly to the other

intermediary or to the foreign

partnership.

(D) Certification that the foreign

intermediary has furnished

documentation for all of the persons to

whom the intermediary certificate

relates is lacking or unreliable. If the

certification required under paragraph

(e)(3)(iii)(D) of this section (that the

attached withholding certificates and

other appropriate documentation

represent all of the persons to whom the

intermediary withholding certificate

relates) is lacking or is unreliable and,

as a result, the withholding agent cannot

reliably determine how much of the

payment is allocable to each of the

persons or group of persons for which

the withholding agent holds a

withholding certificate or other

appropriate documentation, then none

of the payment can reliably be

associated with any one person and the

entire payment is presumed to be made

to an unidentified foreign payee for

whom the intermediary collects the

payment and from which a 30-percent

amount must be withheld in accordance

with paragraph (b)(1) of this section.

(vi) U.S. branches and foreign flowthrough entities. The rules of paragraphs

(b)(3)(v) (B), (C), and (D) of this section

shall apply to payments to a U.S. branch

described in paragraph (b)(2)(iv)(A) of

this section that has agreed to assume

withholding responsibility in the same

manner that they apply to payments to

a foreign intermediary. See § 1.1441–

5(d) for similar rules in the case of

payments to foreign partnerships. See

§ 1.1441–5(e) for similar rules in the

case of payments to foreign trusts or

foreign estates.

(vii) Joint payees. A payment made to

joint payees for whom the withholding

agent cannot reliably associate

documentation for all joint payees or

can reliably associate the payment with

a Form W–9 furnished in accordance

with the procedures described in

§§ 31.3406(d)–1 through 31.3406(d)–5 of

this chapter from one of the joint payees

is presumed to be made to U.S. persons.

For purposes of applying this paragraph

(b)(3), the grace period rules in

paragraph (b)(3)(iv) of this section shall

apply only if each payee qualifies for

the conditions described in paragraph

(b)(3)(iv) of this section. However, as

provided in paragraph (b)(3)(iii)(D) of

this section, a payment of an amount

that would be subject to withholding

under section 1441, 1442, or 1443 if

paid to a foreign person and is exempt

from the application of the provisions of

section 3406 by reason of § 31.3406(g)–

1(e) of this chapter (relating to

exemption from backup withholding

under section 3406 of the Code for

certain payments made with respect to

offshore accounts), is presumed to be

made to foreign persons.

(viii) Rebuttal of presumptions. A

payee or beneficial owner may rebut the

presumptions described in this

paragraph (b)(3) by providing reliable

documentation to the withholding agent

or, if applicable, to the IRS.

(ix) Effect of reliance on presumptions

and of actual knowledge or reason to

know otherwise—(A) General rule.

Except as otherwise provided in

paragraph (b)(3)(ix)(B) of this section, a

withholding agent that withholds on a

payment under section 3402, 3405 or

3406 in accordance with the

presumptions set forth in this paragraph

(b)(3) shall not be liable for withholding

under this section even it is later

established that the beneficial owner of

the payment is, in fact, a foreign person.

Similarly, a withholding agent that

withholds on a payment under this

section in accordance with the

presumptions set forth in this paragraph

(b)(3) shall not be liable for withholding

under section 3402 or 3405 or for

backup withholding under section 3406

even if it is later established that the

payee or beneficial owner is, in fact, a

U.S. person. A withholding agent that,

instead of relying on the presumptions

described in this paragraph (b)(3), relies

on its own actual knowledge to

withhold a lesser amount, not withhold,

or not report a payment, even though

reporting of the payment or withholding

a greater amount would be required if

the withholding agent relied on the

presumptions described in this

paragraph (b)(3) shall be liable for tax,

interest, and penalties to the extent

provided under section 1461 and the

regulations under that section. See

paragraph (b)(7) of this section for

provisions regarding such liability if the

withholding agent fails to withhold in

accordance with the presumptions

described in this paragraph (b)(3).

(B) Actual knowledge or reason to

know that amount of withholding is

greater than is required under the

presumptions or that reporting of the

payment is required. Notwithstanding

the provisions of paragraph (b)(3)(ix)(A)

of this section, a withholding agent may

not rely on the presumptions described

in this paragraph (b)(3) to the extent it

has actual knowledge or reason to know

that the status or characteristics of the

payee or of the beneficial owner are

other than what is presumed under this

paragraph (b)(3) and, if based on such

knowledge or reason to know, it should

withhold (under this section or another

withholding provision of the Code) an

amount greater than would be the case

if it relied on the presumptions

described in this paragraph (b)(3) or it

should report (under this section or

under another provision of the Code) an

amount that would not otherwise be

reportable if it relied on the

presumptions described in this
53430 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

paragraph (b)(3). In such a case, the

withholding agent must rely on its

actual knowledge or reason to know

rather than on the presumptions set

forth in this paragraph (b)(3). Failure to

do so and, as a result, failure to

withhold the higher amount or to report

the payment, shall result in liability for

tax, interest, and penalties to the extent

provided under sections 1461 and 1463

and the regulations under those

sections.

(x) Examples. The provisions of this

paragraph (b)(3) are illustrated by the

following examples:

Example 1. A withholding agent, W, makes

a payment of U.S. source dividends to person

X, Inc. at an address outside the United

States. W cannot reliably associate the

payment to X with documentation. Under

§§ 1.6042–3(b)(1)(vii) and 1.6049–

4(c)(1)(ii)(A)(1), W may treat X as a

corporation. Thus, under the presumptions

described in paragraph (b)(3)(iii) of this

section, W must presume that X is a foreign

person (because the payment is made outside

the United States). However, W knows that

X is a U.S. person who is an exempt

recipient. W may not rely on its actual

knowledge to not withhold under this

section. If W s knowledge is, in fact,

incorrect, W would be liable for tax, interest,

and, if applicable, penalties, under section

1461. W would be permitted to reduce or

eliminate its liability for the tax by

establishing, in accordance with paragraph

(b)(7) of this section, that the tax is not due

or has been satisfied. If W s actual knowledge

is, in fact, correct, W may nevertheless be

liable for tax, interest, or penalties under

section 1461 for the amount that W should

have withheld based upon the presumptions.

W would be permitted to reduce or eliminate

its liability for the tax by establishing, in

accordance with paragraph (b)(7) of this

section, that its actual knowledge was, in

fact, correct and that no tax or a lesser

amount of tax was due.

Example 2. A withholding agent, W, makes

a payment of U.S. source dividends to Y who

does not qualify as an exempt recipient

under §§ 1.6042–3(b)(1)(vii) and 1.6049–

4(c)(1)(ii). W cannot reliably associate the

payment to Y with documentation. Under the

presumptions described in paragraph

(b)(3)(iii) of this section, W must presume

that Y is a U.S. person who is not an exempt

recipient for purposes of section 6042.

However, W knows that Y is a foreign person.

W may not rely on its actual knowledge to

withhold under this section rather than

backup withhold under section 3406. If W s

knowledge is, in fact, incorrect, W would be

liable for tax, interest, and, if applicable,

penalties, under section 3403. If W s actual

knowledge is, in fact, correct, W may

nevertheless be liable for tax, interest, or

penalties under section 3403 for the amount

that W should have withheld based upon the

presumptions. Paragraph (b)(7) of this section

does not apply to provide relief from liability

under section 3403.

Example 3. A withholding agent, W, makes

a payment of U.S. source dividends to X, Inc.

W cannot reliably associate the payment to

X, Inc. with documentation. X, nc. presents

none of the indicia of foreign status described

in paragraph (b)(3)(iii)(A) of this section, but

W has actual knowledge that X, Inc. is a

foreign corporation. W may treat X, Inc. as an

exempt recipient under § 1.6042–3(b)(1)(vii).

Because there are no indicia of foreign status,

W would, absent actual knowledge or reason

to know otherwise, be permitted to treat X,

Inc. as a domestic corporation in accordance

with the presumptions of paragraph (b)(3)(iii)

of this section. However, under paragraph

(b)(3)(ix)(B) of this section, W may not rely

on the presumption of U.S. status since

reliance on its actual knowledge requires that

it withhold an amount greater than would be

the case under the presumptions.

Example 4. A withholding agent, W, is a

plan administrator who makes pension

payments to person X with a mailing address

in a foreign country with which the United

States has an income tax treaty in effect.

Under that treaty, the type of pension income

paid to X is taxable solely in the country of

residence. The plan administrator has a

record of X’s U.S. social security number. W

has no actual knowledge or reason to know

that X is a foreign person. W may rely on the

presumption of paragraph (b)(3)(iii)(C) of this

section in order to treat X as a U.S. person.

Therefore, any withholding and reporting

requirements for the payment are governed

by the provisions of section 3405 and the

regulations under that section.

(4) List of exemptions from, or

reduced rates of, withholding under

chapter 3 of the Code. A withholding

agent that has determined that the payee

is a foreign person for purposes of

paragraph (b)(1) of this section must

determine whether the payee is entitled

to a reduced rate of withholding under

section 1441, 1442, or 1443. This

paragraph (b)(4) identifies items for

which a reduction in the rate of

withholding may apply and whether the

rate reduction is conditioned upon

documentation being furnished to the

withholding agent. Documentation

required under this paragraph (b)(4) is

documentation that a withholding agent

must be able to associate with a

payment upon which it can rely to treat

the payment as made to a foreign person

that is the beneficial owner of the

payment in accordance with paragraph

(e)(1)(ii) of this section. This paragraph

(b)(4) also cross-references other

sections of the Code and applicable

regulations in which some of these

exceptions, exemptions, or reductions

are further explained. See, for example,

paragraph (b)(4)(viii) of this section,

dealing with effectively connected

income, that cross-references § 1.1441–

4(a); see paragraph (b)(4)(xv) of this

section, dealing with exemptions from,

or reductions of, withholding under an

income tax treaty, that cross-references

§ 1.1441–6. This paragraph (b)(4) is not

an exclusive list of items to which a

reduction of the rate of withholding may

apply and, thus, does not preclude an

exemption from, or reduction in, the

rate of withholding that may otherwise

be allowed under the regulations under

the provisions of chapter 3 of the Code

for a particular item of income

identified in this paragraph (b)(4).

(i) Portfolio interest described in

section 871(h) or 881(c) and substitute

interest payments described in § 1.871–

7(b)(2)(i) or 1.881–2(b)(2) are exempt

from withholding under section 1441(a).

See § 1.871–14 for regulations regarding

portfolio interest and section 1441(c)(9)

for exemption from withholding.

Documentation establishing foreign

status is required for interest on an

obligation in registered form to qualify

as portfolio interest. See section

871(h)(2)(B)(ii) and § 1.871–

14(c)(1)(ii)(C). For special

documentation rules regarding foreigntargeted registered obligations described

in § 1.871–14(e)(2), see § 1.871–14(e) (3)

and (4) and, in particular, § 1.871–

14(e)(4)(i)(A) and (ii)(A) regarding the

time when the withholding agent must

receive the documentation. The

documentation furnished for purposes

of qualifying interest as portfolio

interest serves as the basis for the

withholding exemption for purposes of

this section and for purposes of

establishing foreign status for purposes

of section 6049. See § 1.6049–5(b)(8).

Documentation establishing foreign

status is not required for qualifying

interest on an obligation in bearer form

described in § 1.871–14(b)(1) as

portfolio interest. However, in certain

cases, documentation for portfolio

interest on a bearer obligation may have

to be furnished in order to establish

foreign status for purposes of the

information reporting provisions of

section 6049 and backup withholding

under section 3406. See § 1.6049–

5(b)(7).

(ii) Bank deposit interest and similar

types of deposit interest (including

original issue discount) described in

section 871(i)(2)(A) or 881(d) that are

from sources within the United States

are exempt from withholding under

section 1441(a). See section 1441(c)(10).

Documentation establishing foreign

status is not required for purposes of

this withholding exemption but may

have to be furnished for purposes of the

information reporting provisions of

section 6049 and backup withholding

under section 3406. See § 1.6049–

5(d)(3)(iii) for exceptions to the foreign

payee and exempt recipient rules

regarding this type of income. See also

§ 1.6049–5(b)(11) for applicable

documentation exemptions for certain
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53431

bank deposit interest paid on

obligations in bearer form.

(iii) Bank deposit interest (including

original issue discount) described in

section 861(a)(1)(B) is exempt from

withholding under sections 1441(a) as

income that is not from U.S. sources.

Documentation establishing foreign

status is not required for purposes of

this withholding exemption but may

have to be furnished for purposes of the

information reporting provisions of

section 6049 and backup withholding

under section 3406. Reporting

requirements for payments of such

interest are governed by section 6049

and the regulations under that section.

See § 1.6049–5(b)(12) and alternative

documentation rules under § 1.6049–

5(c)(4).

(iv) Interest or original issue discount

from sources within the United States

on certain short-term obligations

described in section 871(g)(1)(B) or

881(a)(3) is exempt from withholding

under sections 1441(a). Documentation

establishing foreign status is not

required for purposes of this

withholding exemption but may have to

be furnished for purposes of the

information reporting provisions of

section 6049 and backup withholding

under section 3406. See § 1.6049–

5(b)(12) for applicable documentation

for establishing foreign status and

§ 1.6049–5(d)(3)(iii) for exceptions to

the foreign payee and exempt recipient

rules regarding this type of income. See

also § 1.6049–5(b)(10) for applicable

documentation exemptions for certain

obligations in bearer form.

(v) Income from sources without the

United States is exempt from

withholding under sections 1441(a).

Documentation establishing foreign

status is not required for purposes of

this withholding exemption but may

have to be furnished for purposes of the

information reporting provisions of

section 6049 or other applicable

provisions of chapter 61 of the Code and

backup withholding under section 3406.

See, for example, § 1.6049–5(b) (6) and

(12) and alternative documentation

rules under § 1.6049–5(c)(4). See also

paragraph (b)(5) of this section for cross

references to other applicable provisions

of the regulations under chapter 61 of

the Code.

(vi) Distributions from certain

domestic corporations described in

section 871(i)(2)(B) or 881(d) are exempt

from withholding under section 1441(a).

See section 1441(c)(10). Documentation

establishing foreign status is not

required for purposes of this

withholding exemption but may have to

be furnished for purposes of the

information reporting provisions of

section 6042 and backup withholding

under section 3406. See § 1.6042–3(b)(1)

(iii) through (vi).

(vii) Dividends paid by certain foreign

corporations that are treated as income

from sources within the United States

by reason of section 861(a)(2)(B) are

exempt from withholding under section

884(e)(3) to the extent that the

distributions are paid out of earnings

and profits in any taxable year that the

corporation was subject to branch

profits tax for that year. Documentation

establishing foreign status is not

required for purposes of this

withholding exemption but may have to

be furnished for purposes of the

information reporting provisions of

section 6042 and backup withholding

under section 3406. See § 1.6042–3(b)(1)

(iii) through (vii).

(viii) Certain income that is effectively

connected with the conduct of a U.S.

trade or business is exempt from

withholding under section 1441(a). See

section 1441(c)(1). Documentation

establishing foreign status and status of

the income as effectively connected

must be furnished for purposes of this

withholding exemption to the extent

required under the provisions of

§ 1.1441–4(a). Documentation furnished

for this purpose also serves as

documentation establishing foreign

status for purposes of applicable

information reporting provisions under

chapter 61 of the Code and for backup

withholding under section 3406. See,

for example, § 1.6041–4(a)(1).

(ix) Certain income with respect to

compensation for personal services of

an individual that are performed in the

United States is exempt from

withholding under section 1441(a). See

section 1441(c)(4) and § 1.1441–4(b).

However, such income may be subject

to withholding as wages under section

3402. Documentation establishing

foreign status must be furnished for

purposes of any withholding exemption

or reduction to the extent required

under § 1.1441–4(b) or 31.3401(a)(6)–1

(e) and (f) of this chapter.

Documentation furnished for this

purpose also serves as documentation

establishing foreign status for purposes

of information reporting under section

6041. See § 1.6041–4(a)(1).

(x) Amounts described in section

871(f) that are received as annuities

from certain qualified plans are exempt

from withholding under section 1441(a).

See section 1441(c)(7). Documentation

establishing foreign status must be

furnished for purposes of the

withholding exemption as required

under § 1.1441–4(d). Documentation

furnished for this purpose also serves as

documentation establishing foreign

status for purposes of information

reporting under section 6041. See

§ 1.6041–4(a)(1).

(xi) Payments to a foreign government

(including a foreign central bank of

issue) that are excludable from gross

income under section 892(a) are exempt

from withholding under section 1442.

See § 1.1441–8(b). Documentation

establishing status as a foreign

government is required for purposes of

this withholding exemption. Payments

to a foreign government are exempt from

information reporting under chapter 61

of the Code (see § 1.6049–4(c)(1)(ii)(F)).

(xii) Payments of certain interest

income to a foreign central bank of issue

or the Bank for International

Settlements that are exempt from tax

under section 895 are exempt from

withholding under section 1442.

Documentation establishing eligibility

for such exemption is required to the

extent provided in § 1.1441–8(c)(1).

Payments to a foreign central bank of

issue or to the Bank for International

Settlements are exempt from

information reporting under chapter 61

of the Code (see § 1.6049–4(c)(1)(ii) (H)

and (M)).

(xiii) Amounts derived by a foreign

central bank of issue from bankers’

acceptances described in section

871(i)(2)(C) or 881(d) are exempt from

tax and, therefore, from withholding.

See section 1441(c)(10). Documentation

establishing foreign status is not

required for purposes of this

withholding exemption if the name of

the payee and other facts surrounding

the payment reasonably indicate that

the beneficial owner of the payment is

a foreign central bank of issue as

defined in § 1.861–2(b)(4). See § 1.1441–

8(c)(2) for withholding procedures. See

also §§ 1.6049–4(c)(1)(ii)(H) and 1.6041–

3(q)(8) for a similar exemption from

information reporting.

(xiv) Payments to an international

organization from investments in the

United States of stocks, bonds, or other

domestic securities or from interest on

deposits in banks in the United States

of funds belonging to such international

organization are exempt from tax under

section 892(b) and, thus, from

withholding. Documentation

establishing status as an international

organization is not required if the name

of the payee and other facts surrounding

the payment reasonably indicate that

the beneficial owner of the payment is

an international organization within the

meaning of section 7701(a)(18). See

§ 1.1441–8(d). Payments to an

international organization are exempt

from information reporting under

chapter 61 of the Code (see § 1.6049–

4(c)(1)(ii)(G)).
53432 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(xv) Amounts may be exempt from, or

subject to a reduced rate of, withholding

under an income tax treaty.

Documentation establishing eligibility

for benefits under an income tax treaty

is required for this purpose as provided

under §§ 1.1441–6. Documentation

furnished for this purpose also serves as

documentation establishing foreign

status for purposes of applicable

information reporting provisions under

chapter 61 of the Code and for backup

withholding under section 3406. See,

for example, § 1.6041–4(a)(1).

(xvi) Amounts of scholarships and

grants paid to certain exchange or

training program participants that do

not represent compensation for services

but are not excluded from tax under

section 117 are subject to a reduced rate

of withholding of 14-percent under

section 1441(b). Documentation

establishing foreign status is required

for purposes of this reduction in rate as

provided under § 1.1441–4(c). This

income is not subject to information

reporting under chapter 61 of the Code

nor to backup withholding under

section 3406. The compensatory portion

of a scholarship or grant is reportable as

wage income. See § 1.6041–3(o).

(xvii) Amounts paid to a foreign

organization described in section 501(c)

are exempt from withholding under

section 1441 to the extent that the

amounts are not income includible

under section 512 in computing the

organization’s unrelated business

taxable income and are not subject to

the tax imposed by section 4948(a).

Documentation establishing status as a

tax-exempt organization is required for

purposes of this exemption to the extent

provided in § 1.1441–9. Amounts

includible under section 512 in

computing the organization’s unrelated

business taxable income are subject to

withholding to the extent provided in

section 1443(a) and § 1.1443–1(a). Gross

investment income (as defined in

section 4940(c)(2)) of a private

foundation is subject to withholding at

a 4-percent rate to the extent provided

in section 1443(b) and § 1.1443–1(b).

Payments to a tax-exempt organization

are exempt from information reporting

under chapter 61 of the Code and the

regulations thereunder (see § 1.6049–

4(c)(1)(ii)(B)(1)).

(xviii) Per diem amounts for

subsistence paid by the U.S. government

to a nonresident alien individual who is

engaged in any program of training in

the United States under the Mutual

Security Act of 1954 are exempt from

withholding under section 1441(a). See

section 1441(c)(6). Documentation of

foreign status is required under

§ 1.1441–4(e) for purposes of

establishing eligibility for this

exemption. See § 1.6041–3(p).

(xix) Interest with respect to tax-free

covenant bonds issued prior to 1934 is

subject to special withholding

procedures set forth in § 1.1461–1 in

effect prior to January 1, 1999 (see

§ 1.1461–1 as contained in 26 CFR part

1, revised April 1, 1997).

(xx) Income from certain gambling

winnings of a nonresident alien

individual is exempt from tax under

section 871(j) and from withholding

under section 1441(a). See section

1441(c)(11). Documentation establishing

foreign status is not required for

purposes of this exemption but may

have to be furnished for purposes of the

information reporting provisions of

section 6041 and backup withholding

under section 3406. See §§ 1.6041–1 and

1.6041–4(a)(1).

(xxi) Any payments not otherwise

mentioned in this paragraph (b)(4) shall

be subject to withholding at the rate of

30-percent if it is an amount subject to

withholding (as defined in § 1.1441–

2(a)) unless and to the extent the IRS

may otherwise prescribe in published

guidance (see § 601.601(d)(2) of this

chapter) or unless otherwise provided in

regulations under chapter 3 of the Code.

(5) Establishing foreign status under

applicable provisions of chapter 61 of

the Code. This paragraph (b)(5)

identifies relevant provisions of the

regulations under chapter 61 of the

Code that exempt payments from

information reporting, and therefore,

from backup withholding under section

3406, based on the payee’s status as a

foreign person. Many of these

exemptions require that the payee’s

foreign status be established in order for

the exemption to apply. The regulations

under applicable provisions of chapter

61 of the Code generally provide that

the documentation described in this

section may be relied upon for purposes

of determining foreign status.

(i) Payments to a foreign person that

are governed by section 6041 (dealing

with certain trade or business income)

are exempt from information reporting

under § 1.6041–4(a).

(ii) Payments to a foreign person that

are governed by section 6041A (dealing

with remuneration for services and

certain sales) are exempt from

information reporting under § 1.6041A–

1(d)(3).

(iii) Payments to a foreign person that

are governed by section 6042 (dealing

with dividends) are exempt from

information reporting under § 1.6042–

3(b)(1) (iii) through (vi).

(iv) Payments to a foreign person that

are governed by section 6044 (dealing

with patronage dividends) are exempt

from information reporting under

§ 1.6044–3(c)(1).

(v) Payments to a foreign person that

are governed by section 6045 (dealing

with broker proceeds) are exempt from

information reporting under § 1.6045–

1(g).

(vi) Payments to a foreign person that

are governed by section 6049 (dealing

with interest) to a foreign person are

exempt from information reporting

under § 1.6049–5(b) (6) through (15).

(vii) Payments to a foreign person that

are governed by section 6050N (dealing

with royalties) are exempt from

information reporting under § 1.6050N–

1(c).

(viii) Payments to a foreign person

that are governed by section 6050P

(dealing with income from cancellation

of debt) are exempt from information

reporting under section 6050P or the

regulations under that section except to

the extent provided in Notice 96–61

(I.R.B. 1996–49); see also § 601.601(b)(2)

of this chapter.

(6) Rules of withholding for payments

by a foreign intermediary or certain U.S.

branches. A foreign intermediary

described in paragraph (e)(3)(i) of this

section or a U.S. branch described in

paragraph (b)(2)(iv) of this section that

receives an amount subject to

withholding (as defined in § 1.1441–

2(a)) shall be deemed to have satisfied

any obligation it has under chapter 3 of

the Code and the regulations thereunder

to withhold and report the amount

when it, in turn, pays such amount to

another person (whether or not the

beneficial owner) to the extent that the

payment is associated with a valid

withholding certificate described in

paragraph (e)(3) (ii), (iii), or (v) of this

section that it has furnished to another

withholding agent and the intermediary

does not know and has no reason to

know that the correct amount has not

been withheld under chapter 3 of the

Code and the regulations thereunder.

See § 1.1441–5(c)(3)(v) for a similar rule

for payments by certain foreign

partnerships.

(7) Liability for failure to obtain

documentation timely or to act in

accordance with applicable

presumptions—(i) General rule. A

withholding agent that cannot reliably

associate a payment with

documentation on the date of payment

and that does not withhold under this

section, or withholds at less than the 30-

percent rate prescribed under section

1441(a) and paragraph (b)(1) of this

section, is liable under section 1461 for

the tax required to be withheld under

chapter 3 of the Code and the

regulations thereunder, without the

benefit of a reduced rate unless—
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53433

(A) The withholding agent has

appropriately relied on the

presumptions described in paragraph

(b)(3) of this section (including the grace

period described in paragraph (b)(3)(iv)

of this section) in order to treat the

payee as a U.S. person or, if applicable,

on the presumptions described in

§ 1.1441–4(a) (2)(i) or (3) to treat the

payment as effectively connected

income; or

(B) The withholding agent can

demonstrate to the satisfaction of the

district director or the Assistant

Commissioner (International) that the

proper amount of tax, if any, was in fact

paid to the IRS; or

(C) No documentation is required

under section 1441 or this section in

order for a reduced rate of withholding

to apply.

(ii) Proof that tax liability has been

satisfied. Proof of payment of tax may be

established for purposes of paragraph

(b)(7)(i)(B) of this section on the basis of

a Form 4669 (or such other form as the

IRS may prescribe in published

guidance (see § 601.601(d)(2) of this

chapter)), establishing the amount of

tax, if any, actually paid by or for the

beneficial owner on the income. Proof

that a reduced rate of withholding was,

in fact, appropriate under the provisions

of chapter 3 of the Code and the

regulations thereunder may also be

established after the date of payment by

the withholding agent on the basis of a

valid withholding certificate or other

appropriate documentation furnished

after that date. However, in the case of

a withholding certificate or other

appropriate documentation received

after the date of payment (or after the

grace period specified in paragraph

(b)(3)(iv) of this section), the district

director or the Assistant Commissioner

(International) may require additional

proof if it is determined that the delays

in obtaining the withholding certificate

affect its reliability.

(iii) Liability for interest and

penalties. A withholding agent that has

failed to withhold other than based on

appropriate reliance on the

presumptions described in paragraph

(b)(3) of this section or in § 1.1441–4(a)

(2)(i) or (3) is not relieved from liability

for interest under section 6601. Such

liability exists even if there is no

underlying tax liability due. The interest

on the amount that should have been

withheld shall be imposed as prescribed

under section 6601 beginning on the last

date for paying the tax due under

section 1461 (which, under section

6601, is the due date for filing the

withholding agent’s return of tax). The

interest shall stop accruing on the

earlier of the date that the required

withholding certificate or other

documentation is provided to the

withholding agent and to the extent of

the amount of tax that is determined not

to be due based on documentation

provided, or the date, and to the extent,

that the unpaid tax liability under

section 871, 881 or under section 1461

is satisfied. Further, in the event that a

tax liability is assessed against the

beneficial owner under section 871, 881,

or 882 and interest under section

6601(a) is assessed against, and

collected from, the beneficial owner, the

interest charge imposed on the

withholding agent shall be abated to

that extent so as to avoid the imposition

of a double interest charge. However,

the withholding agent is not relieved of

any applicable penalties. See section

1464.

(iv) Special effective date. See

paragraph (f)(2)(ii) of this section for the

special effective date applicable to this

paragraph (b)(7).

(v) Examples. The provisions of

paragraph (b)(7) of this section are

illustrated by the following examples:

Example 1. On June 15, 1999, a

withholding agent pays U.S. source interest

on an obligation in registered form (issued

after July 18, 1984) to a foreign corporation

that it cannot reliably associate with a Form

W–8 or other appropriate documentation

upon which to rely to treat the beneficial

owner as a foreign person. The withholding

agent does not withhold from the payment.

On September 30, 2001, the withholding

agent receives from the foreign corporation a

valid Form W–8 described in paragraph

(e)(2)(ii) of this section. Thus, the interest

qualifies as portfolio interest retroactively to

June 15, 1999 (the date of payment). See

§ 1.871–14(c)(3). The foreign corporation

does not file a U.S. federal income tax return

and does not pay the tax owed. The

withholding agent is not liable under section

1461 for the 30-percent tax on the interest

income because the receipt of the Form W–

8 exempts the interest from tax for purposes

of sections 881(a) and 1461. The withholding

agent, however, is liable for interest on the

amount of withholding that should have been

deducted from the payment on June 15, 1999

and deposited. Under paragraph (b)(7)(iii) of

this section, the period during which interest

may be assessed against the withholding

agent runs from March 15, 2000 (the due date

for the Form 1042 relating to the payment)

until September 30, 2001 (i.e., the date that

appropriate documentation is furnished to

the withholding agent).

Example 2. On June 15, 1999, a

withholding agent pays U.S. source

dividends to a foreign corporation that it

cannot reliably associate with a Form W–8 or

other appropriate documentation upon

which to rely to treat the beneficial owner as

a foreign person. The withholding agent does

not withhold from the payment. On

September 30, 2001, the withholding agent

receives from the foreign corporation a valid

Form W–8 described in paragraph (e)(2)(ii) of

this section claiming a reduced 15-percent

rate of withholding under a U.S. income tax

treaty. The dividend qualifies for the reduced

treaty rate retroactively to June 15, 1999 (the

date of payment). The foreign corporation

does not file a U.S. federal income tax return

and does not pay the tax owed. Under section

1461, the withholding agent is liable only for

a 15-percent tax on the dividend income

because the receipt of the Form W–8 allows

the tax rate to be reduced for purposes of

sections 881(a) and 1461 from 30 percent to

15 percent. The withholding agent, however,

is liable for interest on the full 30-percent

amount that should have been deducted and

withheld from the payment on June 15, 1999,

and deposited, over a period running from

March 15, 2000 (the due date for the Form

1042 relating to the payment) until

September 30, 2001 (the date that the

appropriate documentation is furnished to

the withholding agent supporting a reduction

in rate under a tax treaty). Additional interest

may be assessed relating to the outstanding

15-percent tax liability (i.e., the portion of the

30-percent total tax liability that is not

reduced under the treaty). Such additional

interest runs from March 15, 2000, until such

date as that 15-percent tax liability is

satisfied by the withholding agent or the

taxpayer (subject to abatement in order to

avoid a double interest charge).

(8) Adjustments, refunds, or credits of

overwithheld amounts. If the amount

withheld under section 1441, 1442, or

1443 is greater than the tax due by the

withholding agent or the taxpayer,

adjustments may be made in accordance

with the procedures described in

§ 1.1461–2(a). Alternatively, refunds or

credits may be claimed in accordance

with the procedures described in

§ 1.1464–1, relating to refunds or credits

claimed by the beneficial owner, or

§ 1.6414–1, relating to refunds or credits

claimed by the withholding agent. If an

amount was withheld under section

3406 or is subsequently determined to

have been paid to a foreign person, see

paragraph (b)(3)(vii) of this section and

§ 31.6413(a)–3(a)(1) of this chapter.

(9) Payments to joint owners. A

payment to joint owners that requires

documentation in order to reduce the

rate of withholding under chapter 3 of

the Code and the regulations thereunder

does not qualify for such reduced rate

unless the withholding agent can

reliably associate the payment with

documentation from each owner.

Notwithstanding the preceding

sentence, a payment to joint owners

qualifies as a payment exempt from

withholding under this section if any

one of the owners provides a certificate

of U.S. status on a Form W–9 in

accordance with paragraph (d) (2) or (3)

of this section or the withholding agent

can associate the payment with a

withholding certificate upon which it

can rely to treat the payment as made
53434 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

to a U.S. beneficial owner under

paragraph (d)(4) of this section. See

§ 31.3406(h)–2(a)(3)(i)(B) of this chapter.

(c) Definitions—(1) Withholding. The

term withholding means the deduction

and withholding of tax at the applicable

rate from the payment.

(2) Foreign and U.S. person. The term

foreign person means a nonresident

alien individual, a foreign corporation,

a foreign partnership, a foreign trust, a

foreign estate, and any other person that

is not a U.S. person described in the

next sentence. For purposes of the

regulations under chapter 3 of the Code,

the term foreign person also means, with

respect to a payment by a withholding

agent, a foreign branch of a U.S. person

that furnishes an intermediary

withholding certificate described in

paragraph (e)(3)(ii) of this section. A

U.S. person is a person described in

section 7701(a)(30), the U.S. government

(including an agency or instrumentality

thereof), a State (including an agency or

instrumentality thereof), or the District

of Columbia (including an agency or

instrumentality thereof).

(3) Individual—(i) Alien individual.

The term alien individual means an

individual who is not a citizen or a

national of the United States. See § 1.1–

1(c).

(ii) Nonresident alien individual. The

term nonresident alien individual

means a person described in section

7701(b)(1)(B), an alien individual who is

a resident of a foreign country under the

residence article of an income tax treaty

and § 301.7701(b)–7(a)(1) of this

chapter, or an alien individual who is a

resident of Puerto Rico, Guam, the

Commonwealth of Northern Mariana

Islands, the U.S. Virgin Islands, or

American Samoa as determined under

§ 301.7701(b)–1(d) of this chapter. An

alien individual who has made an

election under section 6013 (g) or (h) to

be treated as a resident of the United

States is nevertheless treated as a

nonresident alien individual for

purposes of withholding under chapter

3 of the Code and the regulations

thereunder.

(4) Certain foreign corporations. For

purposes of this section, a corporation

created or organized in Guam, the

Commonwealth of Northern Mariana

Islands, the U.S. Virgin Islands, and

American Samoa, is not treated as a

foreign corporation if the requirements

of sections 881(b)(1) (A), (B), and (C) are

met for such corporation. Further, a

payment made to a foreign government

or an international organization shall be

treated as a payment made to a foreign

corporation for purposes of withholding

under chapter 3 of the Code and the

regulations thereunder.

(5) Financial institution and foreign

financial institution. For purposes of the

regulations under chapter 3 of the Code,

the term financial institution means a

person described in § 1.165–12(c)(1)(iv)

(not including a person providing

pension or other similar benefits or a

regulated investment company or other

mutual fund, unless otherwise

indicated) and the term foreign financial

institution means a financial institution

that is a foreign person, as defined in

paragraph (c)(2) of this section.

(6) Beneficial owner—(i) General rule.

In the case of a payment of income, the

term beneficial owner means the person

who is the owner of the income for tax

purposes and who beneficially owns

that income. A person shall be treated

as the owner of the income to the extent

that it is required under U.S. tax

principles to include the amount paid in

gross income under section 61

(determined without regard to an

exclusion or exemption from gross

income under the Code). Beneficial

ownership of income is determined

under the provisions of section 7701(l)

and the regulations under that section

and any other applicable general U.S.

tax principles, including principles

governing the determination of whether

a transaction is a conduit transaction.

Thus, a person receiving income in a

capacity as a nominee, agent, custodian

for another person is not the beneficial

owner of the income. In the case of a

scholarship, the student receiving the

scholarship is the beneficial owner of

that scholarship. In the case of a

payment of an amount that is not

income, the beneficial owner

determination shall be made under this

paragraph (c)(6) as if the amount was

income.

(ii) Special rules for flow-through

entities and arrangements—(A) General

rule. The beneficial owners of income

paid to a partnership or other flowthrough arrangements described in

paragraph (c)(6)(ii)(C) of this section are

those persons who, under U.S. tax

principles, are the owners of the income

for tax purposes in their separate or

individual capacities and who

beneficially own that income. For

example, a partnership (first tier) that is

a partner in another partnership (second

tier) is not the beneficial owner of

income paid to the second tier

partnership since the first tier

partnership is not the owner of the

income under U.S. tax principles.

Rather, the partners of the first tier

partnership are the beneficial owners (to

the extent they are not themselves

partnerships and are not conduits

within the meaning of section 7701(l)

and the regulations under that section).

See § 1.1441–5(b) for applicable

withholding procedures for payments to

a domestic partnership. See also

§ 1.1441–5(c)(3)(ii) for applicable

withholding procedures for payments to

a foreign partnership where one of the

partners (at any level in the chain of

tiers) is a domestic partnership. See

§ 1.1441–6(b)(4) for rules governing the

eligibility of a payment to an entity or

other arrangement for a reduced rate of

withholding under an income tax treaty.

(B) Trusts and estates. The provisions

of paragraphs (c)(6)(i) and (ii)(A) of this

section shall not apply to a trust or an

estate, whether domestic or foreign. The

beneficial owner of income paid to a

trust or to an estate shall be determined

under the provisions of § 1.1441–3(f)

and (g) in effect prior to January 1, 1999

(see § 1.1441–3(f) and (g) as contained in

26 CFR part 1, revised April 1, 1997).

(C) Definition of a flow-through entity

or arrangement. For purposes of this

paragraph (c)(6)(ii), a flow-through

entity means a partnership, estate, or

trust. A flow-though arrangement is a

contractual arrangement that does not

involve an entity and is treated as a

partnership for U.S. tax purposes or is

a wholly-owned entity that is

disregarded for federal tax purposes

under § 301.7701–2(c)(2) of this chapter

as an entity separate from its owner. The

term partnership means any entity or

arrangement (as defined in § 301.7701–

2(c)(1) of this chapter) whose tax regime

is governed by subchapter K of chapter

1 of the Code.

(7) Withholding agent. For a

definition of the term withholding agent

and applicable rules, see § 1.1441–7.

(8) Person. For purposes of the

regulations under chapter 3 of the Code,

the term person shall mean a person

described in section 7701(a)(1) and the

regulations under that section and a

U.S. branch to the extent treated as a

U.S. person under paragraph (b)(2)(iv) of

this section. For purposes of the

regulations under chapter 3 of the Code,

the term person does not include a

wholly-owned entity that is disregarded

for federal tax purposes under

§ 301.7701–2(c)(2) of this chapter as an

entity separate from its owner. See

paragraph (b)(2)(iii) of this section for

procedures applicable to payments to

such entities.

(9) Source of income. The source of

income is determined under the

provisions of part I (section 861 and

following) , subchapter N, chapter 1 of

the Code and the regulations under

those provisions.

(10) Chapter 3 of the Code. For

purposes of the regulations under

sections 1441, 1442, and 1443, any

reference to chapter 3 of the Code shall
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53435

not include references to sections 1445

and 1446, unless the context indicates

otherwise.

(11) Reduced rate. For purposes of

regulations under chapter 3 of the Code,

and other withholding provisions of the

Code, the term reduced rate, when used

in regulations under chapter 3 of the

Code, shall include an exemption from

tax.

(d) Beneficial owner’s or payee’s

claim of U.S. status—(1) In general.

Under paragraph (b)(1) of this section, a

withholding agent is not required to

withhold under chapter 3 of the Code

on payments to a U.S. payee, to a person

presumed to be a U.S. payee in

accordance with the provisions of

paragraph (b)(3) of this section, or to a

person that the withholding agent may

treat as a U.S. beneficial owner of the

payment. Absent actual knowledge or

reason to know otherwise, a

withholding agent may rely on the

provisions of this paragraph (d) in order

to determine whether to treat a payee or

beneficial owner as a U.S. person.

(2) Payments for which a Form W–9

is otherwise required. A withholding

agent may treat as a U.S. person a payee

who is required to furnish a Form W–

9 and who furnishes it in accordance

with the procedures described in

§§ 31.3406(d)–1 through 31.3406(d)–5 of

this chapter (including the requirement

that the payee furnish its taxpayer

identifying number (TIN)) if the

withholding agent meets all the

requirements described in § 31.3406(h)–

3(e) of this chapter regarding reliance by

a payor on a Form W–9.

(3) Payments for which a Form W–9

is not otherwise required. In the case of

a payee who is not required to furnish

a Form W–9 under section 3406, the

withholding agent may rely on a

certificate of U.S. status described in

this paragraph (d)(3). A certificate of

U.S. status is a certificate described in

§ 31.3406(h)–3(c)(2) of this chapter

(relating to forms for exempt recipients)

or a Form W–9 (or a substitute form or

such other form as the IRS may

prescribe) that is signed under penalties

of perjury by the payee and contains the

name, permanent residence address,

and TIN of the payee. The procedures

described in § 31.3406(h)–2(a) of this

chapter shall apply to payments to joint

payees. A withholding agent that

receives a Form W–9 in order to satisfy

this paragraph (d)(3) must retain the

form in accordance with the provisions

of § 31.3406(h)–3(g) of this chapter, if

applicable, or of paragraph (e)(4)(iii) of

this section (relating to the retention of

withholding certificates) if § 31.3406(h)–

3(g) of this chapter does not apply. The

rules of this paragraph (d)(3) are only

intended to provide a method by which

a withholding agent may determine that

a payee is not a foreign person and do

not otherwise impose a requirement that

documentation be furnished by a person

who is otherwise treated as an exempt

recipient for purposes of the applicable

information reporting provisions under

chapter 61 of the Code (e.g., § 1.6049–

4(c)(1)(ii) for payments of interest).

(4) Other payments. This paragraph

(d)(4) describes the documentation upon

which a withholding agent may rely in

order to treat a payment as made to a

U.S. person that is a beneficial owner

for purposes of paragraph (b)(1) of this

section. The withholding agent may

treat the payment as made to a U.S.

beneficial owner only if it can reliably

associate the payment with

documentation prior to the payment, if

it complies with the electronic

confirmation procedures described in

paragraph (e)(4)(v) of this section, if

required, and if it has not been notified

by the IRS that any of the information

on the withholding certificate or other

documentation is incorrect or

unreliable. In the case of a Form W–9

that is required to be furnished for a

reportable payment that may be subject

to backup withholding, the payor may

be notified in accordance with section

3406(a)(1)(B) and the regulations under

that section. See applicable procedures

under that section and the regulations

under that section for payors who have

been notified with regard to such a

Form W–9. Payors who have been

notified in relation to other Forms

W–9, including under section 6724(b)

pursuant to section 6721, may rely on

the withholding certificate or other

documentation only to the extent

provided under procedures as

prescribed by the IRS (see

§ 601.601(d)(2) of this chapter). A

withholding agent may treat a payment

as made to a U.S. beneficial owner—

(i) To the extent the withholding

agent can reliably associate the payment

with a Form W–9 described in

paragraph (d) (2) or (3) of this section

attached to a valid intermediary, flowthrough, or U.S. branch withholding

certificate described in paragraph

(e)(3)(i) of this section;

(ii) To the extent the withholding

agent can reliably associate a payment

to a qualified intermediary with the

category of assets described in

paragraph (e)(5)(v)(B)(2) of this section

that the qualified intermediary has

represented, in accordance with

paragraphs (e) (3)(ii)(E) and (5)(v) of this

section as being allocable to U.S.

persons based on the Forms W–9 that

they have furnished; or

(iii) To the extent the withholding

agent can reliably associate the payment

with a Form W–8 from a U.S. branch

described in paragraph (e)(3)(v) of this

section that evidences an agreement

between the U.S. branch and the

withholding agent to treat the U.S.

branch as U.S. person.

(e) Beneficial owner’s claim of foreign

status—(1) Withholding agent’s

reliance—(i) In general. Absent actual

knowledge or reason to know otherwise,

a withholding agent may treat a

payment as made to a foreign beneficial

owner in accordance with the

provisions of paragraph (e)(1)(ii) of this

section. See paragraph (e)(4)(viii) of this

section for applicable reliance rules. See

paragraph (b)(4) of this section for a

description of payments for which a

claim of foreign status is relevant for

purposes of claiming a reduced rate of

withholding for purposes of section

1441, 1442, or 1443. See paragraph

(b)(5) of this section for a list of

payments for which a claim of foreign

status is relevant for other purposes,

such as claiming an exemption from

information reporting under chapter 61

of the Code.

(ii) Payments that a withholding agent

may treat as made to a foreign person

that is a beneficial owner—(A) General

rule. The withholding agent may treat a

payment as made to a foreign person

that is a beneficial owner if it complies

with the requirements described in

paragraph (e)(1)(ii)(B) of this section

and, then, only to the extent—

(1) That the withholding agent can

reliably associate the payment with a

beneficial owner withholding certificate

described in paragraph (e)(2) of this

section furnished by the person whose

name is on the certificate or attached to

a valid foreign intermediary, flowthrough entity, or U.S. branch

withholding certificate described in

paragraph (e)(3)(v) of this section;

(2) That the payment is made outside

the United States (within the meaning of

§ 1.6049–5(e)) with respect to an

offshore account (within the meaning of

§ 1.6049–5(c)(1)) and the withholding

agent can reliably associate the payment

with documentary evidence described

in §§ 1.1441–6(c)(3) or (4), or 1.6049–

5(c)(1) relating to the beneficial owner;

(3) That the withholding agent can

reliably associate the payment with the

category of assets described in

paragraph (e)(5)(v)(B)(1) of this section

that the qualified intermediary has

represented, in accordance with

paragraphs (e) (3)(ii)(E) and (5)(v) of this

section as being allocable to foreign

persons for whom the qualified

intermediary is holding valid

documentation;
53436 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(4) That the withholding agent can

reliably associate the payment with a

withholding certificate described in

§ 1.1441–5(c)(3)(iii) from a foreign

partnership claiming that the payment

is effectively connected income;

(5) That the withholding agent

identifies the payee as a U.S. branch

described in paragraph (b)(2)(iv) of this

section, the payment to which it treats

as effectively connected income in

accordance with § 1.1441–4(a) (2)(ii) or

(3);

(6) That the withholding agent

identifies the payee as an international

organization (or any wholly-owned

agency or instrumentality thereof) as

defined in section 7701(a)(18) that has

been designated as such by executive

order (pursuant to 22 U.S.C. 288

through 288(f)); or

(7) That the withholding agent pays

interest from bankers’ acceptances and

identifies the payee as a foreign central

bank of issue (as defined in § 1.861–

2(b)(4)).

(B) Additional requirements. In order

for a payment described in paragraph

(e)(1)(ii)(A) of this section to be treated

as made to a foreign beneficial owner,

the withholding agent must hold the

documentation (if required) prior to the

payment, comply with the electronic

confirmation procedures described in

paragraph (e)(4)(v) of this section (if

required), and must not have been

notified by the IRS that any of the

information on the withholding

certificate or other documentation is

incorrect or unreliable. If the

withholding agent has been so notified,

it may rely on the withholding

certificate or other documentation only

to the extent provided under procedures

prescribed by the IRS (see

§ 601.601(d)(2) of this chapter). See

paragraph (b)(2)(vii) of this section for

rules regarding reliable association of a

payment with a withholding certificate

or other appropriate documentation.

(2) Beneficial owner withholding

certificate—(i) In general. A beneficial

owner withholding certificate is a

statement by which the beneficial owner

of the payment represents that it is a

foreign person and, if applicable, claims

a reduced rate of withholding under

section 1441. A separate withholding

certificate must be submitted to each

withholding agent. If the beneficial

owner receives more than one type of

payment from a single withholding

agent, the beneficial owner may have to

submit more than one withholding

certificate to the single withholding

agent for the different types of payments

as may be required by the applicable

forms and instructions, or as the

withholding agent may require (such as

to facilitate the withholding agent’s

compliance with its obligations to

determine withholding under this

section or the reporting of the amounts

under § 1.1461–1 (b) and (c)). For

example, if a beneficial owner claims

that some but not all of the income it

receives is effectively connected with

the conduct of a trade or business in the

United States, it may be required to

submit two separate withholding

certificates, one for income that is not

effectively connected and one for

income that is so connected. See

§ 1.1441–6(b)(4)(ii) for special rules for

determining who must furnish a

beneficial owner withholding certificate

when a benefit is claimed under an

income tax treaty. See paragraph

(e)(4)(ix) of this section for reliance

rules in the case of certificates held by

another person or at a different branch

location of the same person.

(ii) Requirements for validity of

certificate. A beneficial owner

withholding certificate is valid only if it

is provided on a Form W–8, or a Form

8233 in the case of personal services

income described in § 1.1441–4(b) or

certain scholarship or grant amounts

described in § 1.1441–4(c) (or a

substitute form described in paragraph

(e)(4)(vi) of this section, or such other

form as the IRS may prescribe). A Form

W–8 is valid only if its validity period

has not expired, it is signed under

penalties of perjury by the beneficial

owner, and it contains all of the

information required on the form. The

required information is the beneficial

owner’s name, permanent residence

address, and TIN (if required), the

country under the laws of which the

beneficial owner is created,

incorporated, or governed (if a person

other than an individual), the

classification of the entity, and such

other information as may be required by

the regulations under section 1441 or by

the form or accompanying instructions

in addition to, or in lieu of, the

information described in this paragraph

(e)(2)(ii). A person’s permanent

residence address is an address in the

country where the person claims to be

a resident for purposes of that country’s

income tax. In the case of a certificate

furnished in order to claim a reduced

rate of withholding under an income tax

treaty, the residence must be

determined in the manner prescribed

under the applicable treaty. See

§ 1.1441–6(b)(4)(i). The address of a

financial institution with which the

beneficial owner maintains an account,

a post office box, or an address used

solely for mailing purposes is not a

residence address for this purpose. If the

beneficial owner is an individual who

does not have a tax residence in any

country, the permanent residence

address is the place at which the

beneficial owner normally resides. If the

beneficial owner is not an individual

and does not have a tax residence in any

country, then the permanent residence

address is the place at which the person

maintains its principal office. See

paragraph (e)(4)(vii) of this section for

circumstances in which a TIN is

required on a beneficial owner

withholding certificate. See paragraph

(f)(2)(i) of this section for continued

validity of certificates during a

transition period.

(3) Intermediary, flow-through, or U.S.

branch withholding certificate—(i) In

general. An intermediary withholding

certificate is a Form W–8 by which a

payee represents that it is a foreign

person and that it is an intermediary

with respect to a payment and not the

beneficial owner. A flow-through

withholding certificate is a Form W–8

furnished by a flow-through entity

under § 1.1441–5(c)(2) or (3) for a

partnership or under § 1.1441–5(e) for a

foreign estate or trust. See paragraph

(c)(6)(ii)(C) of this section for a

definition of a flow-through entity. A

U.S. branch certificate is a Form W–8 by

which the payee represents that it is a

U.S. branch described in paragraph

(b)(2)(iv) (A) or (E) of this section and

that the payment is not effectively

connected with the conduct of its trade

or business in the United States. An

intermediary withholding certificate is

used by an intermediary either to make

representations regarding the status of

beneficial owners of the amount paid or

to transmit appropriate documentation

to the withholding agent. A flowthrough certificate is used by a flowthrough entity to establish its status as

a foreign person or the status of its

partners or beneficiaries, if required,

and, if applicable, to claim a reduced

rate of withholding. An intermediary

means, with respect to a payment that

it receives, a person that, for that

payment, acts as a custodian, broker,

nominee, or otherwise as an agent for

another person, regardless of whether

such other person is the beneficial

owner of the amount paid, a flowthrough entity, or another intermediary.

See paragraph (e)(4)(viii) of this section

for applicable reliance rules.

(ii) Intermediary withholding

certificate from a qualified

intermediary. An intermediary

withholding certificate from a person

representing to be a qualified

intermediary (described in paragraph

(e)(5)(ii) of this section) is valid only if

it is furnished on a Form W–8 (or an
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53437

acceptable substitute form or such other

form as the IRS may prescribe), it is

signed under penalties of perjury by an

officer of the qualified intermediary

with authority to sign for the

intermediary, its validity has not

expired, and it contains the following

information, statement, and

certifications:

(A) The name, permanent residence

address (as described in paragraph

(e)(2)(ii) of this section), and the

employer identification number of the

intermediary, and the country under the

laws of which the intermediary is

created, incorporated, or governed.

(B) A certification that the person

whose name is on the Form W–8 is not

acting for its own account and is acting

as a qualified intermediary within the

meaning of paragraph (e)(5)(ii) of this

section.

(C) A certification that the

intermediary has obtained the

appropriate certificates (such as Forms

W–8 or W–9) or other appropriate

documentation in the manner required

in its withholding agreement with the

IRS for those account holders that are

covered by the certificate and whose

assets are identified as being allocable to

the categories described in paragraph

(e)(5)(v)(B) (1) or (2) (in accordance with

paragraph (e)(5)(v) of this section or

otherwise).

(D) A certification whether the

qualified intermediary is assuming

primary withholding responsibility for

the amounts to which the certificate

relates.

(E) A statement attached to the

certificate that provides such

information as may be required by the

form and accompanying instructions,

including sufficient information for the

withholding agent to determine the

amount required to be withheld from

amounts paid to the intermediary and

reported to the IRS. See paragraph

(e)(5)(v) of this section for requirement

of a statement and rules applicable

thereto.

(F) Any other information or

certification as may be required by the

form or accompanying instructions in

addition to, or in lieu of, the

information and certifications described

in this paragraph (e)(3)(ii).

(iii) Intermediary withholding

certificate from an intermediary that is

not a qualified intermediary. An

intermediary withholding certificate

from a person that does not represent to

be a qualified intermediary within the

meaning of paragraph (e)(5)(ii) of this

section is valid only if it is furnished on

a Form W–8 (or an acceptable substitute

form, or such other form as the IRS may

prescribe), it is signed under penalties

of perjury by a person authorized to sign

for the intermediary, it contains the

information, statement, and

certifications described in this

paragraph (e)(3)(iii), its validity has not

expired, and the withholding

certificates and other appropriate

documentation for all the persons to

whom the certificate relates are attached

to the certificate. Appropriate

documentation consists of beneficial

owner withholding certificates

described in paragraph (e)(2)(i) of this

section, intermediary withholding

certificates described in paragraph

(e)(3)(i) of this section, flow-through

certificates described in § 1.1441–

5(c)(2)(iv), (3)(iii), and (e), documentary

evidence described in § 1.1441–6(b)(2)(i)

or in § 1.6049–5(c)(1) related to the

beneficial owner (or documentary

evidence described in § 1.6049–5(c)(4)

for purposes of information reporting

under chapter 61 of the Code), and other

documentation or certificate applicable

under other provisions of the Code or

regulations that certify or establish the

status of the payee or beneficial owner

as a U.S. or a foreign person. If the

intermediary is acting on behalf of

another intermediary that is not a

qualified intermediary or on behalf of a

partnership that is not a withholding

foreign partnership described in

§ 1.1441–5(c)(2)(i), then the

intermediary must attach to its own

withholding certificate the intermediary

withholding certificate or the

partnership withholding certificate to

which all the withholding certificates

and other appropriate documentation

required to be attached under this

paragraph (e)(3)(iii) or in § 1.1441–

5(c)(3)(iii) or (e) are also attached.

Nothing in this paragraph (e)(3)(iii) shall

require an intermediary to furnish

original documentation. Copies of

certificates or documentary evidence

may be passed up to the U.S.

withholding agent, in which case the

intermediary must retain the original

documentation for the same time period

that the copy is required to be retained

by the withholding agent under

paragraph (e)(4)(iii) of this section and

must provide it to the withholding agent

upon request. For purposes of this

paragraph (e)(3)(iii), a valid

intermediary withholding certificate

also includes a statement described in

§ 1.871–14(c)(2)(v) furnished in order

for interest to qualify as portfolio

interest for purposes of sections 871(h)

and 881(c) or in order for amounts

described in § 1.1441–6(b)(2)(ii) to

qualify as amounts paid to a foreign

person. The information and

certification required on a Form W–8

described in this paragraph (e)(3)(iii) (or

on an acceptable substitute form or such

other form as the IRS may prescribe) are

as follows:

(A) The name and permanent resident

address (as described in paragraph

(e)(2)(ii) of this section) of the

intermediary, and the country under the

laws of which the intermediary is

created, incorporated, or governed.

(B) A certification that the person

whose name is on the Form W–8 is not

acting for its own account and is using

the certificate as a form to transmit

withholding certificates and other

appropriate documentation for the

payment to which the form relates.

