[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Proposed Rules]
[Pages 17614-17667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8936]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517, 
520, and 521

[INTL-O62-90; INTL-0032-93; INTL-52-86; INTL-52-94]
RINS 1545-AO27; 1545-AR90; 1545-AL99; 1545-AT00


General Revision of Regulations Relating to Withholding of Tax on 
Certain U.S. Source Income Paid to Foreign Persons and Related 
Collection, Refunds, and Credits; Revision of Information Reporting and 
Backup Withholding Regulations; and Removal of Regulations Under Part 
35a and of Certain Regulations Under Income Tax Treaties

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and withdrawal of notice of 
proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
withholding of income tax under sections 1441 and 1442 on certain U.S. 
source income paid to foreign persons, the related tax deposit and 
reporting requirements under section 1461, and the related collection, 
refunds, and credits of withheld tax under sections 1461 through 1463 
and section 6402. Additionally, this document contains proposed 
regulations relating to the statutory exemption under sections 871(h) 
and 881(c) for portfolio interest. This document proposes to remove 
certain temporary employment tax regulations under the Interest and 
Dividend Compliance Act of 1983 and to amend existing regulations under 
sections 6041A and 6050N. This document also proposes changes to 
proposed regulations contained in project number INTL-52-86, published 
on February 29, 1988 (53 FR 5991) under sections 6041, 6042, 6045, and 
6049. This document proposes related changes to the regulations under 
sections 163(f), 165(j), 3401, 3406, 6114, and 6413 and proposes 
further changes to the proposed regulations under section 6109 
contained in project number IL-0024-94 published on June 8, 1995 (60 FR 
30211). This document proposes to remove certain regulations under 
income tax treaties. The IRS and Treasury have reviewed current 
withholding and reporting procedures applicable to cross-border flows 
of income and have concluded that changes are necessary in view of the 
substantial growth in such flows over

[[Page 17615]]

the past 15 years. This document also removes proposed regulations 
published on July 12, 1976 (41 FR 28517) and September 10, 1984 (49 FR 
355110), respectively.

DATES: Written comments and requests for a public hearing must be 
received by July 22, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R ([INTL-0032-93]), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R 
([INTL-0032-93]), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Philip Garlett, telephone (202) 622-
3880 (not a toll-free number), for questions on proposed regulations 
under sections 1441, 1442, 1461, 1462, 1463, 3401, 6402, and 6413; 
Gwendolyn A. Stanley, telephone (202) 622-3860 (not a toll-free number) 
for questions on payments to partnerships; Carl Cooper, telephone (202) 
622-3840 (not a toll-free number) for questions on proposed regulations 
under sections 163(f), 165(j), 871(h) and 881(c) and on withholding 
agreements; Teresa Burridge Hughes, telephone (202) 622-3880 (not a 
toll-free number), for questions on proposed regulations under sections 
6041 through 6049, 6050N; Teresa Burridge Hughes, telephone (202) 622-
3880 and Renay France, telephone (202) 622-4910, for questions on 
proposed regulations under section 3406; Elissa Shendalman (202) 622-
3870 on proposed regulations under section 6045 and 6049 relating to 
the reporting of payments made in a currency other than the U.S. dollar 
or transactions subject to section 988; Lilo Hester, telephone (202) 
874-1490 (not a toll-free number), for questions on proposed 
regulations under section 6109; David F. Bergkuist, telephone (202) 
622-3860 (not a toll-free number), for questions on proposed 
regulations under section 6114.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507).
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collections of information should be received by June 
21, 1996.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The collections of information relating to foreign persons that 
receive payments subject to withholding under sections 1441 or 1442 of 
the Internal Revenue Code are in Secs. 1.1441-1(e), 1.1441-4(a)(2), 
1.1441-4(b) (1) and (2), 1.1441-4(c), (d) and (e), 1.1441-5(a)(2)(ii), 
1.1441-5(b), 1.1441-6(b) and (c), 1.1441-8(b), 1.1441-9(b), 1.1461-1(b) 
and (c), 301.6114-1, and 301.6402-3(e), 31.3401(a)(6)-1(e). This 
information is required by the IRS to identify and verify the status of 
persons to whom payments of U.S. source income is made. This 
information will be used to claim foreign person status and, in 
appropriate cases, to claim residence in a country with which the 
United States has an income tax treaty in effect, so that withholding 
at a reduced rate of tax may be obtained at source. The likely 
respondents and recordkeepers are individuals, state or local 
governments, farms, business or other for-profit institutions, federal 
agencies, nonprofit institutions, and small business or organizations. 
Responses to this collection of information are mandatory.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    The burden for the reporting requirement contained in Secs. 1.1441-
1(e)(2), 1.1441-4(a)(2), 1.1441-4(b)(2), 1.1441-4(c)(2), 1.1441-4(d), 
1.1441-4(e)(1), (2) and (3), 1.1441-6(b), 1.1441-8(b), 1.1441-9(a)(2), 
301.6114-1(b)(4), and 301.6402-3(e) will be reflected in the burden of 
Form W-8, Form 8833, Form 8233, and the income tax return of a foreign 
person filed for purposes of claiming a refund of tax.
    The collection of information requirement for corporations 
contained in Sec. 1.6049-4(c) will be reflected in the burden of Form 
W-8.
    The requirement for the recordkeeping requirement in Sec. 1.6049-
5(c)(1) (ii) and (iii) is in an existing regulation, appearing in TD 
7966 that was approved under OMB number 1545-0112.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f), 
165(j), 871, 881, 1441, 1442, 1461, 1462, 1463, 3401, 3406, 6041, 
6041A, 6042, 6045, 6049, 6050N, 6109, 6114, 6402, and 6413 of the 
Internal Revenue Code (Code). This document also proposes to remove 
certain regulations under income tax treaties.

Explanation of Provisions

A. Current Rules

    These proposed regulations deal with the withholding of tax under 
section 1441, 1442, or 1443 on amounts paid to foreign persons, 
procedures for claiming foreign status to avoid backup withholding 
under section 3406 on certain payments, and the reporting to the IRS of 
payments to foreign persons. Reporting to the IRS may be required under 
sections 6011 and 1461 or under the reporting provisions of chapter 61 
of the Code, such as sections 6041, 6041A, 6042, 6044, 6045, 6049, 
6050H, and 6050N, (the 1099 reporting provisions).
1. U.S. Income Tax on U.S. Source Income of Foreign Persons
    Under sections 871(a) and 881(a) of the Code, non-resident alien 
individuals and foreign corporations are subject to a 30 percent tax on 
most items of income they receive from sources within the United States 
that are not effectively connected with the conduct of a trade or 
business in the United States. Income taxable under these provisions 
includes interest, dividends, royalties, compensation, and other fixed 
or determinable annual or periodical income. The tax liability imposed 
under section 871(a) and 881(a) is generally collected by way of 
withholding at source under section 1441(a) (for payments to non-
resident alien individuals and foreign partnerships) or under section 
1442(a) (for payments to foreign corporations). Special withholding 
provisions apply under section 1443 to payments of certain income to 
foreign tax-exempt entities.
    The 30 percent rate is often reduced under the Code or an income 
tax treaty. Under current regulations, a withholding agent may 
generally rely on a statement furnished by, or on behalf of, the 
beneficial owner certifying entitlement to a reduced rate. For example, 
the portfolio interest exception under section 871(h) and 881(c) is 
conditioned upon the beneficial owner

[[Page 17616]]

of the interest providing a statement of foreign status to the U.S. 
withholding agent, which can be provided on a Form W-8. See 
Sec. 35a.9999-5(b), A-9. If a reduction is claimed under an income tax 
treaty, the withholding agent may generally rely on a Form 1001 
provided by, or on behalf of, the beneficial owner claiming residence 
in a treaty country. For dividends, however, no certification is 
required and the withholding agent may generally rely on the address of 
the payee in the treaty country. The procedural requirements for 
claiming a reduced rate of withholding may vary depending upon the type 
of income, the taxpayer, or whether a treaty is involved.
    A withholding agent is generally required to file an annual income 
tax return on Form 1042 to report amounts upon which a tax was actually 
withheld under chapter 3 of the Code or would have been required to be 
withheld but for an exemption under the Code, the regulations, or an 
income tax treaty. An information return on a Form 1042-S must be 
attached to the Form 1042 and report each recipient's name and address, 
amounts paid, and taxes withheld, if any. Section 1.1461-2(b) and (c).
2. Backup Withholding
    Under chapter 61 of the Code and section 3406, a reportable 
payment, as defined in section 3406(b), is subject to backup 
withholding at the rate of 31 percent unless the payor receives a 
taxpayer identifying number (TIN), generally on a Form W-9, and, for 
reportable interest and dividends, a certification that the payee is 
not subject to notified payee underreporting. The payor of a reportable 
payment is also generally required to file Form 1099 with the IRS 
showing the name, address, and TIN of the payee; the amount of the 
payment; and the amount that was withheld, if any. The payor must also 
provide a copy of Form 1099 to the payee, who must report the payment 
on an income tax return to the extent the payment constitutes gross 
income. A payor that fails to obtain a TIN or other required 
information or to backup withhold when required under section 3406 may 
also be liable under section 3403 for the amount that should have been 
withheld. Information reporting by payors is critical to a matching 
system that allows the IRS to match information provided by payors with 
income reported on a payee's return.
    The information reporting provisions of chapter 61 provide guidance 
to help payors determine when payments are made to a foreign person 
and, therefore, exempt from 1099 reporting and backup withholding. 
Generally, depending upon the type of payment involved, a payor may 
rely on a certification of foreign status made on Form W-8, Form 1001, 
Form 4224, or on documentary evidence. Therefore, even though an amount 
is exempt from withholding under chapter 3 of the Code if earned by a 
foreign person (e.g., gain from the sale of securities), a payor must 
nevertheless comply with specified certification procedures in order to 
avoid being subject to backup withholding. Only amounts subject to 
reporting under the 1099 reporting provisions can be subject to backup 
withholding under section 3406. Therefore, payments to foreign persons 
that are exempt from reporting are also exempt from backup withholding.

B. Need for Reform

    The IRS and Treasury have reviewed the current withholding and 
reporting procedures applicable to cross-border flows of income and 
have concluded that changes are necessary in view of the substantial 
growth in such flows over the past 15 years. The IRS and Treasury have 
concluded that allowing the benefit of the reduced rate at source 
continues to be desirable. A system that reduces withholding at source 
permits an investor to receive its full income without the 
administrative costs and delays that can occur when applying for a 
refund of withheld taxes. This advantage, however, is necessarily 
accompanied by the need to rely, in part, on withholding agents. 
Withholding agents perform an important compliance function as 
recipients of the necessary documentation substantiating claims of 
foreign status and of reduced rates of withholding and as providers of 
information to the IRS.
    One of the important objectives of the proposed revisions is to 
eliminate unnecessary burdens that the lack of standardization and 
coordination of current procedures imposes on withholding agents. For 
example, under current rules, different forms must be used for 
different purposes; different standards of proof apply for establishing 
foreign status for purposes of the 1099 reporting provisions (and the 
related backup withholding provisions) and of the Chapter 3 withholding 
provisions. Also, the revisions seek to facilitate compliance by 
clarifying many of the uncertainties under current procedures (e.g., 
the scope of due diligence standards imposed on withholding agents). 
This proposal also addresses the important issue of payments to 
intermediaries (nominees, agents, etc.) and whether, in the case of 
interest, dividends, and gross proceeds from publicly traded or widely 
held obligations or stocks, intermediaries should certify status on 
behalf of beneficial owners and, if so, how.
    Under current rules, nominee procedures work differently for 
different types of income. For example, a U.S. broker redeeming a 
short-term obligation held by a foreign financial institution as an 
agent may exempt the payment from 1099 reporting and backup withholding 
and grant the exemption from the 30 percent tax under section 871(a) 
without having to obtain certificates or documentation. If the foreign 
financial institution makes a payment to another person offshore then 
no certification or documentation is required. On the other hand if, 
for example, the foreign financial institution, remitted the amount to 
a person in the United States through a U.S. office, it might have to 
obtain a Form W-8 or a Form W-9. In contrast, interest on registered 
obligations may not qualify as portfolio interest under sections 871(h) 
and 881(c) unless the U.S. withholding agent receives a statement that 
the beneficial owner of the obligation is not a U.S. person (see 
section 871(h)(2)(B)(ii)). Current regulations implement this condition 
by requiring that a beneficial owner certification be passed up through 
a chain of intermediaries to the U.S. withholding agent. These 
procedures have proved difficult to implement in a number of cases and 
these proposed regulations offer alternative procedures. The proposed 
revisions, therefore, respond to the concerns expressed by various 
representatives of the financial community regarding the cost of 
complying with current procedures and potential harm to the 
competitiveness of U.S. financial institutions in handling investment 
transactions in the United States and abroad.
    These proposed regulations are also responsive to the Congressional 
mandate in section 342 of the Tax Equity and Fiscal Responsibility Act 
of 1982 (TEFRA) that Treasury consider a range of options for replacing 
the address/self-certification method of administering income tax 
treaty benefits. Since 1982, the IRS and Treasury have studied several 
options for improving the withholding tax procedures, including a 
system of certification of residence in a treaty country and refund 
systems. At hearings held in February of 1985 on proposed regulations 
issued in 1984 under section 1441, comments from the public and several 
U.S. treaty partners made it apparent that certification requirements,

[[Page 17617]]

as proposed, would create too many administrative problems for payments 
made through nominees. The proposed revisions take these comments into 
account and propose to rely on procedures essentially identical to the 
procedures proposed for portfolio interest on registered obligations.
    The streamlining of current procedures and the implementation of 
workable nominee certification procedures represent a substantial 
simplification and reduction of burden. The IRS and Treasury expect 
that this, in turn, should result in greater compliance and improve the 
ability by withholding agents and the IRS to detect abusive claims 
under U.S. income tax treaties or under the Code.

C. Summary of Proposal

1. Changes Affecting Portfolio-Type Investments
    The proposed regulations under section 1441 and related Code 
provisions would substantially revise some aspects of the current 
system for withholding on, and reporting of, amounts paid to foreign 
persons. Current certification procedures (i.e., Forms W-8, 1001, 4224, 
etc.,) would be unified and reliance standards would be clarified in an 
effort to streamline the processing of cross-border payments, 
particularly by banks and other financial institutions. Most forms (W-
8, 1001, 4224, 8709) are proposed to be combined into a single form 
(Form W-8). In addition, taxpayer identifying numbers are not required 
to be stated on withholding certificates, with certain limited 
exceptions that do not affect market-based transactions. These changes 
are important steps toward reducing the burden on withholding agents 
and assisting taxpayer compliance.
    The address rule for claiming tax treaty benefits for dividends is 
proposed to be eliminated. Instead, dividends would be made subject to 
the same beneficial owner and intermediary certification procedures as 
are proposed for portfolio interest on registered obligations. It is 
also proposed to apply the same procedures to bank deposit interest (as 
described in section 871(i)(2)(A)). On the other hand, the documentary 
evidence procedures currently in effect for bank deposit interest on 
accounts held with foreign branches would be continued and would be 
applied as well to offshore payments of dividends on publicly traded 
stocks and portfolio interest on registered obligations. Therefore, 
documentary evidence would become the general rule for dividends and 
interest earned on accounts held with foreign branches. These proposed 
changes illustrate the effort by the IRS and Treasury to eliminate 
unnecessary procedural differences in order to reduce the burden on 
withholding agents.
    The proposal does not generally affect other important classes of 
investment transactions. Thus, current portfolio interest rules for 
bearer obligations (including commercial paper), convertible 
obligations, pass-through certificates, as well as rules for broker 
proceeds and short term obligations would be retained. In order to 
further simplify compliance, the regulations under section 165(j) 
(Sec. 1.165-12) are proposed to be revised to eliminate the 
requirements that, in connection with delivery of bearer obligations, 
holders receive statements and send confirmations. Provisions regarding 
foreign-targeted registered obligations are to be retained. However, 
because these special procedures have been rarely used, comments are 
solicited on their usefulness and whether they should be retained.
    Foreign intermediary procedures as currently applicable to 
portfolio interest (which are proposed to become applicable to 
dividends and bank deposit interest as well) are substantially revised 
by providing several options, allowing different taxpayers to comply in 
different ways. These options recognize that it is appropriate to adapt 
withholding requirements to accommodate different types of transactions 
and should provide substantial relief from current requirements.
    In order to allow sufficient time for transition, the regulations 
are proposed to be generally effective for payments made after 1997. In 
addition, withholding agents would be allowed to continue to rely on 
existing certificates after that date until their validity expires as 
determined under current rules. Comments are solicited on whether these 
proposed effective dates leave adequate time to implement necessary 
system changes.
    The regulations proposed in 1988 regarding the reporting by U.S. 
banks of bank deposit interest paid to Canadian residents are 
finalized, effective for payments made on or after January 1, 1997 with 
respect to Forms W-8 furnished on or after that date. See the Rules and 
Regulations section of this issue of the Federal Register.
2. Intermediary Procedures Options for Portfolio Interest, Dividends on 
Publicly Traded Stock, and Bank Deposit Interest
    The proposed regulations offer intermediary certification options 
designed to simplify compliance by withholding agents. These procedures 
would be mostly relevant to portfolio interest on registered 
obligations, dividends on publicly traded stocks (eliminating the 
address rule), and interest paid on bank deposits (as described in 
section 871(i)(2)(A)). First, for portfolio interest on registered 
obligations, the current certification procedures would be retained, as 
an option and are not reproposed. See Sec. 35a.9999-5(b), A-9. These 
rules will be included in final regulations in proposed Sec. 1.871-
14(c)(2)(iii) and, accordingly, that section of the proposed 
regulations is reserved. Preserving the existing regulations is 
designed to accommodate those taxpayers and withholding agents for whom 
the current rules work appropriately.
    The regulations propose to add two new procedures. First, a 
withholding agent would be allowed to rely on an intermediary Form W-8 
furnished on behalf of one or more beneficial owners (or other 
intermediaries) without having to obtain beneficial owner documentation 
if the intermediary has entered into a withholding agreement with the 
IRS and, thus, is a ``qualified intermediary.'' In a chain of 
intermediaries, an intermediary would be allowed to rely on the 
intermediary Form W-8 of another qualified intermediary. If the other 
intermediary is not qualified, the qualified intermediary would 
generally be required to obtain beneficial owner documentation from the 
other non-qualified intermediary. The qualified intermediary would then 
pass such documentation up the chain or rely on such documentation when 
issuing its intermediary Form W-8.
    Under the withholding agreement procedure, a qualified intermediary 
would agree with the IRS to obtain such documentation or certifications 
as the agreement would specify. It is contemplated that institutions 
that are subject to bona fide ``know-your-customer'' procedures under 
their domestic laws will generally be permitted to rely on such 
procedures. The withholding agreement will generally include provisions 
for beneficial owner information to be reported or made available to 
the IRS and for the IRS to audit such information. In appropriate 
cases, the reporting and audit may be limited to

[[Page 17618]]

the beneficial ownership information pertaining to U.S. source income 
(other than gross proceeds) of U.S. customers or to an audit of the 
reports prepared by, and the methodology employed by, the approved 
external auditors of the qualified intermediary.
    The regulations propose a second intermediary procedure permitting 
a foreign agent of a U.S. withholding agent to act on behalf of the 
withholding agent. While the U.S. withholding agent would remain liable 
for the acts (or failures to act) of its agent, the proposed procedure 
streamlines the withholding process as the foreign agent would collect 
the appropriate documentation on behalf of the U.S. withholding agent 
and report beneficial owner information to the IRS without having to 
furnish the documentation to the U.S. withholding agent. The 
documentation requirements under this procedure would be the same as 
those normally applicable to withholding agents.
    Lastly, the proposed regulations provide that the U.S. competent 
authority may agree to special withholding procedures with a foreign 
competent authority under an income tax treaty. The United States 
intends to consult with its tax treaty partners before implementing 
changes that would affect its relationship with its treaty partners.
3. Use of Taxpayer Identifying Number
    A taxpayer identifying number (TIN) is not required to be shown on 
withholding documents provided for income on portfolio-type 
investments.
    A TIN continues to be required for claims of effectively connected 
income. A TIN would also be required to support claims of benefits 
under an income tax treaty (other than dividends on publicly traded 
stocks). Therefore, for example, payments of dividends on non-publicly 
traded stocks, royalties, or related party interest would require a TIN 
to be shown on the withholding certificate in order for a withholding 
agent to rely on a claim of a reduced rate under a tax treaty.
    In the case of an individual, a TIN would generally be an IRS 
individual taxpayer identifying number (ITIN) issued by the IRS to a 
nonresident alien individual who is not otherwise eligible for a Social 
Security Number. In the case of a non-individual, a TIN would be an 
Employer Identification Number (EIN). Over time, the IRS will issue 
EIN's to foreign persons that begin with the two digits ``98'' to 
permit instant recognition of foreign status. See regulations proposed 
under section 6109 contained in project number INTL-0024-94, published 
on June 8, 1995 (60 FR 302111), describing the types of taxpayer 
identifying numbers issued to nonresident alien individuals and the 
manner in which a number can be obtained. Further revisions to the 
regulations under section 6109 are proposed in order to require the 
statement of a TIN in appropriate cases.
4. Other Proposed Changes
    The regulations propose to clarify the extent of due diligence 
expected from certain withholding agents, such as banks and other 
financial institutions. Thus, for payments of portfolio-type income, 
the withholding agent's due diligence would be limited to an 
examination of the address stated on the withholding certificate. If 
the address on the certificate were a U.S. address or did not match the 
address information in its records, the withholding agent would have to 
seek further proof of a claim of foreign status. This change would not 
affect the current requirement that a withholding agent cannot ignore 
what it actually knows when determining the extent to which it may rely 
on a withholding certificate. However, in the case of financial 
institutions, knowledge would be limited to information that can be 
associated with the account under the same procedures as apply for 
purposes of the backup withholding provisions.
    As a further burden reduction, the regulations propose to eliminate 
the requirement to attach withholding certificates to Forms 1042 and 
1042-S. The current reporting requirements are otherwise unchanged 
except for clarification of how these requirements apply in the case of 
payments to intermediaries. Therefore, even though certification 
procedures are proposed to be modified for bank deposit interest, such 
interest continues to be exempt from reporting (except for certain 
interest on bank deposits paid to Canadian residents).
    The period of validity of a certificate of foreign status (Form W-
8) is limited to three years as under current law. However, a Form W-8 
stating a beneficial owner's TIN is proposed to be valid indefinitely 
if it relates to income required to be reported to the IRS (or if the 
TIN is actually reported even though not otherwise required). The 
validity period for certificates used to claim a reduced rate for 
effectively connected income is proposed to be extended from one year 
to three years.
    The regulations propose new procedures dealing with payments to 
foreign partnerships. These procedures generally would allow looking 
through to the partners and reliance on a certification provided for 
each partner. Alternatively, in order to facilitate certification for 
partnerships with many partners or for tiered partnerships, the 
regulations would also allow a foreign partnership to be a qualified 
intermediary under an agreement with the IRS. In that case, the 
partnership would be allowed to furnish an intermediary certificate for 
the partnership. The partnership would be required to withhold under 
section 1441 in the same manner as a domestic partnership. In addition, 
the regulations would clarify the manner in which a foreign entity and 
its interest holders can determine entitlement to benefits under an 
income tax treaty with a particular country based upon the principles 
in effect under the laws of that country.
    The proposed regulations also address the practical difficulties 
that exist under current rules due to the lack of clear guidelines on 
determining the status of a payee as a U.S. or a foreign person in the 
absence of documentation. While some guidelines exist in limited cases 
(e.g., Sec. 35a.9999-5(b) A-10), guidance is incomplete. The proposed 
regulations offer a comprehensive and uniform set of presumptions to 
assist withholding agents with these determinations.
5. Changes to Reporting Rules Under Chapter 61 of the Internal Revenue 
Code
    On February 29, 1988, the IRS and Treasury published in project 
number INTL-52-86 (53 FR 5991) proposed amendments to the 1099 
information reporting regulations (the 1988 proposed regulations) 
modifying the reporting requirements and the procedures for presenting 
a claim of foreign status. The provisions in the 1988 proposed 
regulations concerning information reporting of bank deposit interest 
paid to persons resident in Canada are finalized. See Sec. 1.6049-
5(e)(2) of the 1988 proposed regulations and the Rules and Regulations 
section of this issue of the Federal Register. The 1988 proposed 
regulations are not otherwise amended. In order to standardize 
procedures, changes are proposed to the procedures for certifying 
foreign status that were proposed in 1988 so as to conform them to 
those proposed under section 1441. The IRS and Treasury are considering 
finalizing the 1988 proposed regulations at the same time that the 
proposed regulations under section 1441 are finalized.

Proposed Effective Dates

    Unless otherwise provided in the regulations, the regulations are 
proposed to be effective for payments made after December 31, 1997. The

[[Page 17619]]

regulations contain a number of transition rules designed to phase out 
currently outstanding withholding certificates (e.g., Forms W-8 and 
1001)

Section-by-Section Analysis

Section 1.163-5  Denial of Interest Deduction on Certain Obligations 
Issued After December 31, 1982, Unless Issued in Registered Form

    Section 1.163-5(c) contains foreign targeting procedures applicable 
to certain obligations issued in bearer form. Section 1.163-
5(c)(2)(i)(B)(5) would be revised to modify the cross-reference to the 
documentary evidence rules since the Q&A regulations under part 35a are 
proposed to be eliminated

Section 1.165-12  Denial of Deduction for Losses on Registration-
Required Obligations Not in Registered Form

    Section 165(j)(1) and 1.165-12(a) deny a loss deduction to a holder 
of a registration-required obligation that is not in registered form 
unless the holder meets certain exceptions. Under Sec. 1.165-12(c)(1) 
(iii) and (iv), the loss disallowance rule does not apply to a holder 
that delivers a registration-required obligation that is in bearer form 
and that is offered or sold in the United States if the holder delivers 
the obligation to a financial institution, and the financial 
institution provides a statement that it is a financial institution 
within the meaning of Sec. 1.165-12(c)(1)(v), it is purchasing the 
obligation for its own account, the account of another financial 
institution, or an exempt organization, that will comply with section 
165(j)(3) (A), (B), or (C). The loss disallowance rule also does not 
apply if a holder delivers a registration-required obligation in bearer 
form that is offered or sold outside the United States if it is 
delivered to a financial institution and the holder gives the financial 
institution a confirmation stating that any U.S. taxpayer that holds 
the obligation in bearer form and that is not exempt under section 
165(j)(3) (A), (B), or (C) will be denied a deduction for any loss or 
capital gain treatment with respect to the obligation. A holder may 
deliver a registration-required obligation in bearer form that is 
offered and sold outside the United States to a person other than a 
financial institution only if the holder has documentary evidence, as 
described in

Section 35a.9999-4T, A-5  That the Person Is Not a U.S. Person

    These proposed regulations would revise Sec. 1.165-12(c)(1)(iv) to 
eliminate the requirement that the holder receive a statement from a 
financial institution for bearer obligations offered or sold in the 
United States. The proposed regulations would also eliminate the 
requirement that the holder deliver a confirmation to a financial 
institution for obligations offered or sold outside the United States. 
These changes are proposed to reduce the documentation burden 
associated with secondary market transactions. The documentary evidence 
requirement for delivery outside the United States to a foreign person 
other than a financial institution is retained. The proposed 
regulations would clarify that the holder may receive such evidence 
electronically

Section 1.871-14  Rules for Portfolio Interest

    Under sections 871(h) and 881(c), interest that qualifies as 
portfolio interest is generally exempt from tax and is exempt from 
withholding at source under section 1441(b)(9). Section 1.871-14 
proposes procedures governing whether interest (including original 
issue discount) qualifies as portfolio interest described in section 
871(h)(2). Section 1.1441-2(d) provides the exemption from withholding.
    For interest on bearer obligations, the existing provisions in 
Sec. 35a.9999-5(a), A-1 (dealing with portfolio interest on bearer 
obligations) and in Sec. 35a.9999-5(c) (dealing with convertible 
obligations) will be incorporated in Sec. 1.871-14(b) without 
substantive changes and are not reproposed. These rules will be 
restated in proposed Sec. 1.871-14 (b)(1) and (b)(2) that are currently 
shown as reserved
    For interest on registered obligations, section 871(h)(2)(B)(ii) 
provides that such interest qualifies as portfolio interest only if the 
U.S. withholding agent receives a statement that the beneficial owner 
is not a United States person. Paragraph (c)(2)(i) provides that the 
statement requirement would be satisfied if the beneficial owner 
furnishes the type of documents described in proposed Sec. 1.1441-
1(e)(1)(i) for a withholding agent to rely on a claim of foreign 
status. Thus, in the case of a payment to a beneficial owner, the 
beneficial owner must provide a beneficial owner withholding 
certificate described in proposed Sec. 1.1441-1(e)(2) or, if the 
payment is made on an account held at a foreign branch, documentary 
evidence may be substituted (see paragraph (c)(2)(ii)). The ability to 
use documentary evidence on foreign branch accounts is a significant 
change from current law and one that intends to reduce the burden on 
transactions outside the United States. Further, as under current 
regulations, the withholding certificate would not have to state a 
taxpayer identifying number (although one may be provided, if desired). 
See Sec. 35a.9999-5(b), A-9.
    In the case of a payment to a foreign person that acts as an 
intermediary (e.g., an agent, representative, nominee, etc.), the 
proposed procedures under section 1441 would require either that the 
intermediary furnish an intermediary withholding certificate or, if the 
intermediary acts as the agent of the withholding agent, that the 
intermediary be an authorized foreign agent. Under proposed 
Sec. 1.1441-1(e)(3)(iv) or proposed Sec. 1.871-14(c)(2)(iii), the 
certificate could be, as under current rules, a certificate to which 
the beneficial owner documentation is attached (see Sec. 35a.9999-5(b), 
A-9). Alternatively, under proposed Sec. 1.1441-1(e)(3)(ii), it could 
be a certificate by which the intermediary certifies for the beneficial 
owner (or other intermediaries) without being required to attach 
beneficial owner documentation. The latter certificate could be issued 
only by a qualified intermediary, i.e., a person that has an agreement 
with the IRS. The qualified intermediary certificate would be issued 
based upon certifications or documentation obtained by the qualified 
intermediary. The same standards would apply to these documents as are 
proposed to be applied to documents that a U.S. withholding agent is 
required to obtain when paying directly to a beneficial owner. 
Therefore, a taxpayer identifying number is not required to be shown on 
a beneficial owner withholding certificate provided to the qualified 
intermediary. Alternatively, the qualified intermediary could rely on 
documentary evidence for accounts held at foreign branches. In 
addition, different procedures may apply under the terms of a qualified 
intermediary's agreement with the IRS.
    Where a withholding agent acts through an authorized foreign agent, 
certificates received by the agent would be deemed to be received by 
the withholding agent. In that case, no certificate would be required 
from the authorized agent. See proposed Sec. 1.1441-7(c)(2) for the 
description of an authorized foreign agent and proposed Sec. 1.1461-1 
(b)(2)(iii) and (c)(4)(iii) for the filing of returns by the 
withholding agent and its authorized foreign agent. Paragraph 
(c)(2)(iv) specifies that other procedures may apply under a competent 
authority agreement with a country with which the United States has an 
income tax treaty.

