A United States citizen who has lived permanently in France for twenty years, and has no United States address, opens an account at a US broker-dealer. How is she classified for the tax certification, and why?

As a foreign person, because permanent residence abroad ends a citizen's status as a United States person

As a United States person, because US citizenship makes her one wherever in the world she lives

As a foreign person, because her only address and her tax residence are both now in France

As a United States person only if she has kept a US address or bank account for the new account

For the purpose of deciding whether an account holder completes Form W-9 or Form W-8, when is a trust a United States person?

When its trustee is a US citizen resident in the United States and the trust's assets are held in custody at a financial institution there

When it was created under the law of a US state and registered with that state, whoever administers it and whichever persons control its decisions

When a US court is able to exercise primary supervision over its administration and US persons have authority to control all its substantial decisions

When a majority of its beneficiaries are US citizens or residents, wherever it is administered and whichever persons have authority over its decisions

A lawful permanent resident of the United States holds a green card throughout the year but spends ten months of that year abroad. Is she a resident alien for the year?

Yes, because the green card test turns on her legal status at any time in the year, not on her days of presence

Yes, but only for the two months of the year during which she was physically present in the United States, not for the rest

No, because the green card test also requires her to be physically present in the United States on at least half the days of the year

No, because a green card holder who lives abroad for most of the year is treated as a nonresident alien until she returns to stay

The substantial presence test requires at least 183 days of presence counted across the current year and the two preceding years. A client was physically present in the United States for 120 days in each of three consecutive years. Does she meet the test for the third year?

Yes: all 360 days of presence count, far above the required number

No: the three years count as 120, 40 and 20 days, which is 180 in all

Yes: the three years count as 120, 60 and 40 days, which is 220 in all

No: only the 120 days of the current year count toward the test

A foreign student holding an F visa lives in the United States for most of the calendar year. Why may he still be a nonresident alien for that year?

The substantial presence test counts only the days an individual spends working for pay in the United States, and he has no job there

The substantial presence test is met only by an individual who intends to remain in the United States permanently, which he does not

His days in the United States as a student on an F visa are generally not counted toward the substantial presence test

Residence for tax purposes generally follows the country that issued the individual's passport and visa, not the country where he lives

A resident alien completing Form W-9 does not have a Social Security number and is not eligible to get one. Which taxpayer identification number does she certify?

The Social Security number of her US citizen spouse

An employer identification number issued in her own name

The tax identifying number issued by her home country

Her IRS individual taxpayer identification number

A broker-dealer receives a completed and signed Form W-9 from a new account holder. What does the firm do with the form itself?

Keeps it as documentation supporting its own tax reporting decisions; the form is not sent to the IRS

Forwards it to the IRS by the end of the year, the IRS then keeping it as the official record of her certification

Returns it to the account holder, who attaches it to her own federal income tax return for the year

Files it with the IRS before the first reportable payment, so that the number is registered to the account

A US person who has applied for a taxpayer identification number but not yet received it returns Form W-9 with the words Applied For in place of the number. How long does the certificate give her to provide the number, and from when is that period measured?

Sixty calendar days, measured from the date on which she applied to the IRS for the number

Sixty calendar days, measured from the date on which the payer receives the certificate

Ninety calendar days, measured from the date on which the account was opened at the firm

Until the end of the calendar year in which the payer receives the certificate from her

While an account holder who has returned an awaiting-TIN certificate still has time to supply her number, the payer operates under the reserve rule. What does the reserve rule require of the payer?

To backup withhold on every reportable payment from the first day of the period, refunding the amounts withheld to her once her number arrives

To freeze every withdrawal from the account until the number arrives, crediting each payment to the account but holding all of it back from her meanwhile

To backup withhold if she withdraws more than $500 at one time, unless she reserves an amount equal to the backup rate on all reportable payments

To backup withhold only if the account's balance falls below $500 at any time, restoring the shortfall out of the next reportable payment credited to it

A US person who has applied for a taxpayer identification number gives her broker-dealer an awaiting-TIN certificate. While she waits for the number, the firm credits dividends to her account and also pays her a fee for consulting services. How does backup withholding apply to the two payments during the waiting period?

The consulting fee falls within the certificate's relief, but the dividends are subject to backup withholding at once

Both payments fall within the certificate's relief, since it covers every payment made to her

Neither payment falls within the certificate's relief, since it only postpones the payer's reporting of the two payments

The dividends fall within the certificate's relief, but the consulting fee is subject to backup withholding at once

A foreign individual signs Form W-8BEN in March 2025, and nothing on the form later becomes incorrect. Until when does the form remain in effect?

Until December 31, 2028, the last day of the third calendar year after the year of signing

Until March 2028, three full years after the date on which the form was signed by the individual

Until December 31, 2027, the last day of the second calendar year after the year of signing

Indefinitely, since such a form expires only when some of the information on it becomes incorrect

A resident of a treaty country claims the reduced treaty rate on Form W-8BEN for dividends from shares actively traded on a US exchange. She has never been issued any number by the IRS. Must she obtain one before she can make the claim?