(C) If furnishing an intermediary

certificate to transmit withholding

certificates or other appropriate

documentation for more than one

person, a statement attached to the Form

W–8 that provides such information as

may be required by the form and

accompanying instructions, including

sufficient information for the

withholding agent to determine the

amount required to be withheld from

amounts paid to the intermediary. See

paragraph (e)(3)(iv) of this section for

rules applicable to such a statement.

(D) A certification either that the

attached withholding certificates and

other appropriate documentation

represent all of the persons to whom the

intermediary withholding certificate

relates or that the amounts allocable to

persons covered by the intermediary

withholding certificate and for whom

withholding certificates or other

appropriate documentation are lacking

or unreliable are separately identified.

(E) Any other information or

certification as may be required by the

form or accompanying instructions in

addition to, or in lieu of, the

information and certification described

in this paragraph (e)(3)(iii).

(iv) Information to the withholding

agent regarding assets owned by

beneficial owners, etc.—(A) General

rule. An intermediary that has not

represented that it is acting as a

qualified intermediary within the

meaning of paragraph (e)(5)(ii) of this

section must provide information

sufficient for the withholding agent to

determine the proportion of each

payment of reportable amounts (as

described in paragraph (e)(3)(vi) of this

section) that is allocable to each person

to whom the intermediary withholding

certificate relates, including persons for

whom the intermediary has not attached

a withholding certificate or other

appropriate documentation. The

withholding agent may rely on such

information in order to determine the

amount of withholding on the payment
53438 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

and how to report this payment under

chapter 3 or 61 of the Code and the

regulations thereunder. The sum of all

the proportions indicated by the

intermediary, expressed as a percentage,

must equal, but not exceed, one

hundred percent of the payment. The

information for persons for whom a

withholding certificate or other

appropriate documentation is lacking or

unreliable may be provided in the

aggregate and need not be provided

separately for each such person. The

foreign intermediary is not required to

disclose the names of the persons for

whom it collects the payment, unless it

has actual knowledge that any such

person is a U.S. person that is not an

exempt recipient. In such a case, the

intermediary must state separately the

information for such U.S. person even

though such person has not provided a

Form W–9 to the intermediary in the

manner described in paragraph (d)(2) of

this section. The information may be

furnished in any manner that the parties

choose. For example, if the withholding

agent maintains separate accounts for

different types of income or withholding

rates, the intermediary must provide

sufficient information so that the

withholding agent may allocate assets

appropriately among the relevant

accounts. If the withholding agent does

not maintain separate accounts, it may

require the intermediary to attach a

statement to the intermediary

withholding certificate under

paragraphs (e)(3)(iii)(C) and (D) of this

section providing the information

described in this paragraph (e)(3)(iv).

(B) Updating the information. The

intermediary must update the

information furnished to the

withholding agent in accordance with

paragraph (e)(3)(iv)(A) of this section as

often as is necessary in order to enable

the withholding agent to withhold at the

appropriate rate on each payment and to

report such income for purposes of

chapter 3 or 61 of the Code and sections

3402, 3405 and 3406 (and the

regulations under those provisions).

Any update of the information as

required under this paragraph

(e)(3)(iv)(B) shall be treated as an

integral part of the intermediary

withholding certificate with which it is

associated. See paragraph (e)(4)(ii)(D) of

this section regarding how changes in

the information described in this

paragraph (e)(3)(iv) may affect the

validity of withholding certificates. See

paragraph (b)(3)(v)(C) of this section for

consequences if the information is not

updated as required.

(C) Examples. The rules of paragraph

(e)(3)(iii) of this section and of this

paragraph (e)(3)(iv) are illustrated by the

following examples:

Example 1. A U.S. withholding agent, W,

pays U.S. source dividends to foreign

intermediary X who, in turn, pays to foreign

intermediary Y, who collects on behalf of

foreign beneficial owners, A and B. A and B

have each furnished a beneficial owner Form

W–8 to Y. Y must furnish to X an

intermediary Form W–8 described in

paragraph (e)(3)(iii) of this section, to which

it must attach the original or copies of A’s

and B’s Forms W–8. X, in turn, must furnish

to W its own intermediary Form W–8

described in paragraph (e)(3)(iii) of this

section, to which it must attach the original

or copies of the intermediary Form W–8

received from Y and A’s and B’s Forms W–

8.

Example 2. A foreign bank, X, acts as an

intermediary for five different persons, A, B,

C, D, and E, who each own securities from

which they receive U.S. source dividends.

The distributions are paid by a U.S. financial

institution, W, as custodian of the securities

for X. A’s, B’s, C’s, D’s, and E’s respective

claimed ownership interest in the securities

is 20-percent each. X has furnished to W an

intermediary Form W–8 described in

paragraph (e)(3)(iii) of this section, to which

it has attached a statement described in this

paragraph (e)(3)(iv) stating each of A’, B’s,

and C’s interest in the securities with respect

to which distributions are made periodically.

The respective ownership interests of D and

E are not stated separately because X has not

received a valid withholding certificate or

other appropriate documentation from D or

E. Therefore, on the statement, D’s and E’s

interest in the securities is stated in the

aggregate (i.e., 40-percent attributable to

undocumented owners). X has attached a

Form W–8 for A and documentary evidence

for B (who each claim a reduced rate of

withholding under an income tax treaty), and

a Form W–9 for C. In determining the amount

to be withheld from the amount paid to X,

W may rely on X’s intermediary Form W–8,

the allocation statement attached to the Form

W–8, and the attached Form W–8,

documentary evidence, and Form W–9 for

each of A, B, and C. Based on paragraphs

(b)(1), (b)(2)(v), (b)(2)(vii), (d)(4)(i), and

(e)(1)(ii)(A)(1) of this section, W may

withhold as follows on the payment to X: no

withholding on 20-percent of the payment on

the basis of C’s Form W–9, withholding at the

reduced treaty rate on 40-percent of the

payment on the basis of A’s Form W–8 and

B’s documentary evidence, and 30-percent on

40-percent of the payment to the

undocumented owners group formed by D

and E in accordance with the presumptions

described in paragraph (b)(3)(v)(B) of this

section (i.e., due to the lack of documentation

for D and E). Under paragraph (e)(3)(iii) of

this section, X is not required to identify D

or E to W. For purposes of making a return

under § 1.1461–1(c), W would prepare a

single Form 1042–S for the group of

undocumented owners, D and E (if the names

are undisclosed, the Form 1042–S should be

made in the name of X and state that the

return is made for unknown owners (see

§ 1.1461–1(c)(4)(iv)). Because X has not

furnished required documentation for D and

E, X does not qualify under paragraph (b)(6)

of this section for relief from an obligation to

make a report on a Form 1042–S (to the

extent D and E are presumed to be foreign

persons under paragraph (b)(3)(iii) of this

section) when X makes the payment to D and

E (however, because a full 30-percent amount

was withheld under this section, X does not

have to withhold an additional amount under

the facts of this example). In contrast, under

paragraph (b)(6) of this section, X is not

required to make a report on Form 1042–S for

its payments to A or B. Under § 1.6042–

3(b)(1)(vi), X is not required to report C’s

share of the payment on Form 1099 (unless

X has actual knowledge that W has not

reported the portion of payment allocable to

C in accordance with § 1.6042–2).

Example 3. The facts are the same as in

Example 2, except that D’s name is D

Insurance Company whom X knows is a U.S.

person. Because of D’s name, X may treat D

as an exempt recipient on an eyeball test

basis under §§ 1.6042–3(b)(1)(vii) and

1.6049–4(c)(1)(ii)(A)(1). However, even if

those facts are disclosed to W, W must

withhold 30-percent of the portion of the

payment allocable to D because W is making

a payment to a foreign person (X). Under

paragraph (b)(1) of this section, W may

reduce the rate of withholding only if it can

associate the payment with documentation

upon which it can rely to treat the beneficial

owner as a U.S. person or as a foreign person

entitled to a reduced rate of withholding.

Because X has not furnished documentation

for D, W does not have the proper

documentation with which it can associate

the payment allocable to D. Thus, insofar as

W is concerned, the portion of the payment

allocable to D is treated as a payment to an

undocumented owner that W must presume

to be a foreign person under paragraph

(b)(3)(v)(B) of this section. Accordingly,

under this paragraph (e)(3)(iv), W need not

identify the information for D separately and

can aggregate the portion of the payment

allocable to D and E. W’s reporting

requirements for the portion of the payment

allocable to D and E are the same as under

Example 2. When X makes the payment to D,

X does not benefit from the relief from

reporting under § 1.6042–3(b)(1)(vi).

However, X is not required to report the

payment to D on Form 1099 under section

6042 because, under § 1.6042–3(b)(1)(vii), X

can treat D as an exempt recipient.

(v) Withholding certificate from

certain U.S. branches. A U.S. branch

certificate is a representation by the U.S.

branch whose name is on the certificate

that the payment it receives is not

effectively connected with the conduct

of a trade or business in the United

States and that it is using the certificate

either to transmit the appropriate

documentation for the persons for

whom the branch receives the payment

(i.e., as an intermediary) or as evidence

of its agreement with the withholding

agent to be treated as a U.S. person with

respect to any payment associated with

the certificate. A U.S. branch

withholding certificate is valid only if it
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53439

is furnished on a Form W–8 (or an

acceptable substitute form, or such other

form as the IRS may prescribe), it is

signed under penalties of perjury by a

person authorized to sign for the branch,

its validity has not expired, and it

contains the information, statement, and

certifications described in this

paragraph (e)(3)(v). If the certificate is

furnished to transmit withholding

certificates and other documentation, it

must contain the information and

certifications described in paragraphs

(e)(3)(v) (A) through (C) of this section

and in paragraphs (e)(3)(iii) (C) and (D)

of this section. If the certificate is

furnished pursuant to an agreement to

treat the U.S. branch as a U.S. person,

the information and certification

required on the Form W–8 (or an

acceptable substitute form or such other

form as the IRS may prescribe) are

limited to the following—

(A) The name of the person of which

the branch is a part and the address of

the branch in the United States;

(B) A certification that the payments

associated with the certificate are not

effectively connected with the conduct

of its trade or business in the United

States; and

(C) Any other information or

certification as may be required by the

form or accompanying instructions in

addition to, or in lieu of, the

information and certification described

in this paragraph (e)(3)(v).

(vi) Reportable amounts. For purposes

of this section, the term reportable

amount means an amount subject to

withholding within the meaning of

§ 1.1441–2(a), bank deposit interest

(including original issue discount) and

similar types of deposit interest

described in section 871(i)(2)(A) or

881(d) that are from sources within the

United States, and any amount of

interest or original issue discount from

sources within the United States on

certain short-term obligations described

in section 871(g)(1)(B) or 881(a)(3). For

purposes of this paragraph (e)(3)(vi),

however, reportable amounts do not

include payments with respect to

deposits with banks and other financial

institutions that remain on deposit for a

period of two weeks or less, to amounts

of original issue discount arising from a

sale and repurchase transaction that is

completed within a period of two weeks

or less, or to amounts described in

§ 1.6049–5(b) (7), (10) or (11) (relating to

certain obligations issued in bearer

form). While short-term OID and bank

deposit interest are not subject to

withholding under chapter 3 of the

Code, such amounts may be subject to

information reporting under section

6049 if paid to a U.S. person who is not

an exempt recipient described in

§ 1.6049–4(c)(1)(ii) and to backup

withholding under section 3406 in the

absence of documentation. See

§ 1.6049–5(d)(3)(iii) for applicable

procedures when such amounts are paid

to a foreign intermediary.

(4) Applicable rules. The provisions

in this paragraph (e)(4) describe

procedures applicable to withholding

certificates on Form W–8 or Form 8233

(or a substitute form) or documentary

evidence furnished to establish foreign

status. These provisions do not apply to

Forms W–9 (or their substitutes). For

corresponding provisions regrading

Form W–9 (or a substitute form), see

section 3406 and the regulations under

that section.

(i) Who may sign the certificate. A

withholding certificate (or other

acceptable substitute) may be signed by

any person authorized to sign a

declaration under penalties of perjury

on behalf of the person whose name is

on the certificate as provided in section

6061 and the regulations under that

section (relating to who may sign

generally for an individual, estate, or

trust, which includes certain agents who

may sign returns and other documents),

section 6062 and the regulations under

that section (relating to who may sign

corporate returns), and section 6063 and

the regulations under that section

(relating to who may sign partnership

returns).

(ii) Period of validity—(A) Three-year

period. A withholding certificate

described in paragraph (e)(2)(i) of this

section, a certificate described in

§ 1.871–14(c)(2)(v) (furnished to qualify

interest as portfolio interest for purposes

of sections 871(h) and 881(c) or to

qualify amounts paid on certain

securities described in § 1.1441–

6(b)(2)(ii) as paid to a foreign person), or

documentary evidence described in

§ 1.1441–6(b)(2)(i) or in § 1.6049–5(c)(1)

shall remain valid until the earlier of the

last day of the third calendar year

following the year in which the

certificate is signed or the documentary

evidence is created or the day that a

change of circumstances occurs that

makes any information on the certificate

or documentary evidence incorrect. For

example, a certificate signed on

September 30, 1999, remains valid

through December 31, 2002, unless

circumstances change that make the

information on the form no longer

correct.

(B) Indefinite validity period.

Notwithstanding paragraph (e)(4)(ii)(A)

of this section, the following certificates

or parts of certificates shall remain valid

until the status of the person whose

name is on the certificate is changed in

a way relevant to the certificate or

circumstances change that make the

information on the certificate no longer

correct:

(1) A beneficial owner withholding

certificate described in paragraph

(e)(2)(ii) of this section that is furnished

with a TIN if the income for which such

certificate is furnished is required to be

reported under § 1.1461–1(c)(2)(i) or the

TIN furnished on the certificate is

reported to the IRS under the

procedures described in § 1.1461–1(d).

(2) A certificate described in

paragraph (e)(3)(ii) of this section

(dealing with a certificate from a person

representing to be a qualified

intermediary).

(3) A certificate described in

paragraph (e)(3)(iii) of this section

(dealing with a certificate from a person

representing to be a non-qualified

intermediary), but not including the

withholding certificates or documentary

evidence required to be attached to the

certificate.

(4) A certificate described in

paragraph (e)(3)(v) of this section

(dealing with a certificate from a person

representing to be a U.S. branch), but

not the withholding certificates or

documentary evidence required to be

attached to the certificate.

(5) A certificate described in § 1.1441–

5(c)(2)(iv) (dealing with a certificate

from a person representing to be a

withholding foreign partnership).

(6) A certificate described in § 1.1441–

5(c)(3)(iii) (dealing with a certificate

from a person representing to be a

foreign partnership that is not a

withholding foreign partnership), but

not including the withholding

certificates or documentary evidence

required to be attached to the certificate.

(7) A certificate furnished by a person

representing to be an integral part of a

foreign government (within the meaning

of § 1.892–2T(a)(2)) in accordance with

§ 1.1441–8(b), or by a person

representing to be a foreign central bank

of issue (within the meaning of § 1.861–

2(b)(4)) or the Bank for International

Settlements in accordance with

§ 1.1441–8(c)(1).

(C) Withholding certificate for

effectively connected income.

Notwithstanding paragraph

(e)(4)(ii)(B)(1) of this section, the period

of validity of a withholding certificate

furnished to a withholding agent to

claim a reduced rate of withholding for

income that is effectively connected

with the conduct of a trade or business

within the United States shall be limited

to the three-year period described in

paragraph (e)(4)(ii)(A) of this section.

(D) Change in circumstances. If a

change in circumstances makes any
53440 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

information on a certificate or other

documentation incorrect, then the

person whose name is on the certificate

or other documentation must inform the

withholding agent within 30 days of the

change and furnish a new certificate or

new documentation. A certificate or

documentation becomes invalid from

the date that the withholding agent

holding the certificate or documentation

knows or has reason to know that

circumstances affecting the correctness

of the certificate or documentation have

changed. However, a withholding agent

may choose to apply the provisions of

paragraph (b)(3)(iv) of this section

regarding the 90-day grace period as of

that date while awaiting a new

certificate or documentation or while

seeking information regarding changes,

or suspected changes, in the person’s

circumstances. If an intermediary

(including a U.S. branch described in

paragraph (b)(2)(iv)(A) of this section

that passes through certificates to a

withholding agent) or a flow-through

entity becomes aware that a certificate

or other appropriate documentation it

has furnished to the person from whom

it collects the payment is no longer

valid because of a change in the

circumstances of the person who issued

the certificate or furnished the other

appropriate documentation, then the

intermediary or flow-through entity

must notify the person from whom it

collects the payment of the change of

circumstances. It must also obtain a new

withholding certificate or new

appropriate documentation to replace

the existing certificate or documentation

whose validity has expired due to the

change in circumstances. If a beneficial

owner withholding certificate is used to

claim foreign status only (and not, also,

residence in a particular foreign country

for purposes of an income tax treaty), a

change of address is a change in

circumstances for purposes of this

paragraph (e)(4)(ii)(D) only if it changes

to an address in the United States.

Further, a change of address within the

same foreign country is not a change in

circumstances for purposes of this

paragraph (e)(4)(ii)(D). A change in the

circumstances affecting the withholding

information provided to the

withholding agent in accordance with

the provisions in paragraph (e) (3)(iv) or

(5)(v) of this section or in § 1.1441–

5(c)(3)(iv) shall terminate the validity of

the withholding certificate with respect

to the information that is no longer

reliable unless the information is

updated. A withholding agent may rely

on a certificate without having to

inquire into possible changes of

circumstances that may affect the

validity of the statement, unless it

knows or has reason to know that

circumstances have changed. A

withholding agent may require a new

certificate at any time prior to a

payment, even though the withholding

agent has no actual knowledge or reason

to know that any information stated on

the certificate has changed.

(iii) Retention of withholding

certificate. A withholding agent must

retain each withholding certificate and

other documentation for as long as it

may be relevant to the determination of

the withholding agent’s tax liability

under section 1461 and § 1.1461–1.

(iv) Electronic transmission of

information. Under procedures issued

by the IRS (see § 601.601(d)(2) of this

chapter), a withholding agent may be

permitted to receive in electronic form

the information required to be included

on a withholding certificate.

(v) Electronic confirmation of

taxpayer identifying number on

withholding certificate. The

Commissioner may prescribe

procedures in a revenue procedure (see

§ 601.601(d)(2) of this chapter) or other

appropriate guidance to require a

withholding agent to confirm

electronically with the IRS information

concerning any TIN stated on a

withholding certificate.

(vi) Acceptable substitute form. A

withholding agent may substitute its

own form instead of an official Form W–

8 or 8233 (or such other official form as

the IRS may prescribe). Such a

substitute for an official form will be

acceptable if it contains provisions that

are substantially similar to those of the

official form, it contains the same

certifications relevant to the

transactions as are contained on the

official form and these certifications are

clearly set forth, and the substitute form

includes a signature-under-penalties-ofperjury statement identical to the one

stated on the official form. The

substitute form is acceptable even if it

does not contain all of the provisions

contained on the official form, so long

as it contains those provisions that are

relevant to the transaction for which it

is furnished. For example, a

withholding agent that pays no income

for which treaty benefits are claimed

may develop a substitute form that is

identical to the official form, except that

it does not include information

regarding claim of benefits under an

income tax treaty. A withholding agent

who uses a substitute form must furnish

instructions relevant to the substitute

form only to the extent and in the

manner specified in the instructions to

the official form. A withholding agent

may refuse to accept a certificate from

a payee or beneficial owner (including

the official Form W–8 or 8233) if the

certificate is not provided the acceptable

substitute form provided by the

withholding agent. However, a

withholding agent may refuse to accept

a certificate provided by a payee or

beneficial owner only if the withholding

agent furnishes the payee or beneficial

owner with an acceptable substitute

form immediately upon receipt of an

unacceptable form or within 5 business

days of receipt of an unacceptable form

from the payee or beneficial owner. In

that case, the substitute form is

acceptable only if it contains a notice

that the withholding agent has refused

to accept the form submitted by the

payee or beneficial owner and that the

payee or beneficial owner must submit

the acceptable form provided by the

withholding agent in order for the payee

or beneficial owner to be treated as

having furnished the required

withholding certificate.

(vii) Requirement of taxpayer

identifying number. A TIN must be

stated on a withholding certificate when

required by this paragraph (e)(4)(vii). A

TIN is required to be stated on a

beneficial owner certificate if the

beneficial owner is claiming the benefit

of a reduced rate under an income tax

treaty (other than for amounts described

in § 1.1441–6(b)(2)(ii)), an exemption

from withholding because income is

effectively connected with a U.S. trade

or business, an exemption under section

871(f) for certain annuities received

under qualified plans, or an exemption

solely based on a foreign organization’s

claim of tax exempt status under section

501(c) or private foundation status.

Thus, a TIN is not required from a

foreign private foundation that is subject

to the 4-percent tax under section

4948(a) on income if that income is

otherwise exempt under the Code. In

addition, a TIN is required to be stated

on the withholding certificate from a

person representing to be a qualified

intermediary described in paragraph

(e)(5)(ii) of this section, on the

withholding certificate from a person

representing to be a withholding foreign

partnership described in § 1.1441–

5(c)(2)(i)), on the withholding certificate

from a person representing to be a

foreign trust or foreign estate, or from a

fiduciary thereof, and on the

withholding certificate from a person

representing to be a U.S. branch

described in paragraph (e)(3)(v) of this

section. A TIN is an IRS individual

taxpayer identification number, an

employer identification number, or a

social security number as described in

section 6109 and § 301.6109–1 of this
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53441

chapter, or any other identifier that the

Commissioner may designate.

(viii) Reliance rules. A withholding

agent may rely on the information and

certifications stated on withholding

certificates or other documentation

without having to inquire into the

truthfulness of this information or

certification, unless it has actual

knowledge or reason to know that the

same is untrue. In the case of amounts

described in § 1.1441–6(b)(2)(ii), a

withholding agent described in

§ 1.1441–7(b)(2)(ii) has reason to know

that the information or certifications on

a certificate are untrue only to the extent

provided in § 1.1441–7(b)(2)(ii). See

§ 1.1441–6(b)(4)(ii) for reliance on

representations regarding eligibility for

a reduced rate under an income tax

treaty. Paragraphs (e)(4)(viii) (A) and (B)

of this section provide examples of such

reliance.

(A) Classification. A withholding

agent may rely on the claim of entity

classification indicated on the

withholding certificate that it receives

from or for the beneficial owner, unless

it has actual knowledge or reason to

know that the classification claimed is

incorrect. A withholding agent may not

rely on a person’s claim of classification

other than as a corporation if the name

of the corporation indicates that the

person is a per se corporation described

in § 301.7701–2(b)(8)(i) of this chapter

unless the certificate contains a

statement that the person is a

grandfathered per se corporation

described in § 301.7701–2(b)(8) of this

chapter and that its grandfathered status

has not been terminated. In the absence

of reliable representation or information

regarding the classification of the payee

or beneficial owner, see § 1.1441–

1(b)(3)(ii) for applicable presumptions.

(B) Status of payee as an intermediary

or as a person acting for its own

account. A withholding agent may rely

on the type of certificate furnished as

indicative of the payee’s status as an

intermediary or as an owner, unless the

withholding agent has actual knowledge

or reason to know otherwise. For

example, a withholding agent that

receives a beneficial owner withholding

certificate from a foreign financial

institution may treat the institution as

the beneficial owner, unless it has

information in its records that would

indicate otherwise or the certificate

contains information that is not

consistent with beneficial owner status

(e.g., sub-account numbers or names). If

the financial institution also acts as an

intermediary, the withholding agent

may request that the institution furnish

two certificates, i.e., a beneficial owner

certificate described in paragraph

(e)(2)(i) of this section for the amounts

that it receives as a beneficial owner,

and an intermediary withholding

certificate described in paragraph

(e)(3)(i) of this section for the amounts

that it receives as an intermediary. In

the absence of reliable representation or

information regarding the status of the

payee as an owner or as an

intermediary, see paragraph (b)(3)(v)(A)

for applicable presumptions.

(ix) Certificates to be furnished for

each account unless exception applies.

Unless otherwise provided in this

paragraph (e)(4)(ix), a withholding agent

that is a financial institution with which

a customer may open an account shall

obtain withholding certificates or other

appropriate documentation on an

account-by-account basis.

(A) Coordinated account information

system in effect. A withholding agent

may rely on the withholding certificate

or other appropriate documentation

furnished by a customer for a preexisting account under any one or more

of the circumstances described in this

paragraph (e)(4)(ix)(A).

(1) A withholding agent may rely on

documentation furnished by a customer

for another account if all such accounts

are held at the same branch location.

(2) A withholding agent may rely on

documentation furnished by a customer

for an account held at another branch

location of the same withholding agent

or at a branch location of a person

related to the withholding agent if the

withholding agent and the related

person are part of a universal account

system that uses a customer identifier

that can be used to retrieve

systematically all other accounts of the

customer. See § 31.3406(c)1(c)(3)(ii) and

(iii)(C) of this chapter for an identical

procedure for purposes of backup

withholding. For purposes of this

paragraph (e)(4)(ix)(A), a withholding

agent is related to another person if it is

related within the meaning of section

267(b) or 707(b).

(3) A withholding agent may rely on

documentation furnished by a customer

for an account held at another branch

location of the same withholding agent

or at a branch location of a person

related to the withholding agent if the

withholding agent and the related

person are part of an information system

other than a universal account system

and the information system is described

in this paragraph (e)(4)(ix)(A)(3). The

system must allow the withholding

agent to easily access data regarding the

nature of the documentation, the

information contained in the

documentation, and its validity status,

and must allow the withholding agent to

easily transmit data into the system

regarding any facts of which it becomes

aware that may affect the reliability of

the documentation. The withholding

agent must be able to establish how and

when it has accessed the data regarding

the documentation and, if applicable,

how and when it has transmitted data

regarding any facts of which it became

aware that may affect the reliability of

the documentation. In addition, the

withholding agent or the related party

must be able to establish that any data

it has transmitted to the information

system has been processed and

appropriate due diligence has been

exercised regarding the validity of the

documentation.

(B) Family of mutual funds. An

interest in a mutual fund that has a

common investment advisor or common

principal underwriter with other mutual

funds (within the same family of funds)

may, in the discretion of the mutual

fund, be represented by one single

withholding certificate where shares are

acquired or owned in any of the funds.

See § 31.3406(h)–3(a)(2) of this chapter

for an identical procedures for purposes

of backup withholding.

(C) Special rule for brokers. A

withholding agent may rely on the

certification of a broker acting as the

agent of a beneficial owner that the

broker holds a valid beneficial owner

withholding certificate described in

paragraph (e)(2)(i) of this section or

other documentation for that beneficial

owner. The certification must contain

the date of expiration of the certificate

or documentation and be in writing or

in electronic form. For purposes of this

paragraph (e)(4)(ix)(C), the term broker

shall have the same meaning as in

§ 31.3406(h)–3(d) of this chapter.

(5) Qualified intermediaries—(i)

General rule. A qualified intermediary,

as defined in paragraph (e)(5)(ii) of this

section, may furnish an intermediary

withholding certificate to a withholding

agent. Such a certificate certifies on

behalf of other persons (such as

beneficial owners, intermediaries, flowthrough entities described in § 1.1441–

5, or U.S. payees) for the purpose of

claiming and verifying reduced rates of

withholding under section 1441 or 1442

and for the purpose of reporting and

withholding under other provisions of

the Code, such as the provisions under

chapter 61 of the Code and section 3406

(and the regulations under those

provisions). Furnishing such a

certificate is in lieu of transmitting to a

withholding agent withholding

certificates or other appropriate

documentation for the persons for

whom the qualified intermediary

receives the payment or for its

shareholders (in the case of claims of
53442 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

benefits under an income tax treaty by

a reverse hybrid entity). Although the

qualified intermediary is required to

obtain withholding certificates or other

appropriate documentation from

beneficial owners, payees, or

shareholders pursuant to its agreement

with the IRS, it is not required to attach

such documentation to the intermediary

withholding certificate. However, the

qualified intermediary must disclose the

names of those U.S. persons for whom

the qualified intermediary receives

reportable payments (within the

meaning of paragraph (e)(3)(vi) of this

section) and who are not exempt

recipients (as defined in § 1.6049–

4(c)(1)(ii) or an applicable provision

under section 6041, 6042, 6045, or

6050N), irrespective of local secrecy

laws. A person may claim qualified

intermediary status before an agreement

is executed with the IRS if it has applied

for such status and the IRS authorizes

such status on an interim basis under

such procedures as the IRS may

prescribe.

(ii) Definition of qualified

intermediary. With respect to a payment

to a foreign person, the term qualified

intermediary means a person that is a

party to a withholding agreement with

the IRS and such person is—

(A) A foreign financial institution or

a foreign clearing organization (as

defined in § 1.163–5(c)(2)(i)(D)(8),

without regard to the requirement that

the organization hold obligations for

members), other than a U.S. branch or

U.S. office of such institution or

organization;

(B) A foreign branch or office of a U.S.

financial institution or a foreign branch

or office of a U.S. clearing organization

(as defined in § 1.163–5(c)(2)(i)(D)(8),

without regard to the requirement that

the organization hold obligations for

members);

(C) A foreign corporation for purposes

of presenting claims of benefits under

an income tax treaty on behalf of its

shareholders; or

(D) Any other person acceptable to the

IRS.

(iii) Withholding agreement—(A) In

general. The IRS may, upon request,

enter into a withholding agreement with

a foreign person described in paragraph

(e)(5)(ii) of this section pursuant to such

procedures as the IRS may prescribe in

published guidance (see § 601.601(d)(2)

of this chapter). Under such

withholding agreement, a qualified

intermediary shall be generally subject

to the applicable withholding and

reporting provisions applicable to

withholding agents and payors under

chapters 3 and 61 of the Code, and

section 3406, and the regulations under

those provisions, and other withholding

provisions of the Code, except to the

extent provided under the agreement. A

withholding agreement may apply to the

entity as a whole or to certain specified

branches of the institution. The

determination of the scope of the

agreement shall be made on a branchby-branch basis.

(B) Terms of the withholding

agreement. Generally, the agreement

shall specify the type of certification

and documentation upon which the

qualified intermediary may rely to

ascertain the nationality and residence

of beneficial owners and U.S. payees

who receive payments collected by the

qualified intermediary and, if necessary,

entitlement to the benefits of a reduced

rate under an income tax treaty. It shall

specify if the qualified intermediary

may assume primary withholding

responsibility in accordance with

paragraph (e)(5)(iv) of this section. It

shall specify the extent to which

applicable return filing and information

reporting requirements are modified so

that, in appropriate cases, the qualified

intermediary may report payments to

the IRS on an aggregated basis, without

having to disclose the identity of

individual customers. However, the

qualified intermediary may be required

to provide to the IRS the name and

address of those foreign customers who

benefit from a reduced rate under an

income tax treaty pursuant to the

qualified intermediary arrangement for

purposes of verifying entitlement to

such benefits, particularly under an

applicable Limitation on Benefits

provision. Under the agreement, a

qualified intermediary may agree to act

as an acceptance agent to perform the

duties described in § 301.6109–

1(d)(3)(iv)(A) of this chapter. The

agreement may specify the manner in

which applicable procedures for

adjustments for underwithholding and

overwithholding, including refund

procedures apply in the context of a

qualified intermediary arrangement and

the extent to which applicable

procedures may be modified. In

particular, a withholding agreement

may allow a qualified intermediary to

claim refunds of overwithheld amounts

on behalf of its customers. If relevant,

the agreement shall specify the manner

in which the qualified intermediary may

deal with payments to other

intermediaries. In addition, the

agreement must specify the manner in

which the IRS will verify compliance

with the agreement. In appropriate

cases, the IRS may agree to rely on

audits performed by an intermediary’s

approved auditor. In such a case, the

IRS’ audit may be limited to the audit

of the auditor’s records (including work

papers of the auditor and reports

prepared by the auditor indicating the

methodology employed to verify the

entity’s compliance with the

agreement). For this purpose, the

agreement shall specify which auditor

or class of auditors is approved.

Generally, an auditor will be approved

if it is subject to regulatory supervision

under the laws of the country in which

a significant part of the intermediary

activities under the agreement are

expected to occur, its internal

procedures require it to verify that the

intermediary complies with the terms of

the withholding agreement and to report

non-compliance findings under the

agreement in the same manner as it is

required to report other findings of noncompliance with applicable local laws

and regulatory requirements, and its

relevant records (i.e., work papers and

reports) are available to the IRS. The

agreement must include provisions for

the assessment and collection of tax in

the event that failure to comply with the

terms of the agreement results in the

failure by the withholding agent or the

qualified intermediary to withhold and

deposit the required amount of tax.

Further, the agreement shall specify the

procedures by which deposits of

amounts withheld are to be deposited,

if different from normally applicable

deposit procedures under the Code and

applicable regulations. The agreement

shall also specify the assets that the

qualified intermediary has in the United

States or alternative means of collection,

if necessary. To determine the terms of

any particular withholding agreement,

the IRS will consider appropriate factors

including whether or not the foreign

person agrees to assume primary

responsibility as a withholding agent,

the type of local know-your-customer

laws and practices to which it is subject,

the extent and nature of supervisory and

regulatory control exercised under the

laws of the foreign country over the

foreign person, the volume of

investments in U.S. securities

(determined in dollar amounts and

number of account holders), and

financial condition of the foreign

person.

(iv) Assignment of primary

withholding responsibility. A

withholding agent making a payment to

a qualified intermediary must presume

that the withholding agent has full

withholding responsibility for that

payment, except as otherwise specified

in this paragraph (e)(5)(iv). For this

purpose, withholding responsibility

means the obligation to withhold as
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53443

required under the provisions of section

1441, 1442, or 1443, and the regulations

under those sections, and the related

reporting obligations under § 1.1461–

1(b)(2)(ii) and (c)(4)(ii) for payments

identified or treated as made to foreign

persons. Withholding responsibility also

means obligations imposed on payors

under chapter 61 of the Code (and the

regulations under those provisions) and,

if applicable, under section 3405 or

3406 (and the regulations under those

sections). A qualified intermediary that

assumes primary withholding

responsibility vis-a-vis a withholding

agent must assume such responsibility

for all payments made to any one

account. Any qualified intermediary

may agree with the withholding agent to

assume primary withholding

responsibility, but only if expressly

permitted to do so under its agreement

with the IRS. Generally, reporting or

withholding liability arising from a

payment to a U.S. person (or treated as

or presumed to be made to a U.S.

person) under any provision of the Code

or applicable regulations thereunder

may not be assigned to a qualified

intermediary except where the qualified

intermediary is a foreign branch of a

U.S. financial institution or except to

the extent that the qualified

intermediary has a branch in the United

States and establishes to the satisfaction

of the IRS that its U.S. branch can

adequately fulfill the qualified

intermediary’s obligations on behalf of

the qualified intermediary regarding

information reporting under chapter 61

of the Code and the regulations under

the applicable provisions of that chapter

and, if necessary, backup withholding

under section 3406 and the regulations

under that section (even though the U.S.

branch is not a qualified intermediary).

(v) Information to withholding agent

regarding applicable withholding

rates—(A) General rule. The qualified

intermediary must separate the assets

that generate payments of reportable

amounts (as described in paragraph

(e)(3)(vi) of this section) that are

associated with its withholding

certificate furnished to the withholding

agent into the categories described in

paragraph (e)(5)(v)(B) of this section,

and provide that information to the

withholding agent so that the

withholding agent may determine the

applicable withholding rate applicable

to each category. The information may

be furnished in any manner that the

parties choose. For example, if the

withholding agent maintains separate

accounts for each category of assets

described in paragraph (e)(5)(v)(B) of

this section, the intermediary must

provide information sufficient for the

withholding agent to allocate assets

appropriately among the various

accounts. If the withholding agent does

not maintain separate accounts, it may

require the intermediary to attach a

statement to the intermediary

withholding certificate under paragraph

(e)(3)(ii)(E) of this section providing the

information described in this paragraph

(e)(5)(v).

(B) Categories of assets. A payment of

a reportable amount (as defined in

paragraph (e)(3)(vi) of this section) must

be associated with one of the three

categories of assets set forth in

paragraphs (e)(5)(v)(B) (1) through (3) of

this section and may be associated with

only one of these three categories.

Additional or different categories of

assets may be specified, however, under

procedures prescribed by the IRS (see

§ 602.602–1(d) of this chapter) or in the

qualified intermediary agreement. No

information is required regarding assets

that do not generate a reportable amount

described in paragraph (b)(3)(vi) of this

section. The information provided to the

withholding agent, and any update

thereof, shall be considered an integral

part of the intermediary withholding

certificate. The three categories of assets

required to be identified to the

withholding agent are as follows:

(1) The first category of assets consists

of assets that are associated with nonU.S. payees to which the intermediary

certificate relates, and the applicable

withholding rate. If different

withholding rates apply, the

withholding agent must indicate the

applicable rate for each class of nonU.S. payees to which different

withholding rates apply and the assets

associated with each class. In the case

of a qualified intermediary that has

assumed primary withholding

responsibility, the intermediary must

simply certify the amount of assets for

which it assumes primary withholding

responsibility because they are assets for

which it holds the appropriate

documentation and are not described in

the other two categories.

(2) The second category of assets

consists of assets that are associated

with all U.S. payees to which the

certificate relates. The qualified

intermediary must furnish a Form W–9

(or an acceptable substitute form) for

each U.S. payee described in paragraph

(d)(2) of this section or, in the absence

of a Form W–9, the name and address

of the U.S. payee or such information it

has available regarding the payee. The

identity of U.S. payees described in

paragraph (d)(3) of this section need not

be disclosed to the withholding agent.

(3) The third category of assets

consists of assets that are associated

with payees for whom the qualified

intermediary holds no documentation,

or holds documentation that it knows or

has reason to know is unreliable and for

which it has no actual knowledge that

the payees are U.S. persons. A qualified

intermediary that has assumed primary

withholding responsibility need not

furnish information regarding this

category of assets.

(C) Updating the information. The

intermediary must update the

information furnished to the

withholding agent in accordance with

this paragraph (e)(5)(v) as often as is

necessary in order to enable the

withholding agent to withhold at the

appropriate rate on each payment and to

report such income for purposes of

chapter 3 or 61 of the Code and sections

3402, 3405 and 3406 (and the

regulations under those provisions). See

paragraph (e)(4)(ii)(D) of this section

regarding how changes in the

information affect the validity of a

withholding certificate. See § 1.1441–

1(b)(3)(v)(C) for consequences if the

information is not updated as required.

(f) Effective date—(1) In general. This

section applies to payments made after

December 31, 1998.

(2) Transition rules—(i) Special rules

for existing documentation. For

purposes of paragraphs (d)(3) and

(e)(2)(i) of this section, a withholding

agent that on December 31, 1998, holds

a Form W–8, 8233, 1001, 4224, 1078, or

a statement described in § 1.1441–5 in

effect prior to January 1, 1999 (see

§ 1.1441–5 as contained in 26 CFR part

1, revised April 1, 1997) under the

regulations in effect prior to January 1,

1999 (see 26 CFR parts 1 and 35a,

revised April 1, 1997), that is a valid

certificate or statement as determined

under those regulations may treat the

certificate or statement as a valid

withholding certificate until its validity

expires under those regulations or, if

earlier, until December 31, 1999.

Further, the validity of a withholding

certificate or statement that is dated

prior to January 1, 1998, is valid on

January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (f)(2)(i), however,

does not apply to extend the validity

period of a withholding certificate that

expires in 1998 solely by reason of

changes in the circumstances of the

person whose name is on the certificate.

Notwithstanding the three preceding

sentences, a withholding agent may

choose to not take advantage of the
53444 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

transition rule in this paragraph (f)(2)(i)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

(ii) Lack of documentation for past

years. A taxpayer may elect to apply the

provisions of paragraphs (b)(7)(i)(B), (ii),

and (iii) of this section, dealing with

liability for failure to obtain

documentation timely, to all of its open

tax years, including tax years that are

currently under examination by the IRS.

The election is made by simply taking

action under those provisions in the

same manner as the taxpayer would take

action for payments made after

December 31, 1998.

§ 1.1441–2 Amounts subject to

withholding.

(a) In general. For purposes of the

regulations under chapter 3 of the

Internal Revenue Code (Code), the term

amounts subject to withholding means

amounts from sources within the United

States that constitute either fixed or

determinable annual or periodical

income described in paragraph (b) of

this section or other amounts subject to

withholding described in paragraph (c)

of this section. For purposes of this

paragraph (a), an amount shall not be

treated as not being from sources within

the United States merely because the

source of the amount cannot be

determined at the time of payment. See

§ 1.1441–3(d)(1) for determining the

amount to be withheld from a payment

in the absence of information at the time

of payment regarding the source of the

amount. Amounts subject to

withholding include amounts that are

not fixed or determinable annual or

periodical income and upon which

withholding is specifically required

under a provision of this section or

another section of the regulations under

chapter 3 of the Code (such as corporate

distributions that do not constitute

dividend income upon which

withholding is required under § 1.1441–

3(c)(1)). Amounts subject to withholding

do not include amounts described in

§ 1.1441–1(b)(4)(i) to the extent they

involve interest on obligations in bearer

form or on foreign-targeted registered

obligations (but, in the case of a foreigntargeted registered obligation, only to

the extent of those amounts paid to a

registered owner that is a financial

institution within the meaning of

section 871(h)(5)(B)), amounts described

in § 1.1441–1(b)(4)(ii) (dealing with

bank deposit interest and similar types

of interest (including original issue

discount) described in section

871(i)(2)(A) or 881(d)), amounts

described in § 1.1441–1(b)(4)(iv)

(dealing with interest or original issue

discount on certain short-term

obligations described in section

871(g)(1)(B) or 881(a)(3)), and amounts

described in § 1.1441–1(b)(4)(xx)

(dealing with income from certain

gambling winnings exempt from tax

under section 871(j)).

(b) Fixed or determinable annual or

periodical income—(1) In general—(i)

Definition. For purposes of chapter 3 of

the Code and the regulations

thereunder, fixed or determinable

annual or periodical income is all

income included in gross income under

section 61 (including original issue

discount), except for the items specified

in paragraph (b)(2) of this section.

Therefore, items of U.S. source income

that are excluded from gross income

under any provision of law without

regard to the identity of the holder, such

as interest excluded from gross income

under section 103(a), are not fixed or

determinable annual or periodical

income. See § 1.306–3(h) for treating

income from the disposition of section

306 stock as fixed or determinable

annual or periodical income.

(ii) Manner of payment. The term

fixed or determinable annual or

periodical is merely descriptive of the

character of a class of income. If an item

of income falls within the class of

income contemplated in the statute and

described in paragraph (a) of this

section, it is immaterial whether

payment of that item is made in a series

of payments or in a single lump sum.

Further, the income need not be paid

annually if it is paid periodically; that

is to say, from time to time, whether or

not at regular intervals. The fact that a

payment is not made annually or

periodically does not, however, prevent

it from being fixed or determinable

annual or periodical income (e.g., a

lump sum payment). In addition, the

fact that the length of time during which

the payments are to be made may be

increased or diminished in accordance

with someone s will or with the

happening of an event does not

disqualify the payment as determinable

or periodical. For this purpose, the

share of the fixed or determinable

annual or periodical income of an estate

or trust from sources within the United

States which is required to be

distributed currently, or which has been

paid or credited during the taxable year,

to a nonresident alien beneficiary of

such estate or trust constitutes fixed or

determinable annual or periodical

income.

(iii) Determinability of amount. An

item of income is fixed when it is to be

paid in amounts definitely predetermined. An item of income is

determinable if the amount to be paid is

not known but there is a basis of

calculation by which the amount may

be ascertained at a later time. For

example, interest is determinable even if

it is contingent in that its amount

cannot be determined at the time of

payment of an amount with respect to

a loan because the calculation of the

interest portion of the payment is

contingent upon factors that are not

fixed at the time of the payment. For

purposes of this section, an amount of

income does not have to be determined

at the time that the payment is made in

order to be determinable. An amount of

income described in paragraph (a) of

this section which the withholding

agent knows is part of a payment it

makes but which it cannot calculate

exactly at the time of payment, is

nevertheless determinable if the

determination of the exact amount

depends upon events expected to occur

at a future date. In contrast, a payment

which may be income in the future

based upon events that are not

anticipated at the time the payment is

made is not determinable. For example,

loan proceeds may become income to

the borrower when and to the extent the

loan is canceled without repayment.

While the cancellation of the debt is

income to the borrower when it occurs,

it is not determinable at the time the

loan proceeds are disbursed to the

borrower if the lack of repayment

leading to the cancellation of part or all

of the debt was not anticipated at the

time of disbursement. The fact that the

source of an item of income cannot be

determined at the time that the payment

is made does not render a payment not

determinable. See § 1.1441–3(d)(1) for

determining the amount to be withheld

from a payment in the absence of

information at the time of payment

regarding the source of the amount.

(2) Exceptions. For purposes of

chapter 3 of the Code and the

regulations thereunder, the items of

income described in this paragraph

(b)(2) are not fixed or determinable

annual or periodical income—

(i) Gains derived from the sale of

property (including market discount

and option premiums), except for gains

described in paragraph (b)(3) or (c) of

this section;

(ii) Insurance premiums within the

meaning of section 4372 paid to a

foreign insurer or reinsurer; and

(iii) Any other income that the

Internal Revenue Service (IRS) may

determine, in published guidance (see

§ 601.601(d)(2) of this chapter), is not

fixed or determinable annual or

periodical income.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53445

(3) Original issue discount—(i)

General rule. An amount representing

original issue discount is fixed or

determinable annual or periodical

income that is subject to withholding to

the extent provided in this paragraph

(b)(3) if not otherwise excluded under

paragraph (a) of this section. Under

sections 871(a)(1)(C) and 881(a)(3), an

amount of original issue discount is

subject to tax to a foreign beneficial

owner of an obligation carrying original

issue discount upon a taxable sale or

exchange of the obligation or when a

payment is made on such obligation.

The amount taxable is the amount of

original issue discount that accrued

while the foreign person held the

obligation up to the time that the

obligation is sold or exchanged or that

a payment is made on the obligation,

reduced by any amount of original issue

discount that was taken into account

prior to that time (due to a payment

made on the obligation). In the case of

a taxable event due to a payment made

on the obligation, the tax due on the

amount of taxable original issue

discount may not exceed the payment

less the tax imposed thereon. A person

who is a withholding agent with respect

to a payment that, under section

871(a)(1)(C) or 881(a)(3), is taxable to a

foreign person holding or disposing of

an original issue discount obligation

must withhold to the extent provided in

this paragraph (b)(3).

(ii) Amounts actually known to the

withholding agent. A withholding agent

must withhold on the taxable amount of

original issue discount to the extent that

it has actual knowledge of the

proportion of the payment that is

taxable to the beneficial owner under

section 871(a)(1)(C) or 881(a)(3)(A). A

withholding agent has actual knowledge

if it knows how long the beneficial

owner has held the obligation, the terms

of the obligation, and the extent to

which the beneficial owner purchased

the obligation at a premium. A

withholding agent is treated as having

knowledge if the information is

reasonably available. The information is

not considered reasonably available if

the withholding agent does not have a

direct customer relationship with the

foreign beneficial owner or such other

person who has actual knowledge of the

facts relevant to the determination of the

amount taxable to the foreign beneficial

owner, and has no access to such

information in the ordinary course of its

business due to the manner in which

the obligation is held (e.g., in street

name or through intermediaries). In the

case of a withholding agent maintaining

a direct account relationship with the

beneficial owner, knowledge regarding

the beneficial owner’s holding period

and acquisition premium is considered

to be reasonably available to the

withholding agent. A withholding agent

may rely on the most recently published

List of Original Issue Discount

Instruments (IRS Publication 1212

(available from the IRS Forms

Distribution Centers) or similar list)

published by the IRS in order to

determine the amount of taxable OID in

any particular transaction.

(iii) Amounts for which certain

documentation is not furnished.

Notwithstanding lack of knowledge

(within the meaning of paragraph

(b)(3)(ii) of this section), withholding is

required on the entire amount of stated

interest, if any, and original issue

discount on the obligation as

determined as of the date of original

issue if the withholding agent, pursuant

to the provisions in § 1.1441–1(b)(3),

treats the payment as made to a foreign

payee because it cannot reliably

associate the payment with

documentation and the amount would

qualify as portfolio interest if the

withholding agent held documentation

described in § 1.871–14(c)(2). A

withholding agent may rely on the most

recently published List of Original Issue

Discount Instruments (IRS Publication

1212 (available from the IRS Forms

Distribution Centers) or similar list)

published by the IRS in order to

determine the amount of taxable OID in

any particular transaction. See § 1.1441–

1(b)(8) for adjustments to any amount

that has been overwithheld.

(iv) Exceptions to withholding. The

obligation to withhold under this

paragraph (b)(3) shall apply only to

obligations issued after December 31,

1998, and payable more than 183 days

from the date of original issue. Any

exemption from withholding pursuant

to this paragraph (b)(3) applies without

a requirement that documentation be

furnished to the withholding agent.

However, documentation may have to

be furnished for purposes of the

information reporting provisions under

section 6049 and backup withholding

under section 3406. See § 1.6049–5(b)

(7) through (15).

(4) Securities lending transactions

and equivalent transactions. See

§§ 1.871–7(b)(2) and 1.881–2(b)(2)

regarding the character of substitute

payments as fixed and determinable

annual or periodical income. Such

amounts constitute income subject to

withholding to the extent they are from

sources within the United States, as

determined under section §§ 1.861–

2(a)(7) and 1.861–3(a)(6). See §§ 1.6042–

3(a)(2) and 1.6049–5(a)(5) for reporting

requirements applicable to substitute

dividend and interest payments,

respectively.

(c) Other income subject to

withholding. Withholding is also

required on the following items of

income—

(1) Gains described in sections 631 (b)

or (c), relating to treatment of gain on

disposal of timber, coal, or domestic

iron ore with a retained economic

interest; and

(2) Gains subject to the 30-percent tax

under section 871(a)(1)(D) or 881(a)(4),

relating to contingent payments

received from the sale or exchange of

patents, copyrights, and similar

intangible property.

(d) Exceptions to withholding where

no money or property is paid or lack of

knowledge—(1) General rule. A

withholding agent who is not related to

the recipient or beneficial owner has an

obligation to withhold under section

1441 only to the extent that, at any time

between the date that the obligation to

withhold would arise (but for the

provisions of this paragraph (d)) and the

due date for the filing of return on Form

1042 (including extensions) for the year

in which the payment occurs, it has

control over, or custody of money or

property owned by the recipient or

beneficial owner from which to

withhold an amount and has knowledge

of the facts that give rise to the payment.

The exemption from the obligation to

withhold under this paragraph (d) shall

not apply, however, to distributions

with respect to stock or if the lack of

control or custody of money or property

from which to withhold is part of a prearranged plan known to the withholding

agent to avoid withholding under

section 1441, 1442, or 1443. For

purposes of this paragraph (d), a

withholding agent is related to the

recipient or beneficial owner if it is

related within the meaning of section

482. Any exemption from withholding

pursuant to this paragraph (d) applies

without a requirement that

documentation be furnished to the

withholding agent. However,

documentation may have to be

furnished for purposes of the

information reporting provisions under

chapter 61 of the Code and backup

withholding under section 3406. The

exemption from withholding under this

paragraph (d) is not a determination that

the amounts are not fixed or

determinable annual or periodical

income, nor does it constitute an

exemption from reporting the amount

under § 1.1461–1 (b) and (c).

(2) Cancellation of debt. A lender of

funds who forgives any portion of the

loan is deemed to have made a payment
53446 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

of income to the borrower under § 1.61–

12 at the time the event of forgiveness

occurs. However, based on the rules of

paragraph (d)(1) of this section, the

lender shall have no obligation to

withhold on such amount to the extent

that it does not have custody or control

over money or property of the borrower

at any time between the time that the

loan is forgiven and the due date

(including extensions) of the Form 1042

for the year in which the payment is

deemed to occur. A payment received

by the lender from the borrower in

partial settlement of the debt obligation

does not, for this purpose, constitute an

amount of money or property belonging

to the borrower from which the

withholding tax liability can be

satisfied.

(3) Satisfaction of liability following

underwithholding by withholding agent.

A withholding agent who, after failing

to withhold the proper amount from a

payment, satisfies the underwithheld

amount out of its own funds may cause

the beneficial owner to realize income

to the extent of such satisfaction or may

be considered to have advanced funds

to the beneficial owner. Such

determination depends upon the

contractual arrangements governing the

satisfaction of such tax liability (e.g.,

arrangements in which the withholding

agent agrees to pay the amount due

under section 1441 for the beneficial

owner) or applicable laws governing the

transaction. If the satisfaction of the tax

liability is considered to constitute an

advance of funds by the withholding

agent to the beneficial owner and the

withholding agent fails to collect the

amount from the beneficial owner, a

cancellation of indebtedness may result,

giving rise to income to the beneficial

owner under § 1.61–12. While such

income is annual or periodical fixed or

determinable, the withholding agent

shall have no liability to withhold on

such income to the extent the

conditions set forth in paragraphs (d) (1)

and (2) of this section are satisfied with

respect to this income. Contrast the

rules of this paragraph (d)(3) with the

rules in § 1.1441–3(f)(1) dealing with a

situation in which the satisfaction of the

beneficial owner’s tax liability itself

constitutes additional income to the

beneficial owner. See, also, § 1.1441–

3(c)(2)(ii)(B) for a special rule regarding

underwithholding on corporate

distributions due to underestimating an

amount of earnings and profits.

(e) Payment—(1) General rule. A

payment is considered made to a person

if that person realizes income whether

or not such income results from an

actual transfer of cash or other property.

For example, realization of income from

cancellation of debt results in a deemed

payment. A payment is considered

made when the amount would be

includible in the income of the

beneficial owner under the U.S. tax

principles governing the cash basis

method of accounting. A payment is

considered made whether it is made

directly to the beneficial owner or to

another person for the benefit of the

beneficial owner (e.g., to the agent of the

beneficial owner). Thus, a payment of

income is considered made to a

beneficial owner if it is paid in complete

or partial satisfaction of the beneficial

owner’s debt to a creditor. In the event

of a conflict between the rules of this

paragraph (e)(1) governing whether a

payment has occurred and its timing

and the rules of § 31.3406(a)–4 of this

chapter, the rules in § 31.3406(a)–4 of

this chapter shall apply to the extent

that the application of section 3406 is

relevant to the transaction at issue.

(2) Income allocated under section

482. A payment is considered made to

the extent income subject to

withholding is allocated under section

482. Further, income arising as a result

of a secondary adjustment made in

conjunction with a reallocation of

income under section 482 from a foreign

person to a related U.S. person is

considered paid to a foreign person

unless the taxpayer to whom the income

is reallocated has entered into a

repatriation agreement with the IRS and

the agreement eliminates the liability for

withholding under this section. For

purposes of determining the liability for

withholding, the payment of income is

deemed to have occurred on the last day

of the taxable year in which the

transactions that give rise to the

allocation of income and the secondary

adjustments, if any, took place.

(3) Blocked income. Income is not

considered paid if it is blocked under

executive authority, such as the

President’s exercise of emergency power

under the Trading with the Enemy Act

(50 U.S.C. App. 5), or the International

Emergency Economic Powers Act (50

U.S.C. 1701 et seq). However, on the

date that the blocking restrictions are

removed, the income that was blocked

is considered constructively received by

the beneficial owner (and therefore paid

for purposes of this section) and subject

to withholding under § 1.1441–1. Any

exemption from withholding pursuant

to this paragraph (e)(3) applies without

a requirement that documentation be

furnished to the withholding agent.

However, documentation may have to

be furnished for purposes of the

information reporting provisions under

chapter 61 of the Code and backup

withholding under section 3406. The

exemption from withholding granted by

this paragraph (e)(3) is not a

determination that the amounts are not

fixed or determinable annual or

periodical income.

(4) Special rules for dividends. For

purposes of sections 1441 and 6042, in

the case of stock for which the record

date is earlier than the payment date,

dividends are considered paid on the

payment date. In the case of a corporate

reorganization, if a beneficial owner is

required to exchange stock held in a

former corporation for stock in a new

corporation before dividends that are to

be paid with respect to the stock in the

new corporation will be paid on such

stock, the dividend is considered paid

on the date that the payee or beneficial

owner actually exchanges the stock and

receives the dividend. See § 31.3406(a)–

4(a)(2) of this chapter.

