Qualified Intermediary – Withholding Rules

A qualified intermediary (“QI”) is any foreign intermediary (or foreign branch of a U.S. intermediary) that has entered into a qualified withholding agreement with the IRS:

1. For NRA tax withholding, unlike payments to foreign intermediaries, where the payees are the persons to whom the foreign intermediary collects the payments (e.g. account holders), the QI is considered the payee and the payor is not required to withhold NRA tax on U.S. source income, based on the Form W-8 IMY provided by the QI.

2. An intermediary is a custodian, broker, nominee or any other person that acts as an agent for another person.

3. A foreign intermediary is either a qualified intermediary (not subject to NRA tax withholding on U.S. source income as the “payee’), or a non-qualified intermediary (a foreign person who is not a qualified intermediary, not treated as the payee, i.e. the payees of a payment made to a NQI are the account holders on whose behalf the NQI is acting and they are subject to NRA tax withholding).

4. The payor of U.S. source income determines whether an entity is a qualified or non-qualified intermediary based on the “Foreign Intermediary” Form W-8 IMY (and collected documentation; e.g. Form W-9, W-8 BEN).

5. If the payor of U.S. source income does not have all the required documentation required to reasonably associate a payment with a payee, the “Presumption Rules” must be applied.

6. For example, a payment of U.S. source interest to a non-qualified foreign intermediary who gives the payor a Form W-8 IMY and Form W-8 BEN for a foreign person, and Form W-9 for a U.S. person, for which the NQI is collecting the payments, the interest paid to the foreign person is reported on Form 1042-S, to the U.S. person on Form 1099-INT.

The QI may be treated as the payee to the extent the QI assumes primary withholding responsibility, or primary Form 1099 reporting and back-up withholding responsibility for a payment, (i.e. the QI is required to withhold the tax)

A payment to a QI that does not assume primary NRA tax withholding responsibility is considered made to the person on whose behalf the QI acts. If the QI does not assume Form 1099 reporting and back-up withholding responsibility, the payor must report on Form 1099, and if applicable back-up withholding, as if the payment was made directly to the U.S. person.

Under a qualified withholding agreement, the QI is entitled to simplified withholding and reporting rules.

1. A QI is not required to forward documentation obtained from foreign account holders to the U.S. withholding agent from whom the QI received a payment of U.S. source income.

2. The QI maintains the documentation at its location and provides the U.S. withholding agent with withholding rate pools, i.e. a payment of a single type of income (reported on Form 1042-S, “income categories”) that is subject to a single rate of withholding.

3. A QI is required to provide the U.S. withholding agent with information regarding U.S. persons subject to Form 1099 reporting unless the QI assumes the primary obligation to do Form 1099 reporting and back-up withholding.

Form 1042-S Reporting

A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically.

Pooled basis reporting is not available for payments to certain account holders, e.g. non-qualified intermediary, flow-through entities.

A QI may seek a refund on behalf of its direct account holders, who are not required to file returns with the IRS to obtain refunds.

U.S. Branches of Foreign Banks and Foreign Insurance Companies

Specific rules apply to U.S. branches. If the payor of U.S. source income treats the branch as a U.S. person, they may treat the branch as a U.S. payee (for a payment subject to NRA withholding) if they receive a Form W-8 IMY from the U.S. branch, in which case the U.S. payor is not required to withhold tax. The payment must still be reported on Form 1042-S.

Payors of U.S. source income to a U.S. branch of an amount not subject to NRA withholding, treats the payment as made to a foreign person (irrespective of any agreement to treat the branch as a U.S. person) which is not subject to Form 1099 reporting or back-up withholding.

Or a U.S. bank may provide the payor with a Form W-8 IMY with which it associates the documentation of the persons on whose behalf it acts, in which case the payees are the persons on whose behalf the branch acts.

If the U.S. branch does not provide the payor with a Form W-8 IMY, the payor treats the payment subject to NRA tax withholding as made to the foreign parties, and the income as effectively connected with the conduct of a U.S. trade or business.

“QI Withholding Rate Pools”

Payments made to a QI that do not assume NRA withholding responsibility are treated as paid to its account holders. A QI is not required to provide the payor of U.S. source income with foreign account holder documentation, instead it provides a withholding statement that contains withholding rate pool information.

A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding.

A QI is required to provide the payor with information regarding U.S. persons subject to Form 1099 reporting and to provide the payor with withholding rate pool information separately for each such U.S. person, unless it has assumed Form 1099 reporting and back-up withholding responsibility.

The QI withholding statement must:

1. Designate those accounts for which it acts as a qualified intermediary;

2. Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and back-up withholding responsibility, and

3. Provide sufficient information to the payor to allocate the payment to a withholding rate pool.

If a QI does not assume primary NRA withholding responsibility on Form 1099 reporting and back-up withholding responsibility for the payment, the payor can reasonably associate the payment with valid documentation, only to the extent the payor can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees.

Unless the alternative procedure applies, the qualified intermediary must provide the U.S. payor with a separate withholding rate pool for each U.S. person subject to Form 1099 reporting and/or back-up withholding. The QI must provide a Form W-9, or in the absence of the form, the name, address and TIN, if available, for such person.

If a QI assumes primary NRA withholding responsibility (but not Form 1099 back-up withholding and reporting responsibility) the payor can reliably associate the payment with valid documentation, only to the extent that the payor can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U.S. person, unless the alternative procedure applies, subject to Form 1099 reporting and/or back-up withholding. The QI must provide a Form W-9 or in the absence of the form, the name, address and TIN number of such person.

If the payor makes a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and back-up withholding responsibility, the payor can reasonably associate a payment with valid documentation provided they receive a valid Form W-8 IMY (it is not necessary to associate the payment with withholding rate pools).

For example, if a payor makes a payment of a U.S. dividend for a QI with three customers: one foreign person entitled to 20% tax rate, one foreign person entitled to a 30% tax rate, one U.S. person who provides Form W-9, no tax withholding: The QI does not assume primary withholding responsibility, but issues the U.S. payor a Form W-8 IMY, with which it associates the Form W-9 and a withholding statement that allocates the dividend to a 20% withholding rate pool, a 30% withholding rate pool and no withholding for the U.S. person, the U.S. payor should report on Form 1042-S, one payment made to a 20% rate dividend pool, one payment made to a 30% rate dividend pool, with the payment to the U.S. person reportable on Form 1099-DIV.

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