[[Page 17620]]

    The regulations clarify the consequences of a late-received Form W-
8 or other documentation. Paragraph (c)(3) provides that the 
withholding certificate may be received by the withholding agent at any 
time before expiration of the beneficial owner's period of limitation 
for claiming a refund of tax with respect to the interest. The 
applicable period is described in section 6511(a). Under this rule, a 
foreign person would be allowed, for example, to provide the required 
certificate to a U.S. withholding agent (or its authorized foreign 
agent) at any time prior to filing an income tax return and still be 
able to qualify the interest as portfolio interest. However, a 
withholding agent that does not hold a valid certificate (or other 
valid documentation) when paying the interest would be required to 
withhold. Failure to do so would make the withholding agent liable for 
the tax if the required certification or documentation procedures are 
not complied with prior to the expiration of the beneficial owner's 
period of limitation. If a withholding agent fails to withhold although 
it does not hold a valid certificate, but the documentation procedures 
are ultimately complied with, a withholding agent would be liable for 
interest pursuant to section 1463 even though there is no underlying 
tax liability.
    In addition, the withholding agent may be subject to penalties for 
failure to withhold tax. See proposed Sec. 1.1441-1(f)(5).
    Paragraphs (d) and (e) are reserved. Paragraph (d) will reflect the 
rules in Sec. 35a.9999-5(e), regarding pass-through certificates. 
Paragraph (e) will reflect the rules in 35a.9999-5(b) A-12 through A-15 
regarding foreign-targeted registered obligations. These rules are not 
reproposed. Under Sec. 1.871-14(g), the rules contained in proposed 
regulation Sec. 1.871-14 are proposed to be effective for payments of 
interest after December 31, 1997. However, withholding agents may 
continue to rely on valid Forms W-8 that they hold on the date that is 
60 days after the regulations become final until the forms expire under 
the rules as in effect on April 22, 1996.

Section 1.1441-1  Requirement for the Withholding of Tax on Payments to 
Foreign Persons

    This section states the general rules concerning withholding on 
payments to foreign persons. Paragraph (a) provides the general purpose 
and scope of the section. Paragraph (b) states the general rule that a 
withholding agent must withhold 30 percent of the gross amount of 
income subject to withholding if paid to a foreign person unless the 
beneficial owner of the income is a U.S. person or is a foreign person 
entitled to a reduced rate of tax. A withholding agent may grant a 
reduced rate at source in the case of a payment to a foreign person 
only if, before payment, it can associate the appropriate documentation 
with the payment. Therefore, actual knowledge that the beneficial owner 
is a foreign person would not excuse the obligation to obtain 
appropriate documentation. A withholding agent failing to act in 
accordance with these rules may ultimately be relieved from the 
liability for the tax under section 1461, but would, in any event, be 
liable for interest, and possibly, penalties. See paragraph (f)(5). For 
this purpose, payment to a foreign person includes a payment to a U.S. 
person if the withholding agent has actual knowledge or reason to know 
that the U.S. person is acting as the agent of a foreign person. These 
rules restate current law. See Secs. 1.1441-1 and 1.1441-7(a)(1) of the 
existing regulations.
    Paragraph (c) defines terms, including payee and beneficial owner. 
Paragraph (c)(3) defines a payee as the person to whom the payment is 
made. This definition has significance for purposes of coordinating the 
section 1441 withholding provisions with the 1099 reporting and backup 
withholding rules under chapter 61 of the Code and section 3406, 
respectively (the 1099 reporting and backup withholding provisions 
determine consequences of payments based on payees; in contrast, the 
section 1441 withholding provisions determine consequences of payments 
based on beneficial owner). In the case of a payment to a foreign 
partnership, paragraph (c)(3)(ii) provides that the partners, and not 
the partnership, are considered to be the payees. However, a foreign 
partnership could be considered a payee if it certified to the 
withholding agent that it is a qualified intermediary (see paragraph 
(e)(5) regarding qualified intermediaries) or if it certified that the 
income is effectively connected with a U.S. trade or business (in which 
case, the partnership must itself withhold the tax required under 
section 1446). The provisions specify how these rules would apply on a 
look-through basis to tiered partnership structures.
    Under paragraph (c)(6), a beneficial owner is defined as the person 
who, under U.S. tax principles, would be required to include the amount 
paid in gross income. Therefore, under these principles, partners, and 
not partnerships, are the beneficial owners (unless the partner is 
itself a partnership, in which case, one looks through to the partners 
of the highest tier foreign partnership). Therefore, the identification 
of a beneficial owner is influenced by the classification of the entity 
to which the payment is made. This proposed rule revises Sec. 1.1441-
3(f) of the existing regulations that, in effect, treats a partnership 
as a beneficial owner for purposes of the withholding provisions. This 
provision has created difficulties for partners of a foreign 
partnership who wish to claim the benefit of a reduced rate at source 
based on their status, but may not do so because the entity does not 
qualify for the reduced rate. The proposed regulations would alleviate 
these difficulties by permitting beneficial owner information to be 
passed to the withholding agent or by permitting the partnership to be 
a qualified intermediary.
    The IRS and Treasury are aware that some large investment 
partnerships hold significant amounts of U.S. portfolio type 
investments. The IRS and Treasury understand that generally these 
entities are treated as corporations under the provisions of section 
7704(c)(3) and the regulations under that section. Therefore, the 
proposed revisions requiring beneficial owner documentation for 
partners would not adversely affect these entities. The IRS and 
Treasury solicit comments on this point.
    Generally, the determination of the classification of an entity, 
including an entity organized in a foreign country, is made under U.S. 
tax rules. Because U.S. and foreign laws may differ on classification 
principles, the U.S. tax classification of an entity as a partnership 
or a corporation may differ from the tax treatment of that entity under 
the laws of a foreign country. Therefore, in the case of income paid to 
a foreign entity, the entity might be considered the beneficial owner 
under U.S. tax principles (because it is classified as an association 
taxable as a corporation under U.S. tax principles), but, if foreign 
tax principles are applied, its interest holders, rather than the 
entity, might be considered the beneficial owners. This dual 
characterization may give rise to difficulties in the application of 
income tax treaties. In order to alleviate these difficulties, 
paragraph (c)(6)(ii)(B) proposes that foreign tax principles, rather 
than U.S. tax principles, apply to identify the beneficial owner of 
income for which a claim of a reduced rate of withholding is made based 
upon a tax treaty. Under this proposed rule, when a benefit is claimed 
under a tax treaty with a particular country, the tax principles that 
govern the determination

[[Page 17621]]

of who the beneficial owner is for purposes of obtaining benefits under 
that treaty would be the principles in effect under the laws of that 
country. This clarification is intended to address the significant 
uncertainties resulting from the current lack of guidance on these 
issues. The IRS and Treasury intend to consult with treaty partners in 
order to promote uniformity in this area. Paragraph (c)(6)(iii) 
provides that the beneficial owner rules in the proposed regulations 
would not apply to trusts. Until further guidance is provided, the 
rules in the current regulations would continue to apply trusts. See 
Sec. 1.1441-3 (f) and (g) of the existing regulations.
    While different procedures would apply depending upon whether a 
payment is made to a corporation or a partnership, a withholding agent 
would not be required to determine the classification of an entity when 
making a payment to a foreign person. Rather, a withholding agent would 
be allowed to rely on the classification claimed by the entity, unless 
it had actual knowledge or reason to know otherwise.
    Paragraph (d) deals with procedures that would enable a withholding 
agent to determine the circumstances in which it could consider that 
the payment is made to a U.S. person and is, therefore, exempt from 
section 1441 withholding. This paragraph replaces Sec. 1.1441-5 of the 
existing regulations and proposes to replace Form 1078 with Form W-9, 
consistent with the manner in which a U.S. payee must generally provide 
a taxpayer identifying number under section 3406. In the case of a 
payment to an exempt recipient or a payment of scholarship, grant, 
pension, or annuities, for which no Form W-9 is required under section 
3406, a person also would be permitted to use a Form W-9 to establish 
its U.S. status. The regulations specify the information that must be 
stated on such a certificate, which parallels that required under 
Sec. 31.3406(h)-3(e)(2) in order for a payor to reasonably rely on a 
Form W-9. If no, or insufficient, documentation is provided, the 
presumptions in Sec. 1.1441-1(f) would apply to determine whether the 
beneficial owner should be treated as a foreign or U.S. person.
    In the case of a payment to a foreign person acting as an 
intermediary (e.g., agent, representative, or nominee) for a U.S. 
person, paragraph (d)(3) provides that the intermediary may transmit a 
Form W-9 for the U.S. person to claim U.S. status and avoid section 
1441 withholding. If the U.S. person is not an exempt recipient, the 
withholding agent would then have to comply with the 1099 reporting 
requirements under chapter 61 of the Code, because, under these rules, 
the U.S. person would be treated as a payee. Similarly, as a result of 
the payee rules set forth in paragraph (c)(3)(ii) dealing with payments 
to foreign partnerships, a withholding agent may treat a payment to a 
foreign partnership as a payment made to a U.S. person to the extent of 
the U.S. partner's distributive share of that payment. Similarly, the 
withholding agent would have to comply with the 1099 reporting 
requirements.
    Paragraph (e) describes the conditions for a withholding agent to 
rely upon a beneficial owner's claim of foreign status. Paragraph 
(e)(1) provides that a withholding agent may rely upon a claim of 
foreign status if, prior to making the payment, the withholding agent 
(1) Holds a beneficial owner withholding certificate or an intermediary 
withholding certificate, (2) complies with on-line confirmation 
procedures when prescribed by the IRS, and (3) has not received a 
notification from the IRS that the withholding certificate is incorrect 
or unreliable. The withholding agent's reliance on the withholding 
certificate is subject to the withholding agent's actual knowledge or 
reason to know otherwise. See standards of knowledge in proposed 
Sec. 1.1441-7(b).
    Paragraph (e)(2) sets forth the requirements for a beneficial owner 
withholding certificate. Generally, a withholding certificate would be 
a Form W-8 or, in the case of certain compensation for personal 
services, a Form 8233 (or an acceptable substitute) that is signed 
under penalties of perjury by the beneficial owner and contains certain 
required information. The certificate serves as a representation that 
the beneficial owner is not a U.S. person and that the conditions for 
claiming a reduced rate of withholding tax are satisfied. These 
conditions may vary depending upon the nature of the income or the type 
of exemption claimed.
    Required information on a beneficial owner Form W-8 would include 
the beneficial owner's name, permanent residence address, the type of 
income to be received, and the basis for any reduced rate claimed. 
Generally, the Form W-8 would not be required to state the beneficial 
owner's taxpayer identifying number (``TIN''), except in limited cases 
(see paragraph (e)(4)(vii), below).
    Paragraph (e)(3) sets forth the requirements for an intermediary 
withholding certificate. Intermediary withholding certificates may be 
provided by one of three types of persons: (1) A qualified 
intermediary, (2) a foreign partnership, or (3) an agent, nominee, or 
other representative that is not a qualified intermediary.
    Information required from a qualified intermediary on a Form W-8 
would include similar information as that required for the beneficial 
owner Form W-8 except that the information would relate to the 
intermediary. In addition, the Form W-8 would have to state a TIN and 
certify that the issuer is a qualified intermediary and has obtained 
the appropriate certificates or documentation with respect to the 
account holders covered by the Form W-8. A foreign partnership that is 
not a withholding agent (because it is not a qualified intermediary or 
acting for the account of others) would have to provide the same 
information about itself, and attach the partners' withholding 
certificates. In addition, the partnership would be required to state 
an EIN on the withholding certificate. See proposed Sec. 1.1441-5(b) 
for the certificates required to be attached in the case of tiered 
partnerships. See also, proposed Sec. 1.1461-1(c)(4)(v) for Form 1042-S 
filing requirements for the withholding agent.
    An agent, nominee, or representative furnishing an intermediary 
certificate would have to provide information about itself, state an 
EIN for the intermediary (or an SSN or ITIN in the case of an 
individual) and certify that it is not acting for its own account and 
is using the Form W-8 to transmit beneficial owner certification for 
the payment to which the Form W-8 relates. These procedures are 
essentially similar to those in effect for portfolio interest on 
registered obligations under Sec. 1.9999-5(b), A9 and that are proposed 
to be retained in proposed Sec. 1.871-14(c)(2)(iii).
    Paragraph (e)(4)(i) requires that, in the case of joint owners, 
each owner provide a withholding certificate. This rule would parallel 
the requirements for backup withholding purposes. See Sec. 31.3406(h)-
2(a).
    Paragraph (e)(4)(ii)(A) provides the general rule that a 
withholding certificate would be valid for a period of three years or 
until the circumstances of the beneficial owner changed, making an item 
of information on the certificate incorrect. However, under paragraph 
(e)(4)(ii)(B), a withholding certificate that includes a TIN would be 
valid indefinitely if the income (or, under special procedures, the 
TIN) with which the certificate is associated were reported to the IRS. 
For example, a bank may rely on a claim of foreign status by an account 
holder if it holds a Form W-8 for the account holder even without a 
TIN. In that case, the certificate would be valid for a period of three 
years only.

[[Page 17622]]

If, however, the account holder were to state a TIN on the form and the 
bank adopted procedures by which it reports the TIN to the IRS as 
provided in proposed Sec. 1.1461-1(d), the certificate would be valid 
indefinitely until a change in circumstances of the account holder made 
the information on the form incorrect.
    Second, certificates furnished to claim a reduced rate of 
withholding on income that is effectively connected with the conduct of 
a trade or business within the United States would also be limited to 
three years in all circumstances. This is a change from existing 
regulations under Sec. 1.1441-4(a)(2) that require that a new 
certificate be filed each year. This change would relieve the burden 
associated with annual renewal of these certificates and simplify 
compliance by providing uniform validity period rules. The 3-year 
period of validity for this certificate would extend from the date it 
is signed to the last day of the third succeeding calendar year. This 
change would insure a full 3-year validity period in all cases (and up 
to four years where the certificate is furnished at the beginning of 
the calendar year).
    Under paragraph (e)(4)(iii), withholding certificates must be 
retained for as long as they are relevant for the determination of the 
withholding agent's liability under proposed Sec. 1.1461-1. This rule 
would replace the 4-year retention period under current law and conform 
the rules under section 1441 to the retention period required for Forms 
W-9 under section 3406. This change is necessary because the Form W-8, 
like Form W-9, is proposed to be made valid indefinitely in certain 
circumstances. Paragraph (e)(4)(iv) anticipates the possibility that, 
in the future, a withholding agent may rely on electronically 
transmitted information otherwise required to be stated on a 
withholding certificate.
    Paragraph (e)(4)(v) provides for on-line confirmation procedures 
for TIN's required to be stated on withholding certificates in order to 
verify their correctness and the claim that it belongs to a foreign 
person. Such procedures are being developed by the IRS and, when the 
system becomes operational, the IRS may require certain categories of 
withholding agents handling large volumes of payments to foreign 
persons (such as certain teaching institutions) to perform on-line 
confirmation of such TIN's. These procedures would be similar to those 
currently in use under section 3406 in order to notify payors of an 
incorrect TIN.
    Paragraph (e)(4)(vi) defines an acceptable substitute form. As 
under section 3406, these regulations would permit the use of 
substitute forms provided the information furnished is the same as is 
required under the regulations and is certified to be correct under 
penalties of perjury. See Sec. 31.3406(h)-3(c)(1).
    Paragraph (e)(4)(vii) provides all of the circumstances in which a 
taxpayer is required to furnish a TIN on a withholding certificate for 
purposes of the regulations under sections 1441, 1442, and 1443. 
Taxpayers would be required to furnish a TIN when claiming the benefit 
of a reduced rate under an income tax treaty (other than with respect 
to dividends on publicly traded stocks) or because income is 
effectively connected with a U.S. trade or business. In addition, 
intermediaries, partnerships, foreign organizations claiming to be tax-
exempt under section 501(c), and private foundations would be required 
to furnish a TIN. A TIN would be an IRS Individual Taxpayer 
Identification Number (ITIN), a Social Security Number (SSN), or an 
Employer Identification Number (EIN). A nonresident alien individual 
not eligible for a social security number would be able to obtain an 
ITIN from the IRS. See proposed regulations under section 6109 
describing procedures for obtaining an ITIN.
    Paragraph (e)(5)(i) provides that a qualified intermediary may 
furnish a single intermediary withholding certificate to a withholding 
agent on behalf of beneficial owners, other intermediaries, and U.S. 
payees. The qualified intermediary would have to obtain certification 
or documentation from these persons on whose behalf the intermediary 
withholding certificate is provided. Generally, the certification and 
documentation would be the same as that which a withholding agent is 
required to obtain, subject to such modifications as the intermediary's 
agreement with the IRS would provide. It is anticipated that the terms 
of the agreement would be flexible enough to accommodate the individual 
circumstances of a particular qualified intermediary, including any 
locally applicable know-your-customer rules or practices. Therefore, 
the agreement might acknowledge certain documentary evidence procedures 
already in place and not require additional documentation. Paragraph 
(e)(5)(ii) provides that a qualified intermediary is a foreign person 
that is a party to a withholding agreement with the IRS and is a 
clearing organization as defined in Sec. 1.163-5(c)(2)(i)(D)(8), a 
financial institution as defined in Sec. 1.165-12(c)(1)(iv), a 
partnership, or any other person acceptable within the discretion of 
the IRS. A qualified intermediary would be able to either assume 
primary responsibility for withholding and reporting to the IRS (if so 
permitted under its agreement with the IRS) or leave that 
responsibility to the withholding agent. A qualified intermediary that 
assumes primary withholding responsibility would present an 
intermediary withholding certificate to the withholding agent or 
another qualified intermediary representing that it will withhold all 
appropriate amounts and comply with all applicable reporting 
requirements. The withholding agent or other qualified intermediary 
would be allowed to rely on such a certificate and not withhold. 
However, the withholding agent would have to file Forms 1042 and 1042-S 
under section 1461 to report the payment to the qualified intermediary 
and the qualified intermediary's EIN. See proposed Sec. 1.1461-
1(b)(2)(ii) and (c)(4)(ii).
    A qualified intermediary that does not assume primary withholding 
responsibility would present an intermediary withholding certificate to 
a U.S. withholding agent or another qualified intermediary representing 
that beneficial owners of U.S. income payments (other than gross 
proceeds) are not U.S. persons and, if applicable, qualify for a 
reduced rate of withholding. It is anticipated that a qualified 
intermediary would establish separate accounts for income subject to 
different withholding rates. A single intermediary withholding 
certificate should serve as documentation for all these separate 
accounts. In addition, the qualified intermediary would provide a Form 
W-9 for each beneficial owner that is a U.S. person to whom payments of 
income otherwise subject to withholding are made and for whom reporting 
is required under chapter 61 of the Code.
    A qualified intermediary would generally have to agree to be 
subject to the same reporting requirements as apply to withholding 
agents under proposed Sec. 1.1461-1(b) and (c), to allow periodic 
inspection of its records, and to pay any amount of tax liability 
determined to be due. The IRS intends to agree to arrangements with the 
qualified intermediary so that, for example, inspection of records may 
be minimized where the IRS otherwise gets sufficient access to 
beneficial ownership information, through annual reporting of TIN's, 
review of know-your-customer rules, and selection of appropriate 
account information, or through an exchange of information program 
under a tax treaty. In appropriate cases, the IRS may rely on audits 
performed by an

[[Page 17623]]

institution's approved external auditors where, for example, under an 
income tax treaty or local laws, the IRS would be given access to 
appropriate auditor's records to verify compliance. Records may include 
workpapers of, reports prepared by, and methodology employed by, the 
approved external auditors.
    A proposed revenue procedure providing guidance with respect to 
withholding agreements has been published as Announcement 96-23 
simultaneously with the publication of this document in the Federal 
Register.
    Paragraph (e)(5)(v) specifies that a foreign partnership that is a 
qualified intermediary acting for its partners is a withholding agent 
with respect to its partners' distributive shares of income paid to the 
partnership. In that case, the partnership is subject to the same 
withholding and reporting procedures as would apply to a domestic 
partnership. Thus, any arrangement whereby the partnership would seek 
to shift primary withholding responsibility to the withholding agent 
under the provisions of paragraph (e)(5)(iv)(B) would not be 
recognized.
    Paragraph (f) contains a set of presumptions upon which a 
withholding agent (for purposes of section 1441) and a payor (for 
purposes of the 1099 reporting provisions) would rely to determine 
whether to treat a person as U.S. or foreign if, at the time of 
payment, the withholding agent or payor does not have actual knowledge 
of the status of the person to whom the payment is made and lacks the 
required documentation or knows or has reason to know that the 
documentation it holds is incorrect or unreliable. A presumption under 
this paragraph (f) could be rebutted by providing or correcting the 
required documentation to the withholding agent or payor. Thus, these 
presumptions would assist the payor in determining whether the income 
paid is subject to the 1099 reporting and backup withholding regime (if 
paid to a U.S. person that is not an exempt recipient) or to the 
section 1441 withholding regime (if paid to a foreign person).
    Presumptions of foreign status resulting from the application of 
these provisions would, when applied for purposes of section 1441, only 
affect whether the withholding agent should withhold 30 percent from 
the payment on the ground that the payment may, under the provisions, 
be treated as made to a foreign beneficial owner. However, the 
presumptions could not operate to deem the payee as having established 
proof of foreign status for purposes of claiming a reduced rate of tax 
under the Code or an income tax treaty.
    Paragraph (f)(2)(i) addresses reportable payments to a non-exempt 
recipient (a non-exempt recipient is a person for whom the payor must 
file a Form 1099; see proposed Sec. 1.6049-4(c)(1)(ii) for a list of 
exempt recipients). Where a withholding agent lacks the required 
documentation, it would presume that the payee is a U.S. individual. 
Accordingly, the withholding agent would withhold 31 percent under 
section 3406. Paragraph (f)(2)(ii) incorporates the concept of the 30-
day grace period under Sec. 31.3406(d)-3(a) for a payee to furnish a 
Form W-9 to the payor. Because it may take longer to obtain the 
required documentation from a foreign person than from a U.S. person, 
the proposed regulations allow a withholding agent to treat a payee as 
a beneficial owner that is a foreign person for up to 90 days from the 
date the agent credits the payee's account (or until the end of the 
calendar year if earlier) if the withholding agent has the name and a 
foreign address for the account holder or a facsimile copy or an 
electronic transmission of the information on a withholding 
certificate. This special rule would defer the obligation to backup 
withhold under section 3406 because there are sufficient indicia of 
foreign status, but does not defer the obligation to withhold under 
section 1441, if applicable. If the required documentation were 
provided or corrected within the 90-day grace period, the amount 
withheld may be refunded to the payee under the adjustment procedures 
described in proposed Sec. 1.1461-2. The 90-day grace period would be 
terminated if any part of the proceeds in the account that are subject 
to the grace period were withdrawn (other than for purposes of 
withholding an amount of tax). If the required documentation were not 
provided or corrected by the expiration of the grace period, the payee 
would be presumed to be a U.S. payee for purposes of section 3406 and 
chapter 61 of the Code from the date the account was first credited.
    A special rule for joint owners or payees is provided in paragraph 
(f)(2)(iii) that would permit a withholding agent to presume that a 
payment made to joint owners or payees for whom it does not hold the 
required documentation is made to U.S. payees. The grace period would 
apply to joint payees if each payee qualified for its application. If 
any one of them withdrew any portion of the funds in the account, then 
additional withholding under paragraph (f)(2)(ii)(A) would be required.
    Paragraph (f)(2)(iv) addresses reportable payments to an exempt 
recipient. In that case, the withholding agent could presume that the 
payee is a foreign person if it knew the payee's TIN and the TIN began 
with the two digits ``98.'' The withholding agent also could presume 
that the payee is a foreign person if the payee had a foreign mailing 
address or the payment were made outside of the United States (as 
defined in proposed Sec. 1.6049-5(e)). In other cases, the withholding 
agent could presume that the exempt recipient is a U.S. person. Thus, 
for example, a U.S. withholding agent making a payment of interest on a 
registered obligation to a corporation with an EIN beginning with the 
digits ``98'' would not have to backup withhold under section 3406 
(because the corporation is an exempt recipient). However, it should 
withhold a 30 percent tax under section 1442 because the condition 
under Sec. 1.871-14(c)(1)(iii) that a certificate of foreign status be 
received by the U.S. withholding agent for the interest to qualify as 
portfolio interest would not be satisfied. Thus, the withholding agent 
should treat the interest as not qualified for the portfolio interest 
exemption for purposes of section 1441(b)(9). Adjustments to the tax 
may be made at a later time in accordance with proposed Sec. 1.1461-2 
if the required documentation described in proposed Sec. 1.871-14(c)(2) 
is later furnished. See proposed Secs. 1.871-14(c)(3) and 1.1441-
1(f)(5) for rules addressing late received documentation.
    Paragraph (f)(3) contains special presumption provisions for 
certain payments that are not subject to backup withholding: 
scholarship and pension income. In the case of scholarship and grant 
income, the withholding agent or payor may generally treat the payee as 
a U.S. person unless it has U.S. visa information in its records 
concerning the payee. For pension and annuities, the payment would be 
presumed to be made to a U.S. person if the payor had the payee's 
Social Security number and the payment were made either to a U.S. 
mailing address or to a mailing address in a foreign country with which 
the United States has an income tax treaty in effect that exempts 
residents of the country from U.S. tax on that income. In all other 
cases, the payor could presume that the payee is a foreign person. A 
withholding agent may use these presumptions as a safe harbor or may, 
at its option, choose to withhold at a higher rate if it were unsure of 
the application of the presumption in a particular case.