(5) Certain interest accrued by a

foreign corporation. For purposes of

sections 1441 and 6049, a foreign

corporation shall be treated as having

made a payment of interest as of the last

day of the taxable year if it has made an

election under § 1.884–4(c)(1) to treat

accrued interest as if it were paid in that

taxable year.

(6) Payments other than in U.S.

dollars. For purposes of section 1441, a

payment includes amounts paid in a

medium other than U.S. dollars. See

§ 1.1441–3(e) for rules regarding the

amount subject to withholding in the

case of such payments.

(f) Effective date. This section applies

to payments made after December 31,

1998.

Par. 8. Section 1.1441–3 is amended

by:

1. Revising the section heading, and

paragraphs (a) through (f) and (h).

2. Removing paragraphs (g) and (i).

3. Redesignating paragraph (j) as

paragraph (g).

4. Removing the language ‘‘(j)’’ and

adding ‘‘(g)’’ in its place in the fourth

sentence of newly designated paragraph

(g)(1) and in the first sentence of newly

designated paragraph (g)(2).

5. Removing the language ‘‘§ 1.1441–

7(d)’’ in the last sentence of newly

designated paragraph (g)(1) and adding

‘‘§ 1.1441–7(f)’’ in its place.

6. Removing the authority citation at

the end of the section.

The revisions read as follows:

§ 1.1441–3 Determination of amounts to be

withheld.

(a) Withholding on gross amount.

Except as otherwise provided in

regulations under section 1441, the

amount subject to withholding under

§ 1.1441–1 is the gross amount of

income subject to withholding that is
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53447

paid to a foreign person. The gross

amount of income subject to

withholding may not be reduced by any

deductions, except to the extent that one

or more personal exemptions are

allowed as provided under § 1.1441–

4(b)(6).

(b) Withholding on payments on

certain obligations—(1) Withholding at

time of payment of interest. When

making a payment on an interestbearing obligation, a withholding agent

must withhold under § 1.1441–1 upon

the gross amount of stated interest

payable on the interest payment date,

regardless of whether the payment

constitutes a return of capital or the

payment of income within the meaning

of section 61. To the extent an amount

was withheld on an amount of capital

rather than interest, see the rules for

adjustments, refunds, or credits under

§ 1.1441–1(b)(8).

(2) No withholding between interest

payment dates—(i) In general. A

withholding agent is not required to

withhold under § 1.1441–1 upon

interest accrued on the date of a sale of

debt obligations when that sale occurs

between two interest payment dates

(even though the amount is treated as

interest under § 1.61–7 (c) or (d) and is

subject to tax under section 871 or 881).

See § 1.6045–1(c) for reporting

requirements by brokers with respect to

sale proceeds. See § 1.61–7(c) regarding

the character of payments received by

the acquirer of an obligation subsequent

to such acquisition (that is, as a return

of capital or interest accrued after the

acquisition). Any exemption from

withholding pursuant to this paragraph

(b)(2)(i) applies without a requirement

that documentation be furnished to the

withholding agent. However,

documentation may have to be

furnished for purposes of the

information reporting provisions under

section 6045 or 6049 and backup

withholding under section 3406. The

exemption from withholding granted by

this paragraph (b)(2) is not a

determination that the accrued interest

is not fixed or determinable annual or

periodical income under section 871(a)

or 881(a) nor does it constitute an

exemption from reporting under

§ 1.1461–1 (b) and (c) the amount of

accrued interest paid.

(ii) Anti-abuse rule. The exemption in

paragraph (b)(2)(i) of this section does

not apply if the sale of securities is part

of a plan the principal purpose of which

is to avoid tax by selling and

repurchasing securities and the

withholding agent has actual knowledge

or reason to know of such plan.

(c) Corporate distributions—(1)

General rule. A corporation making a

distribution with respect to its stock or

any intermediary (described in

§ 1.1441–1(e)(3)(i)) making a payment of

such a distribution is required to

withhold under section 1441, 1442, or

1443 on the entire amount of the

distribution, unless it elects to reduce

the amount of withholding under the

provisions of paragraph (c)(2) of this

section. The exemption from

withholding provided by this paragraph

(c) applies without any requirement to

furnish documentation to the

withholding agent. However,

documentation may have to be

furnished for purposes of the

information reporting provisions under

section 6042 or 6045 and backup

withholding under section 3406. The

exemption from withholding granted by

this paragraph (c) does not constitute a

determination that the exempted

amounts are not fixed or determinable

annual or periodical income under

sections 871(a) or 881(a) nor does it

constitute an exemption from reporting

under § 1.1461–1 (b) and (c) the amount

of the distribution.

(2) Exception to withholding on

distributions—(i) In general. An election

described in paragraph (c)(1) of this

section is made by actually reducing the

amount of withholding at the time that

the payment is made. An intermediary

that makes a payment of a distribution

is not required to reduce the

withholding based on the distributing

corporation’s estimate of earnings and

profits, even if the distributing

corporation itself elects to reduce the

withholding on payments of

distributions that it itself makes to

foreign persons. Conversely, an

intermediary may elect to reduce the

amount of withholding with respect to

the payment of a distribution even if the

distributing corporation does not so

elect for the payments of distributions

that it itself makes of distributions to

foreign persons. The amounts with

respect to which a distributing

corporation or intermediary may elect to

reduce the withholding are as follows:

(A) A distributing corporation or

intermediary may elect to not withhold

on a distribution to the extent it

represents a nontaxable distribution

payable in stock or stock rights.

(B) A distributing corporation or

intermediary may elect to not withhold

on a distribution to the extent it

represents a distribution in part or full

payment in exchange for stock.

(C) A distributing corporation or

intermediary may elect to not withhold

on a distribution (actual or deemed) to

the extent it is not paid out of

accumulated earnings and profits or

current earnings and profits, based on a

reasonable estimate determined under

paragraph (c)(2)(ii) of this section.

(D) A regulated investment company

or intermediary may elect to not

withhold on a distribution representing

a capital gain dividend (as defined in

section 852(b)(3)(C)) or an exempt

interest dividend (as defined in section

852(b)(5)(A)) based on the applicable

procedures described under paragraph

(c)(3) of this section.

(E) A U.S. Real Property Holding

Corporation (defined in section

897(c)(2)) or a real estate investment

trust (defined in section 856) or

intermediary may elect to not withhold

on a distribution to the extent it is

subject to withholding under section

1445 and the regulations under that

section. See paragraph (c)(4) of this

section for applicable procedures.

(ii) Reasonable estimate of

accumulated and current earnings and

profits on the date of payment—(A)

General rule. A reasonable estimate for

purposes of paragraph (c)(2)(i)(C) of this

section is a determination made by the

distributing corporation at a time

reasonably close to the date of payment

of the extent to which the distribution

will constitute a dividend, as defined in

section 316. The determination is based

upon the anticipated amount of

accumulated earnings and profits and

current earnings and profits for the

taxable year in which the distribution is

made, the distributions made prior to

the distribution for which the estimate

is made and all other relevant facts and

circumstances. A reasonable estimate

may be made based on the procedures

described in § 31.3406(b)(2)–4(c)(2) of

this chapter.

(B) Procedures in case of

underwithholding. A distributing

corporation or intermediary that is a

withholding agent with respect to a

distribution and that determines at the

end of the taxable year in which the

distribution is made that it

underwithheld under section 1441 on

the distribution shall be liable for the

amount underwithheld as a withholding

agent under section 1461. However, for

purposes of this section and § 1.1461–1,

any amount underwithheld paid by a

distributing corporation, its paying

agent, or an intermediary shall not be

treated as income subject to additional

withholding even if that amount is

treated as additional income to the

shareholders unless the additional

amount is income to the shareholder as

a result of a contractual arrangement

between the parties regarding the

satisfaction of the shareholder’s tax

liabilities. In addition, no penalties shall

be imposed for failure to withhold and

deposit the tax if—
53448 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(1) The distributing corporation made

a reasonable estimate as provided in

paragraph (c)(2)(ii)(A) of this section;

and

(2) Either—

(i) The corporation or intermediary

pays over the underwithheld amount on

or before the due date for filing a Form

1042 for the calendar year in which the

distribution is made, pursuant to

§ 1.1461–2(b); or

(ii) The corporation or intermediary is

not a calendar year taxpayer and it files

an amended return on Form 1042X (or

such other form as the Commissioner

may prescribe) for the calendar year in

which the distribution is made and pays

the underwithheld amount and interest

within 60 days after the close of the

taxable year in which the distribution is

made.

(C) Reliance by intermediary on

reasonable estimate. For purposes of

determining whether the payment of a

corporate distribution is a dividend, a

withholding agent that is not the

distributing corporation may, absent

actual knowledge or reason to know

otherwise, rely on representations made

by the distributing corporation

regarding the reasonable estimate of the

anticipated accumulated and current

earnings and profits made in accordance

with paragraph (c)(2)(ii)(A) of this

section. Failure by the withholding

agent to withhold the required amount

due to a failure by the distributing

corporation to reasonably estimate the

portion of the distribution treated as a

dividend or to properly communicate

the information to the withholding

agent shall be imputed to the

distributing corporation. In such a case,

the Internal Revenue Service (IRS) may

collect from the distributing corporation

any underwithheld amount and subject

the distributing corporation to

applicable interest and penalties as a

withholding agent.

(D) Example. The rules of this

paragraph (c)(2) are illustrated by the

following example:

Example. (i) Facts. Corporation X, a

publicly traded corporation with both U.S.

and foreign shareholders and a calendar year

taxpayer, has an accumulated deficit in

earnings and profits at the close of 2000. In

2001, Corporation X generates $1 million of

current earnings and profits each month and

makes an $18 million distribution, resulting

in a $12 million dividend. Corporation X

plans to make an additional $18 million

distribution on October 1, 2002.

Approximately one month before that date,

Corporation X’s management receives an

internal report from its legal and accounting

department concerning Corporation X’s

estimated current earnings and profits. The

report states that Corporation X should

generate only $5.1 million of current earnings

and profits by the close of the third quarter

due to costs relating to substantial

organizational and product changes, but

these changes will enable Corporation X to

generate $1.3 million of earnings and profits

monthly for the last quarter of the 2002 fiscal

year. Thus, the total amount of current and

earnings and profits for 2002 is estimated to

be $9 million.

(ii) Analysis. Based on the facts in

paragraph (i) of this Example, including the

fact that earnings and profits estimate was

made within a reasonable time before the

distribution, Corporation X can rely on the

estimate under paragraph (c)(2)(ii)(A) of this

section. Therefore, Corporation X may treat

$9 million of the $18 million of the October

1, 2002, distribution to foreign shareholders

as a non-dividend distribution.

(3) Special rules in the case of

distributions from a regulated

investment company—(i) General rule.

If the amount of any distributions

designated as being subject to section

852(b)(3)(C) or (5)(A) exceeds the

amount that may be designated under

those sections for the taxable year, then

no penalties will be asserted for any

resulting underwithholding if the

designations were based on a reasonable

estimate (made pursuant to the same

procedures as are described in

paragraph (c)(2)(ii)(A) of this section)

and the adjustments to the amount

withheld are made within the time

period described in paragraph

(c)(2)(ii)(B) of this section. Any

adjustment to the amount of tax due and

paid to the IRS by the withholding agent

as a result of underwithholding shall

not be treated as a distribution for

purposes of section 562(c) and the

regulations thereunder. Any amount of

U.S. tax that a foreign shareholder is

treated as having paid on the

undistributed capital gain of a regulated

investment company under section

852(b)(3)(D) may be claimed by the

foreign shareholder as a credit or refund

under § 1.1464–1.

(ii) Reliance by intermediary on

reasonable estimate. For purposes of

determining whether a payment is a

distribution designated as subject to

section 852(b) (3)(C) or (5)(A), a

withholding agent that is not the

distributing regulated investment

company may, absent actual knowledge

or reason to know otherwise, rely on the

designations that the distributing

company represents have been made in

accordance with paragraph (c)(3)(i) of

this section. Failure by the withholding

agent to withhold the required amount

due to a failure by the regulated

investment company to reasonably

estimate the required amounts or to

properly communicate the relevant

information to the withholding agent

shall be imputed to the distributing

company. In such a case, the IRS may

collect from the distributing company

any underwithheld amount and subject

the company to applicable interest and

penalties as a withholding agent.

(4) Coordination with withholding

under section 1445—(i) In general. A

distribution from a U.S. Real Property

Holding Corporation (USRPHC) (or from

a corporation that was a USRPHC at any

time during the five-year period ending

on the date of distribution) with respect

to stock that is a U.S. real property

interest under section 897(c) or from a

Real Estate Investment Trust (REIT)

with respect to its stock is subject to the

withholding provisions under section

1441 (or section 1442 or 1443) and

section 1445. A USRPHC making a

distribution shall be treated as satisfying

its withholding obligations under both

sections if it withholds in accordance

with one of the procedures described in

either paragraph (c)(4)(i) (A) or (B) of

this section. A USRPHC must apply the

same withholding procedure to all the

distributions made during the taxable

year. However, the USRPHC may

change the applicable withholding

procedure from year to year. For rules

regarding distributions by REITs, see

paragraph (c)(4)(i)(C) of this section.

(A) Withholding under section 1441.

The USRPHC may choose to withhold

on a distribution only under section

1441 (or 1442 or 1443) and not under

section 1445. In such a case, the

USRPHC must withhold under section

1441 (or 1442 or 1443) on the full

amount of the distribution, whether or

not any portion of the distribution

represents a return of basis or capital

gain. If a reduced tax rate under an

income tax treaty applies to the

distribution by the USRPHC, then the

applicable rate of withholding on the

distribution shall be no less than 10-

percent, unless the applicable treaty

specifies an applicable lower rate for

distributions from a USRPHC, in which

case the lower rate may apply.

(B) Withholding under both sections

1441 and 1445. As an alternative to the

procedure described in paragraph

(c)(4)(i)(A) of this section, a USRPHC

may choose to withhold under both

sections 1441 (or 1442 or 1443) and

1445 under the procedures set forth in

this paragraph (c)(4)(i)(B). The USRPHC

must make a reasonable estimate of the

portion of the distribution that is a

dividend under paragraph (c)(2)(ii)(A) of

this section, and must—

(1) Withhold under section 1441 (or

1442 or 1443) on the portion of the

distribution that is estimated to be a

dividend under paragraph (c)(2)(ii)(A) of

this section; and
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53449

(2) Withhold under section 1445(e)(3)

and § 1.1445–5(e) on the remainder of

the distribution or on such smaller

portion based on a withholding

certificate obtained in accordance with

§ 1.1445–5(e)(2)(iv).

(C) Coordination with REIT

withholding. Withholding is required

under section 1441 (or 1442 or 1443) on

the portion of a distribution from a REIT

that is not designated as a capital gain

dividend or return of basis. Withholding

is required under section 1445 on the

portion of the distribution designated by

a REIT as a capital gain dividend. See

§ 1.1445–8.

(ii) Intermediary reliance rule. A

withholding agent that is not the

distributing USRPHC must withhold

under paragraph (c)(4)(i) of this section,

but may, absent actual knowledge or

reason to know otherwise, rely on

representations made by the USRPHC

regarding the determinations required

under paragraph (c)(4)(i) of this section.

Failure by the withholding agent to

withhold the required amount due to a

failure by the distributing USRPHC to

make these determinations in a

reasonable manner or to properly

communicate the determinations to the

withholding agent shall be imputed to

the distributing USRPHC. In such a

case, the IRS may collect from the

distributing USRPHC any

underwithheld amount and subject the

distributing USRPHC to applicable

interest and penalties as a withholding

agent.

(d) Withholding on payments that

include an undetermined amount of

income—(1) In general. Where the

withholding agent makes a payment and

does not know at the time of payment

the amount that is subject to

withholding because the determination

of the source of the income or the

calculation of the amount of income

subject to tax depends upon facts that

are not known at the time of payment,

then the withholding agent must

withhold an amount under § 1.1441–1

based on the entire amount paid that is

necessary to assure that the tax withheld

is not less than 30 percent (or other

applicable percentage) of the amount

that will subsequently be determined to

be from sources within the United

States or to be income subject to tax.

The amount so withheld shall not

exceed 30 percent of the amount paid.

In the alternative, the withholding agent

may make a reasonable estimate of the

amount from U.S. sources or of the

taxable amount and set aside a

corresponding portion of the amount

due under the transaction and hold such

portion in escrow until the amount from

U.S. sources or the taxable amount can

be determined, at which point

withholding becomes due under

§ 1.1441–1. See § 1.1441–1(b)(8)

regarding adjustments in the case of

overwithholding. The provisions of this

paragraph (d)(1) shall not apply to the

extent that other provisions of the

regulations under chapter 3 of the

Internal Revenue Code (Code) specify

the amount to be withheld, if any, when

the withholding agent lacks knowledge

at the time of payment (e.g., lack of

reliable knowledge regarding the status

of the payee or beneficial owner,

addressed in § 1.1441–1(b)(3), or lack of

knowledge regarding the amount of

original issue discount under § 1.1441–

2(b)(3)).

(2) Withholding on certain gains.

Absent actual knowledge or reason to

know otherwise, a withholding agent

may rely on a claim regarding the

amount of gain described in § 1.1441–

2(c) if the beneficial owner withholding

certificate, or other appropriate

withholding certificate, states the

beneficial owner’s basis in the property

giving rise to the gain. In the absence of

a reliable representation on a

withholding certificate, the withholding

agent must withhold an amount under

§ 1.1441–1 that is necessary to assure

that the tax withheld is not less than 30

percent (or other applicable percentage)

of the recognized gain. For this purpose,

the recognized gain is determined

without regard to any deduction

allowed by the Code from the gains. The

amount so withheld shall not exceed 30

percent of the amount payable by reason

of the transaction giving rise to the

recognized gain. See § 1.1441–1(b)(8)

regarding adjustments in the case of

overwithholding.

(e) Payments other than in U.S.

dollars—(1) In general. The amount of a

payment made in a medium other than

U.S. dollars is measured by the fair

market value of the property or services

provided in lieu of U.S. dollars. The

withholding agent may liquidate the

property prior to payment in order to

withhold the required amount of tax

under section 1441 or obtain payment of

the tax from an alternative source.

However, the obligation to withhold

under section 1441 is not deferred even

if no alternative source can be located.

Thus, for purposes of withholding

under chapter 3 of the Code, the

provisions of § 31.3406(h)–2(b)(2)(ii) of

this chapter (relating to backup

withholding from another source) shall

not apply. If the withholding agent

satisfies the tax liability related to such

payments, the rules of paragraph (f) of

this section apply.

(2) Payments in foreign currency. If

the amount subject to withholding tax is

paid in a currency other than the U.S.

dollar, the amount of withholding under

section 1441 shall be determined by

applying the applicable rate of

withholding to the foreign currency

amount and converting the amount

withheld into U.S. dollars on the date of

payment at the spot rate (as defined in

§ 1.988–1(d)(1)) in effect on that date. A

withholding agent making regular or

frequent payments in foreign currency

may use a month-end spot rate or a

monthly average spot rate. A spot rate

convention must be used consistently

for all non-dollar amounts withheld and

from year to year. Such convention

cannot be changed without the consent

of the Commissioner. The U.S. dollar

amount so determined shall be treated

by the beneficial owner as the amount

of tax paid on the income for purposes

of determining the final U.S. tax liability

and, if applicable, claiming a refund or

credit of tax.

(f) Tax liability of beneficial owner

satisfied by withholding agent—(1)

General rule. In the event that the

satisfaction of a tax liability of a

beneficial owner by a withholding agent

constitutes income to the beneficial

owner and such income is of a type that

is subject to withholding, the amount of

the payment deemed made by the

withholding agent for purposes of this

paragraph (f) shall be determined under

the gross-up formula provided in this

paragraph (f)(1). Whether the payment

of the tax by the withholding agent

constitutes a satisfaction of the

beneficial owner’s tax liability and

whether, as such, it constitutes

additional income to the beneficial

owner, must be determined under all

the facts and circumstances surrounding

the transaction, including any

agreements between the parties and

applicable law. The formula described

in this paragraph (f)(1) is as follows:

Payment =

Gross payment

without withholding

1-(tax rate)

(2) Example. The following example

illustrates the provisions of this

paragraph (f):

Example. College X awards a qualified

scholarship within the meaning of section

117(b) to foreign student, FS, who is in the

United States on an F visa. FS is a resident

of a country that does not have an income tax

treaty with the United States. The

scholarship is $20,000 to be applied to

tuition, mandatory fees and books, plus

benefits in kind consisting of room and board

and roundtrip air transportation. College X

agrees to pay any U.S. income tax owed by

FS with respect to the scholarship. The fair

market value of the room and board

measured by the amount College X charges

non-scholarship students is $6,000. The cost
53450 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

of the roundtrip air transportation is $2,600.

Therefore, the total fair market value of the

scholarship received by FS is $28,600.

However, the amount taxable is limited to the

fair market value of the benefits in kind

($8,600) because the portion of the

scholarship amount for tuition, fees, and

books is not included in gross income under

section 117. The applicable rate of

withholding is 14 percent under section

1441(b). Therefore, under the gross-up

formula, College X is deemed to make a

payment of $10,000 ($8,600 divided by (1–

.14). The U.S. tax that must be deducted and

withheld from the payment under section

1441(b) is $1,400 (.14×$10,000). College X

reports scholarship income of $30,000 and

$1,400 of U.S. tax withheld on Forms 1042

and 1042–S.

* * * * *

(h) Effective date. Except as otherwise

provided in paragraph (g) of this

section, this section applies to payments

made after December 31, 1998.

Par. 9. Section 1.1441–4 is amended

by:

1. Revising the section heading, and

paragraph (a).

2. Paragraph (b)(1) is amended by:

a. Revising of paragraphs (b)(1)(i) and

(b)(1)(ii).

b. Removing the period at the end of

paragraph (b)(1)(iii) and adding a

semicolon in its place.

c. Removing the language ‘‘or’’ at the

end of paragraph (b)(1)(iv) and adding a

semicolon in its place.

d. Removing the period at the end of

paragraph (b)(1)(v) and adding ‘‘ ; or’’ in

its place.

e. Adding paragraph (b)(1)(vi).

3. Adding four sentences at the end of

paragraph (b)(2)(i).

4. Paragraph (b)(2)(ii) is amended by:

a. Revising paragraph (b)(2)(ii)

heading and introductory text, and

paragraph (b)(2)(ii)(A).

b. Redesignating paragraph

(b)(2)(ii)(H) as paragraph (b)(2)(ii)(J) and

amending newly designated paragraph

(b)(2)(ii)(J) by removing the period and

adding ‘‘; and’’ in its place.

c. Redesignating paragraphs (b)(2)(ii)

(B), (C), (D), (E), (F) and (G) as

paragraphs (b)(2)(ii)(D), (E), (F), (G), (H)

and (I), respectively.

d. Adding new paragraphs

(b)(2)(ii)(B), (C), and (K).

e. Removing the period at the end of

newly designated paragraph (b)(2)(ii)(D)

and the comma at the end of newly

designated paragraphs (b)(2)(ii)(E), (F),

(G), and (H) and adding a semicolon in

each place.

f. Removing the language ‘‘, and’’ and

adding a semicolon in its place in newly

designated paragraph (b)(2)(ii)(I).

5. Removing the concluding text

immediately following paragraph

(b)(2)(iv)(C).

6. Revising paragraph (b)(2)(v).

7. Removing the language ‘‘statement’’

and adding the language ‘‘withholding

certificate’’ in each place in paragraph

(b)(2)(i).

8. Removing the language ‘‘Director of

the Foreign Operations District’’ in

paragraphs (b)(2)(i) fourth sentence,

(b)(2)(iii) fourth and fifth sentences, and

(b)(3) first sentence, and adding the

language ‘‘Assistant Commissioner

(International)’’ in each place.

9. Adding paragraph (b)(6).

10. Revising paragraphs (c), (d), (e),

(f), and (g) .

11. Removing paragraphs (h) and (i).

12. Removing the OMB parenthetical

and the authority citation at the end of

the section.

The revisions and additions read as

follows:

§ 1.1441–4 Exemptions from withholding

for certain effectively connected income

and other amounts.

(a) Certain income connected with a

U.S. trade or business—(1) In general.

No withholding is required under

section 1441 on income otherwise

subject to withholding if the income is

(or is deemed to be) effectively

connected with the conduct of a trade

or business within the United States and

is includible in the beneficial owner’s

gross income for the taxable year. For

purposes of this paragraph (a), an

amount is not deemed to be includible

in gross income if the amount is (or is

deemed to be) effectively connected

with the conduct of a trade or business

within the United States and the

beneficial owner claims an exemption

from tax under an income tax treaty

because the income is not attributable to

a permanent establishment in the

United States. To claim a reduced rate

of withholding because the income is

not attributable to a permanent

establishment, see § 1.1441–6(b)(1). This

paragraph (a) does not apply to income

of a foreign corporation to which section

543(a)(7) applies for the taxable year or

to compensation for personal services

performed by an individual. See

paragraph (b) of this section for

compensation for personal services

performed by an individual.

(2) Withholding agent’s reliance on a

claim of effectively connected income—

(i) In general. Absent actual knowledge

or reason to know otherwise, a

withholding agent may rely on a claim

of exemption based upon paragraph

(a)(1) of this section if, prior to the

payment to the foreign person, the

withholding agent can reliably associate

the payment with a Form W–8 upon

which it can rely to treat the payment

as made to a foreign beneficial owner in

accordance with § 1.1441–1(e)(1)(ii). For

purposes of this paragraph (a), a

withholding certificate is valid only if,

in addition to other applicable

requirements, it includes the taxpayer

identifying number of the person whose

name is on the Form W–8 and

represents, under penalties of perjury,

that the amounts for which the

certificate is furnished are effectively

connected with the conduct of a trade

or business in the United States. In the

absence of a reliable claim that the

income is effectively connected with the

conduct of a trade or business in the

United States, the income is presumed

not to be effectively connected, except

as otherwise provided in paragraph (a)

(2)(ii) or (3) of this section. See

§ 1.1441–1(e)(4)(ii)(C) for the period of

validity applicable to a certificate

provided under this section and

§ 1.1441–1(e)(4)(ii)(D) for changes in

circumstances arising during the taxable

year indicating that the income to which

the certificate relates is not, or is no

longer expected to be, effectively

connected with the conduct of a trade

or business within the United States. A

withholding certificate shall be effective

only for the item or items of income

specified therein. The provisions of

§ 1.1441–1(b)(3)(iv) dealing with a 90-

day grace period shall apply for

purposes of this section.

(ii) Special rules for U.S. branches of

foreign persons—(A) U.S. branches of

certain foreign banks or foreign

insurance companies. A payment to a

U.S. branch described in § 1.1441–

1(b)(2)(iv)(A) is presumed to be

effectively connected with the conduct

of a trade or business in the United

States without the need to furnish a

certificate, unless the U.S. branch

provides a U.S. branch withholding

certificate described in § 1.1441–

1(e)(3)(v) that represents otherwise. If no

certificate is furnished but the income is

not, in fact, effectively connected

income, then the branch must withhold

whether the payment is collected on

behalf of other persons or on behalf of

another branch of the same entity. See

§ 1.1441–1(b) (2)(iv) and (6) for general

rules applicable to payments to U.S.

branches of foreign persons.

(B) Other U.S. branches. See § 1.1441–

1(b)(2)(iv)(E) for similar procedures for

other U.S. branches to the extent

provided in a determination letter from

the district director or the Assistant

Commissioner (International).

(3) Income on notional principal

contracts—(i) General rule. A

withholding agent that pays amounts

attributable to a notional principal

contract described in § 1.863–7(a) or

1.988–2(e) shall have no obligation to
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53451

withhold on the amounts paid under the

terms of the notional principal contract

regardless of whether a withholding

certificate is provided. However, a

withholding agent must file returns

under § 1.1461–1(b) and (c) reporting

the income that it must treat as paid to

a foreign person and as effectively

connected with the conduct of a trade

or business in the United States under

the provisions of this paragraph (a)(3).

Except as otherwise provided in

paragraph (a)(3)(ii) of this section, a

withholding agent must so treat the

income unless it can reliably associate

the payment with a withholding

certificate upon which it can rely to

treat the payment as an amount that is

not effectively connected. Income on a

notional principal contract does not

include the amount characterized as

interest under the provisions of § 1.446–

3(g)(4).

(ii) Exception for certain payments. A

payment to a foreign financial

institution (within the meaning of

§ 1.165–12(c)(1)(iv)) shall not be treated

as effectively connected with the

conduct of a trade or business within

the United States for purposes of

paragraph (a)(3)(i) of this section even if

no withholding certificate is furnished if

the payee provides a representation in a

master agreement that governs the

transactions in notional principal

contracts between the parties (for

example an International Swaps and

Derivatives Association (ISDA)

Agreement, including the Schedule

thereto) or in the confirmation on the

particular notional principal contract

transaction that the counterparty is a

U.S. person or a non-U.S. branch of a

foreign person.

(b) * * * (1) * * *

(i) Such compensation is subject to

withholding under section 3402

(relating to withholding on wages) and

the regulations under that section;

(ii) Such compensation would be

subject to withholding under section

3402 but for the provisions of section

3401(a) (not including paragraph (a)(6)

of that section) and the regulations

under that section. This paragraph

(b)(1)(ii) does not apply to payments to

a nonresident alien individual from any

trust described in section 401(a), any

annuity plan described in section

403(a), or any annuity, custodial

account, or retirement income account

described in section 403(b). Instead,

these payments are subject to

withholding under this section to the

extent they are exempted from the

definition of wages under section

3401(a)(12) or to the extent they are

from an annuity, custodial account, or

retirement income account described in

section 403(b). Thus, for example,

payments to a nonresident alien

individual from a trust described in

section 401(a) are subject to withholding

under section 1441 and not under

section 3405 or 3406;

* * * * *

(vi) Compensation that is exempt from

withholding under section 3402 by

reason of section 3402(e), provided that

the employee and his employer enter

into an agreement under section 3402(p)

to provide for the withholding of

income tax upon payments of amounts

described in § 31.3401(a)–3(b)(1) of this

chapter. An employee who desires to

enter into such an agreement should

furnish his employer with Form W–4

(withholding exemption certificate) (or

such other form as the Internal Revenue

Service (IRS) may prescribe). See

section 3402(f) and the regulations

thereunder and § 31.3402(p)-1 of this

chapter.

(2) * * * (i) * * * The withholding

agent may rely on an accepted

withholding certificate only if the IRS

has not objected to the certificate. For

purposes of this paragraph (b)(2)(i), the

IRS will be considered to have not

objected to the certificate if it has not

notified the withholding agent within a

10-day period beginning from the date

that the withholding certificate is

forwarded to the IRS pursuant to

paragraph (b)(2)(v) of this section. After

expiration of the 10-day period, the

withholding agent may rely on the

withholding certificate retroactive to the

date of the first payment covered by the

certificate. The fact that the IRS does not

object to the withholding certificate

within the 10-day period provided in

this paragraph (b)(2)(i) shall not

preclude the IRS from examining the

withholding agent at a later date in light

of facts that the withholding agent knew

or had reason to know regarding the

payment and eligibility for a reduced

rate and that were not disclosed to the

IRS as part of the 10-day review process.

(ii) Withholding certificate claiming

withholding exemption. The statement

claiming an exemption from

withholding shall be made on Form

8233 (or an acceptable substitute or

such other form as the IRS may

prescribe). Form 8233 shall be dated,

signed by the beneficial owner under

penalties of perjury, and contain the

following information—

(A) The individual’s name, permanent

residence address, taxpayer identifying

number (or a copy of a completed Form

W–7 or SS–5 showing that a number has

been applied for), and the U.S. visa

number, if any;

(B) The individual’s current

immigration status and visa type;

(C) The individual’s original date of

entry into the United States;

* * * * *

(K) Any other information as may be

required by the form or accompanying

instructions in addition to, or in lieu of,

the information described in this

paragraph (b)(2)(ii).

* * * * *

(v) Copies of Form 8233. The

withholding agent shall forward one

copy of each Form 8233 that is accepted

under paragraph (b)(2)(iv) of this section

to the Assistant Commissioner

(International), within five days of such

acceptance. The withholding agent shall

retain a copy of Form 8233.

* * * * *

(6) Personal exemption—(i) In

general. To determine the tax to be

withheld at source under § 1.1441–1

from remuneration paid for personal

services performed within the United

States by a nonresident alien individual

and from scholarship and fellowship

income described in paragraph (c) of

this section, a withholding agent may

take into account one personal

exemption pursuant to sections

873(b)(3) and 151 regardless of whether

the income is effectively connected. For

purposes of withholding under section

1441 on remuneration for personal

services, the exemption must be

prorated upon a daily basis for the

period during which the personal

services are performed within the

United States by the nonresident alien

individual by dividing by 365 the

number of days in the period during

which the individual is present in the

United States for the purpose of

performing the services and multiplying

the result by the amount of the personal

exemption in effect for the taxable year.

See § 31.3402(f)(6)–1 of this chapter.

(ii) Multiple exemptions. More than

one personal exemption may be claimed

in the case of a resident of a contiguous

country or a national of the United

States under section 873(b)(3). In

addition, residents of a country with

which the United States has an income

tax treaty in effect may be eligible to

claim more than one personal

exemption if the treaty so provides.

Claims for more than one personal

exemption shall be made on the

withholding certificate furnished to the

withholding agent. The exemption must

be prorated on a daily basis in the same

manner as described in paragraph

(b)(6)(i) of this section.

(iii) Special rule where both certain

scholarship and compensation income

are received. The fact that both noncompensatory scholarship income and

compensation income (including
53452 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

compensatory scholarship income) are

received during the taxable year does

not entitle the taxpayer to claim more

than one personal exemption amount

(or more than the additional amounts

permitted under paragraph (b)(6)(ii) of

this section). Thus, if a nonresident

alien student receives noncompensatory taxable scholarship

income from one withholding agent and

compensation income from another

withholding agent, no more than the

total personal exemption amount

permitted under the Internal Revenue

Code or under an income tax treaty may

be taken into account by both

withholding agents. For this purpose,

the withholding agent may rely on a

representation from the beneficial

owner that the exemption amount

claimed does not exceed the amount

permissible under this section.

(c) Special rules for scholarship and

fellowship income—(1) In general.

Under section 871(c), certain amounts

paid as a scholarship or fellowship for

study, training, or research in the

United States to a nonresident alien

individual temporarily present in the

United States as a nonimmigrant under

section 101(a)(15) (F), (J), (M), or (Q) of

the Immigration and Nationality Act are

treated as income effectively connected

with the conduct of a trade or business

within the United States. The amounts

described in the preceding sentence are

those amounts that do not represent

compensation for services. Such

amounts (as described in the second

sentence of section 1441(b)) are subject

to withholding under section 1441, but

at the lower rate of 14 percent. That rate

may be reduced under the provisions of

an income tax treaty. Claims of a

reduced rate under an income tax treaty

shall be made under the procedures

described in § 1.1441–6(b)(1). Therefore,

claims for reduction in withholding

under an income tax treaty on amounts

described in this paragraph (c)(1) may

not be made on a Form 8233. However,

if the payee is receiving both

compensation for personal services

(including compensatory scholarship

income) and non-compensatory

scholarship income described in this

paragraph (c)(1) from the same

withholding agent, claims for reduction

of withholding on both types of income

may be made on Form 8233.

(2) Alternate withholding election. A

withholding agent may elect to

withhold on the amounts described in

paragraph (c)(1) of this section at the

rates applicable under section 3402, as

if the income were wages. Such election

shall be made by obtaining a Form W–

4 (or an acceptable substitute or such

other form as the IRS may prescribe)

from the beneficial owner. The fact that

the withholding agent asks the

beneficial owner to furnish a Form

W–4 for such fellowship or scholarship

income or to take such income into

account in preparing such Form

W–4 shall serve as notice to the

beneficial owner that the income is

being treated as wages for purposes of

withholding tax under section 1441.

(d) Annuities received under qualified

plans. Withholding is not required

under section § 1.1441–1 in the case of

any amount received as an annuity if

the amount is exempt from tax under

section 871(f) and the regulations under

that section. The withholding agent may

exempt the payment from withholding

if, prior to payment, it can reliably

associate the payment with

documentation upon which it can rely

to treat the payment as made to a

beneficial owner in accordance with

§ 1.1441–1(e)(1)(ii). A beneficial owner

withholding certificate furnished for

purposes of claiming the benefits of the

exemption under this paragraph (d) is

valid only if, in addition to other

applicable requirements, it contains a

taxpayer identifying number.

(e) Per diem of certain alien trainees.

Withholding is not required under

section 1441(a) and § 1.1441–1 on per

diem amounts paid for subsistence by

the United States Government (directly

or by contract) to any nonresident alien

individual who is engaged in any

program of training in the United States

under the Mutual Security Act of 1954,

as amended (22 U.S.C. chapter 24). This

rule shall apply even though such

amounts are subject to tax under section

871. Any exemption from withholding

pursuant to this paragraph (e) applies

without a requirement that

documentation be furnished to the

withholding agent. However,

documentation may have to be

furnished for purposes of the

information reporting provisions under

section 6041 and backup withholding

under section 3406. The exemption

from withholding granted by this

paragraph (e) is not a determination that

the amounts are not fixed or

determinable annual or periodical

income.

(f) Failure to receive withholding

certificates timely or to act in

accordance with applicable

presumptions. See applicable

procedures described in § 1.1441–1(b)(7)

in the event the withholding agent does

not hold an appropriate withholding

certificate or other appropriate

documentation at the time of payment

or does not act in accordance with

applicable presumptions described in

paragraph (a) (2)(i), (2)(ii), or (3) of this

section.

(g) Effective date—(1) General rule.

This section applies to payments made

after December 31, 1998.

(2) Transition rules. A withholding

agent that on December 31, 1998, holds

a Form 4224 or 8233 that is a valid

certificate as determined under the

regulations in effect prior to January 1,

1999 (see CFR part 1 revised, April 1,

1997), may treat the certificate as a valid

withholding certificate until its validity

expires under those regulations or, if

earlier, until December 31, 1999.

Further, the validity of a withholding

certificate or statement that is dated

prior to January 1, 1998, is valid on

January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (g)(2), however,

does not apply to extend the validity

period of a withholding certificate that

expires in 1998 solely by reason of

changes in the circumstances of the

person whose name is on the certificate.

Notwithstanding the three preceding

sentences, a withholding agent may

choose to not take advantage of the

transition rule in this paragraph (g)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

§ 1.1441–4T [Removed]

Par. 10. Section 1.1441–4T is

removed.

Par. 11. Sections 1.1441–5 and

1.1441–6 are revised to read as follows:

§ 1.1441–5 Withholding on payments to

partnerships, trusts, and estates.

(a) Rules of withholding applicable to

payments to partnerships. This

paragraph (a) describes the

determinations that a withholding agent

must make when making a payment to

a person that may be a partnership (as

defined in § 1.1441–1(c)(6)(ii)(C)). Such

determinations are made in order to

determine a withholding agent’s

obligations under chapters 3 and 61 of

the Internal Revenue Code (Code) and

sections 3402, 3405, and 3406 (and

applicable regulations under those

provisions) to withhold and report

payments of amounts subject to

withholding under chapter 3 of the

Code and the regulations thereunder.

The reliance provisions stated in this

paragraph (a) are subject to the

presumptions described in § 1.1441–

1(b)(3) and paragraph (d) of this section,

including § 1.1441–1(b)(3)(ix) regarding
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53453

the withholding agent’s actual

knowledge or reason to know that the

presumptions are not correct. For

similar presumptions for reporting and

withholding on amounts not subject to

withholding under chapter 3 of the

Code (e.g., foreign source income,

broker proceeds) that may be paid to a

foreign partnership, see § 1.6049–5(d)

(2) through (5).

(1) The withholding agent must

determine whether the payee is a U.S.

or a foreign person. For this purpose,

the withholding agent may treat the

payee as U.S. or foreign if it can reliably

associate the payment with a Form

W–9 described in § 1.1441–1(d) or a

Form W–8 described in § 1.1441–

1(e)(2)(i) or (3)(i). In the absence of

documentation, see § 1.1441–1(b)(3) and

paragraph (d) of this section for

applicable presumptions of foreign or

U.S. status and other relevant

characteristics.

(2) If the payee is determined to be a

foreign person, the withholding agent

must determine whether the foreign

payee is acting for its own account or for

the account of others (i.e., as an

intermediary, as defined in § 1.1441–

1(e)(3)(i)). The withholding agent may

treat the payee as a foreign intermediary

if it can reliably associate the payment

with a Form W–8 described in § 1.1441–

1(e)(3) (ii), (iii), or (v), within the

meaning of § 1.1441-1(b)(3)(v)(A).

(3) If the foreign payee is determined

to act as an intermediary described in

§ 1.1441–1(e)(3)(i), the withholding

agent must determine whether or not

the payee is a qualified intermediary.

The withholding agent may treat the

payee as a qualified intermediary only

if it can reliably associate the payment

with a Form W–8 described in § 1.1441–

1(e)(3)(ii). A foreign payee that is treated

as an intermediary with respect to a

payment is subject to the provisions

applicable to intermediaries in

§ 1.1441–1(e) (3) or (5). In such a case,

the provisions of paragraph (c) of this

section do not apply to the payment.

(4) If the foreign payee is determined

to act for its own account (or is so

presumed), the withholding agent must

determine the status of the payee as a

partnership. The withholding agent may

treat the payee as a domestic or as a

foreign partnership if it can reliably

associate the payment with a Form

W–9 furnished in accordance with

§ 1.1441–1(d) (2) or (4) (for a domestic

partnership) or a Form W–8 described

in paragraph (c) (2)(iv) or (3)(iii) of this

section (for a foreign partnership). See

§ 1.1441–1(e)(4)(viii) for reliance on the

payee’s representations on a Form W–8.

In the absence of documentation, see

§ 1.1441–1(b)(3)(ii) and paragraph (d)(2)

of this section for applicable

presumptions of status.

(5) If the foreign payee is determined

to be a foreign partnership and the

withholding agent has determined (or

presumes) that the partnership is acting

for the account of its partners, then the

withholding agent must determine

whether the payment represents income

effectively connected with the

partnership’s conduct of a U.S. trade or

business. The withholding agent may

treat the payment as effectively

connected if it can reliably associate the

payment with a Form W–8 described in

paragraph (c)(3)(iii) of this section

representing that the income is

effectively connected or if it so

presumes in accordance with the

provisions in § 1.1441–4(a) (2)(ii) or (3).

In the absence of documentation, the

payment is generally presumed to be

non-effectively connected. See § 1.1441–

4(a)(2)(i). See §§ 1.1461–1(c)(2)(ii)(A),

1.6031–1 and 1.6031(b)–1T for reporting

requirements applicable to the

withholding agent and to the

partnership.

(6) If the withholding agent cannot

reliably treat the payment as effectively

connected income nor presume that it is

so connected, then the withholding

agent must determine whether the

partnership is a withholding foreign

partnership described in paragraph

(c)(2)(i) of this section. The withholding

agent may treat the foreign partnership

as a withholding partnership if it can

reliably associate the payment with a

Form W–8 described in paragraph

(c)(2)(iv) of this section. In the absence

of a reliable Form W–8, the foreign

partnership is presumed to be a nonwithholding foreign partnership

described in paragraph (c)(3)(i) of this

section. In such a case, under paragraph

(c)(1)(i) of this section, the withholding

agent must treat the partners, rather

than the partnership, as payees. See

paragraph (d) of this section for

determining the status of the partners as

U.S. or foreign persons in the absence of

documentation. See § 1.1461–

1(c)(2)(ii)(A), 1.6031–1 and 1.6031(b)–

1T for reporting requirements applicable

to the withholding agent and to the

partnership.

(7) If the withholding agent

determines that the payee is a U.S.

partnership, or so presumes in

accordance with paragraph (d)(2) of this

section in the absence of

documentation, the withholding agent is

not required to withhold under

paragraph (b)(1) of this section because

the partnership is treated as a U.S.

payee. See paragraph (b)(2) of this

section for withholding requirements

applicable to a domestic partnership

with foreign partners. See §§ 1.1461–

1(c)(2)(ii)(A), 1.6031–1 and 1.6031(b)–

1T for reporting requirements applicable

to the withholding agent and to the

partnership.

(8) In order to determine whether to

rely on a claim for a reduced rate under

a tax treaty by a person that the

withholding agent treats as a

partnership or as a partner in a

partnership, the withholding agent must

apply the provisions of § 1.894–1T(d).

For applicable procedures regarding

reliance by a withholding agent on a

claim for benefits under a tax treaty in

such a situation, see § 1.1441–6(b)(4).

(b) Domestic partnerships—(1)

Exemption from withholding on

payment to domestic partnerships. A

payment to a person that the

withholding agent may treat as a

domestic partnership is treated as a

payment to a U.S. payee. Therefore, a

payment to a domestic partnership is

not subject to withholding under section

1441 even though it may have partners

that are foreign persons. A withholding

agent may treat the person to whom the

payment is made as a domestic

partnership if it can reliably associate

the payment with a Form W–9

furnished by the partnership in

accordance with the procedures under

§ 1.1441–1(d) (2) or (4) or based upon

the presumptions described in

paragraph (d)(2) of this section.

(2) Withholding by a domestic

partnership—(i) In general. A domestic

partnership is required to withhold

under § 1.1441–1 as a withholding agent

on the gross amount of items of income

subject to withholding that are

includible in the distributive share of

income of a partner that is a foreign

person. Pursuant to the authority

provided under section 702(a), each

partner shall take into account

separately its distributive share of

amounts subject to withholding, and

thus the partnership, pursuant to

section 703(a)(1), shall separately state

these amounts when computing its

taxable income. A partnership shall

withhold when any distributions that

include amounts subject to withholding

are made or when guaranteed payments

are made. To the extent a foreign

partner’s distributive share of an

amount subject to withholding has not

been actually distributed, the

partnership is required to withhold on

the partner’s distributive share of that

amount on the earlier of the date that

the statement required under section

6031(b) and § 1.6031(b)–1T to be

provided to that partner is mailed or

otherwise furnished to the partner or the

due date for furnishing that statement as

provided under § 1.6031(b)–1T. If a
53454 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

partnership withholds on a distributive

share before the amount is actually

distributed to the partner, then

withholding is not required when the

amount is subsequently distributed.

Withholding on items of income that are

effectively connected income in the

hands of the partners who are foreign

persons is governed by section 1446 and

not by this section. In such a case,

partners in a domestic partnership are

not required to furnish a withholding

certificate in order to claim an

exemption from withholding under

section 1441(c)(1) and § 1.1441–4.

(ii) Determination by the domestic

partnership of the partners’ status. For

purposes of determining whether the

partners or some other persons are the

payees of the partners’ distributive

shares of any payment made to the

partnership and the status of the

partners, the partnership shall apply the

rules of § 1.1441–1(b) (2) and (3), and of

paragraphs (c)(1) and (d) of this section

(in the case of a partner that is a foreign

partnership) and of paragraph (e) of this

section (in the case of a partner that is

a foreign estate or a foreign trust) in the

same manner as if the partnership were

making a payment directly to the

partners other than in their capacity as

partners.

(iii) Reliance on a partner’s claim for

reduced withholding. Absent actual

knowledge or reason to know otherwise,

a domestic partnership may rely on a

claim for reduced withholding under

chapter 3 of the Code by a partner, if

prior to the time the partnership is

required to withhold, the partnership

can reliably associate the partner’s

distributive share of the partnership

items with documentation upon which

it may rely to treat the partner or

another person as a U.S. person under

§ 1.1441–1(d) (2) or (3), as a U.S.

beneficial owner under § 1.1441–1(d)(4),

or as a foreign beneficial owner under

§ 1.1441–1(e)(1)(ii).

(iv) Rules for reliably associating a

payment with documentation. For rules

regarding the reliable association of a

payment with documentation, see

§ 1.1441–1(b)(2)(vii).

(v) Coordination with chapter 61 of

the Internal Revenue Code and section

3406. A domestic partnership is not a

payor for purposes of chapter 61 of the

Code or section 3406 with respect to

payments to its partners in their

capacity as partners. Thus, it is not

required to make an information return

on Form 1099 nor to backup withhold

with respect to its partners’ distributive

share of partnership items. However, it

must file returns under section 6031.

Such returns are in lieu of making

returns under § 1.1461–1 (b) and (c). See

§ 1.1461–1(c)(2)(ii)(A).

(c) Foreign partnerships—(1)

Determination of payee—(i) Payments

treated as made to partners. Except as

otherwise provided in paragraph

(c)(1)(ii) of this section, a payment to a

person that the withholding agent may

treat as a foreign partnership in

accordance with paragraph (c)(2)(i),

(3)(i), or (d)(2) of this section is treated

as a payment to the partners (looking

through partners that are foreign flowthrough entities) as follows—

(A) If the withholding agent can

reliably associate the partner’s

distributive share of the payment with

a Form W–9, a Form W–8, or other

appropriate documentation upon which

it can rely to treat the payment as made

to a U.S. or foreign beneficial owner

under § 1.1441–1 (d)(4) or (e)(1)(ii), then

the beneficial owner so identified is

treated as the payee;

(B) If the withholding agent can

reliably associate the partner’s

distributive share with an intermediary

certificate described in § 1.1441–1(e)(3)

(ii), (iii), or (v), then the rules of

§ 1.1441–1(b)(2)(v) shall apply to

determine who the payee is in the same

manner as if the partner’s distributive

share of the payment had been paid

directly to such intermediary;

(C) If the withholding agent can

reliably associate the partner’s

distributive share with a partnership

certificate described in paragraph

(c)(2)(iv) or (3)(iii) of this section, then

the rules of paragraph (c)(1) (i) or (ii) of

this section shall apply to determine

whether the payment is treated as made

to the partners of the higher-tier

partnership under this paragraph

(c)(1)(i) or to the higher tier partnership

(under the rules of paragraph (c)(1)(ii) of

this section), in the same manner as if

the partner’s distributive share of the

payment had been paid directly to such

foreign partnership;

(D) If the withholding agent can

reliably associate the partner’s

distributive share with a withholding

certificate described in § 1.1441–

1(e)(3)(i) regarding a foreign trust or

estate, then the rules of paragraph (e) of

this section shall apply to determine

who the payees are; and

(E) If the withholding agent cannot

reliably associate the partner’s

distributive share with a withholding

certificate or other appropriate

documentation, the partners are

considered to be the payees and the

presumptions described in paragraph

(d)(3) of this section shall apply to

determine the status of the partners.

(ii) Payments treated as made to the

partnership. A payment to a person that

the withholding agent may treat as a

foreign partnership in accordance with

paragraph (c) (2)(i), (3)(i), or (d)(2) of

this section is treated as a payment to

the foreign partnership and not to its

partners only if—

(A) The withholding agent can

reliably associate the payment with a

withholding certificate described in

paragraph (c)(2)(iv) of this section

(dealing with a certificate from a person

representing to be a withholding foreign

partnership); or

(B) The withholding agent can

reliably associate the payment with a

withholding certificate described in

paragraph (c)(3)(iii) of this section

certifying that the payment is income

that is effectively connected with the

conduct of a trade or business in the

United States.

(iii) Rules for reliably associating a

payment with documentation. For rules

regarding the reliable association of a

payment with documentation, see

§ 1.1441–1(b)(2)(vii). In the absence of

documentation, see § 1.1441–1(b)(3) and

paragraph (d) of this section for

applicable presumptions.

(iv) Example. The rules of paragraphs

(c)(1) (i) and (ii) of this section are

illustrated by the following example:

Example. (i) Facts. A foreign partnership,

P, has two partners, a corporation, C, and a

partnership, P1, both organized in country X.

P1 has three partners, a foreign pension fund,

a domestic partnership, P2, and a foreign

partnership, P3, organized in country Y. P2’s

partners are foreign pension funds. P holds

U.S. Treasury obligations in registered form,

on which it receives interest from U.S.

custodian, Z. P1 is not a withholding foreign

partnership and it does not certify that the

interest is effectively connected with the

conduct of a U.S. trade or business. P3 is a

withholding foreign partnership. P has

furnished a valid withholding certificate

described in paragraph (c)(3)(iii) of this

section to which it has attached valid

withholding certificates for C (beneficial

owner Form W–8 described in § 1.1441–

1(e)(2)(i)), P1, and P1’s three partners (a Form

W–9 for P2, a withholding certificate

described in paragraph (c)(2)(iv) of this

section for P3 and a beneficial owner Form

W–8 described in § 1.1441–1(e)(2)(i) for the

foreign pension fund). P has furnished

appropriate information in accordance with

paragraph (c)(3)(iv) of this section upon

which the withholding agent can rely to

determine which portion of the payment is

associated with each withholding certificate.

(ii) Analysis. The payment to P is treated

as a payment to its partners because none of

the conditions described in paragraph

(c)(1)(ii) exist under the facts to treat P as the

payee (i.e., it is not a withholding foreign

partnership and, although it has furnished a

withholding certificate described under

paragraph (c)(3)(iii) of this section, it is not

claiming that the interest is effectively

connected with the conduct of a U.S. trade
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53455

or business). Under paragraph (c)(1)(i)(A) of

this section, C, as a partner of P, is treated

as a payee because it is not a flow-through

entity or an intermediary (based on the

documentation furnished for C). Under

paragraph (c)(1)(i)(C) of this section, P1 is not

treated as a payee because it is a foreign

partnership and none of the conditions

described under paragraph (c)(1)(ii) of this

section exist under the facts to treat P as the

payee. Instead, P2 (under paragraph

(c)(1)(i)(A) of this section), P3 (under

paragraph (c)(1)(ii)(A) of this section), and

the foreign pension fund that is a partner of

P1 (under paragraph (c)(1)(i)(A) of this

section), are treated as the payees of P1’s

distributive share of the payment to P. P2 is

a payee because, although a flow-through

entity, it is a domestic partnership (see

paragraph (b)(1) of this section). P3 is treated

as a payee under paragraph (c)(1)(ii)(A) of

this section, irrespective of who its partners

are, because it has furnished a valid

withholding certificate as a withholding

foreign partnership. The foreign pension

fund is treated as a payee under paragraph

(c)(1)(i)(A) of this section because it has

furnished a beneficial owner Form W–8

described in § 1.1441–1(e)(2)(i).

(2) Withholding foreign

partnerships—(i) Reliance on claim of

withholding foreign partnership status.

A withholding foreign partnership is a

foreign partnership that has entered into

an agreement with the Internal Revenue

Service (IRS), as described in paragraph

(c)(2)(ii) of this section. A withholding

agent that can reliably associate a

payment with a certificate described in

paragraph (c)(2)(iv) of this section may

treat the person to whom it makes the

payment as a withholding foreign

partnership for purposes of withholding

under chapter 3 of the Code,

information reporting under chapter 61

of the Code, backup withholding under

section 3406, and withholding under

other provisions of the Internal Revenue

Code. Furnishing such a certificate is in

lieu of transmitting to a withholding

agent withholding certificates or other

appropriate documentation for its

partners. Although the withholding

foreign partnership generally will be

required to obtain withholding

certificates or other appropriate

documentation from its partners

pursuant to its agreement with the IRS,

it is not required to attach such

documentation to the partnership

withholding certificate.

(ii) Withholding agreement—(A) In

general. A foreign partnership may

claim withholding foreign partnership

status before an agreement is executed

with the IRS if it has applied for such

status and the IRS authorizes such

status on an interim basis under such

procedures as the IRS may issue. A

withholding foreign partnership must

file a partnership return under section

6031(a) to the extent required under the

regulations under that section and

furnish statements on Form K–1 to its

partners under section 6031(b) to the

extent required under the regulations

under that section. See §§ 1.6031–1 and

1.6031(b)–1T. See § 1.1461–1(c)(2)(ii)(A)

for an exemption from filing Forms 1042

and 1042–S. A foreign withholding

partnership that wishes to also be a

qualified intermediary under § 1.1441–

1(e)(5) for payments it receives for

persons other than its partners may

combine both agreements into one

single agreement.

