by Michael Wiener, E.A.
Certain withholding requirements apply that a foreign person should be aware of when purchasing a United States Real Property Interest (USRPI). A withholding agent is the person responsible for withholding on payments made to a foreign person.
However, certain exceptions apply if (1) a WA can reliably associate the payment with documentation from a U.S. person; (2) a reduced rate (including an exemption) to withholding may apply if a WA can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding).
You are a U.S. or foreign person, when you have control, receipt, custody, disposal, or payment of an amount subject to withholding. Under IRC section 1446, a WA may also be an individual, corporation, partnership, trust, association, nominee, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. The full tax is required to be withheld only once. As a WA, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax as well as interest and any applicable penalties. In no case, should you withhold more than 30% of the payment in escrow until the earlier of the date that the amount of income from U.S. sources or the taxable amount can be determined or one year from the date the amount is placed in escrow at which time the withholding becomes due or, to the extent that withholding is not required, the escrowed amount must be paid to the payee.
Withholding is required at the time you make a payment of an amount subject to withholding. A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. A payment is considered made to a person if it is made for that person’s benefit.
Additionally, a payment is also considered made to a person if it is made to that person’s agent. A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. However, if a foreign partner’s distributive share of income subject to withholding is not actually distributed the U.S. partnership must withhold on the foreign partner’s distributive share of the income on the earlier of the date that a Schedule K-1, Form 1065 is provided or mailed to the partner or the due date for furnishing that schedule. A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust’s distributable net income consists of amounts subject to withholding. In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes the following: (1) The payee is a U.S. person; (2) The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding under the Code or an applicable income tax treaty.
If you make a payment to joint payees: e.g. (holders of a joint account) you need to get documentation from each payee. If you
make a payment to joint payees and cannot reliably associate the payment with documentation from all of the payees, presume the payment is made to an unidentified U.S. person. See Forms 1042; 1042-S, 8805, 8288, 8288-A, W-8 BEN, W-8 BEN-E, and W-9.
If you should have a topic that you would like me to discuss or if you should have a question, please feel free to call 239.403.4410 or e-mail me at firstname.lastname@example.org.
An enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics