We were first introduced to the new W-8BEN (for individuals) and W-8BEN-E (for entities) when the IRS released draft forms applicable to the 2014 tax year. The IRS continues to fine-tune the W-8BEN-E forms and instructions in the 2015 drafts. These forms can seem very complex, especially to foreign entities that may not be familiar with the U.S. tax laws and language. The W-8BEN-E is eight pages long and the U.S. Treasury estimates it takes an average of 21 hours to complete! The underlying reason for all the changes to these forms is to comply with the new FATCA rules, which are aimed at bringing U.S. taxpayers holding offshore accounts into reporting compliance.
Page one of Form W-8BEN-E asks for the Chapter 4 Status of the foreign entity. Currently there are 31 different categories of Chapter 4 statuses. Many of these categories include different types of foreign financial institutions (FFI) and non-financial foreign entities (NFFE). If a foreign entity is a financial institution (FFI), it must enter into a compliance agreement with the IRS to report accounts with U.S. ownership. Under a compliance agreement, these FFIs must register and obtain a Global Intermediary Identification Number (GIIN) and comply with all reporting requirements under the FATCA regulations and intergovernmental agreement (IGA). If a FFI doesn’t comply, it is penalized with a 30% tax withholding regime.
A foreign entity that is not a financial entity is known as a NFFE, or non-financial foreign entity. Unless it is publicly traded, the entity needs to determine whether it is active or passive. A passive NFFE is required to disclose its substantial U.S. owners or to certify it has no substantial U.S. owners, whereas an active NFFE has no such requirement. However, if an entity does not want to perform the analysis required to determine it is an active NFFE, the form now offers an option to check the box on line 40a to disclose substantial U.S. owners or certify there are no U.S. owners. This option may be appealing to those active entities that would rather disclose substantial U.S. owners or certify there are no substantial U.S. owners than to perform a complex analysis of its financials to confirm its active status.
As there are many complexities under the new FATCA rules, please be sure to consult with a qualified tax professional when completing these forms.
By Jill A. Helm, CPA