(B) Terms of withholding agreement.

The IRS may, upon request, enter into

a withholding agreement with a foreign

partnership pursuant to such

procedures as the IRS may prescribe in

published guidance (see § 601.601(d)(2)

of this chapter). Under such

withholding agreement, a foreign

partnership shall generally be subject to

the applicable withholding and

reporting provisions applicable to

withholding agents and payors under

chapters 3 and 61 of the Code, and

section 3406, and the regulations under

those provisions, and other withholding

provisions of the Code, except to the

extent provided under the agreement. In

particular, the agreement must include

provisions for reporting of information

on Form 1065 and furnishing K–1

statements to the partners in the manner

required under section 6031 and the

regulations under that section. Under

the agreement, a foreign partnership

may agree to act as an acceptance agent

to perform the duties described in

§ 301.6109–1(d)(3)(iv)(A) of this chapter.

The agreement may specify the manner

in which applicable procedures for

adjustments for underwithholding and

overwithholding, including refund

procedures apply to the foreign

partnership and its partners and the

extent to which applicable procedures

may be modified. In particular, a

withholding agreement may allow a

qualified intermediary to claim refunds

of overwithheld amounts on behalf of its

customers. In addition, the agreement

must specify the manner in which the

IRS will audit the foreign partnership’s

books and records in order to verify the

accuracy of the Forms 1065 filed by the

partnership and K–1 statements

furnished to the partners as required

under section 6031 and the regulations

under that section. The agreement shall

also specify the assets that the foreign

partnership has in the United States or

alternative means of collection, if

necessary.

(iii) Withholding responsibility. A

withholding foreign partnership must

assume primary withholding

responsibility for all payments that are

made to it and, therefore, is not required

to provide information to the

withholding agent regarding each

partner’s distributive share of the

payment (see paragraph (c)(3)(iv) of this

section for the requirement to provide

distributive share information to the

withholding agent in the case of other

foreign partnerships). The partnership

shall be a withholding agent with

respect to each of its partner’s

distributive share of income subject to

withholding that is paid to the

partnership. Therefore, the withholding

agent is not required to withhold any

amount under chapter 3 of the Code on

a payment to a foreign partnership that

has furnished a withholding certificate

representing that it is a withholding

foreign partnership, unless it has actual

knowledge or reason to know that the

certificate is incorrect. The foreign

partnership shall withhold the

payments under the same procedures

and at the same time as is prescribed for

withholding by a domestic partnership

under paragraph (b)(2) of this section,

except that, for purposes of determining

the partner’s status, the provisions of

paragraph (d)(4)(iv) of this section shall

apply and paragraph (b)(2)(ii) of this

section shall not apply.

(iv) Withholding certificate from a

withholding foreign partnership. The

rules of § 1.1441–1(e)(4) shall apply to

withholding certificates described in

this paragraph (c)(2)(iv). A withholding

certificate furnished by a withholding

foreign partnership is valid with regard

to any partner on whose behalf the

certificate is furnished only if it is

furnished on a Form W–8 (or an

acceptable substitute form or such other

form as the IRS may prescribe), it is

signed under penalties of perjury by a

partner with authority to sign for the

partnership, its validity has not expired,

and it contains the information,

statement, and certifications described

in this paragraph (c)(2)(iv) as follows—

(A) The name, permanent residence

address (as described in § 1.1441–

1(e)(2)(ii)), and the employer

identification number of the

partnership, and the country under the

laws of which the partnership is created

or governed;

(B) A certification that the partnership

is a withholding foreign partnership

within the meaning of paragraph

(c)(2)(i) of this section; and

(C) Any other information or

certification as may be required by the

form or accompanying instructions in

addition to, or in lieu of, the

information and certifications described

in this paragraph (c)(2)(iv).
53456 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

(3) Other foreign partnerships—(i)

Reliance on claim of foreign partnership

status. A withholding agent that can

reliably associate a payment with a

certificate described in paragraph

(c)(3)(iii) of this section may treat the

person to whom it makes the payment

as a foreign partnership that is not a

withholding foreign partnership. Such

reliance is permitted for purposes of

withholding under chapter 3 of the

Code, information reporting under

chapter 61 of the Code, backup

withholding under section 3406, and

withholding under other provisions of

the Internal Revenue Code. For

purposes of this paragraph (c)(3)(i), a

payment that the withholding agent can

reliably associate with a withholding

certificate described in paragraph

(c)(3)(iii) of this section that would be

valid except for the fact that some or all

of the withholding certificates or other

appropriate documentation required to

be attached are lacking or are unreliable,

or that information for allocating the

payment among the partners is lacking

or is unreliable, shall nevertheless be

treated as a payment to a foreign

partnership.

(ii) Reliance on claim of reduced

withholding by a partnership for its

partners. This paragraph (c)(3)(ii)

describes the manner in which a

withholding agent may rely on a claim

of reduced withholding when making a

payment to a foreign partnership that is

not a withholding foreign partnership.

To the extent that a withholding agent

treats a payment to a foreign partnership

as a payment to its partners in

accordance with paragraph (c)(1) of this

section, it may rely on a claim for

reduced withholding by a partner if,

prior to the payment, the withholding

agent can reliably associate the payment

with a withholding certificate described

in paragraph (c)(3)(iii) of this section

pertaining to the partner unless the

withholding agent has actual knowledge

or reason to know that the withholding

certificate is unreliable. The certificate

will be considered to pertain to the

partner if the appropriate withholding

certificate for the partner is attached to

the partnership’s withholding

certificate. An appropriate withholding

certificate for a partner includes a

beneficial owner withholding certificate

described in § 1.1441–1(e)(2)(i) or, if

applicable, documentary evidence

described in § 1.1441–6(b)(2)(i) or in

§ 1.6049–5(c)(1) (for a partner claiming

to be a foreign person and a beneficial

owner, determined under the provisions

of § 1.1441–1(c)(6)), the applicable

certificates described in § 1.1441–1(d)(2)

or (3) (for a partner claiming to be a U.S.

payee), an intermediary withholding

certificate described in § 1.1441–

1(e)(3)(ii) or (iii), a U.S. branch

withholding certificate described in

§ 1.1441–1(e)(3)(v), or a partnership

withholding certificate described in

paragraph (c)(2)(iv) or (3)(iii) of this

section. Except where the partnership

certificate is provided for income

claimed to be effectively connected with

the conduct of a trade or business in the

United States, a claim must be

presented for each portion of the

payment that represents an item of

income includible in the distributive

share of the partner as required under

paragraph (c)(3)(iii)(C) of this section.

When making a claim for several

partners, the partnership may present a

single partnership withholding

certificate to which the partners’

certificates are attached. Where the

partnership certificate is provided for

income claimed to be effectively

connected with the conduct of a trade

or business in the United States, the

claim may be presented without having

to identify the partner’s distributive

share of the payment if the certificate

contains the certification described in

paragraph (c)(3)(iii)(E) of this section.

(iii) Withholding certificate from a

foreign partnership that is not a

withholding foreign partnership. A

withholding certificate furnished by a

foreign partnership that is not a

withholding foreign partnership is valid

only if it is furnished on a Form W–8

(or an acceptable substitute form or such

other form as the IRS may prescribe), it

is signed under penalties of perjury by

a partner with authority to sign for the

partnership, its validity has not expired,

it contains the information, statement,

and certifications described in this

paragraph (c)(3)(iii), and the

withholding certificates or other

appropriate documentation for all of the

partners are attached (except that

certificates for partners are not required

to be attached for a certificate furnished

solely for income claimed to be

effectively connected with the conduct

of a trade or business in the United

States, regardless of any partner’s status

as a U.S. person). The rules of § 1.1441–

1(e)(4) shall apply to withholding

certificates described in this paragraph

(c)(3)(iii). The information, statement,

and certifications required on the

withholding certificate are as follows:

(A) The name, permanent residence

address (as described in § 1.1441–

1(e)(2)(ii)), and the employer

identification number of the

partnership, and the country under the

laws of which the partnership is created

or governed.

(B) A representation that the person

whose name is on the certificate is a

foreign partnership.

(C) A statement attached to the

certificate that provides such

information as may be required by the

form and accompanying instructions,

including sufficient information to the

withholding agent to determine the

amount required to be withheld from

amounts paid to the partnership, such

as each partner’s distributive share of

amounts to which the certificate relates,

prepared in the manner described in

paragraph (c)(3)(iv) of this section. No

statement is required for a certificate

furnished for income claimed to be

effectively connected with the conduct

of a trade or business in the United

States.

(D) If the withholding certificates are

required to be attached to the

partnership’s withholding certificate, a

statement either that the attached

withholding certificates represent all of

the partners or that the partners for

whom withholding certificates are

lacking are separately identified in the

statement required under paragraph

(c)(3)(iv) of this section.

(E) A certification that the income is

effectively connected with the conduct

of a trade or business in the United

States, if applicable.

(F) Any other information or

certification as may be required by the

form or accompanying instructions in

addition to, or in lieu of, the

information and certifications described

in this paragraph (c)(3)(iii).

(iv) Information to the withholding

agent regarding each partner’s

distributive share. The partnership must

furnish information sufficient for the

withholding agent to determine each

partner’s distributive share of reportable

amounts (described in § 1.1441–

1(e)(3)(vi)). The sum of all partners’

distributive shares, expressed as a

percentage, must equal, but not exceed

one hundred percent. For purposes of

this paragraph (c)(3)(iv), the rules of

§ 1.1441–1(e)(3)(iv) regarding the

information to furnish to the

withholding agent shall apply.

(v) Withholding by a foreign

partnership. A foreign partnership

described in this paragraph (c)(3) that

receives an amount subject to

withholding under chapter 3 of the

Code shall be deemed to have satisfied

any obligation under such chapter to

withhold on the amount with respect to

any partner to the extent that the

partner’s distributive share of the

payment can be reliably associated with

a withholding certificate described in

paragraph (c)(3)(iii) of this section

pertaining to the partner that the
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53457

partnership has furnished to a

withholding agent and the partnership

does not know and has no reason to

know that the correct amount has not

been withheld under chapter 3 of the

Code and the regulations under such

chapter.

(d) Presumptions regarding payee’s

status in the absence of

documentation—(1) In general. This

paragraph (d) contains the applicable

presumptions for determining the status

of the partnership and its partners in the

absence of documentation. The

provisions of § 1.1441–1(b)(3)(iv)

(regarding the 90-day grace period) and

§ 1.1441–1(b)(3) (vii) through (ix) shall

apply for purposes of this paragraph (d).

(2) Determination of partnership

status as domestic or foreign in the

absence of documentation. In the

absence of a valid representation of

domestic partnership status in

accordance with paragraph (b)(1) of this

section and of foreign partnership status

in accordance with paragraph (c)(2)(i) or

(3)(i) of this section, the withholding

agent shall determine the status of the

payee as a corporation, a partnership or

otherwise, based upon the presumptions

set forth in § 1.1441–1(b)(3)(ii). If, based

upon these presumptions, the

withholding agent treats the payee as a

partnership, the partnership shall be

presumed to be a foreign partnership if

the withholding agent has actual

knowledge of the payee’s employer

identification number and that number

begins with the two digits ‘‘98,’’ if the

withholding agent’s communications

with the payee are mailed to an address

in a foreign country, or if the payment

is made outside the United States (as

defined in § 1.6049–5(e)). For rules

regarding reliable association with a

withholding certificate from a domestic

or a foreign partnership, see § 1.1441–

1(b)(2)(vii).

(3) Determination of partners’ status

in the absence of certain

documentation. If the withholding agent

treats the payee as a foreign partnership

in accordance with paragraph (c)(2)(i),

(3)(i), or (d)(2) of this section, the

presumptions described in this

paragraph (d)(3) shall apply when the

withholding agent cannot reliably

associate a payment with partner

documentation. The provisions of

paragraphs (d) (3)(i), (ii), and (iii) of this

section are not relevant to a payment

that a withholding agent can reliably

associate with a withholding certificate

described in paragraph (c)(2)(iv) of this

section.

(i) Documentation regarding the

status of a partner is lacking or

unreliable. Any portion of a payment

that the withholding agent cannot

reliably associate with a partner because

a withholding certificate or other

appropriate documentation for that

partner is lacking or unreliable is

presumed to be made to foreign payee.

Therefore, under § 1.1441–1(b)(1), the

withholding agent must withhold 30

percent from payments to the

partnership of amounts subject to

withholding that are allocable to such

partner or group of partners.

(ii) Information regarding the

allocation of payment is lacking or

unreliable. If a withholding agent can

reliably associate a payment with a

group of partners but lacks reliable

information to determine how much of

the payment is allocable to each partner

in the group, the payment, to the extent

it cannot reliably be allocated, is

presumed to be allocable entirely to the

partner in the group with the highest

applicable withholding rate or, if the

rates are equal, to the partner in the

group with the highest U.S. tax liability,

as the withholding agent shall estimate,

based on its knowledge and available

information. If a withholding certificate

attached to the partnership certificate is

another partnership certificate or an

intermediary certificate described in

§ 1.1441–1(e)(3)(iii), the rules of this

paragraph (d)(3)(ii) apply by treating the

share of the payment allocable to the

other partnership or the intermediary

certificate as if the payment were made

directly to the foreign partnership or

intermediary.

(iii) Certification that the foreign

partnership has furnished

documentation for all of the persons to

whom the intermediary certificate

relates is lacking or unreliable. If the

certification required under paragraph

(c)(3)(iii)(D) of this section (that the

attached withholding certificates and

other appropriate documentation

represent all of the partners in the

partnership) is lacking or is unreliable

and, as a result, the withholding agent

cannot reliably determine how much of

the payment is allocable to each of the

partners or group of partners for which

the withholding agent holds a

withholding certificate or other

appropriate documentation, then none

of the payment can reliably be

associated with any one partner and the

entire payment is presumed to be made

to a foreign payee.

(iv) Determination by a withholding

foreign partnership of the status of its

partners. For purposes of determining

whether the partners or some other

persons are the payees of the partners’

distributive shares of any payment made

to a withholding foreign partnership,

the partnership shall apply the rules of

§ 1.1441–1(b)(2), and of paragraph (c)(1)

of this section (in the case of a partner

that is a foreign partnership) and of

paragraph (e) (in the case of a partner

that is a foreign estate or a foreign trust),

in the same manner as if the partnership

were making a payment directly to the

partners other than in their capacity as

partners. Further, the provisions of

paragraphs (d)(3) (i), (ii), and (iii) of this

section shall apply to determine the

status of partners and the applicable

withholding rates to the extent that, at

the time the foreign partnership is

required to withhold on the amount, it

cannot reliably associate the amount

with documentation for any one or more

of its partners. See §§ 1.6031–1 and

1.6031–1T for reporting and filing

requirements applicable to a

withholding foreign partnership.

(4) Examples. The rules of this

paragraph (d) may be illustrated by the

following examples:

Example 1. (i) Facts. FP is a foreign

partnership receiving U.S. source interest

that would qualify as portfolio interest

described in section 871(h)(2)(B) if the

statement described in section 871(h)(5) were

furnished. FP has three partners, A, B, and

C. FP furnishes to the withholding agent a

partnership withholding certificate described

in paragraph (c)(3)(iii) of this section to

which it attaches a Form W–9 for A and a

beneficial owner Form W–8 for B. Nothing on

A’s Form W–9 indicates that A is an exempt

recipient within the meaning of § 1.6049–

4(c)(1)(i). No documentation is attached for

C. The partnership has one single account

with the withholding agent. It furnishes a

statement to the withholding agent under

paragraph (c)(3)(iv) of this section indicating

that A’s, B’s, and C’s respective distributive

shares of the payments are 40%, 40%, and

20% and represents, in accordance with

paragraph (c)(3)(iii)(D) of this section, that

there are only three partners.

(ii) Analysis. Absent actual knowledge or

reason to know otherwise, the withholding

agent may rely on FP’s withholding

certificate and A’s Form W–9 to treat A as a

U.S. beneficial owner under § 1.1441–

1(d)(4)(i) and as a U.S. payee under

paragraph (c)(1)(i)(A) of this section to the

extent of 40 percent of the payment. Under

§ 1.1441–1(b)(1), the withholding agent is not

required to withhold on A’s share of the

payment. Under § 1.6049–4(a), the

withholding agent must comply with

information reporting obligations (i.e., file a

Form 1099) with respect to A who is treated

as a U.S. payee under paragraph (c)(1)(i)(A)

of this section and § 1.6049–5(d)(1) for

purposes of the information reporting

provisions of chapter 61 of the Code and the

regulations thereunder. Absent actual

knowledge or reason to know otherwise, the

withholding agent may also rely on FP’s

withholding certificate and B’s Form W–8 to

treat B as a foreign beneficial owner under

§ 1.1441–1(e)(1)(ii)(A)(1) and paragraph

(c)(1)(i)(A) of this section. Thus, under

§ 1.1441–1(b)(1), the withholding agent may

rely on B’s claim for portfolio interest
53458 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

treatment for B’s share of the payment. Under

§ 1.1461–1(b)(1) and (c)(1), the withholding

agent must report the payment to B on Forms

1042 and 1042–S unless, under section 6031

and the regulations under that section, the

partnership is required to file a return.

Because the withholding agent cannot

associate the documentation (as defined in

§ 1.1441–1(b)(3)(vii)) for C’s share of the

interest income, the withholding agent must,

under paragraph (d)(3)(i) of this section, treat

that amount as a payment made to an

unidentified foreign partner and withhold 30

percent under section 1441 in accordance

with § 1.1441–1(b)(1).

Example 2. The facts are the same as in

Example 1, but the partnership has furnished

no information under paragraph (c)(3)(iv) of

this section regarding how much of the

payment to the foreign partnership is

attributable to A and C. Under paragraph

(d)(3)(ii) of this section, the payment

allocable to group A–C is presumed made

entirely to A or to C, depending of who of

A or C is subject to the highest withholding

rate. A is not subject to withholding because

it has furnished a valid Form W–9. C is

subject to a 30-percent withholding rate

under § 1.1441–1(b)(1) because it is

presumed to be an unidentified foreign

partner under paragraph (d)(3)(i) of this

section. Therefore, under paragraph (d)(3)(ii)

of this section, the portion of the payment

that the withholding agent can associate with

A and C is subject to withholding at a 30-

percent rate. The withholding agent may

ignore the fact that A has furnished a valid

Form W–9 supporting his claim of exemption

from withholding as a U.S. person because it

has no reliable information on how much of

the payment is allocable to A. Because the

withholding agent has a Form W–9 for the

U.S. individual partner, it must also report

A’s distributive share on a Form 1099. To the

extent that A’s exact share is not known, the

entire amount should be reported on the

Form 1099.

(e) Trusts and estates. [Reserved]

(f) Failure to receive withholding

certificate timely or to act in accordance

with applicable presumptions. See

applicable procedures described in

§ 1.1441–1(b)(7) in the event the

withholding agent does not hold an

appropriate withholding certificate or

other appropriate documentation at the

time of payment or fails to rely on the

presumptions set forth in § 1.1441–

1(b)(3) or in paragraph (d) or (e) of this

section.

(g) Effective date—(1) General rule.

This section applies to payments made

after December 31, 1998.

(2) Transition rules. A withholding

agent that on December 31, 1998, holds

a withholding certificate that is valid

under the regulations in effect prior to

January 1, 1999 (see 26 CFR parts 1 and

35a, revised April 1, 1997), may treat it

as a valid withholding certificate until

its validity expires under those

regulations or, if earlier, until December

31, 1999. Further, the validity of a

withholding certificate or statement that

is dated prior to January 1, 1998, is valid

on January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (g)(2), however,

does not apply to extend the validity

period of a withholding certificate that

expires in 1998 solely by reason of

changes in the circumstances of the

person whose name is on the certificate.

Notwithstanding the three preceding

sentences, a withholding agent may

choose to not take advantage of the

transition rule in this paragraph (g)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

§ 1.1441–6 Claim of reduced withholding

under an income tax treaty.

(a) In general. The rate of withholding

on a payment of income subject to

withholding may be reduced to the

extent provided under an income tax

treaty in effect between the United

States and a foreign country. Most

benefits under income tax treaties are to

foreign persons who reside in the treaty

country. In some cases, benefits are

available under an income tax treaty to

U.S. citizens or U.S. residents or to

residents of a third country.

See paragraph (b)(5) of this section for

claims of benefits by U.S. persons. If the

requirements of this section are met, the

amount withheld from the payment may

be reduced at source to account for the

treaty benefit. See also § 1.1441–4(b)(2)

for rules regarding claims of reduced

rate of withholding under an income tax

treaty in the case of compensation from

personal services.

(b) Reliance on claim of reduced

withholding under an income tax

treaty—(1) In general. Absent actual

knowledge or reason to know otherwise,

a withholding agent may rely on a claim

that a beneficial owner is entitled to a

reduced rate of withholding based upon

an income tax treaty if, prior to the

payment, the withholding agent can

reliably associate the payment with

documentation upon which it can rely

to treat the payment as made to a foreign

beneficial owner in accordance with

§ 1.1441–1(e)(1)(ii) (not including

1.1441–1(e)(1)(ii)(B) relating to

documentary evidence). Except as

otherwise provided in paragraph (b)(2)

or (3) of this section, for purposes of this

paragraph (b)(1), a beneficial owner

withholding certificate described in

§ 1.1441–1(e)(2)(i) is valid only if it

includes the beneficial owner’s taxpayer

identifying number and certifies that the

taxpayer has complied with the advance

ruling requirements described in

paragraph (e) of this section (if

applicable), and, if the beneficial owner

is a person related to the withholding

agent within the meaning of section 482,

that the beneficial owner will file the

statement required under § 301.6114–

1(d) of this chapter (if applicable). The

requirement to file an information

statement under section 6114 for

income subject to withholding applies

only to amounts received during the

calendar year that, in the aggregate,

exceed $500,000. See § 301.6114–1(d) of

this chapter. The Internal Revenue

Service (IRS) may apply the provisions

of § 1.1441–1(e)(1)(ii)(B) to notify the

withholding agent that the certificate

cannot be relied upon to grant benefits

under an income tax treaty. A beneficial

owner’s taxpayer identifying number on

a withholding certificate is valid for

purposes of establishing proof of

residence in a treaty country only if the

taxpayer identifying number is certified

by the IRS in accordance with the

procedures set forth in paragraph (c) of

this section. However, absent actual

knowledge or reason to know otherwise,

a withholding agent may rely on a

taxpayer identifying number without

having to inquire as to whether the

taxpayer identifying number is certified,

if the number appears correct on its face

and the permanent residence address on

the certificate is in the country whose

tax treaty with the United States is

invoked. See 1.1441–1(e)(4)(viii)

regarding reliance on a withholding

certificate by a withholding agent. The

provisions of § 1.1441–1(b)(3)(iv)

dealing with a 90-day grace period shall

apply for purposes of this section.

(2) Exemption from requirement to

furnish a taxpayer identifying number

and special documentary evidence rules

for certain income—(i) General rule. In

the case of income described in

paragraph (b)(2)(ii) of this section, a

withholding agent may rely on a

beneficial owner withholding certificate

described in paragraph (b)(1) of this

section even if the person whose name

is on the certificate has not provided a

taxpayer identifying number. In the case

of payments made outside the United

States (as defined in § 1.6049–5(e)) with

respect to an offshore account (as

defined in § 1.6049–5(c)(1)), a

withholding agent may, as an alternative

to a withholding certificate described in

paragraph (b)(1) of this section, rely on

a certificate of residence described in

paragraph (c)(3) of this section or

documentary evidence described in

paragraph (c)(4) of this section, relating
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53459

to the beneficial owner, that the

withholding agent has reviewed and

maintains in its records in accordance

with § 1.1441–1(e)(4)(iii). In the case of

a payment to a person other than an

individual, the certificate of residence

or documentary evidence must be

accompanied by the certifications

described in paragraphs (c)(5) (i) and (ii)

of this section regarding limitation on

benefits and whether the amount paid is

derived by such person or by one of its

interest holders. The withholding agent

maintains the reviewed documents by

retaining either the documents viewed

or a photocopy thereof and noting in its

records the date on which, and by

whom, the documents were received

and reviewed. This paragraph (b)(2)(i)

shall not apply to amounts that are

exempt from withholding based on a

claim that the income is effectively

connected with the conduct of a trade

or business in the United States.

(ii) Income to which special rules

apply. The income to which paragraph

(b)(2)(i) of this section applies is

dividends and interest from stocks and

debt obligations that are actively traded,

dividends from any redeemable security

issued by an investment company

registered under the Investment

Company Act of 1940 (15 U.S.C. 80a–1),

dividends, interest, or royalties from

units of beneficial interest in a unit

investment trust that are (or were, upon

issuance) publicly offered and are

registered with the Securities and

Exchange Commission under the

Securities Act of 1933 (15 U.S.C. 77a)

and amounts paid with respect to loans

of securities described in this paragraph

(b)(2)(ii). For purposes of this paragraph

(b)(2)(ii), a stock or debt obligation is

actively traded if it is actively traded

within the meaning of section 1092(d)

and § 1.1092(d)–1 when documentation

is provided.

(3) Competent authority agreements.

The procedures described in this section

may be modified to the extent the U.S.

competent authority may agree with the

competent authority of a country with

which the United States has an income

tax treaty in effect.

(4) Eligibility for reduced withholding

under an income tax treaty in the case

of a payment to a person other than an

individual—(i) General rule. The

withholding imposed under section

1441, 1442, or 1443 on any payment to

a foreign person is eligible for reduction

under the terms of an income tax treaty

only to the extent that such payment is

treated as derived by a resident of an

applicable treaty jurisdiction, such

resident is a beneficial owner of the

payment, and all other applicable

requirements for benefits under the

treaty are satisfied. A payment received

by an entity is treated as derived by a

resident of an applicable treaty

jurisdiction to the extent that the

payment is subject to tax in the hands

of a resident of that jurisdiction. For this

purpose, a payment received directly by

an entity that is treated as fiscally

transparent by the applicable treaty

jurisdiction shall be considered a

payment subject to tax in the hands of

a resident of the jurisdiction to the

extent that the interest holders in the

entity are residents of the jurisdiction.

For purposes of the preceding sentence,

interest holders do not include any

direct or indirect interest holders that

are themselves treated as fiscally

transparent entities by the applicable

treaty jurisdiction. A payment received

by an entity that is not treated as fiscally

transparent by the applicable treaty

jurisdiction shall be considered a

payment subject to tax in the hands of

a resident of such jurisdiction only if

the entity is itself a resident of that

jurisdiction. If the entity is a whollyowned entity that is disregarded for

federal tax purposes under § 301.7701–

2(c)(2) of this chapter as an entity

separate from its owner and whose

single member is a foreign person,

amounts paid to such entity may

nevertheless be treated as derived by a

resident of a treaty country if the entity

is treated by the applicable treaty

country as deriving the income as a

resident of that country. The provisions

of § 1.894–1T(d) (1) through (4) shall

apply for purposes of determinations

made under this paragraph (b)(4).

(ii) Withholding certificates—(A) In

general. The type of withholding

certificate or other appropriate

documentation that must be furnished

by a person claiming a reduced rate of

withholding under an income tax treaty

depends upon the status of the entity

under the laws of the applicable treaty

jurisdiction. For example, if the person

receiving the payment is a foreign entity

but the persons eligible for benefits

under the applicable income tax treaty

are the entity’s interest holders in the

foreign entity receiving the payment,

rather than the entity itself, then the

entity shall be treated as a foreign

partnership for purposes of determining

which withholding certificate is

appropriate irrespective of the fact that

the entity may be treated as a

corporation for U.S. tax purposes. If,

conversely, the person eligible for

benefits under an income tax treaty is

the entity rather than the interest

holders, then the entity shall be treated

as a corporation for purposes of

determining which withholding

certificate is appropriate irrespective of

the fact that the entity may be treated as

a partnership for U.S. tax purposes. In

the event of a claim for dual treatment

described in paragraph (b)(4)(iii) of this

section, multiple withholding

certificates may have to be furnished.

Multiple withholding certificates may

also have to be furnished if the entity

receives income for which a reduction

of withholding is claimed under a

provision of the Internal Revenue Code

(e.g., portfolio interest) and income for

which a reduction of withholding is

claimed under an income tax treaty.

Absent actual knowledge or reason to

know otherwise, a withholding agent

may rely on the representations on the

certificate that the beneficial owner

derives the income and is a resident of

the applicable treaty country, within the

meaning of § 1.894–1T(d) and the

applicable income tax treaty, without

having to inquire into the truthfulness

of these representations or to research

foreign law.

(B) Certification by qualified

intermediary. A foreign corporation that

is a qualified intermediary described in

§ 1.1441–1(e)(5)(ii)(C) for purposes of

claiming reduced rates of withholding

under an income tax treaty for its

shareholders (who are treated as

deriving the income paid to the

corporation as resident of an applicable

treaty jurisdiction) may furnish a single

Form W–8 for its shareholders for

amounts for which it claims the benefit

of a reduced rate of withholding under

an applicable income tax treaty. The

Form W–8 shall be one described under

§ 1.1441–1(e)(3)(ii).

(iii) Multiple claims of treaty benefits.

A withholding agent may make a

payment to a foreign entity that is

simultaneously claiming a reduced rate

of tax on its own behalf for a portion of

the payment and a reduced rate on

behalf of persons in their capacity as

interest holders in that entity for the

same or for another portion of the

payment. In the case of concurrent and

inconsistent claims of treaty benefits for

the same amount, the withholding agent

may choose to reject the claim and

request that a consistent claim be

submitted or it may choose which

reduction to apply. In the case of

concurrent and consistent claims (e.g.,

the entity that is paid the amount claims

a reduced rate for a portion of the

payment and an interest holder claims

a different reduced rate for the balance

of the payment), the withholding agent

may, at its option, accept such dual

claim based, as appropriate, on

withholding certificates furnished by

such persons with respect to their

respective shares of such payment, even
53460 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

though the withholding agent holds

different withholding certificates that

requires it to treat the entity

inconsistently with respect to different

payments or with respect to different

portions of the same payment. See

paragraph (b)(4)(iv) Example 2 of this

section. If the withholding agent does

not accept claims of reduced rate

presented by any one or more of the

interest holders, or by the entity, any

interest holder or the entity may

subsequently claim a refund or credit of

any amount so withheld to the extent

the holder’s or entity’s share of such

withholding exceeds the amount of tax

due under section 894 (in the case of a

foreign person) or under section 1 or 11

(in the case of a U.S. person).

(iv) Examples. This paragraph (b)(4) is

illustrated by the following examples:

Example 1. (i) Facts. Entity A is a business

organization formed under the laws of

country Y that has an income tax treaty with

the United States. A receives U.S. source

royalties from withholding agent R and

claims a reduced rate of withholding under

the U.S.-Y tax treaty on its own behalf (rather

than on behalf of its interest holders). A

furnishes a beneficial owner withholding

certificate described in paragraph (b)(1) of

this section that represents that A is a

resident of country Y (within the meaning of

the U.S.-Y tax treaty) and the beneficial

owner of the royalties (within the meaning of

the U.S.-Y tax treaty).

(ii) Analysis. Absent actual knowledge or

reason to know otherwise, R may rely on the

representation that A is a resident of country

Y and a beneficial owner of the royalty

income within the meaning of the U.S.-Y tax

treaty.

Example 2. (i) Facts. The facts are the same

as under Example 1, except that one of A’s

interest holders, T, is an entity organized in

country Z. The U.S.-Z tax treaty reduces the

rate on royalties to zero whereas the rate on

royalties under the U.S.-Y tax treaty is only

reduced to 5 percent. T furnishes a beneficial

owner withholding certificate to A that

represents that T is deriving its distributive

share of the royalty income paid to A as a

resident of country Z (within the meaning of

§ 1.894–1T(d)(1) and the U.S.-Z tax treaty)

and is the beneficial owner of the royalty

income (within the meaning of the U.S.-Z tax

treaty). A furnishes to R an intermediary

withholding certificate described in

§ 1.1441–1(e)(3)(iii) to which it attaches T’s

beneficial owner withholding certificate for

the portion of the payment that T claims as

its distributive share of the royalty income.

A also furnishes to R a beneficial owner

withholding certificate for itself for the

portion of the payment that T does not claim

as its distributive share.

(ii) Analysis. Absent actual knowledge or

reason to know otherwise, R may rely on the

documentation furnished by A in order to

treat the royalty payment to a single foreign

entity (A) as derived by different residents of

tax treaty countries as a result of concurrent

and consistent claims presented under

different treaties. R may, at its option, grant

dual treatment, that is, a reduced rate of zero

percent under the U.S.-Z treaty on the

portion of the royalty payment that T claims

to derive as a resident of country Z and a

reduced rate of 5 percent under the U.S.-Y

treaty for the balance. However, under

paragraph (b)(4)(iii) of this section, R may, at

its option, treat A as the only relevant person

deriving the royalty and grant benefits under

the U.S.-Y treaty only.

Example 3. (i) Facts. Entity A is a business

organization formed under the laws of the

United States and is classified as a

partnership for U.S. tax purposes. A’s

partners are S and T. S is an entity organized

in country Z. T is an entity organized in

country X. Under the laws of country Z, A

is treated as an entity taxable at the entity

level. Therefore, S is treated as a shareholder

for purposes of the laws of country Z and is

not required to take A’s income into account

for purposes of determining its tax liability

under those laws. Distributions from A are

treated as distributions from a corporate

entity for purposes of the tax laws of Country

Z. Under the laws of country X, A is treated

as a fiscally transparent entity and T is

required to take into account its distributive

share of A’s income for purposes of

determining its tax liability under those laws.

A receives U.S. source royalties that are not

connected with a trade or business. The

United States has a tax treaty with countries

Z and X under which the rate on royalties is

reduced to zero. Both S and T furnish a

beneficial owner certificate to A representing

that they are resident of their respective

countries and a beneficial owner of their

respective distributive share of royalty

income. A has actual knowledge of the tax

treatment of S and T in their respective

countries.

(ii) Analysis. Because A is a partnership for

U.S. tax purposes, S and T are each taxable

on their respective distributive share of the

royalty income under section 881(a).

However, under § 1.1441–5(b)(1), the

payment of royalty to A is not a payment

subject to withholding. Instead, under

§ 1.1441–5(b)(2), A must withhold on each

partner’s distributive share of U.S. source

royalty income and may apply the rules of

this section to determine the extent to which

the 30-percent withholding rate under

section 1442 should be reduced under the

income tax treaties with countries Z and X.

Because A has actual knowledge of the tax

treatment of S in country Z as a shareholder

of A and not as a partner (or owner of a

fiscally transparent entity), A may not rely on

the certificate furnished by S in order to

reduce the rate of withholding under the

U.S.-Z tax treaty. Therefore, it withholds 30

percent of S’s distributive share of royalty

income. A may rely on T’s certificate to treat

T as deriving its distributive share of A’s

royalty income as a resident of country X and

as a beneficial owner. Therefore, A withholds

on T’s distributive share of royalty income at

the reduced rate under the U.S.-X tax treaty.

Example 4. (i) Facts. Entity A is a business

organization formed under the laws of

country Y. A receives from withholding agent

R U.S. source royalties and U.S. source

interest income that is potentially eligible for

the portfolio interest exemption under

section 871(h) and 881(c). A’s interest

holders are S, an individual who resides in

country Y, T, an individual who resides in

country Z, and U, an individual resident in

the United States. The United States has a tax

treaty with both country Y and country Z.

The U.S.-Y tax treaty reduces the rate on

royalties to 5 percent, and the U.S.-Z tax

treaty reduces the rate to zero. A is classified

as a partnership under U.S. tax principles.

Under the tax laws of country Y, A is treated

as a fiscally transparent entity and S is

required to include in income his distributive

share of A’s income. A furnishes to R an

intermediary withholding certificate

described in § 1.1441–5(c)(3)(iii) to which it

attaches—

(A) A Form W–9 for U; and

(B) Beneficial owner withholding

certificates for S and T that represent that S

and T are foreign persons. For purposes of

claiming the reduced rate under each

applicable tax treaty, each of S’s and T’s

certificates represents that S and T are

deriving their distributive share of the royalty

income as a resident of their respective

countries (within the meaning of § 1.894–

1T(d)(1) and of the applicable tax treaty) and

as a beneficial owner (within the meaning of

the applicable tax treaty).

(ii) Analysis. Absent actual knowledge or

reason to know otherwise, R may rely on the

representations that S and T derive a

distributive share of the royalty income as

resident of their respective countries and are

the beneficial owners of the income.

Therefore, R may withhold on S’s

distributive share of the royalty income paid

to A at the 5-percent rate under the U.S.–Y

tax treaty. R may withhold on T’s distributive

share of the royalty income paid to A at the

zero rate under the U.S.-Z tax treaty, even

though A is not organized in, or a resident

of, country Z. R may rely on U’s Form

W–9 to treat U as a U.S. person. Therefore,

R does not withhold on U’s share of the

royalty payment. R also does not withhold on

any portion of the interest paid to A because

S and T have furnished beneficial owner

certificates and U has furnished a Form

W–9.

Example 5. (i) Facts. The facts are the same

as in Example 4, except that A represents

that it derives the royalty income it receives

from R as a resident of country Y (within the

meaning of § 1.894–1T(d)(1) and the U.S.-Y

tax treaty) and as a beneficial owner of the

income (within the meaning of the U.S.-Y tax

treaty). Neither T nor S represent to derive

the royalty income as resident of their

respective country. A furnishes an

intermediary withholding certificate

described in § 1.1441–1(e)(3)(iii) to which it

attaches a Form W–9 for U and beneficial

owner withholding certificates for S and T.

No claims of reduced rate under a tax treaty

are made on S’s or T’s certificates. A also

furnishes to R its own beneficial withholding

certificate in order to claim the reduced rate

under the U.S.-Y tax treaty for the royalty

income.

(ii) Analysis. Absent actual knowledge or

reason to know otherwise, R may rely on A’s

intermediary certificate and the certificates

attached thereto in order to treat S and T as
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53461

foreign beneficial owners for purposes of

treating the interest as portfolio interest and

to treat U as a U.S. payee. Therefore, R does

not withhold on the payment of interest to

A. In addition, absent actual knowledge or

reason to know otherwise, R may rely on A’s

beneficial owner certificate in order to reduce

the rate of withholding on the royalty income

under the U.S.-Y tax treaty.

(5) Claim of benefits under an income

tax treaty by a U.S. person. In certain

cases, a U.S. person may claim the

benefit of an income tax treaty. For

example, under certain treaties, a U.S.

citizen residing in the treaty country

may claim a reduced rate of U.S. tax on

certain amounts representing a pension

or an annuity from U.S. sources. Claims

of treaty benefits by a U.S. person may

be made by furnishing a Form W–9 to

the withholding agent or such other

form as the IRS may prescribe in

published guidance (see § 601.601(d)(2)

of this chapter).

(c) Proof of tax residence in a treaty

country and certification of entitlement

to treaty benefits—(1) In general. A

beneficial owner establishes proof of its

tax residence in a treaty country for

purposes of its claim to the withholding

agent that a reduced rate of tax applies

under an income tax treaty by

complying with the procedures

described in this paragraph (c) or with

such other procedures as the IRS may

prescribe in published guidance (see

§ 601.601(d)(2) of this chapter). For

purposes of this section, the residence

of a beneficial owner must be

determined in accordance with the

provisions of the applicable U.S. income

tax treaty as may be clarified by any

applicable regulations thereunder, or

technical explanations thereof, or other

published guidance.

(2) Certification of taxpayer

identifying number—(i) In general. A

taxpayer may certify its taxpayer

identifying number as required under

paragraph (b)(1) of this section by

having the number certified by the IRS

either directly as provided under

paragraph (c)(2)(ii) of this section or

through a qualified intermediary as

provided in paragraph (c)(2)(iii) of this

section.

(ii) IRS-certified TIN. The IRS shall

certify a taxpayer identifying number

(TIN) upon a certificate of residence

described in paragraph (c)(3) of this

section to which it shall attach the

certifications described in paragraphs

(c)(5) (i) and (ii) of this section, if

applicable. The taxpayer may provide

documentary evidence described in

paragraph (c)(4) of this section instead

of a certificate of residence. However, a

taxpayer (other than a person organized

as a corporate body in the applicable

treaty jurisdiction) may furnish

documentary evidence instead of a

certificate of residence only if a

certificate of residence is not available

to the taxpayer.

A certificate of residence is not

available for purposes of this paragraph

(c)(2)(ii) if the tax administration of the

country where the taxpayer claims to be

a resident does not have a procedure in

effect by which such certificates are

routinely issued or the taxpayer

establishes that obtaining such

certificate would require an

unreasonable amount of time or costs

relative to the taxpayer’s circumstances

(e.g., amount of investments in the

United States). A person organized as a

corporate body in the applicable treaty

jurisdiction may, instead of a certificate

of residence, furnish a certificate of

incorporation, articles of incorporation,

or other official document reflecting the

taxpayer’s status as a corporate body in

that jurisdiction, regardless of whether a

certificate of residence described in

paragraph (c)(3) of this section is

otherwise available. The certificate or

documentary evidence must be

furnished to the IRS by, or on behalf of,

the beneficial owner upon application

for the taxpayer identifying number or

at any other time, as permitted under

such procedures as the IRS may

prescribe in published guidance (see

§ 601.601(d)(2) of this chapter). If the tax

residence of the beneficial owner

changes, the beneficial owner shall

notify the IRS of that change within 30

days thereof. This requirement is in

addition to the notification

requirements described in § 1.1441–

1(e)(4)(ii)(D) regarding notification to a

withholding agent in the event of

changes in the beneficial owner s

circumstances. The IRS may, under the

exchange of information provisions of

an applicable income tax treaty,

exchange information with the relevant

foreign competent authority for the

purpose of confirming with appropriate

tax officials of the other country that the

beneficial owner continues to be a tax

resident of that country. The IRS may

from time to time, in its discretion,

request that the beneficial owner

reconfirm its residence in the treaty

country.

(iii) Special rules for qualified

intermediaries. The IRS may certify a

taxpayer identifying number based upon

the certification of a qualified

intermediary described in § 1.1441–

1(e)(5)(ii) regarding the tax residence of

any of its account holders, under

procedures agreed upon with the IRS. If

a new account holder has a TIN at the

time it opens an account, the qualified

intermediary may rely on a statement by

the account or interest holder that

appropriate proof of tax residence in the

treaty jurisdiction was previously

provided to the IRS. In such case, the

qualified intermediary must notify the

IRS each time that the account or

interest holder’s address changes to

another country or when the account or

interest holder terminates its

relationship with the qualified

intermediary within 30 days of that

change.

(3) Certificate of residence. A

certificate of residence referred to in

paragraph (b)(2)(i) or (c)(2)(ii) of this

section is a certification issued by the

competent authority (or another

appropriate tax official) of the treaty

country of which the taxpayer claims to

be a resident that the taxpayer has filed

its most recent income tax return as a

resident of that country (within the

meaning of the applicable tax treaty). A

certificate of residence is valid for a

period of three years or such longer

period as the IRS may prescribe in

published guidance (see § 601.601(d)(2)

of this chapter). The competent

authorities may agree to a different

procedure for certifying residence, in

which case such procedure shall govern

for payments made to a person claiming

to be a resident of the country with

which such an agreement is in effect.

(4) Documentary evidence

establishing residence in the treaty

country—(i) Individuals. For purposes

of this paragraph (c)(4), documentary

evidence establishes the residence of an

individual in a treaty country if it

includes the name, address, and

photograph of the person seeking to

prove residence, is an official document

issued by an authorized governmental

body (i.e., a government or agency

thereof, or a municipality), and has been

issued no more than three years prior to

presentation to the IRS or the

withholding agent. A document older

than three years may be relied upon as

proof of residence only if it is

accompanied by additional evidence of

the person’s residence in the treaty

country (e.g., a bank statement, utility

bills, or medical bills). Documentary

evidence must be in the form of original

documents or certified copies thereof.

Documentary evidence must be

accompanied by an affidavit of the

taxpayer signed under penalties of

perjury that the documentary evidence

submitted is true and complete.

(ii) Persons other than individuals.

For purposes of this paragraph (c)(4),

documentary evidence establishes the

residence in a treaty country of a person

other than an individual if it includes

the name of the entity and the address

of its principal office in the treaty
53462 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

country, and is an official document

issued by an authorized governmental

body (e.g., a government or agency

thereof, or a municipality).

(5) Certifications regarding

entitlement to treaty benefits—(i)

Certification regarding conditions under

a Limitation on Benefits Article. A

taxpayer that is not an individual must

certify to the IRS by way of an affidavit

attached to its request for certification of

its employer identification number that

it meets one or more of the conditions

set forth in the Limitation on Benefits

Article (if any, or in a similar provision)

contained in the applicable tax treaty.

The affidavit must describe sufficient

facts for the IRS to determine which

condition the taxpayer claims to satisfy.

The affidavit must be signed by the

taxpayer under penalties of perjury.

(ii) Certification regarding whether the

taxpayer derives the income. A taxpayer

that is not an individual shall certify to

the IRS by way of an affidavit attached

to its request for certification of its

employer identification number that any

income for which it intends to claim

benefits under an applicable income tax

treaty is income that will properly be

treated as derived by itself as a resident

of the applicable treaty jurisdiction

within the meaning of § 1.894–1T(d)(1).

The affidavit must be signed under

penalties of perjury. This requirement

does not apply if the taxpayer furnishes

a certificate of residence that certifies

that fact.

(d) Joint owners. In the case of a

payment to joint owners, each owner

must furnish a withholding certificate

or, if applicable, documentary evidence

or a certificate of residence. The

applicable rate of tax on a payment of

income to joint owners shall be the

highest applicable rate.

(e) Related party dividends under

U.S.-Denmark income tax treaty. Article

VI(3) of the income tax treaty between

the United States and Denmark (see

1950–1 C.B. 77; see also § 601.601(d)(2)

of this chapter) reduces the rate of tax

on dividends between related

corporations to 5 percent subject to the

condition that the relationship between

the domestic and foreign corporations

was not arranged or maintained for the

purpose of securing the reduced rate. A

domestic corporation that makes a

distribution derived by a resident of

Denmark may treat this condition as

satisfied if, prior to the payment, a

request has been made to the IRS for a

private letter ruling determining that the

relationship between the corporation

and the Danish resident was not

arranged or maintained for such

purpose and the IRS has either issued a

favorable ruling (and the ruling has not

been revoked) or is considering the

ruling request.

(f) Failure to receive withholding

certificate timely. See applicable

procedures described in § 1.1441–1(b)(7)

in the event the withholding agent does

not hold an appropriate withholding

certificate or other appropriate

documentation at the time of payment.

(g) Effective date—(1) General rule.

This section applies to payments made

after December 31, 1998.

(2) Transition rules. For purposes of

this section, a withholding agent that on

December 31, 1998, holds a Form 1001

or 8233 that is valid under the

regulations in effect prior to January 1,

1999 (see 26 CFR parts 1 and 35a,

revised April 1, 1997), may treat it as a

valid withholding certificate until its

validity expires under those regulations

or, if earlier, until December 31, 1999.

Further, the validity of a withholding

certificate or statement that is dated

prior to January 1, 1998, is valid on

January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (g)(2), however,

does not apply to extend the validity

period of a withholding certificate that

expires in 1998 solely by reason of

changes in the circumstances of the

person whose name is on the certificate

or in interpretation of the law under the

regulations under § 1.894–1T(d).

Notwithstanding the three preceding

sentences, a withholding agent may

choose to not take advantage of the

transition rule in this paragraph (g)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section. Certificates

issued prior to April 1, 1998, that expire

at any time after March 31, 1998 (other

than by reason of changes in the

circumstances of the person whose

name is on the certificate) shall remain

valid until December 31, 1998.

Par. 12. Section 1.1441–7 is amended

by

1. Revising paragraphs (a) through (c).

2. Redesignating paragraph (d) as

paragraph (f).

3. Adding new paragraph (d), and

paragraphs (e) and (g).

4. Removing the language ‘‘(j)’’ and

adding ‘‘(g)’’ in its place in the first

sentence of newly designated paragraph

(f)(1).

5. Removing the language ‘‘(d)’’ and

adding ‘‘(f)’’ in its place in the first

sentence of newly designated paragraph

(f)(1), in the first sentence of newly

designated paragraph (f)(2)(i), and in the

first sentence of newly designated

paragraph (f)(3).

6. Removing the authority citation at

the end of the section.

The revisions read as follows:

§ 1.1441–7 General provisions relating to

withholding agents.

(a) Withholding agent defined. For

purposes of chapter 3 of the Internal

Revenue Code (Code) and the

regulations under such chapter, the term

withholding agent means any person,

U.S. or foreign, that has the control,

receipt, custody, disposal, or payment of

an item of income of a foreign person

subject to withholding, including (but

not limited to) a foreign intermediary

described in § 1.1441–1(e)(3)(i), a

foreign partnership, or a U.S. branch

described in § 1.1441–1(b)(2)(iv) (A) or

(E). See § 1.1441–1(b) (1) and (2) for

determining whether a payment is

considered made to a foreign person.

Any person who meets the definition of

a withholding agent is required to

deposit any tax withheld under

§ 1.1461–1(a) and to make the returns

prescribed by § 1.1461–1 (b) and (c), as

modified by the terms of an agreement

with a qualified intermediary (in the

case of a qualified intermediary) or, in

the case of a foreign partnership, to

make the returns prescribed under

section 6031 and the regulations

thereunder. When several persons

qualify as withholding agents with

respect to a single payment, only one

tax is required to be withheld and,

generally, only one return (on Form

1042, as required under § 1.1461–1(b)),

is required to be made. See § 1.1461–

1(b)(2) and (c)(4) for filing procedures

when multiple withholding agents are

involved. In the case of a withholding

agent paying to partners of a

withholding foreign partnership

described in § 1.1441–5(c)(2)(i), the

withholding agent may arrange with the

partnership to withhold if it is provided

the information by the partnership, in

which case the partnership does not

have to withhold. However, the

partnership must still file a partnership

return under section 6031(a) and the

regulations under that section. The

withholding agent does not have to file

Forms 1042–S (but does have to file a

Form 1042) since the withholding

foreign partnership furnishes FormsK–1

to its partners pursuant to section

6031(b) and § 1.6031(b)–1T. For

purposes of this section and any

requirement to withhold under chapter

3 of the Code and the regulations

thereunder, a person who, as a nominee

described in § 1.6031(c)–1T, has

furnished to a partnership all of the

information required to be furnished
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53463

under § 1.6031(c)–1T(a) shall not be

treated as a withholding agent if it has

notified the partnership that it is

treating the provision of information to

the partnership as a discharge of its

obligations as a withholding agent.

(b) Standards of knowledge—(1) In

general. A withholding agent must

withhold at the full 30-percent rate

under section 1441, 1442, or 1443(a) or

at the full 4-percent rate under section

1443(b) if it has actual knowledge or

reason to know that a claim of U.S.

status or of a reduced rate of

withholding under section 1441, 1442,

or 1443 is incorrect. A withholding

agent shall be liable for tax, interest, and

penalties to the extent provided under

sections 1461 and 1463 and the

regulations under those sections if it

fails to withhold the correct amount

despite its actual knowledge or reason

to know the amount required to be

withheld. For purposes of the

regulations under sections 1441, 1442,

and 1443, a withholding agent may rely

on information or certifications

contained in, or attached to, a

withholding certificate or other

documentation furnished by or for a

beneficial owner or payee unless the

withholding agent has actual knowledge

or reason to know that the information

or certifications are not correct and, if

based on such knowledge or reason to

know, it should withhold (under

chapter 3 of the Code or another

withholding provision of the Code) an

amount greater than would be the case

if it relied on the information or

certifications, or it should report (under

chapter 3 of the Code or under another

provision of the Code) an amount that

would not otherwise be reportable if it

relied on the information or

certifications. See § 1.1441–1(e)(4)(viii)

for applicable reliance rules. A

withholding agent that has received

notification by the Internal Revenue

Service (IRS) that a claim of U.S. status

or of a reduced rate is incorrect has

actual knowledge beginning on the date

that is 30 calendar days after the date

the notice is received. A withholding

agent that fails to act in accordance with

the presumptions set forth in §§ 1.1441–

1(b)(3), 1.1441–4(a), 1.1441–5 (d) and

(e), or 1.1441–9(b)(3) may also be liable

for tax, interest, and penalties. See

§ 1.1441–1(b)(3)(ix) and (7).

(2) Reason to know—(i) In general. A

withholding agent shall be considered

to have reason to know if its knowledge

of relevant facts or statements contained

in the withholding certificates or other

documentation is such that a reasonably

prudent person in the position of the

withholding agent would question the

claims made.

(ii) Limits on reason to know in

certain cases. Except as otherwise

provided in paragraph (b)(3) of this

section, a withholding agent that is a

financial institution (including a

regulated investment company) with

which a customer may open an account

has a reason to know with respect to

payments of amounts described in

§ 1.1441–6(b)(2)(ii) that a beneficial

owner withholding certificate or

documentary evidence for a beneficial

owner is not reliable only if any one or

more of the circumstances described in

this paragraph (b)(2)(ii) exist for a

withholding certificate. In such a case,

the withholding agent may require a

new withholding certificate. In the

absence of a new certificate, a

withholding agent may rely on the

withholding certificate only after

documentation is provided in support of

the claim of foreign status,

classification, or reduced rate of tax

under a tax treaty.

(A) The permanent residence address

on the withholding certificate is an

address in the United States. In the case

of an individual, trust, or estate, the

withholding agent may rely on

information in its files that is less than

three years old and that supports the

beneficial owner’s claim of foreign

status, despite a U.S. address (for

example, a bank has evidence of the

diplomatic status of a customer). In the

absence of evidence in the withholding

agent’s files, the agent meets its due

diligence obligation for purposes of this

paragraph (b)(2)(ii)(A) if it contacts the

beneficial owner or its agent in the

United States and obtains an

explanation in writing supporting the

foreign status of the beneficial owner

(for example, the beneficial owner is a

nonresident alien individual

temporarily present in the United States

as a teacher; see § 301.7701(b)–3(b)(3) of

this chapter) and documentation

supporting the claim of foreign status is

attached to the beneficial owner’s

statement (for example, in the case of a

nonresident alien individual teacher, a

copy of the relevant pages of the

beneficial owner’s passport showing the

individual’s U.S. visa status or a copy of

relevant INS documents). In the case of

a beneficial owner other than an

individual, trust, or estate, the

withholding agent must inquire as to

whether the person whose name is on

the certificate is actually organized or

created under the laws of a foreign

country.

(B) The payment is directed to a P.O.

Box, an in-care-of address, or a U.S.

address. In the case of an individual, the

withholding agent may rely, for

example, on documentary evidence of a

type described in § 1.1441–6(c) (3) or (4)

supporting the beneficial owner’s claim

of residence in a foreign country to

ascertain that the individual is a

nonresident alien individual. In the case

of a person other than an individual, the

withholding agent may rely on other

evidence to ascertain that the person

whose name is on the certificate is not

a U.S. person.

(C) In the case of income for which

benefits are claimed under an income

tax treaty, the permanent residence

address or mailing address is not in the

corresponding treaty country. In such a

case, the withholding agent may rely,

for example, on documentary evidence

of a type described in § 1.1441–6(c) (3)

or (4) supporting the beneficial owner’s

claim of residence in the country whose

benefits under an income tax treaty with

the United States are invoked.

(D) The mailing address on the

withholding certificate is in the United

States or the beneficial owner notifies

the withholding agent of a new address

for mailing or residential purposes that

is in the United States, a P.O. box, or an

in-care-address, or, in the case of

income for which benefits are claimed

under an income tax treaty, the mailing

address on the certificate or the new

mailing or residential address notified

to the withholding agent is not in the

treaty country. The withholding agent

may, however, rely on documentary

evidence of a type described in

§ 1.1441–6(c) (3) or (4) supporting the

beneficial owner’s claim of residence in

a foreign country.