[[Page 17624]]

    Paragraph (f)(4) provides special rules for pass-through entities. 
Paragraph (f)(4)(i) provides rules for determining whether to treat a 
partnership as foreign or domestic. The withholding agent or payor 
could presume that the partnership is a foreign partnership if the 
withholding agent or payor actually knows that the partnership's EIN 
begins with the digits ``98,'' if the mailing address of the 
partnership is in a foreign country, if the payment is made outside of 
the United States (as defined in proposed Sec. 1.6049-5(e)), or if the 
withholding agent or payor knows or had reason to know that the 
partnership is foreign.
    Under paragraph (f)(4)(ii), a withholding agent or payor that makes 
a reportable payment to a person determined to be a foreign partnership 
could presume that any partner for which it does not hold the required 
documentation is a U.S. individual. In that case, the payee would be 
treated as a U.S. payee that is not an exempt recipient and the payment 
would be subject to reporting under chapter 61 of the Code and to 
backup withholding under section 3406.
    Paragraph (f)(4)(iii) provides rules for partners' distributive 
shares. A domestic partnership could treat a partner as a U.S. payee 
if, at the time it is required to withhold on a reportable payment, it 
did not hold all of the required documentation for that partner. A 
foreign partnership that is a qualified intermediary under proposed 
Sec. 1.1441-1(e)(5)(ii) could treat a partner as a foreign payee if, at 
the time it were required to withhold on a reportable payment, it could 
not associate the payment with the required documentation.
    Paragraph (f)(5) clarifies that a withholding agent that does not 
act in accordance with the presumptions and fails to withhold the 
required amount may be liable under section 1461 or 3403 for the tax 
that should have been withheld based upon the presumptions in paragraph 
(f), unless the withholding agent can demonstrate either that the 
correct amount of tax was, in fact, withheld or that the beneficial 
owner paid the tax due. Proof of payment of tax could be established on 
the basis of a Form 4669 furnished by the beneficial owner certifying 
the amount of tax paid to the IRS. Proof that the correct amount of tax 
was, in fact, withheld, could be based upon obtaining the required 
documentation. Late-received documentation could be accepted as proof 
of status and entitlement to a reduced rate of tax. However, if the 
delays involved in obtaining this documentation affected its 
reliability, the IRS could require further proof of status or 
entitlement to a reduced rate. Further, pursuant to section 1463 or 
section 3403, the withholding agent would be liable for interest under 
section 6601, even though, ultimately, there is no underlying tax 
liability. Penalties may also apply.
    Under paragraph (f)(6), a reportable payment is an amount 
reportable under section 3406(b) (without regard to any exception to 
reporting under section 6041, 6041A, 6042, 6045, 6049, 6050A, or 
6050N).
    Paragraph (f)(7) provides that if overwithholding occurs under 
section 1441 as a result of application of the presumptions in 
paragraph (f), adjustments may be made in accordance with proposed 
Sec. 1.1461-2(a). Appropriate refunds and credits may be claimed under 
section 1464 or 6414. Amounts overwithheld under section 3406 are 
subject to adjustments pursuant to Sec. 31.6413(a)-3(a)(1).
    Paragraph (g) provides that these rules are effective for payments 
made after December 31, 1997. However, transition rules are provided so 
that valid certificates (as determined under current rules) that are 
outstanding on the date that is 60 days after these regulations are 
published as final regulations may continue to be relied upon for their 
period of validity. In addition, dividends on publicly traded stocks 
are given special transition relief. See proposed Sec. 1.1441-6(b)(2).

section 1.1441-2   Income Subject to Withholding

    Paragraph (a) restates the rules in Secs. 1.1441-1 and -3(a) of the 
existing regulations limiting withholding to items of income from 
sources within the United States. Paragraph (b) simplifies Sec. 1.1441-
2(a) of the existing regulations by providing that, for purposes of 
chapter 3 of the Code, fixed or determinable, annual or periodical 
(FDAP) income is any income includable in income under section 61, 
subject to enumerated exceptions in paragraph (b)(2) (including certain 
exceptions for original issue discount and capital gains, including 
option premiums). Under these proposed rules, income paid under a 
national principal contract would be FDAP, but see proposed 
Sec. 1.1441-4(a)(3) for an exemption from withholding.
    Paragraph (b)(3) reflects the position adopted by the IRS in TIR-
877 (December 27, 1966) and in Rev. Rul. 68-333, 1968-1 C.B. 390 that 
FDAP includes original issue discount paid by an original issuer of 
bonds or other obligations with original issue discount. However, under 
the authority of section 1441(c)(8), only certain items of original 
issue discount are currently subject to withholding of tax under 
Chapter 3. The lack of rules in this area in the past reflects the 
difficulties in determining the amount of OID upon which withholding 
should be applied. These proposed regulations, however, identify 
transactions in which information about the amount of original issue 
discount would generally be known or available to the withholding 
agent. Therefore, the proposed regulations require withholding on 
amounts paid upon sale by an obligor that is related to the original 
issuer. In addition, amounts that fail to qualify for the portfolio 
interest exemption under section 871(h) or 881(c) (because, for 
example, the statement described in section 871(h)(5) has not been 
furnished to the U.S. withholding agent) would also be subject to 
withholding, regardless of whether it is possible for the withholding 
agent to determine precisely the amount of OID. See proposed 
Sec. 1.871-14(c)(2). If the required documentation were not furnished, 
the amounts could be treated as paid to a U.S. or foreign payee based 
upon the presumptions in proposed Sec. 1.1441-1(f). If the amounts are 
presumed paid to a U.S. payee, backup withholding under section 3406 
might apply. See Sec. 31.3406(b)(2)-(2). If the amounts are presumed 
paid to a foreign payee, withholding under section 1441 would apply 
(unless the OID instrument had a maturity not exceeding 183 days from 
the date of issue).
    Under these rules, the entire amount of OID (as determined on the 
date of issue) would have to be reported as taxable if the exact amount 
of OID were not known. Any amount of overwithholding may be adjusted or 
refunded in accordance with the procedures in proposed Sec. 1.1461-2(a) 
or Sec. 1.1464-1.
    The proposed changes to the OID rules would be effective for OID on 
obligations issued after a date that is 60 days after these regulations 
are published as final regulations.
    Paragraph (c) restates Sec. 1.1441-2(b) of the existing regulations 
to eliminate the reference to pre-1967 payments. It also eliminates the 
reference to items of income under section 402(a)(2) and 403(a)(2), 
relating to payments from certain employees trusts or under employee 
annuities, in order to conform to the amendment made to sections 
1441(b) and (c)(5) by Public Law 102-318 that deleted these sections 
from the requirement of withholding under section 1441.
    Paragraph (d) lists exemptions from withholding for certain items 
that

[[Page 17625]]

otherwise constitute FDAP income. Paragraph (d)(1) lists the exceptions 
that are not conditioned upon furnishing documentation (e.g., interest 
on bearer or foreign targeted registered obligations, short-term 
obligations). However, documentation may be required under the 1099 
reporting provisions in order to avoid reporting under sections 6041 or 
6049 and backup withholding under section 3406. Paragraph (d)(2) lists 
two other exceptions, but those exceptions are conditioned upon 
furnishing documentation described in proposed Sec. 1.871-14(c)(2). The 
exceptions are portfolio interest on registered obligations described 
in section 871(h)(2)(B) or 881(c)(2)(B) (other than foreign targeted 
obligations) and bank deposit interest described in section 
871(i)(2)(A). Because bank deposit interest is not subject to 
beneficial owner documentation requirements under current rules, the 
regulations propose a transition rule that would allow interest paid on 
accounts in existence on or before a date that is 60 days after these 
regulations are published as final regulations to continue to be 
subject to current rules until December 31, 1999.
    Paragraph (e) clarifies the meaning of payment for purposes of 
withholding. An amount would be considered paid when it is includable 
in income under the cash basis method of accounting. Under paragraph 
(e)(2), income reallocated under section 482 from a U.S. person to a 
related foreign person would be considered a payment for withholding 
tax purposes. A payment would also be considered to be made if income 
arose as a result of a secondary adjustment made after income is 
allocated under section 482, unless the taxpayer entered into a 
repatriation agreement that eliminated the liability for withholding. 
Paragraph (e)(3) provides that income is not considered paid if it is 
blocked under certain executive authority, but is considered paid on 
the date the blocking restriction is removed and, therefore, subject to 
withholding as of that date. Paragraph (e)(4) provides special payment 
rules for dividends. These rules are similar to those in effect for 
purposes of backup withholding. See Sec. 31.3406(b)(2)-4. Paragraph 
(e)(5) coordinates the payment election for branch interest tax under 
Sec. 1.884-4(c)(1) with section 6049 and the withholding provisions 
under section 1441.

Section 1.1441-3   Amounts Subject to Withholding

    Paragraph (a) restates the rule in Sec. 1.1441-2(a)(1) of the 
existing regulations that withholding is generally imposed on the gross 
amount of income. Paragraph (b) provides for special withholding rules 
for interest. Paragraph (b)(1) restates the rule in Sec. 1.1441-3(c)(3) 
of the existing regulations that requires withholding on the entire 
amount of stated interest owed on an interest-bearing obligation, 
regardless of the character of the amounts paid. The heading is 
modified to eliminate any inference that this rule is limited to 
payments on defaulted interest coupons. Paragraph (b)(2) restates the 
exemption from withholding in Sec. 1.1441-4(h) of the existing 
regulations regarding sales of obligations between interest payment 
dates. An anti-abuse rule is added that would require withholding where 
the withholding agent knew or had reason to know that the sale 
transaction was part of a plan the principal purpose of which was to 
avoid withholding through a pattern of sales and repurchases.
    Paragraph (c) provides rules relating to corporate distributions 
and substantially relieves the withholding burden imposed under 
Sec. 1.1441-3(b) of the existing regulations on these distributions. 
Under the proposed regulations, a corporation could determine the 
amount of a distribution subject to withholding based on a reasonable 
estimate of available earnings and profits for the taxable year. A 
corporation that made a reasonable estimate, but nonetheless 
underwithheld, would remain liable for the amount of tax underwithheld 
(and interest), but not penalties. These proposed regulations adopt the 
same ``reasonable estimate'' standard as is provided under 
Sec. 31.3406(b)(2)-4(c)(2). Under paragraph (c)(2)(ii), an intermediary 
could rely on a reasonable estimate represented by the distributing 
corporation. The distributing corporation would be made liable for any 
amount of underwithholding where the withholding agent had relied on 
the representation and the estimate had not been reasonably determined.
    Paragraph (c)(3) proposes special procedures for withholding on 
certain distributions made by a Regulated Investment Company (RIC). In 
order to determine whether a withholding obligation arises in that 
case, a RIC would benefit from the same exceptions that would apply to 
other corporations for distributions payable in stock or stock rights 
or distributions treated in part or in full as in exchange for stock. 
In addition, the proposed regulations provide that no withholding is 
required for a distribution that is a capital gain dividend defined in 
section 852(b)(3)(C) or an exempt interest dividend defined in section 
852(b)(5)(A). Special procedures are proposed for implementing these 
exemptions, however, because a RIC must specifically designate the 
extent to which a distribution falls under one of these provisions. 
Under applicable rules, the designation may be made as late as 60 days 
after the close of the RIC's taxable year, and after making the 
designation, the RIC may find that the amount so designated exceeds 
what the Code and the regulations allow. This presents special 
difficulties under section 1441, which assumes that the amounts subject 
to withholding are fixed at the time they are paid.
    To address these special difficulties, paragraph (c)(3) would allow 
a RIC to designate interim distributions as being subject to section 
852(b)(3)(C) or 852(b)(5)(A). If it later determined that the 
designation was in excess of what was permitted and, as a result, had 
underwithheld, the RIC would have to satisfy the tax liability and 
could adjust the withholding pursuant to proposed Sec. 1.1461-2(b). A 
RIC would not be subject to penalties for failure to withhold timely, 
provided the designation was based upon a reasonable estimate when 
made. However, interest would apply under section 6601. In addition, 
the RIC might be liable for penalties if the IRS determined that the 
estimates were not reasonably determined.
    Paragraph (d) restates, without significant changes, the rule in 
Sec. 1.1441-3(d) of the existing regulations regarding withholding on 
the full amount realized from the sale of property where the 
withholding agent does not know the amount of gain subject to 
withholding. A withholding agent may, however, determine gain based on 
the beneficial owner's withholding certificate if it indicates the 
beneficial owner's basis in the property sold. This rule is of limited 
application as most capital gains are exempt from withholding under 
section 1441.
    Paragraph (e) restates the rule in Sec. 1.1441-7(c) of the existing 
regulations pertaining to payments in kind. The property conversion 
requirement under current rules would be made optional. Instead, the 
withholding agent could choose to obtain payment from another source. 
The regulations further propose to clarify that the amount of a payment 
in kind is measured by the fair market value of the property 
transferred or of the services provided. Payments made in foreign 
currency require a conversion of the amount of tax using the spot rate 
(as defined in Sec. 1.988-1(d)(1)) or a reasonable spot rate 
convention. Paragraph (e)(3) provides guidance

[[Page 17626]]

where the withholding agent's satisfaction of the beneficial owner's 
tax liability constitutes additional income to the beneficial owner 
that is subject to withholding. In that case, the final withholding tax 
liability would be calculated under a gross-up formula.
    The provisions currently stated under Sec. 1.1441-3(j), relating to 
conduit financing arrangements, are proposed to be incorporated without 
change into a new paragraph (f). These provisions are not reproposed.
    The address rule in Sec. 1.1441-3(b)(3) of the existing regulations 
would be eliminated and replaced by requirements to furnish appropriate 
documentation or to establish foreign status and, if applicable, 
residence in a treaty country. See proposed Sec. 1.1441-1(e) and 
1.1441-6. Section Sec. 1.1441-3(c)(1) requiring withholding in the case 
of interest paid on obligations issued by the U.S. government would be 
deleted as unnecessary given the provisions in Sec. 1.1441-2(a) 
describing income subject to withholding. Section Sec. 1.1441-3(c)(4) 
addressing unknown owners would also be deleted because the presumption 
provisions in Sec. 1.1441-1(f) provide guidance. The special rules for 
tax-free covenant bonds issued prior to 1934 are proposed to be 
deleted. Comments are solicited as to whether these rules are still 
necessary.

Section 1.1441-4   Certain Exemptions From Withholding

    Paragraph (a)(1) restates, without significant change, the 
provisions in Sec. 1.1441-4(a) of the existing regulations regarding 
the exemption from withholding for certain income effectively connected 
with the conduct of a trade or business within the United States. The 
regulations clarify that the exemption under this section does not 
apply to claim an exemption under an income tax treaty (i.e., income 
not attributable to a permanent establishment). Claims of treaty 
benefit must be made under the procedures described in proposed 
Sec. 1.1441-6.
    Under paragraph (a)(2)(i), a withholding agent could rely on a 
claim that income is effectively connected with the conduct of a trade 
or business within the United States if it held a withholding 
certificate so stating. The regulations do not permit a withholding 
agent to rely on a qualified intermediary withholding certificate to 
grant a reduced rate of withholding for income claimed to be 
effectively connected, except in the case of a qualified intermediary 
that is a partnership acting for its own account. A partnership that 
does not claim to be a qualified intermediary could also furnish an 
intermediary withholding certificate described in proposed Sec. 1.1441-
1(e)(3)(iii) (i.e., the transmittal certificate normally required from 
a partnership transmitting its partners' documentation under the 
procedures described in proposed Sec. 1.1441-5(b)). For purposes of 
claiming an effectively connected income exemption, it would not be 
necessary to attach the partners' documentation to the certificate 
since the exemption is available regardless of the status of the 
partners and, under section 1446, the partnership is required to 
withhold. The validity period of a withholding certificate used to 
claim an effectively connected exemption is proposed to be extended 
from one year to three years (subject to amendment if a change in 
circumstances affected the character of the income that the beneficial 
owner anticipated would be effectively connected). This rule should 
significantly ease the burden on continuing transactions that generate 
effectively connected income every year.
    The regulations propose to eliminate the requirement that the 
certificate be attached to the Form 1042-S; the withholding agent would 
be required to state the beneficial owner's TIN on the Form 1042-S. See 
proposed Sec. 1.1461-1(c)(1)(i). If the withholding certificate were 
silent as to whether the income is effectively connected or if the 
required documentation were lacking, incorrect, or unreliable, the 
withholding agent should presume that the income is not effectively 
connected.
    The rules provided in Sec. 1.1441-4(f) of the existing regulations 
are proposed to be restated in a new paragraph (a)(2)(ii) and are not 
reproposed. Paragraph (a)(2)(iii) provides for special rules for 
payments made to joint owners that would require each joint owner to 
provide a withholding certificate certifying that the income is 
effectively connected with a trade or business in the United States. 
These rules are consistent with the joint owners rules provided under 
the section 3406 regulation. See Sec. 31.3406(h)-2(a).
    Paragraph (a)(3) provides that no withholding is required on income 
from national principal contracts regardless of whether a withholding 
certificate is provided. However, such income would have to be reported 
on a Form 1042 and 1042-S. This rule would significantly simplify the 
paper flows currently associated with these transactions.
    Paragraph (a)(4) parallels the rule in proposed Sec. 1.1441-1(f)(5) 
regarding the consequences of acting in a manner contrary to prescribed 
presumptions. Late received documentation could relieve the withholding 
agent from the tax liability. However, an interest charge would apply 
under section 6601 on the amount that should have been withheld even 
if, ultimately, there is no underlying tax liability. In addition, 
penalties might apply.
    Paragraph (b) of the existing regulations concerning compensation 
for personal services of an individual is substantially unchanged. A 
new paragraph (b)(1)(ii) is added to require that withholding on 
distributions from certain qualified pension plans and annuities occur 
under section 1441 rather than under section 3405 as was required under 
Sec. 1.1441-4T(b)(ii) (which expired on February, 1993). A new 
paragraph (b)(1)(vi) is also added that would allow employers to wage 
withhold on compensation that is otherwise exempt from wage withholding 
by reason of section 3402(e). This rule provides relief for employers 
of nonresident alien individuals who derive income from sources partly 
within and partly without the United States on a regular basis (e.g., 
crew members working on cruise ships). Without this rule, employers 
would have to withhold at the 30 percent rate instead of the lower wage 
withholding rate.
    The provisions under paragraph (b)(2) of the existing regulations 
(dealing with a claim of reduced rate of withholding on personal 
service income under an income tax treaty) are unchanged with one 
exception. The 10-day review rule in paragraphs (b)(2)(i) and (iv) 
would be extended to 20 days. This extension is necessary because of 
the increase in the number of Forms 8233 that the IRS receives.
    Paragraph (b)(6) is added to eliminate the requirement in 
Sec. 1.1441-3(e) of the existing regulations to pro-rate the personal 
exemption based on the period during which a nonresident alien 
individual is present in the United States during the taxable year. 
Therefore, the entire personal exemption amount could be taken into 
account to determine the base amount on which to withhold.
    Paragraph (c) incorporates the provisions in Sec. 1.1441-2(c) of 
the existing regulations dealing with participants in certain exchange 
or training programs and provides additional guidance with respect to 
payments of scholarship or fellowship grants to nonresident alien 
individuals. It reflects 1988 and 1994 statutory amendments to section 
1441 concerning certain visa holders. Such income is subject to a lower 
withholding rate of 14 percent under section 871(c). The regulations 
propose an alternate withholding election so that taxpayers

[[Page 17627]]

may choose to be subject to the withholding rates applicable to wages, 
which in many cases are likely to result in a lower rate. Also, 
individuals who receive both scholarship or grants and compensation 
income from the same withholding agent could choose to combine all 
income on Form 8233 to claim a reduced rate under a tax treaty for both 
types of income.
    Paragraphs (d) (dealing with annuities) and (e) (dealing with 
central banks of issue and the Bank of International Settlement) merely 
reflect conforming changes regarding the proposed documentation 
requirements.

Section 1.1441-5  Withholding on Payments to Pass-Through Entities

    The existing regulations in Sec. 1.1441-5 address claims of U.S. 
status. These provisions are restated, with modifications, in proposed 
Sec. 1.1441-1(d).
    This section, as revised, would provide special withholding 
procedures for payments to partnerships. Paragraph (a) deals with 
domestic partnerships. As under current regulations, payments to 
domestic partnerships would not require withholding, even if the 
partners were foreign persons. A domestic partnership is the 
withholding agent for items of income included in the distributive 
share of a partner that is a foreign person. Paragraph (b) proposes to 
modify the current rules for payments to foreign partnerships to permit 
a look-through approach, so that claims of reduced rate could be 
presented by the partnership on behalf of the partners (including 
partners that are U.S. persons). The look-through approach would apply 
through tiers of foreign partnerships. In the alternative, a foreign 
partnership could, under an agreement with the IRS, become a qualified 
intermediary so that the partners' documentation would not have to be 
furnished to the withholding agent. See proposed Sec. 1.1441-1(e)(5) 
for rules applicable to qualified intermediaries. Paragraph (b)(2) 
clarifies how the look-through approach would operate in the case of a 
tiered partnership. Generally, the partnership would have to look 
through tiers until it reached the beneficial owner (as determined 
under proposed Sec. 1.1441-1(c)(6)). However, it could stop at any 
level in the chain that constitutes a payee (as defined in proposed 
Sec. 1.1441-1(c)(3)).

Section 1.1441-6  Claim of a Reduced Rate Under an Income Tax Treaty

    The proposed regulations eliminate the ``address'' rule in 
Sec. 1.1441-6(c)(1) of the existing regulations and in regulations 
under several income tax treaties, which permits a withholding agent to 
grant a reduced rate of tax under a treaty based upon the address of 
the payee (including a nominee). Paragraph (b)(1) provides general 
procedures for reliance by a withholding agent on a claim for a reduced 
rate of withholding under a treaty based upon the documentation 
requirements described in proposed Sec. 1.1441-1(e)(1)(i). A 
withholding agent could rely upon a beneficial owner withholding 
certificate described in proposed Sec. 1.1441-1(e)(2) as establishing 
both foreign status and residence in the treaty country provided a TIN 
is stated on the certificate. In addition, in the case of dividends 
with respect to which an advance ruling is required in order to secure 
the reduced rate of tax under the tax treaty, the withholding 
certificate would have to state that the beneficial owner has obtained 
such a ruling. Such rulings are currently required under a very limited 
number of tax treaties: Austria, Denmark, Ireland, and Switzerland. See 
paragraph (e) regarding the procedures for obtaining such a ruling. 
Further, for amounts exceeding $500,000 in the aggregate for the 
taxable year paid to a beneficial owner related to the withholding 
agent, the beneficial owner would have to indicate on the certificate 
that it will file a Form 8833 under section 6114. The regulations under 
section 6114 are proposed to be modified accordingly. Claims of treaty 
benefit could also be made on the basis of an intermediary withholding 
certificate described in proposed Sec. 1.1441-1(e)(3). Further, a U.S. 
withholding agent could act through an authorized foreign agent 
described in proposed Sec. 1.1441-7(c)(2).
    Paragraph (b)(2) provides special rules for certain dividends paid 
on stock that is traded on a U.S. established market. For these 
dividends, the withholding agent could grant treaty benefits based upon 
the same documentation procedures as are proposed to apply to portfolio 
interest on registered obligations (e.g., no TIN is required on a 
beneficial owner withholding certificate). See proposed Sec. 1.871-
14(c)(2). Paragraph (b)(3) provides that the competent authorities may 
agree to different certification procedures under an applicable tax 
treaty.
    Paragraph (b)(4) clarifies the manner in which beneficial owners 
could claim benefits under a tax treaty where foreign law principles 
apply to identify the beneficial owner of a payment made to a foreign 
entity. Under proposed Sec. 1.1441-1(c)(6)(ii)(B), the beneficial owner 
would be determined based upon the laws of the country whose tax treaty 
with the United States is invoked to claim a reduced rate of tax.
    These procedures are intended to apply in a reciprocal manner. 
Therefore, paragraph (b)(4)(iv) provides that, if the IRS determined 
that a treaty partner is not identifying beneficial owners in a similar 
manner and, as a result, denies benefits under an otherwise applicable 
treaty to an entity organized in the United States or to interest 
holders residing in the United States, the benefits of these procedures 
could be suspended for entities organized, or interest holders 
residing, in that country until the competent authorities reached a 
reciprocal agreement on the application of treaty benefits in such 
cases. Suspension of benefits under this provision would be effective 
on a prospective basis only.
    Paragraph (c) states the rules regarding certification of a TIN by 
the IRS. These procedures would apply to payments for which a Form W-8 
is furnished with a TIN. They are directed to beneficial owners (or 
their agents) and are designed to ensure that the IRS can verify the 
beneficial owner's status as a resident of a treaty country based upon 
the information return later filed by the withholding agent on Form 
1042-S. If the IRS determined that the TIN does not support the 
beneficial owner's claim of residence in the treaty country, it would 
so notify the withholding agent. The IRS could waive the requirement 
that a taxpayer certify its TIN with the IRS when it implements 
procedures to verify a taxpayer's status directly with a foreign 
competent authority. The IRS could also certify a TIN based upon 
representations made by a qualified intermediary.
    The IRS would certify a TIN based upon a certificate of residence 
or documentary evidence. Paragraph (c)(3) describes a certificate of 
residence as a certificate issued by the tax authorities of the treaty 
country certifying that the taxpayer files income tax returns as a 
resident of that country and is current on his filing obligations. 
Paragraph (c)(4) describes documentary evidence as a document that is 
no more than three-years old and sufficiently identifies the person and 
the residence of that person in the treaty country.
    Paragraph (e) incorporates the provisions in existing regulations 
that condition the benefit of the reduced five-percent rate on related 
party dividends to an advance ruling from the IRS determining that the 
parent-subsidiary relationship is not established or maintained with 
the principal purpose to secure the reduced rate. The ruling would be 
required only

[[Page 17628]]

if so required under an applicable treaty. It must be requested prior 
to the payment of the dividend. While a request made after payment 
would not disqualify the dividend from the benefit of the reduced rate 
if a favorable ruling is later obtained, the withholding agent would 
nevertheless withhold. Failure to do so would subject the withholding 
agent to an interest charge under section 6601. Also, the withholding 
agent would be liable for the tax and related penalties if a favorable 
ruling were not issued. See proposed Sec. 1.1441-1(f)(5) regarding the 
consequences to the withholding agent when it does not withhold the 
full amount even though it does not hold the required documentation 
prior to payment.
    The regulations are proposed to be effective for payments made 
after December 31, 1997. However, certificates issued on or before the 
date that is 60 days after these regulations are published as final 
regulations will continue to be valid until they expire, based upon 
existing regulations. In addition, because no documentation is 
currently required for dividends, the regulations propose a transition 
rule that would allow dividends paid on publicly-traded stock to 
accounts in existence on or before a date that is 60 days after these 
regulations are published as final regulations to continue to be 
subject to the current address rule until December 31, 1999.

