Withholding Exemptions and Reductions You should withhold any required tax if facts indicate that theindividual, or the fiduciary, to whom you are to pay the income is anonresident alien. However, the alien may be allowed an exemption fromwithholding or a reduced rate of withholding as explained here. Evidence of residence.If an individual gives you a written statement stating that he orshe is a citizen or resident of the United States, and you do not knowotherwise, you do not have to withhold tax under the rules discussedin this publication. Instead, get Publication 15, Circular E. An alienmay claim U.S. residence by filing with you, Form 1078,Certificate of Alien Claiming Residence in the United States.Keep the statement or form for your records. Do not file it withthe IRS. Holders of visas that do not permit permanent residence inthe United States should write to the Internal Revenue Service,Assistant Commissioner (International), Attention: CP:IN:D:CS, 950L'Enfant Plaza South, SW, Washington, DC 20024, for advice aboutfiling a Form 1078 and, if filing Form 1078 is proper, about the needto make estimated tax payments. Note.If your employee is late in notifying you that his or her statuschanged from nonresident alien to resident alien, you may have to makean adjustment to Form 941 if that employee was exempt from withholdingof social security and Medicare taxes as a nonresident alien. For moreinformation on making adjustments, see Section 13 of Circular E. A U.S. bank that pays income subject to withholding may decidewhether to accept an individual's proof of U.S. citizenship orresidence given through a foreign bank to which income is paid. If theU.S. bank accepts this proof, it will not be liable for payment of taxif later it is shown that the individual was a nonresident alien. Ifit accepts the proof, the U.S. bank must file Form 1042-Sshowing the name, address, identification number, and the particularsecurities of the actual owner, and indicating that it is relying onproof provided by the foreign bank as its basis for not withholdingunder the rules in this publication. Partnerships and corporations.You may rely on a written statement from a partnership orcorporation claiming that it is not foreign as proof that thepartnership or corporation is domestic and not subject to withholdingtax. It must contain the entity's employer identification number, theaddress of its U.S. office or place of business, and the signature ofa member of the partnership or the signature and official title of thecorporate officer. Keep the statement for your records. Do not file itwith the IRS. Withholding exemption for undue administrative burden.Do not withhold on income paid to a foreign partnership orcorporation engaged in a trade or business in the United States if thewithholding would impose an undue administrative burden for the taxyear and the collection of the tax would not be jeopardized by notwithholding. These facts must be established to the satisfaction ofthe district director in whose district the related books and recordsare kept. The withholding exemption is available to a foreign partnership orcorporation only if it provides you with a copy of the determinationit receives from the district director stating that the exemptionapplies. Generally, withholding will impose an undue administrative burdenonly if: The person entitled to the income, such as a foreigninsurance company, receives income from you on securities issued by asingle corporation, some of which is, and some of which is not,effectively connected with the conduct of a trade or business withinthe United States, and It is unduly difficult to determine the effective connectionbecause of the circumstances under which the securities areheld. Withholding on effectively connected income.Generally, you do not need to withhold tax on income if: The income is effectively connected with the conduct of atrade or business in the United States (see definition, later) by theperson entitled to the income, The income is includible in the recipient's gross income,and A statement claiming exemption, such as Form 4224, has beengiven to you by the person entitled to the income, as discussedlater. This withholding exemption applies to income for services performedby a foreign partnership or foreign corporation (unless item (4) belowapplies to the corporation). The withholding exemption does not apply to any of the following: Effectively connected taxable income of a partnership thatis allocable to its foreign partners. Income from the disposition of a U.S. real propertyinterest. Pay for personal services performed by an individual. Payments to a foreign corporation for personal services ifall of the following apply: The foreign corporation otherwise qualifies as a personalholding company for income tax purposes, The foreign corporation receives amounts under a contractfor personal services of an individual whom the corporation has noright to designate, and 25% or more in value of the outstanding stock of the foreigncorporation at some time during the tax year is owned, directly orindirectly, by or for an individual who has performed, is to performor may be designated as the one to perform, the services called forunder the contract. Definition of effectively connected income.Generally, when a nonresident alien individual or foreigncorporation engages in a trade or business in the United States, allincome from sources within the United States other than fixed ordeterminable annual or periodic income (such as wages, interest,dividends, and rent) and certain similar amounts is consideredeffectively connected with a U.S. business. Fixed or determinableannual or periodic income and similar amounts may or may not beeffectively connected with a U.S. business. For example, effectivelyconnected income includes rents