(E) The name of the person on the

withholding certificate or documentary

evidence indicates that the person’s

status is a corporation, partnership,

trust, estate, or an individual, and the

person’s claim of status is not consistent

with such indication. For example, a

person whose name indicates that it is

a per se corporation described in

§ 301.7701–2(b)(8)(i) of this chapter

represents on a Form W–8 that it is a

partnership.

(F) Such other circumstances as the

IRS may prescribe in published

guidance (see § 601.601(d)(2) of this

chapter).

(3) Coordinated account information

systems. See § 1.1441–1(e)(4)(ix) for

application of these rules other than on

an account-by-account basis so that a

withholding agent that relies on a

coordinated account information system

for documentation is considered to

know or have reason to know the facts

recorded in the system.

(c) Authorized agent—(1) In general.

The acts of an agent of a withholding

agent (including the receipt of

withholding certificates, the payment of
53464 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

amounts of income subject to

withholding, and the deposit of tax

withheld) are imputed to the

withholding agent on whose behalf it is

acting. However, if the agent is a foreign

person, a withholding agent that is a

U.S. person may treat the acts of the

foreign agent as its own for purposes of

determining whether it has complied

with the provisions of this section, but

only if the agent is an authorized foreign

agent, as defined in paragraph (c)(2) of

this section. An authorized foreign agent

cannot apply the provisions of this

paragraph (c) to appoint another person

its authorized foreign agent with respect

to the payments it receives from the

withholding agent.

(2) Authorized foreign agent. An agent

is an authorized foreign agent only if—

(i) There is a written agreement

between the withholding agent and the

foreign person acting as agent;

(ii) The notification procedures

described in paragraph (c)(3) of this

section have been complied with;

(iii) Books and records and relevant

personnel of the foreign agent are

available (on a continuous basis,

including after termination of the

relationship) for examination by the IRS

in order to evaluate the withholding

agent’s compliance with the provisions

of chapters 3 and 61 of the Code, section

3406, and the regulations under those

provisions; and

(iv) The U.S. withholding agent

remains fully liable for the acts of its

agent and does not assert any of the

defenses that may otherwise be

available, including under common law

principles of agency in order to avoid

tax liability under the Internal Revenue

Code.

(3) Notification. A withholding agent

that appoints an authorized agent to act

on its behalf for purposes of § 1.871–

14(c)(2), the withholding provisions of

chapter 3 of the Code, section 3406 or

other withholding provisions of the

Internal Revenue Code, or the reporting

provisions of chapter 61 of the Code, is

required to file notice of such

appointment with the Office of the

Assistant Commissioner (International).

Such notice shall be filed before the first

payment for which the authorized agent

acts as such. Such notice shall

acknowledge the withholding agent

liability as provided in paragraph

(c)(2)(iv) of this section.

(4) Liability of U.S. withholding agent.

An authorized foreign agent is subject to

the same withholding and reporting

obligations that apply to any

withholding agent under the provisions

of chapter 3 of the Code and the

regulations thereunder. In particular, an

authorized foreign agent does not

benefit from the special procedures or

exceptions that may apply to a qualified

intermediary. A withholding agent

acting through an authorized foreign

agent is liable for any failure of the

agent, such as failure to withhold an

amount or make payment of tax, in the

same manner and to the same extent as

if the agent’s failure had been the failure

of the U.S. withholding agent. For this

purpose, the foreign agent’s actual

knowledge or reason to know shall be

imputed to the U.S. withholding agent.

The U.S. withholding agent’s liability

shall exist irrespective of the fact that

the authorized foreign agent is also a

withholding agent and is itself

separately liable for failure to comply

with the provisions of the regulations

under section 1441, 1442, or 1443.

However, the same tax, interest, or

penalties shall not be collected more

than once.

(5) Filing of returns. See § 1.1461–

1(b)(2)(iii) and (c)(4)(iii) regarding

returns required to be made where a

U.S. withholding agent acts through an

authorized foreign agent.

(d) United States obligations. If the

United States is a withholding agent for

an item of interest, including original

issue discount, on obligations of the

United States or of any agency or

instrumentality thereof, the withholding

obligation of the United States is

assumed and discharged by—

(1) The Commissioner of the Public

Debt, for interest paid by checks issued

through the Bureau of the Public Debt;

(2) The Treasurer of the United States,

for interest paid by him or her, whether

by check or otherwise;

(3) Each Federal Reserve Bank, for

interest paid by it, whether by check or

otherwise; or

(4) Such other person as may be

designated by the IRS.

(e) Assumed obligations. If, in

connection with the sale of a

corporation’s property, payment on the

bonds or other obligations of the

corporation is assumed by a person,

then that person shall be a withholding

agent to the extent amounts subject to

withholding are paid to a foreign

person. Thus, the person shall withhold

such amounts under § 1.1441–1 as

would be required to be withheld by the

seller or corporation had no such sale or

assumption been made.

* * * * *

(g) Effective date. Except as otherwise

provided in paragraph (f)(3) of this

section, this section applies to payments

made after December 31, 1998.

Par. 13. Section 1.1441–8T is

redesignated as § 1.1441–8 and

amended as follows:

1. The section heading and paragraph

(b) are revised.

2. Paragraphs (c), (d), (e) and (f) are

added.

The revisions and additions read as

follows:

§ 1.1441–8 Exemption from withholding for

payments to foreign governments,

international organizations, foreign central

banks of issue, and the Bank for

International Settlements.

* * * * *

(b) Reliance on claim of exemption by

foreign government. Absent actual

knowledge or reason to know otherwise,

the withholding agent may rely upon a

claim of exemption made by the foreign

government if, prior to the payment, the

withholding agent can reliably associate

the payment with documentation upon

which it can rely to treat the payment

as made to a beneficial owner in

accordance with § 1.1441–1(e)(1)(ii). A

Form W–8 furnished by a foreign

government for purposes of claiming an

exemption under this paragraph (b) is

valid only if, in addition to other

applicable requirements, it certifies that

the income is, or will be, exempt from

taxation under section 892 and the

regulations under that section and

whether the person whose name is on

the certificate is an integral part of a

foreign government (as defined in

§ 1.892–2T(a)(2)) or a controlled entity

(as defined in § 1.892–2T(a)(3)).

(c) Income of a foreign central bank of

issue or the Bank for International

Settlements—(1) Certain interest

income. Section 895 provides for the

exclusion from gross income of certain

income derived by a foreign central

bank of issue, or by the Bank for

International Settlements, from

obligations of the United States or of

any agency or instrumentality thereof or

from interest on deposits with persons

carrying on the banking business if the

bank is the owner of the obligations or

deposits and does not hold the

obligations or deposits for, or use them

in connection with, the conduct of a

commercial banking function or other

commercial activity by such bank. See

§ 1.895–1. Absent actual knowledge or

reason to know that a foreign central

bank of issue, or the Bank for

International Settlements, is operating

outside the scope of the exclusion

granted by section 895 and the

regulations under that section, the

withholding agent may rely on a claim

of exemption if, prior to the payment,

the withholding agent can reliably

associate the payment with

documentation upon which it can rely

to treat the foreign central bank of issue

or the Bank for International
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53465

Settlements as the beneficial owner of

the payment in accordance with

§ 1.1441–1(e)(1)(ii). A Form W–8

furnished by a foreign central bank of

issue or the Bank for International

Settlements for purposes of claiming an

exemption under this paragraph (c)(1) is

valid only if, in addition to other

applicable requirements, it certifies that

the person whose name is on the

certificate is a foreign central bank of

issue, or the Bank for International

Settlements, and that the bank does not,

and will not, hold the obligations or the

bank deposits covered by the Form W–

8 for, or use them in connection with,

the conduct of a commercial banking

function or other commercial activity.

(2) Bankers acceptances. Interest

derived by a foreign central bank of

issue from bankers acceptances is

exempt from tax under sections

871(i)(2)(C) and 881(d) and § 1.861–

2(b)(4). With respect to bankers’

acceptances, a withholding agent may

treat a payee as a foreign central bank

of issue without requiring a withholding

certificate if the name of the payee and

other facts surrounding the payment

reasonably indicate that the payee or

beneficial owner is a foreign central

bank of issue, as defined in § 1.861–

2(b)(4).

(d) Exemption for payments to

international organizations. A payment

to an international organization (within

the meaning of section 7701(a)(18)) is

exempt from withholding on any

payment. A withholding agent may treat

a payee as an international organization

without requiring a withholding

certificate if the name of the payee is

one that is designated as an

international organization by executive

order (pursuant to 22 U.S.C. 288

through 288(f)) and other facts

surrounding the transaction reasonably

indicate that the international

organization is the beneficial owner of

the payment.

(e) Failure to receive withholding

certificate timely and other applicable

procedures. See applicable procedures

described in § 1.1441–1(b)(7) in the

event the withholding agent does not

hold a valid withholding certificate

described in paragraph (b) or (c)(1) of

this section or other appropriate

documentation at the time of payment.

Further, the provisions of § 1.1441–

1(e)(4) shall apply to withholding

certificates and other documents related

thereto furnished under the provisions

of this section.

(f) Effective date—(1) In general. This

section applies to payments made after

December 31, 1998.

(2) Transition rules. For purposes of

this section, a withholding agent that on

December 31, 1998, holds a Form 8709

that is valid under the regulations in

effect prior to January 1, 1999 (see 26

CFR part 1, revised April 1, 1997), may

treat it as a valid withholding certificate

until its validity expires under those

regulations or, if earlier, until December

31, 1999. Further, the validity of a

withholding certificate or statement that

is dated prior to January 1, 1998, is valid

on January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998 by reason of the

immediately preceding sentence). The

rule in this paragraph (f)(2), however,

does not apply to extend the validity

period of a withholding certificate that

expires in 1998 solely by reason of

changes in the circumstances of the

person whose name is on the certificate.

Notwithstanding the three preceding

sentences, a withholding agent may

choose to not take advantage of the

transition rule in this paragraph (f)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

Par. 14. Section 1.1441–9 is added to

read as follows.

§ 1.1441–9 Exemption from withholding on

exempt income of a foreign tax-exempt

organization, including foreign private

foundations.

(a) Exemption from withholding for

exempt income. No withholding is

required under section 1441(a) or 1442,

and the regulations under those

sections, on amounts paid to a foreign

organization that is described in section

501(c) to the extent that the amounts are

not income includable under section

512 in computing the organization’s

unrelated business taxable income. See,

however, § 1.1443–1 for withholding on

payments of unrelated business income

to foreign tax-exempt organizations and

on payments subject to tax under

section 4948. For a foreign organization

to claim an exemption from withholding

under section 1441(a) or 1442 based on

its status as an organization described in

section 501(c), it must furnish the

withholding agent with a withholding

certificate described in paragraph (b)(2)

of this section. A foreign organization

described in section 501(c) may choose

to claim a reduced rate of withholding

under the procedures described in other

sections of the regulations under section

1441 and not under this section. In

particular, if an organization chooses to

claim benefits under an income tax

treaty, the withholding procedures

applicable to claims of such a reduced

rate are governed solely by the

provisions of § 1.1441–6 and not of this

section.

(b) Reliance on foreign organization’s

claim of exemption from withholding—

(1) General rule. A withholding agent

may rely on a claim of exemption under

this section only if, prior to the

payment, the withholding agent can

reliably associate the payment with a

valid withholding certificate described

in paragraph (b)(2) of this section.

(2) Withholding certificate. A

withholding certificate under this

paragraph (b)(2) is valid only if it is a

Form W–8 and if, in addition to other

applicable requirements, the Form W–8

includes the taxpayer identifying

number of the organization whose name

is on the certificate, and it certifies that

the Internal Revenue Service (IRS) has

issued a favorable determination letter

(and the date thereof) that is currently

in effect, what portion, if any, of the

amounts paid constitute income

includable under section 512 in

computing the organization’s unrelated

business taxable income, and, if the

organization is described in section

501(c)(3), whether it is a private

foundation described in section 509.

Notwithstanding the preceding

sentence, if the organization cannot

certify that it has been issued a

favorable determination letter that is

still in effect, its withholding certificate

is nevertheless valid under this

paragraph (b)(2) if the organization

attaches to the withholding certificate

an opinion that is acceptable to the

withholding agent from a U.S. counsel

concluding that the organization is

described in section 501(c). If the

determination letter or opinion of

counsel to which the withholding

certificate refers concludes that the

organization is described in section

501(c)(3), and the certificate further

certifies that the organization is not a

private foundation described in section

509, an affidavit of the organization

setting forth sufficient facts concerning

the operations and support of the

organization for the Internal Revenue

Service (IRS) to determine that such

organization would be likely to qualify

as an organization described in section

509(a) (1), (2), (3), or (4) must be

attached to the withholding certificate.

An organization that provides an

opinion of U.S. counsel or an affidavit

may provide the same opinion or

affidavit to more than one withholding

agent provided that the opinion is

acceptable to each withholding agent

who receives it in conjunction with a

withholding certificate. Any such

opinion of counsel or affidavit must be

renewed whenever the certificate to
53466 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

which it is attached is required to be

renewed.

(3) Presumptions in the absence of

documentation. Notwithstanding

paragraph (b)(1) of this section, if the

organization’s certification with respect

to whether amounts paid constitute

income includable under section 512 in

computing the organization’s unrelated

business taxable income is not reliable

or is lacking but all other certifications

are reliable, the withholding agent may

rely on the certificate but the amounts

paid are presumed to be income

includable under section 512 in

computing the organization’s unrelated

business taxable income. If the

certification regarding private

foundation status is not reliable, the

withholding agent may rely on the

certificate but the amounts paid are

presumed to be paid to a foreign

beneficial owner that is a private

foundation.

(4) Reason to know. Reliance by a

withholding agent on the information

and certifications stated on a

withholding certificate is subject to the

agent’s actual knowledge or reason to

know that such information or

certification is incorrect as provided in

§ 1.1441–7(b). For example, a

withholding agent must cease to treat a

foreign organization’s claim for

exemption from withholding based on

the organization’s tax-exempt status as

valid beginning on the earlier of the date

on which such agent knows that the IRS

has given notice to such foreign

organization that it is not an

organization described in section 501(c)

or the date on which the IRS gives

notice to the public that such foreign

organization is not an organization

described in section 501(c). Similarly, a

withholding agent may no longer rely

on a certification that an amount is not

subject to tax under section 4948

beginning on the earlier of the date on

which such agent knows that the IRS

has given notice to such foreign

organization that it is subject to tax

under section 4948 or the date on which

the IRS gives notice that such foreign

organization is a private foundation

within the meaning of section 509(a).

(c) Failure to receive withholding

certificate timely and other applicable

procedures. See applicable procedures

described in § 1.1441–1(b)(7) in the

event the withholding agent does not

hold a valid withholding certificate or

other appropriate documentation at the

time of payment. Further, the provisions

of § 1.1441–1(e)(4) shall apply to

withholding certificates and other

documents related thereto furnished

under the provisions of this section.

(d) Effective date—(1) In general. This

section applies to payments made after

December 31, 1998.

(2) Transition rules. For purposes of

this section, a withholding agent that on

December 31, 1998, holds a Form W–8,

1001 or 4224 or a statement that is valid

under the regulations in effect prior to

January 1, 1999,( see 26 CFR parts 1 and

35a, revised April 1, 1997), may treat it

as a valid withholding certificate until

its validity expires under those

regulations or, if earlier, until December

31, 1999. Further, the validity of a

withholding certificate or statement that

is dated prior to January 1, 1998, is valid

on January 1, 1998, and would expire at

any time during 1998, is extended until

December 31, 1998 (and is not extended

after December 31, 1998, by reason of

the immediately preceding sentence).

The rule in this paragraph(d)(2),

however, does not apply to extend the

validity period of a withholding

certificate that expires in 1998 solely by

reason of changes in the circumstances

of the person whose name is on the

certificate. Notwithstanding the three

preceding sentences, a withholding

agent may choose to not take advantage

of the transition rule in this paragraph

(d)(2) with respect to one or more

withholding certificates and, therefore,

to require new withholding certificates

conforming to the requirements

described in this section.

Par. 15. Sections 1.1442–1 and

1.1442–2 are revised to read as follows:

§ 1.1442–1 Withholding of tax on foreign

corporations.

For regulations concerning the

withholding of tax at source under

section 1442 in the case of foreign

corporations, foreign governments,

international organizations, foreign taxexempt corporations, or foreign private

foundations, see §§ 1.1441–1 through

1.1441–9.

§ 1.1442–2 Exemption under a tax treaty.

For regulations providing for a claim

of reduced withholding tax under

section 1442 by certain foreign

corporations pursuant to the provisions

of an income tax treaty, see § 1.1441–6.

Par. 16. Section 1.1442–3 is added to

read as follows:

§ 1.1442–3 Tax exempt income of a foreign

tax-exempt corporations

For regulations providing for a claim

of exemption for income exempt from

tax under section 501(a) of a foreign taxexempt corporation, see § 1.1441–9. See

§ 1.1443–1 for withholding rules

applicable to foreign private

foundations and to the unrelated

business income of foreign tax-exempt

organizations.

Par. 17. Section 1.1443–1 is revised to

read as follows:

§ 1.1443–1 Foreign tax-exempt

organizations.

(a) Income includible under section

512 in computing unrelated business

taxable income. In the case of a foreign

organization that is described in section

501(c), amounts paid to the organization

includible under section 512 in

computing the organization’s unrelated

business taxable income are subject to

withholding under §§ 1.1441–1, 1.1441–

4, and 1.1441–6 in the same manner as

payments of the same amounts to any

foreign person that is not a tax-exempt

organization. Therefore, a foreign

organization receiving amounts

includible under section 512 in

computing the organization’s unrelated

business taxable income may claim an

exemption from withholding or a

reduced rate of withholding with

respect to that income in the same

manner as a foreign person that is not

a tax-exempt organization. See § 1.1441–

9(b)(3) for presumption that amounts are

includible under section 512 in

computing the organization’s unrelated

business taxable income in the absence

of a reliable certification.

(b) Income subject to tax under

section 4948—(1) In general. The gross

investment income (as defined in

section 4940(c)(2)) of a foreign private

foundation is subject to withholding

under section 1443(b) at the rate of 4

percent to the extent that the income is

from sources within the United States

and is subject to the tax imposed by

section 4948(a) and the regulations

under that section. Withholding under

this paragraph (b) is required

irrespective of the fact that the income

may be effectively connected with the

conduct of a trade or business in the

United States by the foreign

organization. See § 1.1441–9(b)(3) for

applicable presumptions that amounts

are subject to tax under section 4948.

The withholding imposed under this

paragraph (b)(1) does not obviate a

private foundation’s obligation to file

any return required by law with respect

to such organization, such as the form

that the foundation is required to file

under section 6033 for the taxable year.

(2) Reliance on a foreign

organization’s claim of foreign private

foundation status. For reliance by a

withholding agent on a foreign

organization’s claim of foreign private

foundation status, see § 1.1441–9 (b) and

(c).

(3) Applicable procedures. A

withholding agent withholding the 4-

percent amount pursuant to paragraph

(b)(1) of this section shall treat such
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53467

withholding as withholding under

section 1441(a) or 1442(a) for all

purposes, including reporting of the

payment on a Form 1042 and a Form

1042–S pursuant to § 1.1461–1 (b) and

(c). Similarly, the foreign private

foundation shall treat the 4-percent

withholding as withholding under

section 1441(a) or 1442(a), including for

purposes of claims for refunds and

credits.

(4) Claim of benefits under an income

tax treaty. The withholding procedures

applicable to claims of a reduced rate

under an income tax treaty are governed

solely by the provisions of § 1.1441–6

and not by this section.

(c) Effective date—(1) In general. This

section applies to payments made after

December 31, 1998.

(2) Transition rules. For purposes of

this section, a withholding agent that on

December 31, 1998, holds an affidavit or

opinion of counsel described in

§ 1.1443–1(b)(4)(i) in effect prior to

January 1, 1999 (see § 1.1443–1(b)(4)(i)

as contained in 26 CFR part 1, revised

April 1, 1997) that is valid under these

provisions may treat it as a valid

withholding certificate until December

31, 1999. However, a withholding agent

may choose to not take advantage of the

transition rule in this paragraph (c)(2)

with respect to one or more withholding

certificates and, therefore, to require

new withholding certificates

conforming to the requirements

described in this section.

Par. 18. Section 1.1445–5 is amended

by revising the second sentence of

paragraph (b)(1) to read as follows:

§ 1.1445–5 Special rules concerning

distributions and other transactions by

corporations, partnerships, trusts, and

estates.

* * * * *

(b) * * * (1) * * * For rules

coordinating the withholding under

section 1441 (or section 1442 or 1443)

and under section 1445 on distributions

from a corporation, see § 1.1441–3(b)(4).

* * *

* * * * *

Par. 19. Sections 1.1461–1 and

1.1461–2 are revised to read as follows:

§ 1.1461–1 Payment and returns of tax

withheld.

(a) Payment of withheld tax—(1)

Deposits of tax. Every withholding agent

who withholds tax pursuant to chapter

3 of the Internal Revenue Code (Code)

and the regulations under such chapter

shall deposit such amount of tax with a

Federal reserve bank or authorized

financial institution as provided in

§ 1.6302–2(a). If for any reason the total

amount of tax required to be returned

for any calendar year pursuant to

paragraph (b) of this section has not

been deposited pursuant to § 1.6302–2,

the withholding agent shall pay the

balance of tax due for such year at such

place as the Internal Revenue Service

(IRS) shall specify. The tax shall be paid

when filing the return required under

paragraph (b)(1) of this section for such

year, unless the IRS specifies otherwise.

See paragraph (b)(2) of this section

when there are multiple withholding

agents.

(2) Penalties for failure to pay tax. For

penalties and additions to the tax for

failure to timely pay the tax required to

be withheld under chapter 3 of the

Code, see sections 6656, 6672, and 7202

and the regulations under those

sections.

(b) Income tax return—(1) General

rule. A withholding agent shall make an

income tax return on Form 1042 (or

such other form as the IRS may

prescribe) for income paid during the

preceding calendar year that the

withholding agent is required to report

on an information return on Form 1042–

S (or such other form as the IRS may

prescribe) under paragraph (c)(1) of this

section. See section 6011 and § 1.6011–

1(c). The withholding agent must file

the return on or before March 15 of the

calendar year following the year in

which the income was paid. The return

must show the aggregate amount of

income paid and tax withheld required

to be reported on all the Forms 1042–

S for the preceding calendar year by the

withholding agent, in addition to such

information as is required by the form

and accompanying instructions.

Withholding certificates or other

statements or information provided to a

withholding agent are not required to be

attached to the return. A return must be

filed under this paragraph (b)(1) even

though no tax was required to be

withheld during the preceding calendar

year. The withholding agent must retain

a copy of Form 1042 for the applicable

statute of limitations on assessments

and collection with respect to the

amounts required to be reported on the

Form 1042. See section 6501 and the

regulations thereunder for the

applicable statute of limitations.

Adjustments to the total amount of tax

withheld, as described in § 1.1461–2,

shall be stated on the return as

prescribed by the form and

accompanying instructions.

(2) Multiple withholding agents—(i)

General rule. Except as otherwise

provided in paragraph (b)(2)(ii), (iii),

(iv), or (v) of this section, no Form 1042

is required to be filed under paragraph

(b)(1) of this section if a return is filed

by another withholding agent reporting

the same income in compliance with the

provisions of this paragraph (b) and any

remaining tax due is paid by such other

withholding agent with the return in

accordance with the provisions of

paragraph (a) of this section.

(ii) Payment to a qualified

intermediary. A U.S. withholding agent

making a payment to a qualified

intermediary (as defined in § 1.1441–

1(e)(5)(ii)) must file a return under

paragraph (b)(1) of this section,

regardless of whether the qualified

intermediary assumes primary

withholding responsibility for the

payment, as described in § 1.1441–

1(e)(5)(iv) and regardless of whether the

qualified intermediary is also required

to file a return under the terms of its

agreement with the IRS. A qualified

intermediary’s agreement with the IRS

shall specify the extent, if any, to which

the intermediary is subject to filing

requirements under this section.

(iii) Payment to a non-qualified

intermediary. A withholding agent

making a payment to a foreign

intermediary that is not a qualified

intermediary described in § 1.1441–

1(e)(5)(ii) must file a return under

paragraph (b)(1) of this section to report

such payments. The foreign

intermediary is not required to make a

return to report the payments that it

itself makes to the persons for whom it

collects the payments to the extent that

the withholding agent represents to the

intermediary that it will file such a

return or that it has done so.

(iv) Payment to or through an

authorized foreign agent. Both the U.S.

withholding agent making a payment to

or through an authorized foreign agent

(defined in § 1.1441–7(c)) and the

authorized foreign agent are required to

file a return under paragraph (b)(1) of

this section.

(v) Payments to foreign partnerships.

A withholding agent making a payment

to a foreign partnership shall file a

return under paragraph (b)(1) of this

section in the same manner as is

required for a withholding agent making

a payment to a qualified intermediary.

(vi) Payments to a U.S. branch of

certain foreign banks, securities dealers,

or insurance companies. A withholding

agent making a payment to a U.S.

branch described in § 1.1441–1(b)(2)(iv)

must file a return under paragraph (b)(1)

of this section, irrespective of the fact

that the branch is treated as a U.S.

person or is presumed to receive income

that is effectively connected with its

conduct of a trade or business in the

United States.

(3) Payments to wholly-owned

entities. A withholding agent making a

payment to a wholly-owned entity that
53468 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

is disregarded for Federal tax purposes

under § 301.7701–2(c)(2) of this chapter

as an entity separate from its owner and

whose single owner is a foreign person

shall file a return under paragraph (b)(1)

of this section.

(4) Amended returns. An amended

return may be filed on a Form 1042X or

such other form as the IRS may

prescribe. An amended return must

include such information as the form or

accompanying instructions shall

require, including, with respect to any

information that has changed from the

time of the filing of the return, the

information that was shown on the

original return and the corrected

information.

(c) Information returns—(1) Filing

requirement—(i) In general. A

withholding agent (other than an

individual who is not acting in the

course of a trade or business with

respect to the payment) must make an

information return on Form 1042–S (or

such other form as the IRS may

prescribe) to report the amounts

specified in paragraph (c)(2) of this

section that were paid during the

preceding calendar year. One Form

1042–S shall be prepared for each

beneficial owner (except as otherwise

provided in paragraph (c)(4) of this

section regarding multiple withholding

agents). The Form 1042–S shall be

prepared in such manner as the form

and accompanying instructions

prescribe. One copy of the Form 1042–

S shall be filed with the IRS on or before

March 15 of the calendar year following

the year in which the item of income

was paid. It shall be filed with a

transmittal form as provided in the

instructions to the Form 1042–S and to

the transmittal form. Withholding

certificates or other statements or

documentation provided to a

withholding agent are not required to be

attached to the information return.

Another copy of the Form 1042–S shall

be furnished to the payee on or before

March 15 of the calendar year following

the year in which the item of income

was paid.

The withholding agent shall retain a

copy of each Form 1042–S for the

statute of limitations on assessment and

collection applicable to the Form 1042

to which the Form 1042–S relates.

(ii) Joint owners. In the case of joint

owners, a single Form 1042–S may be

prepared. However, upon request of any

one of the owners, the withholding

agent shall furnish to such owner its

own Form 1042–S. Where more than

one Form 1042–S is issued with respect

to a single payment to joint owners, the

aggregate amount of items paid and tax

withheld reported on the Forms 1042–

S cannot exceed the amounts paid to the

joint owners and tax withheld thereon.

If a single Form 1042–S is prepared, the

form shall state the name of only one

owner and that name shall be that of

any person whose status the

withholding agent relied upon to

determine the applicable rate of

withholding tax.

(2) Amounts subject to reporting—(i)

In general. Subject to the exceptions

described in paragraph (c)(2)(ii) of this

section, the amounts required to be

reported on a Form 1042–S are amounts

paid to foreign persons (including

persons who are presumed to be foreign)

that consist of amounts subject to

withholding (as defined in § 1.1441–

2(a)) under section 1441, 1442, or 1443.

This includes (but is not limited to)—

(A) The entire amount of corporate

distributions (whether deemed or

actual) paid to a foreign person,

irrespective of any estimate of the

portion of the distribution that

represents a taxable dividend;

(B) Amounts deemed paid to a foreign

person as described in § 1.1441–2(d)

(dealing with exceptions to withholding

where no money or property is paid),

except where the amount is exempt

from withholding due to lack of

knowledge;

(C) Amounts that are (or are presumed

to be) effectively connected with the

conduct of a trade or business in the

United States, irrespective of the fact

that no withholding certificate is

required to be furnished by the payee or

beneficial owner. In the case of amounts

paid on a notional principal contract

described in § 1.1441–4(a)(3) that are

presumed to be effectively connected

with the conduct of a trade or business

in the United States, the amount

required to be reported is limited to the

net income from the notional principal

contract as described in § 1.446–3(d).

Effectively connected non-periodic

payments are reportable for the year in

which an actual payment is made;

(D) Interest (including original issue

discount) that is not exempt from

reporting as provided under § 1.6049–8,

dealing with certain interest on deposits

with banks paid to Canadian residents;

(E) Amounts representing interest

paid on an obligation that is sold

between interest payment dates;

(F) Amounts paid to foreign

governments, international

organizations, or the Bank for

International Settlements, whether or

not documentation must be provided;

(G) Interest (including original issue

discount) paid with respect to foreigntargeted registered obligations described

in § 1.871–14(e)(2) to the extent the

documentation requirements described

in § 1.871–14(e)(3) and (4) are satisfied

(taking into account the provisions of

§ 1.871–14(e)(4)(ii), if applicable).

(ii) Exceptions to reporting. The

amounts listed in paragraphs

(c)(2)(ii)(A) through

(G) of this section are not required to

be reported on a Form 1042–S—

(A) Any item paid by a partnership,

trust or estate to the extent the item is

required to be reported by the

partnership under section 6031 or by

the trust or estate under sections 6012(a)

and 6034A, and the regulations under

those sections;

(B) Any item required to be reported

on a Form W–2, including an item

required to be shown on Form W–2

solely by reason of § 1.6041–2 (relating

to return of information as to payments

to employees) or § 1.6052–1 (relating to

information regarding payment of wages

in the form of group-term life

insurance);

(C) Any item required to be reported

on Form 1099, and such other forms as

are prescribed pursuant to the

information reporting provisions of

sections 6041 through 6050P and the

regulations under these sections;

(D) Amounts paid on a notional

principal contract described in

§ 1.1441–4(a)(3)(i) that are not

effectively connected with the conduct

of a trade or business in the United

States (or treated as not effectively

connected pursuant to § 1.1441–

4(a)(3)(ii));

(E) Amounts required to be reported

on Form 8288 (U.S. Withholding Tax

Return for Dispositions by Foreign

Persons of U.S. Real Property Interests)

or Form 8804 (Annual Return for

Partnership Withholding Tax (Section

1446)). A withholding agent that must

report a distribution partly on a Form

8288 or 8804 and partly on a Form

1042–S may elect to report the entire

amount on a Form 8288 or 8804;

(F) Original issue discount for which

no withholding is required under

§ 1.1441–2(b)(3); and

(G) Amounts described in § 1.1441–

1(b)(4)(xviii) (dealing with certain

amounts paid by the U.S. government).

(3) Required information. The

information required to be furnished

under this paragraph (c)(3) shall be

based upon the information provided by

or on behalf of the beneficial owner

(e.g., a beneficial owner withholding

certificate or documentary evidence), as

corrected and supplemented based on

the withholding agent’s actual

knowledge. The Form 1042-S must

include the following information, if

applicable—
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53469

(i) The name, address, and taxpayer

identifying number of the withholding

agent;

(ii) A description of each category of

income paid (e.g., interest, dividends,

royalties, etc.) and the aggregate amount

in each category expressed in U.S.

dollars;

(iii) The rate of withholding applied;

(iv) The name and permanent

residence address of the beneficial

owner (or of the payee if the beneficial

owner is unknown, or of the person

receiving the amount if the payee is also

unknown);

(v) The taxpayer identifying number

of the beneficial owner if required under

§ 1.1441–1(e)(4)(vii) to be stated on a

beneficial owner withholding certificate

(or if actually known to the withholding

agent making the return). In the case of

a financial institution, actual knowledge

exists with respect to accounts

maintained for customers only if such

taxpayer identifying number was stated

on a Form W–8 furnished for another

payment made through the same

account or through another account, the

information for which can be retrieved

through a centralized account

information system (as described in

§ 1.1441–1(e)(4)(ix)) containing both

accounts; and

(vi) Such information as the form or

the instructions may require in addition

to, or in lieu of, information required

under this paragraph (c)(3).

(4) Multiple withholding agents—(i) In

general. Except as otherwise provided

in this paragraph (c)(4), no information

return is required to be made under

paragraph (c)(1)(i) of this section if a

return is filed by another withholding

agent reporting the same amount

pursuant to the provisions of this

paragraph (c).

(ii) Payments to a qualified

intermediary or a withholding foreign

partnership. A withholding agent

making a payment to a qualified

intermediary (described in § 1.1441–

1(e)(5)(ii)) or to a withholding foreign

partnership (described in § 1.1441–

5(c)(2)(i)) must report the payment on a

single Form 1042–S or as otherwise

directed by the form or the

accompanying instructions to the form

and must provide a copy of the Form

1042–S to the intermediary or

partnership (but is not required to

provide the Form 1042–S to the

beneficial owners or partners). The

Form 1042-S must report the different

categories of payments based on

different types of income and applicable

withholding rates.

(iii) Payments to an authorized

foreign agent—(A) Filing obligation of

foreign authorized agent. An authorized

foreign agent (as described in § 1.1441–

7(c)(2)) is subject to the filing

requirements described in paragraph

(c)(1)(i) of this section because it is a

withholding agent. Therefore, to the

extent the U.S. withholding agent for

which it is acting is not reporting the

information required under this

paragraph (c), it must report the

information required to be reported

under paragraph (c)(3) or (4)(vi) of this

section.

(B) Filing obligations of the U.S.

withholding agent. A U.S. withholding

agent making a payment to an

authorized foreign agent is exempted

from the requirement under paragraph

(c)(4)(iv) of this section to make a return

on Form 1042–S for each beneficial

owner and may, instead, make a return

on a single Form 1042–S to report the

payment made to the authorized foreign

agent. The exemption in this paragraph

(c)(4)(iii)(B) shall apply only to the

extent the authorized foreign agent

complies with the filing requirements

under paragraph (c)(4)(iii)(A) of this

section.

(iv) Payments to other intermediaries

or foreign partnerships. Payment of an

amount to a foreign intermediary

described in § 1.1441–1(e)(3)(i) that is

not a qualified intermediary or to a

foreign partnership that is not a

withholding foreign partnership

described in § 1.1441–5(c)(2)(i) may not

be shown on a single Form 1042–S but

must be reported on separate Forms

1042–S for each beneficial owner or

payee whose name appears on a

withholding certificate attached to the

intermediary’s or partnership

withholding certificate that is from a

qualified intermediary or a withholding

foreign partnership. Payments to an

intermediary for the account of

undocumented owners or to a foreign

partnership for the account of

undocumented partners should be

reported on a single Form 1042–S made

out to the intermediary and bearing the

mention ‘‘unknown owners’’.

(v) Payments to a U.S. branch of

certain foreign entities. Payment of an

amount to the U.S. branch of a foreign

entity described in § 1.1441–1(b)(2)(iv)

shall be reported—

(A) On a single Form 1042–S as

effectively connected income if the

withholding agent cannot reliably

associate documentation with the

payment to the U.S. branch;

(B) On a single Form 1042–S as an

amount paid to an intermediary if the

withholding agent can reliably associate

the payment with a U.S. branch

withholding certificate described in

§ 1.1441–1(e)(3)(v) furnished as

evidence of an agreement between the

branch and the withholding agent to

treat the branch as a U.S. person; or

(C) On separate Forms 1042–S for

each beneficial owner or payee whose

name appears on a withholding

certificate or other appropriate

documentation attached to the U.S.

branch withholding certificate.

(vi) Required information. An

information return on a Form 1042–S by

a withholding agent reporting payments

to an intermediary, to a foreign

partnership, or to a U.S. branch must

contain the information contained in

this paragraph (c)(4)(vi). The

information on the Form 1042–S must

be based upon the withholding

certificates furnished by the payee, as

corrected and supplemented by the

withholding agent based on its actual

knowledge or reason to know other

facts:

(A) The name, address, and taxpayer

identifying number of the withholding

agent.

(B) A description of each category of

income paid (e.g., interest, dividends,

royalties, etc.) and the aggregate amount

in each category expressed in U.S.

dollars.

(C) The rate of withholding applied.

(D) The basis for not withholding or

withholding at a reduced rate.

(E) The name, address, and taxpayer

identifying number of the payee.

(F) In the case of payments described

in paragraph (c)(4)(iv) of this section,

the information described in paragraphs

(c)(3)(iv) and (v) of this section

regarding the person for whom a Form

1042–S is required to be prepared under

paragraph (c)(4)(iv).

(G) Such information as the form or

instructions may require in addition to,

or in lieu of, the information required

under this paragraph (c)(4)(vi).

(5) Payments to single-member entity.

A withholding agent that, upon reliance

on a valid withholding certificate, treats

a payment as made to a wholly-owned

entity that is disregarded to federal tax

purposes under § 301.7701–2(c)(2) of

this chapter as an entity separate from

its owner and whose single owner is a

foreign person shall make an

information return on Form 1042–S in

the name of the foreign single owner,

using the owner’s taxpayer identifying

number if such a number is required to

be stated on the form.

(6) Special rules in the case of claims

of treaty benefits by hybrid entities or

their interest holders. A withholding

agent must make an information return

on a Form 1042–S for each beneficial

owner (within the meaning of the

applicable tax treaty) upon whose

withholding certificate or other

appropriate documentation the
53470 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

withholding agent relies to reduce the

rate of withholding under a tax treaty.

Therefore, in the case of concurrent and

consistent claims of reduced rates under

several tax treaties by the entity and by

one or more interest holders, the

withholding agent must make an

information return for the entity and for

each of the interest holders claiming to

derive an allocable share of amounts

paid to the entity as a resident of an

applicable treaty country.

(7) Effect of grace period on filing

requirements. A withholding agent who

relies on the provisions of § 1.1441–

1(b)(3)(iv) to treat the payee as a foreign

person during a 90-day grace period

while awaiting the documentation must

make an information return on a Form

1042–S to report all payments to such

person during the grace period even if

such person is (or is presumed to be) a

U.S. person based upon documentation

furnished to the withholding agent

when the grace period expired or

subsequently, or based upon applicable

presumptions in § 1.1441–1(b)(3).

(8) Magnetic media reporting. A

withholding agent that makes 250 or

more Form 1042–S information returns

for a taxable year must file Form 1042–

S returns on magnetic media. See

§ 301.6011–2 of this chapter for

requirements applicable to a

withholding agent that files Forms

1042–S with the IRS on magnetic media

and publications of the IRS relating to

magnetic media filing.

(d) Report of taxpayer identifying

numbers. When so required under

procedures that the IRS may prescribe

in published guidance (see

§ 601.601(d)(2) of this chapter), a

withholding agent must attach to the

Form 1042 a list of all the taxpayer

identifying numbers (and corresponding

names) that have been furnished to the

withholding agent and upon which the

withholding agent has relied to grant a

reduced rate of withholding and that are

not otherwise required to be reported on

a Form 1042–S under the provisions of

this section.

(e) Indemnification of withholding

agent. A withholding agent is

indemnified against the claims and

demands of any person for the amount

of any tax it deducts and withholds in

accordance with the provisions of

chapter 3 of the Code and the

regulations under that chapter. A

withholding agent that withholds based

on a reasonable belief that such

withholding is required under chapter 3

of the Code and the regulations under

that chapter is treated for purposes of

section 1461 and this paragraph (e) as

having withheld tax in accordance with

the provisions of chapter 3 of the Code

and the regulations under that chapter.

In addition, a withholding agent is

indemnified against the claims and

demands of any person for the amount

of any payments made in accordance

with the grace period provisions set

forth in § 1.1441–1(b)(3)(iv). This

paragraph (e) does not apply to relieve

a withholding agent from tax liability

under chapter 3 of the Code or the

regulations under that chapter.

(f) Amounts paid not constituting

gross income. Any amount withheld in

accordance with § 1.1441–3 shall be

reported and paid in accordance with

this section, even though the amount

paid to the beneficial owner may not

constitute gross income in whole or in

part. For this purpose, a reference in

this section and § 1.1461–2 to an

amount shall, where appropriate, be

deemed to refer to the amount subject to

withholding under § 1.1441–3.

(g) Extensions of time to file Forms

1042 and 1042–S. The IRS may grant an

extension of time in which to file a

Form 1042 or a Form 1042–S. Form

2758, Application for Extension of Time

to File Certain Excise, Income,

Information, and Other Returns (or such

other form as the IRS may prescribe),

must be used to request an extension of

time for a Form 1042. Form 8809,

Request for Extension of Time to File

Information Returns (or such other form

as the IRS may prescribe) must be used

to request an extension of time for a

Form 1042–S. The request must contain

a statement of the reasons for requesting

the extension and such other

information as the forms or instructions

may require. It must be mailed or

delivered not later than March 15 of the

year following the end of the calendar

year for which the return will be filed.

(h) Penalties. For penalties and

additions to the tax for failure to file

returns or furnish statements in

accordance with this section, see

sections 6651, 6662, 6663, 6721, 6722,

6723, 6724(c), 7201, 7203, and the

regulations under those sections.

(i) Effective date. This section shall

apply to returns required for payments

made after December 31, 1998.

§ 1.1461–2 Adjustments for

overwithholding or underwithholding of tax.

(a) Adjustments of overwithheld tax—

(1) In general. A withholding agent that

has overwithheld under chapter 3 of the

Internal Revenue Code (Code) and made

a deposit of the tax as provided in

§ 1.6302–2(a) may adjust the

overwithheld amount either pursuant to

the reimbursement procedure described

in paragraph (a)(2) of this section or

pursuant to the set-off procedure

described in paragraph (a)(3) of this

section. Adjustments under this

paragraph (a) may only be made within

the time prescribed under paragraph (a)

(2) or (3) of this section. After such time,

an adjustment to the amount

overwithheld can only be claimed by

the beneficial owner with the Internal

Revenue Service (IRS) pursuant to the

procedures described in chapter 65 of

the Code. For purposes of this section,

the term overwithholding means any

amount actually withheld (determined

before application of the adjustment

procedures under this section) from an

item of income pursuant to chapter 3 of

the Code or the regulations thereunder

in excess of the actual tax liability due,

regardless of whether such

overwithholding was in error or

appeared correct at the time it occurred.

(2) Reimbursement of tax—(i) General

rule. Under the reimbursement

procedure, the withholding agent repays

the beneficial owner or payee for the

amount overwithheld. In such a case,

the withholding agent may reimburse

itself by reducing, by the amount of tax

actually repaid to the beneficial owner

or payee, the amount of any deposit of

tax made by the withholding agent

under § 1.6302–2(a)(1)(iii) for any

subsequent payment period occurring

before the end of the calendar year

following the calendar year of

overwithholding. Any such reduction

that occurs for a payment period in the

calendar year following the calendar

year of overwithholding shall be

allowed only if—

(A) The withholding agent states, on

a timely filed (not including extensions)

Form 1042–S for the calendar year of

overwithholding, the amount of tax

withheld and the amount of any actual

repayment; and

(B) The withholding agent states on a

timely filed (not including extensions)

Form 1042 for the calendar year of

overwithholding, that the filing of the

Form 1042 constitutes a claim for credit

in accordance with § 1.6414–1.

(ii) Record maintenance. If the

beneficial owner is repaid an amount of

withholding tax under the provisions of

this paragraph (a)(2), the withholding

agent shall keep as part of its records a

receipt showing the date and amount of

repayment and the withholding agent

must provide a copy of such receipt to

the beneficial owner. For this purpose,

a canceled check or an entry in a

statement is sufficient provided that the

check or statement contains a specific

notation that it is a refund of tax

overwithheld.

(3) Set-offs. Under the set-off

procedure, the withholding agent may

repay the beneficial owner by applying

the amount overwithheld against any
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53471

amount which otherwise would be

required under chapter 3 of the Code or

the regulations thereunder to be

withheld from income paid by the

withholding agent to such person before

the earlier of the due date (without

regard to extensions) for filing the Form

1042–S for the calendar year of

overwithholding or the date that the

Form 1042–S is actually filed with the

IRS. For purposes of making a return on

Form 1042 or 1042–S (or an amended

form) for the calendar year of

overwithholding and for purposes of

making a deposit of the amount

withheld, the reduced amount shall be

considered the amount required to be

withheld from such income under

chapter 3 of the Code and the

regulations thereunder.

(4) Examples. The principles of this

paragraph (a) are illustrated by the

following examples:

Example 1. (i) N is a nonresident alien

individual who is a resident of the United

Kingdom. In December 1999, a domestic

corporation C pays a dividend of $100 to N,

at which time C withholds $30 and remits

the balance of $70 to N. On February 10,

2000, prior to the time that C files its Form

1042, N furnishes a valid Form W–8

described in § 1.1441–1(e)(2)(i) upon which C

may rely to reduce the rate of withholding to

15 percent under the provisions of the U.S.–

U.K. tax treaty. Consequently, N advises C

that its tax liability is only $15 and not $30

and requests reimbursement of $15. Although

C has already deposited the $30 that was

withheld, as required by § 1.6302–2(a)(1)(iv),

C repays N in the amount of $15.

(ii) During 1999, C makes no other

payments upon which tax is required to be

withheld under chapter 3 of the Code;

accordingly, its return on Form 1042 for such

year, which is filed on March 15, 2000,

shows total tax withheld of $30, an adjusted

total tax withheld of $15, and $30 previously

paid for such year. Pursuant to § 1.6414–1(b),

C claims a credit for the overpayment of $15

shown on the Form 1042 for 1999.

Accordingly, it is permitted to reduce by $15

any deposit required by § 1.6302–2 to be

made of tax withheld during the calendar

year 2000. The Form 1042–S required to be

filed by C with respect to the dividend of

$100 paid to N in 1999 is required to show

tax withheld of $30 and tax released of $15.

Example 2. The facts are the same as in

Example 1. In addition, during 2000, C

makes payments to N upon which it is

required to withhold $200 under chapter 3 of

the Code, all of which is withheld in June

2000. Pursuant to § 1.6302–2(a)(1)(iii), C

deposits the amount of $185 on July 15, 2000

($200 less the $15 for which credit is claimed

on the Form 1042 for 1999). On March 15,

2001, C Corporation files its return on Form

1042 for calendar year 2000, which shows

total tax withheld of $200, $185 previously

deposited by C, and $15 allowable credit.

Example 3. The facts are the same as in

Example 1. Under § 1.6032–2(a)(1)(ii)), C is

required to deposit on a quarter-monthly

basis the tax withheld under chapter 3 of the

Code. C withholds tax of $100 between

February 8 and February 15, 2000, and

deposits $75 [($100 x 90 percent) less $15]

of the withheld tax within 3 banking days

after February 15, 2000, and by depositing

$10 [($100¥$15) less $75] within 3 banking

days after March 15, 2000.

(b) Withholding of additional tax

when underwithholding occurs. A

withholding agent may withhold from

future payments made to a beneficial

owner the tax that should have been

withheld from previous payments to

such beneficial owner. In the

alternative, the withholding agent may

satisfy the tax from property that it

holds in custody for the beneficial

owner or property over which it has

control. Such additional withholding or

satisfaction of the tax owed may only be

made before the date that the Form 1042

is required to be filed (not including

extensions) for the calendar year in

which the underwithholding occurred.

See § 1.6302–2 for making deposits of

tax or § 1.1461–1(a) for making payment

of the balance due for a calendar year.

(c) Definition. For purposes of this

section, the term payment period means

the period for which the withholding

agent is required by § 1.6302–2(a)(1) to

make a deposit of tax withheld under

chapter 3 of the Code.

(d) Effective date. This section applies

to payments made after December 31,

1998.

§§ 1.1461–3 and 1.1461–4 [Removed]

Par. 20. Sections 1.1461–3 and

1.1461–4 are removed.

Par. 21. Sections 1.1462–1 and

1.1463–1 are revised to read as follows:

§ 1.1462–1 Withheld tax as credit to

recipient of income.

(a) Creditable tax. The entire amount

of the income from which the tax is

required to be withheld (including

amounts calculated under the gross-up

formula in § 1.1441–3(f)(1)) shall be

included in gross income in the return

required to be made by the beneficial

owner of the income, without deduction

for the amount required to be or actually

withheld, but the amount of tax actually

withheld shall be allowed as a credit

against the total income tax computed

in the beneficial owner’s return.

(b) Amounts paid to persons who are

not the beneficial owner. Amounts

withheld at source under chapter 3 of

the Internal Revenue Code (Code) on

payments to a fiduciary, partnership, or

intermediary is deemed to have been

paid by the taxpayer ultimately liable

for the tax upon such income. Thus, for

example, if a beneficiary of a trust is

subject to the taxes imposed by section

1, 2, 3, or 11 upon any portion of the

income received from a foreign trust, the

part of any amount withheld at source

which is properly allocable to the

income so taxed to such beneficiary

shall be credited against the amount of

the income tax computed upon the

beneficiary’s return, and any excess

shall be refunded. Further, if a

partnership withholds an amount under

chapter 3 of the Code with respect to the

distributive share of a partner that is a

partnership or with respect to the

distributive share of partners in an

upper tier partnership, such amount is

deemed to have been withheld by the

upper tier partnership.

(c) Effective date. This section applies

to payments made after December 31,

1998.

§ 1.1463–1 Tax paid by recipient of

income.

(a) Tax paid. If the tax required to be

withheld under chapter 3 of the Internal

Revenue Code is paid by the beneficial

owner of the income or by the

withholding agent, it shall not be recollected from the other, regardless of

the original liability therefor. However,

this section does not relieve the person

that did not withhold tax from liability

for interest or any penalties or additions

to tax otherwise applicable. See

§ 1.1441–7(b)(7) for additional

applicable rules.

(b) Effective date. This section applies

to failures to withhold occurring after

December 31, 1989.

Par. 23. Section 1.6041–1 is amended

by:

1. Revising paragraph (a)(1).

2. Adding a sentence at the end of

paragraph (a)(2) .

3. Revising paragraphs (d)(1)

introductory text and (d)(3).

4. Adding a heading for paragraphs

(d)(2) and (d)(4).

5. Adding paragraph (d)(5).

The additions and revisions read as

follows:

§ 1.6041–1 Return of information as to

payments of $600 or more

(a) General rule—(1) Information

returns required—(i) Payments required

to be reported. Except as otherwise

provided in §§ 1.6041–3 and 1.6041–4,

every person engaged in a trade or

business shall make an information

return for each calendar year with

respect to payments it makes during the

calendar year in the course of its trade

or business to another person of fixed or

determinable income described in

paragraph (a)(1)(i) (A) or (B) of this

section. For purposes of the regulations

under this section, the person described

in this paragraph (a)(1)(i) is a payor.

(A) Salaries, wages, commissions,

fees, and other forms of compensation
53472 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

for services rendered aggregating $600

or more.

(B) Interest (including original issue

discount), rents, royalties, annuities,

pensions, and other gains, profits, and

income aggregating $600 or more.

(ii) Information returns required

under other provisions of the Internal

Revenue Code. The payments described

in paragraphs (a)(1)(i) (A) and (B) of this

section shall not include any payments

of amounts with respect to which an

information return is required by, or

may be required under authority of,

section 6042(a) (relating to dividends),

section 6043(a)(2) (relating to

distributions in liquidation), section

6044(a) (relating to patronage

dividends), section 6045 (relating to

brokers’ transactions with customers),

sections 6049(a) (1) and (2) (relating to

interest), section 6050N(a) (relating to

royalties), or section 6050P (a) or (b)

(relating to cancellation of

indebtedness). In addition, the

payments described in paragraphs

(a)(1)(i) (A) and (B) of this section shall

not include amounts excepted from the

definition of dividends under section

6042(b)(2) and § 1.6042–3(b)(1),

amounts described in section 6044(b),

amounts excepted from reporting under

§ 1.6045–1(g), amounts excepted from

the definition of interest under section

6049(b)(2) (C) or (D), § 1.6049–4(c), or

1.6049–5(b)(6) through (15).

Notwithstanding the preceding

sentence, interest with respect to a

notional principal contract excluded

from the definition of interest under

§ 1.6049–5(b)(15) is reportable under

this section. The term interest as used in

this paragraph (a)(1)(ii) otherwise

includes all interest, other than interest

coming within the definition of interest

provided in § 1.6049–5(a). For example,

a closely held corporation borrows

money from one of its officers on a

promissory note not in registered form

bearing annual stated interest of $300.

The corporation also pays royalties to

the officer amounting to $400 a year. An

information return is required under

this paragraph (a)(1) to report the

payments to the officer because the

interest does not come within the

definition of interest in § 1.6049–5(a)

and the aggregate of interest and

royalties exceeds $600.

(2) * * * For the requirement to

submit the information required by

Form 1099 on magnetic media for

payments after December 31, 1983, see

section 6011(e) and § 301.6011–2 of this

chapter (Procedure and Administration

Regulations).

* * * * *

(d) * * * (1) In general. Amounts

paid in respect of life insurance,

endowment, or annuity contracts are

required to be reported in returns of

information under this section—

* * * * *

(2) Professional fees. * * *

(3) Prizes and awards. Amounts paid

as prizes and awards that are required

to be included in gross income under

section 74 and § 1.74–1 when paid in

the course of a trade or business are

required to be reported in returns of

information under this section.

(4) Disability payments. * * *

(5) Notional principal contracts.

Amounts paid after December 31, 1998,

with respect to notional principal

contracts referred to in §§ 1.863–7 or

1.988–2(e) to persons who are not

described in § 1.6049–4(c)(1)(ii) are

required to be reported in returns of

information under this section.

However, a payment made outside the

United States (as defined in § 1.6049–

5(e)) by a non-U.S. payor or a non-U.S.

middleman, or by a U.S. payor or U.S.

middleman that is not a U.S. person

(such as a controlled foreign corporation

defined in section 957(a) or certain

foreign corporations or foreign

partnerships engaged in a U.S. trade or

business) or is a foreign branch of a U.S.

bank is not reportable under this section

if, in the case of a person that is a U.S.

payor, a U.S. middleman, or a foreign

branch of a U.S. institution, the payor

has no actual knowledge that the payee

is a U.S. person. The amount required

to be reported under this paragraph

(d)(5) is limited to the net income from

the notional principal contract as

described in § 1.446–3(d). A nonperiodic payment is reportable for the

year in which an actual payment is

made. Any amount of interest

determined under the provisions of

§ 1.446–3(g)(4) (dealing with interest in

the case of a significant non-periodic

payment) is reportable under this

paragraph (d)(5) and not under section

6049 (see § 1.6049–5(b)(15)). See

§ 1.6041–4(a)(4) for reporting exceptions

regarding payments to foreign persons.

See, however, § 1.1461–1(c)(1) for

reporting amounts described under this

paragraph (d)(5) that are paid to foreign

persons. The provisions of § 1.6049–5(d)

shall apply for determining whether a

payment with respect to a notional

principal contract is made to a foreign

person. See § 1.6049–4(a) for a

definition of payor. For purposes of this

paragraph (d)(5), a payor includes a

middleman defined in § 1.6049–4(f)(4).

See § 1.6049–5(c)(5) for a definition of a

U.S. payor, a U.S. middleman, a nonU.S. payor, and a non-U.S. middleman.

* * * * *

Par. 24. Section 1.6041–2 is amended

by revising paragraph (c) to read as

follows:

§ 1.6041–2 Return of information as to

payments to employees.

* * * * *

(c) Payments to foreign persons. See

§ 1.6041–4 for reporting exemptions

regarding payments to foreign persons.

See § 1.6049–5(d) for determining

whether a payment is made to a foreign

person.

Par. 25. Section 1.6041–3 is amended

by:

1. Revising the introductory text of

the section.

2. Revising paragraphs (a) and (b).

3. Removing the semicolon at the end

of paragraphs (d) through (f), and (h)

through (j), and adding a period in its

place; and removing the language ‘‘;

and’’ at the end of paragraph (o), and

adding a period in its place.