Section 1.1441-7  General Provisions Relating to Withholding Agents

    This section modifies Sec. 1.1441-7 of the existing regulations 
dealing with withholding agents. Paragraph (a) clarifies that a 
withholding agent is any person that has the control, receipt, custody, 
disposal, or payment of an item of income and not merely a person that 
pays or causes an amount to be paid. If there are several withholding 
agents with respect to one payment, only one tax should be withheld and 
only one return should be filed.
    Paragraph (b) restates the ``actual knowledge or reason to know'' 
standards applicable to a withholding agent as in effect under current 
law. The IRS and Treasury are aware that the application of a ``reason 
to know'' standard without limitation may be impractical in the case of 
financial institutions handling large volumes of transactions for many 
customers. Therefore, the regulations propose to limit the due 
diligence expected from withholding agents paying portfolio interest, 
deposit interest, or dividends on publicly traded stock. Under 
paragraph (b)(2)(ii), a withholding agent's due diligence regarding a 
beneficial owner certificate would be limited to examining the address 
stated on the certificate. If this information indicated that the 
beneficial owner might be a U.S. taxpayer or conflicted with 
information that the withholding agent otherwise had in its records for 
that account, the withholding agent would have to obtain specified 
documentation to verify the beneficial owner's claim of foreign status 
or residence. Paragraph (b)(3) proposes to incorporate rules consistent 
with those under section 3406 dealing with universal accounts. 
Therefore, if the withholding agent used a system of universal 
accounts, it would be required to use that system to determine the 
scope of its due diligence under the regulations.
    Paragraph (c) restates and expands the provisions in Sec. 1.1441-
7(b) of the existing regulations pertaining to authorized agents and 
adds provisions regarding an authorized foreign agent. This new concept 
is intended to facilitate compliance by U.S. withholding agents that 
make payments through their agent abroad. By imputing the acts of a 
foreign agent to a U.S. withholding agent, the required documentation 
could remain with the foreign agent and would not have to be provided 
to the U.S. withholding agent. However, the regulations require that 
the agent be ``authorized'' in order to insure that the IRS can verify 
the foreign agent's compliance with the withholding procedures, which, 
in turn, would determine whether the U.S. withholding agent has itself 
complied. See proposed Sec. 1.1461-1 (b)(2)(iii) and (c)(4)(iii) 
regarding corresponding filing requirements.
    Section Sec. 1.1441-7(b)(3) of the Existing Regulations is Proposed 
to be Deleted, Pending Comments on the Continuing Necessity of 
Providing Guidance on Tax-Free Covenant Bonds
    Paragraph (d) restates without changes the provisions in 
Sec. 1.1441-7(a)(2) of the existing regulations dealing with the United 
States as a withholding agent. Paragraph (e) restates without changes 
the provisions in Sec. 1.1441-3(c)(2) of the existing regulations 
dealing with assumed obligations. Section Sec. 1.1441-7(c) of existing 
regulations dealing with payments other than money would be deleted and 
restated in proposed Sec. 1.1441-3(f) dealing with withholding 
procedures for payments in kind.

Section 1.1441-8T  Foreign Government and International Organization 
Exemption From Withholding

    This section exempts from withholding certain types of income 
excluded from gross income under section 892 that are paid to foreign 
governments and international organizations. Revisions are proposed to 
paragraph (b) of the existing regulations to conform the certification 
procedures to the proposed withholding certificate procedures described 
in proposed Sec. 1.1441-1(e)(1)(i). Therefore, Form 8709 would be 
replaced by the standard withholding certificate (Form W-8), meaning 
that foreign governments and international organizations would be 
relieved from the requirement to furnish annual certification. A 
foreign government or an international organization would not be 
required to furnish a tax identifying number. However, if it did, the 
certificate would be valid indefinitely for income required to be 
reported on Form 1042 or for which the withholding agent reports the 
TIN to the IRS. See proposed Sec. 1.1441-1(e)(4)(ii).

Section 1.1441-9  Exemption From Withholding on Exempt Income of 
Foreign Tax-Exempt Corporations and Foreign Private Foundations

    This new section provides that income paid to a foreign 
organization described in section 501(c) would not be subject to 
withholding under section 1442 if the income were not subject to tax as 
unrelated business income under section 511 and the entity were exempt 
from tax under section 501(a). For purposes of granting a reduced rate, 
a withholding agent could rely on a withholding certificate satisfying 
the requirements of proposed Sec. 1.1441-1(e)(1). A beneficial owner 
certificate must include a taxpayer identifying number and must certify 
that it will not be subject to tax under section 511, and that the IRS 
has issued a determination letter. In the absence of such a letter, the 
beneficial owner should provide an opinion of counsel stating that the 
organization meets the conditions for a tax exemption under section 
501(c). Since the affidavit requirement for foreign foundations is 
proposed to be eliminated, foreign tax-exempt organizations would be 
subject to the same documentation requirements as would apply to 
foreign foundations under proposed Sec. 1.1443-1(b).

[[Page 17629]]

Section 1.1461-1  Deposit and Return of Tax Withheld

    The provisions in Sec. 1.1461-1 of the existing regulations 
pertaining to ownership certificates for bond interest are proposed to 
be deleted. Interest on bonds described in this section would be 
subject to the regular procedures provided in the regulations under 
sections 1441 and 1443. The special rules would no longer be necessary 
in view of the substitute procedures provided in the proposed 
regulations. Comments are solicited as to the continuing need for 
provisions governing tax-free covenant bonds.
    Section 1.1461-1 contains proposed procedures for withholding 
agents to pay the withheld tax and file the annual income tax return 
and information returns with respect to payments of income subject to 
section 1441 withholding. Paragraph (a) restates Sec. 1.1461-3 of the 
existing regulations regarding the payment of amounts withheld. The 
provisions regarding pre-1973 years are proposed to be deleted as 
obsolete. Paragraph (b) revises Sec. 1.1461-2(b) of the existing 
regulations on the filing of returns of amounts withheld. Paragraph 
(b)(1) clarifies that the Form 1042 must include the total amount of 
income paid during the preceding calendar year. Also, the filing date 
is changed from March 15 to February 28 in order to conform with the 
filing dates for Form 1099. The proposed regulations would eliminate 
the requirement to attach the Forms 1042-S to the return. Instead, the 
Forms 1042-S would have to be filed separately with a transmittal form. 
See paragraph (c)(1)(i).
    Paragraph (b)(2) describes applicable return requirements for 
multiple withholding agents. Generally, as under current rules, only 
one Form 1042 would have to be filed for an item of income. Exceptions 
to this general rule are provided for payments to qualified 
intermediaries where the U.S. withholding agent would have to file a 
return, regardless of whether the qualified intermediary assumed 
primary withholding responsibility for the payment and regardless of 
whether the qualified intermediary were also required to file a return 
under its agreement with the IRS. Another exception would be provided 
for payments to an authorized foreign agent. In that case, the U.S. 
withholding agent and the authorized foreign agent would each be 
required to make a return. The return of the withholding agent would 
report amounts paid to the authorized foreign agent. The return of the 
authorized foreign agent would report amounts paid to the beneficial 
owner or its intermediaries.
    Paragraph (b)(3) requires that changes to the originally filed Form 
1042 be filed on an amended return on a new Form 1042X. This change is 
designed to facilitate the processing of returns by the IRS and would 
be consistent with the procedures for filing other amended returns.
    Paragraph (c) revises the provisions in Sec. 1.1461-2(c) of the 
existing regulations regarding the filing of information returns on 
Form 1042-S. As under existing regulations, any income subject to 
withholding must be reported on an information return on Form 1042-S 
and a return would be due irrespective of the fact that no tax was 
withheld (e.g., the beneficial owner claimed an exemption or the 
withholding agent failed to withhold).
    The provisions of Sec. 1.1461-2(c)(3) of the existing regulations 
requiring that the name of the beneficial owner be reported on Form 
1042-S would be retained. However, more detailed guidance is provided 
regarding reporting of income paid to intermediaries. See paragraph 
(c)(4) below dealing with multiple agents. The proposed regulations 
eliminate as unnecessary the requirements under existing regulations to 
attach any certificate, form, or statement to the return.
    Paragraph (c)(1)(ii) proposes new rules pertaining to joint owners. 
A single Form 1042-S may be provided to one of the joint owners. In 
that case, the withholding agent should provide the Form 1042-S to the 
joint owner whose status determines the tax withheld. Further, any one 
owner may request a separate Form 1042-S, but the total amounts of 
income and tax reported paid and withheld on all the forms 1042-S may 
not exceed the total amount of income actually paid and tax actually 
withheld.
    Paragraph (c)(2) replaces Sec. 1.1461-2(c)(1) of the existing 
regulations and states that the items of income that are subject to 
reporting on Form 1042-S are those items of income subject to 
withholding, income from a notional principal contract, and amounts 
described in sections 6041 through 6050P that are paid to a foreign 
person and are not exempt from reporting under those sections or the 
corresponding regulations. This provision is intended to standardize 
reports of payments to foreign persons to the IRS and should simplify 
compliance by withholding agents. Paragraph (c)(2)(ii) lists the 
exceptions to reporting on a Form 1042-S. As under current regulations, 
items of income exempt from reporting include portfolio interest on a 
bearer obligation and original issue discount on short-term 
obligations. An explicit exception for reporting on deposits described 
in section 871(i)(2)(A) would be added. However, bank deposit interest 
that is subject to withholding under section 1441 (because, for 
example, documentation was not furnished but payments were made to a 
foreign address; see special grace period provisions under proposed 
Sec. 1.1441-1(f)(2)(i)(B)) would have to be reported. Also, interest on 
bank deposit interest paid to Canadian residents would have to be 
reported based upon provisions under final regulations under section 
6049 published in the Rules and Regulations section of this issue of 
the Federal Register. In addition to the items excepted from reporting 
under existing Sec. 1.1461-1(c)(1), other items are added that prevent 
duplicative reporting. Finally, the proposed regulations would clarify 
that to the extent group-term life insurance and other items of income 
required to be reported pursuant to the provisions in Secs. 1.6041-2 
and 1.6052-1 can be associated with wages required to be reported on a 
Form W-2, then such items may also be reported on a Form W-2 instead of 
a Form 1042-S.
    Paragraph (c)(3) restates the provisions of Sec. 1.1461-2(c)(2) of 
the existing regulations regarding the types of information to be 
included on Form 1042-S. It clarifies that the information could be 
based on the information furnished by or on behalf of the beneficial 
owner, as corrected based on the withholding agent's actual knowledge 
if necessary. In addition, the Form 1042-S would have to include the 
TIN of the beneficial owner if required to be shown on the withholding 
certificate. Also, a beneficial owner's TIN that the beneficial owner 
is not required to furnish but which is actually known to the 
withholding agent would have to be reported on Form 1042-S.
    Paragraph (c)(4) is added to provide rules for filing Form 1042-S 
where there are multiple withholding agents. Generally, as with the 
Form 1042, only one Form 1042-S must be filed with respect to an item 
of income. Current rules requiring the withholding agent to identify 
the beneficial owners of payments made to agents, nominees, or 
representatives, if known, would be eliminated for payments to an 
intermediary that either claims to be a qualified intermediary or is an 
authorized foreign agent. In all other cases, the information on a Form 
1042-S must be reported for each beneficial owner. This would modify 
Sec. 1.1461-

[[Page 17630]]

2(c)(3)(i) of the existing regulations providing that beneficial owner 
information be reported only if known. For payments made to a person 
claiming to be a qualified intermediary or is an authorized foreign 
agent, each withholding agent in the chain would be permitted to report 
on one Form 1042-S reflecting the payment made to the next qualified 
intermediary or authorized foreign agent in the chain. In the case of a 
payment to an authorized foreign agent, however, the withholding agent 
would be excused from the requirement to report the beneficial owner 
information only to the extent that the authorized foreign agent 
actually complies with the filing requirements under paragraph 
(c)(4)(iv).
    Paragraph (c)(5) is added to cross-reference the magnetic media 
filing requirements applicable to Forms 1042-S under Sec. 1.6011-1(c). 
Generally, a filer of 250 or more Forms 1042-S must file on magnetic 
media, unless a waiver is granted.
    Paragraph (d) would allow a withholding agent to provide a list of 
taxpayer identifying numbers furnished by or on behalf of beneficial 
owners to the extent the agent has relied upon such number to grant a 
reduced rate of withholding tax. This is a special filing procedure 
under which the reporting of the associated amount of income would not 
be have to be reported.
    Finally, paragraph (e) clarifies the provisions regarding 
indemnification of withholding agents. Section 1461 indemnifies a 
withholding agent from the claim of any person for the amount of any 
payments made in accordance with the provisions of chapter 3 of the 
Code. Some commentators and withholding agents have expressed concerns 
that section 1461 could be interpreted to limit indemnification to 
amounts that were required to be withheld. The proposed regulations 
clarify that a withholding agent that withheld based upon a reasonable 
belief that such amount was withheld in accordance with chapter 3 of 
the Code would be treated for purposes of section 1461 as having 
withheld in accordance with chapter 3 (even though it is later 
determined that the withholding agent's application of the rules was 
incorrect). Additionally, a withholding agent would be indemnified 
against any claim of any person for the amount of any withholding made 
in accordance with the grace period provisions under proposed 
Sec. 1.1441-1(f)(2)(ii).
    Paragraph (f) restates without changes Sec. 1.1461-2(f) of the 
existing regulations dealing with amounts that may not constitute gross 
income, in whole or in part. This rule would apply to amounts subject 
to withholding under proposed Secs. 1.1441-3(b)(1) or 1.1441-3(d).
    Paragraph (g) is added to provide guidance on requests of 
extensions of time to file Form 1042, Forms 1042-S, and to furnish 
Forms 1042-S to recipients. The rules with respect to such requests 
would parallel those under section 6081. A change would be made, 
however, to the form to be used for making a request for an extension 
of time to file Forms 1042-S.
    Currently, these requests are made on Form 2758; the proposed 
regulations require such a request to be made on Form 8809.

Section 1.1461-2  Adjustments for Overwithholding and Underwithholding 
of Tax

    This section has also been renumbered and, although the rules are 
the same as those of the current regulations in Sec. 1.1461-4, it has 
been redrafted to simplify the language and to update the examples. 
Specifically, the rule for reimbursements remains the same, but the 
rule in proposed Sec. 1.1461-4(b) with respect to the adjustment of tax 
payments or deposits is now titled ``set-offs,'' which more accurately 
describes the adjustment process.

Section 1.1462-1  Withheld Tax as Credit to Recipient of Income

    Section 1.1462-1(a) is clarified by stating that the amount of 
income from which the tax is required to be withheld includes the 
amount calculated under the gross-up formula in proposed Sec. 1.1441-
3(e)(3).

Section 1.1463-1  Tax Paid by Recipient of Income

    This section provides that if the income tax for which the 
beneficial owner and the withholding agent have joint liability under 
section 1461 has been paid by either one of them, the IRS may not 
collect from the other, regardless of the original liability for the 
tax. This section has been changed to reflect the 1989 statutory 
amendment (Pub. L. 101, 239, Sec. 7743(a)) that provides for the 
imposition of interest and penalties on the party that fails to 
withhold.
Prior Proposed Regulations Under Section 871 and Chapter 3 of the Code
    In 1976, proposed regulations were published relating primarily to 
withholding and original issue discount. In 1984, proposed regulations 
were published relating primarily to claims of benefits under income 
tax treaties. These proposed regulations were contained in project 
number LR-2043, published on July 12, 1976 (41 FR 28517) and project 
number LR-271-83, published on September 10, 1984 (49 FR 35511). Both 
proposed regulations are being withdrawn on April 22, 1996.
Regulations Under Sections 6041, 6041A, 6042, 6045, 6049, and 6050N
    These proposed regulations provide exceptions from information 
reporting and backup withholding under sections 3406, 6041, 6041A, 
6042, 6045, 6049, and 6050N for payments to foreign beneficial owners 
and for income paid by certain foreign payors or middlemen.
    Generally the regulations clarify and simplify the regulations 
under sections 3406, 6041, 6042, 6045, and 6049 that were proposed on 
February 29, 1988, at 53 FR 5991 (1988) (the 1988 proposed 
regulations). In addition, the regulations under these sections are 
proposed to be revised. The regulations also would add new exceptions 
from reporting (including the addition of middleman rules) to sections 
6041, 6041A, and 6050N. These proposed revisions and new exceptions 
from reporting parallel the exceptions under these proposed regulations 
under sections 6042 and 6049. Further, parallel provisions are found in 
each section for: definitions of terms (such as non-U.S. payor or non-
U.S. middleman); presumptions as to whether a payee is U.S. or foreign 
where the required documentation is lacking, incorrect, or unreliable; 
rules for payments to joint owners; and rules for converting into U.S. 
dollars amounts paid in foreign currency. In addition, the proposed 
regulations specify that the standard of knowledge applicable to payors 
and middlemen would be actual knowledge. Thus, the ``reason to know'' 
standard would not apply for purposes of the reporting provisions.
    The subparagraphs under proposed Sec. 1.6042-3(a) (dealing with the 
definition of dividends for purposes of information reporting under 
that section) are proposed to be restated with changes in drafting 
only. The substantive rules in that paragraph would be unchanged and 
are, therefore, not reproposed. Also, Sec. 1.6042-3(b) (3) and (4) of 
the 1988 proposed regulations (relating to capital gain dividends from 
regulated investment companies and payments to exempt recipients) would 
be redesignated as subparagraphs (vii) and (viii), respectively, of 
proposed Sec. 1.6042-3(b)(1). These rules are not reproposed.
    This document also proposes to revise the definition of an exempt 
recipient in the case of a corporation. Section Sec. 1.6049-
4(c)(1)(ii)(A) of the 1988 proposed regulations provides that a person 
would be treated as a corporation, and therefore as an exempt

[[Page 17631]]

recipient not subject to information reporting, if the name of the 
payee or a corporate resolution provided to the payor clearly indicates 
corporate status (the eyeball test). These proposed regulations retain 
the eyeball test of the 1988 proposed regulations for payments (1) 
other than interest, dividends and broker proceeds paid to accounts 
established after a date that is 60 days after the date that these 
regulations are published as final regulations in the Federal Register 
and (2) other than interest, dividends and broker proceeds that are not 
paid to a person to whom the payor has an account relationship. For 
interest and dividends paid to a new account, the entity would be 
required to provide either a corporate resolution or similar document 
that clearly indicates corporate status, a Form W-9 with an EIN, or a 
Form W-8. For interest and dividends paid where an account relationship 
does not exist, the payor may continue to rely on the eyeball test if 
the payor also has a mailing address of the payee in the United States. 
The IRS and Treasury understand that financial institutions routinely 
request a corporate resolution when opening accounts for entities. 
Therefore, requiring such a document would not significantly increase 
burden and would improve compliance. This proposed rule is reflected in 
paragraph (c)(1)(ii)(A). In addition, the list of international 
organizations under paragraph (c)(1)(ii)(G) is proposed to be 
eliminated as a simplification measure.
    In addition, the 1988 proposed regulations under Sec. 1.6049-5 are 
proposed to be substantially redrafted, although without significant 
substantive changes. Paragraph (b)(6) provides an exception from 
reporting for amounts from sources outside the United States paid 
outside the United States by a non-U.S. payor or non-U.S. middleman. 
This provision duplicates that found in the 1988 proposed regulations 
at proposed Secs. 1.6049-5(b)(8) and 1.6049-5(d)(3) (i), (ii), and the 
foreign source portion of proposed Sec. 1.6049-5(d)(3)(iii).
    Paragraph (b)(7) (which corresponds to Sec. 1.6049-5(c)(6) of the 
1988 proposed regulations) would except portfolio interest paid on 
bearer obligations if paid outside the United States. In these proposed 
regulations, this exception would not apply where a U.S. middleman acts 
as a custodian, nominee, or other agent of the payee and collects the 
amount for, or on behalf of, the payee, whether or not the middleman is 
also acting as agent of the payor. Paragraph (b)(8) (which corresponds 
to Sec. 1.6049-5(c)(6) of the 1988 proposed regulations) provides an 
exception for portfolio interest paid on registered obligations.
    The provisions of Sec. 1.6049-5(b)(9) of the 1988 proposed 
regulations, which excepted from reporting amounts paid by an 
international organization (or its agent) on an obligation issued by 
the international organization are proposed to be incorporated in 
paragraph (b)(9) of these new proposed regulations. These rules are not 
reproposed.
    Paragraph (b)(10) (which corresponds to Sec. 1.6049-5(c)(5)(ii) of 
the 1988 proposed regulations) provides an exception for certain short-
term foreign targeted obligations. Paragraph (b)(11) (which corresponds 
to Sec. 1.6049-5(e)(1) (the parenthetical language) and Sec. 1.6049-
5(e)(2) (i) and (ii) of the proposed 1988 proposed regulations) 
provides an exception for certain foreign-targeted obligations issued 
by persons engaged in the banking business. Although the 1988 proposed 
regulations limited the exceptions at Sec. 1.6049-5(e)(2) (i) and (ii) 
to Canadians, these proposed regulations expand the scope of the 
exceptions to apply to all beneficial owners. However, as under the 
1988 proposed regulations, the exception would not apply where a U.S. 
middleman acts as an agent of the payee.
    Paragraph (b)(12) (which corresponds to Secs. 1.6049-5(b)(7) and 
(c) (1), (2), and (3) of the 1988 proposed regulations) would except 
any amount of U.S. source interest subject to withholding under section 
1441. Such interest would be required to be reported on a Form 1042-S 
under proposed Sec. 1.1461-1(c). This exception would replace 
Sec. 1.6049-5(b)(1)(vi), (b)(1)(vi)(B)(1) and (b)(2)(iv) of the 
existing regulations, which provide an exception for reporting for bank 
deposit interest paid to a foreign person, but only if a Form W-8 (or 
documentary evidence in appropriate cases) is provided to the payor. 
The withholding certificate requirement for bank deposit interest is 
now found at proposed Sec. 1.1441-2(d)(2).
    Paragraph (b)(13) provides a new exception for assets blocked 
pursuant to an executive order.
    Paragraph (b)(14) provides the general rule for exempting any other 
amount of otherwise reportable interest based on specified 
documentation furnished to the payor or middleman. The standards of 
documentation are described in paragraph (c) and would generally 
parallel the documentation standards proposed for purposes of claiming 
a reduced rate of withholding under section 1441. Therefore, the payor 
could rely on a beneficial owner or intermediary withholding 
certificate described in proposed Sec. 1.1441-1(e)(1)(i) provided it 
complied with the procedures described in proposed Sec. 1.1441-1(e)(4) 
(iv) and (v) (dealing with on-line confirmation and notification 
procedures). No taxpayer identifying number is required to be stated on 
a beneficial owner withholding certificate. These proposed regulations 
retain the permission under current regulations to furnish documentary 
evidence instead of a certificate for payments made to an off-shore 
account. The on-shore and off-shore distinction is similar to that 
found in the 1988 proposed regulations. The provisions of the 1988 
proposed regulations contained in paragraphs (d), (e), (f), (g), (h), 
(i), and (l) are withdrawn. Proposed paragraphs (j) (relating to 
payments outside the United States) and (k) (dealing with original 
issue discount) of the 1988 proposed regulations would be renumbered as 
paragraphs (e) and (f), respectively. The provisions in these 
paragraphs are not restated.

Section 31.3401(a)(6)-1(e)--Income Exempt From Income Tax

    This section is amended to reflect the new certification procedures 
under proposed Secs. 1.1441-1(e).
Backup Withholding Regulations Under Section 3406
    Several changes to the backup withholding regulations under section 
3406 are proposed to conform those regulations to the proposed 
information reporting and chapter 3 withholding regulations. Section 
31.3406(d)-3 (c) would be amended to extend to 90 days the current 30-
day grace period applicable to readily tradeable instruments acquired 
directly from a payor if the payment were made to a person for whom 
indicia of foreign status existed, as described in proposed 
Sec. 1.1441-1(f)(2)(i)(B).
    Section 31.3406(g)-1(e) would revise the proposed regulations 
contained in project number IA-224-82 published in the Federal Register 
on September 27, 1990 (55 FR 39427) to restate the principles that no 
backup withholding applies under section 3406 to reportable payments 
made outside the United States even though documentary evidence of non-
U.S. status may be required in order to exempt the payment from 1099 
reporting, unless the payor has actual knowledge that the payee is a 
United States person. The regulations propose to add an exception for 
notional principal contract payments that are made outside the United 
States.
Amendments to Sec. 31.6413(a)-3
    The regulations under Sec. 31.6413(a)-3 are proposed to be amended 
in order to

[[Page 17632]]

allow payers to refund backup withholding in certain circumstances. 
Those regulations currently prohibit a refund of backup withholding 
except when erroneous withholding has occurred. It is proposed to 
expand the definition of erroneous withholding to a situation where the 
withholding agent backup withholds because the payee fails to provide 
sufficient documentation as required under section 3406 and 1441 and 
the regulations under these sections. Where an appropriate withholding 
certificate is later provided, the withholding agent could treat the 
earlier withholding as erroneous withholding. However, the withholding 
certificate should to be received prior to the end of the calendar year 
in which the payment is made and prior to the time the payor furnishes 
a Form 1099 to the payee with respect to the payment for which the 
withholding erroneously occurred. The amount refunded would be the 
amount actually withheld less the amount required to be withheld, if 
any, under chapter 3 of the Code.
Removal of Q&A Regulations
    The existing regulations under part 35a are proposed to be removed 
in order to reflect the proposed revisions in this document.
Amendments to Sec. 301.6109-1
    Amendments to the regulations under this section are currently 
pending to authorize the IRS to issue taxpayer identifying numbers to 
certain foreign persons and to require a taxpayer to state a TIN on any 
tax return filed (other than an information return). These regulations 
are proposed to be further amended to require that a TIN be stated on 
withholding certificates as may be required under the regulations 
proposed under sections 1441, 1442, and 1443.
Amendments to Sec. 301.6114-1
    The regulations under section 6114 are proposed to be amended to 
require certain foreign entities to file a Form 8833 if they are 
claiming to be qualified under a limitation of benefits provision under 
an income tax treaty, even though the income is also reported on a Form 
1042 by the withholding agent. The filing requirement would be limited 
to payments between related parties that exceed $500,000 for the 
taxable year. See proposed Sec. 1.1441-6(b)(1).
Amendments to Sec. 301.6402-3(e)
    Paragraph (e) of the regulations under Sec. 301.6402-3 is proposed 
to be amended to require that returns filed to claim a refund of tax 
include the taxpayer's TIN. In addition, the Form 1042-S would have to 
be attached to the return and also show the taxpayer's TIN.
Removal of Certain Regulations Under Tax Conventions
    This document proposes to remove certain regulations issued under 
income tax conventions between the United States and Greece, Germany, 
Switzerland, Ireland, France, Austria, Pakistan, Sweden and Denmark. 
Removal of these regulations will be done in consultation with the 
competent authorities of these countries.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, these regulations will be submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled on a date, time, and place as will be 
published in the Federal Register.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensations.

26 CFR Part 35a

    Employment taxes, Income taxes, Reporting and recordkeeping 
requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping

26 CFR 502

    Greece, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 503

    Germany, reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 509

    Switzerland, Reporting and recordkeeping requirements, Tax 
treaties.

26 CFR Part 513

    Ireland, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 514

    France, Reporting and recordkeeping requirements, Tax treaties.

26 CFR 516

    Austria, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 517

    Pakistan, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 520

    Sweden, Reporting and recordkeeping requirements, Tax treaties.

26 CFR Part 521

    Denmark, Reporting and recordkeeping requirements, Tax treaties.

Proposed Amendment to the Regulations

    Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR chapter 
I is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order and removing the entry for Sec. 1.1441-4T to 
read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6). * * *
    Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6). * * *

[[Page 17633]]

Sec. 1.163-5   [Amended]

    Par. 2. In Sec. 1.163-5 paragraph (c)(2)(i)(B)(5) is amended by 
removing the language ``subdivision (iii) of A-5 of Sec. 35a.9999-4T'' 
in the last sentence and adding ``Sec. 1.6049-5(c)(2)(ii)'' in its 
place.
    Par. 3. Section 1.165-12(c) is amended by:
    1. Removing paragraph (c)(1)(iii).
    2. Redesignating paragraphs (c)(1)(iv) and (c)(1)(v) as paragraphs 
(c)(1)(iii) and (c)(1)(iv), respectively.
    3. Amending paragraphs (c)(1)(i) and (c)(1)(ii) by removing the 
language ``(c)(1)(v)'' and adding ``(c)(1)(iv)'' in its place.
    4. Revising newly designated paragraph (c)(1)(iii). The revision 
reads as follows:


Sec. 1.165-12   Denial of deduction for losses on registration-required 
obligations not in registered form.