No, because a treaty claim on Form W-8BEN never requires a taxpayer identification number of any kind

No, because a claim on dividends from actively traded stock needs no IRS-issued number for the individual

Yes, because every treaty claim on Form W-8BEN must carry a number that the IRS itself has issued

Yes, unless she has held the shares for more than one year before the dividend is paid to her

An account holder uses Form W-8BEN only to certify her foreign status and claims no treaty benefits. She moves her residence from Germany to Brazil. Is the move a change in circumstances that requires a new form?

Yes, because a move to a country that has no applicable US income tax treaty ends her ability to certify foreign status

Yes, because a change in the account holder's country of residence generally makes the information on her form incorrect

No, because for a form that certifies foreign status and nothing more, a move to another foreign country is generally not one

No, and nor would a later change of her address to one in the United States count as a change in circumstances for the form

For an obligation issued under the current rules, what feature must the obligation itself generally have for interest on it to qualify as portfolio interest?

It must have an original maturity above one year

It must be listed and traded on a US exchange

It must be denominated in a foreign currency

It must be issued in registered form

A foreign individual owns twelve percent of the total combined voting power of a US corporation's stock and also holds that corporation's bonds. Is the interest on the bonds portfolio interest?

No, because interest paid to an owner of ten percent or more of the issuer's voting power is excluded

Yes, because the exclusion for insiders reaches only owners of more than half of the issuer's total combined voting power

Yes, because an individual's shareholding in the issuer is irrelevant to the character of interest paid to her on its debt

No, because interest paid by any corporation in which the holder owns shares of any class is excluded, whatever the size of the stake

Interest on a bond qualifies as portfolio interest and so escapes the thirty percent chapter 3 withholding. The payee is a nonparticipating foreign financial institution and the interest is a withholdable payment. What follows under chapter 4?

Nothing is withheld, because interest that is exempt under chapter 3 is exempt under chapter 4 as well

It can still be withheld on at thirty percent, because portfolio interest is not exempt from FATCA withholding

It is withheld on at the payee's treaty rate, because chapter 4 follows the treaty relief under chapter 3

It may be withheld on only once the IRS has notified the payer that the institution has failed to comply

A foreign individual sells shares of a US corporation at a profit through a US broker-dealer. How does the nonresident withholding regime generally treat the gain on the sale?

It is withheld on at thirty percent of the gross sale proceeds, with any excess refunded to her after the year ends

It is generally withheld on at thirty percent of the gain, the standard rate for US-source income of foreign persons

It is generally not withheld on, because gain from a sale is not fixed or determinable annual or periodical income

It is withheld on at the dividend rate in any treaty the individual claims, the gain arising on shares of stock

A nonresident alien individual is present in the United States for periods aggregating 183 days or more in a taxable year, during which she has both US-source gains and US-source losses on sales of capital assets. On what is she taxed at thirty percent?

On the gains on assets she held for under one year, the gains on longer-held assets being exempt

On the full amount of each gain she realised, with the losses on her other sales disregarded

On the gross proceeds of every sale she made, whether the sale produced a gain or a loss

On the amount by which the year's US-source capital gains exceed its US-source capital losses

A foreign account holder's statement shows several distributions from a US mutual fund, each labelled a dividend. Which of them may be exempt from chapter 3 withholding?

Ordinary dividends paid out of the fund's income from its equity holdings

None, since every fund distribution labelled a dividend is withheld at the dividend rate

Only the distributions that are reinvested in additional shares of the same fund

A foreign person receives US-source income that is effectively connected with the conduct of a US trade or business. How is that income taxed, compared with the same person's portfolio dividends?

At the flat thirty percent withheld at source, the same as is applied to the portfolio dividends

At the graduated rates that apply to United States persons, rather than at the flat thirty percent

At a flat fifteen percent, the rate that an applicable tax treaty sets for business income generally

Not at all in the United States, being taxable only in the foreign person's home country of residence

A foreign intermediary receives US-source dividends on behalf of several underlying clients rather than as their beneficial owner, and gives the withholding agent Form W-8IMY. What must accompany the form?

The intermediary's own treaty claim, which the agent applies to the dividends it receives for every client

A single certificate stating one blended rate that the agent then applies to all of the clients' dividends

A withholding statement identifying the underlying beneficial owners and the withholding rate that applies to each

A list of the clients' names alone, the rates being left for the withholding agent to determine for itself

What does FATCA require of a foreign financial institution, such as a broker-dealer outside the United States, with respect to accounts held by United States persons?