4. Removing paragraphs (c) and (l).

5. Redesignating paragraphs (d), (e),

(f), (g), (h), (i), (j), (k), (m), (n), (o), and

(p) as paragraphs (c), (d), (e), (f), (g), (h),

(i), (j), (k), (l), (m), and (n), respectively.

6. Revising newly designated

paragraphs (f) and (j).

7. Adding new paragraphs (o) and (p),

and paragraph (q).

The addition and revisions read as

follows:

§ 1.6041–3 Payments for which no return

of information is required under section

6041.

Returns of information are not

required under section 6041 and

§§ 1.6041–1 and 1.6041–2 for payments

described in paragraphs (a) through (q)

of this section. See § 1.6041–4 for

reporting exemptions regarding

payments to foreign persons. See

§ 1.6041–4 for reporting exemptions

regarding foreign persons.

(a) Payments of income required to be

reported on Forms 1120–S, 941, W–2,

and W–3 (however, see § 1.6041–2(a)

with respect to Forms W–2 and W–3).

(b) Payments by a broker to his

customer (but for reporting

requirements as to certain of such

payments, see sections 6042, 6045, and

6049 and the regulations thereunder in

this part).

* * * * *

(f) Compensation and profits paid or

distributed by a partnership to the

individual partners (but for reporting

requirements, see § 1.6031–1).

* * * * *

(j) Payments of interest on corporate

bonds (but for reporting requirements as
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53473

to payments of interest on certain

corporate bonds, see § 1.6049–5).

* * * * *

(o) Payments to individuals as

scholarships or fellowship grants within

the meaning of section 117(b)(1),

whether or not ‘‘qualified scholarships’’

as described in section 117(b). This

exception does not apply to any amount

of a scholarship or fellowship grant that

represents payment for services within

the meaning of section 117(c). Instead,

these amounts are required to be

reported as wages on Form W–2. See

§ 1.1461–1(c) for applicable reporting

requirements for amounts paid to

foreign persons.

(p) Per diem of certain alien trainees

described under section 1441(c)(6).

(q) Payments made to the following

persons:

(1) A corporation described in

§ 1.6049–4(c)(1)(ii)(A), except a

corporation engaged in providing

medical and health care services or

engaged in the billing and collecting of

payments in respect to the providing of

medical and health care services.

However, no reporting is required where

payment is made to a hospital or

extended care facility described in

section 501(c)(3) which is exempt from

taxation under section 501(a) or to a

hospital or extended care facility owned

and operated by the United States, a

State, the District of Columbia, a

possession of the United States, or a

political subdivision, agency or

instrumentality of any of the foregoing.

For reporting requirements as to

payments by cooperatives, and to

certain other payments, see sections

6042, 6044, and 6049 and the

regulations thereunder in this part.

(2) An organization exempt from

taxation under section 501(a), as

described in § 1.6049–4(c)(1)(ii)(B)(1), or

an individual retirement plan, as

described in § 1.6049–4(c)(1)(ii)(C).

(3) The United States, as described in

§ 1.6049–4(c)(1)(ii)(D).

(4) A State, the District of Columbia,

a possession of the United States, or any

political subdivision of any of the

foregoing, as described in § 1.6049–

4(c)(1)(ii)(E).

(5) A foreign government or political

subdivision of a foreign government, as

described in § 1.6049–4(c)(1)(ii)(F).

(6) An international organization, as

described in § 1.6049–4(c)(1)(ii)(G).

(7) A foreign central bank of issue, as

described in § 1.6049–4(c)(1)(ii)(H) and

the Bank for International Settlements.

(8) Any wholly owned agency or

instrumentality of any person described

in paragraph (q) (2), (3), (4), (5), (6), or

(7) of this section.

Par. 26. Section 1.6041–4 is revised to

read as follows:

§ 1.6041–4 Foreign-related items and other

exceptions

(a) Exempted foreign-related items—

(1) Returns of information are not

required for payments that a payor can,

prior to payment, associate with

documentation upon which it may rely

to treat as made to a foreign beneficial

owner in accordance with § 1.1441–

1(e)(1)(ii) or as made to a foreign payee

in accordance with § 1.6049–5(d)(1) or

presumed to be made to a foreign payee

under § 1.6049–5(d)(2), (3), (4), or (5).

However, such payments may be

reportable under § 1.1461–1(b) and (c).

For purposes of this paragraph (a)(1),

the provisions in § 1.6049–5(c)

(regarding rules applicable to

documentation of foreign status and

definition of U.S. payor and non-U.S.

payor) shall apply. See § 1.1441–

1(b)(3)(iii)(B) and (C) for special payee

rules regarding scholarships, grants,

pensions, annuities, etc. The provisions

of § 1.1441–1 shall apply by substituting

the term payor for the term withholding

agent and without regard to the fact that

the provisions apply only to amounts

subject to withholding under chapter 3

of the Internal Revenue Code and the

regulations under that chapter.

(2) Returns of information are not

required for payments of amounts from

sources outside the United States

(determined under the provisions of

part I, subchapter N, chapter 1 of the

Internal Revenue Code and the

regulations under those provisions)

made by a non-U.S. payor or non-U.S.

middleman outside the United States.

For a definition of non-U.S. payor and

non-U.S. middleman, see § 1.6049–

5(c)(5). For circumstances in which a

payment is considered to be made

outside the United States, see § 1.6049–

5(e).

(3) Returns of information are not

required for amounts paid by a foreign

intermediary described in § 1.1441–

1(e)(3)(i) that it has received in its

capacity as an intermediary and that are

associated with a valid withholding

certificate described in § 1.1441–

1(e)(3)(ii) or (iii) and payments made by

a U.S. branch of a foreign bank or of a

foreign insurance company described in

§ 1.1441–1(b)(2)(iv) that are associated

with a valid withholding certificate

described in § 1.1441–1(e)(3)(v), which

certificate the intermediary or branch

has furnished to the payor or

middleman from whom it has received

the payment, unless, and to the extent,

the intermediary or branch knows that

the payments are required to be reported

under § 1.6041–1 and were not so

reported.

(4) Returns of information are not

required for amounts paid with respect

to notional principal contracts referred

to in § 1.863–7 or 1.988–2(e) which the

payor may treat as effectively connected

income of a foreign payee under the

provisions of § 1.1441–4(a)(3) or if the

payee provides a representation in a

master agreement that governs the

transactions in notional principal

contracts between the parties (for

example, an International Swap and

Derivatives Association (ISDA)

Agreement, including the Schedule

thereto) or in the confirmation on the

particular notional principal contract

transaction that the counterparty is a

foreign person. See, however, § 1.1461–

1(c)(2)(i) for applicable reporting

requirements.

(5) Returns of information are not

required for the period that the amounts

paid represent assets blocked as

described in § 1.1441–2(e)(3). The

exemption in this paragraph (a)(5) shall

terminate when payment is deemed to

occur in accordance with the provisions

of § 1.1441–2(e)(3).

(b) Joint owners. Amounts paid to

joint owners for which a certificate or

documentation is required as a

condition for being exempt from

reporting under paragraph (a) of this

section are presumed made to U.S.

payees who are not exempt recipients if,

prior to payment, the payor or

middleman cannot reliably associate the

payment either with a Form W–9

furnished by one of the joint owners in

the manner required in §§ 31.3406(d)–1

through 31.3406(d)–5 of this chapter, or

with documentation described in

paragraph (a)(1) of this section

furnished by each joint owner upon

which the payor or middleman can rely

to treat each joint owner as a foreign

payee or foreign beneficial owner.

(c) Conversion into United States

dollars of amounts paid in foreign

currency. For rules concerning foreign

currency conversion, see § 1.6049–

4(d)(3)(i).

(d) Effective date. The provisions of

this section apply to payments made

after December 31, 1998.

Par. 27. Section 1.6041–7 is amended

by revising the section heading and

adding a sentence to the end of

paragraph (a) to read as follows:

§ 1.6041–7 Magnetic media requirement.

(a) * * * High-volume filers of

information returns must file their

returns on magnetic media. See section

6011(e) and § 301.6011–2 of this chapter

(Procedure and Administration
53474 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

Regulations) for the requirements for

filing on magnetic media.

* * * * *

Par. 28. Section 1.6041–8 is added to

read as follows:

§ 1.6041–8 Cross-reference to penalties.

For provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6041(a) or (b), see

§ 301.6721–1 of this chapter (Procedure

and Administration Regulations). For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6041(d), see § 301.6722–1 of this

chapter. See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

Par. 29. Section 1.6041A–1 is added

to read as follows:

§ 1.6041A–1 Returns regarding payments

of remuneration for services and certain

direct sales.

(a) through (c) [Reserved].

(d) Exceptions to return requirement.

[Reserved].

(1) and (2) [Reserved].

(3) Foreign transactions—(i) In

general. No return shall be required

under section 6041A with respect to

payments described in this paragraph

(d)(3).

(A) Returns of information are not

required for payments that a payor can,

prior to payment, associate with

documentation upon which it may rely

to treat as made to a foreign beneficial

owner in accordance with § 1.1441–

1(e)(1)(ii) or as made to a foreign payee

in accordance with § 1.6049–5(d)(1) or

presumed to be made to a foreign payee

under § 1.6049–5(d)(2), (3), (4), or (5).

However, such payments may be

reportable under § 1.1461–1(b) and (c).

For purposes of this paragraph

(d)(3)(i)(A), the provisions in § 1.6049–

5(c) (regarding rules applicable to

documentation of foreign status and

definition of U.S. payor and non-U.S.

payor) shall apply. The provisions of

§ 1.1441–1 shall apply by substituting

the term payor for the term withholding

agent.

(B) Returns of information are not

required for payments of remuneration

for services and certain direct sales from

sources outside the United States

(determined under the provisions of

part I, subchapter N, chapter 1 of the

Internal Revenue Code and the

regulations under those provisions) if

payments made outside the United

States by a non-U.S. payor or non-U.S.

middleman. For a definition of non-U.S.

payor or non-U.S. middleman, see

§ 1.6049–5(c)(5). For circumstances in

which a payment is considered to be

made outside the United States, see

§ 1.6049–5(e).

(ii) Payor. The term payor has the

same meaning as described in § 1.6049–

4(a)(2).

(iii) Joint owners. Amounts paid to

joint owners for which a certificate or

documentation is required as a

condition for being exempt from

reporting under paragraph (d)(3)(i) of

this section are presumed made to U.S.

payees who are not exempt recipients if,

prior to payment, the payor or

middleman cannot reliably associate the

payment either with a Form W–9

furnished by one of the joint owners in

the manner required in §§ 31.3406(d)–1

through 31.3406(d)–5 of this chapter, or

with documentation described in

paragraph (d)(3)(i)(A) of this section

furnished by each joint owner upon

which it can rely to treat each joint

owner as a foreign payee or foreign

beneficial owner.

(iv) Conversion into United States

dollars of amount paid in foreign

currency. For rules concerning foreign

currency conversion, see § 1.6049–

4(d)(3)(i).

(v) Effective date. The provisions of

this paragraph (d)(3) apply to payments

made after December 31, 1998.

(e) [Reserved].

(f) Statements to be furnished to

persons with respect to whom

information is required to be

furnished—(1) [Reserved].

(2) Time for furnishing statement.

[Reserved].

(3) Contents of statement. [Reserved].

(g) [Reserved].

(h) Cross-reference to penalties. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6041A(a) or (b), see

§ 301.6721–1 of this chapter (Procedure

and Administration Regulations). For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6041A(e), see § 301.6722–1 of

this chapter. See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

Par. 30. Section 1.6042–2 is amended

by:

1. Revising the section heading,

adding introductory text to paragraph

(a)(1), and revising paragraphs (a)(1)(i)

and (a)(1)(ii).

2. Removing the language ‘‘1099M’’ in

the first sentence of paragraph (a)(1)(iii)

and adding ‘‘1099A’’ in its place.

3. Removing the language ‘‘1087’’

each time it appears in the second

sentence of paragraph (a)(4) and adding

‘‘1099’’ in each place, and removing the

last sentence.

4. Revising paragraph (d).

5. Revising the heading of paragraph

(e) and adding a sentence to the end of

paragraph (e).

The revisions and addition read as

follows:

§ 1.6042–2 Returns of information as to

dividends paid.

(a) Requirement of reporting—(1) In

general. An information return on Form

1099 shall be made under section

6042(a) by—

(i) Every person who makes a

payment of dividends (as defined in

§ 1.6042–3) to any other person during

a calendar year. The information return

shall show the aggregate amount of the

dividends, the name, address, and

taxpayer identifying number of the

person to whom paid, the amount of tax

deducted and withheld under section

3406 from the dividends, if any, and

such other information as required by

the forms. An information return is

generally not required if the amount of

dividends paid to the other person

during the calendar year aggregates less

than $10 or if the payment is made to

a person who is an exempt recipient

described in § 1.6049–4(c)(1)(ii) unless

the payor backup withholds under

section 3406 on such payment (because,

for example, the payee has failed to

furnish a Form W–9 on request), in

which case the payor must make a

return under this section, unless the

payor refunds the amount withheld

pursuant to § 31.6413(a)–3 of this

chapter.

(ii) Every person, except to the extent

that he acts as a nominee described in

paragraph (a)(1)(iii) of this section, who

receives payments of dividends as a

nominee on behalf of another person

shall make a return of information

under this section for the calendar year

of the payment . The information return

shall show the aggregate amount of the

dividends, the name, address, and

taxpayer identification number of the

person on whose behalf the dividends

are received, the amount of tax

deducted and withheld under section

3406 from the dividends, if any, and

such other information as required by

the forms. An information return is

generally not required if the amount of

the dividends received on behalf of the

other person during the calendar year

aggregates less than $10. However, a

return of information is not required

under this section if—

(A) The record owner is, pursuant to

section 6012(a) (3) or (4) and § 1.6012–

3, required to file a fiduciary return on
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53475

Form 1041 that is filed for the estate or

trust disclosing the name, address, and

identifying number of both the record

owner and actual owner and furnishes

Form K–1 to each actual owner

containing the information required to

be shown on the form, including

amounts withheld under section 3406;

(B) The record owner is a nominee of

a banking institution or trust company

exercising trust powers, and such

banking institution or trust company is,

pursuant to section 6012(a) (3) or (4)

and § 1.6012–3, required to file a

fiduciary return on Form 1041 that is

filed for the estate or trust disclosing the

name, address, and identifying number

of both the record owner and the actual

owner and furnishes Form K–1 to each

actual owner containing the information

required to be shown on the form,

including amounts withheld under

section 3406; or

(C) The record owner is a banking

institution or trust company exercising

trust powers, or a nominee thereof, and

the actual owner is an organization

exempt from taxation under section

501(a) for which such banking

institution or trust company files an

annual return but only if the name,

address, and identifying number of the

record owner are included on or with

the annual return filed for the tax

exempt organization).

* * * * *

(d) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6042(a), see § 301.6721–1

of this chapter (Procedure and

Administration Regulations). See

§ 301.6724–1 of this chapter for the

waiver of a penalty if the failure is due

to reasonable cause and is not due to

willful neglect.

(e) Magnetic media requirement.

* * * For the requirement to submit the

information required by Form 1099 on

magnetic media for payments after

December 31, 1983, see section 6011(e)

and § 301.6011–2 of this chapter

(Procedure and Administration

Regulations).

Par. 31. Section 1.6042–3 is amended

by:

1. Revising paragraphs (a)

introductory text and (a)(2).

2. Removing the concluding text

immediately following paragraph (a)(2).

3. Adding paragraph (a)(3).

4. Revising paragraph (b).

5. Removing the authority citation at

the end of the section.

The addition and revision read as

follows:

§ 1.6042–3 Dividends subject to reporting.

(a) In general. Except as provided in

paragraph (b) of this section, the term

dividend for purposes of this section

and §§ 1.6042–2 and 1.6042–4 means

the amounts described in the following

paragraphs (a) (1) through (3) of this

section—

* * * * *

(2) Any payment made by a

stockbroker to any person as a substitute

for a dividend. Such a payment includes

any payment made in lieu of a dividend

to a person whose stock has been

borrowed. See § 1.6045–2(h) for

coordination of the reporting

requirements under sections 6042 and

6045(d) with respect to such payments;

and

(3) A distribution from a regulated

investment company (irrespective of the

fact that any part of the distribution may

not represent ordinary income (i.e.,

may, for example, represent a capital

gain dividend as defined in section

852(b)(3)(C)).

(b) Exceptions—(1) In general. For

purposes of §§ 1.6042–2 and 1.6042–4,

the amounts described in paragraphs

(b)(1)(i) through ( vii) of this section are

not dividends.

(i) Amounts paid by an insurance

company to a policyholder, other than

a dividend upon its capital stock.

(ii) Payments (however denominated)

by a mutual savings bank, savings and

loan association, or similar organization,

in respect of deposits, investment

certificates, or withdrawable or

repurchasable shares. See, however,

section 6049 and the regulations under

that section for provisions requiring

reporting of these payments.

(iii) Distributions or payments that a

payor can, prior to payment, reliably

associate with documentation upon

which it may rely to treat as made to a

foreign beneficial owner in accordance

with § 1.1441–1(e)(1)(ii) or as made to a

foreign payee in accordance with

§ 1.6049–5(d)(1) or presumed to be

made to a foreign payee under § 1.6049–

5(d) (2), (3), (4), or (5). However, such

payments may be reportable under

§ 1.1461–1(b) and (c). For purposes of

this paragraph (b)(1)(iii), the provisions

in § 1.6049–5(c) (regarding rules

applicable to documentation of foreign

status and definition of U.S. payor and

non-U.S. payor) shall apply. The

provisions of § 1.1441–1 shall apply by

substituting the term payor for the term

withholding agent and without regard to

the fact that the provisions apply only

to amounts subject to withholding

under chapter 3 of the Internal Revenue

Code (Code).

(iv) Distributions or payments from

sources outside the United States (as

determined under the provisions of part

I, subchapter N, chapter 1 of the Code

and the regulations under those

provisions) paid outside the United

States by a non-U.S. payor or a non-U.S.

middleman. For a definition of non-U.S.

payor and non-U.S. middleman, see

§ 1.6049–5(c)(5). For circumstances in

which a payment is considered to be

made outside the United States, see

§ 1.6049–5(e).

(v) Distributions or payments for the

period that the amounts represent assets

blocked as described in § 1.1441–2(e)(3).

The exemption in this paragraph

(b)(1)(v) shall terminate when payment

is deemed to occur in accordance with

the rules of § 1.1441–2(e)(3).

(vi) Payments made by a foreign

intermediary described in § 1.1441–

1(e)(3)(i) that it has received in its

capacity as an intermediary and that are

associated with a valid withholding

certificate described in § 1.1441–1(e)(3)

(ii) or (iii) and payments made by a U.S.

branch of a foreign bank or of a foreign

insurance company described in

§ 1.1441–1(b)(2)(iv) that are associated

with a valid withholding certificate

described in § 1.1441–1(e)(3)(v), which

certificate the intermediary or branch

has furnished to the payor or

middleman from whom it has received

the payment, unless, and to the extent,

the intermediary or branch knows that

the payments are required to be reported

under § 1.6042–2 and were not so

reported.

(vii) With respect to amounts paid or

credited after December 31, 1982, any

amount paid or credited to any person

described in § 1.6049–4(c)(1)(ii), unless

a tax is withheld under section 3406

and is not refunded by the payor in

accordance with § 31.6413(a)–3 of this

chapter (Employment Tax Regulations).

(2) Payor. The term payor has the

same meaning as described in § 1.6049–

4(a)(2).

(3) Joint owners. Amounts paid to

joint owners for which a certificate or

documentation is required as a

condition for being exempt from

reporting under this paragraph (b) are

presumed made to U.S. payees who are

not exempt recipients if, prior to

payment, the payor or middleman

cannot reliably associate the payment

either with a Form W–9 furnished by

one of the joint owners in the manner

required in §§ 31.3406(d)–1 through

31.3406(d)–5 of this chapter, or with

documentation described in paragraph

(b)(1)(iii) of this section furnished by

each joint owner upon which it can rely

to treat each joint owner as a foreign

payee or foreign beneficial owner. For

purposes of applying this paragraph

(b)(3), the grace period described in
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§ 1.6049–5(d)(2)(ii) shall apply only if

each payee qualifies for such grace

period.

(4) Conversion into United States

dollars of amounts paid in foreign

currency. For rules concerning foreign

currency conversion, see § 1.6049–

4(d)(3)(i).

(5) Effective date—(i) General rule.

The provisions of this paragraph (b)

apply to payments made after December

31, 1998.

(ii) Transition rules. A payor that, on

December 31, 1998, holds a valid Form

W–8 or other form upon which it is

permitted to rely to hold the payee as

a foreign person pursuant to the

regulations in effect prior to January 1,

1999 (see 26 CFR parts 1 and 35a,

revised April 1, 1997), may treat it as a

valid certificate until its validity expires

under those regulations or, if earlier,

until December 31, 1999. Further, the

validity of a Form W–8 or other form

that is dated prior to January 1, 1998, is

valid on January 1, 1998, and would

expire at any time during 1998, is

extended until December 31, 1998 (and

is not extended after December 31, 1998

by reason of the preceding sentence).

The rule in this paragraph (b)(5)(ii),

however, does not apply to extend the

validity period of a withholding

certificate that expires in 1998 solely by

reason of changes in the circumstances

of the person whose name is on the

certificate. Notwithstanding the three

preceding sentences, a payor may

choose not to take advantage of the

transition rule in this paragraph

(b)(5)(ii) with respect to one or more

withholding certificates and, therefore,

to require new withholding certificates

conforming to the requirements

described in this section.

* * * * *

Par. 32. Section 1.6042–4 is amended

by revising paragraphs (d)(2)(i)(F) and

(f) to read as follows:

§ 1.6042–4 Statement to recipients of

dividend payments.

* * * * *

(d) * * *

(2) * * *

(i) * * *

(F) Any document concerning the

solicitation of the Form W–9, as

described in § 31.3406(h)–3(a) of this

chapter, or of the Form W–8 as

described in § 1.1441–1(e)(1).

* * * * *

(f) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6042(c), see § 301.6722–1 of this

chapter (Procedure and Administration

Regulations). See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

* * * * *

§ 1.6043–2 [Amended]

Par. 33. In § 1.6043–2, paragraph (a),

the first, second, and last sentences are

amended by removing the reference to

‘‘1099L’’ and adding ‘‘966’’ in each

place.

Par. 34. Section 1.6044–2 is amended

by:

1. Revising the section heading

2. Adding two sentences at the end of

paragraph (a)(1).

3. Revising paragraph (e).

4. Revising the heading for paragraph

(f) and adding a sentence at the

beginning of paragraph (f).

The revisions and additions read as

follows:

§ 1.6044–2 Returns of information as to

payments of patronage dividends.

(a) Requirement of reporting—(1) In

general. * * * The organization is

required to make an information return

regardless of the amount of the payment

if the tax imposed by section 3406 is

required to be withheld. Thus, in the

case of any amount subject to backup

withholding under section 3406 and not

refunded by the payor before the due

date of the information return in

accordance with the regulations under

section 3406, an information return

shall be made even if the payment is not

generally reportable because it is made

to an exempt recipient described in

§ 1.6049–4(c)(1)(ii) or the amount paid

during the calendar year to the recipient

aggregates less than $10.

* * * * *

(e) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6044(a), see § 301.6721–1

of this chapter (Procedure and

Administration Regulations). See

§ 301.6724–1 of this chapter for the

waiver of a penalty if the failure is due

to reasonable cause and is not due to

willful neglect.

(f) Magnetic media requirement. For

the requirement to submit the

information required by Form 1099 on

magnetic media for payments after

December 31, 1983, see section 6011(e)

and § 301.6011–2 of this chapter

(Procedure and Administration

Regulations). * * *

Par. 35. In § 1.6044–3, paragraph (c) is

revised to read as follows:

§ 1.6044–3 Amounts subject to reporting.

* * * * *

(c) Exceptions. An amount described

in paragraph (a) of this section does not

include—

(1) Any amount described in

§ 1.6042–3(b); or

(2) With respect to amounts paid or

credited after December 31, 1982, any

amount paid or credited to any person

described in § 1.6049–4(c)(1)(ii).

* * * * *

Par. 36. In § 1.6044–5, paragraph (c) is

revised to read as follows:

§ 1.6044–5 Statements to recipients of

patronage dividends.

* * * * *

(c) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6044(e), see § 301.6722–1 of this

chapter (Procedure and Administration

Regulations). See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

* * * * *

Par. 37. Section 1.6045–1 is amended

by:

1. Revising the heading of paragraph

(a), paragraph (a) introductory text, and

paragraph (a)(1).

2. Removing paragraph (a)(12) and

redesignating paragraph (a)(13) as

paragraph (a)(12).

3. Adding new paragraph (a)(13).

4. Paragraph (b) is amended by

redesignating Example (1) through

Example (8) as Example 1 through

Example 8, respectively; removing

newly designated Example 1(ii); and

redesignating Example 1(iii) through

(vi) as Example 1(ii) through (v),

respectively.

5. Paragraph (c) is amended by:

a. Redesignating paragraphs

(c)(5)(i)(a) through (c)(5)(i)(f) as

paragraphs (c)(5)(i)(A) through

(c)(5)(i)(F), respectively.

b. Redesignating paragraph (c)(5)(ii)

and Example (1) through Example (4) as

paragraph (c)(5)(iii) and Example 1

through Example 4, respectively.

c. Adding new paragraph (c)(5)(ii).

6. Paragraph (c)(6) is amended by:

a. Redesignating paragraphs

(c)(6)(i)(a) and (c)(6)(i)(b) as paragraphs

(c)(6)(i)(A) and (c)(6)(i)(B), respectively.

b. Redesignating paragraphs

(c)(6)(ii)(a) and (c)(6)(ii)(b) as

paragraphs (c)(6)(ii)(A) and (c)(6)(ii)(B),

respectively.

7. Revising paragraphs (d)(4), (d)(6),

(f)(2)(iii) last sentence of introductory

text, and (g).

8. In paragraph (h)(2), redesignating

Example (1) and Example (2) as

paragraph (h)(2) Example 1 and

Example 2, respectively.
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53477

9. Revising paragraphs (j), (k), and (l).

10. Removing the authority citation at

the end of the section.

The revisions and additions read as

follows:

§ 1.6045–1 Returns of information of

brokers and barter exchanges.

(a) Definitions. The following

definitions apply for purposes of this

section, § 1.6045–2, and § 5f.6045–1 of

this chapter:

(1) The term broker means any person

(other than a person who is required to

report a transaction under section 6043),

U.S. or foreign, that, in the ordinary

course of a trade or business during the

calendar year, stands ready to effect

sales to be made by others. A broker

includes an obligor that regularly issues

and retires its own debt obligations or

a corporation that regularly redeems its

own stock. However, with respect to a

sale (including a redemption or

retirement) effected at an office outside

the United States, a broker includes

only a person described as a U.S. payor

or U.S. middleman in § 1.6049–5(c)(5).

In addition, a broker does not include

an international organization described

in § 1.6049–4(c)(1)(ii)(G) that redeems or

retires an obligation of which it is the

issuer.

* * * * *

(13) The term person includes any

governmental unit and any agency or

instrumentality thereof.

* * * * *

(c) * * *

(5) * * *

(ii) Determination of profit or loss

from foreign currency contracts. A

broker effecting a closing transaction in

foreign currency contracts (as defined in

section 1256(g)) shall report information

with respect to such contracts in the

manner prescribed in paragraph (c)(5)(i)

of this section. If a foreign currency

contract is closed by making or taking

delivery, the net realized profit or loss

for purposes of paragraph (c)(5)(i)(B) of

this section is determined by comparing

the contract price to the spot price for

the contract currency at the time and

place specified in the contract. If a

foreign currency contract is closed by

entry into an offsetting contract, the net

realized profit or loss for purposes of

paragraph (c)(5)(i)(B) of this section is

determined by comparing the contract

price to the price of the offsetting

contract. The net unrealized profit or

loss in a foreign currency contract for

purposes of paragraphs (c)(5)(i) (C) and

(D) of this section is determined by

comparing the contract price to the

broker’s price for similar contracts at the

close of business of the relevant year.

* * * * *

(d) * * *

(4) Sale date. With respect to sales of

property that are reportable under this

section, a broker must report a sale as

occurring on the date the sale is entered

on the books of the broker.

* * * * *

(6) Conversion into United States

dollars of proceeds paid in foreign

currency—(i) Conversion rules. When a

payment is made in a foreign currency,

the U.S. dollar amount shall be

determined by converting such foreign

currency into U.S. dollars on the date of

payment at the spot rate (as defined in

§ 1.988–1(d)(1)) or pursuant to a

reasonable spot rate convention. For

example, a withholding agent may use

a month-end spot rate or a monthly

average spot rate. A spot rate convention

must be used consistently with respect

to all non-dollar amounts withheld and

from year to year. Such convention

cannot be changed without the consent

of the Commissioner or his or her

delegate.

(ii) Effect of identification under

§ 1.988–5(a), (b), or (c) where the

taxpayer effects a sale and a hedge

through the same broker—(A) In

general. In lieu of the amount reportable

under paragraph (d)(6)(i) of this section,

the amount subject to reporting shall be

the integrated amount computed under

§ 1.988–5(a), (b) or (c) if—

(1) A taxpayer effects through a broker

a sale or exchange of nonfunctional

currency (as defined in § 1.988–1(c))

and hedges all or a part of such sale as

provided in § 1.988–5(a), (b) or (c) with

the same broker; and

(2) The taxpayer complies with the

requirements of § 1.988–5(a), (b) or (c)

and so notifies the broker prior to the

end of the calendar year in which the

sale occurs.

(B) Effective date. The provisions of

this paragraph (d)(6)(ii) apply to

transactions entered into after December

31, 1998.

* * * * *

(f) * * *

(2) * * *

(iii) Definition. * * * A barter

exchange may treat a member or client

as a corporation (and therefore as a

corporate member or client) if such

member or client provides an exemption

certificate as described in § 31.3406(h)–

3(a) of this chapter or provided that—

* * * * *

(g) Exempt foreign persons—(1)

Brokers. No return of information is

required to be made by a broker with

respect to a customer who is considered

to be an exempt foreign person under

this paragraph (g)(1). A broker may treat

a customer as an exempt foreign person

under the circumstances described in

paragraphs (g)(1)(i) through (iii) of this

section.

(i) With respect to a sale effected at an

office of a broker either inside or outside

the United States, the broker may treat

the customer as an exempt foreign

person if the broker can, prior to the

payment, associate the payment with

documentation upon which it can rely

in order to treat the customer as a

foreign beneficial owner in accordance

with § 1.1441–1(e)(1)(ii), or as made to

a foreign payee in accordance with

§ 1.6049–5(d)(1) or presumed to be

made to a foreign payee under § 1.6049–

5(d) (2), (3), (4), or (5). For purposes of

this paragraph (g)(1)(i), the provisions in

§ 1.6049–5(c) (regarding rules applicable

to documentation of foreign status and

definition of U.S. payor, U.S.

middleman, non-U.S. payor, and nonU.S. middleman) shall apply. The

provisions of § 1.1441–1 shall apply by

substituting the terms broker and

customer for the terms withholding

agent and payee and without regard for

the fact that the provisions apply to

amounts subject to withholding under

chapter 3 of the Internal Revenue Code

(Code). The provisions of § 1.6049–5(d)

shall apply by substituting the terms

broker and customer for the terms payor

and payee. For purposes of this

paragraph (g)(1)(i), the broker may rely

on a beneficial owner withholding

certificate described in § 1.1441–

1(e)(2)(i) only to the extent that the

certificate includes a certification that

the beneficial owner has not been and,

at the time the certificate is furnished,

reasonably expects not to be present in

the United States for a period

aggregating 183 days or more during

each calendar year to which the

certificate pertains.

(ii) With respect to a redemption or

retirement of stock or an obligation (the

interest or original issue discount on,

which is described in § 1.6049–5(b) (6),

(7), (10), or (11) or the dividends on,

which are described in § 1.6042–

3(b)(1)(iv)) that is effected at an office of

a broker outside the United States by the

issuer (or its paying or transfer agent),

the broker may treat the customer as an

exempt foreign person if the broker is

not also acting in its capacity as a

custodian, nominee, or other agent of

the payee.

(iii) With respect to a sale effected by

a broker at an office of the broker either

inside or outside the United States, the

broker may treat the customer as an

exempt foreign person for the period

that those proceeds are assets blocked,

as described in § 1.1441–2(e)(3). For

purposes of this paragraph (g)(1)(iii) and

section 3406, a sale is deemed to occur
53478 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

in accordance with paragraph (d)(4) of

this section. The exemption in this

paragraph (g)(1)(iii) shall terminate

when payment of the proceeds is

deemed to occur in accordance with the

provisions of § 1.1441–2(e)(3).

(2) Barter exchange. No return of

information is required by a barter

exchange with respect to a client or a

member that the barter exchange may

treat as a foreign person pursuant to the

procedures described in paragraph (g)(1)

of this section.

(3) Applicable rules—(i) Joint owners.

Amounts paid to joint owners for which

a certificate or documentation is

required as a condition for being exempt

from reporting under paragraph (g) (1)(i)

or (2) of this section are presumed made

to U.S. payees who are not exempt

recipients if, prior to payment, the

broker or barter exchange cannot

reliably associate the payment either

with a Form W–9 furnished by one of

the joint owners in the manner required

in §§ 31.3406(d)–1 through 31.3406(d)–

5 of this chapter, or with documentation

described in paragraph (g)(1)(i) of this

section furnished by each joint owner

upon which it can rely to treat each

joint owner as a foreign payee or foreign

beneficial owner. For purposes of

applying this paragraph (g)(3)(i), the

grace period described in § 1.6049–

5(d)(2)(ii) shall apply only if each payee

qualifies for such grace period.

(ii) Special rules for determining who

the customer is. For purposes of this

paragraph (g), the determination of who

the customer is shall be made on the

basis of the provisions in § 1.6049–5(d)

by substituting in that section the terms

payor and payee with the terms broker

and customer.

(iii) Place of effecting sale—(A) Sale

outside the United States. For purposes

of this paragraph (g), a sale is

considered to be effected by a broker at

an office outside the United States if, in

accordance with instructions directly

transmitted to such office from outside

the United States by the broker’s

customer, the office completes the acts

necessary to effect the sale outside the

United States. The acts necessary to

effect the sale may be considered to

have been completed outside the United

States without regard to whether—

(1) Pursuant to instructions from an

office of the broker outside the United

States, an office of the same broker

within the United States undertakes one

or more steps of the sale in the United

States; or

(2) The gross proceeds of the sale are

paid by a draft drawn on a United States

bank account or by a wire or other

electronic transfer from a United States

account.

(B) Sale inside the United States. For

purposes of this paragraph (g), a sale

that is considered to be effected by a

broker at an office outside the United

States under paragraph (g)(3)(iii)(A) of

this section shall nevertheless be

considered to be effected by a broker at

an office inside the United States if

either—

(1) The customer has opened an

account with a United States office of

that broker;

(2) The customer has transmitted

instructions concerning this and other

sales to the foreign office of the broker

from within the United States by mail,

telephone, electronic transmission or

otherwise (unless the transmissions

from the United States have taken place

in isolated and infrequent

circumstances);

(3) The gross proceeds of the sale are

paid to the customer by a transfer of

funds into an account (other than an

international account as defined in

§ 1.6049–5(e)(4)) maintained by the

customer in the United States or mailed

to the customer at an address in the

United States;

(4) The confirmation of the sale is

mailed to a customer at an address in

the United States; or

(5) An office of the same broker

within the United States negotiates the

sale with the customer or receives

instructions with respect to the sale

from the customer.

(iv) Special rules where the customer

is a foreign intermediary or certain U.S.

branches. A foreign intermediary, as

defined in § 1.1441–1(e)(3)(i), is an

exempt foreign person, except when the

broker has actual knowledge or reason

to know (within the meaning of

§ 1.6049–5(c)(3)) that the person for

whom the intermediary acts is a U.S.

person. For an example of this

exception, see § 1.6049–5(d)(3)(iv)

Example 7. In addition, if a foreign

intermediary (acting as an intermediary)

or a U.S. branch receives a payment

from a payor or middleman, which

payment the payor or middleman can

associate with a valid withholding

certificate described in § 1.1441–1(e)(3)

(ii), (iii), or (v), or in § 1.1441–5(c)(3)(iii)

furnished by such intermediary or U.S.

branch, then the intermediary or U.S.

branch is not required to report such

payment when it, in turn, pays the

amount to the person whose name is on

the certificate furnished by the

intermediary or U.S. branch to the payor

or middleman, unless, and to the extent,

the intermediary or U.S. branch knows

that the payment is required to be

reported under this section and was not

so reported. For purposes of the

preceding sentence, a foreign

intermediary is one that is described in

§ 1.1441–1(e)(3)(i) and a U.S. branch is

one that is described in § 1.1441–

1(b)(2)(iv).

(4) Examples. The application of the

provisions of this paragraph (g) may be

illustrated by the following examples:

Example 1. FC is a foreign corporation that

is not a U.S. payor or U.S. middleman

described in § 1.6049–5(c)(5) that regularly

issues and retires its own debt obligations. A

is an individual whose residence address is

inside the United States, who holds a bond

issued by FC that is in registered form

(within the meaning of section 163(f) and the

regulations under that section). The bond is

retired by FP, a foreign corporation that is a

broker within the meaning of paragraph (a)(1)

of this section and the designated paying

agent of FC. FP mails the proceeds to A at

A’s U.S. address. The sale would be

considered to be effected at an office outside

the United States under paragraph

(g)(3)(iii)(A) of this section except that the

proceeds of the sale are mailed to a U.S.

address. For that reason, the sale is

considered to be effected at an office of the

broker inside the United States under

paragraph (g)(3)(iii)(B) of this section.

Therefore, FC is a broker under paragraph

(a)(1) of this section with respect to this

transaction because, although it is not a U.S.

payor or U.S. middleman, as described in

§ 1.6049–5(c)(5), it is deemed to effect the

sale in the United States. FP is a broker for

the same reasons. However, under the

multiple broker exception under § 5f.6045–

1(c)(3)(ii) of this chapter, FP, rather than FC,

is required to report the payment because FP

is responsible for paying the holder the

proceeds from the retired obligations. Under

paragraph (g)(1)(i) of this section, FP may not

treat A as an exempt foreign person and must

make an information return under section

6045 with respect to the retirement of the FC

bond, unless FP obtains the certificate or

documentation described in paragraph

(g)(1)(i) of this section.

Example 2. The facts are the same as in

Example 1 except that FP mails the proceeds

to A at an address outside the United States.

Under paragraph (g)(3)(iii)(A) of this section,

the sale is considered to be effected at an

office of the broker outside the United States.

Therefore, under paragraph (a)(1) of this

section, neither FC nor FP is a broker with

respect to the retirement of the FC bond.

Accordingly, neither is required to make an

information return under section 6045.

Example 3. The facts are the same as in

Example 2 except that FP is also the agent

of A. The result is the same as in Example

2. Neither FP nor FC are brokers under

paragraph (a)(1) of this section with respect

to the sale since the sale is effected outside

the United States and neither of them are

U.S. payors (within the meaning of § 1.6049–

5(c)(5)).

Example 4. The facts are the same as in

Example 1 except that the registered bond

held by A was issued by DC, a domestic

corporation that regularly issues and retires

its own debt obligations. Also, FP mails the

proceeds to A at an address outside the

United States. Interest on the bond is not
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53479

described in paragraph (g)(1)(ii) of this

section. The sale is considered to be effected

at an office outside the United States under

paragraph (g)(3)(iii)(A) of this section. DC is

a broker under paragraph (a)(1)(i)(B) of this

section. DC is not required to report the

payment under the multiple broker exception

under § 5f.6045–1(c)(3)(ii) of this chapter. FP

is not required to make an information return

under section 6045 because FP is not a U.S.

payor described in § 1.6049–5(c)(5) and the

sale is effected outside the United States.

Accordingly, FP is not a broker under

paragraph (a)(1) of this section.

Example 5. The facts are the same as in

Example 4 except that FP is also the agent

of A. DC is a broker under paragraph (a)(1)

of this section. DC is not required to report

under the multiple broker exception under

§ 5f.6045–1(c)(3)(ii) of this chapter. FP is not

required to make an information return under

section 6045 because FP is not a U.S. payor

described in § 1.6049–5(c)(5) and the sale is

effected outside the United States and

therefore FP is not a broker under paragraph

(a)(1) of this section.

Example 6. The facts are the same as in

Example 4 except that the bond is retired by

DP, a broker within the meaning of paragraph

(a)(1) of this section and the designated

paying agent of DC. DP is a U.S. payor under

§ 1.6049–5(c)(5). DC is not required to report

under the multiple broker exception under

§ 5f.6045–1(c)(3)(ii) of this chapter. DP is

required to make an information return under

section 6045 because it is the person

responsible for paying the proceeds from the

retired obligations unless DP obtains the

certificate or documentary evidence

described in paragraph (g)(1)(i) of this

section.

Example 7. Customer A owns U.S.

corporate bonds issued in registered form

after July 18, 1984 and carrying a stated rate

of interest. The bonds are held through an

account with foreign bank, X, and are held

in street name. X is a wholly-owned

subsidiary of a U.S. company and is not a

qualified intermediary within the meaning of

§ 1.1441–1(e)(5)(ii). X has no documentation

regarding A. A instructs X to sell the bonds.

In order to effect the sale, X acts through its

agent in the United States, Y. Y sells the

bonds and remits the sales proceeds to X. X

credits A’s account in the foreign country. X

does not provide documentation to Y.

(i) Y’s obligations to withhold and report.

Y is not required to report the sales proceeds

under the multiple broker exception under

§ 5f.6045–1(c)(3)(ii), because X is the person

responsible for paying the proceeds from the

sale to A. However, the portion of the

payment that represents interest accrued on

the obligation since the last payment date

and that is received as part of the total sales

proceeds from the transaction is reportable

under § 1.1461–1 (b) and (c)(2)(i)(E), as an

amount paid to a foreign person that is

subject to withholding under chapter 3 of the

Code within the meaning of § 1.1441–2(a)

(even though no withholding is required

under chapter 3 of the Code based on

§ 1.1441–3(b)(2)(i), unless § 1.1441–3(b)(2)(ii)

applies). The multiple broker exception

under the regulations under section 6045

does not affect a withholding agent’s

obligation to report an amount otherwise

required to be reported under § 1.1461–1 (b)

and (c). Under § 1.1461–1(c)(3), Y must file

Form 1042–S in the name of X who, under

§ 1.1441–1(b)(3)(v)(A), is presumed to be

acting for its own account because Y cannot

associate the payment of interest with a valid

intermediary Form W–8 described in

§ 1.1441–1(e)(3) (ii) or (iii) from X.

(ii) X’s obligations to withhold and

report. X may also have reporting and

withholding obligations when it credits

A’s account with the sales proceeds.

Although the sale is considered to be

effected at an office outside the United

States under paragraph (g)(3)(iii)(A) of

this section, X is a broker with respect

to the sale because, as a wholly-owned

subsidiary of a U.S. company, it meets

the definition of a broker under

paragraph (a)(1) of this section. Under

the presumptions described in § 1.6049–

5(d)(2), X, as a U.S. payor, must

presume that, with respect to the sales

proceeds, A is a U.S. person who is not

an exempt recipient. Therefore, the

payment of sales proceeds to A by X is

reportable on a Form 1099 under

paragraph (c)(2) of this section. X has no

obligation to backup withhold on the

payment, based on the exemption under

§ 31.3406(g)–1(e), unless X has actual

knowledge that A is a U.S. person who

is not an exempt recipient. X is also a

withholding agent with respect to the

portion of the sales proceeds that

represents accrued interest on the

bonds. Based on the presumptions

under §§ 1.6049–5(d)(2) and 1.1441–

1(b)(3)(iii)(D), X must presume that A is

a foreign person with respect to the

interest portion of the payment, because

the interest amount is an amount subject

to withholding, within the meaning of

§ 1.1441–2(a) (even though a

withholding agent is not required to

withhold on such amounts). Thus, X is

required to file a Form 1042 and 1042–

S with respect to the interest portion of

the payment. Y s filing of a Form 1042–

S with respect to that portion of the

payment to X does not meet the

conditions for the multiple withholding

agent exception under § 1.1461–

1(c)(4)(i) because Y did not report the

payment to X as a payment to an

intermediary.

(5) Effective date—(i) General rule.

The provisions of this paragraph (g)

apply to payments made after December

31, 1998.

(ii) Transition rules. A payor that, on

December 31, 1998, holds a valid Form

W–8 or other form upon which the

payor is permitted to rely to hold the

payee as a foreign person pursuant to

the regulations in effect prior to January

1, 1999 (see 26 CFR parts 1 and 35a,

revised April 1, 1997), may treat it as a

valid certificate until its validity expires

under those regulations or, if earlier,

until December 31, 1999. Further, the

validity of a Form W–8 or other form

that is dated prior to January 1, 1998, is

valid on January 1, 1998, and would

expire at any time during 1998, is

extended until December 31, 1998 (and

is not extended after December 31, 1998

by reason of the preceding sentence).

The rule in this paragraph (g)(b)(ii),

however, does not apply to extend the

validity period of a form that expires in

1998 solely by reason of changes in the

circumstances of the person whose

name is on the certificate.

Notwithstanding the three preceding

sentences, a payor may choose not to

take advantage of the transition rule in

this paragraph (g)(5)(ii) with respect to

one or more withholding certificates

and, therefore, to require new

withholding certificates conforming to

the requirements described in this

section.

* * * * *

(j) Time and place for filing; crossreference to penalty. Forms 1096 and

1099 required under this section shall

be filed after the last calendar day of the

reporting period elected by the broker or

barter exchange and on or before the

end of the second calendar month

following the close of the calendar year

of such reporting period with the

appropriate Internal Revenue Service

Center, the address of which is listed in

the instructions for Form 1096. See

paragraph (l) of this section for the

requirement to file certain returns on

magnetic media. For provisions relating

to the penalty provided for the failure to

file timely a correct information return

under section 6045(a), see § 301.6721–1

of this chapter. See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

(k) Requirement and time for

furnishing statement; cross-reference to

penalty—(1) General requirements. A

broker or barter exchange making a

return of information under this section

with respect to a transaction shall

furnish to the person whose identifying

number is (or is required to be) shown

on such return a written statement

showing the information required by

paragraph (c)(5), (d), (f), or (p) of this

section and containing a legend stating

that such information is being reported

to the Internal Revenue Service. If the

return of information is not made on

magnetic media, this requirement may

be satisfied by furnishing to such person

a copy of all Forms 1099 with respect

to such person filed with the Internal

Revenue Service Center. A statement
53480 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

shall be considered to be furnished to a

person to whom a statement is required

to be made under this paragraph (k) if

it is mailed to such person at the last

address of such person known to the

broker or barter exchange.

(2) Time for furnishing statements. A

broker or barter exchange may furnish

the statements required by this

paragraph (k) yearly, quarterly, monthly,

or on any other basis, without regard to

the reporting period elected by the

broker or barter exchange, provided that

all statements required to be furnished

under this paragraph (k) for a calendar

year shall be furnished on or before

January 31 of the following calendar

year.

(3) Cross-reference to penalty. For

provisions for failure to furnish timely

a correct payee statement, see

§ 301.6724–1 of this chapter (Procedure

and Administration Regulations). See

§ 301.6724–1 of this chapter for the

waiver of a penalty if the failure is due

to reasonable cause and is not due to

willful neglect.

(l) Magnetic media requirement. For

information returns filed after December

31, 1996, see § 301.6011–2 of this

chapter (Procedure and Administration

Regulations) for rules relating to filing

information returns on magnetic media.

A broker or barter exchange that fails to

file a Form 1099 under this section on

magnetic media, when required, may be

subject to a penalty for each such

failure. See paragraph (j) of this section.

* * * * *

§ 1.6045–1T [Removed]

Par. 38. Section 1.6045–1T is

removed.

Par. 39. Section 1.6045–2 is amended

as follows:

1. Paragraph (b)(2) is amended by:

a. Removing the period at the end of

paragraphs (b)(2)(i)(A), (b)(2)(i)(B), and

(b)(2)(i)(C), and adding semicolons in

each place.

b. Removing the period and the end

of paragraph (b)(2)(i)(D) and adding a

semicolon in its place.

c. Removing the language ‘‘, or’’ in

paragraph (b)(2)(i)(E) and adding a

semicolon in its place.

d. Removing the period at the end of

paragraph (b)(2)(i)(F) and adding ‘‘, or’’

in its place.

e. Adding paragraph (b)(2)(i)(G).

2. Revising paragraph (g)(2).

3. Adding paragraph (g)(4).

The revision and additions read as

follows:

§ 1.6045–2 Furnishing statement required

with respect to certain substitute payments.

* * * * *

(b) * * *

(2) * * * (i) * * *

(G) A foreign central bank of issue, as

defined in § 1.6049–4(c)(1)(ii)(H), or the

Bank for International Settlements.

* * * * *

(g) * * *

(2) Magnetic media requirement. For

the requirement to submit the

information required by paragraph (a) of

this section and by Form 1099 on

magnetic media for information returns

filed after December 31, 1996, see

§ 301.6011–2 of this chapter (Procedure

and Administration Regulations). A

broker or barter exchange that fails to

file on magnetic media, when required,

may be subject to a penalty under

section 6721 for each such failure. See

paragraph (g)(4) of this section.

* * * * *

(4) Cross-reference to penalties. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6045(d) and § 1.6045–

2(g)(1), including a failure to file on

magnetic media, see § 301.6721–1 of

this chapter. For provisions relating to

the penalty provided for failure to

furnish timely a correct payee statement

required under section 6045(d) and

§ 1.6045–2(a), see § 301.6722–1 of this

chapter. See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

* * * * *

§ 1.6045–2T [Removed]

Par. 40. Section 1.6045–2T is

removed.

Par. 41. Section 1.6049–4 is amended

by:

1. Removing the reference ‘‘section

3451’’ and adding ‘‘section 3406’’ each

place it appears in the following

locations in § 1.6049–4:

a. Paragraph (b)(2) introductory text,

third sentence.

b. Paragraph (b)(2)(iv).

c. Paragraph (b)(4), last sentence.

d. Paragraph (c)(2)(i).

e. Paragraph (c)(2)(ii) concluding text.

f. Paragraph (e)(4), second and last

sentences.

g. Paragraph (e)(5)(iv).

h. Paragraph (f)(4)(i), fourth sentence.

2. Revising paragraphs (a), (b)(1),

(b)(3), and (c)(1).

3. Removing the reference ‘‘§ 1.6049–

5(c)’’ in paragraphs (b)(5)(i) last

sentence, and (d)(2) and adding

‘‘§ 1.6049–5(f)’’ in its place.

4. Revising paragraph (d)(3).

5. Revising the heading for paragraph

(d)(7) and adding a sentence to the end

of the paragraph.

6. Removing the reference ‘‘§ 1.6049–

5(b)(1)(ii)’’ in the first sentence of

paragraph (d)(8) and adding ‘‘1.6049–

5(b)(2)’’ in its place.

7. Removing the reference ‘‘paragraph

(d)(10)(i)’’ in paragraph (d)(9)(ii)

introductory text, and adding

‘‘paragraph (d)(9)(i)’’ in its place.

8. Removing the reference ‘‘paragraph

(c)(1)(K)’’ in the first sentence of

paragraph (f)(4)(i) and adding

‘‘paragraph (c)(1)(ii)(M)’’ in its place;

and revising the last two sentences of

paragraph (f)(4)(i).

9. Revising the last sentence of the

Example in paragraph (f)(4)(ii).

10. Adding paragraph (g)(3).

The additions and revisions read as

follows:

§ 1.6049–4 Return of information as to

interest paid and original issue discount

includible in gross income after December

31, 1982.

(a) Requirement of reporting—(1) In

general. Except as provided in

paragraph (c) of this section, an

information return shall be made by a

payor, as defined in paragraph (a)(2) of

this section, of amounts of interest and

original issue discount paid after

December 31, 1982. Such return shall

contain the information described in

paragraph (b) of this section.

(2) Payor. A payor is a person

described in paragraph (a)(2) (i) or (ii) of

this section.

(i) Every person who makes a

payment of the type and of the amount

subject to reporting under this section

(or under an applicable section under

this chapter) to any other person during

a calendar year; however, persons not

treated as payors for purposes of

§ 31.3406(a)–2 of this chapter shall not

be treated as payors for purposes of this

paragraph (a)(2).

(ii) Every person who collects on

behalf of another person payments of

the type and of the amount subject to

reporting under this section (or under

an applicable section under this

chapter), including middlemen treated

as payors under § 31.3406(a)–2 of this

chapter, or who otherwise acts as a

middleman (as defined in paragraph

(f)(4) of this section) with respect to

such payment.

(b) Information to be reported—(1)

Interest payments. Except as provided

in paragraphs (b) (3) and (5) of this

section, in the case of interest other than

original issue discount treated as

interest under § 1.6049–5(f), an

information return on Form 1099 shall

be made for the calendar year showing

the aggregate amount of the payments,

the name, address, and taxpayer

identification number of the person to

whom paid, the amount of tax deducted

and withheld under section 3406 from
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53481

the payments, if any, and such other

information as required by the forms.

An information return is generally not

required if the amount of interest paid

to a person aggregates less than $10 or

if the payment is made to a person who

is an exempt recipient described in

paragraph (c)(1)(ii) of this section,

unless the payor backup withholds

under section 3406 on such payment

(because, for example, the payee (i.e.,

exempt recipient) has failed to furnish

a Form W–9 on request), in which case

the payor must make a return under this

section, unless the payor refunds the

amount withheld pursuant to

§ 31.6413(a)–3 of this chapter

(Employment Tax Regulations). For

reporting interest paid to a Canadian

nonresident alien individual, see

§ 1.6049–8.

* * * * *

(3) Returns made by middleman—(i)

In general. Except as provided in

paragraph (b)(5) of this section, every

person acting as a middleman (as

defined in paragraph (f)(4) of this

section) shall make an information

return for the calendar year. In the case

of interest payments (other than original

issue discount and other than interest

described in § 1.6049–8), the

information return shall be made on

Form 1099 and shall show the aggregate

amount of the interest, the name,

address, and taxpayer identification

number of the person on whose behalf

received, the amount of tax withheld

under section 3406, if any, and such

other information as required by the

forms. In the case of original issue

discount, the information return shall

show the information required to be

shown for the person on whose behalf

received, as described in paragraph

(b)(2) of this section. See § 1.6049–5(f) to

determine whether a middleman is

required to make an information return

with respect to original issue discount.

A middleman shall make an information

return regardless of whether the

middleman receives a Form 1099. A

middleman shall not be required to

make an information return if the

payment of interest aggregates less than

$10 or if the payment is made to an

exempt recipient described in paragraph

(c)(1)(ii) of this section, unless the payor

backup withholds under section 3406

on such payment (because, for example,

the payee has failed to furnish a Form

W–9 on request), in which case the

payor must make a return under this

section, unless the payor refunds the

amount withheld pursuant to

§ 31.6413(a)–3 of this chapter

(Employment Tax Regulations).

(ii) Forwarding of interest coupons

and original issue discount obligations.

In the case of a middleman who, from

within the United States, forwards an

interest coupon or discount obligation

on behalf of a payee for presentation,

collection or payment outside the

United States, the middleman shall

make an information return on Form

1099 for the calendar year showing, in

the case of an interest coupon, the

information required under paragraph

(b)(3)(i) of this section and, in the case

of a discount obligation, information

required under paragraph (b)(2) of this

section. For purposes of this paragraph

(b)(3)(ii), a middleman is considered to

forward an interest coupon or discount

obligation on behalf of a payee for

presentation, collection or payment

outside the United States if the

middleman forwards the coupon or

obligations outside the United States on

or after the date when the payee is

entitled to be paid or at an earlier date

that is within 90 days of such date or

if the middleman has actual knowledge

that the coupon or obligation is being

forwarded outside the United States for

presentation, collection, or payment

outside the United States. However, the

transfer, although subject to information

reporting under this section, is not

subject to backup withholding under

section 3406.

