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Decrypting a Form W-8BEN

Investors with direct or indirect interests in investments located in the United States will be required to complete an IRS  (US Internal Revenue Service) Form W-8BEN.

The Standard W-8BEN is a Certificate of Foreign Status of Beneficial Owner for US Withholding and reporting purposes.

Just like in Australia, the USA imposes a withholding tax (a final tax) on certain types of investment income paid to foreign investors. However, given the myriad of tax treaties around the world with different negotiated withholding rates, the payer is required to establish the tax residency and type of entity of the recipient in order to apply the correct rate of withholding tax.

The typical withholding rates (under US – Australia Tax Treaty) for Australian resident investors into US entities are:

Income Withholding rates
Interest 10%
Dividends (<10% shareholding) 15%
Dividends (>10% - <80% shareholding) 5%
Dividends (>80% shareholding) 0%
Royalties 5%

The IRS solution to ensure the correct withholding is applied is to require completion of one of a number of versions of their Form W-8BEN.

Individuals – W-8BEN

The basic Form W-8BEN for Individuals appears relatively straight forward. This simple 1 page Form however, has an 8 page instruction guide, which itself then references various Acts and Agreements. The instructions are more confusing than the form itself.

Top Tip for Individuals

On the form W-8BEN, most Australian investors will only need to write “Australia” at item 9 and do not need to complete item 10 (about special treaty rates).

Entities (non individuals) – W-8BEN-E

While the individual form is relatively straight forward, the Form W-8BEN-E for Entities is 9 pages long, quite confusing and has a 15 page instructions guide which again reference various Acts and Agreements.

What should be a simple form to acknowledge existence and tax residence is far from it due to the FACTA legislation which requires all US citizens to report details of overseas investments (direct or indirect). Of note, at the back of the instruction guide, the IRS estimates the estimated average time to complete the form is over 25 hours:

Record keeping: 12hr 40 min.

Learning about the law of the form: 4hr 17 min

Preparing and sending the form:  8hr 16 min

 

Top Tips for Family Investment Trusts and Self Managed Superannuation Funds (SMSF)

The most common questions we are asked for assistance is in relation to the Entity Type when investing through a Family Discretionary Investment Trust or SMSF.

A Family Discretionary Trust and SMSF will be regarded as a ‘Complex Trust’ (Part I, Question 4 (Chapter 3 Status (entity type)).

For Part I, Question 5 (Chapter 4 Status), most investors via Family Discretionary Investment Trusts or SMSFs will be regarded as a Passive Non-Financial Foreign Entity (NFFE) and require completion of Part XXVI of the form (tick box 40a and 40b).

Conversely, business entities in receipt of Royalties from the USA will generally be regarded as an Active NFFE.

Once completed, the forms are supposed to be valid for 3 years. A form must be completed for each separate investment into US entities.

We have attached links to the Forms and Instructions below:

https://www.irs.gov/uac/Form-W-8BEN,-Certificate-of-Foreign-Status-of-Beneficial-Owner-for-United-States-Tax-Withholding

https://www.irs.gov/uac/About-Form-W-8BEN-E

Please note that Hanrick Curran advisers are not US tax experts, however several advisers have reviewed the forms, the instructions and where necessary, the US tax code to provide the above guidance. The information provided above should be regarded as a guide only and should not be relied upon in substitution for professional advice having regard to your own particular circumstances.

Hanrick Curran is a member of the Alliott Group, a worldwide alliance of Accountants, Lawyers and Consultants, so we can arrange a consultation with a US tax expert if required.

Should you have any questions in relation to the above, please contact your usual adviser or speak with Hanrick Curran’s tax partner, Jamie Towers.

 

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.