* * * * *
    (c) * * *
    (1) * * *
    (iii) The holder may deliver an obligation in bearer form that is 
offered or sold inside the United States only if the holder delivers it 
to a financial institution that is purchasing for its own account, the 
account of another foreign institution, or an exempt organization that 
will comply with the requirements of section 165(j)(3) (A), (B), or 
(C). The holder may deliver a registration-required obligation in 
bearer form that is offered and sold outside the United States to a 
person other than a financial institution only if the holder has 
evidence in its records that such person is not a U.S. citizen or 
resident and does not have actual knowledge that such evidence is 
false. Such evidence may include a statement by that person that is 
delivered electronically. For purposes of this paragraph (c), the term 
deliver includes a transfer of an obligation evidenced by a book entry 
including a book entry notation by a clearing organization evidencing 
transfer of the obligation from one member of the organization to 
another member. For purposes of this paragraph (c), the term deliver 
does not include a transfer of an obligation to the issuer or its agent 
for cancellation or extinguishment.
* * * * *
    Par. 4. Section 1.871-14 is added to read as follows:


Sec. 1.871-14   Rules relating to repeal of tax on interest of 
nonresident alien individuals and foreign corporations received from 
certain portfolio debt investments.

    (a) General rule. No tax shall be imposed under sections 
871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any portfolio 
interest as defined in sections 871(h)(2) and 881(c)(2) received by a 
foreign person. But see section 871(h) or 882(a) if such interest is 
effectively connected with the conduct of a trade or business within 
the United States.
    (b) Rules concerning obligations not in registered form--(1) In 
general. [Reserved] For further guidance, see Sec. 35a.9999-5(a), 
Answer 1.
    (2) Convertible obligations. [Reserved] For further guidance, see 
Sec. 35a.9999-5(c), Answers 18 and 19.
    (3) Coordination with withholding and reporting rules. See 
Sec. 1.1441-2(d)(1)(i) for an exception from documentation requirements 
otherwise applicable for purposes of section 1441. See section 6049 and 
Sec. 1.6049-5(b)(7) for rules relating to an exemption from Form 1099 
reporting and backup withholding under section 3406.
    (c) Rules concerning obligations in registered form--(1) In 
general. In the case of interest paid on an obligation that is in 
registered form, the term portfolio interest means any interest 
(including original issue discount)--
    (i) That is paid on an obligation issued after July 18, 1984;
    (ii) That would be subject to tax under section 871(a)(1)(A), 
871(a)(1)(C), 881(a)(1) or 881(a)(3) but for section 871(h) or 881(c); 
and
    (iii) With respect to which a United States (U.S.) person otherwise 
required to deduct and withhold tax under section 1441(a) or 1442(a) 
receives a statement that meets the requirements of section 871(h)(5) 
that the beneficial owner of the obligation is not a U.S. person.
    (2) Required statement. A U.S. person will be considered to have 
received a statement that meets the requirements of section 871(h)(5) 
if either it complies with one of the procedures described in this 
paragraph and does not have actual knowledge or reason to know that the 
beneficial owner is a U.S. person or it complies with the procedures 
described in paragraph (d) or (e) of this section.
    (i) The U.S. person (or its authorized foreign agent described in 
Sec. 1.1441-7(c)(2)) complies with the withholding certificate 
procedures described in Sec. 1.1441-1(e)(1).
    (ii) The U.S. person complies with the documentary evidence 
procedures described in Sec. 1.6049-5(c)(2)(ii) (but only if payments 
are made outside the United States with respect to offshore accounts). 
See Sec. 1.6049-5(e) for determining the place of payment and 
Sec. 1.6049-5(d)(3) for a definition of offshore accounts.
    (iii) [Reserved] For further guidance, see Sec. 35a.9999-5(b), 
Answer 9, sentences 5 through 13.
    (iv) The U.S. person complies with procedures that the U.S. 
competent authority may agree to with the competent authority of a 
country with which the United States has an income tax treaty in 
effect.
    (3) Time for providing certificate or documentary evidence. 
Interest on a registered obligation shall qualify as portfolio interest 
if the withholding certificate or documentary evidence that must be 
provided is furnished before expiration of the beneficial owner's 
period of limitation for claiming a refund of tax with respect to such 
interest. See, however, Sec. 1.1441-1(f)(5) for consequences to a 
withholding agent that makes a payment without withholding even though 
it cannot associate the payment with the required documentation prior 
to the payment.
    (4) Coordination with withholding and reporting rules. For an 
exemption from withholding under section 1441 with respect to 
obligations described in this paragraph (c), see Sec. 1.1441-2(d)(2). 
For rules applicable to withholding certificates, see Sec. 1.1441-
1(e)(4). For application of presumptions when the U.S. person cannot 
associate the payment with the required documentation, see Sec. 1.1441-
1(f). For standards of knowledge applicable to withholding agents, see 
Sec. 1.1441-7(b). For rules relating to an exemption from Form 1099 
reporting and backup withholding under section 3406, see section 6049 
and Sec. 1.6049-5(b)(8). For rules relating to reporting on Forms 1042 
and 1042-S, see Sec. 1.1461-1(b) and (c).
    (d) Application of repeal of 30 percent withholding to pass-through 
certificates. [Reserved] For further guidance, see Sec. 35a.9999-5(e), 
Answers 21 and 22.
    (e) Foreign-targeted registered obligations. [Reserved] For further 
guidance, see Sec. 35a.9999-5(b), Answers 12 through 15.
    (f) Definitions. For purposes of this section, the terms foreign 
person and beneficial owner have the meaning set forth in Sec. 1.1441-
1(c)(2) and (c)(6), respectively; the term withholding agent has the 
meaning set forth in Sec. 1.1441-7(a); and the term payment has the 
meaning set forth in Sec. 1.1441-2(e).
    (g) Effective date--(1) In general. This section shall apply to 
payments of interest made after December 31, 1997.
    (2) Transition rule. For purposes of paragraph (c)(2)(i) of this 
section, a withholding agent that holds a valid Form W-8 on a date that 
is 60 days after these regulations are published as final regulations 
in the Federal Register may

[[Page 17634]]

treat it as a valid withholding certificate until its validity expires 
under applicable provisions as in effect on April 22, 1996.
    Par. 5. Section 1.1441-0 is added to read as follows:


Sec. 1.1441-0  Outline of regulation provisions for section 1441.

    This section lists captions contained in Secs. 1.1441-1, 1.1441-2, 
1.1441-3, 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-7, 1.1441-8T, and 
1.1441-9.

Sec. 1.1441-1  Requirement for the deduction and withholding of tax 
on payments to foreign persons.

    (a) Purpose and scope.
    (b) General rule of withholding.
    (c) Definitions.
    (1) Withholding.
    (2) Foreign person.
    (3) Payee.
    (4) Individual.
    (5) Foreign corporations.
    (6) Beneficial owner.
    (7) Chapter 3 of the Internal Revenue Code.
    (d) Claim of U.S. status by payee or beneficial owner.
    (1) In general.
    (2) Payments to a payee that is a U.S. person.
    (3) Payments to a foreign person acting for a U.S. payee.
    (e) Beneficial owner's claim of foreign status.
    (1) Withholding agent's reliance.
    (2) Beneficial owner withholding certificate.
    (3) Intermediary withholding certificate.
    (4) Applicable rules.
    (5) Qualified intermediaries.
    (f) Presumptions.
    (1) In general.
    (2) Reportable payments to non-exempt recipients.
    (3) Special rules for scholarships, grants, pensions, annuities, 
etc.
    (4) Special rules for pass-through entities.
    (5) Failure to act in accordance with presumptions.
    (6) Reportable payment.
    (7) Adjustment, refund, or credit of overwithheld tax.
    (g) Effective date.
    (1) In general.
    (2) Transition rules.

Sec. 1.1441-2  Income subject to withholding.

    (a) In general.
    (b) Fixed or determinable annual or periodical income.
    (1) In general.
    (2) Exceptions.
    (3) Original issue discount.
    (4) Securities lending transactions.
    (c) Other income subject to withholding.
    (d) Items of income not subject to withholding under section 
1441.
    (1) Exemptions for which no withholding certificate or 
documentation is required.
    (2) Exemptions for portfolio interest and income on bank, etc. 
deposits requiring a withholding certificate or documentation.
    (e) Payment.
    (1) General rule.
    (2) Income allocated under section 482.
    (3) Blocked income.
    (4) Special rules for dividends.
    (5) Certain interest accrued by a foreign corporation.
    (6) Payments other than in U.S. dollars.
    (f) Effective date.

Sec. 1.1441-3  Amounts subject to withholding.

    (a) Withholding on gross amount.
    (b) Withholding on payments on certain obligations.
    (1) Withholding at time of payment of interest.
    (2) No withholding between interest payment dates.
    (c) Corporate distributions.
    (1) General rule.
    (2) Determination of accumulated and current earnings and 
profits on the date of payment.
    (3) Special rules in the case of distributions from a regulated 
investment company.
    (4) Overwithholding of tax.
    (d) Withholding on certain gains.
    (e) Payments other than in U.S. dollars.
    (1) In general.
    (2) Payments in foreign currency.
    (3) Tax liability of beneficial owner satisfied by withholding 
agent.
    (f) Conduit financing arrangements.
    (g) Effective date.

Sec. 1.1441-4  Certain exemptions from withholding.

    (a) Certain income connected with a U.S. trade or business.
    (1) In general.
    (2) Withholding agent's reliance on a claim of effectively 
connected income.
    (3) Income on notional principal contracts.
    (4) Failure to act in accordance with presumption.
    (b) Compensation for personal services of an individual.
    (1) Exemption from withholding.
    (2) Manner of obtaining withholding exemption under tax treaty.
    (6) Personal exemption.
    (c) Special rules for scholarship and fellowship income.
    (1) In general.
    (2) Alternate withholding election.
    (d) Annuities received under qualified plans.
    (e) Income of foreign central bank of issue or the Bank for 
International Settlements.
    (f) Effective date.
    (1) General rule.
    (2) Transition rules.

Sec. 1.1441-5  Withholding on payments to pass-through entities.

    (a) Domestic partnerships.
    (1) Exemption from withholding on payment to domestic 
partnerships.
    (2) Withholding by a domestic partnership.
    (b) Foreign partnerships.
    (1) In general.
    (2) Special rules in the case of tiered partnerships.
    (3) Presumptions.
    (4) Example.
    (c) Trusts and estates. [Reserved]
    (d) Effective date.
    (1) General rule.
    (2) Transition rules.

Sec. 1.1441-6  Claim of a reduced rate of tax under an income tax 
treaty.

    (a) In general.
    (b) Reliance on claim of treaty benefits.
    (1) In general.
    (2) Special rules for certain dividends.
    (3) Competent authorities agreement.
    (4) Special rules for payments to certain foreign entities.
    (c) Proof of tax residence in a treaty country.
    (1) In general.
    (2) Certification of taxpayer identifying number.
    (3) Certificate of residence.
    (4) Documentary evidence establishing residence in the treaty 
country.
    (d) Joint owners.
    (e) Related party dividends under certain treaties.
    (f) Effective date.
    (1) General rule.
    (2) Transition rules.

Sec. 1.1441-7  General provisions relating to withholding agents.

    (a) Withholding agent defined.
    (b) Standards of knowledge.
    (1) In general.
    (2) Reason to know.
    (3) Universal accounts.
    (c) Authorized agent.
    (1) In general.
    (2) Authorized foreign agent.
    (3) Notification.
    (4) Liability of U.S. withholding agent.
    (5) Filing of returns.
    (d) United States obligations.
    (e) Assumed obligations.
    (f) Conduit financing arrangements. [Reserved]
    (g) Effective date.

Sec. 1.1441-8T  Foreign government and international organization 
exemption from withholding (temporary).

    (a) Foreign governments.
    (b) Statement claiming exemption.
    (c) Effective date.
    (1) In general.
    (2) Transition rules.

Sec. 1.1441-9  Exemption from withholding on exempt income of a 
foreign tax-exempt organization and foreign private foundations.

    (a) Income not subject to tax under section 511.
    (b) Statement claiming exemption.
    (c) Effective date.
    (1) In general.
    (2) Transition rules.

    Par. 6. Section 1.1441-1 is revised to read as follows:


Sec. 1.1441-1  Requirement for the deduction and withholding of tax on 
payments to foreign persons.

    (a) Purpose and scope. This section and Secs. 1.1441-2 through 
1.1441-9 provide rules for withholding under section 1441 when a 
payment is made to a foreign person. This section provides definitions 
of terms used in

[[Page 17635]]

chapter 3 of the Internal Revenue Code and regulations under that 
chapter. It prescribes procedures to determine whether a tax must be 
withheld under chapter 3 of the Internal Revenue Code, including 
presumptions for determining whether a withholding agent should treat a 
payee as a United States (U.S.) person or a foreign person. Special 
procedures regarding payments to foreign persons that act as 
intermediaries are also provided. Section 1.1441-2 describes the income 
subject to withholding under section 1441. Section 1.1441-3 provides 
rules regarding the amount subject to withholding. Section 1.1441-4 
provides exemptions from withholding for certain income effectively 
connected with the conduct of a trade or business in the United States, 
including certain compensation for the personal services of an 
individual. Section 1.1441-5 provides rules regarding withholding on 
payments made to pass-through entities. Section 1.1441-6 provides rules 
regarding claiming a reduced rate of withholding under an income tax 
treaty. Section 1.1441-7 defines the term withholding agent and 
provides rules regarding withholding agents' obligations to withhold. 
Section 1.1441-8T provides rules for income received by a foreign 
government that is excluded from gross income under section 892. 
Section 1.1441-9 provides rules for payments to foreign tax exempt 
organizations and foreign private foundations.
    (b) General rule of withholding. A withholding agent (as defined in 
Sec. 1.1441-7(a)) must withhold 30 percent of the gross amount of a 
payment (as defined in Sec. 1.1441-2(e)) of income subject to 
withholding made to a payee that is a foreign person unless the 
beneficial owner of the income is a foreign person entitled to a 
reduced rate of tax and for the withholding agent holds an appropriate 
withholding certificate or documentation or unless the beneficial owner 
of the income is a U.S. person. For this purpose, a payment to the U.S. 
agent of a foreign person is treated as a payment to a foreign person 
if the withholding agent has actual knowledge or reason to know of the 
agency relationship. For the documentation upon which a withholding 
agent may rely in order to treat a payee or beneficial owner as a U.S. 
person, see paragraph (d) of this section. For the documentation upon 
which a withholding agent may rely in order to treat a payee or a 
beneficial owner as a foreign person, see paragraph (e) of this 
section. For applicable presumptions if the withholding agent cannot 
associate the payment with the required documentation at the time of 
payment, see paragraph (f) of this section. For definitions of foreign 
person, payee, and beneficial owner, see paragraphs (c)(2), (3), and 
(6) of this section, respectively. For the determination of income 
subject to withholding, see Sec. 1.1441-2(a). For a definition of an 
offshore account, see Sec. 1.6049-5(d)(3). For withholding procedures 
applicable to payments to U.S. and foreign partnerships, respectively, 
see Sec. 1.1441-5(a) and (b). For withholding procedures applicable to 
payments to U.S. and foreign trusts and estates, see Sec. 1.1441-5(c).
    (c) Definitions--(1) Withholding. The term withholding means the 
deduction and withholding of tax at the applicable rate from the 
payment of income.
    (2) Foreign person. The term foreign person means a nonresident 
alien individual, a foreign corporation, a foreign partnership, a 
foreign trust, a foreign estate, and any other person that is not a 
United States person for purposes of chapter 3 of the Internal Revenue 
Code. A United States person is a person described in section 
7701(a)(30), the U.S. government (including an agency or 
instrumentality thereof), or a State and the District of Columbia 
(including an agency or instrumentality thereof).
    (3) Payee--(i) General rule. Except as otherwise provided in 
paragraph (c)(3)(ii) of this section, a payee is the person to whom a 
payment is made. See Sec. 1.1441-2(e) for the determination of when a 
payment is considered made. Treatment of a person as a payee has 
consequences for purposes of withholding under chapter 3 of the 
Internal Revenue Code (see paragraph (b) of this section (relating to 
the general rule of withholding)) as well as for purposes of reporting 
income under the provisions of chapter 61 of the Internal Revenue Code 
and backup withholding under section 3406. See paragraph (d)(3) of this 
section for when a withholding agent may treat a payment to a foreign 
person as a payment made to a payee that is a U.S. person if the 
foreign person is acting for or representing the U.S. person.
    (ii) Payments to a foreign partnership. For purposes of chapter 3 
of the Internal Revenue Code, section 3406, and chapter 61 of the 
Internal Revenue Code, a payment made to a foreign partnership shall be 
treated as a payment made to the partners rather than to the 
partnership. A withholding agent may, however, treat a payment to a 
foreign partnership as made to the partnership (rather than to its 
partners) if, with respect to the partnership, it holds an intermediary 
withholding certificate described in paragraph (e)(3)(ii) of this 
section (relating to a certificate from a qualified intermediary) or an 
intermediary withholding certificate described in paragraph (e)(3)(iii) 
of this section (relating to a certificate from a foreign partnership) 
representing that the income to which the certificate relates is 
effectively connected with the conduct of a trade or business in the 
United States. In addition, if the withholding agent holds an 
intermediary withholding certificate described in paragraph (e)(3)(iv) 
of this section (relating to a certificate from an agent, nominee, 
representative, etc.), then the payee shall be the person on whose 
behalf the partnership is receiving the payment. In the case of tiered 
foreign partnerships that are not treated as payees under the 
provisions of this paragraph (c)(3)(ii), the payees shall be the 
partners of the next higher-tier foreign partnership. Thus, the rules 
of this paragraph (c)(3) shall apply through any number of tiers of 
foreign partnerships in order to determine which partner is treated as 
the payee. For example, if a payment is made to a foreign partnership 
(second tier) and one of the partners of the second tier partnership is 
another foreign partnership (first tier) with two individual partners, 
the payment to the second tier is treated as made to the individual 
partners of the first tier (unless the second tier partnership has 
furnished one of the intermediary withholding certificates referred to 
in this paragraph (c)(3)(ii)). If one of the partners in the first tier 
is a domestic partnership, the domestic partnership is treated as the 
payee under the provisions of paragraph (c)(3)(i) of this section, even 
though one of the partners of the domestic partnership might be a 
foreign partnership. If the first tier foreign partnership is a nominee 
and furnishes an intermediary withholding certificate described in 
paragraph (e)(3)(iv) of this section, the person on whose behalf the 
first tier partnership receives the payment is treated as the payee. 
See Sec. 1.1441-5(b) for rules regarding procedures applicable to 
beneficial owners' claims of reduced rate of withholding under chapter 
3 of the Internal Revenue Code.
    (4) Individual--(i) Alien individual. The term alien individual 
means an individual who is not a citizen or a national of the United 
States. See Sec. 1.1-1(c).
    (ii) Nonresident alien individual. The term nonresident alien 
individual means a person described in section 7701(b)(1)(B), an alien 
individual who is

[[Page 17636]]

a resident of a foreign country under the residence article of an 
income tax treaty and Sec. 301.7701(b)-7(a)(1) of this chapter, or an 
alien individual who is a resident of Puerto Rico, Guam, the 
Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, or 
American Samoa as determined under Sec. 301.7701(b)-1(d) of this 
chapter. An alien individual who has made an election under section 
6013(g) or (h) to be treated as a resident of the United States is 
nevertheless treated as a nonresident alien individual for purposes of 
withholding under chapter 3 of the Internal Revenue Code.
    (5) Foreign corporations. For purposes of this section, a 
corporation created or organized in Guam, the Commonwealth of Northern 
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not 
treated as a foreign corporation if the requirements of subparagraphs 
(A), (B), and (C) of section 881(b)(1) are met for such corporation. 
Further, a payment made to a foreign government or an international 
organization shall be treated as a payment made to a foreign 
corporation for purposes of withholding under chapter 3 of the Internal 
Revenue Code.
    (6) Beneficial owner--(i) General rule. In the case of a payment of 
income, the term beneficial owner means the person required under U.S. 
tax principles to include the amount paid in gross income under section 
61 (determined without regard to an exclusion or exemption from gross 
income under the Internal Revenue Code). Thus, a nominee, agent, 
custodian, or any person acting in a similar capacity is not the 
beneficial owner. In the case of a scholarship, the student receiving 
the scholarship is the beneficial owner of that scholarship.
    (ii) Special rules for certain entities--(A) General rule. The 
beneficial owners of income paid to a partnership are those persons 
that, under U.S. tax principles, are the taxpayers with respect to that 
income in their separate or individual capacities. For example, a 
partnership (first tier) that is a partner in another partnership 
(second tier) is not the beneficial owner of income paid to the second 
tier partnership since the first tier partnership is not liable for 
income tax under U.S. tax principles. See, however, Sec. 1.1441-5(a) 
for applicable withholding procedures for payments to a domestic 
partnership. See also Sec. 1.1441-5(b)(2) for applicable withholding 
procedures for payments to a foreign partnership where one of the 
partners (at any level in the chain of tiers) is a domestic 
partnership.
    (B) Special rules when an income tax treaty applies. For purposes 
of claiming a reduction in the rate of withholding on income paid to a 
foreign entity based on an income tax treaty between the United States 
and a foreign country, the tax principles in effect under the laws of 
that foreign country shall apply to determine whether the entity or the 
persons holding an interest in that entity are required to include the 
amounts in income and, therefore, whether, under the principles of this 
paragraph (c)(6), the entity or the interest holders in the entity are 
the beneficial owners of the income. See Sec. 1.1441-6(b)(4)(iii) 
permitting a withholding agent to treat, at its option, payments made 
to a single foreign entity as beneficially owned in part by the entity 
and, in part, by any one or more persons holding an interest in the 
entity. The possibility of dual treatment may also occur if a reduced 
rate of tax is claimed under the Internal Revenue Code for certain 
types of income and under a U.S. income tax treaty for other types of 
income or if reduced rates are claimed under different tax treaties. 
For purposes of this paragraph (c)(6)(ii)(B), the term foreign entity 
does not include a trust or an estate. See Sec. 1.1441-6(b)(4) for 
procedures governing claims of benefits under an income tax treaty.
    (C) Trusts. The provisions of paragraphs (c)(6)(i) and 
(c)(6)(ii)(A) of this section shall not apply to a trust, whether 
domestic or foreign. The beneficial owner of income paid to a trust 
shall be determined under the provisions of Sec. 1.1441-3(f) and (g), 
as in effect on the date preceding the date on which this document is 
published as a final regulation in the Federal Register.
    (7) Chapter 3 of the Internal Revenue Code. For purposes of the 
regulations under sections 1441, 1442, and 1443, any reference to 
chapter 3 of the Internal Revenue Code shall not include references to 
sections 1445 and 1446, unless the context indicates otherwise.
    (d) Claim of U.S. status by payee or beneficial owner--(1) In 
general. Payments made to a U.S. person are not subject to the 
withholding of tax under section 1441, absent actual knowledge or 
reason to know that the U.S. person may be acting as an agent for a 
foreign person. See paragraph (b) of this section. Absent actual 
knowledge or reason to know otherwise, a withholding agent may apply 
the provisions of this paragraph (d) to a payment of income otherwise 
subject to withholding to determine whether to treat the payment as 
made to a U.S. person. See paragraph (f) of this section for applicable 
presumptions if the withholding agent cannot associate the payment with 
the required documentation prior to the time of payment.
    (2) Payments to a payee that is a U.S. person--(i) Reportable 
payments. If a reportable payment (as defined in section 3406(b)) is 
made to a payee that is not an exempt recipient (as defined under the 
applicable information reporting provisions of chapter 61 of the 
Internal Revenue Code), the withholding agent may treat the payment as 
made to a U.S. person if the payee complies with the procedures 
described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter 
(including requiring a payee to furnish its taxpayer identifying 
number) and the withholding agent meets all the requirements described 
in Sec. 31.3406(h)-3(e) of this chapter regarding reliance by a payor 
on a Form W-9).
    (ii) Payments to exempt recipients and certain other payments. If a 
reportable payment is made to a payee that is an exempt recipient (as 
defined under the applicable information reporting provisions of 
chapter 61 of the Internal Revenue Code) or is a scholarship, grant, 
pension, or annuity, a withholding agent may treat the payment as made 
to a U.S. person if the payee provides a certificate of U.S. status. 
For purposes of this paragraph (d)(2)(ii), a certificate of U.S. status 
is a Form W-9 (or such other form as the Internal Revenue Service may 
prescribe) that is signed under penalties of perjury by the payee and 
contains all required information. For purposes of this paragraph 
(d)(2)(ii), required information consists of the payee's name, 
permanent residence address, and taxpayer identifying number. The 
procedures described in Sec. 31.3406(h)-3(a) of this chapter shall 
apply to payments to joint payees. A withholding agent that receives a 
Form W-9 in order to satisfy this paragraph (d)(2)(ii) must retain the 
form in accordance with the provisions of paragraph (e)(4)(iii) of this 
section relating to the retention of withholding certificates. The 
rules of this paragraph (d)(2)(ii) are only intended to provide a 
method by which a withholding agent may determine that a payee is not a 
foreign person and do not otherwise impose a requirement that 
documentation be furnished by an exempt recipient or for payments 
subject to this paragraph (d)(2)(ii).
    (3) Payments to a foreign person acting for a U.S. payee. Absent 
actual knowledge or reason to know otherwise, for purposes of chapter 3 
of the Internal Revenue Code, section 3406, and chapter 61 of the 
Internal Revenue Code, a withholding agent may treat a payment to a 
foreign person as a payment made to a payee that is a U.S. person if it 
receives an intermediary withholding certificate described in