To report those accounts to FinCEN, but only where an account balance exceeds the currency transaction reporting threshold

To close those accounts, or transfer them to an institution in the United States, within a set period after FATCA took effect

To apply backup withholding to payments made to those accounts and remit the amounts to its home country's tax authority

To identify those accounts and report them to the IRS, directly or through its home tax authority under an intergovernmental agreement

A US withholding agent makes a withholdable payment to a non-financial foreign entity. What allows it to make the payment without thirty percent FATCA withholding?

The entity certifies that it has no substantial US owners, or gives the name, address and TIN of each, which the agent reports

The entity shows that it is not a financial institution, which by itself takes payments made to it outside FATCA withholding, whoever owns it

The entity certifies that it is organised in a country that has an income tax treaty in force with the United States

The entity certifies that the payment is not effectively connected with any trade or business that it carries on through an office in the US

A broker-dealer never obtained Form W-8BEN from a UK-resident client, although the client would qualify for the United States-United Kingdom treaty rate on dividends. Why can the firm not apply the treaty rate?

Because the treaty rate is obtained through a refund claim that the client files with the IRS after the year ends, not at source

Because the reduced rate requires documentation of the client's foreign status and treaty residence, which the firm does not hold

Because the treaty rate applies only where the client's home tax authority certifies her residence directly to the IRS

Because a treaty rate can be applied only once the client has held the account for at least one full calendar year

A payer sent an account holder a first B notice after a CP2100 notice that an account's name and taxpayer identification number do not match. In a later calendar year, within three calendar years of the first CP2100, a second CP2100 arrives for the same account. What must the payer receive before the problem is cured?

A sworn statement from the account holder, witnessed and notarised, confirming the number as correct

A newly signed Form W-9 from the account holder, the same cure that follows a first notice for an account

Validation of the account holder's name and number from the Social Security Administration or the IRS

Nothing, since a payer may disregard any second notice that arrives within three years of the first

A payer receives a CP2100 notice for an account. By when must it begin backup withholding, and by when must it stop once the account holder has cured the problem?

Begin within thirty calendar days of receiving the notice; stop within thirty calendar days of receiving the cure

Begin within thirty calendar days of receiving the notice; stop within thirty business days of receiving the cure

Begin within thirty business days of receiving the notice; stop within thirty business days of receiving the cure

Begin within thirty business days of receiving the notice; stop within thirty calendar days of receiving the cure

How does a broker-dealer acting as withholding agent for foreign account holders deposit the tax it withholds, and how does it report the payments each year?

It deposits through the Electronic Federal Tax Payment System on a schedule set by the amount withheld, and files Form 1042-S reporting each payment to each foreign holder

It deposits through the Electronic Federal Tax Payment System on a schedule set by the amount withheld, and files Form 1099 for each holder as for a United States account

It remits the whole year's withholding in a single payment with its own annual return, and files Form 1042-S reporting each payment to each foreign holder

It remits the whole year's withholding in a single payment with its own annual return, and files Form 1099 for each holder as for a United States account

A withholding agent cannot reliably associate an individual payee's dividend payments with any valid documentation, and no particular fact points to foreign status. How does it treat the payee?

As a foreign person, so the dividends are withheld on at the unreduced thirty percent nonresident rate

As a United States person, so the dividends fall under the domestic regime and its backup withholding

As a United States person, but with no withholding of any kind until the IRS confirms the payee's status

As exempt from both regimes until the payee supplies documentation establishing one status or the other

A withholding agent actually knows a payee's status, and that knowledge points to a different rate from the one the presumption rules would produce. When should the agent rely on its knowledge?

In either direction, since what the agent actually knows always overrides a presumption about status

Where relying on it results in less withholding than the presumptions require, but not to withhold more

Where relying on it results in more withholding than the presumptions require, but not to withhold less

In neither direction, since the presumption rules bind the agent whatever it actually knows of status

A brokerage account is owned jointly by two individuals. One gives the withholding agent Form W-8BEN and the other gives Form W-9. How must the agent treat payments to the account?

As undocumented until both owners give the same form, the presumption rules applying meanwhile

As made to a foreign beneficial owner, since one of the owners has documented foreign status

Half as foreign and half as domestic, in proportion to each owner's share of the account

As made to a United States person, the account being treated as a United States account

W-8 and W-9 Forms | Financial Regulation Courses

SERIES 65 | FINANCIAL REGULATION COURSES

The W-8 and W-9 forms are the two foundational IRS tax certification documents that broker-dealers, investment advisers, and other financial institutions collect from clients at account opening to determine the client's tax status — whether they are a United States person subject to domestic tax reporting and potential backup withholding, or a foreign person subject to the nonresident alien withholding regime — and to establish the correct withholding rate on investment income generated within the account.

Form W-9 — the Request for Taxpayer Identification Number and Certification — is completed by United States persons to certify their taxpayer identification number, confirm their status as a United States person, and claim exemption from backup withholding when applicable.