from real property if the alienchooses to treat that income as effectively connected with a U.S.trade or business. The factors to be considered in establishing whether fixed ordeterminable annual or periodic income and similar amounts from U.S.sources are effectively connected with a U.S. trade or businessinclude: Whether the income is from assets used in, or held for usein, the conduct of that trade or business, or Whether the activities of that trade or business were amaterial factor in the realization of the income. There is a special rule for determining whether income fromsecurities is effectively connected with the active conduct of a U.S.banking, financing, or similar business. When the taxpayer's U.S. office actively and materiallyparticipates in soliciting, negotiating, or performing otheractivities required to arrange the acquisition of securities, the U.S.source interest or dividend income from the securities (or gain orloss from their sale or exchange) is attributable to the taxpayer'sU.S. office. Form 4224,Exemption From Withholding of Tax on Income EffectivelyConnected With the Conduct of a Trade or Business in the UnitedStates. Nonresident alien individuals, fiduciaries, foreignpartnerships, or foreign corporations engaged in a trade or businessin the United States at any time during their tax year must notify youas withholding agent as to the items of income for the tax year thatwill be effectively connected with that trade or business and that theincome is includible in their gross income. They can do this by usingForm 4224. Withholding on certain gambling winnings.In general, nonresident aliens are subject to 30% withholding onthe gross proceeds from gambling won in the United States if thatincome is not effectively connected with a U.S. trade or business andis not exempted by treaty. The tax withheld and winnings arereportable on Forms 1042 and 1042-S respectively. However, notax is imposed on nonbusiness gambling income of a nonresident alienplaying blackjack, baccarat, craps, roulette, or big-6 wheel in theUnited States, but the winnings are reportable on Form 1042-S. Nonresident aliens are taxed at graduated rates on gambling incomewon in the U.S. that is effectively connected with a U.S. trade orbusiness. Income ofForeign Governmentsand InternationalOrganizations Investment income earned by a foreign government is not included inthe gross income of the foreign government and is not subject to U.S.withholding tax. Investment income means income from investments inthe United States in stocks, bonds, or other domestic securities,financial instruments held in the execution of governmental financialor monetary policy, and interest on money deposited by a foreigngovernment in banks in the United States. Income received by a foreign government from the conduct of acommercial activity or from sources other than those stated above, issubject to withholding. In addition, income received from a controlledcommercial entity (including gain from the disposition of any interestin a controlled commercial entity) and income received by a controlledcommercial entity is subject to withholding. International organizations are exempt from U.S. tax on all U.S.source income. This income is not subject to withholding. Form 8709,Exemption From Withholding on Investment Income of ForeignGovernments and International Organizations. Foreign governmentsand international organizations may file Form 8709 with you to claimexemption from withholding on investment income. IRS does not requireForm 8709, and there is no obligation on the foreign government orinternational organization to file the form with you, or on you to askfor the form to be filed. However, as the withholding agent, you mustdetermine if the exemption from withholding is allowable. If you failto obtain Form 8709 and fail to establish otherwise that the incomewas exempt from withholding, you will be liable for the tax. You may request Form 8709 from the government or organizationbefore you pay the income. If you do not receive a completed Form8709, you may withhold. If you obtain Form 8709, you will be protectedfrom liability unless either of the following applies: You know or have reason to know that the government ororganization is not eligible for the exemption from taxation underInternal Revenue Code section 892 either because it does not qualifyas a foreign government or international organization, or the incomedoes not qualify for the exemption, or You know or have reason to know that any of the facts orassertions on Form 8709 may be false. If you accept Form 8709 and later determine that one of the abovesituations applies, you must promptly notify, in writing, the Officeof the Assistant Commissioner (International), Director, Office ofInternational District Operations, Attn: CP:IN:D:C:E, 950 L'EnfantPlaza, SW, Washington, DC 20024, and withhold on any amounts not yetpaid. You must also withhold if the office shown above notifies youthat the government, organization, or the income may not be eligiblefor exemption from taxation. Do not send Form 8709 to the IRS. Keep the form for at least 4years after the end of the year in which the income to which itapplies is paid. Treaty Benefits Residents of certain foreign countries may be entitled to reducedrates of, or exemption from, tax under a tax treaty between theircountry of residence and the United States. These foreign residentsgenerally must notify you, as withholding agent, that they areresidents of a country with which the United States has an income taxtreaty and qualify for reduced rates of, or exemption from, income taxwithholding. Some tax treaties have provisions that prevent a third countryresident from obtaining treaty benefits. For example, a foreigncorporation may not be entitled to reduced rates of withholding unlessa