(iii) Example. The following example

illustrates the provisions of paragraph

(b)(3)(ii) of this section:

Example. Individual F, who is entitled to

payment on an interest coupon, instructs an

office of Bank M in the United States to

forward the coupon to Bank N for collection

by Bank N outside the United States. Bank

M in the United States forwards the interest

coupon to Bank N outside the United States.

Bank M is required to make an information

return for the calendar year under paragraph

(b)(3)(ii) of this section showing the aggregate

amount of the interest coupon forwarded, the

name, address of the permanent residence,

and the taxpayer identification number, if

any, of Individual F and such other

information as the form requires.

* * * * *

(c) Information returns not required—

(1) Payment to exempt recipient—(i) In

general. No information return is

required with respect to any payment

made to an exempt recipient described

in paragraph (c)(1)(ii) of this section,

except to the extent otherwise provided

in § 1.6049–5(d)(3) (ii) and (iii).

However, if the payor backup withholds

under section 3406 on such payment

(because, for example, the payee has

failed to furnish a Form W–9 on

request), then the payor is required to

make a return under this section, unless

the payor refunds the amount withheld

in accordance with § 31.6413(a)–3 of

this chapter (Employment Tax

Regulations).

(ii) Exempt recipient defined. The

term exempt recipient means any person

described in paragraphs (c)(1)(ii) (A)

through (Q) of this section. An exempt

recipient is generally exempt from

information reporting without filing a

certificate claiming exempt status unless

the provisions of this paragraph (c)(1)(ii)

require a payee to file a certificate. A

payor may in any case require a payee

not otherwise required to file a

certificate under this paragraph (c)(1)(ii)

to file a certificate in order to qualify as

an exempt recipient. See § 31.3406(h)–3

(a)(1)(iii) and (c)(2) of this chapter for

the certificate that a payee must provide

when a payor requires it in order to treat

the payee as an exempt recipient under

this paragraph (c)(1)(ii). A payor may

treat a payee as an exempt recipient

based upon a properly completed form

as described in § 31.3406(h)–3(e)(2) of

this chapter, its actual knowledge that

the payee is a person described in this

paragraph (c)(1)(ii), or the indicators

described in this paragraph (c)(1)(ii).

(A) Corporation. A corporation, as

defined in section 7701(a)(3), whether

domestic or foreign, is an exempt

recipient. In addition, for purposes of

this paragraph (c)(1), the term

corporation includes a partnership all of

whose members are corporations

described in this paragraph (c)(1), but

only if the partnership files with the

payor a certificate meeting the

certification requirements of paragraphs

(c)(2)(ii)(A) (1) through (5) of this

section. Absent actual knowledge

otherwise, a payor may treat a payee as

a corporation (and, therefore, as an

exempt recipient) if one of the

requirements of paragraph (c)(1)(ii)(A)

(1), (2), (3), or (4), of this section are met

before a payment is made.

(1) The name of the payee contains an

unambiguous expression of corporate

status that is Incorporated, Inc.,

Corporation, Corp., P.C., (but not

Company or Co.) or contains the term

insurance company, indemnity

company, reinsurance company, or

assurance company, or its name

indicates that it is an entity listed as a

per se corporation under § 301.7701–

2(b)(8)(i) of this chapter.

(2) The payor has on file a corporate

resolution or similar document clearly

indicating corporate status. For this

purpose, a similar document includes a

copy of Form 8832, filed by the entity

to elect classification as an association

under § 301.7701–3(b) of this chapter.

(3) The payor receives a Form W–9

which includes an EIN and a statement

from the payee that it is a domestic

corporation.
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(4) The payor receives a withholding

certificate described in § 1.1441–

1(e)(2)(i), that includes a certification

that the person whose name is on the

certificate is a foreign corporation.

(B) Tax exempt organization—(1) In

general. Any organization that is exempt

from taxation under section 501(a) is an

exempt recipient. A custodial account

under section 403(b)(7) shall be

considered an exempt recipient under

this paragraph. A payor may treat an

organization as an exempt recipient

under this paragraph (c)(1)(ii)(B)

without requiring a certificate if the

organization’s name is listed in the

compilation by the Commissioner of

organizations for which a deduction for

charitable contributions is allowed, if

the name of the organization contains an

unambiguous indication that it is a taxexempt organization, or if the

organization is known to the payor to be

a tax-exempt organization.

(2) Examples. The application of the

provisions of this paragraph (c)(1)(ii)(B)

may be illustrated by the following

examples:

Example 1. The following persons

maintain accounts at M Bank: N College, O

University, and P Church. M may treat N, O,

and P as exempt recipients even though such

persons have not filed an exemption

certificate with M because the names of the

organizations contain an unambiguous

indication that they are tax exempt

organizations.

Example 2. Q is listed in the current

edition of Internal Revenue Service

Publication 78 as an organization for which

deductions are permitted for charitable

contributions under section 170(c). Such

listing has not been revoked by an

announcement published in the Internal

Revenue Bulletin (see § 601.601(d)(2) of this

chapter). A payor may treat Q as an exempt

recipient even though Q has not filed an

exemption certificate with the payor.

Example 3. Employer R maintains a section

403(b)(7) custodial account with Regulated

Investment Company S on behalf of R’s

employees. S may treat the account as an

exempt recipient even though R or its

employees have not filed an exemption

certificate with S.

(C) Individual retirement plan. An

individual retirement plan as defined in

section 7701(a)(37) is an exempt

recipient. A payor may treat any such

plan of which it is the trustee or

custodian as an exempt recipient under

this paragraph (c)(1) without requiring a

certificate.

(D) United States. The United States

Government and any wholly-owned

agency or instrumentality thereof are

exempt recipients. A payor may treat a

person as an exempt recipient under

this paragraph (c)(1) without requiring a

certificate if the name of such person

reasonably indicates it is described in

this paragraph (c)(1).

(E) State. A State, the District of

Columbia, a possession of the United

States, a political subdivision of any of

the foregoing, wholly-owned agency or

instrumentality of any one or more of

the foregoing, and a pool or partnership

composed exclusively of any of the

foregoing are exempt recipients. A payor

may treat a person as an exempt

recipient under this paragraph (c)(1)

without requiring a certificate if the

name of such person reasonably

indicates it is described in this

paragraph (c)(1) or if such person is

known generally in the community to be

a State, the District of Columbia, a

possession of the United States or a

political subdivision or a wholly-owned

agency or instrumentality of any one or

more of the foregoing (for example, an

account held in the name of ‘‘Town of

S’’ or ‘‘County of T’’ may be treated as

held by an exempt recipient under this

paragraph (c)(1)(ii)(E)).

(F) Foreign government. A foreign

government, a political subdivision of a

foreign government, and any whollyowned agency or instrumentality of

either of the foregoing are exempt

recipients. A payor may treat a foreign

government or a political subdivision

thereof as an exempt recipient under

this paragraph (c)(1) without requiring a

certificate provided that its name

reasonably indicates that it is a foreign

government or provided that it is known

to the payor to be a foreign government

or a political subdivision thereof (for

example, an account held in the name

of the ‘‘Government of V’’ may be

treated as held by a foreign

government).

(G) International organization. An

international organization and any

wholly-owned agency or

instrumentality thereof are exempt

recipients. The term international

organization shall have the meaning

ascribed to it in section 7701(a)(18). A

payor may treat a payee as an

international organization without

requiring a certificate if the payee is

designated as an international

organization by executive order

(pursuant to 22 U.S.C. 288 through

288(f)).

(H) Foreign central bank of issue. A

foreign central bank of issue is an

exempt recipient. A foreign central bank

of issue is a bank which is by law or

government sanction the principal

authority, other than the government

itself, issuing instruments intended to

circulate as currency. See § 1.895–

1(b)(1). A payor may treat a person as

a foreign central bank of issue (and,

therefore, as an exempt recipient)

without requiring a certificate provided

that such person is known generally in

the financial community as a foreign

central bank of issue or if its name

reasonably indicates that it is a foreign

central bank of issue.

(I) Securities or commodities dealer. A

dealer in securities, commodities, or

notional principal contracts, that is

registered as such under the laws of the

United States or a State or under the

laws of a foreign country is an exempt

recipient. A payor may treat a dealer as

an exempt recipient under this

paragraph (c)(1) without requiring a

certificate if the person is known

generally in the investment community

to be a dealer meeting the requirements

set forth in this paragraph (c)(1) (for

example, a registered broker-dealer or a

person listed as a member firm in the

most recent publication of members of

the National Association of Securities

Dealers, Inc.).

(J) Real estate investment trust. A real

estate investment trust, as defined in

section 856 and § 1.856–1, is an exempt

recipient. A payor may treat a person as

a real estate investment trust (and,

therefore, as an exempt recipient)

without requiring a certificate if the

person is known generally in the

investment community as a real estate

investment trust.

(K) Entity registered under the

Investment Company Act of 1940. An

entity registered at all times during the

taxable year under the Investment

Company Act of 1940, as amended (15

U.S.C. 80a–1), (or during such portion of

the taxable year that it is in existence),

is an exempt recipient. An entity that is

created during the taxable year will be

treated as meeting the registration

requirement of the preceding sentence

provided that such entity is so

registered at all times during the taxable

year for which such entity is in

existence. A payor may treat such an

entity as an exempt recipient under this

paragraph (c)(1) without requiring a

certificate if the entity is known

generally in the investment community

to meet the requirements of the

preceding sentence.

(L) Common trust fund. A common

trust fund, as defined in section 584(a),

is an exempt recipient. A payor may

treat the fund as an exempt recipient

without requiring a certificate provided

that its name reasonably indicates that

it is a common trust fund or provided

that it is known to the payor to be a

common trust fund.

(M) Financial institution. A financial

institution such as a bank, mutual

savings bank, savings and loan

association, building and loan

association, cooperative bank,
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53483

homestead association, credit union,

industrial loan association or bank, or

other similar organization, whether

organized in the United States or under

the laws of a foreign country is an

exempt recipient. A financial institution

also includes a clearing organization

defined in § 1.163–5(c)(2)(i)(D)(8) and

the Bank for International Settlements.

A payor may treat any person described

in the preceding sentence as an exempt

recipient without requiring a certificate

if the person’s name (including a foreign

name, such as ‘‘Banco’’ or ‘‘Banque’’)

reasonably indicates the payee is a

financial institution described in the

preceding sentence. In the case of a

foreign person, a payor may also treat a

person on such list as the Internal

Revenue Service may publish or

approve (such as in the Thomson Bank

Directory or a list approved by the

Federal Reserve Board).

(N) Trust. A trust which is exempt

from tax under section 664(c) (i.e., a

charitable remainder annuity trust or a

charitable remainder unitrust) or is

described in section 4947(a)(1) (relating

to certain charitable trusts) is an exempt

recipient. A payor which is a trustee of

the trust may treat the trust as an

exempt recipient without requiring a

certificate.

(O) Nominees or custodians. A

nominee or custodian.

(P) Brokers. A broker as defined in

section 6045(c) and § 1.6045–1(a)(1).

(Q) Swap dealers. A dealer in notional

principal contracts as defined in

§ 1.446–3(c)(4)(iii).

(iii) Exempt recipient no longer

exempt. Any person who ceases to be an

exempt recipient shall, no later than 10

days after such cessation, notify the

payor in writing when it ceases to be an

exempt recipient unless it reasonably

appears that the person formerly

qualifying as an exempt recipient will

not thereafter receive a reportable

payment from the payor. If a payor

treats a person as an exempt recipient

by requiring the exempt recipient to file

a certificate claiming exempt status, that

person shall revoke the certificate as

provided in the preceding sentence. If

the exempt recipient terminates its

relationship with the payor prior to the

time that the notice of change in status

is otherwise required, the exempt

recipient is not required to notify the

payor. If, however, the person who

formerly qualified as an exempt

recipient later reinstates the relationship

with the payor, the person must, prior

to receiving a reportable payment from

such relationship, notify the payor that

it no longer qualifies as an exempt

recipient in case the payor relies upon

the previous treatment.

* * * * *

(d) * * *

(3) Conversion into United States

dollars of amounts paid in foreign

currency—(i) Conversion rules. When a

payment is made in foreign currency,

the U.S. dollar amount of the payment

shall be determined by converting such

foreign currency into U.S. dollars on the

date of payment at the spot rate (as

defined in § 1.988–1(d)(1)) or pursuant

to a reasonable spot rate convention. For

example, a withholding agent may use

a month-end spot rate or a monthly

average spot rate. A spot rate convention

must be used consistently with respect

to all non-dollar amounts withheld and

from year to year. Such convention

cannot be changed without the consent

of the Commissioner or the

Commissioner’s delegate.

(ii) Special rule for § 1.988–5(a)

transactions where the payor on both

components of a qualified hedging

transaction is the same person—(A) In

general. Interest or original issue

discount on a qualified debt instrument

that is part of a qualified hedging

transaction under § 1.988–5(a) shall be

computed for section 6049 reporting

purposes under the rules described in

§ 1.988–5(a)(9)(ii) if—

(1) The payor on the qualified debt

instrument and the counterparty to the

§ 1.988–5(a) hedge are the same person;

and

(2) The payee complies with the

requirements of § 1.988–5(a) and so

notifies its payor prior to the date

required for filing Form 1099 as

required by this section.

(B) Effective date. The provisions of

this paragraph (d)(3)(ii) apply to

transactions entered into after December

31, 1998.

* * * * *

(7) Magnetic media requirement.

* * * For the requirement to submit the

information required by Form 1099 on

magnetic media for payments after

December 31, 1983, see section 6011(e)

and § 301.6011–2 of this chapter

(Regulations on Procedure and

Administration).

* * * * *

(f) * * *

(4) * * * (i) * * * A person shall be

considered to be a middleman as to any

portion of an interest payment made to

such person which portion is actually

owned by another person, whether or

not the other person’s name is also

shown on the information return filed

with respect to such interest payment,

except that a husband or wife will not

be considered as acting in the capacity

of a middleman with respect to his or

her spouse. A person who, from within

the United States, forwards an interest

coupon or discount obligation on behalf

of a payee for presentation, collection or

payment outside the United States is

also a middleman for purposes of this

section (but the transfer, although

subject to information reporting under

this section, does not make the payment

subject to backup withholding under

section 3406).

(ii) * * *

Example. * * * Broker B is required to

make an information return showing the

amount of original issue discount treated as

paid to A under § 1.6049–5(f).

(g) * * *

(3) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6049(a) and § 1.6049–

4(a)(1), see § 301.6721–1 of this chapter

(Procedure and Administration

Regulations). See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

Par. 42. Section 1.6049–5 is amended

by:

1. Removing the reference ‘‘section

3451’’ in the third sentence of paragraph

(a)(6) and adding ‘‘section 3406’’ in its

place.

2. Removing the last sentence of

paragraph (a)(6).

3. Revising paragraph (b).

4. Redesignating paragraph (c) as

paragraph (f).

5. Adding new paragraphs (c), (d), (e)

and (g).

The revisions and additions read as

follows:

§ 1.6049–5 Interest and original issue

discount subject to reporting after

December 31, 1982.

* * * * *

(b) Interest excluded from reporting

requirement. The term interest or

original issue discount (OID) does not

include—

(1) Interest on any obligation issued

by a natural person as defined in

§ 1.6049–4(f)(2), irrespective of whether

such interest is collected on behalf of

the holder of the obligation by a

middleman.

(2) Interest on any obligation if such

interest is exempt from taxation under

section 103(a), relating to certain

governmental obligations, or interest

which is exempt from taxation under

any other provision of law without

regard to the identity of the holder. The

holder of a tax exempt obligation that is

not in registered form must provide
53484 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

written certification to the payor (other

than the issuer of the obligation) that the

obligation is exempt from taxation. A

statement that interest coupons are tax

exempt on the envelope or shell

commonly used by financial institutions

to process such coupons, signed by the

payee, will be sufficient for this purpose

if the envelope is properly completed

(i.e., shows the name, address, and

taxpayer identification number of the

payee). A payor may rely on such

written certification in treating such

interest as tax exempt for purposes of

section 6049. See § 1.6049–4(d)(8) with

respect to the requirement that the

issuer of a taxable obligation shall make

an information return if such issuer

receives an envelope which improperly

claims that the interest coupons

contained therein are tax exempt.

(3) Interest on amounts held in escrow

to guarantee performance on a contract

or to provide security. However, interest

on amounts held in escrow with a

person described in paragraph (a)(2) or

(3) of this section is interest subject to

reporting under section 6049.

(4) Interest that a governmental unit

pays with respect to tax refunds.

(5) Interest on deposits for security,

such as deposits posted with a public

utility company. However, interest on

deposits posted for security with a

person described in paragraph (a)(2) or

(3) of this section is interest subject to

reporting under section 6049.

(6) Amounts from sources outside the

United States (determined under the

provisions of part I, subchapter N,

chapter 1 of the Internal Revenue Code

(Code) and the regulations under those

provisions) paid outside the United

States by a non-U.S. payor or a non-U.S.

middleman (as defined in paragraph

(c)(5) of this section). See paragraph (e)

of this section for circumstances in

which a payment is considered to be

made outside the United States.

(7) Portfolio interest, as defined in

§ 1.871–14(b)(1), paid with respect to

obligations in bearer form described in

section 871(h)(2)(A) or 881(c)(2)(A) or

with respect to a foreign-targeted

registered obligation described in

§ 1.871–14(e)(2) for which the

documentation requirements described

in § 1.871–14(e)(3) and (4) have been

satisfied (other than by a U.S.

middleman (as defined in paragraph

(c)(5) of this section) that, as a custodian

or nominee of the payee, collects the

amount for, or on behalf of, the payee,

regardless of whether the middleman is

also acting as agent of the payor).

(8) Portfolio interest described in

§ 1.871–14(c)(1)(ii), paid with respect to

obligations in registered form described

in section 871(h)(2)(B) or 881(c)(2)(B)

that is not described in paragraph (b)(7)

of this section.

(9) Any amount paid by an

international organization described in

§ 1.6049–4(c)(1)(ii)(G) (or its paying,

transfer, or other agent that is not also

a payee’s agent) with respect to an

obligation of which the international

organization is the issuer.

(10)(i) Amounts paid outside the

United States (other than by a U.S.

middleman (as defined in paragraph

(c)(5) of this section) that, as a custodian

or nominee or other agent of the payee,

collects the amount for, or on behalf of,

the payee, regardless of whether the

middleman is also acting as agent of the

payor) with respect to an obligation that:

Has a face amount or principal amount

of not less than $500,000 (as determined

based on the spot rate on the date of

issuance if in foreign currency); has a

maturity (at issue) of 183 days or less;

satisfies the requirements of sections

163(f)(2)(B)(i) and (ii)(I) and the

regulations thereunder (as if the

obligation would otherwise be a

registration-required obligation within

the meaning of section 163(f)(2)(A))

(however, an original issue discount

obligation with a maturity of 183 days

or less from the date of issuance is not

required to satisfy the certification

requirement of § 1.163–5(c)(2)(i)(D)(3))

and is issued in accordance with the

procedures of § 1.163–5(c)(2)(i)(D); and

has on its face the following statement

(or a similar statement having the same

effect):

By accepting this obligation, the holder

represents and warrants that it is not a

United States person (other than an exempt

recipient described in section 6049(b)(4) of

the Internal Revenue Code and regulations

thereunder) and that it is not acting for or on

behalf of a United States person (other than

an exempt recipient described in section

6049(b)(4) of the Internal Revenue Code and

the regulations thereunder).

(ii) If the obligation is in registered

form, it must be registered in the name

of an exempt recipient described in

§ 1.6049–4(c)(1)(ii). For purposes of this

paragraph (b)(10), a middleman may

treat an obligation as described in

section 163(f)(2)(B)(i) and (ii)(I) and the

regulations under that section if the

obligation, or coupons detached

therefrom, whichever is presented for

payment, contains the statement

described in this paragraph (b)(10).

(11) Amounts paid with respect to an

account or deposit with a U.S. or foreign

branch of a domestic or foreign

corporation or partnership that is paid

with respect to an obligation described

in either paragraph (b)(11)(i) or (ii) of

this section, if the branch is engaged in

the commercial banking business; and

the interest or OID is paid outside the

United States (other than by a U.S.

middleman (as defined in paragraph

(c)(5) of this section) that acts as a

custodian, nominee, or other agent of

the payee, and collects the amount for,

or on behalf of, the payee, regardless of

whether the middleman is also acting as

agent of the payor).

(i) An obligation is described in this

paragraph (b)(11)(i) if it is not in

registered form (within the meaning of

section 163(f) and the regulations under

that section), is described in section

163(f)(2)(B) and issued in accordance

with the procedures of § 1.163–

5(c)(2)(i)(C) or (D), and, in the case of a

U.S. branch, is part of a larger single

public offering of securities. For

purposes of this paragraph (b)(11)(i), a

middleman may treat an obligation as

described in section 163(f)(2)(B) if the

obligation, and any detachable coupons,

contains the statement described in

section 163(f)(2)(B)(ii)(II) and the

regulations under that section.

(ii)(A) An obligation is described in

this paragraph (b)(11)(ii) if it produces

income described in section

871(i)(2)(A); has a face amount or

principal amount of not less than

$500,000 (as determined based on the

spot rate on the date of issuance if in

foreign currency); satisfies the

requirements of sections 163(f)(2)(B)(i)

and (ii)(I) and the regulations

thereunder (as if the obligation would

otherwise be a registration-required

obligation within the meaning of section

163(f)(2)(A)) and is issued in accordance

with the procedures of § 1.163–5(c)(2)(i)

(C) or (D) (however, an original issue

discount obligation with a maturity of

183 days or less from the date of

issuance is not required to satisfy the

certification requirement of § 1.163–

5(c)(2)(i)(D)(3)). For purposes of this

paragraph (b)(11)(ii), a middleman may

treat an obligation as described in

sections 163(f)(2)(b) (i) and (ii) and the

regulations under that section if the

obligation, or any detachable coupon,

contains the statement described in

paragraph (b)(11)(ii)(b) of this section.

(B) The obligation must have on its

face, and on any detachable coupons,

the following statement (or a similar

statement having the same effect):

By accepting this obligation, the holder

represents and warrants that it is not a

United States person (other than an exempt

recipient described in section 6049(b)(4) and

regulations under that section) and that it is

not acting for or on behalf of a United States

person (other than an exempt recipient

described in section 6049(b)(4) and the

regulations under that section).

(C) If the obligation is in registered

form, it must be registered in the name
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53485

of an exempt recipient described in

§ 1.6049–4(c)(1)(ii).

(12) Returns of information are not

required for payments that a payor can,

prior to payment, reliably associate with

documentation upon which it may rely

to treat the payment as made to a foreign

beneficial owner in accordance with

§ 1.1441–1(e)(1)(ii) or as made to a

foreign payee in accordance with

paragraph (d)(1) of this section or

presumed to be made to a foreign payee

under paragraph (d) (2), (3), (4), or (5)

of this section. However, such payments

may be reportable under § 1.1461–1 (b)

and (c). The provisions of § 1.1441–1

shall apply by substituting the term

payor for the term withholding agent

and without regard to the fact that the

provisions apply only to amounts

subject to withholding under chapter 3

of the Code. In the event of a conflict

between the provisions of § 1.1441–1

and paragraph (d) of this section in

determining the foreign status of the

payee, the provisions of § 1.1441–1 shall

govern for payments of amounts subject

to withholding under chapter 3 of the

Code and the provisions of paragraph

(d) of this section shall govern in other

cases. This paragraph (b)(12) does not

apply to interest paid to a Canadian

nonresident alien individual as

provided in § 1.6049–8.

(13) Amounts for the period that the

debt obligation with respect to which

the interest arises represents an asset

blocked as described in § 1.1441–2(e)(3).

Payment of such amounts, including

interest that is past due and OID on

obligations that mature on or before the

date that the assets are no longer

blocked, is deemed to occur in

accordance with the rules of § 1.1441–

2(e)(3).

(14) Payments made by a foreign

intermediary described in § 1.1441–

1(e)(3)(i) that it has received in its

capacity as an intermediary and that are

associated with a valid withholding

certificate described in § 1.1441–1(e)(3)

(ii) or (iii) and payments made by a U.S.

branch of a foreign bank or of a foreign

insurance company described in

§ 1.1441–1(b)(2)(iv) that are associated

with a valid withholding certificate

described in § 1.1441–1(e)(3)(v), which

certificate the intermediary or branch

has furnished to the payor or

middleman from whom it has received

the payment, unless, and to the extent,

the intermediary or branch knows that

the payments are required to be reported

under § 1.6049–4 and were not so

reported.

(15) Amounts of interest as

determined under the provisions of

§ 1.446–3(g)(4) (dealing with interest in

the case of a significant non-periodic

payment with respect to a notional

principal contract). Such amounts are

governed by the provisions of section

6041. See § 1.6041–1(d)(5).

(c) Applicable rules—(1)

Documentary evidence for offshore

accounts. A payor may rely on

documentary evidence described in this

paragraph (c)(1) instead of a beneficial

owner withholding certificate described

in § 1.1441–1(e)(2)(i) in the case of a

payment made outside the United States

to an offshore account or, in the case of

broker proceeds described in § 1.6045–

1(c)(2), in the case of a sale effected

outside the United States (as defined in

§ 1.6045–1(g)(3)(iii)(A)). For purposes of

this paragraph (c)(1), an offshore

account means an account maintained

at an office or branch of a U.S. or foreign

bank or other financial institution at any

location outside the United States (i.e.,

other than in any of the fifty States or

the District of Columbia) and outside of

U.S. possessions. Thus, for example, an

account maintained in a foreign country

at a branch of a U.S. bank or of a foreign

subsidiary of a U.S. bank is an offshore

account. For the definition of a payment

made outside the United States, see

paragraph (e) of this section. A payor

may rely on documentary evidence if

the payor has established procedures to

obtain, review, and maintain

documentary evidence sufficient to

establish the identity of the payee and

the status of that person as a foreign

person (including, but not limited to,

documentary evidence described in

§ 1.1441–6(c) (3) or (4)); and the payor

obtains, reviews, and maintains such

documentary evidence in accordance

with those procedures. A payor

maintains the documents reviewed by

retaining the original, certified copy, or

a photocopy (or microfiche or similar

means of record retention) of the

documents reviewed and noting in its

records the date on which and by whom

the document was received and

reviewed. Documentary evidence

furnished for the payment of an amount

subject to withholding under chapter 3

of the Code must contain all of the

information that is necessary to

complete a Form 1042–S for that

payment.

(2) Other applicable rules. The

provisions of § 1.1441–1(e)(4)(i) through

(ix) (regarding who may sign a

certificate, validity period of certificates,

retention of certificates, etc.) shall apply

(by substituting the term payor for the

term withholding agent and

disregarding the fact that the provisions

under § 1.1441–1(e)(4) only apply to

amounts subject to withholding under

chapter 3 of the Code) to withholding

certificates and documentary evidence

furnished for purposes of this section.

See § 1.1441–1(b)(2)(vii) for provisions

dealing reliable association of a

payment with documentation.

(3) Standards of knowledge. A payor

may not rely on a withholding

certificate or documentary evidence

described in paragraph (c)(1) or (4) of

this section if it has actual knowledge or

reason to know that any information or

certification stated in the certificate or

documentary evidence is unreliable. A

payor has reason to know that

information or certifications are

unreliable only if the payor would have

reason to know under the provisions of

§ 1.1441–7(b)(2)(ii) and (3) that the

information and certifications provided

on the certificate or in the documentary

evidence are unreliable or, in the case

of a Form W–9 (or an acceptable

substitute), it cannot reasonably rely on

the documentation as set forth in

§ 31.3406(h)–3(e) of this chapter (see the

information and certification described

in § 31.3406(h)–3(e)(2)(i) through (iv) of

this chapter that are required in order

for a payor reasonably to rely on a Form

W–9). The provisions of § 1.1441–

7(b)(2)(ii) and (3) shall apply for

purposes of this paragraph (c)(3)

irrespective of the type of income to

which § 1.1441–7(b)(2)(ii) is otherwise

limited. The exemptions from reporting

described in paragraphs (b)(10) and (11)

of this section shall not apply if the

payor has actual knowledge that the

payee is a U.S. person who is not an

exempt recipient.

(4) Special documentation rules for

certain payments. This paragraph (c)(4)

modifies the provisions of this

paragraph (c) for payments to offshore

accounts maintained at a bank or other

financial institution of amounts that are

not subject to withholding under

chapter 3 of the Code, other than

amounts described in (d)(3)(iii) of this

section (dealing with U.S. short-term

OID and U.S. bank deposit interest).

Amounts are not subject to withholding

under chapter 3 of the Code if they are

not included in the definition of

amounts subject to withholding under

§ 1.1441–2(a) (e.g., deposit interest with

foreign branches of U.S. banks, foreign

source income, or broker proceeds).

(i) Alternative documentary evidence.

In the case of payments to which this

paragraph (c)(4) applies, the payor may,

instead of a beneficial owner

withholding certificate described in

§ 1.1441–1(e)(2)(i) or documentary

evidence described in paragraph (c)(1)

of this section, rely on a customer’s

declaration of foreign status made on an

account opening form that contains the

statement described in this paragraph

(c)(4)(i) (or such substitute statement as
53486 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

the Internal Revenue Service may

prescribe) if the mailing and permanent

residence address of the customer is in

the country in which the branch or

office is located and, under the local

laws, regulations, or practices

applicable to the type of account or

transaction described in this paragraph

(c)(4), it is not customary to obtain

documentary evidence described in

paragraph (c)(1) of this section or, it is

customary to obtain such documentary

evidence, but it is not customary to

request that it be renewed periodically.

Reliance on the documentary evidence

described in this paragraph (c)(4)(i) is

permitted only if there are no

indications that the person opening the

account is a U.S. person (e.g.,

permanent residence address is in a

foreign country, the person does not

have a mailing address in the United

States, the person is not employed by a

U.S.-based multinational organization).

If reliance is not permitted because

there are indications of U.S. status (e.g.,

the person’s permanent residence

address is in the United States, the

person changes his mailing address to

the United States, the person is

employed by a U.S.-based multinational

organization) then the payor must

obtain either documentary evidence

described in paragraph (c)(1) of this

section or a Form W–8 described in

§ 1.1441–1(e)(2)(i) in order to treat the

customer as a foreign payee. The form

or documentary evidence must be

renewed every three years in accordance

with the renewal procedures set forth in

§ 1.1441–1(e)(4)(ii)(A) for as long as

indicia of U.S. status continue to be

present. The statement referred to in

this paragraph (c)(4)(i) must appear near

the signature line and must read as

follows:

By opening this account and signing

below, the account owner represents and

warrants that he/she/it is not a U.S. person

for purposes of U.S. federal income tax and

that he/she/it is not acting for or on behalf

of a U.S. person. A false statement or

misrepresentation of tax status by a U.S.

person could lead to penalties under U.S.

law. If your tax status changes and you

become a U.S. citizen or a resident, you must

notify us within 30 days.

(ii) Continuous validity of declaration

of foreign status subject to due diligence

by financial institution. A declaration of

foreign status described in paragraph

(c)(4)(i) of this section does not expire

if the financial institution complies with

the mailing requirement described in

paragraph (c)(4)(iii) of this section,

unless the financial institution becomes

aware of circumstances indicating that

the customer may be a U.S. person

(including indications described in

§ 1.1441–7(b)(2)(ii), dealing with due

diligence standards applicable to

financial institutions). If circumstances

indicate that the customer may be a U.S.

person, then the financial institution

may rely on the foreign status of the

customer only if it obtains documentary

evidence from the customer that is

described in paragraph (c)(1) of this

section or a beneficial withholding

certificate described in § 1.1441–

1(e)(2)(i). Such documentary evidence

or certificate does not expire after the

three-year validity period otherwise

prescribed for such documentation but

must be renewed each time new

circumstances occur indicating that the

customer may be a U.S. person.

(iii) Negative confirmation of change

of status. In order for a declaration of

foreign status to remain valid, the

financial institution must include the

following statement on a year-end

statement mailed to the customer:

You have declared to us that you are not

a U.S. person and, unless you notify us to the

contrary, we will continue to rely on that

declaration to treat the account as owned by

a non-U.S. person. You have an obligation to

notify us if your status changes and you

become a U.S. citizen or a U.S. resident. A

U.S. person who fails to report earnings on

the account could be subject to penalties

under U.S. law.

(iv) Special rule when non-renewable

documentary evidence is customary. If it

is customary in the country in which

the branch or office is located to obtain

documentary evidence described in

paragraph (c)(1) of this section, but it is

not customary for such documentary

evidence to be renewed, then a payor

must request such documentary

evidence in lieu of the statement

described in paragraph (c)(4)(i) of this

section. All other requirements

described in paragraphs (c)(4)(ii) and

(c)(4)(iii) of this section shall apply.

(v) Exception for existing accounts.

The rules of paragraphs (c)(4)(i) and (iv)

of this section shall apply only to

accounts opened on or after January 1,

1999.

(5) U.S. payor, U.S. middleman, nonU.S. payor, and non-U.S. middleman.

The terms payor and middleman have

the meanings ascribed to them under

§ 1.6049–4(a). A non-U.S. payor or nonU.S. middleman means a payor or

middleman other than a U.S. payor or

U.S. middleman. The term U.S. payor or

U.S. middleman means—

(i) A person described in section

7701(a)(30) (including a foreign branch

or office of such person);

(ii) The government of the United

States or the government of any State or

political subdivision thereof (or any

agency or instrumentality of any of the

foregoing);

(iii) A controlled foreign corporation

within the meaning of section 957(a);

(iv) A foreign partnership, if at any

time during its tax year, one or more of

its partners are U.S. persons (as defined

in § 1.1441–1(c)(2)) who, in the

aggregate hold more than 50 percent of

the income or capital interest in the

partnership or if, at any time during its

tax year, it is engaged in the conduct of

a trade or business in the United States;

(v) A foreign person 50 percent or

more of the gross income of which, from

all sources for the three-year period

ending with the close of its taxable year

preceding the collection or payment (or

such part of such period as the person

has been in existence), was effectively

connected with the conduct of trade or

business within the United States; or

(vi) A U.S. branch of a foreign bank

or a foreign insurance company

described in § 1.1441–1(b)(2)(iv).

(6) Examples. The following examples

illustrate the provisions of paragraphs

(b) and (c) of this section:

Example 1. FC is a foreign corporation that

is not engaged in a trade or business in the

United States during the current calendar

year. D, an individual who is a resident and

citizen of the United States, holds a

registered obligation issued by FC in a public

offering. Interest is paid on the obligation

within the United States by DC, a U.S.

corporation that is the designated paying

agent of FC. D does not have an account with

DC. Although interest paid on the obligation

issued by FC is foreign source, the interest

paid by DC to D is considered to be interest

for purposes of information reporting under

section 6049 because it is paid in the United

States.

Example 2. The facts are the same as in

Example 1 except that D is a nonresident

alien individual who has furnished DC with

a Form W–8 in accordance with the

provisions of § 1.1441–1(e)(1)(ii). By reason

of paragraph (b)(12) of this section, the

payment of interest by DC to D is not

considered to be a payment of interest for

purposes of information reporting under

section 6049. Therefore, DC is not required

to make an information return under section

6049.

Example 3. The facts are the same as in

Example 2 except that D has not furnished

a Form W–8 and DC pays interest on the

obligation at its branch outside the United

States. The payment of interest by DC to D

is not considered to be a payment of interest

for purposes of information reporting under

section 6049 because DC, although a U.S.

person is not a middleman or a payor within

the meaning of § 1.6049–4(a) and (f)(4). Thus,

the amount is described in paragraph (b)(6)

of this section. Therefore, DC is not required

to make an information return under section

6049.

Example 4. The facts are the same as in

Example 3 except that the obligation of FC

is held in a custodial account for D by FB,
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53487

a foreign branch of a U.S. financial

institution. By reason of paragraph (c)(5) of

this section, FB is considered to be a U.S.

middleman. Therefore, FB is required to

make an information return unless FB may

treat D as a beneficial owner that is a foreign

person in accordance with the provisions of

§ 1.1441–1(e)(1)(ii).

Example 5. The facts are the same as in

Example 4 except that the FC obligation is

held for D by NC, in a custodial account at

NC’s foreign branch. NC is a foreign

corporation that is a non-U.S. middleman

described in paragraph (c)(5) of this section.

Under paragraph (b)(6) of this section, the

payment by NC to D is not considered to be

a payment of interest for purposes of section

6049. Therefore, NC is not required to make

an information return under section 6049

with respect to the payment.

(d) Determination of status as U.S. or

foreign payee and applicable

presumptions in the absence of

documentation—(1) Identifying the

payee. The provisions of § 1.1441–

1(b)(2) shall apply (by substituting the

term payor for the term withholding

agent) to identify the payee for purposes

of this section (and other sections of

regulations under this chapter to which

this paragraph (d)(1) applies), except to

the extent provided in this paragraph

(d)(1) in the case of payments of

amounts that are not subject to

withholding under chapter 3 of the

Code. Amounts are not subject to

withholding under chapter 3 of the

Code if they are not included in the

definition of amounts subject to

withholding under § 1.1441–2(a) (e.g.,

deposit interest with foreign branches of

U.S. banks, foreign source income, or

broker proceeds). The exceptions to the

application of § 1.1441–1(b)(2) to

amounts that are not subject to

withholding under chapter 3 of the

Code are as follows:

(i) The provisions of § 1.1441–

1(b)(2)(ii), dealing with payments to a

U.S. agent of a foreign person, shall not

apply. Thus, a payment to a U.S. agent

of a foreign person is treated as a

payment to a U.S. payee.

(ii) Payments to U.S. branches of

certain banks or insurance companies

described in § 1.1441–1(b)(2)(iv) shall be

treated as payments to a foreign payee,

irrespective of the fact that the U.S.

branch may have arranged with the

payor to be treated as a U.S. person for

payments of amounts subject to

withholding and irrespective of the fact

that the branch is treated as a U.S. payor

for purposes of paragraph (c)(5) of this

section.

(2) Presumptions of U.S. or foreign

status in the absence of

documentation—(i) In general. For

purposes of this section (and other

sections of regulations under this

chapter to which this paragraph (d)(2)

applies), the provisions of § 1.1441–

1(b)(3)(i), (ii), (iii), (vii), (viii), and (ix)

shall apply (by substituting the term

payor for the term withholding agent) to

determine the status of a payee as a U.S.

or a foreign person and its relevant

characteristics (e.g., as an owner or

intermediary, or as an individual,

corporation, or flow-through entity),

irrespective of whether the payments

are subject to withholding under

chapter 3 of the Code. In addition, the

rules of § 1.1441–1(b)(2)(vii) shall apply

for purposes of determining when a

payment can reliably be associated with

documentation, by substituting the term

payor for the term withholding agent.

For this purpose, the documentary

evidence described in paragraph (c)(4)

of this section can be treated as

documentation with which a payment

can be associated.

(ii) Grace period in the case of indicia

of a foreign payee. When the conditions

of this paragraph (d)(2)(ii) are satisfied,

the 30-day grace period provisions

under section 3406(e) shall not apply

and the provisions of this paragraph

(d)(2)(ii) shall apply instead. A payor

that, at any time during the grace period

described in this paragraph (d)(2)(ii),

credits an account with amounts

reportable under section 6042, 6045, or

6049 with respect to publicly traded

securities, or under section 6050N in the

case of royalties from a unit investment

trust that are (or were upon issuance)

publicly offered and are registered with

the Securities and Exchange

Commission under the Securities Act of

1933 (15 U.S.C. 77a) may, instead of

treating the account as owned by a U.S.

person and applying backup

withholding under section 3406,

choose, in its discretion, to treat the

account as owned by a foreign person if,

at the beginning of the grace period, the

address that the payor has in its records

for the account holder is in a foreign

country, the payor has been furnished

the information contained in a

withholding certificate described in

§ 1.1441–1(e)(2)(i) or (3)(i) (by way of a

facsimile copy of the certificate or other

non-qualified electronic transmission of

the information required to be stated on

the certificate), or the payor holds a

withholding certificate that is no longer

reliable. In the case of a newly opened

account, the grace period begins on the

date that the payor first credits the

account. In the case of an existing

account for which the payor holds a

Form W–8 or documentary evidence of

foreign status, the grace period begins

on the date that the payor first credits

the account after the existing

documentation held with regard to the

account can no longer be relied upon

(other than because the validity period

described in § 1.1441–1(e)(4)(ii)(A) has

expired). A new account shall be treated

as an existing account if the account

holder already holds an account at the

branch location at which the new

account is opened. It shall also be

treated as an existing account if an

account is held at another branch

location if the institution maintains a

coordinated account information system

described in § 1.1441–1(e)(4)(ix). The

grace period terminates on the earlier of

the close of the 90th day from the date

on which the grace period begins, the

date that the documentation is

provided, or the last day of the calendar

year in which the grace period begins.

The grace period also terminates when

the remaining balance in the account

(due to withdrawals or otherwise) is less

than 31 percent of the total amounts

credited since the beginning of the grace

period that would be subject to backup

withholding if the provisions of this

paragraph (d)(2)(ii) did not apply. At the

end of the grace period, the payor shall

treat the amounts credited to the

account during the grace period as paid

to a U.S. or foreign payee depending

upon whether documentation has been

furnished and the nature of any such

documentation furnished upon which

the payor may rely to treat the account

as owned by a U.S. or foreign payee. If

the documentation has not been

received on or before the date of

expiration of the grace period, the payor

may also apply the presumptions

described in this paragraph (d) to

amounts credited to the account after

the date on which the grace period

expires (until such time as the payor can

reliably associate the documentation

with amounts credited). See

§ 31.6413(a)–3(a)(1)(iv) of this chapter

for treating backup withheld amounts

under section 3406 as erroneously

withheld when the documentation

establishing foreign status is furnished

prior to the end of the calendar year in

which backup withholding occurs. If the

provisions of this paragraph (d)(2)(ii)

apply, the provisions of § 31.3406(d)–3

of this chapter shall not apply. For

purposes of this paragraph (d)(2)(ii), an

account holder’s reinvestment of gross

proceeds of a sale into other instruments

constitutes a withdrawal and a nonqualified electronic transmission of

information on a withholding certificate

is a transmission that is not in

accordance with the provisions of

§ 1.1441–1(e)(4)(iv). See § 1.1092(d)–1

for a definition of the term publicly
53488 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

traded for purposes of this paragraph

(d)(2)(ii).

(iii) Joint owners. Amounts paid to

accounts held jointly for which a

certificate or documentation is required

as a condition for being exempt from

reporting under paragraph (b) of this

section are presumed made to U.S.

payees who are not exempt recipients if,

prior to payment, the payor cannot

reliably associate the payment either

with a Form W–9 furnished by one of

the joint owners in the manner required

in §§ 31.3406(d)–1 through 31.3406(d)-5

of this chapter, or with documentation

described in paragraph (b)(12) of this

section furnished by each joint owner

upon which it can rely to treat each

joint owner as a foreign payee or foreign

beneficial owner. For purposes of

applying this paragraph (d)(2)(iii), the

grace period described in paragraph

(d)(2)(ii) of this section shall apply only

if each payee qualifies for such grace

period.

(3) Payments to foreign

intermediaries—(i) Payments of

amounts subject to withholding under

chapter 3 of the Internal Revenue Code.

In the case of payments of amounts that

are subject to withholding under

chapter 3 of the Code, the provisions of

§ 1.1441–1(b) (2)(v) and (3)(v) shall

apply (by substituting the term payor for

the term withholding agent) to identify

the payee and determine the applicable

presumptions for purposes of this

section (and other sections of

regulations under this chapter to which

this paragraph (d)(3) applies).

(ii) Payments of amounts not subject

to withholding under chapter 3 of the

Internal Revenue Code. Amounts that

are not subject to withholding under

chapter 3 of the Code that the payor may

treat as paid to a foreign intermediary in

accordance with § 1.1441–1(b)(3)(v)(A)

shall be treated as made to an exempt

recipient described in § 1.6049–

4(c)(1)(ii) (M), (O), (P), or (Q) except to

the extent that the payor has actual

knowledge that any person for whom

the intermediary is collecting the

payment is a U.S. person who is not an

exempt recipient. In the case of such

actual knowledge, the payor shall treat

the payment that it knows is allocable

to such U.S. person as a payment to a

U.S. payee who is not an exempt

recipient. If the payor does not have

sufficient reliable information regarding

the portion of the payment to the foreign

intermediary that is allocable to such

presumed U.S. payee, then the payor

shall treat the maximum portion of the

payment that could be allocable to such

presumed U.S. payee as so allocable.

(iii) Special rule for payments of

certain short-term original issue

discount and bank deposit interest—(A)

General rule. A payment of U.S. source

original issue discount on an obligation

with a maturity from the date of issue

of 183 days or less (short-term OID)

described in sections 871(g)(1)(B) or

881(a)(3) or of U.S. source interest

(including original issue discount) on

deposits with banks and other financial

institutions described in sections

871(i)(2)(A) or 881(d) that the payor may

treat as paid to a foreign intermediary in

accordance with the provisions of

§ 1.1441–1(b)(3)(v)(A) shall be treated as

paid to an exempt recipient only to the

extent that the payor can treat the

payment as made to a foreign person

that is a beneficial owner in accordance

with the provisions of § 1.1441–

1(e)(1)(ii), or can treat as a payment to

a U.S. beneficial owner in accordance

with the provisions of § 1.1441–1(d)(4)

(except to the extent that the payment

is associated with a Form W–9

described in § 1.1441–1(d)(2) relating to

a U.S. payee who is not an exempt

recipient), or can rely on the payee’s

claim that the payee assumes

withholding responsibility in

accordance with § 1.1441–1(e)(5)(iv).

(B) Payee has not furnished reliable

documentation. If the payment is made

to a person described in § 1.6049–

4(c)(1)(ii) that the payor may treat as an

exempt recipient without requiring

documentation and the payor may not

treat the payee as a foreign intermediary

in accordance with the provisions of

§ 1.1441–1(b)(3)(v)(A), then the payee

shall be treated as an exempt recipient

only if the payor can treat the person as

a U.S. person, or if the person has

furnished a certificate as a U.S. branch

described in § 1.1441–1(b)(2)(iv), or the

person has furnished a certificate such

that the payor can treat the payment as

a payment made to a foreign person that

is a beneficial owner, or if the payor can

treat the person as a foreign person that

has furnished an indication to the payor

that such person is receiving the

payment for its own account. A payor

must treat the payee as a foreign person

for purposes of this paragraph (d)(3)(iii)

if the payor has actual knowledge of the

person’s employer identification

number and that number begins with

the two digits ‘‘98,’’ if the payor’s

communications with the person are

mailed to an address in a foreign

country, or if the payment is made

outside the United States (as defined in

paragraph (e) of this section). The payor

may treat as a U.S. person any person

not described in the preceding sentence

for purposes of this paragraph (d)(3)(iii).

If the payee is treated as a foreign

person under this paragraph

(d)(3)(iii)(B), it must be treated as not

acting for its own account unless it

furnishes an indication of beneficial

ownership in any manner that the payor

and the person may choose, provided

the indication is documented in the

payor’s records. The indication is not

required to be under penalties of

perjury. The provisions of this

paragraph (d)(3)(iii) shall not apply to

deposits with banks and other financial

institutions that remain on deposit for a

period of two weeks or less, to amounts

of original issue discount arising from a

sale and repurchase transaction that is

completed within a period of two weeks

or less, or to amounts described in

paragraphs (b)(7), (10) and (11) of this

section (relating to certain obligations

issued in bearer form).

(iv) Examples. The rules of this

paragraph (d)(3) are illustrated by the

following example:

Example 1. A payor, X, makes a payment

to Y of U.S. source interest on debt

obligations issued prior to July 18, 1984.

Therefore, the interest does not qualify as

portfolio interest under sections 871(h) or

881(d). Y is a non-qualified foreign

intermediary that has furnished to X a valid

intermediary withholding certificate

described in § 1.1441–1(e)(3)(iii) to which it

has attached a valid Form W–9 for A, and

two valid beneficial owner Forms W–8, one

for B and one for C. Y’s withholding

certificate does not contain reliable

information regarding B and C’s share of the

payment. B’s withholding certificate

(attached to Y’s withholding certificate)

indicates that B is a foreign pension fund,

exempt from U.S. tax under the U.S. income

tax treaty with Country T. C’s withholding

certificate (attached to Y’s withholding

certificate) indicates that C is a foreign

corporation not entitled to a reduced rate of

withholding. Under paragraph (b)(12) of this

section, X may rely on the withholding

certificates to determine the status of A, B,

and C for purposes of deciding whether the

amounts paid are interest within the meaning

of this section. However, because X cannot

reliably determine how much of the payment

is allocable to B and C, it must presume

under paragraph (d)(3)(i) of this section and

§ 1.1441–1(b)(3)(v)(C) that 80 percent of the

payment (i.e., all of the payment less A’s

share) is allocable to C because the rate of

withholding applicable to the payment to C

is the highest of the withholding rates

applicable to B and C. Thus, based on such

presumption, X may treat C as a foreign

payee under paragraph (b)(12) of this section

and, therefore, may treat the payment as not

being interest reportable under § 1.6049–4(a).

Example 2. The facts are the same as in

Example 1, except that X can reliably

determine C’s allocable share, but cannot

reliably determine A’s and B’s share. No

withholding is required under chapter 3 of

the Code or under section 3406 on the

payment to A or B since A is a U.S. person

who has furnished a valid Form W–9 and B

is an exempt recipient (as defined in
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53489

§ 1.6049–4(c)(1)(ii)(B)) and a foreign taxexempt organization exempt from chapter 3

withholding (see § 1.1441–9). However, X

estimates that A, as a U.S. person, is subject

to a higher U.S. tax liability with respect to

the payment than B is, since B is a foreign

tax-exempt organization. Therefore, X must

presume under paragraph (d)(3)(i) of this

section and § 1.1441–1(b)(3)(v)(C) that 70

percent of the payment (i.e., all of the

payment less C’s share) is allocable to A.

Consequently, X must report all of the

payment on the Form 1099 filed for A under

§ 1.6049–4(a).

Example 3. A payor, X, makes a payment

of foreign source interest to Y, a nonqualified foreign intermediary that has

furnished an intermediary withholding

certificate described in § 1.1441–1(e)(3)(iii) to

which it has attached a withholding

certificate described in § 1.1441–1(e)(3)(iii)

for Z, that is also a non-qualified foreign

intermediary. Beneficial owner certificates

are attached to Z’s certificate. Under

paragraph (d)(1) of this section, X must rely

on the provisions of § 1.1441–1(b)(2)(v) to

treat the payment as made to the persons

whose withholding certificates are attached

to Z’s certificate to the extent both Y and Z

have reliably certified in accordance with

§ 1.1441–1(e)(3)(iii)(D) that the certificates

that each of them has attached to their

respective intermediary withholding

certificate represent all of the persons to

whom the intermediary withholding

certificate relates. X must rely on the

provisions of § 1.1441–1(b)(2)(v) even though

the payment is not an amount subject to

withholding under chapter 3 of the Code.

Example 4. A payor, X, makes a payment

to Y of foreign source interest and U.S.

source dividends. Y has furnished to X a

qualified intermediary withholding

certificate described in § 1.1441–1(e)(3)(ii) for

itself. Y indicates that 10 percent of each type

of payments is allocable to the category

described in § 1.1441–1(e)(5)(v)(B)(3),

relating to assets owned by persons for whom

the qualified intermediary does not hold the

documentation. X has no actual knowledge

that the persons owning the assets are U.S.

persons. With respect to the payment of

foreign source interest (an amount that is not

subject to withholding under chapter 3 of the

Code), X must, under paragraph (d)(3)(ii) of

this section, treat the payment as made to a

foreign payee. Such treatment is effective for

purposes of paragraph (b)(12) of this section,

meaning that the 10-percent amount is not

treated as interest for purposes of reporting

under § 1.6049–4(a). With respect to the

amount of U.S. source dividends, X must,

under paragraph (d)(3)(i) of this section, treat

the payment as made to a foreign payee

(based upon paragraph (d)(3)(i)’s crossreference to § 1.1441–1(b)(3)(v)(B)). Such

treatment is effective for purposes of

§ 1.6042–3(b)(1)(iii), meaning that the 10-

percent amount is not treated as a dividend

for purposes of reporting under § 1.6042–2(a).

Example 5. A payor, X, makes a payment

of foreign source interest to Y, a nonqualified foreign intermediary that has

furnished an intermediary withholding

certificate described in § 1.1441–1(e)(3)(iii) to

which it has attached beneficial owner Forms

W–8. In its withholding certificate, Y

represents to X that 30 percent of the

payment is allocable to a U.S. person who

has not furnished a Form W–9 and whom Y

cannot treat as an exempt recipient. Under

paragraph (d)(3)(ii) of this section, X must

treat 70 percent of the payment as made to

a foreign payee. X, however, may not rely on

the rule of paragraph (d)(3)(ii) of this section

to treat the remainder of the payment as

made to a foreign payee because X has actual

knowledge that the remainder of the payment

is allocable to a U.S. person. Under

paragraph (d)(3)(ii) of this section, X must

treat 30 percent of the payment as made to

a U.S. payee who is not an exempt recipient.

Example 6. A payor, X, holds a valid

withholding certificate from Y, a qualified

intermediary, with which it reliably

associates payments made to A, a U.S.

individual who maintains an account

relationship with Y and who has furnished

a valid Form W–9 to Y. Y has furnished A’s

Form W–9 to X who has set up a separate

account for those assets held in Y’s name,

and which Y has indicated are allocable to

A. The assets consist of 10,000 shares of

stock of domestic corporation T, publicly

traded on a U.S. stock exchange. When

dividends are paid on the T stock held in the

Y/A account, X credits the dividend amounts

to the account and reports the dividend

amounts credited to that account on a Form

1099–DIV under section 6042, treating A as

the payee in accordance with paragraph

(d)(1) of this section (cross-referencing

§ 1.1441–1(b)(2)(v)). When A later instructs Y

to sell the shares, X effects the sale and

credits the Y/A account with the gross

proceeds from the sale of 10,000 shares of the

T stock. Under § 1.6045–1(c)(2) and

paragraph (d)(3)(ii) of this section, X must

report the gross proceeds credited to the Y/

A account on a Form 1099–-B made in the

name of A since it has actual knowledge that

the gross proceeds are paid to a U.S. person

who is not an exempt recipient. See section

1.6045–1(g)(3)(iv).

Example 7. A payor, X, holds a valid

withholding certificate from Y, a nonqualified intermediary, and can reliably

associate a payment of U.S. short-term OID

and proceeds from the sale of shares with the

certificate. Y has not attached any certificates

or documentary evidence to its certificate

and informs X that the payment is allocable

to persons for whom it holds no

documentation. Under paragraph (d)(3)(iii) of

this section, X must, for purposes of this

section and section 3406, treat the payment

of short-term OID as made to a U.S. payee

who is not an exempt recipient. However,

under paragraph (d)(3)(ii) of this section, the

payment of gross proceeds from the sale of

shares is treated as made to a foreign payee.

X must rely on this treatment for purposes of

determining its reporting obligations under

section 6045 and the regulations under that

section (see § 1.6045–1(g)(1)(i)) and,

consequently, its withholding obligations

under section 3406 and the regulations under

that section.

(4) Determination of partnership and

partners status in the absence of

documentation—(i) Payments of

amounts subject to withholding under

chapter 3 of the Internal Revenue Code.

In the case of payments of amounts that

are subject to withholding under

chapter 3 of the Code, the provisions of

§§ 1.1441–1(b)(3)(ii) and 1.1441–5(c)(1),

and (d) shall apply (by substituting the

term payor for the term withholding

agent) to determine the status of the

payee as a partnership, as a domestic or

foreign partnership, and the status of its

partners for purposes of this section

(and other sections of regulations under

this chapter to which this paragraph

(d)(4) applies).