Form W-8 — a family of related certificates of foreign status, the most commonly encountered of which in the securities industry is Form W-8BEN — is completed by foreign persons to establish their status as non-United States persons, identify the applicable withholding rate on United States source income, and claim any reduced withholding rate available under an applicable income tax treaty between the United States and the foreign person's country of residence.

The W-8 and W-9 forms are directly tested on the Series 65 examination in the context of account opening procedures, tax withholding obligations, the PATRIOT Act customer identification programme, and the Know Your Customer framework applicable to investment advisers and broker-dealers.

The Fundamental Distinction — US Person Versus Foreign Person

The entire W-8 and W-9 framework rests on a single foundational distinction — whether the account holder is a United States person or a foreign person for federal income tax purposes — because this classification determines the entire tax reporting and withholding regime applicable to investment income generated in the account.

A United States person for federal income tax purposes includes United States citizens — regardless of where they reside in the world — resident aliens who meet the green card test or the substantial presence test — domestic corporations and partnerships, any estate other than a foreign estate, and any trust over whose administration a court within the United States can exercise primary supervision and whose substantial decisions one or more United States persons have the authority to control — and other persons who meet the definition of United States person under IRC Section 7701(a)(30).

A United States citizen living permanently in France remains a United States person for tax purposes and must complete a Form W-9 rather than a Form W-8 for any United States financial account.

A foreign person is any individual, corporation, partnership, trust, or estate that does not meet the definition of a United States person — nonresident alien individuals who do not meet the green card test or substantial presence test, foreign corporations organised under the laws of a country other than the United States, foreign partnerships, foreign trusts, and foreign estates.

A Canadian citizen living in Canada who opens a brokerage account at a United States broker-dealer is a foreign person who must complete a Form W-8BEN.

This classification is not always immediately apparent from the account holder's name or address — a person with a United States address may be a nonresident alien on a temporary visa, and a person with a foreign address may be a United States citizen.

The W-8 and W-9 certification process requires each account holder to affirmatively certify their tax status under penalties of perjury, creating legal accountability for accurate self-classification.

Resident Alien Status — The Green Card and Substantial Presence Tests

An individual who is not a United States citizen is a resident alien for a calendar year — and so completes Form W-9 rather than Form W-8BEN — if he or she meets either the green card test or the substantial presence test for that year. The green card test turns on legal status rather than on physical presence: an individual who was a lawful permanent resident of the United States at any time during the calendar year is a resident alien for that year, so that a green card holder who spends most of the year abroad does not thereby become a nonresident alien.

The substantial presence test turns on days of physical presence measured across three years. The individual must be physically present in the United States on at least thirty-one days during the current calendar year, and on at least one hundred and eighty-three days during the current year and the two preceding years — counting every day of presence in the current year, but only one third of the days of presence in the first preceding year and only one sixth of the days in the second preceding year. An individual present for one hundred and twenty days in each of three consecutive years therefore counts one hundred and twenty days, plus forty, plus twenty — one hundred and eighty in all — and does not meet the test for the third year, despite three hundred and sixty actual days of presence across the period.

In most cases the days an individual spends in the United States as a teacher, student or trainee on an F, J, M or Q visa are not counted toward the substantial presence test, an exception that applies for a limited period of time. A foreign student on an F visa may therefore live in the United States for most of the year and remain a nonresident alien who properly completes Form W-8BEN — the length of the stay alone does not decide the form.

Form W-9 — The US Person Certification

Form W-9 — titled Request for Taxpayer Identification Number and Certification — is the document that United States persons complete and provide to financial institutions to certify four things under penalties of perjury — that their taxpayer identification number is correct, that they are not subject to backup withholding, that they are a United States person, and that any FATCA exemption code they enter is correct.

The taxpayer identification number certified on Form W-9 is the Social Security number for an individual United States person — or, for a resident alien who does not have and is not eligible to get a Social Security number, the IRS individual taxpayer identification number — or the employer identification number for United States business entities — corporations, partnerships, and limited liability companies taxed as corporations or partnerships. The TIN is the foundational number connecting the account to the IRS reporting system — all Form 1099 information returns reporting investment income paid to the account are filed using this number, ensuring that the IRS can match income reported by the payer with income reported by the recipient on their individual or entity tax return.

The certification of United States person status on Form W-9 establishes that the domestic information reporting regime — Form 1099 reporting — applies to the account rather than the nonresident alien withholding regime. A broker-dealer that receives a completed Form W-9 from an account holder treats all investment income paid to that account as subject to Form 1099 reporting — reporting dividends on Form 1099-DIV, interest on Form 1099-INT, and proceeds from securities sales on Form 1099-B — but does not withhold tax on investment income paid unless backup withholding is required.