minimum percentage of its owners are citizens or residents of theUnited States or the treaty country. The exemptions from, or reduced rates of, U.S. tax vary under eachtreaty. Therefore, you must check the provisions of the tax treatythat applies. If the treaty does not cover a particular type of income, or if notreaty exists with the country of which the alien is a resident, youmust withhold on the income at the statutory rates shown in thispublication. However, if the payment of income is covered by a treaty,you must follow the provisions of that treaty. If a nonresident alien individual has made an election with his orher U.S. citizen or resident spouse to be treated as a U.S. residentfor income tax purposes, the nonresident alien may not claim to be aforeign resident to obtain the benefits of a reduced rate of, orexemption from, U.S. income tax under an income tax treaty. Tables at the end of this publication show the countries with whichthe United States has income tax treaties and the rates of withholdingthat apply in cases where all conditions of the particular treatyarticles are satisfied. Foreign payee's status.If, as a withholding agent, you are not able to easily determinethe relationship between yourself and a foreign payee or therelationship of a foreign payee and a foreign corporation, you shouldwithhold at a rate of 30%. The 30% rate also applies if you are unableto determine whether the alien is a nonresident or a resident of theUnited States. Form 1001,Ownership, Exemption, or Reduced Rate Certificate. Aforeign payee may claim an exemption or reduced tax rate by filingForm 1001 with you. For income other than dividends and pay forpersonal services, the payee should file Form 1001 as soon aspracticable for any period of 3 successive calendar years during whichthe income is expected to be received. For interest on coupon bonds,the payee should file the form each time a coupon is presented forpayment. The payee must use a separate Form 1001 for each type of income.However, a payee who receives income from a trust, estate, orinvestment account uses a separate Form 1001 for each different trust,estate, or investment account, regardless of how many types of incomeare received. Payee no longer eligible for treaty benefits.If, after filing Form 1001, a payee ceases to be eligible for thebenefits of the treaty for the income, the payee must promptly notifyyou as the withholding agent by letter. When any change occurs in theownership of the income as recorded on the books of the payer, thewithholding exemption or reduction no longer applies unless the newowner of record also is entitled to a reduced rate of tax or is exemptunder a treaty and properly files Form 1001 with you. If you have reason to know that an owner of income is not eligiblefor treaty benefits claimed on a Form 1001, disregard the form andwithhold tax at the statutory rate. However, before the time you havereason to have that knowledge, you are not responsible formisstatements made on a Form 1001. Dividends.A foreign payee who receives only dividends does not need to fileForm 1001. You generally may rely on the payee's address of record asthe basis for allowing the benefit of an income tax treaty. However, foreign corporations that receive dividends from otherforeign corporations with income effectively connected with a U.S.trade or business may need to file Form 1001 to obtain treatyexemption. See the Form 1001 Instructions. Coupon bond interest.Since coupons for interest payable on bonds, debentures, andsimilar evidences of indebtedness (including tax-free covenant bonds)are payable to the bearer, you as the payer must ascertain each time acoupon is presented for payment whether the payee is subject towithholding. Foreign payees ordinarily must file a separate Form 1001 each timethey present a coupon for payment of interest for each issue of bondsof a corporation or each time they are paid interest on obligations ofthe United States or its agencies or instrumentalities. Gambling income.Gambling income won in the United States by residents (as definedby treaty) of the following foreign countries is not taxable by theUnited States: Austria, Czech Republic, Finland, France, Germany,Hungary, Ireland, Italy, Netherlands, Russian Federation, SlovakRepublic, South Africa, Spain, Sweden, Tunisia, Turkey, and the UnitedKingdom. A foreign payee described in the preceding paragraph must file Form1001 with you to claim an exemption from withholding tax under a taxtreaty. Pay for Personal Services Most tax treaties to which the United States is a party provide forat least a partial exemption from tax for pay for labor or personalservices performed in the United States by a qualifying individual. Inmost cases, the qualifying individual must be a resident of the treatycountry. In some cases, the individual must be a citizen of the treatycountry. Under the treaty with Canada, for example, pay received by aresident of Canada for dependent personal services performed in theUnited States during the year is exempt from U.S. income tax if: The resident is in the United States for not more than 183days during the calendar year, and the pay is not deductible by a U.S.resident employer or by a permanent establishment or a fixed base ofan employer in the United States, or The pay for performing those services is not more than$10,000 for the year. Teacher, student, or trainee.Another provision found in many treaties exempts from U.S. tax, payreceived by a professor or teacher who is present in the United Statestemporarily for a specified activity, but only pay resulting from thatspecified activity. Many treaties also exempt from U.S. tax, amountsreceived from abroad by a student or trainee for maintenance orstudies in the United States. Table 2.See Table 2 at the end of this publication for