What Is the W-8BEN-E Form? A Guide for Non-US Small Businesses
The W-8BEN-E is an IRS form used by foreign companies doing business in the United States. Only corporations and partnerships need to file this form. Individuals and sole proprietors need to file the W-8BEN form. The W-8BEN-E form is used to confirm that a vendor is a foreign company and must be filled out before the vendor can be paid, according to the University of Washington.
In this article, we’ll cover the following topics related to these forms:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice or instructions in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is Form W-8BEN-E?
The W-8BEN-E is a form from the United State’s tax collection agency, the Internal Revenue Service (IRS). All foreign (non-U.S.) businesses that are receiving payment from an American company must fill out the W-8BEN-E form.
The W-8BEN-E form is used to prove that the business providing the services is indeed a foreign entity.
The W-8BEN-E is a new form that came about thanks to the The Foreign Account Tax Compliance Act (FATCA).
FATCA came into place in 2010 so that the IRS could learn more about U.S. citizens who are earning income or investing via international, non-U.S. sources, according to Thomson Reuters. Its focus on cross-border tax compliance also extends to foreign entities doing business with U.S. clients.
There are different requirements for different vendors
The W-8BEN-E form is lengthy—it has 30 parts. That said, not all the fields of the form must be completed for a foreign vendor to get paid by a U.S. company. Requirements differ.
The University of Washington, for example, only requires foreign vendors to fill out:
- Part I
- Part II (if a tax treaty is being claimed)
- Part XXIX
Sole proprietors and individuals must not fill out the W-8BEN-E form. Instead, they are required to submit the W-8BEN form to receive payment from U.S. companies.
It’s best to review the form with your tax advisor in order to properly complete it.
What Is the W-8BEN-E Used For?
The W-8BEN-E form is used for reporting to the IRS information about a non-U.S. company earning money from U.S. employers.
The W-8BEN-E form asks for information such as:
- Company name
- Where the company was incorporated or is located
- Organization status (chapter 4 status)
- U.S. or foreign TIN (taxpayer identification number)
- Claim of tax treaty benefits
Organization status refers to whether the business is a foreign government, publicly traded company, nonprofit company or otherwise.
Tax treaty benefits on income can only be claimed if there’s a tax treaty between the U.S. and the country where the business is a tax resident. The United States has tax treaties with countries such as Canada, the United Kingdom, Ireland, Mexico and Australia. A full list is available on the IRS website.
If a tax treaty isn’t in place, non-U.S. entities have to pay 30 percent tax on their U.S. earnings, according to the IRS.
If you don’t submit a W-8BEN-E form to your US client, 30 percent of your income is subject to withholding, regardless of whether your country has a tax treaty with the U.S.
Does the W-8BEN-E Expire?
The W-8BEN-E form can expire. It only lasts until the end of the calendar year when it was signed and then the next three years. It expires at the end of that period.
- For example, a W-8BEN-E form signed in 2012 would be valid for the rest of 2012 as well as 2013, 2014 and 2015. It would expire on January 1, 2016.
Once the W-8BEN-E form expires, a new form has to be filled out by the foreign vendor and submitted to its American employer before any more payments can be processed.
The W-8BEN-E form also expires if any information on the form changes, such as the address of the foreign vendor. Then a new W-8BEN-E has to be filled out and submitted, according to the University of Washington.
People also ask:
What Is W-8BEN?
The W-8BEN is a form required by the Internal Revenue Service (IRS), the United States tax agency.
The W-8BEN form is applicable to foreign individuals and sole proprietors who earn money or income from U.S. sources. These individuals must provide a completed W-8BEN form to their U.S. client in order to avoid paying tax to the IRS.
That said, you can only avoid paying tax if:
- Your business doesn’t have an office or branch in the U.S.
- Your country of origin has a tax treaty with the U.S. In this case, you avoid double taxation. You don’t pay tax on your U.S. income to the IRS. But you will pay tax on that income in your country of origin.
The US has tax treaties with countries like Canada and the UK. The IRS has a full list.
Failure to fill out form W-8BEN means the IRS can withhold 30 percent of income earned from U.S. sources.
This includes any interest, rents, royalties and other compensation.
W-8BEN and the IRS
The W-8BEN form confirms to the IRS the following information:
- You are not a U.S. resident
- The individual or owner of the sole proprietorship receiving income from a U.S. source
- You qualify for a tax treaty that exempts you from paying tax to the IRS, or reduces the tax withholding rate. Don’t qualify for an exemption? You’ll need to pay the IRS 30 percent of your earnings.
In short, the W-8BEN form determines your status as a foreign individual. Based on your country of origin, the W-8BEN determines how much (if any) tax you owe the IRS.
What Is My Chapter 4 Status?
Chapter 4 status comes from Chapter 4 of the Internal Revenue Code, a document that lists tax laws in the U.S.
Chapter 4 status refers to the status of an individual or company under FATCA, the Foreign Account Tax Compliance Act. It can be used to identify U.S. residents who invest offshore. It also helps categorize foreign vendors doing business with U.S. companies.
According to Cornell Law, chapter 4 statuses are:
- U.S. person
- Specified U.S. person
- Foreign person
- Participating FFI (foreign financial institution)
- Deemed-compliant FFI
- Restricted distributor
- Exempt beneficial owner
- Nonparticipating FFI
- Territory financial institution
- Active NFFE (non-financial foreign entities)
- Passive NFFE
Businesses that are not in the financial industry are usually classified as NFFEs, according to BDO Canada. Active NFFEs get less than 50 percent of their gross income from passive income. Active NFFEs need to do little except establish their status with the IRS.
A partnership or corporation must declare their status via IRS forms such as the W-8BEN-E. A foreign individual or sole proprietor receiving US income do not need to declare their status but will need to file a W-8BEN form.