(ii) Payments of amounts not subject

to withholding under chapter 3 of the

Internal Revenue Code. In the case of

amounts that are not subject to

withholding under chapter 3 of the

Code, the provisions of §§ 1.1441–

1(b)(3)(ii) and 1.1441–5(c)(1), and (d)

shall also apply (by substituting the

term payor for the term withholding

agent), subject to the following

exceptions—

(A) If, in the absence of

documentation, the payor treats the

payee as a partnership in accordance

with the presumptions set forth in

§ 1.1441–1(b)(3)(ii), the presumptions of

§ 1.1441–5(d)(2) shall not apply to treat

the partnership as a foreign partnership;

instead, the person treated as a

partnership shall be presumed to be a

domestic partnership; and

(B) In the case of payments described

in § 1.1441–5(d)(3)(i) (dealing with

lacking or unreliable documentation

regarding the status of partners) or in

§ 1.1441–5(d)(3)(iii), dealing with

lacking or unreliable information

regarding the number of partners

represented by the withholding

certificate), the partners are presumed to

be U.S. payees who are not exempt

recipients and not foreign payees.

(5) Presumptions for payments to or

by foreign trusts or estates. [Reserved]

(e) Determination of whether amounts

are considered paid outside the United

States—(1) In general. For purposes of

section 6049 and this section, an

amount is considered to be paid by a

payor or middleman outside the United

States if the payor or middleman

completes the acts necessary to effect

payment outside the United States. See

paragraphs (e)(2), (3), and (4) of this

section for further clarification of where

amounts are considered paid. A

payment shall not be considered to be

made within the United States for

purposes of section 6049 merely by

reason of the fact that it is made on a

draft drawn on a United States bank

account or by a wire or other electronic

transfer from a United States account.

However, without regard to the location
53490 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

of the account from which the amount

is drawn, an amount that is described in

paragraph (e)(1) (i) or (ii) of this section

and paid by transfer to an account

maintained by the payee in the United

States or by mail to a United States

address is not considered to be paid

outside the United States.

(i) The amount is paid by an issuer or

the paying agent of the issuer and the

obligation is either—

(A) Issued by a U.S. payor, as defined

in paragraph (c)(5) of this section;

(B) Registered under the Securities

Act of 1933 (15 U.S.C. 77a); or

(C) Listed on an exchange that is

registered as a national securities

exchange in the United States or

included in an interdealer quotation

system in the United States.

(ii) The amount is paid by a U.S.

middleman (as defined in paragraph

(c)(5) of this section) that, as a

custodian, nominee, or other agent of a

payee, collects the amount for or on

behalf of the payee.

(2) Amounts paid with respect to

deposits or accounts with banks and

other financial institutions.

Notwithstanding paragraph (e)(1) of this

section, an amount paid by a bank or

other financial institution with respect

to a deposit or with respect to an

account with the institution is

considered paid at the branch or office

at which the amount is credited unless

the amount is collected by the financial

institution as the agent of the payee.

However, an amount will not be

considered to be paid at the branch or

office where the amount is considered

to be credited unless the branch or

office is a permanent place of business

that is regularly maintained, occupied,

and used to carry on a banking or

similar financial business; the business

is conducted by at least one employee

of the branch or office who is regularly

in attendance at such place of business

during normal business hours; and the

branch or office receives deposits and

engages in one or more of the other

activities described in § 1.864–4(c)(5)(i).

In addition, an amount paid by a bank

or other financial institution with

respect to a deposit or an account with

the institution is not considered paid at

a branch or office outside the United

States if the customer has transmitted

instructions to an agent, branch, or

office of the institution from inside the

United States by mail, telephone,

electronic transmission, or otherwise

concerning the deposit or account

(unless the transmission from the

United States has taken place in isolated

and infrequent circumstances).

(3) Coupon bonds and discount

obligations in bearer form.

Notwithstanding paragraph (e)(1) of this

section, an amount paid with respect to

a bond with coupons attached

(including a certificate of deposit with

detachable interest coupons) or a

discount obligation that is not in

registered form (within the meaning of

section 163(f) and the regulations

thereunder) is considered to be paid

where the coupon or the discount

obligation is presented to the payor or

its paying agent for payment. However,

without regard to where the coupon or

discount obligation is presented for

payment, an amount paid with respect

to either a bond with coupons attached

or a discount obligation by transfer to an

account maintained by the payee in the

United States or by mail to the United

States is considered paid in the United

States if the payment is described in

paragraphs (e)(3) (i) and (ii) of this

section.

(i) The amount is paid by an issuer or

the paying agent of the issuer and the

obligation is either—

(A) Issued by a U.S. payor, as defined

in paragraph (c)(5) of this section;

(B) Registered under the Securities

Act of 1933 (15 U.S.C. 77a); or

(C) Listed on an exchange that is

registered as a national securities

exchange in the United States or

included in a interdealer quotation

system in the United States.

(ii) The amount is paid by a U.S.

middleman (as defined in paragraph

(c)(5) of this section) that, as a

custodian, nominee, or other agent of

payee, collects the amount for or on

behalf of the payee.

(4) Foreign-targeted registered

obligations. Notwithstanding paragraph

(e)(1) of this section, where the payor is

the issuer or the issuer’s agent, an

amount is considered paid outside the

United States with respect to a foreigntargeted registered obligation, as

described in § 1.871–14(e)(2), if either

the amount is paid by transfer to an

account maintained by the registered

owner outside the United States, or by

mail to an address of the registered

owner outside the United States, or by

credit to an international account. For

purposes of this paragraph (e)(4), the

term international account means the

book-entry account of a financial

institution (within the meaning of

section 871(h)(4)(B)) or of an

international financial organization with

the Federal Reserve Bank of New York

for which the Federal Reserve Bank of

New York maintains records that

specifically identifies an international

financial organization or a financial

institution (within the meaning of

section 871(h)(4)(B)) as either a nonUnited States person or a foreign branch

of a United States person as registered

owner. An international financial

organization is a central bank or

monetary authority of a foreign

government or a public international

organization of which the United States

is a member to the extent that such

central bank, authority, or organization

holds obligations solely for its own

account and is exempt from tax under

section 892 or 895.

(5) Examples. The application of the

provisions of this paragraph (e) are

illustrated by the following examples:

Example 1. FC is a foreign corporation that

is not a U.S. payor or U.S. middleman, as

defined in paragraph (c)(5) of this section. A

holds FC coupon bonds that are not in

registered form under section 163(f) and the

regulations thereunder, that were issued by

FC in a public offering outside the United

States, that are not registered under the

Securities Act of 1933 (15 U.S.C. 77a), and

that are neither listed on an exchange that is

registered as a national securities exchange in

the United States nor included in an

interdealer quotation system. DC, a U.S.

corporation that is engaged in a commercial

banking business, is the designated fiscal

agent for FC. FB, a foreign branch of DC, is

the designated paying agent with respect to

the bonds issued by FC. A does not have an

account with FB. A presents a coupon from

a FC bond for payment to FB at its office

outside the United States. FB pays A with a

check drawn against a bank account

maintained in the United States. For

purposes of section 6049, the place of

payment of interest on the FC bond by FB to

A is considered to be outside the United

States under paragraph (e)(3) of this section.

Example 2. The facts are the same as in

Example 1 except that A presents the coupon

to FB at its office outside the United States

with instructions to transfer funds in

payment to a bank account maintained by A

in the United States. FB transfers the funds

in accordance with A’s instructions. Even

though the amount is credited to an account

in the United States, the place of payment of

interest on the FC bonds is considered to be

outside the United States under paragraph

(e)(3) of this section because the coupon is

presented for payment outside the United

States; because FC is a foreign person that is

not a U.S. payor or U.S. middleman, as

defined in paragraph (d)(1) of this section;

because FB is not acting as A’s agent; and

because the obligation is not registered under

the Securities Act of 1933 (15 U.S.C. 77a),

listed on a securities exchange that is

registered as a national securities exchange in

the United States, or included in an

interdealer quotation system.

Example 3. FC is a foreign corporation that

is not a U.S. payor or U.S. middleman, as

defined in paragraph (d)(1) of this section. B,

a United States citizen, holds a bond issued

by FC in registered form under section 163(f)

and the regulations thereunder and registered

under the Securities Act of 1933 (15 U.S.C.

77a). The bond is not a foreign-targeted

registered obligation as defined in § 1.871–

14(e)(2). DB, a United States branch of a
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53491

foreign corporation engaged in the

commercial banking business, is the registrar

of the bonds issued by FC. DB supplies FC

with a list of the holders of the FC bonds.

Interest on the FC bonds is paid to B and

other bondholders by checks prepared by FC

at its principal office outside the United

States, and B’s check is mailed from there to

his designated address in the United States.

The bond is described in paragraph

(e)(1)(i)(B) of this section. The place of

payment to B by FC of the interest on the FC

bonds is considered to be inside the United

States under paragraph (e)(1) of this section.

Example 4. The facts are the same as in

Example 3 except that the checks are

prepared and mailed in the United States by

DC, a U.S. corporation engaged in the

commercial banking business that is the

designated paying agent with respect to the

bonds issued by FC, and B’s check is mailed

to his designated address outside the United

States. For purposes of section 6049, the

place of payment by DC of the interest on the

FC bonds is considered to be within the

United States under paragraph (e)(1) of this

section.

Example 5. Individual C deposits funds in

an account with FB, a foreign country X

branch of DB, a U.S. corporation engaged in

the commercial banking business. FB

maintains an office and employees in foreign

country X, accepts deposits, and conducts

one or more of the other activities listed in

§ 1.864–4(c)(5)(i). The terms of C’s deposit

provide that it will be payable in six months

with accrued interest. On the day that the

interest is credited to C’s account with FB,

C telephones DB from inside the United

States and asks DB to direct FB to transfer the

funds in his account with FB to an account

C maintains in the United States with DB.

Transmissions from the United States

concerning this account have taken place in

isolated and infrequent circumstances. Under

paragraph (e)(2) of is section, FB is

considered to have paid the interest on C’s

deposit outside the United States.

Example 6. The facts are the same as in

Example 5 except that C has placed his

deposit with FB for an indefinite period of

time. Interest will be credited to C’s account

daily. C has instructed FB to wire the interest

at 90-day intervals to C’s account with DB

within the United States. FB is considered to

have paid the interest credited to A’s account

within the United States under paragraph

(e)(2) of this section because the regular

crediting of the account disqualifies the

transmission from being isolated or

infrequent.

Example 7. DC, a U.S. corporation engaged

in the commercial banking business,

maintains FB, a branch in foreign country X.

FB has an office and employees in foreign

country X, accepts deposits, and engages in

one or more of the other activities listed in

§ 1.864–4(c)(5)(i). D, a United States citizen,

purchases a certificate of deposit issued in

1980 by FB. The certificate of deposit has a

maturity of 20 years and has detachable

interest coupons payable at six-month

intervals. D presents some of the coupons at

the U.S. office of DC and receives payment

in cash. Because the coupon is presented to

DC for payment within the United States, DC

is considered to have made the payment

within the United States under paragraph

(e)(3) of this section.

Example 8. FB is recognized by both

foreign country X and by the Federal Reserve

Bank as a foreign country X branch of DC, a

U.S. corporation engaged in the commercial

banking business. A local foreign country X

bank serves as FB’s resident agent in Country

X. FB maintains no physical office or

employees in foreign country X. All the

records, accounts, and transactions of FB are

handled at the United States office of DC. E

deposits funds in an amount maintained with

FB. Interest earned on the deposit is

periodically credited to E’s account with FB

by employees of DC. For purposes of section

6049, the place of payment of the interest on

E’s deposit with FB is considered to be

within the United States by reason of

paragraphs (e)(1) and (2) of this section.

Example 9. DC is a U.S. corporation. a

holds bonds that were issued by DC in

registered form under section 163(f) and the

regulations thereunder and that are foreigntargeted registered obligations as defined in

§ 1.871–14(e)(2). DB, a commercial banking

business, is the registrar of bonds issued by

DC. Interest on the DC bonds is paid to a and

other bondholders by check prepared by DB

at its principal office inside the United States

and mailed from there to a’s address outside

the United States. The check is drawn on a

United States account maintained by DC with

DB within the United States. The place of

payment to a by DB of the interest on the DC

bonds is considered to be outside the United

States under paragraph (e)(4) of this section.

* * * * *

(g) Effective date—(1) General rule.

The provisions of paragraphs (b)(6)

through (15), (c), (d), and (e) of this

section apply to payments made after

December 31, 1998.

(2) Transition rules. A payor that, on

December 31, 1998, holds a valid Form

W–8 or other form upon which it is

permitted to rely to hold the payee as

a foreign person pursuant to the

regulations in effect prior to January 1,

1999 (see 26 CFR parts 1 and 35a,

revised April 1, 1997), may treat it as a

valid certificate until its validity expires

under those regulations or, if earlier,

until December 31, 1999. Further, the

validity of a Form W–8 or other form

that is dated prior to January 1, 1998, is

valid on January 1, 1998, and would

expire at any time during 1998, is

extended until December 31, 1998 (and

is not extended after December 31, 1998

by reason of the immediately preceding

sentence). The rule in this paragraph

(g)(2), however, does not apply to

extend the validity period of a

withholding certificate that expires in

1998 solely by reason of changes in the

circumstances of the person whose

name is on the certificate.

Notwithstanding the three preceding

sentences, a payor may choose not to

take advantage of the transition rule in

this paragraph (g)(2) with respect to one

or more withholding certificates and,

therefore, may require new withholding

certificates conforming to the

requirements described in this section.

Par. 43. Section 1.6049–6 is amended

by:

1. Removing the language, ‘‘a

reasonable facsimile thereof’’ in the first

sentence of paragraph (d) and adding

‘‘an acceptable substitute’’ in its place.

2. Revising paragraph (e)(3).

The revision reads as follows:

§ 1.6049–6 Statements to recipients of

interest payments and holders of

obligations for attributed original issue

discount.

* * * * *

(e) * * *

(3) Cross-reference to penalty. For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6049(c) and § 1.6049–6(a), see

§ 301.6722–1 of this chapter (Procedure

and Administration Regulations). See

§ 301.6724–1 of this chapter for the

waiver of a penalty if the failure is due

to reasonable cause and is not due to

willful neglect.

* * * * *

Par. 44. Section 1.6049–7 is amended

by revising paragraph (c)(4) to read as

follows:

§ 1.6049–7 Returns of information with

respect to REMIC regular interests and

collateralized debt obligations.

* * * * *

(c) * * *

(4) A foreign central bank of issue (as

defined in § 1.895–1(b)(1)) or the Bank

for International Settlements;

* * * * *

Par. 45. In § 1.6049–8, paragraph (a) is

amended by removing the last two

sentences and adding four sentences in

their place to read as follows:

§ 1.6049–8 Interest and original issue

discount paid to residents of Canada.

(a) Interest subject to reporting

requirement. * * * The payor or

middleman may rely upon the

permanent residence address (as

defined in § 1.1441–1(e)(2)(ii)) as stated

on the Form W–8 described in § 1.1441–

1(e)(2)(i) in order to determine whether

the payment is made to a Canadian

nonresident alien individual. If the

permanent residence address stated on

the certificate is in Canada, or if the

payor has actual knowledge of the

individual’s residence address in

Canada, the payor must presume that

the individual resides in Canada.

Amounts described in this paragraph (a)

are not subject to backup withholding
53492 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

under section 3406. See § 31.3406(g)-

1(d) of this chapter.

* * * * *

Par. 46. Section 1.6050A–1 is

amended by

1. Removing the language ‘‘Form

1099F’’ each place it appears and

adding ‘‘Form 1099-MISC’’ in its place

in paragraphs (a) introductory text, (a)

concluding text, (b) and (c)(1) first and

second sentences.

2. Adding paragraph (d) to read as

follows:

§ 1.6050A–1 Reporting requirements of

certain fishing boat operators.

* * * * *

(d) Cross-reference to penalties. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6050A(a) and § 1.6050A–

1(a), see § 301.6721–1 of this chapter

(Procedure and Administration

Regulations). For provisions relating to

the penalty provided for failure to

furnish timely a correct payee statement

required under section 6050A(b) and

§ 1.6050A–1(c), see § 301.6722–1 of this

chapter. See § 301.6724–1 of this

chapter for the waiver of a penalty if the

failure is due to reasonable cause and is

not due to willful neglect.

§ 1.6050H–1 [Amended]

Par. 47. Section 1.6050H–1 is

amended by:

1. Removing the language § 35a.9999–

4T, Q/A–5(iii) and adding § 1.6049–5(c)

in its place in paragraph (d)(2)(ii)(A).

2. Removing the language ‘‘§ 1.6049–

5(b)(2)(iv) and adding § 1.1441–1(e)(1)

in its place in paragraph (d)(2)(ii)(B).

Par. 48. Section 1.6050N–1 is

amended by:

1. Revising the section heading.

2. Revising paragraphs (c) and (d).

3. Adding paragraph (e).

The addition and revisions read as

follows:

§ 1.6050N–1 Statement to recipients of

royalties paid after December 31, 1986.

* * * * *

(c) Exempted foreign-related items—

(1) In general. No return shall be

required under paragraph (a) of this

section for payments of the items

described in paragraphs (c)(1)(i) through

(iv ) of this section.

(i) Returns of information are not

required for payments of royalties that

a payor can, prior to payment, associate

with documentation upon which it may

rely to treat as made to a foreign

beneficial owner in accordance with

§ 1.1441–1(e)(1)(ii) or as made to a

foreign payee in accordance with

§ 1.6049–5(d)(1) or presumed to be

made to a foreign payee under § 1.6049-

5(d)(2), (3), (4), or (5). However, such

payments may be reportable under

§ 1.1461–1(b) and (c).

For purposes of this paragraph

(c)(1)(i), the provisions in § 1.6049–5(c)

(regarding rules applicable to

documentation of foreign status and

definition of U.S. payor and non-U.S.

payor) shall apply. See § 1.1441–

1(b)(3)(iii)(B) and (C) for special payee

rules regarding scholarships, grants,

pensions, annuities, etc. The provisions

of § 1.1441–1 shall apply by substituting

the term payor for the term withholding

agent and without regard to the fact that

the provisions apply only to amounts

subject to withholding under chapter 3

of the Internal Revenue Code.

(ii) Returns of information are not

required for payments of royalties from

sources outside the United States

(determined under Part I of subchapter

N and the regulations under these

provisions) made outside the United

States by a non-U.S. payor or non-U.S.

middleman. For a definition of non-U.S.

payor or non-U.S. middleman, see

§ 1.6049–5(c)(5). For circumstances in

which a payment is considered to be

made outside the United States, see

§ 1.6049–5(e).

(iii) Returns of information are not

required for payments made by a foreign

intermediary described in § 1.1441–

1(e)(3)(i) that it has received in its

capacity as an intermediary and that are

associated with a valid withholding

certificate described in § 1.1441–

1(e)(3)(ii) or (iii) and payments made by

a U.S. branch of a foreign bank or of a

foreign insurance company described in

§ 1.1441–1(b)(2)(iv) that are associated

with a valid withholding certificate

described in § 1.1441–1(e)(3)(v), which

certificate the intermediary or branch

has furnished to the payor or

middleman from whom it has received

the payment, unless, and to the extent,

the intermediary or branch knows that

the payments are required to be reported

and were not so reported.

(2) Definitions—(i) Payor. For

purposes of this section, the term payor

shall have the meaning ascribed to it

under § 1.6049–4(a).

(ii) Joint owners. Amounts paid to

joint owners for which a certificate or

documentation is required as a

condition for being exempt from

reporting under this paragraph (c) of

this section are presumed made to U.S.

payees who are not exempt recipients if,

prior to payment, the payor cannot

reliably associate the payment either

with a Form W–9 furnished by one of

the joint owners in the manner required

in §§ 31.3406(d)-1 through 31.3406(d)-5

of this chapter, or with documentation

described in paragraph (c)(1)(i) of this

section furnished by each joint owner

upon which it can rely to treat each

joint owner as a foreign payee or foreign

beneficial owner. For purposes of

applying this paragraph (c)(2)(ii), the

grace period described in § 1.6049–

5(d)(2)(ii) shall apply only if each payee

qualifies for such grace period.

(d) Cross-reference to penalties. For

provisions relating to the penalty

provided for failure to file timely a

correct information return required

under section 6050N(a), see § 301.6721–

1 of this chapter (Procedure and

Administration Regulations). For

provisions relating to the penalty

provided for failure to furnish timely a

correct payee statement required under

section 6050N(b) and § 1.6050N–1(a),

see § 301.6722–1 of this chapter. See

§ 301.6724–1 of this chapter for the

waiver of a penalty if the failure is due

to reasonable cause and is not due to

willful neglect.

(e) Effective date—This section,

except paragraph (c) , is applies to payee

statements due after December 31, 1995,

without regard to extensions. For further

guidance regarding the substantially

similar statement mailing requirements

that apply with respect to forms

required to be filed after October 22,

1986, and before January 1, 1996 (see

Rev. Proc. 84–70 (1984–2 C.B. 716) and

§ 601.601(d)(2) of this chapter). The

provisions of paragraph (c) of this

section apply to payments made after

December 31, 1998.

Par. 49. Section 1.6071–1, is amended

by revising paragraphs (c)(7),

(c)(8),(c)(11), (c)(13), and (c)(15) to read

as follows:

§ 1.6071–1 Time for filing returns and

other documents.

* * * * *

(c) * * *

(7) For provisions relating to the time

for filing information returns by persons

making certain payments, see § 1.6041–

2(a)(3) and § 1.6041–6.

(8) For provisions relating to the time

for filing information returns regarding

payments of dividends, see § 1.6042–

2(c).

* * * * *

(11) For provisions relating to the

time for filing information returns with

respect to payments of patronage

dividends, see § 1.6044–2(d).

* * * * *

(13) For provisions relating to the

time for filing information returns

regarding certain payments of interest,

see § 1.6049–4(g).

* * * * *

(15) For provisions relating to the

time for filing the annual information
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53493

return on Form 1042–S of the tax

withheld under chapter 3 of the Code

(relating to withholding of tax

nonresident aliens and foreign

corporations and tax-free covenant

bonds), see § 1.1461–1(c).

* * * * *

Par. 50. In § 1.6091–1, paragraph

(b)(15) is revised to read as follows:

§ 1.6091–1 Place for filing returns or other

documents.

* * * * *

(b) * * *

(15) For the place for filing

information returns on Forms 1042–S

with respect to certain amounts paid to

foreign persons, see instructions to the

form.

* * * * *

PART 31—EMPLOYMENT TAXES AND

COLLECTION OF INCOME TAX AT

SOURCE

Par. 51. The authority for part 31 is

amended by adding an entry in

numerical order to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Section 31.3401(a)(6)–1 also issued

under 26 U.S.C. 1441(c)(4) and 26

U.S.C. 3401(a)(6). * * *

Par. 52. Section 31.3401(a)(6)–1 is

amended by:

1. Revising the section heading.

2. Revising the paragraph heading and

first sentence of paragraph (e).

3. Adding paragraph (f).

4. Removing the authority citation at

the end of the section.

The addition and revisions read as

follows:

§ 31.3401(a)(6)–1 Remuneration for

services of nonresident alien individuals.

* * * * *

(e) Exemption from income tax for

remuneration paid for services

performed before January 1, 1999.

Remuneration paid for services

performed within the United States by

a nonresident alien individual before

January 1, 1999, is excepted from wages

and hence is not subject to withholding

if such remuneration is, or will be,

exempt from income tax imposed by

chapter 1 of the Internal Revenue Code

by reason of a provision of the Internal

Revenue Code or an income tax

convention to which the United States

is a party. * * *

(f) Exemption from income tax for

remuneration paid for services

performed after December 31, 1998.

Remuneration paid for services

performed within the United States by

a nonresident alien individual after

December 31, 1998, is excepted from

wages and hence is not subject to

withholding if such remuneration is, or

will be, exempt from the income tax

imposed by chapter 1 of the Internal

Revenue Code by reason of a provision

of the Internal Revenue Code or an

income tax convention to which the

United States is a party. An employer

may rely on a claim that the employee

is entitled to an exemption from tax if

it complies with the requirements of

§ 1.1441–1(e)(1)(ii) of this chapter (for a

claim based on a provision of the

Internal Revenue Code) or § 1.1441–

4(b)(2) of this chapter (for a claim based

on an income tax convention).

§ 31.3406–0 [Amended]

Par. 53. Section 31.3406–0 is

amended by removing the entries in the

table for § 31.3406(h)–2, paragraphs

(e)(1) and (e)(2).

Par. 54. Section 31.3406(d)–3 is

amended by:

1. Adding two sentences at the end of

paragraph (a).

2. Removing the words ‘‘30-day’’ in

the first sentence, revising the word

‘‘these’’ to ‘‘the 30-day’’, and adding the

word ‘‘may’’ immediately before the

words ‘‘apply only if’’ in the second

sentence, and revising the word ‘‘those’’

to ‘‘the’’ in the third sentence in

paragraph (b).

3. Revising paragraph (c).

The addition and revision read as

follows:

§ 31.3406(d)–3 Special 30-day rules for

certain reportable payments.

(a) * * * For payments made after

December 31, 1998, see § 1.6049–

5(d)(2)(ii) of this chapter for the

application of a 90-day grace period in

lieu of the 30-day grace period

described in this paragraph (a) if, at the

beginning of the 90-day grace period,

certain conditions are satisfied. If the

grace period provisions of § 1.6049–

5(d)(2)(ii) or § 1.1441–1(b)(3)(iv) of this

chapter are applied with respect to a

new account, the grace period

provisions of this paragraph (a) shall not

apply to that account.

* * * * *

(c) Application to foreign payees. The

rules of paragraphs (a) and (b) of this

section also apply to a payee from

whom the payor is required to obtain a

Form W–8 (or an acceptable substitute)

or other evidence of foreign status

(pursuant to relevant regulations under

an applicable Internal Revenue Code

section without regard to the

requirement to furnish a taxpayer

identifying number, and the

certifications described in

§§ 31.3406(d)–1(b)(3) and 31.3406(d)–2),

provided the payee represents orally or

otherwise, before or at the time of the

acquisition or sale of the instrument or

the establishment of the account, that

the payee is not a United States citizen

or resident. The 30-day rules described

in paragraph (a) or (b) of this section

may apply only if the payee does not

qualify for, or the payor does not apply,

the 90-day grace period described in

§ 1.6049–5(d)(2)(ii) or § 1.1441–

1(b)(3)(iv) of this chapter.

Par. 55. In § 31.3406(g)–1, paragraph

(e) is added to read as follows:

§ 31.3406(g)–1 Exception for payments to

certain payees and certain other payments.

* * * * *

(e) Certain reportable payments made

outside the United States by foreign

persons, foreign offices of United States

banks and brokers, and others. For

reportable payments made after

December 31, 1998, a payor is not

required to backup withhold under

section 3406 on a reportable payment

that qualifies for the documentary

evidence rule described in § 1.6049–

5(c)(1) or (4) of this chapter, whether or

not documentary evidence is actually

provided to the payor, unless the payor

has actual knowledge that the payee is

a United States person. Further, no

backup withholding is required for

payments upon which a 30-percent

amount was withheld by another payor

in accordance with the withholding

provisions under chapter 3 of the

Internal Revenue Code and the

regulations under that chapter. For rules

applicable to notional principal

contracts, see § 1.6041–1(d)(5) of this

chapter.

Par. 56. Section 31.3406(h)–2 is

amended by:

1. Revising paragraph (a)(3)(i).

2. Revising the penultimate sentence

in paragraph (d)

3. Removing the heading of paragraph

(e)(1).

4. Removing the paragraph

designation (e)(1).

5. Removing paragraph (e)(2).

The revisions read as follows:

§ 31.3406(h)–2 Special rules.

(a) * * *

(3) Joint foreign payees—(i) In general.

If the relevant payee listed on a jointly

owned account or instrument provides

a Form W–8 or documentary evidence

described in § 1.1441–1(e)(1)(ii)

regarding its foreign status, withholding

under section 3406 applies unless every

joint payee provides the statement

regarding foreign status (under the

provisions of chapters 3 or 61 of the

Internal Revenue Code and the

regulations under those provisions) or

any one of the joint owners who has not
53494 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

established foreign status provides a

taxpayer identification number to the

payor in the manner required in

§§ 31.3406(d)–1 through 31.3406(d)–5.

See § 1.6049–5(d)(2)(iii) of this chapter

for corresponding joint payees

provisions.

* * * * *

(d) * * * If its payee is not subject to

withholding under section 3406, the

payor must pay or credit the full amount

of the payment to the payee, unless,

with respect to payments made after

December 31, 1998, the payor chooses to

apply prior withholding under section

3406 to an amount required to be

withheld under another section of the

Internal Revenue Code (such as under

section 1441) to the extent permitted

under procedures prescribed by the

Internal Revenue Service (see

§ 601.601(d)(2) of this chapter). * * *

* * * * *

Par. 57. Section 31.6413(a)–3 is

amended as follows:

1. Paragraph (a)(1)(ii) is amended by

removing the language ‘‘or’’ at the end

of the paragraph.

2. In paragraph (a)(1)(iii), the

parenthetical ‘‘(including the

certification relating to foreign status

described in § 1.6049–5(b)(2)(iv) of this

chapter or § 1.6045–1(g)(1) of this

chapter)’’ is removed and ‘‘(including

the documentation described in

§ 1.1441–1(e)(1)(ii), 1.6045–1(g)(3), or

1.6049–5(c) of this chapter)’’ is added in

its place.

3. Paragraph (a)(1)(iii) is further

amended by removing the period at the

end of the paragraph and adding ‘‘; or’’

in its place.

4. Paragraph (a)(1)(iv) is added.

5. Paragraphs (a)(2) and (b)(2) are

revised.

The addition and revisions read as

follows:

§ 31.6413(a)–3 Repayment by payor of tax

erroneously collected from payee.

(a) * * * (1) * * *

(iv) The amount is withheld because

a payor imposed backup withholding on

a payment made to a person because the

payee failed to furnish the

documentation described in § 1.1441–

1(e)(1)(ii) of this chapter and the payee

subsequently furnishes, completes, or

corrects the documentation. The

documentation must be furnished,

completed, or corrected prior to the end

of the calendar year in which the

payment is made and prior to the time

the payor furnishes a Form 1099 to the

payee with respect to the payment for

which the withholding erroneously

occurred.

(2) For purposes of paragraph (a)(1) of

this section (other than erroneous

withholding occurring under the

circumstances described in paragraph

(a)(1)(iv) of this section), if a payor or

broker withholds because the payor or

broker has not received a taxpayer

identifying number or required

certification and the payee subsequently

provides a taxpayer identifying number

or a required certification to the payor,

the payor or broker may not refund the

amount to the payee.

(b) * * *

(2) Adjustment after the deposit of the

tax—(i) In general. Except as provided

in paragraph (b)(2)(ii) of this section, if

the amount erroneously withheld has

been deposited prior to the time that the

refund is made to the payee, the payor

or broker may adjust any subsequent

deposit of the tax collected under

chapter 24 of the Internal Revenue Code

that the payor or broker is required to

make in the amount of the tax that has

been refunded to the payee.

(ii) Erroneous withholding from a

payee that is a foreign person. Where a

payor withholds in error from a payee

that is a nonresident alien or foreign

person, as described in paragraph

(a)(1)(iv) of this section, the payor may

refund some or all of the amount subject

to backup withholding under section

3406. A refund may be paid in

accordance with the requirements of

this paragraph (b)(2)(ii) where the

documentation is furnished, completed,

or corrected prior to the end of the

calendar year in which the payment is

made and prior to the time the payor

furnishes a Form 1099 to the payee with

respect to the payment for which the

withholding erroneously occurred. The

amount of the refund will be the amount

erroneously withheld less the amount of

tax required to be withheld, if any,

under chapter 3 of the Internal Revenue

Code and the regulations under that

chapter. With respect to the amount of

the payment to the foreign person and

the amount of tax required to be

withheld under chapter 3 of the Internal

Revenue Code (and the regulations

thereunder), returns must be made in

accordance with the requirements of

§ 1.1461–1 (b) and (c) of this chapter.

Par. 58. Effective October 14, 1997,

§ 31.9999–0 is added to read as follows:

§ 31.9999–0 Effective dates.

In general, the provisions of

§§ 35a.9999–1, 35a.9999–2, 35a.9999–3,

35a.9999–3A, 35a.9999–4, and

35a.9999–5 of this chapter apply before

January 1, 1997. The provisions of those

sections remain applicable after

December 31, 1996, and before January

1, 1999, however, for purposes of

§ 301.6724–1 of this chapter, relating to

due diligence safe harbor, and for

international transactions, including

transactions involving a foreign payee, a

foreign payor, a foreign office of a U.S.

bank or broker, or a payment from

sources without the United States. See

§§ 31.3406–0 through 31.3406(i)–1 of

this chapter for rules that apply to other

transactions after December 31, 1996.

§ 31.9999–0 [Removed]

Par. 59. Effective January 1, 1999,

§ 31.9999–0 is removed.

PART 35a—TEMPORARY

EMPLOYMENT TAX REGULATIONS

UNDER THE INTEREST AND DIVIDEND

TAX COMPLIANCE ACT OF 1983

Par. 60. The authority for part 35a is

amended by removing the entries for §

§ 35a.9999–1, 35a.9999–2, 35a.9999–3,

35a.9999–3A, 35a.9999–4T, and 35a.9999–

5 to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§ 35a.9999–0T [Removed]

Par. 60a. Effective October 14, 1997

§ 35a.9999–0T is removed.

Par. 61. Effective October 14, 1997

§ 35a.9999–0 is added to read as

follows:

§ 35a.9999–0 Effective date.

See § 31.9999–0 of this chapter for

applicability dates for §§ 35a.9999–1

through 35a.9999–5.

Par. 62. Effective January 1, 1999,

§§ 35a.9999–0, 35a.9999–1, 35a.9999–2,

35a.9999–3, 35a.9999–3A, 35a.9999–4T

and 35a.9999–5 are removed.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 63. The authority citation for part

301 is amended by adding an entry in

numerical order to read in part as

follows:

Authority: 26 U.S.C. 7805. * * *

Section 301.6402–3 also issued under

95 Stat. 357 amending 88 Stat. 2351.

* * *

Par. 64. Section 301.6109–1 is

amended as follows:

1. Paragraphs (b)(2)(iv) and (b)(2)(v)

are revised.

2. Paragraph (b)(2)(vi) is added.

3. Paragraph (c) is revised.

The revisions and addition read as

follows:

§ 301.6109–1 Identifying numbers.

* * * * *

(b) * * *

(2) * * *

(iv) A foreign person that makes a

return of tax (including income, estate,

and gift tax returns), an amended return,

or a refund claim under this title but
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53495

excluding information returns,

statements, or documents;

(v) A foreign person that makes an

election under § 301.7701–3(c); and

(vi) A foreign person that furnishes a

withholding certificate described in

§ 1.1441–1(e)(2) or (3) of this chapter or

§ 1.1441–5(c)(2)(iv) or (3)(iii) of this

chapter to the extent required under

§ 1.1441–1(e)(4)(vii) of this chapter.

(c) Requirement to furnish another’s

number. Every person required under

this title to make a return, statement, or

other document must furnish such

taxpayer identifying numbers of other

U.S. persons and foreign persons that

are described in paragraph (b)(2)(i), (ii),

(iii), or (vi) of this section as required by

the forms and the accompanying

instructions. The taxpayer identifying

number of any person furnishing a

withholding certificate referred to in

paragraph (b)(2)(vi) of this section shall

also be furnished if it is actually known

to the person making a return,

statement, or other document described

in this paragraph (c). If the person

making the return, statement, or other

document does not know the taxpayer

identifying number of the other person,

and such other person is one that is

described in paragraph (b)(2)(i), (ii), (iii),

or (vi) of this section, such person must

request the other person’s number. The

request should state that the identifying

number is required to be furnished

under authority of law. When the

person making the return, statement, or

other document does not know the

number of the other person, and has

complied with the request provision of

this paragraph (c), such person must

sign an affidavit on the transmittal

document forwarding such returns,

statements, or other documents to the

Internal Revenue Service, so stating. A

person required to file a taxpayer

identifying number shall correct any

errors in such filing when such person’s

attention has been drawn to them.

* * * * *

Par. 65. Section 301.6114–1 is

amended by:

1. Revising paragraph (a)(1)(ii).

2. Revising paragraph (b)(4)(ii)

introductory text

3. Removing the period at the end of

paragraph (b)(4)(ii)(B)(7) and adding ‘‘;

or’’ in its place

4. Adding paragraphs (b)(4)(ii)(C) and

(b)(4)(ii)(D).

5. Revising paragraph (c)(1)(i).

6. Adding paragraph (c)(6).

The revisions and addition read as

follows:

§ 301.6114–1 Treaty-based return

positions.

(a) * * * (1) * * *

(ii) If a return of tax would not

otherwise be required to be filed, a

return must nevertheless be filed for

purposes of making the disclosure

required by this section. For this

purpose, such return need include only

the taxpayer’s name, address, taxpayer

identifying number, and be signed

under penalties of perjury (as well as

the subject disclosure). Also, the

taxpayer’s taxable year shall be deemed

to be the calendar year (unless the

taxpayer has previously established, or

timely chooses for this purpose to

establish, a different taxable year). In the

case of a disclosable return position

relating solely to income subject to

withholding (as defined in § 1.1441–2(a)

of this chapter), however, the statement

required to be filed in paragraph (d) of

this section must instead be filed at

times and in accordance with

procedures published by the Internal

Revenue Service.

* * * * *

(b) * * *

(4) * * *

(ii) A treaty exempts from tax, or

reduces the rate of tax on, fixed or

determinable annual or periodical

income subject to withholding under

section 1441 or 1442 that a foreign

person receives from a U.S. person, but

only if described in paragraphs

(b)(4)(ii)(A) and (B) of this section, or in

paragraph (b)(4)(ii)(C) or (D) of this

section as follows—

* * * * *

(C) For payments made after

December 31, 1998, with respect to a

treaty that contains a limitation on

benefits article, that—

(1) The treaty exempts from tax, or

reduces the rate of tax on income

subject to withholding (as defined in

§ 1.1441–2(a) of this chapter) that is

received by a foreign person (other than

a State, including a political subdivision

or local authority) that is the beneficial

owner of the income and the beneficial

owner is related to the person obligated

to pay the income within the meaning

of sections 267(b) and 707(b), and the

income exceeds $500,000; and

(2) A foreign person (other than an

individual or a State, including a

political subdivision or local authority)

meets the requirements of the limitation

on benefits article of the treaty; or

(D) For payments made after

December 31, 1998, with respect to a

treaty that imposes any other conditions

for the entitlement of treaty benefits, for

example as a part of the interest,

dividends, or royalty article, that such

conditions are met;

* * * * *

(c) * * *

(1) * * *

(i) Notwithstanding paragraph (b)(4)

or (5) of this section, that a treaty has

reduced the rate of withholding tax

otherwise applicable to a particular type

of fixed or determinable annual or

periodical income subject to

withholding under section 1441 or

1442, such as dividends, interest, rents,

or royalties to the extent such income is

beneficially owned by an individual or

a State (including a political subdivision

or local authority);

* * * * *

(6) This section does not apply to

amounts required to be reported under

section 6038A on a Form 5472 (or

successor form) to the extent permitted

under the form or accompanying

instructions.

* * * * *

Par. 66. Section 301.6402–3 is

amended by:

1. Revising paragraph (e).

2. Removing the authority citation at

the end of the section.

The revision reads as follows:

§ 301.6402–3 Special rules applicable to

income tax.

* * * * *

(e) In the case of a nonresident alien

individual or foreign corporation, the

appropriate income tax return on which

the claim for refund or credit is made

must contain the tax identification

number of the taxpayer required

pursuant to section 6109 and the entire

amount of income of the taxpayer

subject to tax, even if the tax liability for

that income was fully satisfied at source

through withholding under chapter 3 of

the Internal Revenue Code (Code). Also,

if the overpayment of tax resulted from

the withholding of tax at source under

chapter 3 of the Code, a copy of the

Form 1042–S required to be provided to

the beneficial owner pursuant to

§ 1.1461–1(c)(1)(i) of this chapter must

be attached to the return. For purposes

of claiming a refund, the Form 1042–S

must include the taxpayer identifying

number of the beneficial owner even if

not otherwise required. No claim of

refund or credit under chapter 65 of the

Code may be made by the taxpayer for

any amount that the payor has repaid to

the taxpayer pursuant to § 1.1461–

2(a)(2) of this chapter, that was subject

to a set-off pursuant to § 1.1461–2(a)(3)

of this chapter, or in accordance with

the provisions of an agreement that a

qualified intermediary described in

§ 1.1441–1(e)(5)(ii) has in effect with the

Internal Revenue Service. Upon request,

a taxpayer must also submit such

documentation as the Commissioner (or

delegate), the District Director, or the

Assistant Commissioner (International),
53496 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

may require establishing that the

taxpayer is the beneficial owner of the

income for which a claim of refund or

credit is being made.

Par. 67. In § 301.6721–0, the table is

amended by adding entries for

§ 3012.6724–1, paragraphs (g)(1), (g)(2),

and (g)(3) to read as follows:

§ 301.6721–0 Table of Contents.

* * * * *

§ 301.6724–1 Reasonable cause.

* * * * *

(g) * * *

(1) In general.

(2) Special rules relating to TINs.

(3) Effective dates.

* * * * *

Par. 68. In § 301.6724–1, paragraph (g)

is revised to read as follows:

§ 301.6724–1 Reasonable cause.

* * * * *

(g) Due diligence safe harbor—(1) In

general. A filer may establish reasonable

cause with respect to a failure relating

to an information reporting requirement

as described in paragraph (j) of this

section if the filer exercises due

diligence as provided under section

6724(c)(1) with respect to failures

described in sections 6721 through

6723.

(2) Special rules relating to TINs. The

following questions and answers

provide guidance on the exercise of due

diligence for an exception to a penalty

under sections 6721 through 6723 for a

failure to provide a correct TIN on any

information return (as defined in

§ 301.6721–1(g)), payee statement (as

defined in § 301.6722–1(d)), document

(as described in § 301.6723–1(a)(4)), or

the failure merely to provide a TIN as

described in § 301.6723–1(a)(4)(ii).

General Rule

Q–1. Is a payor subject to a penalty for

a failure to provide a correct TIN on an

information return with respect to a

reportable interest or dividend payment

if the payee has certified, under

penalties of perjury, that the TIN

furnished to the payor is the payee’s

correct number, the payor provided that

number on an information return, and

the number is later determined not to be

the payee’s correct number?

A–1. A payor is not subject to a

penalty for failure to provide the payee’s

correct TIN on an information return, if

the payee has certified, under penalties

of perjury, that the TIN provided to the

payor was his correct number, and the

payor included such number on the

information return before being notified

by the Internal Revenue Service (IRS)

(or a broker) that the number is

incorrect.

Due Diligence Defined for Accounts

Opened and Instruments Acquired

After December 31, 1983

Q–2. In order for a payor of a

reportable interest or dividend payment

(other than in a window transaction) to

be considered to have exercised due

diligence in furnishing the correct TIN

of a payee with respect to an account

opened or an instrument acquired after

December 31, 1983, what actions must

the payor take?

A–2. (1) In general, the payor of an

account or instrument that is not a pre1984 account nor a window transaction

must use a TIN provided by the payee

under penalties of perjury on

information returns filed with the IRS to

satisfy the due diligence requirement.

Therefore, if a payor permits a payee to

open an account without obtaining the

payee’s TIN under penalties of perjury

and files an information return with the

IRS with a missing or an incorrect TIN,

the payor will be liable for the $50

penalty for the year with respect to

which such information return is filed.

However, in its administrative

discretion, the IRS will not enforce the

penalty with respect to a calendar year

if the certified TIN is obtained after the

account is opened and before December

31 of such year, provided that the payor

exercises due diligence in processing

such number, i.e., the payor uses the

same care in processing the TIN

provided by the payee that a reasonably

prudent payor would use in the course

of the payor’s business in handling

account information such as account

numbers and balances.

(2) Once notified by the IRS (or a

broker) that a number is incorrect, a

payor is liable for the penalty for all

prior years in which an information

return was filed with that particular

incorrect number if the payor has not

exercised due diligence with respect to

such years. A pre-existing certified TIN

does not constitute an exercise of due

diligence after the IRS or a broker

notifies the payor that the number is

incorrect unless the payor undertakes

the actions described in § 31.3406(d)–

5(d)(2)(i) of this chapter with respect to

accounts receiving reportable payments

described in section 3406(b)(1) and

reported on information returns

described in sections 6724(d)(1)(A) (i)

through (iv).

Q–3. Is a payor as described in A–2

liable for the penalty if the payor

obtained a certified TIN from a payee

but inadvertently processed the name or

number incorrectly on the information

return?

A–3. Yes. The payor is liable for the

penalty unless the payor exercised that

degree of care in processing the TIN and

name and in furnishing it on the

information return that a reasonably

prudent payor would use in the course

of the payor’s business in handling

account information, such as account

numbers and account balances.

Special Rules

Q–4. With respect to an instrument

transferred without the assistance of a

broker, is a payor liable for the penalty

for filing an information return with a

missing or an incorrect TIN if the payor

records on its books a transfer of a

readily tradable instrument in a

transaction in which the payor was not

a party?

A–4. Generally, a payor as described

in Q–4 will be considered to have

exercised due diligence with respect to

a readily tradable instrument that is not

part of a pre-1984 account with the

payor if the payor records on its books

a transfer in which the payor was not a

party. This exception applies until the

calendar year in which the payor

receives a certified TIN from the payee.

Q–5. Is the payor described in A–4

required to solicit the TIN of a payee of

an account with a missing TIN in order

to be considered as having exercised

due diligence in a subsequent calendar

year?

A–5. There is no requirement on the

payor to solicit the TIN in order to be

considered to have exercised due

diligence in a subsequent calendar year

under the rule set forth in A–4.

Q–6. Is a payor as described in Q–4

considered to have exercised due

diligence if the payee provides a TIN to

the payor (whether or not certified), the

payor uses that number on the

information return filed for the payee,

and the number is later determined to

be incorrect?

A–6. A payor as described in Q–4

who records on its books a transfer in

which it was not a party is considered

to have exercised due diligence under

the rule set forth in A–4 where the

transfer is accompanied with a TIN

provided that the payor uses the same

care in processing the TIN provided by

a payee that a reasonably prudent payor

would use in the course of the payor’s

business in handling account

information, such as account numbers

and account balances. Thus, a payor

will not be liable for the penalty if the

payor uses the TIN provided by the

payee on information returns that it

files, even if the TIN provided by the

payee is later determined to be

incorrect. However, a payor will not be

considered as having exercised due

diligence under A–4 after the IRS or a

broker notifies the payor that the
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations 53497

number is incorrect unless the payor

undertakes the required additional

actions described in the second

paragraph of A–2.

Q–7. Is a payor liable for a penalty for

filing an information return with a

missing or an incorrect TIN with respect

to a post-1983 account or instrument if

the payor could have met the due

diligence requirements but for the fact

that the payor incurred an undue

hardship?

A–7. A payor of a post-1983 account

or instrument is not liable for a penalty

under section 6721(a) for filing an

information return with a missing or an

incorrect TIN if the IRS determines that

the payor could have satisfied the due

diligence requirements but for the fact

that the payor incurred an undue

hardship. An undue hardship is an

extraordinary or unexpected event such

as the destruction of records or place of

business of the payor by fire or other

casualty (or the place of business of the

payor’s agent who under a pre-existing

written contract had agreed to fulfill the

payor’s due diligence obligations with

respect to the account subject to the

penalty and there was no means for the

obligations to be performed by another

agent or the payor). Undue hardship

will also be found to exist if the payor

could have met the due diligence

requirements only by incurring an

extraordinary cost.

Q–8. How does a payor obtain a

determination from the IRS that the

payor has met the undue hardship

exception to the penalty under section

6721(a) for the failure to include the

correct TIN on an information return for

the year with respect to which the payor

is subject to the penalty?

A–8. A determination of undue

hardship may be established only by

submitting a written statement to the

IRS signed under penalties of perjury

that sets forth all the facts and

circumstances that make an affirmative

showing that the payor could have

satisfied the due diligence requirements

but for the occurrence of an undue

hardship. Thus, the statement must

describe the undue hardship and make

an affirmative showing that the payor

either was in the process of exercising

or stood ready to exercise due diligence

when the undue hardship occurred. A

payor may request an undue hardship

determination from the district director

or the director of the Internal Revenue

Service Center where the payor is

required to remit the penalty under

section 6721(a).

Q–9. Is a pre-1984 account or

instrument of a payor that is exchanged

for an account or instrument of another

payor as a result of a merger of the other

payor or acquisition of the accounts or

instruments of such payor transformed

into a post-1983 account or instrument

if the merger or acquisition occurs after

December 31, 1983?

A–9. No. A pre-1984 account or

instrument that is exchanged for another

account or instrument pursuant to a

statutory merger or the acquisition of

accounts or instruments is not

transformed into a post-1983 account or

instrument because the exchange occurs

without the participation of the payee.

Q–10. May the acquiring taxpayer

described in A–9 rely upon the business

records and past procedures of the

merged payor or the payor whose

accounts or instruments were acquired

in order to establish that due diligence

has been exercised on the acquired pre1984 and post-1983 accounts or

instruments?

A–10. Yes. The acquiring payor may

rely upon the business records and past

procedures of the merged payor or of the

payor whose accounts or instruments

were acquired in order to establish due

diligence to avoid the penalty under

section 6721(a) with respect to

information returns that have been or

will be filed.

Q–11. To what extent may a payor

rely on the due diligence rules set forth

in §§ 35a.9999–1, 35a.9999–2, and

35a.9999–3 of this chapter in effect prior

to January 1, 1999 (see §§ 35a.9999–1,

35a.9999–2, and 35a.9999–3 as

contained in 26 CFR part 35a, revised

April 1, 1997).

A–11. A payor may rely on the due

diligence rules set forth in §§ 35a.9999–

1, 35a.9999–2, and 35a.9999–3 of this

chapter in effect prior to January 1, 1999

(see §§ 35a.9999–1, 35a.9999–2, and

35a.9999–3 as contained in 26 CFR part

35a, revised April 1, 1997) solely for the

definitions of terms or phrases used in

this paragraph (g)(2).

(3) Effective dates. This paragraph (g)

is effective for information returns (as

defined in section 6724(d)(1)) required

to be filed, payee statements (as defined

in section 6724(d)(2)) required to be

furnished, and specified information (as

described in section 6724(d)(3))

required to be reported after December

31, 1998. See § 301.6724–1(g) in effect

prior to January 1, 1999 (see § 301.

6724–1(g) as contained in 26 CFR part

301, revised April 1, 1997) for

substantially similar rules applicable

prior to January 1, 1999.

* * * * *

PART 502—[REMOVED]

Par. 70. Part 502 is removed.

PART 503—[REMOVED]

Par. 71. Part 503 is removed.

PART 509—SWITZERLAND

Par. 72. The authority citation for

‘‘Subpart—General Income Tax’’ is

removed and a general authority citation

for part 509 is added to read as follows:

Authority: 26 U.S.C. 62, 3791 and 7805.

Par. 73. Part 509 is amended as

follows:

§§ 509.1 through 509.10

[Removed]

1. Subpart—Withholding of Tax

consisting of §§ 509.1 through 509.10 is

removed.

§ 509.103 [Amended]

2. In § 509.103, paragraph (e) is

removed and reserved.

§ 509.117 [Amended]

3. In § 509.117, paragraph (a) is

removed and reserved.

§ 509.119 [Removed]

§ 509.122 [Removed]

4. Sections 509.119 and 509.122 are

removed.

PART 513—IRELAND

Par. 74. The authority citation for part

513 is revised to read as follows:

Authority: 26 U.S.C. 62.

Par. 75. Part 513 is amended as

follows:

§ 513.1 [Removed]

1. Section 513.1 is removed.

2. Sections 513.2, 513.3, 513.4 and

513.5 are revised to read as follows:

§ 513.2 Dividends.

The fact that the payee of the

dividend is not required to pay Irish tax

on such dividend because of the

application of reliefs or exemptions

under Irish revenue laws does prevent

the application of the reduction in rate

of United States tax with respect to such

dividend. If the dividend would have

been subject to Irish tax had the payee

thereof derived an income large enough

to require payment of tax then liability

to Irish tax exists for the purpose of the

reduction in rate of United State tax. As

to what constitutes a permanent

establishment, see Article II(1)(i) of the

convention.

§ 513.3 Interest.

The provisions of § 513.2 relating to

the degree of liability to Irish tax in the

case of dividends are equally applicable

with respect to the income falling

within the scope of this section.
53498 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Rules and Regulations

§ 513.4 Patent and copyright royalties and

film rentals.

The provisions of § 513.2 relating to

the degree of liability to Irish tax in the

case of dividends are equally applicable

with respect to the income falling

within the scope of this section.

§ 513.5 Natural resource royalties and real

property rentals.

The provisions of § 513.2 relating to

the degree of liability to Irish tax in the

case of dividends are equally applicable

with respect to the income falling

within the scope of this section.

PART 514—FRANCE

Par. 76. The authority citation for part

514 is added to read as set forth below

and the authority citation preceding

§ 514.1 is removed.

Authority: 26 U.S.C. 7805.

Par. 77. Part 514 is amended as

follows:

1. The undesignated centerheading

preceding § 514.1 is removed.

§§ 514.20 and 514.21 [Removed]

2. Sections 514.20 and 514.21 are

removed.

§ 514.22 [Amended]

3. In § 514.22, paragraph (c) is

removed.

§§ 514.23 through 514.32 [Removed]

4. Sections 514.23 through 514.32 are

removed.

§§ 514.101 through 514.117 [Removed]

5. Subpart—General Income Tax

consisting of sections 514.101 through

514.117 is removed.

PART 516—[REMOVED]

Par. 78. Part 516 is removed.

PART 517—[REMOVED]

Par. 79. Part 517 is removed.

PART 520—[REMOVED]

Par. 80. Part 520 is removed.

PART 521—[AMENDED]

Par. 81. The authority citation for part

521 is revised to read as follows:

Authority: 26 U.S.C. 62, 143, 144, 211, and

231.

Par. 82. Part 521 is amended as

follows:

§§ 521.1–521.8 [Removed]

1. Subpart—Withholding of Tax

consisting of §§ 521.1 through 521.8 is

removed.

§ 521.103 [Amended]

2. In § 521.103, paragraph (d) is

removed and reserved.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 83. The authority for part 602

continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 84. In § 602.101, paragraph (c) is

amended by:

1. Removing the following entries

from the table:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–8T ................................. 1545–1053

* * * * *

1.1461–3 ................................... 1545–0054

1545–0055

1545–0096

1545–0795

1.1461–4 ................................... 1545–0054

1545–0055

1545–0096

* * * * *

35a.9999–3 ............................... 545–0112

* * * * *

Part 502 .................................... 1545–0844

Part 503 .................................... 1545–0837

* * * * *

Part 516 .................................... 1545–0841

Part 517 .................................... 1545–0849

Part 520 .................................... 1545–0833

* * * * *

2. Adding entries in numerical order

to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–1 ................................... 1545–1484

1.1441–4 ................................... 1545–1484

* * * * *

11.1441–8 ................................. 1545–1484

1545–1053

1.1441–9 ................................... 1545–1484

* * * * *

31.3401(a)(6) ............................ 1545–1484

301.6114–1 ............................... 1545–1484

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

3. Revising entries in the table to read

as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.1441–5 ................................... 1545–0096

1545–0795

1545–1484

1.1441–6 ................................... 1545–0055

1545–0795

1545–1484

* * * * *

1.1461–1 ................................... 1545–0054

1545–0055

1545–0795

1545–1484

* * * * *

301.6402–3 ............................... 1545–0055

1545–0073

1545–0091

1545–0132

1545–1484

* * * * *

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–25998 Filed 10–6–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8735]

RIN 1545–AP71

Certain Payments Made Pursuant to a

Securities Lending Transaction

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

Income Tax Regulations relating to the

taxation of certain payments made

pursuant to a cross-border securities

lending transaction. These regulations

provide guidance concerning the source,

character, and income tax treaty

treatment of such payments and affect