How to complete the form W-8BEN-E requested by the US customer?
To comply with FATCA all US companies have to request their overseas partners to complete W-8BEN-E form in order to reduce or eliminate
30% withholding tax.
Private Canadian companies were among the first to face the new reporting requirements under FATCA and just like others were required to
complete the new W-8BEN-E form in order to get paid by their US clients. Businesses working with customers across the border should now complete
the proper paperwork and satisfy the enhanced FATCA provisions in order to avoid the 30% US tax withholding.
The new reporting rules in the US are introduced for additional control over US taxpayer's moneys that are often directed overseas.
As such, the new FATCA provisions should not affect the Canadian private businesses honestly providing their services to US clients.
However, numerous tax arrangements aimed at reducing tax liability use overseas companies, including Canadian firms, beneficiary owners of which are located in US.
Therefore, payment to an overseas recipient by US entity is subjected to reporting under FATCA and the form W-8BEN-E needs to be provided by Canadian business (including
corporation, partnership, trust, estate, tax-exempt organization), in order to receive payment from US company.
Let us review the typical case of Small Canadian Corporation, carrying an active business in Canada, and as part of their ordinary business providing services to US customers.
The first question is whether the Canadian business would be a subject to that 30% withholding if collecting payments for goods and services from its US customers.
Referring to Tax Treaty between the two countries, the Convention Between Canada and the US With Respect to Taxes on Income and on
Capital, Article VII, Business Profits, says that :
"1. The business profits of a resident of a Contracting State shall be taxable only
in that State unless the resident carries on business in the other Contracting
State through a permanent establishment situated therein. If the resident
carries on, or has carried on, business as aforesaid, the business profits of the
resident may be taxed in the other State but only so much of them as are
attributable to that permanent establishment."
Article VII of the US-Canada treaty allows Canadian taxpayer with US operations not conducted through permanent establishment to report income and pay the income tax in Canada, entirely or partially eliminating requirement
for 30% withholding when paid by US client.
If the taxpayer intends to file a protective return, or participates in US trade or business, filing US tax return (form 1120-F) and disclosing treaty-based position (form 8833) may be required.
When the Canadian business is considered to operate through US permanent establishment, filing US tax return (form 1120) and paying tax in the US is required.
Permanent Establishment definition, described in Article V of the convention includes:
- a physical office location in the US
- travel of corporate executive to participate in marketing events, hold meetings, sign agreements or perform other key duties
- presence of corporation's employee or agent performing business duties in the US for 183 days or more in any 12-month period
- providing services with respect to the same project or connected projects for 183 days or more in any 12-month interval
The above considers the requirements of Chapter 3 of Internal Revenue Code (Withholding of Tax on Nonresident Aliens and Foreign Corporations).
Further, to eliminate or reduce the 30% tax withholding, the requirements set out in Chapter 4 of the Internal Revenue Code (Taxes to Enforce Reporting on Certain Foreign Accounts),
should also be satisfied. Generally, the focus of Chapter 4 is on US tax residents represented by foreign business and investment firms. For that reason,
most of the sections of form W-8BEN-E are for Foreign Financial Institutions (FFI). All other businesses that are not financial institutions, are referred to as NFFEs, or
Non-Financial Foreign Entities. The form differentiates between Active and Passive NFFE types. To qualify as active NFFE, the following conditions are set by the form:
- The entity is not a financial institution;
- Less than 50% of gross income for the preceding calendar year is passive income;
- Less than 50% of the assets produce or are held for the production of passive income.
An example of completed form W-8BEN-E by an active business operating from Canada that is satisfying mentioned requirements, providing its services to US client is displayed below.
Note that this is a sample only, and the actual form must be prepared by professional taking into account all aspects of current tax legislation.
Please note that provided information is subjective opinion of the author(s) and that it may not be current, guaranteed from mistake,
error or omission and may not be relied upon as an advice. Professional opinion should be requested in each case
related to the subject matter.
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Important notice(1):
Article above is a general educational text only. Any U.S. or Canadaian tax and other information above is not intended and is not written to be used, and it cannot be used,
by any person to avoid tax or penalties under U.S. or Canada federal, state, province or local tax law, or promote, market or recommend to any person any
matter addressed herein. The information above may reflect a subjective interpretation by the author(s), who, by no means may accept any responsibility or
liability whatsoever for the results of proper or improper use of the
above information, whole or in part, it as well is explicitly stated that whatever information provided by authors, may not suit specific purpose
of specific reader, and it alone may not be relied upon to produce decision. In each individual case professional advice must be obtained.
Important notice(2): This text is subject to copyright (c)
legislation and may not be reproduced, whole or in part without
author(s) written permission.