Backup withholding is triggered under IRC Section 3406 when an account holder has failed to furnish a TIN, when the IRS has notified the payer that the TIN furnished is incorrect, when the IRS has notified the payer that the account holder has underreported interest or dividend income, or when the account holder has failed to certify that they are not subject to backup withholding — the last two triggers applying only to interest and dividend payments. The current backup withholding rate is twenty-four percent of investment income — applied to dividends, interest, and certain other payments when backup withholding conditions are met. A Form W-9 that includes the account holder's correct TIN and the certification that they are not subject to backup withholding prevents backup withholding on that account unless the IRS later notifies the payer that the TIN is incorrect or that the account holder has underreported interest or dividend income.

The Form W-9 is not submitted to the IRS — it is retained by the financial institution as documentation supporting its tax reporting decisions. The financial institution uses the certified information to file Form 1099 information returns with the IRS and to furnish statements to the account holder early in the following year — by January 31 for most Forms 1099, and by February 15 for Form 1099-B and for statements furnished as part of a broker's consolidated reporting statement — for use in preparing their personal tax return.

The Awaiting-TIN Certificate

A United States person who has applied for a taxpayer identification number but has not yet received one is not left without a Form W-9. For interest and dividend payments and certain payments with respect to readily tradable instruments, the account holder may return a properly completed and signed Form W-9 with the words Applied For written in place of the number — an awaiting-TIN certificate — and then has sixty calendar days from the date the payer receives the certificate to provide the number. If the payer has not received the number by the end of that period, it must begin backup withholding.

The sixty days are not free of obligations for the payer. Under the reserve rule it must backup withhold on reportable payments made during the period if the account holder withdraws more than five hundred dollars at one time, unless the account holder reserves an amount equal to the current backup withholding rate on all reportable payments made to the account. Alternatively the payer may elect, after a seven-day grace period, either to backup withhold on reportable payments when the account holder makes a withdrawal after the close of seven business days following receipt of the certificate, or to backup withhold on all reportable payments made to the account, whether or not anything is withdrawn, beginning no later than seven business days after receipt.

The sixty-day relief reaches only interest, dividends and certain payments relating to readily tradable instruments. Any other reportable payment — nonemployee compensation, for example — is subject to backup withholding immediately, even while the payee has applied for and is awaiting a number, so that an awaiting-TIN certificate protects an investment account's interest and dividends but does not protect a fee paid to the same person for services.

Form W-8BEN — The Foreign Individual Certification

Form W-8BEN — Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting — is the most commonly encountered member of the W-8 family of forms in the retail brokerage context, completed by foreign individuals who are the beneficial owners of investment income paid by United States sources. Form W-8BEN establishes that the account holder is a foreign person subject to the nonresident alien withholding regime rather than the domestic Form 1099 reporting regime.

A foreign individual who completes Form W-8BEN certifies their foreign status — that they are not a United States citizen and not a resident alien — and provides their country of residence, their foreign taxpayer identification number if applicable, and their date of birth. The form also allows the foreign individual to claim treaty benefits — a reduced withholding rate on certain categories of income under an applicable income tax treaty between the United States and their country of residence.

Without a treaty claim, the standard withholding rate on United States source investment income paid to nonresident alien individuals is thirty percent. This thirty percent withholding rate applies to dividends paid by domestic corporations, interest income — except interest that qualifies for the portfolio interest exemption under IRC Section 871(h) for individuals and Section 881(c) for foreign corporations — royalties, and other fixed or determinable annual or periodical income from United States sources. The United States withholds thirty percent of each dividend payment and each interest payment at the source — the paying broker-dealer deducts thirty percent before crediting the net amount to the foreign account holder.

Many income tax treaties between the United States and foreign countries reduce the withholding rate on dividends and interest below the standard thirty percent for residents of the treaty country. For example the United States-United Kingdom income tax treaty reduces the withholding rate on ordinary dividends to fifteen percent and eliminates withholding on portfolio interest entirely for qualifying United Kingdom residents. The United States-Canada income tax treaty similarly reduces dividend withholding to fifteen percent and eliminates most interest withholding. A foreign individual who completes Form W-8BEN and claims a reduced treaty rate — certifying residence in the treaty country and, where the treaty conditions the reduction on more than residence, identifying the specific treaty article and paragraph authorising it — allows the broker-dealer to apply the reduced rate rather than the standard thirty percent.

Form W-8BEN generally remains in effect from the date it is signed until the last day of the third succeeding calendar year — a form signed in 2024 remains valid through December 31, 2027 unless a change in circumstances makes information on the form incorrect, such as, for an account holder claiming treaty benefits, a move out of the treaty country or to the United States.

Treaty Claims and Changes in Circumstances on Form W-8BEN

A treaty claim on Form W-8BEN identifies the country of which the beneficial owner claims to be a resident for income tax treaty purposes, and a person is a resident of a treaty country for this purpose only if he or she is a resident of that country under the terms of the treaty itself. A treaty claim generally requires a taxpayer identification number — either a United States number such as an individual taxpayer identification number, or a foreign tax identifying number issued by the claimant's jurisdiction of tax residence — but no individual taxpayer identification number is required to claim treaty benefits on dividends and interest from stocks and debt obligations that are actively traded, on dividends from a redeemable security issued by a registered investment company, or on income from loans of such securities.