[[Page 17637]]

paragraph (e)(3)(iv) of this section regarding the foreign person to 
which is attached the applicable certification described in paragraph 
(d)(2) of this section concerning the U.S. payee on whose behalf the 
foreign person is receiving the payment. See paragraph (e)(5) of this 
section for applicable procedures in the case of a payment to a foreign 
person acting as a qualified intermediary. See also, Sec. 1.1441-
5(b)(1) for applicable procedures in the case of a payment to a foreign 
partnership that is not a qualified intermediary.
    (e) Beneficial owner's claim of foreign status--(1) Withholding 
agent's reliance. Absent actual knowledge or reason to know otherwise, 
a withholding agent may rely on a claim that the beneficial owner of 
income is a foreign person, if, prior to the payment, it complies with 
the requirements described in paragraphs (e)(1)(i), (ii), and (iii) of 
this section. For this purpose, a withholding agent acting through an 
authorized foreign agent is deemed to comply with such requirements to 
the extent its authorized foreign agent so complies. See Sec. 1.1441-
7(c)(2) for the description of an authorized foreign agent. In the case 
of a payment to a person other than an individual, a withholding agent 
may rely on the claim of entity classification made on the basis of the 
certification (or documentation, if applicable) furnished to the 
withholding agent, unless it has actual knowledge or reason to know 
that the classification claimed is incorrect.
    (i) The withholding agent holds a beneficial owner withholding 
certificate described in paragraph (e)(2)(i) of this section or an 
intermediary withholding certificate described in paragraph (e)(3)(i) 
of this section.
    (ii) The withholding agent complies with the electronic 
confirmation procedures described in paragraph (e)(4)(v) of this 
section, if required.
    (iii) The withholding agent has not been notified by the Internal 
Revenue Service that any of the information on the withholding 
certificate is incorrect or unreliable.
    (2) Beneficial owner withholding certificate--(i) In general. A 
beneficial owner withholding certificate is a statement by which the 
beneficial owner of the income paid represents that it is a foreign 
person and, if applicable, claims a reduced rate of withholding under 
section 1441. A separate withholding certificate must be submitted to 
each withholding agent. If the beneficial owner receives more than one 
type of income from a single payor, the beneficial owner may submit one 
withholding certificate to the single payor for the different types of 
income. See paragraph (c)(6)(ii)(B) of this section and Sec. 1.1441-
6(b)(4)(i) for the determination of beneficial owner when a benefit is 
claimed under an income tax treaty. A beneficial owner of an interest 
in a mutual fund that has a common investment advisor or common 
principal underwriter with other mutual funds (within the same family 
of funds) may, in the discretion of the mutual fund, provide one 
withholding certificate for shares acquired or owned in any of the 
funds. See Sec. 31.3406(h)-3(a)(2) of this chapter.
    (ii) Requirements for validity of certificate. A beneficial owner 
withholding certificate is valid only if it is provided on a Form W-8 
(or, in the case of personal services income described in Sec. 1.1441-
4(b), a Form 8233), its validity period has not expired, it is signed 
under penalties of perjury by the beneficial owner and it contains all 
of the information described in this paragraph (e)(2)(ii). The required 
information is the name, permanent residence address, and taxpayer 
identifying number (TIN) of the beneficial owner (if required), the 
basis for the reduced rate of withholding claimed, if applicable, 
(including any applicable tax treaty provisions), and any other 
information as may be required (in addition to, or in lieu of, the 
information described in this paragraph (e)(2)(ii)) by the regulations 
under section 1441 or by a form or accompanying instructions. A 
permanent residence address is the address in the country where the 
person claims to be a resident for purposes of that country's income 
tax. The address of a financial institution with which the beneficial 
owner maintains an account, a post office box, or an address used 
solely for mailing purposes is not a residence address for this 
purpose. If the beneficial owner is an individual who does not to have 
a tax residence in any country, the address is where the beneficial 
owner normally resides. If the beneficial owner is a corporation, then 
the address is where the corporation maintains its principal office in 
its country of incorporation. Instead of the Form W-8 (or the Form 
8233, if applicable), the withholding agent may rely on an acceptable 
substitute form or such other form as the Internal Revenue Service may 
prescribe. See paragraph (g)(2) of this section for continued validity 
of certificates during the transition period. See paragraph (e)(4)(vii) 
of this section for circumstances in which a taxpayer identifying 
number is required on a beneficial owner withholding certificate.
    (3) Intermediary withholding certificate--(i) In general. An 
intermediary withholding certificate is a statement by which a foreign 
payee represents that it is not the beneficial owner of the income paid 
or is a statement furnished by a partnership for its partners. It is 
used either to make representations regarding the status of beneficial 
owners of the income or to transmit appropriate documentation to the 
withholding agent. This paragraph (e)(3) describes the requirements for 
the validity of an intermediary withholding certificate issued either 
by a qualified intermediary, by a foreign partnership that is not a 
qualified intermediary, or by any other person that is neither a 
qualified intermediary nor a foreign partnership.
    (ii) Intermediary withholding certificate from a qualified 
intermediary. In the case of an intermediary withholding certificate 
issued by a qualified intermediary (described in paragraph (e)(5)(ii) 
of this section), the certificate is valid only if it is furnished on a 
Form W-8 (or an acceptable substitute form or such other form as the 
Internal Revenue Service may prescribe), it is signed under penalties 
of perjury by an officer or partner of the qualified intermediary with 
authority to sign for the intermediary, and it contains the information 
and certifications described in this paragraph (e)(3)(ii).
    (A) The name, permanent residence address (as described in 
paragraph (e)(2)(ii) of this section), and the employer identification 
number of the qualified intermediary.
    (B) A certification that the issuer is a qualified intermediary.
    (C) A certification that the issuer has obtained, as required in 
the withholding agreement with the Internal Revenue Service, the 
appropriate certificates (such as Forms W-8 or W-9) or any other 
documentation regarding its account holders or partners.
    (D) A statement whether the qualified intermediary is assuming 
primary withholding responsibility for the amounts to which the 
certificate relates.
    (E) If the information is not assuming primary withholding 
responsibility, the information and certificates required under 
paragraph (e)(5)(iv)(B) of this section regarding the basis for any 
reduced rate of withholding tax claimed.
    (F) Any other information or certification as may be required (in 
addition to, or in lieu of, the information and certifications 
described in this paragraph (e)(3)(ii)) by the form or accompanying 
instructions.
    (iii) Intermediary withholding certificate from a foreign 
partnership. In the case of an intermediary withholding

[[Page 17638]]

certificate issued under the provisions of Sec. 1.1441-5(b) by a 
foreign partnership that is not a qualified intermediary, the 
certificate is valid only if it is furnished on a Form W-8 (or an 
acceptable substitute form or such other form as the Internal Revenue 
Service may prescribe), it is signed under penalties of perjury by a 
partner with authority to sign for the partnership, and it contains the 
information and certifications described in this paragraph (e)(3)(iii).
    (A) The name, permanent residence address (as described in 
paragraph (e)(2)(ii) of this section), and the employer identification 
number of the partnership.
    (B) The basis for the reduced rate of withholding claimed, 
expressed in relation to the distributive share of each partner to 
which the certificate relates.
    (C) The appropriate withholding certificates for the partners as 
required under Sec. 1.1441-5(b)(1) (except for an intermediary 
withholding certificate furnished in order to claim a reduced rate for 
income effectively connected with the conduct of a trade or business in 
the United States).
    (D) A statement that the income is effectively connected with the 
conduct of a trade or business in the United States, if applicable.
    (E) Any other information or certification as may be required (in 
addition to, or in lieu of, the information described in this paragraph 
(e)(3)(iii)) by the form or accompanying instructions.
    (iv) Intermediary withholding certificate from an agent, nominee, 
representative, etc. In the case of an intermediary withholding 
certificate issued by a person that is not a qualified intermediary and 
is not acting for its own account, the certificate is valid if it is 
described in this paragraph (e)(3)(iv). In addition, a certificate 
furnished to qualify interest as portfolio interest for purposes of 
sections 871(h) and 881(c) or to qualify dividends on publicly traded 
stock (as defined in Sec. 1.1441-6(b)(2)) is valid if it is described 
in Sec. 1.871-14(c)(2)(iii). A certificate is described in this 
paragraph (e)(3)(iv) if it is furnished on a Form W-8 (or an acceptable 
substitute form, or such other form as the Internal Revenue Service may 
prescribe), it is signed under penalties of perjury by a person 
authorized to sign for the issuer of the certificate, and it contains 
the information and certifications described in this paragraph 
(e)(3)(iv).
    (A) The name, permanent resident address (as described in paragraph 
(e)(2)(ii) of this section) and the taxpayer identifying number of the 
issuer of the certificate.
    (B) A certification that the issuer is not acting for its own 
account and is using the certificate as a form to transmit beneficial 
owner documentation for the payment to which the certificate relates 
(or other applicable documentation concerning the person for whom the 
intermediary is receiving the payment.
    (C) If furnishing an intermediary certificate to transmit more than 
one withholding certificate, the certificate may indicate the basis for 
the reduced rate of withholding claimed, based upon the attached 
withholding certificates.
    (D) Any other information or certification as may be required (in 
addition to, or in lieu of the information and certification described 
in this paragraph (e)(3)(iv)) by the form or accompanying instructions.
    (4) Applicable rules--(i) Joint owners. In the case of a payment to 
joint owners, a withholding certificate must be provided by each owner 
claiming to be a foreign person.
    (ii) Period of validity--(A) Three year period. Except as otherwise 
provided in paragraph (e)(4)(ii)(B) of this section, a beneficial owner 
withholding certificate or an intermediary withholding certificate 
shall remain valid for three years or until such time as a change in 
circumstances makes any information on the certificate incorrect.
    (B) Validity period where TIN provided. A withholding certificate 
furnished with a taxpayer identifying number shall remain valid until 
such time as a change in circumstances makes any information on the 
certificate incorrect but only if the income for which such certificate 
is furnished is required to be reported under Sec. 1.1461-1(c)(2)(ii) 
or the taxpayer identifying number furnished on the certificate is 
reported to the Internal Revenue Service under the procedures described 
in Sec. 1.1461-1(d).
    (C) Withholding certificate for effectively connected income. 
Notwithstanding paragraph (e)(4)(ii)(B) of this section, the period of 
validity of a withholding certificate furnished to a withholding agent 
to claim a reduced rate of tax for income that is effectively connected 
with the conduct of a trade or business within the United States shall 
be limited to three years.
    (D) Computation of three-year period. The three-year validity 
period shall start from the date that the certificate is signed until 
the last day of the third succeeding calendar year. For example, a 
certificate signed on September 30, 1998 remains valid through December 
31, 2001.
    (E) Change in circumstances. If a change in circumstances makes any 
information on the certificate incorrect, then the issuer of the 
certificate must inform the withholding agent within 30 days of the 
change and issue a new certificate. If a beneficial owner withholding 
certificate is used to claim foreign status only (and not, also, 
residence in a particular foreign country for purposes of an income tax 
treaty), a change of address is a change in circumstances for purposes 
of this paragraph (e)(4)(ii)(E) only if it changes to an address in the 
United States. Further, a change of address within a foreign country is 
not a change in circumstances for purposes of this paragraph 
(e)(4)(ii)(E). A withholding agent may require a new certificate at any 
time prior to a payment, even though the withholding agent has no 
actual knowledge or reason to know that any information stated on the 
certificate has changed.
    (iii) Retention of withholding certificate. A withholding agent 
must retain each withholding certificate for as long as it may be 
relevant to the determination of the withholding agent's tax liability 
under section 1461 and Sec. 1.1461-1.
    (iv) Electronic transmission of information. Under procedures 
issued by the Internal Revenue Service, a withholding agent may be 
permitted to receive in electronic form the information required to be 
included on a withholding certificate or a certificate of U.S. status.
    (v) Electronic confirmation of information on withholding 
certificate. Under procedures issued by the Internal Revenue Service, a 
withholding agent may be required to use an electronic on-line system 
to confirm with the Internal Revenue Service information concerning any 
taxpayer identifying number stated on a withholding certificate or a 
certificate of U.S. status.
    (vi) Acceptable substitute form. For purposes of the regulations 
under section 1441, 1442, and 1443, the term acceptable substitute in 
the case of a Form W-8 or Form 8233 described in paragraph (e)(2) or 
(e)(3) of this section is a document prepared and furnished based on 
the rules set forth in Sec. 31.3406(h)-3(c)(1) of this chapter 
(relating to substitutes for a Form W-9).
    (vii) Requirement of taxpayer identifying number. A taxpayer 
identifying number must be stated on a withholding certificate when 
required by this paragraph (e)(4)(vii). A taxpayer identifying number 
is required to be stated on a beneficial owner certificate if the 
beneficial owner is claiming the benefit of a reduced rate under an 
income tax treaty (other than with respect to dividends on stock traded 
on

[[Page 17639]]

a U.S. established financial market), an exemption from withholding 
because income is effectively connected with a U.S. trade or business, 
an exemption under section 871(f) for certain annuities received under 
qualified plans, or an exemption based on a foreign organization's tax 
exempt status under section 501(c) or private foundation status. In 
addition, a taxpayer identifying number is required to be stated on all 
intermediary withholding certificates. A taxpayer identifying number is 
an IRS individual tax identification number, an employer identification 
number, or a social security number as described in section 6109 and 
Sec. 301.6109-1 of this chapter, or any other identifier the 
Commissioner may designate.
    (5) Qualified intermediaries--(i) General rule. A qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, may 
furnish an intermediary withholding certificate to a withholding agent 
for purposes of certifying on behalf of beneficial owners, 
intermediaries (such as agents or nominees acting for the accounts of 
others), other qualified intermediaries or U.S. payees for the purpose 
of claiming reduced rates of withholding tax under section 1441, 1442, 
or 1443. Such certificate is in lieu of transmitting withholding 
certificates or other required documentation to a withholding agent. 
While the qualified intermediary is generally required to obtain 
withholding certificates or other appropriate documentary evidence from 
beneficial owners or payees pursuant to its agreement with the Internal 
Revenue Service, it is not required to attach such documentation to the 
intermediary withholding certificate.
    (ii) Definition of qualified intermediary. The term qualified 
intermediary means a foreign person that is a party to a withholding 
agreement with the Internal Revenue Service and that is--
    (A) A financial institution (as defined in Sec. 1.165-12(c)(1)(iv)) 
or a clearing organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8));
    (B) A partnership; or
    (C) Any other person acceptable to the Internal Revenue Service.
    (iii) Withholding agreement--(A) In general. The Internal Revenue 
Service may, upon request, enter into a withholding agreement with a 
foreign person described in paragraph (e)(5)(ii) of this section 
pursuant to such procedures as the Internal Revenue Service may 
prescribe. The withholding agreement shall include the terms, 
conditions and procedures that the Internal Revenue Service shall deem 
appropriate to insure the collection of the tax due and reporting of 
information under sections 1441, 1461, 3406 and chapter 61 of the 
Internal Revenue Code.
    (B) Terms of the withholding agreement. Generally, the agreement 
must include provisions dealing with defining, obtaining, and 
maintaining appropriate certification and documentation upon which the 
foreign person may rely to ascertain the nationality and residence of 
beneficial owners and U.S. payees, reporting account information to the 
Internal Revenue Service or otherwise making the account information 
available to the Internal Revenue Service, and, if applicable, acting 
as an acceptance agent to perform the duties described in 
Sec. 301.6109-1(d)(3)(iv)(A) of this chapter (as proposed in project 
number INTL-0024-94, published on June 8, 1995 (60 FR 30211)). In 
addition the agreement must specify the manner in which the Internal 
Revenue Service will verify compliance with the agreement. In 
appropriate cases, the Internal Revenue Service may agree to rely on 
audits performed by an intermediary's approved external auditor's 
records (including workpapers of the auditor and reports prepared by 
the auditor indicating the methodology employed to verify the entity's 
compliance with the agreement). For this purpose, the agreement shall 
specify which auditor or class of auditors is approved. An external 
auditor may not be approved unless it is subject to regulatory 
supervision under the laws of the country in which a significant part 
of the intermediary activities under the agreement are expected to 
occur, its internal procedures require it to verify that the 
intermediary complies with the terms of the withholding agreement and 
to report non-compliance findings under the agreement in the same 
manner as it is required to report other findings of non-compliance 
with applicable local laws and regulatory requirements, and the 
auditor's relevant records (i.e., workpapers and reports) are available 
to the Internal Revenue Service. The agreement must include provisions 
for the assessment and collection of tax in the event that failure to 
comply with the terms of the agreement result in the failure by the 
withholding agent or the qualified intermediary to withhold and deposit 
the required amount of tax. Further, the agreement shall provide that a 
qualified intermediary that withholds any amount of tax must make 
deposits of the tax as required under Sec. 1.1461-1(a). The Internal 
Revenue Service may require the posting of a bond conforming to the 
requirements of Sec. 301.7101-1 of this chapter as to form of bond or 
surety required. The agreement shall specify the scope of the agreement 
in the case of a foreign person with branches or relevant intermediary 
activities in more than one country. To determine the terms of any 
particular withholding agreement, the Internal Revenue Service will 
consider appropriate factors including whether or not the foreign 
person agrees to assume primary responsibility as a withholding agent, 
the type of local ``know-your-customer'' laws and practices to which it 
is subject, the extent and nature of supervisory and regulatory control 
exercised under the laws of the foreign country over the foreign 
person, the volume of investments in U.S. securities (determined in 
dollar amounts and number of account holders), and financial condition 
of the foreign person.
    (iv) Assignment of primary withholding responsibility--(A) In 
general. A partnership that is a qualified intermediary acting for its 
own account must assume primary withholding responsibility. Any other 
qualified intermediary may assume primary withholding responsibility 
only if it is permitted to do so under its agreement with the Internal 
Revenue Service. A withholding agent and a qualified intermediary may 
arrange on who of the withholding agent or the qualified intermediary 
shall have primary responsibility for any amount required to be 
withheld under this section and section 3406 for any one or more 
classes of beneficial owners or payees and for any or more types of 
income expected to be paid to the intermediary. In a relationship 
between a withholding agent and a qualified intermediary, the qualified 
intermediary may agree to assume primary withholding responsibility for 
some types of income and not others. However, unless otherwise 
specified in the agreement, primary withholding responsibility for a 
type of income must be assumed for all beneficial owners and payees of 
that income or for none of them.
    (B) Applicable procedures when a qualified intermediary does not 
assume primary withholding responsibility. When a qualified 
intermediary does not assume primary withholding responsibility, the 
intermediary withholding certificate must contain the information 
described in this paragraph (e)(5)(iv)(B) or in any agreement between 
the qualified intermediary and the Service. The certificate must 
separately identify the assets that are associated with each U.S. payee 
to

[[Page 17640]]

which the certificate relates and that generate the type of income 
described in Sec. 1.1441-2(a) (i.e., income that would be subject to 
withholding if paid to a foreign person). The qualified intermediary 
must furnish a Form W-9 for each U.S. payee that is not an exempt 
recipient and the name and address of each U.S. payee that is an exempt 
recipient. The intermediary withholding certificate must also 
separately identify the assets associated with non-U.S. payees to which 
the certificate relates and the applicable withholding tax rate or 
rates. If different withholding tax rates apply, the intermediary 
withholding certificate must indicate the applicable rate for each 
class of non-U.S. payees to which different withholding rates apply and 
the assets associated with each class. For payments that the 
intermediary withholding certificate states are made to U.S. payees, a 
withholding agent dealing with a qualified intermediary that has not 
assumed primary withholding responsibility must comply with applicable 
reporting requirements under chapter 61 of the Internal Revenue Code in 
the same manner as if it had received a Form W-9 (or acceptable 
substitute form) directly from the U.S. payee. The withholding agent 
must also comply with the return requirements under section 1461 and 
Sec. 1.1461-1 (b)(2)(ii) and (c)(4)(ii) for payments made to non-U.S. 
payees.
    (C) Applicable procedures when qualified intermediary assumes 
primary withholding responsibility. A withholding agent relying on an 
intermediary withholding certificate from a qualified intermediary 
representing that the qualified intermediary assumes primary 
withholding responsibility as permitted under its agreement with the 
Internal Revenue Service is relieved from the obligation to withhold on 
payments made to the intermediary. The withholding agent must comply 
with the return requirements under section 1461 and Sec. 1.1461-1 
(b)(2)(ii) and (c)(4)(ii) for payments made to the qualified 
intermediary.
    (v) Special rules for qualified intermediaries that are foreign 
partnerships. A foreign partnership that is a qualified intermediary 
shall be a withholding agent with respect to its partner's distributive 
share of income subject to withholding that is paid to the partnership. 
Therefore, it shall withhold under the same procedures and at the same 
time as is prescribed for withholding by a domestic partnership. See 
Sec. 1.1441-5(a)(2) for withholding procedures applicable to domestic 
partnerships. In addition, the partnership shall not be relieved from 
its obligation to make a return on Form 1065 as required under section 
6031 and the regulations under that section and to furnish the 
statements required under section 6031(b) and the regulations under 
that section.
    (f) Presumptions--(1) In general--(i) Reliance. Absent actual 
knowledge or reason to know otherwise, a withholding agent or a payor 
described in Sec. 31.3406(a)-2 of this chapter may rely on the 
presumptions of this paragraph (f) to determine whether to treat a 
beneficial owner or a payee as a U.S. or a foreign person when, before 
making a payment of income subject to withholding, or a payment subject 
to reporting under chapter 61 of the Internal Revenue Code, the 
withholding agent or payor cannot associate the payment with the 
required documentation. When applying the provisions of this section, 
any presumption of foreign status pursuant to this paragraph (f) shall 
have effect only for purposes of applying the provisions of paragraph 
(b) of this section (regarding the rules of withholding) and may not be 
relied upon for purposes of granting a reduced rate of withholding 
under the Internal Revenue Code (e.g. section 1441(c)(9) or (c)(10)) or 
under an income tax treaty.
    (ii) Required documentation. For purposes of this paragraph (f), 
the term required documentation means the applicable documentation that 
is required to be furnished in connection with the payment under this 
section, under Sec. 1.871-14(c)(2), or under chapter 61 of the Internal 
Revenue Code. A withholding agent or payor is not able to associate a 
payment with required documentation if, for that payment, it lacks 
documentation, the documentation it holds lacks information, or the 
withholding agent or payor knows or has reason to know that information 
associated with the required documentation is incorrect or unreliable. 
For purposes of this paragraph (f)(1), a withholding agent or payor has 
reason to know that information is incorrect or unreliable if the 
withholding agent or payor would have reason to know under the rules of 
Sec. 1.1441-7(b)(2) or cannot reasonably rely on a Form W-9 (or an 
acceptable substitute) under Sec. 31.3406(h)-3(e) of this chapter. For 
purposes of this paragraph (f)(1), a Form W-9 (or an acceptable 
substitute) must contain the information described in Sec. 31.3406(h)-
3(e)(2)(i) through (iv) of this chapter in order for a payor to 
reasonably rely on the Form W-9. In the case of other documentation, 
the required information shall include only the name, permanent 
residence address, taxpayer identifying number (when required), and 
signature under penalties of perjury (when required).
    (2) Reportable payments to non-exempt recipients--(i) In general. 
Except as otherwise provided in paragraphs (f)(2)(ii) and (f)(4) of 
this section, a reportable payment (as defined in paragraph (f)(6) of 
this section) made to a payee who is an individual or other non-exempt 
recipient is presumed made to a U.S. payee for purposes of chapter 61 
of the Internal Revenue Code, section 3406, and this section if, before 
payment, the withholding agent or payor cannot associate the payment 
with the required documentation (as determined under paragraph 
(f)(1)(i) of this section). In such a case, the withholding agent or 
payor must treat the payment as a payment that may be subject to 
reporting under chapter 61 of the Internal Revenue Code and the 
regulations under that chapter and to backup withholding under section 
3406 and the regulations under that section.
    (ii) Special grace period for certain reportable payments in the 
case of indicia of a foreign payee--(A) General rule. This paragraph 
(f)(2)(ii)(A) applies to payments of dividends, interest, original 
issue discount, broker proceeds described in Sec. 1.6045-1(d)(5), and 
exchanges of personal property or services through barter exchanges 
described in Sec. 1.6045-1(e)(2). A withholding agent or payor may 
treat the payee as a beneficial owner that is a foreign person for the 
grace period described in this paragraph (f)(2)(ii)(A) if, at the time 
a payment is first credited to an account, the withholding agent or 
payor has the name and an address in a foreign country for the account 
holder or a facsimile copy or an electronic transmission of the 
information contained in a withholding certificate described in 
paragraph (e)(2) or (e)(3) of this section. The grace period is 90 days 
from the date that the withholding agent or payor first credits the 
account or, if shorter, until the end of the calendar year. If this 
paragraph (f)(2)(ii)(A) applies, the withholding agent may then treat 
the payee as a beneficial owner that is a foreign person and is, 
therefore, required to withhold under section 1441 on the basis of this 
presumption from the time that the amounts are credited to the account.
    (B) Additional withholding in the event of payments or withdrawals. 
If, at any time before provision or correction of the required 
documentation within the grace period specified in paragraph 
(f)(2)(ii)(A) of this section, the withholding agent loses control over

[[Page 17641]]

any part or all of the amounts in an account described in paragraph 
(f)(2)(ii)(A) of this section (such as by making an actual payment from 
the account or allowing withdrawal of any part or all of the amounts in 
the account, other than for purposes of withholding an amount of tax), 
then the withholding agent or payor must treat the payee as a U.S. 
person for all amounts credited to the account during the grace period. 
Accordingly, the payor must withhold to the extent required under 
section 3406 on all reportable payments made to the account during the 
period to which the grace period applies and thereafter. The amount of 
backup withholding is equal to 31 percent of the reportable payments 
reduced by any amount previously withheld from the amounts credited to 
the account.
    (C) Application of withholding upon expiration of grace period. If, 
upon the termination of the grace period described under paragraph 
(f)(2)(ii)(A) of this section, the required documentation has not been 
furnished or corrected, the payee is then presumed to be a U.S. person 
for purposes of section 3406 and chapter 61 of the Internal Revenue 
Code. Accordingly, the payor must withhold to the extent required under 
section 3406 on all reportable payments credited to the account during 
the grace period and thereafter (until appropriate documentation has 
been furnished or corrected). Any amount withheld from the payments 
subject to the grace period may be credited toward any amount of backup 
withholding due under section 3406. If the required documentation is 
furnished or corrected on or before the expiration of the grace period 
described in paragraph (f)(2)(ii)(A) of this section and establishes 
that the beneficial owner is a foreign person, then any amount withheld 
on any payment made during the grace period will be treated as having 
been withheld under section 1441. To the extent such amount exceeds the 
amount of tax ultimately determined to be owed under section 1441, the 
excess shall be treated as an amount of overwithholding subject to 
adjustment under Sec. 1.1461-2(a), or refund or credit under 
Sec. 1.1464-1. If, on the other hand, U.S. status is established by 
required documentation on or before expiration of the grace period, 
then any amount withheld from the payments made during the grace period 
may be credited towards any amount of backup withholding due under 
section 3406. To the extent such tax exceeds the amount required to be 
withheld under section 3406, the excess shall be treated as erroneously 
withheld from the payee and shall be subject to adjustments as provided 
in Sec. 31.6413(a)-3 of this chapter.
    (iii) Joint owners or payees.  A withholding agent or payor may 
presume that a payment made to joint owners or payees for whom it 
cannot associate the required documentation for all payees is made to 
U.S. individuals. For purposes of applying this paragraph (f)(2)(iii), 
the grace period rules in paragraph (f)(2)(ii)(A) of this section shall 
apply only if each payee qualifies for it. In that case, the rules of 
paragraph (f)(2)(ii)(B) of this section would apply when any one of the 
joint account holders receives a payment, makes a withdrawal, or 
reinvests any portion of the funds in the account that are subject to 
the grace period.
    (iv) Special rules for exempt recipients. If the payee is an exempt 
recipient described in Sec. 1.6049-4(c)(1)(ii) and the withholding 
agent or payor has actual knowledge of the payee's employer 
identification number, then the withholding agent or payor may presume 
that the payee is a foreign person if the employer identification 
number begins with the two digits ``98.'' The withholding agent or 
payor may also presume that the payee is foreign if the withholding 
agent's or payor's communications with the payee are mailed to an 
address in a foreign country, or if the payment is made outside the 
United States (as defined in Sec. 1.6049-5(e)). In other cases, the 
withholding agent or payor may presume that the exempt recipient is a 
U.S. person and, therefore, subject to section 3406 and chapter 61 of 
the Internal Revenue Code and the regulations under those provisions. 
If a withholding agent or payor treats a payee as a foreign person 
pursuant to the presumption of this paragraph (f)(2)(iv), it must treat 
the payee as the beneficial owner and apply the provisions of section 
1441, Sec. 1.871-14, and chapter 61 of the Internal Revenue Code 
accordingly. If the withholding agent treats the payee as a foreign 
person, it is subject to the return requirements of Sec. 1.1461-1(b) 
and (c). The presumption of this paragraph (f)(2)(iv) may be rebutted 
by providing the required documentation to the withholding agent or 
payor.
    (3) Special rules for scholarships, grants, pensions, annuities, 
etc.--(i) Scholarships and grants. A payment representing scholarship 
or fellowship grant income (as defined in section 117) is presumed made 
to a U.S. person if the withholding agent or payor has a record of the 
payee's U.S. visa status in its records. In that case, the withholding 
agent or payor has reason to know that such individual is a foreign 
person and, therefore, the presumption of this paragraph (f)(3)(i) 
shall not apply.
    (ii) Pensions, annuities, etc. A withholding agent or payor may 
presume that a payment from a trust described in section 401(a), an 
annuity plan described in section 401(a), an annuity plan described in 
section 403(a), or a payment with respect to any annuity, custodial 
account, or retirement income account described in section 403(b) is 
made to a U.S. or foreign person under the rules of this paragraph 
(f)(3)(ii).
    (A) Such payment is presumed made to a U.S. person, if the 
withholding agent or payor has a Social Security number for the payee 
and a mailing address as described in this paragraph (f)(3)(ii)(A). A 
mailing address is an address used for purposes of information 
reporting or otherwise communicating with the payee that is an address 
in the United States or in certain foreign countries with which the 
United States has an income tax treaty. For this purpose, a income tax 
treaty must provide that the payee, if an individual resident in that 
country, would be entitled to an exemption from U.S. tax on amounts 
described in this paragraph (f)(3)(ii).
    (B) Such payment is presumed made to a foreign person in all cases 
not described in paragraph (f)(3)(ii)(A) of this section.
    (4) Special rules for pass-through entities--(i) Payments to 
partnerships. In the case of a payment to a partnership, the 
presumptions of this paragraph (f)(4)(i) shall apply to determine 
whether to treat the partnership as a domestic or foreign partnership. 
This determination must be made before determining who are the payees 
under paragraph (c)(3) of this section. If the withholding agent or 
payor has actual knowledge of the partnership's employer identification 
number, then the withholding agent or payor may presume that the 
partnership is a foreign partnership if the employer identification 
number begins with the two digits ``98.'' The withholding agent or 
payor may also presume that the partnership is foreign if the 
withholding agent's or payor's communications with the partnership are 
mailed to an address in a foreign country, or if the payment is made 
outside the United States (as defined in Sec. 1.6049-5(e)). In all 
other cases, the withholding agent or payor may presume that the 
partnership is domestic. The presumptions in this paragraph (f)(4)(i) 
may be rebutted by

