Withholding Agents are third parties required to withhold income tax on U.S. source income they pay to:
1. Foreign persons (including non-resident aliens);
2. Foreign corporations;
3. Foreign partnerships;
4. Foreign trusts;
5. Foreign estates;
6. Foreign governments; and
7. International organizations.
Withholding agents are responsible for:
1. Withholding on various types of income;
2. Filing information returns; and
3. Filing tax returns.
Withholding agents have withholding obligations on three (3) types of income:
1. Payments of U.S. sourced income to foreign persons;
2. Income from the disposition of U.S. real property interests; and
3. Partnership withholding on income effectively connected with the active conduct of a U.S. trade or business.
Withholding of Tax
A Foreign Person (including non-resident aliens) is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.
A reduced tax rate (including exemptions) may apply if there is a tax treaty between the foreign person’s country of residence and the United States.
The U.S. income tax is withheld from the payment made to the foreign person (NRA withholding).
NRA withholding refers to the withholding required under the IRC Sections 1441, 1442 and 1443. “NRA withholding” is the tax withholding on a payment of U.S. source income made to foreign persons (including non-resident aliens), foreign entities and foreign governments.
NRA withholding does not include withholding under IRC Sec. 1445 (U.S. Real Property Interest) or IRC Sec. 1446 (Partnership Withholding on Effectively Connected Income).
The withholding agent must withhold tax on the gross amount subject to NRA withholding, not reduced by any tax deductions.
Liability of Withholding Agent
A withholding agent is personally liable for any tax required to be withheld. The liability is independent of the tax liability of the foreign person to whom the payment is made. If the withholding agent fails to withhold, and the foreign payee fails to satisfy its U.S. tax liability, then both the withholding agent and the foreign person are liable for tax, interest and penalty.
The applicable tax will be collected only once. If the foreign person satisfies its U.S. tax liability, the withholding agent is not liable for the tax but remains liable for any interest and penalty for failure to withhold.
When Tax is Withheld
Tax withholding is required at the time the withholding agent makes a payment of an amount subject to withholding.
A payment is made if the recipient realizes income, whether not there is an actual transfer of cash or other property. A payment is considered made if it is paid for that person’s benefit, i.e., to the person’s creditor or to the person’s agent.
A U.S. partnership should withhold when any distributions that include amounts subject to withholding are made. If a foreign person’s distributions of income, subject to withholding, are not actually distributed, the U.S. partnership must withhold on the foreign partner’s distribution share of the income on the earlier of the date that Schedule K-1 (Form 1065) is provided or mailed to the partner on the due date for furnishing that schedule.
A U.S. Trust is required to withhold on the amount includable in the gross income of a foreign beneficiary to the extent the trust’s distributable net income consists of an amount subject to withholding. If the U.S. Trust does not distribute the amount, it must withhold on the foreign beneficiary’s allocable share at the time the income is required to be reported on Form 1042-S.
Withholding Agents – Reduced Rate of Withholding
A withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reasonably associate the payment with representations from a beneficial owner that it is a foreign person entitled to a reduced rate of withholding.
A withholding agent is a U.S. or foreign person that has control, receipt, custody, disposal or payment of any item of income of a foreign person that is subject to withholding.
In most cases, the U.S. person who pays an amount subject to NRA withholding is the person responsible for withholding.