If a change in circumstances makes any information on the form incorrect, the account holder must notify the withholding agent within thirty days and provide a new Form W-8BEN or other appropriate form. Which moves count depends on what the form is being used for. For an account holder who uses it only to certify foreign status, a change of address to an address in the United States is a change in circumstances, while a move within the same foreign country or to another foreign country generally is not; for an account holder who claims treaty benefits, a move to the United States or out of the country whose treaty is being claimed is a change in circumstances.

Becoming a United States person ends the form's role altogether. An account holder who becomes a United States citizen or resident alien after submitting Form W-8BEN — including by meeting the substantial presence test — is no longer subject to thirty percent withholding under section 1441, must notify the withholding agent within thirty days, and may be required to provide Form W-9 in its place.

The Portfolio Interest Exemption

Interest, including original issue discount, that qualifies as portfolio interest is exempt from the thirty percent chapter 3 withholding that would otherwise apply to United States source interest paid to a foreign person. For obligations issued after March 18, 2012, portfolio interest generally includes only interest on an obligation in registered form and the withholding agent must have received documentation that the beneficial owner of the obligation is not a United States person, which for a foreign individual is ordinarily Form W-8BEN.

The exemption is denied to insiders and to lenders in the ordinary sense. Interest paid to a foreign person that owns ten percent or more of the total combined voting power of all classes of stock of the issuing corporation — or ten percent or more of the capital or profits interest in an issuing partnership — is not portfolio interest. Nor, except in the case of interest on an obligation of the United States, is interest paid to a bank on an extension of credit made under a loan agreement entered into in the ordinary course of its banking business, and nor is interest paid to a controlled foreign corporation by a related person.

Qualifying under chapter 3 does not settle the position under chapter 4. Portfolio interest is not exempt from FATCA withholding when the interest is a withholdable payment, unless an exception from chapter 4 withholding applies — so a payment that escapes the nonresident tax as portfolio interest can still be withheld on at thirty percent where the payee is, for example, a nonparticipating foreign financial institution.

Sale Proceeds and Capital Gains of Foreign Account Holders

The thirty percent nonresident withholding regime is aimed at fixed or determinable annual or periodical income — dividends, interest, royalties and similar items — and not at gains. A withholding agent generally does not need to withhold under chapter 3 or chapter 4 on gain from the sale of real or personal property, because such gain is not fixed or determinable annual or periodical income; dispositions of United States real property interests are governed by a separate withholding regime. A foreign individual who sells shares of a United States corporation at a profit through a United States broker-dealer is therefore generally not withheld on at thirty percent on the sale, although the dividends those shares paid while held were subject to it.

The principal exception for individuals turns on presence. A nonresident alien individual who is present in the United States for a period or periods aggregating one hundred and eighty-three days or more during the taxable year is taxed at thirty percent on the amount by which his or her United States source gains from sales or exchanges of capital assets during that year exceed the United States source losses from such sales — a tax on the year's net gain, not on the gross proceeds of each sale.

Distributions from mutual funds are not all treated alike. Certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company are exempt from chapter 3 withholding, so that a distribution labelled a dividend on a foreign account holder's statement is not necessarily one on which the broker-dealer must withhold at the dividend rate.

The W-8 Form Family — Beyond W-8BEN

While Form W-8BEN is the most commonly encountered W-8 form in retail brokerage account opening, the IRS has developed a family of related W-8 forms for different categories of foreign persons and circumstances.

Form W-8BEN-E — Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting — is the entity equivalent of Form W-8BEN, completed by foreign corporations and other foreign entities that are the beneficial owners of United States source income — a foreign partnership is generally not the beneficial owner of income paid to it and documents itself instead on Form W-8IMY. The W-8BEN-E is substantially more complex than the individual W-8BEN — it requires the entity to identify both its entity classification under United States tax principles and its chapter four status under the Foreign Account Tax Compliance Act framework, and in many cases to provide additional certifications about its ownership structure and the nature of its income.

Form W-8ECI — Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States — is completed by foreign persons who receive income that is effectively connected with a United States trade or business. Income that is effectively connected with a United States trade or business is not subject to the thirty percent flat withholding rate but is instead taxed at the same graduated rates applicable to United States persons — making the ECI regime more analogous to the domestic tax system than the nonresident alien withholding regime.

Form W-8EXP — Certificate of Foreign Government or Other Foreign Organization — is completed by foreign governments, international organisations, foreign central banks of issue, and certain other foreign tax-exempt entities claiming exemption from United States withholding.

Form W-8IMY — Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain United States Branches — is completed by foreign financial institutions, foreign partnerships, and similar intermediaries who receive payments on behalf of other persons rather than as the beneficial owner. The W-8IMY is associated with withholding statements identifying the underlying beneficial owners and their applicable withholding rates.

