Understanding international taxation can seem like a daunting task for many businesses, especially those that are expanding their operations across national borders. Yet, international taxation is a key aspect that can shape your company’s financial health and reputation. One component you might encounter when dealing with US source income and international taxation is the W-8 tax form. While it may seem like just another piece of IRS paperwork, this form is important for businesses.
Whether you’re an established multinational business or a startup venturing into new markets, understanding W-8 forms can help ensure your business is compliant with US tax regulations. It can also help you use tax treaty benefits, potentially saving you significant sums of money.
Below, we’ll dig into what W-8 forms are, the different types of W-8 forms, who needs to file them, and how Stripe can help businesses simplify the process of dealing with tax forms, including W-8s.
What’s in this article?
- What is a W-8 form?
- Types of W-8 forms
- Who needs to file a W-8 form?
- How to file W-8 forms
- How Stripe can help
What is a W-8 form?
A W-8 form is a document that the Internal Revenue Service (IRS) requires foreign entities—individuals and corporations—to fill out if they have financial dealings within the US. This form authenticates their status as non-US residents for taxation and is key in managing US source income for these entities—which includes income earned from sources like US property rentals or dividends from US companies.
The form also allows these entities to claim eligibility for reduced or exempt US withholding, which is deducted from various income types paid to nonresidents. This is possible because of the tax treaties the US has with numerous countries, which aim to prevent double taxation for taxpayers abroad. By completing the W-8 form properly, foreign entities certify their non-US status and, if applicable, benefit from the tax treaty between their country and the US. Therefore, the W-8 form is an important element in ensuring international tax compliance and navigating the intricacies of the US tax system.
Types of W-8 forms
The W-8 form is not a single, uniform document, but a series of forms designed to cater to different situations, from foreign individuals earning income in the US to international organizations or foreign governments that have US-based financial dealings. Ensure that you choose the correct form to represent your status, because it can impact the amount of tax that is withheld, or even result in exemptions.
There are several versions of the W-8 form, and each serves a different purpose:
Form W-8 BEN is a document used by foreign individuals—for instance, a freelancer in Germany who provides services to a US company—to confirm their non-US status. This helps them take advantage of tax treaty benefits that could reduce their US tax liability. Additionally, they use this form to affirm that they are the rightful recipient of the income they’re receiving, which is especially relevant when it comes to income like dividends, royalties, or interest.
Form W-8 BEN-E serves a similar purpose but is intended for foreign entities, not individuals. For example, a tech startup in India that provides software services to a US firm would use this form to confirm its foreign status. Additionally, if India and the US have a tax treaty that provides benefits to such businesses, the startup can claim these benefits using this form.
Form W-8 IMY is for intermediaries, which could be entities or individuals acting on behalf of another. For instance, if a Canadian broker manages US securities for Canadian investors, this broker would use Form W-8 IMY to declare its intermediary status and to manage the tax obligations for the income from these securities.
Form W-8 EXP is used by foreign governments, international organizations, and similar entities. For example, a foreign government body that receives interest income from US investments would use this form to confirm its status and to claim any exemptions from US withholdings that apply under US tax law or international treaty.
Form W-8 ECI is for foreign individuals or entities that claim that their income is directly connected with a US trade or business. For example, consider a UK-based marketing consultant who works for a US firm on a project that comprises a significant part of the consultant’s income. Using this form, the consultant can claim that their income is “effectively connected” with a US business, which allows them to be taxed at a rate similar to US individuals or entities rather than face the higher automatic withholding rate for foreign entities.
Each form requires the filer to provide specific information and serves a distinct purpose in the context of US tax laws and regulations. The IRS website offers more detailed explanations of each form and provides guidance on when to use them.
Who needs to file a W-8 form?
Certain foreign individuals and businesses that earn income from US sources must file a W-8 form. These forms assist the IRS in determining the appropriate amount of tax to withhold from the income. The type of W-8 form an individual or business needs to file depends on their specific circumstances.
