If you are a non-US SMB that is selling services to US entities, these US entities will most likely ask you to fill out a W8 form.
If you have not heard about the W8 form yet, you may be surprised as you receive a laconic email from your clients (“Could you please send us the W8 form?”) with an 8-page document attached. No explanation.
Do not panic!
You need to know that US entities are not supposed to pay you any invoice before you send them the W8 form correctly filled and signed, so this is serious business: don’t skip the form. Do not panic either: we provide you with all the information you need in this article to fill out the W8 form and to understand its purpose.
Understanding why you need to fill out a W8 form: introduction to the withholding tax principles
Filling out the W8 form: sections that are relevant to your company and information to provide
Assessing whether you are eligible to pay the withholding tax or not: 2 conditions must be met
Anticipating next steps: tax rates (if applicable) and withholding process
1. Why do I need to fill out a W8 form?
In 2010, the US administration passed laws (Foreign Account Tax Compliance Act) to control transactions between foreign entities and US entities.
The primary purpose of such laws was to track transactions between financial institutions and to crack down on suspicious arrangements (in the fields of finance, insurance, government, investment, etc.). W8 forms have been created to rigorously document such transactions.
The Foreign Account Tax Compliance Act’s scope has progressively extended to non-US companies that sell “services” (see paragraph 4 below for a detailed list of eligible transactions) to US entities. The US tax administration indeed considers that a foreign entity selling services to a US entity may be using US infrastructures to make profit. In that sense, the foreign entity should pay a “withholding tax” when specific conditions are met.
Tracking all foreign entities and all transactions would be a Herculean task for the US administration, so US officials have decided to delegate the process.
US entities are entirely responsible for assessing whether the withholding tax applies to their transactions with foreign entities, and if so, for collecting this tax.
That’s why US companies ask non-US companies that sell them services to fill out a W8 form. They need information to determine whether transactions are eligible to the withholding tax or not, they must share this information with the tax administration, and they must collect the tax if transactions are eligible.
2. How do I fill out the W8 form?
As a non-US company earning income from a US entity, you must fill out the W-8BEN-E form. The US entity is responsible for sending you that form.
At first sight, this form is dense and very difficult to understand. Do not panic! As a foreign SMB doing business with the USA, there are only a few fields to complete on the document:
Page 1 – Part I: Identification of Beneficial Owner
- Fill in #1 (company’s name) and #2 (HQ’s country)
- Fill in #3: check the “corporation” box
- Fill in #4: check the “active NFFE” box (on the right column of the list), “NFFE” standing for “Non-Financial Foreign Entity”. 99% of the companies we help fall into this category.
To understand why you should check this box or to double-check whether you fall into this category or not, we invite you to read the section Step 3b of Chris Clifton’s excellent article on the W-8BEN-E form. Other boxes may be checked in specific situations (e.g. holding or publicly traded company).
- Fill in #6 and #7 with relevant address information
- Fill in #8 if you already have a US taxpayer identification number.
Page 7 – Part XXV: Active NFFE
- Just check the box (“I certify that […]”).
Page 8 – Part XXX: Certification
- Add the authorized signer’s signature, his / her name, and the date.
- Then check the box (“I certify that I have the capacity […]”).
3. How often do I have to fill out the W8 form?
It is likely that each US entity you are doing business with will ask you to submit a W8 form, but you will send the same W8 form to each US entity.
The form is valid for 3 years (= it will remain in effect from the date that the form was signed until the last day of the third succeeding year unless a change in your circumstances makes any information on the form incorrect). If any information changes, you will have to send an updated W8 form.
Please note that many American SMBs have only recently realized that they must submit this form to the IRS, since little effort has been made to educate them on the topic in the past. You may have done business with US companies without ever hearing about the form, but be prepared: more and more US entities, if not all of them, will send you a W8 form to complete in the future.
4. Am I eligible to pay the withholding tax?
As explained, the US entity you are doing business with is entirely responsible for assessing whether you are eligible to pay the withholding tax or not. The US entity will use its own CPA (Certified Public Accountant) to define your status.
Basically, you just have 2 things to do when you receive the W8 form: filling it out correctly and submitting any evidence of a tax treaty between your home country and the USA if such a treaty exists.
However, you may want to get an idea of your eligibility status ahead of time to avoid surprises. 2 conditions must be met at the same time to be eligible to pay the withholding tax:
CONDITION 1:
As a non-US company, you receive any of the following type of revenue from US entities:
- Compensation for, or in expectation of, services performed
- Interest – this includes certain original issue discount (OID)
- Dividends
- Rental income
- Royalties
- Premiums
- Annuities
- Substitute payments in a securities lending transaction
- Other fixed or determinable annual or periodical gains – or FDAP income- profits, or income.
CONDITION 2:
Your company is using US infrastructures to operate such transactions.
Using US infrastructures means that your company has physical presence in the USA: you may for instance deliver setup and maintenance services at your US client’s premises, or you may rent out some facilities you own in the USA to a US entity.
See section 6 below for examples.
5. What happens if I must pay the withholding tax?
If your company meets the 2 conditions mentioned above, you must pay the withholding tax.
Withholding tax rates:
If you have not submitted the W8 form, there is a flat rate = 30% of the gross income you earn from transactions with the US entity. If the US entity asked you to fill out the W8 form and you sent it back, the rate will vary depending on international tax treaties:
Process:
- Your non-US company sends an invoice to the US entity.
- The US entity asks you to fill out a W8 form.
- You complete the form and send it back to the US entity.
- The US entity determines whether you must pay the withholding tax or not:
- If you are not eligible, you are done with the process. The US entity will pay you the amount of the invoice you sent and will simply report the information to the IRS.
- If you are eligible, the US entity will pay you the amount of the invoice you sent minus the amount of the withholding tax. The tax must indeed be withheld at the source. The US entity will then report the information to the IRS.
6. Examples
Example 1:
You are a software developer located in Europe and you deliver an online platform to a US entity.
Since you perform a service for a US client, you must fill out the W8 form. However, since you perform such a service remotely, you are not eligible to pay the withholding tax.
Example 2:
You sell marketing services to a US entity, and you need someone (non-US employees or US contractors) to go to your US client’s site to deliver hardware (e.g. beacons) or to assist your client in setting up or customizing your software.
You must fill out a W8 form and you may also be eligible to pay the withholding tax since your company has physical presence in the USA. If there is no income tax treaty between your HQ’s country and the USA, your US client will pay you the amount of the invoice you send minus 30% of this amount. If an income tax treaty exists, your US client will still collect the tax, but at a reduced rate.
Can I bypass the withholding tax?
You may think of creating a US entity for tax optimization purposes… Be careful, because in some situations, you may get rid of the withholding tax burden as you create a US entity, but you will find yourself having to pay a significant amount of sales tax instead!
To learn more about the US sales tax, please refer to Sales Tax in the USA: Eligibility, Calculation, and Exemptions. A calibrated CPA firm can help you build accurate sales tax estimates if you decide to create a US entity and to sell through this US entity.
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