[[Page 17642]]

providing the required documentation to the withholding agent or payor.
    (ii) Payments to a foreign partnership. A withholding agent or 
payor that makes a reportable payment to a partnership that it treats 
as a foreign partnership may presume that a partner is a U.S. payee 
that is not an exempt recipient if, before payment, the withholding 
agent cannot associate the payment with the required documentation for 
the partner. See paragraph (c)(3)(ii) of this section treating partners 
of a foreign partnership as payees. In such case, the withholding agent 
or payor must treat the portion of the payment allocable to the partner 
as made to a U.S. payee who is not an exempt recipient. Thus, the 
payment may be subject to reporting under chapter 61 of the Internal 
Revenue Code and the regulations under that chapter and to backup 
withholding under section 3406 and the regulations under that section. 
The portion of a payment allocable to a partner shall be determined 
based on the distributive shares of the partnership income allocable to 
each partner.
    (iii) Partners' distributive shares--(A) Domestic partnership. For 
purposes of this paragraph (f)(4)(iii)(A), a domestic partnership may 
presume that a partner is a U.S. payee that is not an exempt recipient 
if, at the time it is required to withhold on the amount, the 
partnership cannot associate the payment with the required 
documentation for that partner and the amount relates to a reportable 
payment made to the partnership.
    (B) Foreign partnership. For purposes of this paragraph 
(f)(4)(iii)(B), a foreign partnership that is a qualified intermediary 
may treat a partner as a foreign payee if, at the time it is required 
to withhold on the amount, it cannot associate the amount with the 
required documentation for that partner.
    (5) Failure to act in accordance with presumptions. A withholding 
agent that, contrary to the presumptions in this paragraph (f), grants 
a claim of reduced rate of withholding under section 1441 on income 
subject to withholding will be liable under section 1461 for the tax 
required to be withheld under section 1441, without the benefit of a 
reduced rate unless the withholding agent can demonstrate to the 
satisfaction of the District Director or the Assistant Commissioner 
(International) that the proper amount of tax, if any, was in fact paid 
to the Internal Revenue Service. Proof of payment of tax may be 
established on the basis of a Form 4669 (or such other form as the 
Internal Revenue Service may prescribe), establishing the amount of 
tax, if any, actually paid by the beneficial owner on the income. Proof 
that a reduced rate of withholding was appropriate may also be 
established on the basis of the required documentation described in 
paragraph (f)(1)(ii) of this section. However, if the required 
documentation was not received by the withholding agent before the time 
the payment was made or within the grace period specified in paragraph 
(f)(2)(ii)(A) of this section, then the Commissioner, or his or her 
delegate, may require additional proof if it determines that the delays 
in obtaining the required documentation affect its reliability. The 
withholding agent will be liable for interest under section 6601 
regardless of whether the underlying tax liability is due. In addition, 
the withholding agent may be subject to penalties.
    (6) Reportable payment. Solely for purposes of the presumptions in 
this paragraph (f), a reportable payment is any payment of income 
subject to withholding (as defined in Sec. 1.1441-2(a)) or any payment 
described in section 3406(b), notwithstanding the provisions in 
sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A, 6050N and the 
regulations under those sections that provide exemptions from reporting 
based upon the status of the payee as a foreign person. For example, a 
payment of interest described in Sec. 1.6049-5(b)(14) as a non-
reportable payment if paid to a foreign person is treated as a 
reportable payment for purposes of this paragraph (f). Accordingly, the 
withholding agent or payor must determine under the presumptions 
described in this paragraph (f) whether to treat the beneficial owner 
or payee as a foreign or U.S. person. See sections 6041 through 6049 
and sections 6050A and 6050N and the regulations under those sections 
for reporting requirements for amounts treated as reportable payments 
for purposes of this paragraph (f).
    (7) Adjustment, refund, or credit of overwithheld tax. If, as a 
result of the presumption rules of paragraph (f) of this section, the 
amount withheld under section 1441 is greater than the tax due, 
adjustments may be made in accordance with the procedures described in 
Sec. 1.1461-2(a). Alternatively, refunds or credits may be claimed in 
accordance with the procedures described in Sec. 1.1464-1, relating to 
refunds or credits claimed by the beneficial owner, or Sec. 1.6414-1, 
relating to refunds or credits claimed by the withholding agent. If an 
amount was withheld under section 3406, see Sec. 31.6413(a)-3(a)(1) of 
this chapter.
    (g) Effective date--(1) In general. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. For purposes of paragraph (e)(2)(i) and 
(d)(2)(ii) of this section, a withholding agent that holds a valid Form 
W-8, 1001, 4224, 1078, or a statement described in Sec. 1.1441-5(b) (as 
contained in 26 CFR Part 1, edition revised April 1, 1995) on the date 
that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid withholding 
certificate until its validity expires under applicable provisions as 
in effect on April 22, 1996. In addition, the documentation 
requirements for dividends on stock traded on a U.S. established 
financial market described in Sec. 1.1441-6(b)(2) shall apply only to 
accounts established after the date that is 60 days after these 
regulations are published as final regulations in the Federal Register. 
For accounts established on or before that date, the documentation 
requirements under this section shall apply to payments made after 
December 31, 1999.
    Par. 7.  Section 1.1441-2 is revised to read as follows:


Sec. 1.1441-2  Income subject to withholding.

    (a) In general. For purposes of the regulations under section 1441, 
the term income subject to withholding means items of income from 
sources within the United States (not including items listed in 
paragraph (d)(1) of this section) that constitute either fixed or 
determinable annual or periodical income described in paragraph (b) of 
this section or other income subject to withholding described in 
paragraph (c) of this section. Withholding applies to the gross amount 
of the payment made to a foreign person. See part I (section 861 and 
following), subchapter N, chapter 1 of the Internal Revenue Code, and 
the regulations under such part for rules governing the determination 
of the source of income. See section 884(f) and the regulations 
thereunder to determine the circumstances under which interest paid by 
a foreign corporation is U.S. source income.
    (b) Fixed or determinable annual or periodical income--(1) In 
general. For purposes of chapter 3 of the Internal Revenue Code, fixed 
or determinable annual or periodical income is all income included in 
gross income under section 61 (including original issue discount), 
except for the items listed in paragraph (b)(2) of this section.
    (2) Exceptions. For purposes of chapter 3 of the Internal Revenue 
Code, the items of income described in this paragraph (b)(2) are not 
fixed or

[[Page 17643]]

determinable annual or periodical income--
    (i) Gains derived from the sale of property (including market 
discount and option premiums), except for gains described in paragraph 
(b)(3) or (c) of this section;
    (ii) Insurance premiums within the meaning of section 4372 paid to 
a foreign insurer or reinsurer;
    (iii) Items of U.S. source income that are excluded from gross 
income under any provision of law without regard to the identity of the 
holder, such as interest excluded from gross income under section 
103(a); and
    (iv) Any other income that the Internal Revenue Service may 
determine, in published guidance, is not fixed or determinable annual 
or periodical income.
    (3) Original issue discount. Amounts of original issue discount are 
fixed or determinable annual or periodical income. However, based on 
the authority of section 1441(c)(8), only the original issue discount 
described in this paragraph (b)(3) may be subject to withholding.
    (i) Amounts paid by original issuer. Amounts paid by the original 
issuer (or its paying agent) to the beneficial owner on any obligation 
issued after March 31, 1972 and payable more than 6 months from the 
date of original issue that represent original issue discount realized 
by the beneficial owner upon the retirement of the obligation, or upon 
payment by the issuer on the obligation, to the extent that the amount 
is subject to tax under section 871(a)(1)(C) or under section 
881(a)(3). This paragraph (b)(3)(i) only applies to original issue 
discount as defined in section 1273(a)(1). Therefore, it does not apply 
to market discount as defined in section 1278(a)(2).
    (ii) Amounts paid by related obligor. Amounts paid by the obligor 
(or its paying agent) on obligations issued after the date that is 60 
days after these regulations are published as final regulations in the 
Federal Register and payable more than 6 months from the date of 
original issue representing an amount of original issue discount if the 
obligor is related to the original issuer (within the meaning of 
section 163(e)(3)), to the extent such accrued amount is subject to tax 
under section 871(a)(1)(C)(ii) or under section 881(a)(3)(B).
    (iii) Amounts paid in a sale between related parties. Amounts paid 
on the sale or exchange of obligations issued after the date that is 60 
days after these regulations are published as final regulations in the 
Federal Register and payable more than 6 months from the date of 
original issue representing an amount of original issue discount if the 
seller is related to the purchaser within the meaning of section 
163(e)(3), to the extent such accrued amount is subject to tax under 
section 871(a)(1)(C)(i) or under section 881(a)(3)(A).
    (iv) Amounts actually known to be taxable original issue discount. 
Amounts paid on obligations issued after the date that is 60 days after 
these regulations are published as final regulations in the Federal 
Register and payable more than 6 months from the date of original issue 
representing an amount of original issue discount if the obligor (or 
the seller in the case of a sale or exchange of obligations) has actual 
knowledge of the amount subject to tax under section 871(a)(1)(C) or 
under section 881(a)(3).
    (v) Amounts for which required documentation is not furnished. Any 
amount of original issue discount paid on obligations issued after the 
date that is 60 days after the publication of these regulations as 
final regulations in the Federal Register and payable more than 6 
months from the date of original issue representing an amount that 
fails to qualify as portfolio interest under section 871(h) or 881(c) 
(because of the failure to furnish the statement described in section 
871(h)(5) and Sec. 1.871-14(c)(2)), to the extent the amount is subject 
to tax under section 871(a)(1)(C)(ii) or under section 881(a)(3)(B). 
The applicable rate of withholding tax shall be applied to the entire 
amount of stated interest, if any, and original issue discount on the 
obligation as determined on the date of original issue if the 
withholding agent does not know what proportion of the payment on the 
obligation represents taxable income. Adjustments to any amount of 
overwithheld tax may be made in compliance with the procedures 
described in Sec. 1.1461-2(a). Alternatively, refunds may be claimed in 
compliance with the procedures in Sec. 1.1464-1.
    (4) Securities lending transactions. [Reserved]
    (c) Other income subject to withholding. Withholding is also 
required on the gross amount of the following items of income:
    (1) Gains described in sections 631(b) or (c), relating to 
treatment of gain on disposal of timber, coal, or domestic iron ore 
with a retained economic interest.
    (2) Gains subject to the 30 percent tax under section 871(a)(1)(D) 
or section 881(a)(4), relating to contingent payments received from the 
sale or exchange of patents, copyrights, and similar intangible 
property.
    (d) Items of income not subject to withholding under section 1441--
(1) Exemptions for which no withholding certificate or documentation is 
required. The items of income described in this paragraph (d)(1) are 
not subject to withholding of tax under section 1441 regardless of the 
fact that no withholding certificate or other documentation has been 
furnished to establish foreign or U.S. status.
    (i) Portfolio interest paid on bearer obligations that are 
described in section 871(h)(2)(A) or 881(c)(2)(A) and Sec. 1.871-14(b). 
See Sec. 1.6049-5(b)(7) regarding exemption from reporting under 
section 6049, and thus, from backup withholding under section 3406.
    (ii) Original issue discount on any obligation payable less than 6 
months from the date of original issue described in section 
871(g)(1)(B)(i). See Sec. 1.6049-5(b)(10), (11), and (14) for 
exemptions from reporting under section 6049, and thus, from backup 
withholding under section 3406.
    (iii) Any amount of original issue discount not described in 
paragraph (b)(3) of this section. See Sec. 1.6049-5(b)(10) and (11) for 
exemptions from reporting under section 6049, and thus, from backup 
withholding under section 3406.
    (iv) Proceeds from a wager placed by a nonresident alien individual 
in the games of blackjack, baccarat, craps, roulette, or big-6 wheel.
    (2) Exemptions for portfolio interest and income on bank, etc. 
deposits requiring a withholding certificate or documentation--(i) In 
general. No withholding is required under sections 1441(c)(9) and 
(c)(10) on interest and original issue discount that either qualifies 
as portfolio interest on an obligation in registered form described in 
section 871(h)(2)(B) or 881(c)(2)(B) (including interest on a foreign-
targeted registered obligation described in Sec. 1.871-14(e)) or is 
paid on deposits described in section 871(i)(2)(A). A withholding agent 
may exempt from withholding an amount of interest and original issue 
discount paid on deposits described in section 871(i)(2)(A) only if, 
prior to the payment, the withholding agent complies with the 
procedures described in Sec. 1.871-14(c). The preceding sentence does 
not apply to amounts of original issue discount described in paragraph 
(d)(1)(ii) of this section or in Sec. 1.6049-5(b)(10) or (11).
    (ii) Transition rule. The documentation requirements for interest 
on deposits described in section 871(i)(2)(A) shall apply to payments 
made after December 31, 1997 with respect to accounts established after 
the date that is 60 days after these

[[Page 17644]]

regulations are published as final regulations in the Federal Register. 
For accounts established on or before that date, the documentation 
requirements under this section shall apply to payments made after 
December 31, 1999.
    (e) Payment--(1) General rule. A payment is considered made when 
the amount would be includible in the income of the beneficial owner 
under the U.S. tax principles governing the cash basis method of 
accounting. A payment is considered made whether it is made directly to 
the beneficial owner or paid to another person for the benefit of the 
beneficial owner (e.g., to the agent of the beneficial owner). Thus, a 
payment of income is considered made to a beneficial owner if it is 
paid in complete or partial satisfaction of the beneficial owner's debt 
to a creditor.
    (2) Income allocated under section 482. A payment is considered 
made to the extent income subject to withholding is allocated under 
section 482. Further, income arising as a result of a secondary 
adjustment made in conjunction with a reallocation of income under 
section 482 from a foreign person to a related U.S. person is 
considered paid to a foreign person unless the taxpayer to whom the 
income is reallocated has entered into a repatriation agreement with 
the Internal Revenue Service and the agreement eliminates the liability 
for the withholding tax. For purposes of determining the liability for 
withholding tax, the payment of income is deemed to have occurred on 
the dates of the transactions that give rise to the allocation of 
income and the secondary adjustments, if any.
    (3) Blocked income. Income is not considered paid if it is blocked 
under executive authority, such as the President's exercise of 
emergency power under the Trading with the Enemy Act, 50 U.S.C. App. 5, 
or the International Emergency Economic Powers Act, 50 U.S.C. 1701 et 
seq. However, on the date that the blocking restrictions are removed, 
the income that was blocked is considered constructively received by 
the beneficial owner (and therefore paid for purposes of this section) 
and subject to withholding under Sec. 1.1441-1.
    (4) Special rules for dividends. For purposes of sections 1441 and 
6042, in the case of stock for which the record date is earlier than 
the payment date, dividends are considered paid on the payment date. In 
the case of a corporate reorganization, if a beneficial owner is 
required to exchange stock held in a former corporation for stock in a 
new corporation before dividends that are to be paid with respect to 
the stock in the new corporation will be paid on such stock, the 
dividend is considered paid on the date that the payee or beneficial 
owner actually exchanges the stock and receives the dividend. See 
Sec. 31.3406(a)-4(a)(2) of this chapter.
    (5) Certain interest accrued by a foreign corporation. For purposes 
of sections 1441 and 6049, a foreign corporation shall be treated as 
having made a payment of interest as of the last day of the taxable 
year if it has made an election under Sec. 1.884-4(c)(1) to treat 
accrued interest as if it were paid in that taxable year.
    (6) Payments other than in U.S. dollars. For purposes of section 
1441, a payment includes amounts paid in a medium other than U.S. 
dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to 
withholding in the case of such payments.
    (f) Effective date. This section applies to payments of income made 
after December 31, 1997.
    Par. 8. Section 1.1441-3 is amended by:
    1. Revising the heading of the section.
    2. Revising paragraphs (a) through (e).
    3. Removing paragraph (f).
    4. Redesignating paragraph (j) as paragraph (f).
    5. Revising paragraph (g).
    6. Removing paragraphs (h) and (i).
    7. Removing the OMB parenthetical and the authority citation at the 
end of the section.
    The revisions read as follows:


Sec. 1.1441-3   Amounts subject to withholding.

    (a) Withholding on gross amount. Except as otherwise provided in 
regulations under section 1441, the amount subject to withholding under 
Sec. 1.1441-1 is the gross amount of income subject to withholding. The 
gross amount of income subject to withholding may not be reduced by any 
deductions, except to the extent that one or more personal exemption is 
allowed as provided under Sec. 1.1441-4(b)(6).
    (b) Withholding on payments on certain obligations--(1) Withholding 
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under 
Sec. 1.1441-1 upon the gross amount of stated interest payable on the 
interest payment date, regardless of whether the payment constitutes a 
return of capital or the payment of income within the meaning of 
section 61. To the extent an amount was withheld on an amount of 
capital rather than interest, adjustments to any amount of overwithheld 
tax may be made under the procedures described in Sec. 1.1461-2(a). 
Alternatively, refunds or credits may be claimed by the beneficial 
owner under the procedures described in Sec. 301.6402-2 of this 
chapter.
    (2) No withholding between interest payment dates--(i) In general. 
A withholding agent is not required to withhold tax under Sec. 1.1441-1 
upon interest accrued on the date of a sale of debt obligations when 
that sale occurs between two interest payment dates, even though the 
interest is subject to tax under section 871 or section 881. See 
Sec. 1.6045-1(c) for reporting requirements by brokers with respect to 
sale proceeds. The exemption from withholding granted by this paragraph 
(b)(2) is not subject to the withholding certificate procedures 
described in Sec. 1.1441-1(e)(1). However, the exception is not a 
determination that the accrued interest is not fixed or determinable 
annual or periodical income.
    (ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this 
section does not apply if the sale of securities is part of a plan the 
principal purpose of which is to avoid tax by selling and repurchasing 
securities and the withholding agent has actual knowledge or reason to 
know of such plan.
    (c) Corporate distributions--(1) General rule. Subject to the 
provisions of this paragraph (c), a corporation making a distribution 
with respect to its stock is not required to withhold under section 
1441,1442, or 1443 on the portion of the distribution--
    (i) That is treated as a nontaxable distribution payable in stock 
or stock rights;
    (ii) That is treated as a distribution in part or full payment in 
exchange for stock;
    (iii) That is not paid out of accumulated earnings and profits or 
current earnings and profits;
    (iv) That is paid by a regulated investment company and is a 
capital gain dividend (as defined in section 852(b)(3)(C)) or an exempt 
interest dividend (as defined in section 852(b)(5)(A)); or
    (v) That is paid by a real property holding corporation (defined in 
section 897(c)(2)) or a real estate investment trust (defined in 
section 856) and is subject to withholding under section 1445 and the 
regulations under that section.
    (2) Determination of accumulated and current earnings and profits 
on the date of payment--(i) General rule. In order for a corporation to 
determine the amount of withholding tax due on any distribution with 
respect to stock, the distributing corporation may, at its option, 
either treat the entire distribution as a dividend as defined in 
section 316 or may treat only a portion

[[Page 17645]]

of the distribution as a dividend if, prior to, and at a time 
reasonably close to the date of payment, the distributing corporation 
makes a reasonable estimate of the portion of the distribution that is 
not a dividend based upon expected earnings and profits as relevant 
facts and circumstances shall indicate. A reasonable estimate may be 
made based on the procedures described in Sec. 31.3406(b)(2)-4(c)(2) of 
this chapter.
    (ii) Procedures in case of underwithholding. A distributing 
corporation that determines at the end of the taxable year of the 
distribution that it underwithheld under section 1441 shall be liable 
under section 1461 for the amount underwithheld. No penalties shall be 
imposed for failure to withhold and deposit tax if--
    (A) The corporation made a reasonable estimate as provided in 
paragraph (c)(2)(i) of this section; and
    (B) Either--
    (1) The corporation pays over the underwithheld amount on or before 
the date that it is required to file a return on Form 1042 for the 
calendar year of the distribution pursuant to Sec. 1.1461-2(b); or
    (2) The corporation is not a calendar year taxpayer and it files an 
amended return on Form 1042X (or such other form as the Commissioner 
may prescribe) for the calendar year in which the distribution is made 
and pays the additional amount of tax and interest within 60 days of 
the close of the taxable year of the distribution.
    (iii) Reliance on reasonable estimate by intermediary. For purposes 
of determining whether the payment of a corporate distribution is a 
dividend, a withholding agent that is not the distributing corporation 
may rely on representations made by the distributing corporation 
regarding the reasonable estimate of expected earnings and profits made 
pursuant to paragraph (c)(2)(i) of this section. Failure by the 
withholding agent to withhold the required amount due to an erroneous 
estimate that the Internal Revenue Service has determined was not 
reasonably made shall be imputed to the distributing corporation. 
Therefore, the Internal Revenue Service may collect any additional 
amount from the distributing corporation and subject the corporation to 
applicable interest and penalties as a withholding agent.
    (3) Special rules in the case of distributions from a regulated 
investment company. If the amount of distributions designated as 
subject to section 852(b)(3)(C) or 852(b)(5)(A) exceeds the amount 
permitted to be designated under those sections for the taxable year, 
then no penalties will be asserted for any resulting underwithholding 
provided the designations were based on a reasonable estimate (made 
pursuant to paragraph (c)(2)(i) of this section) and adjustments to the 
amount withheld are made within the time period described in paragraph 
(c)(2)(ii)(B) of this section. Any adjustment to the amount of tax due 
and paid to the Internal Revenue Service by the withholding agent as a 
result of underwithholding shall not be treated as a distribution for 
purposes of section 562(c) and the regulations thereunder. Any amount 
of U.S. tax that a foreign shareholder is treated as having paid on the 
undistributed capital gain of a regulated investment company under 
section 852(b)(3)(D) may be claimed by the foreign shareholder as a 
credit or refund under Sec. 1.1464-1. The procedures described in 
paragraph (c)(2)(iii) of this section shall apply in the case of 
distributions made to an intermediary.
    (4) Overwithholding of tax. If the tax on any distribution has been 
overwithheld, adjustments may be made in accordance with the procedures 
described in Sec. 1.1461-2(a). Alternatively, refunds or credits may be 
claimed in accordance with Sec. 1.1464-1, relating to refunds or 
credits claimed by the beneficial owner, or Sec. 1.6414-1, relating to 
refunds or credits claimed by the withholding agent.
    (d) Withholding on certain gains. Absent actual knowledge or reason 
to know otherwise, a withholding agent may rely on a claim regarding 
the amount of gain described in Sec. 1.1441-2(c) if the beneficial 
owner withholding certificate, or other appropriate withholding 
certificate, states the beneficial owner's basis in the property giving 
rise to the gain. In the absence of a withholding certificate, the 
withholding agent may withhold an amount under Sec. 1.1441-1 that is 
necessary to assure that the tax withheld is not less than 30 percent 
of the recognized gain. For this purpose, the recognized gain is 
determined without regard to any deduction allowed by the Internal 
Revenue Code from the gains. The amount so withheld shall not exceed 30 
percent of the amount payable by reason of the transaction giving rise 
to the recognized gain. Adjustments to any amount of overwithheld tax 
may be made in accordance with the procedures described in Sec. 1.1461-
2(a). Alternatively, refunds or credits may be claimed in accordance 
with Sec. 1.1464-1, relating to refunds or credits claimed by the 
beneficial owner, or Sec. 1.6414-1, relating to refunds or credits 
claimed by the withholding agent.
    (e) Payments other than in U.S. dollars--(1) In general. The amount 
of a payment made in a medium other than U.S. dollars is measured by 
the fair market value of the property or services provided in lieu of 
U.S. dollars. The withholding agent may liquidate the property prior to 
payment in order to withhold the required amount of tax under section 
1441 or obtain payment of the tax from an alternative source. However, 
the obligation to withhold under section 1441 is not deferred even if 
no alternative source can be located. Thus, for purposes of withholding 
under chapter 3 of the Internal Revenue Code, the provisions of 
Sec. 31.3406(h)-2(b)(2)(ii) of this chapter (relating to backup 
withholding from another source) shall not apply. If the withholding 
agent satisfies the tax liability related to such payments, the rules 
of paragraph (e)(3) of this section apply.
    (2) Payments in foreign currency. If the amount subject to 
withholding tax is paid in a currency other than the U.S. dollar, the 
amount of withholding tax under section 1441 shall be determined by 
applying the applicable rate of withholding to the foreign currency 
amount and converting the amount withheld into U.S. dollars on the date 
of payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or 
pursuant to a reasonable spot rate convention. For example, a 
withholding agent may use a month-end spot rate or a monthly average 
spot rate. A spot rate convention must be used consistently for all 
non-dollar amounts withheld from year to year. Such convention cannot 
be changed without the consent of the Commissioner. The U.S. dollar 
amount so determined shall be treated by the beneficial owner as the 
amount of tax paid on the income for purposes of determining the final 
U.S. tax liability and, if applicable, claiming a refund or credit of 
tax.
    (3) Tax liability of beneficial owner satisfied by withholding 
agent--(i) General rule. In the event the satisfaction of a tax 
liability of a beneficial owner by a withholding agent constitutes 
income to the beneficial owner and such income is of a type that is 
subject to withholding, the amount of the payment deemed made by the 
withholding agent for purposes of this paragraph (e)(3) shall be 
determined under the following gross-up formula:
[GRAPHIC] [TIFF OMITTED] TP22AP96.002


[[Page 17646]]


    (ii) Example. The following example illustrates the provisions of 
this paragraph (e)(3):

    Example. College X awards a qualified scholarship within the 
meaning of section 117(b) to foreign student, FS, who is in the 
United States on an F visa. FS is a resident of a country that does 
not have an income tax treaty with the United States. The 
scholarship is $20,000 to be applied to tuition, mandatory fees and 
books, plus benefits in kind consisting of room and board and 
roundtrip air transportation. College X agrees to pay any U.S. 
income tax owed by FS with respect to the scholarship. The fair 
market value of the room and board measured by the amount College X 
charges non-scholarship students is $6,000. The cost of the 
roundtrip air transportation is $2,600. Therefore, the total fair 
market value of the scholarship received by FS is $28,600. However, 
the amount taxable is limited to the fair market value of the 
benefits in kind ($8,600) because the portion of the scholarship 
amount for tuition, fees, and books is not included in gross income 
under section 117. Under the gross-up formula, College X is deemed 
to make a payment of $10,000 ($8,600 divided by (1-.14). The U.S. 
tax that must be deducted and withheld from the payment under 
section 1441(b) is $1,400 (.14 x $10,000). College X reports 
scholarship income of $30,000 and $1,400 of U.S. tax withheld on 
Forms 1042 and 1042-S.
* * * * *
    (g) Effective date. This section applies to payments of income made 
after December 31, 1997.
    Par. 9. Section 1.1441-4 is amended by:
    1. Revising the section heading.
    2. Revising paragraphs (a) and (b)(1)(ii).
    3. Adding paragraph (b)(1)(vi).
    4. Revising the last sentence of paragraph (b)(2)(i).
    5. Revising the introductory text of paragraph (b)(2)(ii).
    6. Paragraph (b)(2)(ii) is amended by:
    a. Revising paragraph (b)(2)(ii)(A).
    b. Redesignating paragraph (b)(2)(ii)(H) as paragraph (b)(2)(ii)(J) 
and amending newly designated paragraph (b)(2)(ii)(J) by removing the 
period and adding ``; and'' in its place.
    c. Redesignating paragraphs (b)(2)(ii) (B), (C), (D), (E), (F) and 
(G) as paragraphs (b)(2)(ii) (D), (E), (F), (G), (H) and (I), 
respectively.
    d. Adding new paragraphs (b)(2)(ii) (B), (C), and (K).
    e. Amending newly designated paragraph (b)(2)(ii)(I) by removing 
the language ``, and'' and adding a semicolon in its place.
    f. Amending newly designated paragraphs (b)(2)(ii) (D), (E), (F), 
(G), and (H) by removing the comma at the end of the paragraphs and 
adding a semicolon in its place.
    7. The concluding text of paragraph (b)(2)(iv) is amended by:
    a. Removing the language ``ten'' and adding ``20'' in its place.
    b. Removing the language ``Director of Foreign Operations'' and 
adding ``Assistant Commissioner (International)'' in its place.
    8. Revising paragraph (b)(2)(v).
    9. Adding paragraph (b)(2)(vi).
    10. Adding paragraph (b)(6).
    11. Revising paragraphs (c), (d), (e), and (f).
    12. Removing paragraphs (g), (h), and (i).
    13. Removing the OMB parenthetical and the authority citation at 
the end of the section.
    The revisions and additions read as follows:


Sec. 1.1441-4  Certain exemptions from withholding.