FATCA and the Enhanced Foreign Account Reporting Obligation

The Foreign Account Tax Compliance Act — FATCA — enacted as part of the Hiring Incentives to Restore Employment Act of 2010 and applying under the statute to payments made after December 31, 2012, although Treasury regulations postponed the start of FATCA withholding to July 1, 2014 — added a comprehensive new layer of foreign account reporting requirements that significantly expanded the information collected on W-8 forms and created new obligations for foreign financial institutions holding accounts of United States persons.

FATCA requires foreign financial institutions — banks, broker-dealers, investment funds, and other financial institutions outside the United States — to identify accounts held by United States persons and report those accounts to the IRS either directly or through the tax authority of their home country under an intergovernmental agreement. Foreign financial institutions that fail to comply with FATCA are subject to a thirty percent withholding tax on certain United States source payments — a punishing rate designed to create a strong incentive for compliance with the reporting regime.

The current versions of the W-8 forms incorporate FATCA compliance certifications — foreign entities completing Form W-8BEN-E must identify their chapter four status under FATCA including their Global Intermediary Identification Number if they are a participating foreign financial institution. The FATCA framework has made the W-8 form completion process substantially more complex for institutional foreign account holders than the simpler individual W-8BEN completed by retail foreign investors.

For United States financial institutions including broker-dealers, FATCA requires due diligence procedures to identify whether account holders are United States persons — a United States withholding agent making a withholdable payment to a non-financial foreign entity must withhold thirty percent unless the entity certifies that it has no substantial United States owners or provides the name, address and TIN of each one, which the withholding agent then reports to the IRS.

The Account Opening Context — How W-8 and W-9 Fit the Regulatory Framework

The collection of W-8 or W-9 forms at account opening is one component of the comprehensive account opening regulatory framework that also includes the PATRIOT Act customer identification programme requirements and the Know Your Customer obligation of FINRA Rule 2090 and the customer account information requirements of FINRA Rule 4512 and the Investment Advisers Act fiduciary framework.

The CIP requirements of the PATRIOT Act — discussed in the USA PATRIOT Act entry of this dictionary — require a broker-dealer to obtain the customer's name, date of birth for an individual, address, and identification number before opening the account, and to verify the customer's identity within a reasonable time before or after the account is opened. The taxpayer identification number collected under the CIP is the same number that appears on the W-9 for United States persons — for a non-United States person, the CIP accepts one or more of a taxpayer identification number, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of another government-issued photo identification document — any of which may differ from the foreign taxpayer identification number appearing on the W-8BEN.

The Form W-9 certification of the taxpayer identification number under penalties of perjury provides the financial institution with a legal basis for relying on the account holder's self-certification of their TIN without independently verifying it through IRS records. If the Form W-9 TIN proves incorrect — because the account holder certified an incorrect number — the IRS will notify the financial institution through a CP2100 or CP2100A notice, the institution must send the account holder a B notice, and backup withholding must begin unless the account holder returns a newly certified Form W-9 — or, after a second such IRS notice within three calendar years, a validation of the number from the Social Security Administration or the IRS.

The Form W-8 certification establishes the account holder's foreign status and applicable withholding rate — allowing the financial institution to apply the correct withholding treatment to investment income without waiting for IRS guidance on each individual payment. Financial institutions that fail to obtain completed W-8 forms from foreign account holders cannot apply a treaty-reduced rate or the portfolio interest exemption, both of which require documentation, and must withhold at the unreduced rate that the presumption rules dictate, generally thirty percent for a payee treated as foreign — a rate that may significantly exceed the treaty-reduced rate the foreign account holder is entitled to claim.

B Notices — The First and the Second

When the IRS finds that information returns a payer has filed show a missing or incorrect name and taxpayer identification number combination, it sends the payer a CP2100 or CP2100A notice listing the accounts concerned. The payer then has fifteen business days from the date of the notice, or from the date it received the notice if later, to send the account holder a B notice. After the first CP2100 or CP2100A notice for an account, the payer sends the First B Notice together with a Form W-9, and the account holder cures the problem by returning a newly signed Form W-9.

If a second CP2100 or CP2100A notice for the same account arrives within three calendar years, the payer sends the Second B Notice instead, and encloses no Form W-9 — because a further self-certification is no longer enough. The Second B Notice tells the account holder to contact the Social Security Administration or the IRS, and the payer must receive validation of the account holder's name and number from one of them. Generally a payer does not have to send a B notice more than twice within three calendar years to the same account, and it may disregard a second CP2100 or CP2100A notice received in the same calendar year as the first.

Either way the clock runs from the payer's receipt of the IRS notice. The payer must begin backup withholding on all reportable payments to the account holder no later than thirty business days after it receives the CP2100 or CP2100A notice, and must stop within thirty calendar days after it receives the required certification on Form W-9 — or, following a second notice, the validation from the Social Security Administration or the IRS. At its option the payer may start and stop backup withholding at any time within those thirty-day periods.