treatyprovisions that provide for partial or complete exemption from U.S.income taxes for compensation paid for personal services rendered,compensation paid to certain persons teaching or engaging in research,and amounts received by students and trainees. Claiming exemption from withholding.The person entitled to receive salaries, wages, or any other payfor personal services performed in the United States must provide astatement to the withholding agent or employer to claim any exemptionfrom either 30% withholding or graduated withholding. Independent personal services.To qualify for an exemption from withholding because of a taxtreaty, an individual who performs independent personal services (asdistinguished from an employee) must give Form 8233, ExemptionFrom Withholding on Compensation for Independent (and CertainDependent) Personal Services of a Nonresident Alien Individual,to each withholding agent from whom amounts are to be received.Form 8233 must be filed for each tax year of the alien individual. Allinformation required by the form must be provided. The exemption fromwithholding is effective for payments made at least 10 days after acopy of the accepted Form 8233 is mailed to: Office of the AssistantCommissioner (International), Director, Office of InternationalDistrict Operations, CP:IN:D:C:SS, 950 L'Enfant Plaza South, SW,Washington, DC 20024. You, as the withholding agent, must forward one copy of the form tothe director within 5 days of your acceptance of the form. Beforeaccepting Form 8233, you must review it. If you accept it, completeand sign Part II of the form. If you know or have reason to know thatany of the facts or assertions may be false, or that the eligibilityof the individual's pay for the exemption cannot be readilydetermined, you may not accept Form 8233 and must withhold. If you accept Form 8233 and later find that you should not haveaccepted it, you must promptly notify the Director, Office ofInternational District Operations, by letter and withhold on anyamounts still to be paid. If you are notified by that office that theeligibility of the individual's pay for the exemption is in doubt oris not eligible for the exemption, you must withhold. If you forward an incorrect Form 8233, you will be notified thatthe form is not acceptable and that you must begin withholdingimmediately. A Form 8233 is incorrect if it: Claims a tax treaty benefit or exemption that doesn't existor is obviously false, or Has not been completed in sufficient detail to allowdetermination of the correctness of the tax treaty benefit orexemption claimed. You should keep a copy of Form 8233 for your records and give acopy to the nonresident alien individual. Each copy must include anyattachments originally provided by the nonresident alien. Students, teachers, and researchers.Alien students, teachers, and researchers can also use Form 8233 toclaim exemption from withholding of tax on pay for services that isexempt from U.S. tax under a tax treaty. They must complete the form according to its instructions, attachthe applicable statements listed in Appendix A or B of Publication 519, and deliver it to you. You must follow the procedures discussed earlier underIndependent personal services, for accepting Form 8233,forwarding the form to the IRS, and providing copies of the form andattachments. You cannot accept the form if you know that the alien isclaiming an exemption for pay for a period of time, or for an amount,in excess of that provided in a treaty. Employees.A nonresident alien employee who claims an exemption from tax undera provision of the Internal Revenue Code or an income tax treaty mustfile with the employer a statement for the tax year giving name,address, and taxpayer identification number and certifying: The individual is not a citizen or resident of the UnitedStates, and The compensation to be paid during the tax year is, or willbe, exempt from income tax, and the reason for the exemption. If exemption from tax is claimed under an income tax treatyprovision, the statement must indicate the tax treaty provision, thecountry of which the employee is a resident, and enough facts tojustify the claim for exemption. Although no particular form isprescribed for this statement, to establish an exemption under theCode or an income tax treaty, the statement must: Be dated, Identify the tax year for which it applies and the pay towhich it relates, Be signed by the employee entitled to the pay, and Contain, or be verified by, a written declaration that it ismade under the penalties of perjury. Special events and promotions.Unless the IRS has specifically advised you otherwise by letter,you should withhold at the statutory rates for payments that representgate receipts (or television or other receipts) from rock musicfestivals, boxing promotions, and other entertainment or sportingevents made to a nonresident alien or foreign corporation. This isbecause the exemption provided by certain tax treaties usually isbased on factors not generally determinable until after the close ofthe tax year. In any situation where the nature of the relationshipbetween you and the artist or athlete is not easily ascertainable, youshould withhold at a rate of 30%. For example, when a foreigncorporation provides you with an alien's services, the relationshipmay not be easily determined because of the need to resolve issuessuch as whether: The relationship is one of agency rather thanemployment, The foreign corporation is engaged in a trade or business inthe United States, or Assignment of income principles apply. Foreign corporations must request the required letter from the IRSDistrict Director in whose district its books and records are kept.Entertainers and athletes must request the letter as explained inCentral withholding agreements, later, under Artistsand Athletes.