Different foreign entities—and their specific situations—require different W-8 forms:
Foreign individuals (Form W-8 BEN)
Non-US individuals who receive certain types of income from US sources—such as interest, dividends, rents, royalties, and certain other types of income—need to fill out the W-8 BEN. The form is used to claim any applicable tax treaty benefits and to verify that the individual is not a US resident for tax purposes.Foreign business entities (Form W-8 BEN-E)
This form is for foreign entities that earn income from US sources or receive payments as a “beneficial owner.” In this context, a beneficial owner refers to someone who benefits financially from something but is not, technically, the owner. For example, it’s possible that the person with ultimate control over a bank account is not listed on the account as an owner. This person is a beneficial owner. In another example, the beneficial owner could be a foreign corporation that earns dividends from a US company. It could also refer to a foreign partnership that conducts business in the US. For example, an Australian software corporation that earns dividends from a US company or an Italian fashion design partnership that sells products in the US would use this form, allowing them to confirm their foreign status and, if eligible, claim benefits under a US tax treaty.Foreign intermediaries or flow-through entities (Form W-8 IMY)
This form is for foreign intermediaries, foreign partnerships, or foreign simple or grantor trusts. The intermediary might be a broker or agent outside the US that’s managing US investments or receiving US income on behalf of their clients—for instance, a brokerage firm in Hong Kong that manages US securities for its clients or a Swiss trust that receives US income on behalf of its beneficiaries. By filing this form, these intermediaries or trusts facilitate the appropriate tax withholding for their clients or beneficiaries.Foreign governments, international organizations, or foreign central banks (Form W-8 EXP)
These entities file this form to claim an exemption from the Foreign Account Tax Compliance Act (FATCA), if they’re exempt, and to certify their status to avoid certain taxes under US tax law. An example is a foreign central bank that receives interest income from US government bonds. This form helps such entities certify their status and claim any exemptions from US withholding tax in accordance with US tax law or international tax treaties.Foreign individuals with “effectively connected income” (Form W-8 ECI)
Foreign individuals with income effectively connected with a US trade or business need to file this form. “Effectively connected income” can include certain rents and royalties, or income from a partnership that conducts a US trade or business. For example, a British actor performing in a US-produced film could receive income that is considered effectively connected with a US trade or business. This form allows the actor to be taxed at the same graduated rates as a US citizen rather than face the flat withholding that usually applies to foreigners.
Of course, the complexity of US tax laws—and the chance that laws could change—mean that the scenarios outlined above might not encompass all situations in which a W-8 form is necessary. While the IRS does provide comprehensive guidelines for each form, there might still be circumstances that aren’t explicitly addressed. If you are filling out a W-8 BEN form and get stuck, the best thing to do is seek counsel from a tax professional with expertise in US tax laws and regulations.
How to file W-8 forms
Filing a W-8 form involves several steps. Because the IRS uses these forms to determine the correct amount of tax withholding and as proof of treaty benefits, it’s important to fill them out accurately. Here is a guide on how to file W-8 forms:
Identify the correct form: As we’ve discussed, there are several types of W-8 forms. Each type of form serves a different purpose. Step 1 is to identify the form that suits your situation.
Download the form: You can download the required W-8 form from the official IRS website. It’s important that you have the latest version of the form, as the IRS updates these forms occasionally.
Fill out the form: Fill out the form accurately and completely. Any errors can cause delays or issues with processing the form. Follow the instructions provided by the IRS for each form. If you are unsure about any aspect of the form, it’s best to seek advice from a tax professional.
Submit the form: Unlike many other tax forms, the W-8 forms are not typically sent directly to the IRS. Instead, they are given to the withholding agent or payer, which could be the bank, investment company, or another institution from which you’re receiving income. These entities use the information on the form to determine how much tax to withhold from your income and are responsible for forwarding the form to the IRS if needed.
Renew the form: W-8 forms remain valid for three years. After this period, a new form must be submitted. If your circumstances change significantly, you should complete a new form even if the three-year period is not yet over.
This is a generalized guide and may not include all the details required in specific situations. When dealing with tax-related matters, consult with a tax advisor or professional.
How Stripe can help
Stripe offers a variety of tools designed to streamline and simplify the financial operations of businesses. Among these tools is Stripe Tax, a service designed to automate the calculation and collection of sales tax, value-added tax (VAT), and goods and services tax (GST) for businesses.
Stripe can significantly reduce the administrative burden for businesses around W-8 forms and international tax compliance. Here’s how Stripe can help:
Automated W-8 form collection
Stripe can help collect the necessary W-8 forms from customers and vendors, reducing the amount of manual work needed to ensure tax compliance. Stripe’s platform automatically requests the necessary forms and validates them, helping businesses meet their reporting obligations and manage risks associated with noncompliance.Simplified tax documentation
Stripe offers a simple, user-friendly interface that stores all necessary tax documentation in one place. This includes forms such as W-8 BEN or W-8 BEN-E that are needed for international tax compliance.Timely reminders
Stripe also offers reminders when W-8 forms are about to expire (typically, every three years). This feature ensures that businesses have up-to-date tax forms on hand, helping them avoid penalties related to outdated forms.Tax reporting support
Stripe Tax helps businesses prepare for tax time by making it easier to generate necessary reports. These reports could include those that detail income paid to foreign entities, which would be necessary in order to comply with IRS reporting requirements related to the income subject to withholding taxes.
By streamlining the process of tax compliance and providing robust support for businesses navigating international tax obligations, Stripe’s suite of tools can be a valuable asset for businesses that operate across borders.