The Broker-Dealer's Withholding Agent Obligation

A broker-dealer that pays United States source investment income to account holders — dividends on securities held in custody, interest on bonds, and proceeds subject to withholding — is classified as a withholding agent under the Internal Revenue Code, responsible for deducting and remitting the appropriate amount of withholding tax to the IRS on behalf of foreign account holders.

The withholding agent obligation is one of the most significant tax compliance responsibilities of any broker-dealer maintaining custodial accounts. The broker-dealer must determine the correct withholding rate for each payment based on the W-8 documentation in the account — applying thirty percent to a foreign payee without a valid treaty claim on valid W-8 documentation, and the applicable treaty rate for accounts with valid treaty certifications. The withheld amounts must be deposited with the IRS through the Electronic Federal Tax Payment System on a schedule determined by the total amount of tax withheld, and annual information returns on Form 1042-S must be filed reporting each payment to each foreign account holder and the withholding applied.

Errors in withholding — under-withholding particularly — expose the broker-dealer to personal liability for the under-withheld amounts plus interest and penalties, creating powerful incentives for careful documentation collection and withholding rate determination. An investment adviser who also has withholding agent status for client accounts must have adequate procedures for collecting and maintaining W-8 and W-9 documentation and for applying the correct withholding treatment to each payment.

When Documentation Is Missing — The Presumption Rules and Joint Accounts

A withholding agent that cannot reliably associate a payment with valid documentation does not choose a rate at its own discretion; it applies presumption rules that fix the payee's status, and a withholding agent that complies with them is not liable for tax, interest and penalties even where the rate that should have applied on the payee's actual status is different. The starting presumption is that a payment the withholding agent cannot reliably associate with documentation is made to a United States person — so that an undocumented individual's dividends and interest generally fall under the domestic regime and its backup withholding rather than under nonresident withholding. Particular facts displace that presumption for particular payees; a payment made outside the United States with respect to an offshore obligation, for example, is presumed made to a foreign payee unless the withholding agent actually knows that the payee is a United States person.

Actual knowledge works in one direction only. A withholding agent that relies on its own knowledge of a payee's status to withhold less than the presumption rules require may be liable for tax, interest and penalties, but it should rely on that knowledge where doing so results in withholding more than the presumptions would produce.

An account owned jointly is treated as owned by a foreign beneficial owner only if every owner provides Form W-8BEN or Form W-8BEN-E. If the withholding agent receives Form W-9 from any one of the joint owners, the payment must be treated as made to a United States person and the account treated as a United States account; and where no joint owner has provided documentation and all appear to be individuals, the payment is presumed made to an unidentified United States person and backup withholding applies.

Examination Relevance and Key Takeaways

The W-8 and W-9 forms are tested on the Series 65 examination in the context of account opening procedures, tax withholding, the distinction between United States persons and foreign persons, and the broker-dealer's withholding agent obligations.

The key points to retain are these.

Form W-9 — Request for Taxpayer Identification Number and Certification — is completed by United States persons — citizens and resident aliens — to certify their Social Security number, individual taxpayer identification number or employer identification number, confirm their United States person status, and claim exemption from backup withholding. The W-9 establishes the domestic Form 1099 reporting regime — the financial institution reports investment income to the IRS and the account holder on Form 1099 without withholding tax unless backup withholding at twenty-four percent applies due to missing or incorrect TIN or IRS notification.

Form W-8BEN — Certificate of Foreign Status of Beneficial Owner — is completed by foreign individuals to establish their nonresident alien status and claim any applicable treaty-reduced withholding rate. Without a treaty claim the standard withholding rate on United States source investment income paid to foreign persons is thirty percent — applied to dividends, interest, royalties, and other fixed or determinable periodical income from United States sources at the source before the net amount is credited to the foreign account holder. Treaty claims on Form W-8BEN reduce the withholding rate — commonly to fifteen percent for dividends and zero percent for portfolio interest for residents of treaty countries such as the United Kingdom and Canada. Form W-8BEN generally remains in effect until the last day of the third calendar year after the year in which it is signed.

The W-8 form family includes W-8BEN for foreign individuals, W-8BEN-E for foreign entities, W-8ECI for income effectively connected with a United States trade or business, W-8EXP for foreign governments and exempt organisations, and W-8IMY for foreign intermediaries. FATCA — enacted 2010, with withholding starting on July 1, 2014 — added comprehensive foreign account reporting requirements to the W-8 framework requiring foreign financial institutions to identify and report United States person accounts or face thirty percent FATCA withholding. The broker-dealer's withholding agent obligation requires correct W-8 documentation collection to determine the applicable withholding rate — a foreign account holder without valid W-8 documentation cannot receive a treaty-reduced rate — and annual Form 1042-S information returns reporting each payment to each foreign account holder.