    (a) Certain income connected with a U.S. trade or business--(1) In 
general. No withholding is required under section 1441 on income 
otherwise subject to withholding if the income is (or is deemed to be) 
effectively connected with the conduct of a trade or business within 
the United States and is includible in the beneficial owner's gross 
income for the taxable year. For purposes of this paragraph (a), an 
amount is not deemed to be includible in gross income if the amount is 
(or is deemed to be) effectively connected with the conduct of a trade 
or business within the United States and the beneficial owner claims an 
exemption from tax under an income tax treaty because the income is not 
attributable to a permanent establishment in the United States. To 
claim a reduced rate of withholding because the income is not 
attributable to a permanent establishment, see Sec. 1.1441-6(b)(1). 
This paragraph (a) does not apply to income of a foreign corporation to 
which section 543(a)(7) applies for the taxable year or to compensation 
for personal services performed by an individual. See paragraph (b) of 
this section for compensation for personal services performed by an 
individual.
    (2) Withholding agent's reliance on a claim of effectively 
connected income--(i) In general. Absent actual knowledge or reason to 
know otherwise, a withholding agent may rely on a claim of exemption 
based upon paragraph (a)(1) of this section if, prior to the payment to 
the foreign person, the withholding agent complies with the 
requirements of Sec. 1.1441-1(e)(1) and is furnished either a 
beneficial owner withholding certificate (including one that is 
transmitted with an intermediary withholding certificate described in 
Sec. 1.1441-1(e)(3)(iv)), or an intermediary withholding certificate 
described in Sec. 1.1441-1(e)(3)(ii) from a partnership acting for its 
own account (regardless of whether the distributive share information 
is stated on the certificate and whether the certificates described in 
Sec. 1.1441-1(e)(3)(iii)(C) are attached). For purposes of this 
paragraph (a), a withholding certificate is not valid unless it 
includes a taxpayer identifying number. A statement on the withholding 
certificate that the income is effectively connected with the conduct 
of a trade or business in the United States and that the income will be 
reported by the beneficial owner on an income tax return will satisfy 
the requirement of Sec. 1.1441-1(e)(2)(ii) or (e)(3)(iii) that the 
certificate describe the basis for the claim of reduced rate. A 
withholding agent may presume that the income is not effectively 
connected with the conduct of a trade or business in the United States 
if the withholding certificate is silent or if the withholding agent 
cannot associate the payment with the required documentation (as 
defined in Sec. 1.1441-1(f)(1)). See Sec. 1.1441-1(e)(4)(ii)(B)(2) for 
the period of validity applicable to a certificate provided under this 
section. A withholding certificate shall be effective only for the item 
or items of income specified therein. In compliance with Sec. 1.1441-
1(e)(3)(ii)(A), the validity of the certificate expires when subsequent 
circumstances arising during the taxable year indicate that the income 
to which the certificate relates is not, or is no longer expected to 
be, effectively connected with the conduct of a trade or business 
within the United States.
    (ii) Exemption of certain foreign partnerships and foreign 
corporations. [Reserved] For guidance prior to the date these 
regulations are published as final regulations in the Federal Register, 
see Sec. 1.1441-4(f) as contained in the 26 CFR Part 1, edition revised 
April 1, 1995.
    (iii) Payment to joint owners. In the case of payments to joint 
owners, a withholding certificate must be provided by each beneficial 
owner claiming a reduced rate certifying that the income is effectively 
connected with the conduct of a trade or business within the United 
States.
    (3) Income on notional principal contracts. A withholding agent 
that pays income attributable to a notional principal contract 
described in Sec. 1.863-7(a) shall have no obligation to withhold on 
the amounts paid under the terms of the notional principal contract 
regardless of whether a withholding certificate is provided. For rules 
regarding the obligation to file a return, see Secs. 1.1461-1(c)(1)(i) 
and 1.6041-1(d)(5).

[[Page 17647]]

    (4) Failure to act in accordance with presumption. A withholding 
agent that does not withhold, contrary to the presumption set forth in 
paragraph (a)(2) of this section that income is not effectively 
connected with the conduct of a trade or business within the United 
States, shall be liable for the tax imposed under section 1461, without 
the benefit of a reduced rate, unless the withholding agent can 
demonstrate to the satisfaction of the District Director or the 
Assistant Commissioner (International) that the income is effectively 
connected and was included in the Federal income tax return of the 
beneficial owner and that the proper amount of tax, if any, has been 
paid to the Internal Revenue Service. Proof of payment of tax may be 
established on the basis of a Form 4669 (or such other form as the 
Internal Revenue Service may prescribe) establishing the amount of tax, 
if any, actually paid by the beneficial owner on the income. Proof that 
a reduced rate of withholding was appropriate may be established by an 
appropriate withholding certificate described in Sec. 1.1441-
1(e)(1)(i). However, if the required documentation was not received by 
the withholding agent before the time the payment was made or within 
the period specified in Sec. 1.1441-1(f)(2)(i)(B)(1), then the District 
Director or the Assistant Commissioner (International) may require 
additional proof if it determines that the delays in obtaining the 
required documentation affect its reliability. The withholding agent 
will be liable for interest under section 6601 regardless of whether 
the underlying tax liability is due. In addition, the withholding agent 
may be subject to penalties.
    (b) Compensation for personal services of an individual--(1) 
Exemption from withholding. * * *
* * * * *
    (ii) Such compensation that would be subject to withholding under 
section 3402 but for the provisions of section 3401(a) (not including 
paragraph (a)(6) of that section) and the regulations under that 
section. This paragraph (b)(1)(ii) does not apply to payments to a 
nonresident alien individual from any trust described in section 
401(a), any annuity plan described in section 403(a), or any annuity, 
custodial account, or retirement income account described in section 
403(b). Thus, for example, payments to a nonresident alien individual 
from a trust described in section 401(a) are subject to withholding 
under section 1441 and not under section 3405 or 3406.
* * * * *
    (vi) Compensation that is exempt from withholding under section 
3402 by reason of section 3402(e), provided that the employee and his 
employer enter into an agreement under section 3402(p) to provide for 
the withholding of income tax upon payments of amounts described in 
Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to 
enter into such an agreement should furnish his employer with Form W-4 
(withholding exemption certificate) (or such other form as the Internal 
Revenue Service may prescribe). See section 3402(f) and the regulations 
thereunder and Sec. 31.3402(p)-1 of this chapter.
    (2) Manner of obtaining withholding exemption under tax treaty--(i) 
In general. * * * The exemption from withholding becomes effective for 
payments made at least 20 days after a copy of the accepted statement 
is forwarded to the Assistant Commissioner (International).
    (ii) Statement claiming withholding exemption. The statement 
claiming an exemption from withholding shall be made on Form 8233 (or 
an acceptable substitute). Form 8233 shall be dated, signed by the 
beneficial owner under the penalties of perjury, and contain the 
following information:
    (A) The individual's name, permanent residence address, taxpayer 
identifying number, and the U.S. visa number, if any;
    (B) The individual's current immigration status and visa type;
    (C) The individual's original date of entry into the United States;
* * * * *
    (K) Any other information as the form may require.
* * * * *
    (v) Copies of Form 8233. The withholding agent shall forward one 
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of 
this section to the Assistant Commissioner (International), within five 
days of his or her acceptance. The Assistant Commissioner 
(International) may review the forms so submitted. The withholding 
agent shall retain a copy of Form 8233.
    (vi) Electronic filing. Under procedures published by the Internal 
Revenue Service, Forms 8233 may be filed electronically with the 
Internal Revenue Service.
* * * * *
    (6) Personal exemption--(i) In general. To determine the tax to be 
withheld at source under Sec. 1.1441-1 from remuneration paid for 
personal services performed within the United States by a nonresident 
alien individual and from scholarship and fellowship income described 
in paragraph (c) of this section, a withholding agent may take into 
account one personal exemption pursuant to sections 873(b)(3) and 151 
regardless of whether the income is effectively connected. The 
exemption does not need to be prorated for purposes of withholding 
under section 1441.
    (ii) Multiple exemptions. More than one personal exemption may be 
claimed in the case of a resident of a contiguous country or a national 
of the United States under section 873(b)(3). In addition, residents of 
a country with which the United States has an income tax treaty in 
effect may be eligible to claim more than one personal exemption if the 
treaty so provides. Claims for more than one personal exemption shall 
be made on the withholding certificate furnished to the withholding 
agent. The exemptions do not need to be prorated for purposes of 
withholding under section 1441.
    (iii) Special rule where both scholarship and compensation income 
is received. The fact that both scholarship income and compensation 
income are received during the taxable year does not entitle the 
taxpayer to claim more than one personal exemption amount (or more than 
the additional amounts permitted under paragraph (b)(6)(ii) of this 
section). Thus, if a nonresident alien student receives taxable 
scholarship amounts from one payor and compensation income from another 
payor, no more than the total personal exemption amount permitted under 
the Internal Revenue Code or under an income tax treaty may be taken 
into account by both payors.
    (c) Special rules for scholarship and fellowship income--(1) In 
general. Under section 871(c), certain amounts paid as a scholarship or 
fellowship for study, training, or research in the United States to a 
nonresident alien individual temporarily present in the United States 
as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 
101(a)(15) of the Immigration and Nationality Act are treated as income 
effectively connected with the conduct of a trade or business within 
the United States. Such amounts (as described in the second sentence of 
section 1441(b)) are subject to withholding tax under section 1441, but 
at the lower rate of 14 percent. That rate may be reduced under the 
provisions of an income tax treaty. Claims of a reduced rate under an 
income tax treaty shall be made under the procedures described in 
Sec. 1.1441-6(b)(1). Therefore, claims for amounts described in this 
paragraph (c)(1) may not be shown on

[[Page 17648]]

a Form 8233. However, if the payee is receiving both compensation for 
personal services and income described in this paragraph (c)(1) from 
the same withholding agent, claims for both types of income may be 
shown on Form 8233.
    (2) Alternate withholding election. A withholding agent may elect 
to withhold on the amounts described in paragraph (c)(1) of this 
section at the rates applicable under section 3402, as if the income 
were wages. Such election shall be made by obtaining a Form W-4 (or an 
acceptable substitute or such other form as the Internal Revenue 
Service may prescribe) from the beneficial owner. Such Form W-4 shall 
also serve as notice to the beneficial owner that the income is being 
treated as wages for purposes of withholding tax under section 1441.
    (d) Annuities received under qualified plans. Withholding is not 
required under section Sec. 1.1441-1 in the case of any amount received 
as an annuity if the amount is exempt from tax under section 871(f) and 
the regulations under that section. A statement on the beneficial owner 
withholding certificate that the annuity is excluded from gross income 
by reason of section 871(f) and the basis for that exclusion satisfies 
the requirement of Sec. 1.1441-1(e)(2)(ii) that the beneficial owner 
state the basis for the claim of reduced rate. A beneficial owner 
withholding certificate furnished for purposes of claiming the benefits 
of the exemption under this paragraph (d) is not valid unless it 
includes a taxpayer identifying number. See Sec. 1.1441-1(f)(3)(ii) 
regarding applicable presumptions if the withholding agent does not 
hold the required documentation prior to payment.
    (e) Income of a foreign central bank of issue or the Bank for 
International Settlements. Section 895 provides for the exclusion from 
gross income of certain income derived by a foreign central bank of 
issue, or by the Bank for International Settlements, from obligations 
of the United States or of any agency or instrumentality thereof or 
from bank deposits. Absent actual knowledge or reason to know that a 
foreign central bank of issue, or the Bank for International 
Settlements, is operating outside the scope of the exclusion granted by 
section 895, the withholding agent may rely on a claim of exemption if, 
prior to making the payment, the withholding agent complies with the 
requirements of Sec. 1.1441-1(e)(1). The following statement on a 
beneficial owner withholding certificate satisfies the requirement in 
Sec. 1.1441-1(e)(2)(ii) that the beneficial owner state the basis for 
the claim of reduced rate:
    (1) The bank is a foreign central bank of issue, or the Bank for 
International Settlements; and
    (2) The bank does not, and will not, hold the obligations or the 
bank deposits covered by the withholding agreement for, or use them in 
connection with, the conduct of a commercial banking function or other 
commercial activity.
    (f) Effective date--(1) General rule. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. A withholding agent that holds a valid Form 
4224 on a date that is 60 days after the date these regulations are 
published as final regulations in the Federal Register may treat it as 
a valid withholding certificate until its validity expires under 
applicable provisions as in effect on April 22, 1996.


Sec. 1.1441-4T  [Removed]

    Par. 10. Section 1.1441-4T is removed.
    Par. 11. Section 1.1441-5 is revised to read as follows:


Sec. 1.1441-5  Withholding on payments to pass-through entities.

    (a) Domestic partnerships--(1) Exemption from withholding on 
payment to domestic partnerships. A payment of income to a domestic 
partnership is not subject to withholding of tax under section 1441 
even though it may have partners that are foreign persons. A payor 
(within the meaning of section 3406) may rely, in accordance with the 
procedures under Sec. 1.1441-1(d), on a Form W-9 furnished by the 
partnership.
    (2) Withholding by a domestic partnership--(i) In general. A 
domestic partnership is required to withhold tax under Sec. 1.1441-1 as 
a withholding agent on the gross amount of items of income subject to 
withholding that are includible in the distributive share of income of 
a partner that is a foreign person. Pursuant to the authority provided 
under section 702(a), each partner shall take into account separately 
its distributive share of items of income subject to withholding, and 
thus the partnership, pursuant to section 703(a)(1), shall separately 
state these items of gross income when computing its taxable income. A 
partnership shall withhold when any distributions that include items of 
income subject to withholding are made. To the extent a foreign 
partner's distributive share of an item of income subject to 
withholding has not been actually distributed, the partnership is 
required to withhold on the partner's distributive share of that item 
of income on the earlier of the date that the statement required under 
section 6031(b) and Sec. 1.6031-1(b) to be provided to that partner is 
mailed or otherwise furnished to the partner or the due date for 
furnishing that statement as provided under Sec. 1.6031-1(b)(1). If a 
partnership withholds on a distributive share before the income is 
actually distributed to the partner, then withholding is not required 
when the income is subsequently distributed.
    (ii) Reliance on a partner's claim for reduced withholding. Absent 
actual knowledge or reason to know otherwise, a domestic partnership 
may rely on a claim for reduced withholding by a partner, if prior to 
the time the partnership is required to withhold, the partnership 
complies with the requirements of Sec. 1.1441-1(d) or (e)(1), whichever 
is applicable, with respect to the partner. See the presumptions 
described in Sec. 1.1441-1(f)(4)(iii)(A) applicable to a domestic 
partnership in determining the U.S. or foreign status of its partners.
    (b) Foreign partnerships--(1) In general. A withholding agent must 
treat a payment to a foreign partnership as a payment to its partners, 
except to the extent the partnership is treated as a payee under 
Sec. 1.1441-1(c)(3)(ii). See Sec. 1.1441-1(e)(5)(v) for payments to a 
foreign partnership that claims to be a qualified intermediary. If the 
partnership is not treated as a payee, a withholding agent may, absent 
actual knowledge or reason to know otherwise, rely on a claim for a 
reduced rate of withholding by a partner if, prior to the payment, the 
withholding agent holds an intermediary withholding certificate 
described in Sec. 1.1441-1(e)(3)(iii) pertaining to the partner. The 
certificate will be considered to pertain to the partner if the 
appropriate withholding certificate for the partner is attached to the 
intermediary withholding certificate. The appropriate withholding 
certificate for the partner may be a beneficial owner withholding 
certificate described in Sec. 1.1441-1(e)(2) (for a partner claiming to 
be a foreign person and a beneficial owner, determined under the 
provisions of Sec. 1.1441-1(c)(6)), the applicable certificates 
described in Sec. 1.1441-1(d)(2) (for a partner claiming to be a U.S. 
payee), an intermediary withholding certificate described in 
Sec. 1.1441-1(e)(3)(ii) or (iv) (for a partner that is a qualified 
intermediary or not otherwise acting for its own account), or an 
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) representing that the income to which the certificate 
relates is effectively connected with the conduct of a trade or 
business in the

[[Page 17649]]

United States. A claim must be presented for each portion of the 
payment that represents an item of income includible in the 
distributive share of the partner. When making a claim for several 
partners, the partnership may present a single intermediary withholding 
certificate to which the partners' certificates are attached.
    (2) Special rules in the case of tiered partnerships. If a foreign 
or domestic partnership is a partner of a foreign partnership, the 
rules of this paragraph (b)(2) shall apply.
    (i) A withholding agent may treat any portion of a payment made to 
a foreign partnership that represents an item of income includible in 
the distributive share of a partner (at any level in the chain of 
tiers) that is a domestic partnership as a payment to a U.S. person if 
the domestic partnership complies with the procedures described in 
Sec. 1.1441-1(d) (relating to the claim of U.S. status by a payee or 
beneficial owner).
    (ii) A withholding agent may treat any portion of a payment made to 
a foreign partnership that represents an item of income includible in 
the distributive share of a partner (at any level in the chain of 
tiers) that is a foreign partnership as a payment to a foreign person 
if the withholding agent may treat the foreign partnership as the payee 
pursuant to the provisions in Sec. 1.1441-1(c)(3)(ii).
    (iii) Where the partner in the foreign partnership to whom the 
payment is made (second tier) is a foreign partnership (first tier), 
the appropriate withholding certificate for the partner is an 
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) issued by the second tier, and an intermediary withholding 
certificate described in Sec. 1.1441-1(e)(3)(iii) issued by the first 
tier to which is attached an appropriate withholding certificate for 
each of the partners of the first tier. The rules of this paragraph 
(b)(2)(iii) shall apply to any number of tiers of foreign partnerships.
    (3) Presumptions. A withholding agent may apply the presumption 
described in Sec. 1.1441-1(f)(4)(ii) to any portion of a payment for 
which the withholding agent does not receive the required documentation 
(as defined in Sec. 1.1441-1(f)(1)(ii)).
    (4) Example. The rules of this paragraph (b) may be illustrated by 
the following example:

    Example. (i) Facts. FP is a foreign partnership organized under 
the laws of Country X deriving interest that would qualify as 
portfolio interest described in section 871(h)(2)(B) if the 
statement described in section 871(h)(5) is furnished. FP has three 
partners, A, B, and C. FP furnishes to the withholding agent an 
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) to which it attaches a Form W-9 for A and a beneficial 
owner withholding certificate for B. No documentation is attached 
for C.
    (ii) Analysis. Absent actual knowledge or reason to know 
otherwise, the withholding agent may rely on A's Form W-9 to treat A 
as a U.S. person and, therefore, does not withhold on A's share of 
the payment. The withholding agent must comply with any information 
reporting obligations under sections 6042 (i.e., issue a Form 1099) 
with respect to A. Absent actual knowledge or reason to know 
otherwise, the withholding agent may also rely on B's claim for 
portfolio interest treatment for its share of the payment. The 
withholding agent must report the payment to B on Forms 1042 and 
1042-S. Because the withholding agent cannot associate the required 
documentation (as defined Sec. 1.1441-1(f)(1)) for C's share of the 
interest income, the withholding agent may, for purposes of section 
3406, treat that amount as a reportable payment made to a U.S. payee 
that is not an exempt recipient. See Sec. 1.1441-1(f)(4)(ii).

    (c) Trusts and estates. [Reserved]
    (d) Effective date--(1) General rule. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. A withholding agent that holds a valid 
withholding certificate on the date that is 60 days after the date 
these regulations are published as final regulations in the Federal 
Register may treat it as a valid withholding certificate until its 
validity expires under applicable provisions as in effect on April 22, 
1996.
    Par. 12. Section 1.1441-6 is revised to read as follows:


Sec. 1.1441-6  Claim of a reduced rate of tax under an income tax 
treaty.

    (a) In general. Under an income tax treaty in effect between the 
United States and a foreign country, the rate of tax to be withheld on 
a payment of income subject to withholding may be reduced if the 
beneficial owner of the income is a resident of the foreign country. 
Other requirements or conditions of the treaty, or revenue procedures 
issued thereunder, for claiming treaty benefits must also be satisfied, 
such as a limitation of benefits provision. If the requirements of this 
section are met, the amount withheld from the payment may be reduced at 
source to account for the treaty benefit. See also Sec. 1.1441-4(b)(2) 
for rules regarding claims of reduced rate of withholding under an 
income tax treaty in the case of compensation from personal services.
    (b) Reliance on claim of treaty benefits--(1) In general. Absent 
actual knowledge or reason to know otherwise, a withholding agent may 
rely on a claim that a beneficial owner is entitled to a reduced rate 
of withholding based upon an income tax treaty if, prior to the 
payment, the withholding agent complies with the requirements of 
Sec. 1.1441-1(e)(1). Except as otherwise provided in paragraph (b)(2) 
or (b)(3) of this section, for purposes of this paragraph (b)(1), a 
beneficial owner withholding certificate mentioned in Sec. 1.1441-
1(e)(1) means a beneficial owner withholding certificate described in 
Sec. 1.1441-1(e)(2), that includes the beneficial owner's taxpayer 
identifying number and states that the taxpayer has complied with the 
advance ruling requirements described in paragraph (e) of this section 
(if applicable), and, if the beneficial owner is a person related to 
the withholding agent within the meaning of section 267(b) and 707(b), 
that the beneficial owner will file the statement required under 
Sec. 1.6114-1(b) (if applicable). The requirement to file an 
information return under section 6114 for income subject to withholding 
applies only to amounts paid during the calendar year that, in the 
aggregate, exceed $500,000. See Sec. 301.6114-1(b) of this chapter. See 
paragraph (d) of this section for circumstances under which the 
withholding agent may be notified by the Internal Revenue Service that 
the certificate cannot be relied upon to grant benefits under an income 
tax treaty. A beneficial owner's taxpayer identifying number on a 
withholding certificate is valid for purposes of establishing proof of 
residence in a treaty country only if the taxpayer identifying number 
is certified by the Internal Revenue Service. However, absent actual 
knowledge or reason to know otherwise, a withholding agent may rely on 
a taxpayer identifying number that appears correct on its face, without 
having to inquire as to whether the taxpayer identifying number is 
certified, if the permanent residence address on the certificate is in 
the country whose tax treaty with the United States is invoked. See the 
confirmation and notification procedures described in Sec. 1.1441-
1(e)(4) (iv) and (v).
    (2) Special rules for certain dividends. In the case of dividends 
on stock traded on a U.S. established financial market, a withholding 
agent may rely on a beneficial owner withholding certificate described 
in Sec. 1.1441-1(e)(2). For this purpose, a U.S. established financial 
market is a national securities exchange that is registered under 
section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78F), or an 
interdealer quotation system sponsored by a national securities 
association registered under

[[Page 17650]]

section 15A of the Securities Exchange Act of 1934. In the case of 
payments made outside the United States (as defined in Sec. 1.6049-
5(e)) with respect to an offshore account (as defined in Sec. 1.6049-
5(d)(3)), a withholding agent may also consider that it holds a 
withholding certificate if it holds a certificate of residence 
described in paragraph (c)(3) of this section or documentary evidence 
described in paragraph (c)(4) of this section that the withholding 
agent has reviewed and maintains in its records. The withholding agent 
maintains the reviewed documents by retaining either the documents 
viewed or a photocopy thereof and noting in its records the date on 
which, and by whom, the documents were received and reviewed. This 
paragraph (b)(2) shall not apply to dividends that are exempt from 
withholding based on a claim that the dividends are effectively 
connected with the conduct of a trade or business in the United States.
    (3) Competent authorities agreement. The procedures described in 
this section may be modified to the extent the U.S. competent authority 
may agree with the competent authority of a country with which the 
United States has an income tax treaty in effect.
    (4) Special rules for payments to certain foreign entities--(i) 
Determination of beneficial owner. Under Sec. 1.1441-1(c)(6)(ii)(B), 
the tax principles in effect under the laws of the country whose tax 
treaty with the United States is invoked apply in certain cases to 
determine the beneficial owner of income entitled to claim a reduced 
rate of withholding under that income tax treaty. Thus, if a beneficial 
owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is not a 
resident of the country whose law has been applied to determine 
beneficial owner status, then a payment to a foreign entity will not 
qualify for a reduced rate under that country's tax treaty with the 
United States even if the foreign entity receiving the payment is 
organized in that foreign country. Conversely, if a beneficial owner, 
as determined under Sec. 1.1441-1(c)(6)(ii)(B), is a resident of the 
country whose law has been applied to determine beneficial owner 
status, then the beneficial owner's share of a payment to a foreign 
entity will qualify for a reduced rate under the applicable income tax 
treaty (provided other requirements for qualification are met) even if 
the foreign entity receiving the payment is not organized in, or is not 
a resident of, the foreign country in which the beneficial owner is 
resident.
    (ii) Withholding certificates. The person claiming a reduced rate 
of tax under an income tax treaty shall apply the rules of Sec. 1.1441-
1(c)(6)(ii)(B) and paragraph (b)(4)(i) of this section to determine the 
beneficial owner of income and entitlement to a reduced rate under an 
income tax treaty. The beneficial owner so determined may provide, as 
appropriate, a beneficial owner withholding certificate described in 
paragraph (b)(1) or (b)(2) of this section. Thus, for example, if the 
beneficial owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is 
the interest holder rather than the entity, then the entity shall be 
treated as a foreign partnership for purposes of determining which 
withholding certificate is appropriate. If, conversely, the beneficial 
owner, as determined under Sec. 1.1441-1(c)(6)(ii)(B), is the entity 
rather than the interest holders, then the entity shall be treated as a 
corporation for purposes of determining which withholding certificate 
is appropriate.
    (iii) Request for dual treatment. As set forth in Sec. 1.1441-
1(c)(6)(ii)(B), a withholding agent may make payments to a foreign 
entity that is simultaneously claiming a reduced rate of tax on its own 
behalf and a reduced rate on behalf of persons in their capacity as 
interest holders in that entity. In such a case, the withholding agent 
may, at its option, accept such dual claims based, as appropriate, on 
beneficial owner withholding certificates described in paragraph (b) 
(1) or (2) of this section or documentary evidence described in 
Sec. 1.6049-5(c)(2)(ii) furnished by such persons with respect to their 
respective share of such payments, even though the withholding agent 
holds different withholding certificates that requires it to treat the 
entity inconsistently with respect to different payments or with 
respect to different portions of the same payment. See paragraph 
(b)(4)(v) Example 2 of this section.
    (iv) Reciprocal application by treaty partners. Paragraph (b)(4) of 
this section and the principles of Sec. 1.1441-1(c)(6)(ii)(B) will not 
apply if the U.S. competent authority determines that a treaty partner 
is not reciprocally applying the principles of Sec. 1.1441-
1(c)(6)(ii)(B) to entities organized under the laws of the United 
States or to interest holders residing in the United States. In such 
case, the rules set forth in Sec. 1.1441-1(c)(6) shall apply without 
regard to the rules in Sec. 1.1441-1(c)(6)(ii)(B). This determination 
shall be effective upon publication of relevant guidance by the Service 
and shall apply prospectively only.
    (v) Examples. This paragraph (b)(4) is illustrated by the following 
examples:

    Example 1--(i) Facts. Entity A is a business organization formed 
under the laws of country Y that has an income tax treaty with the 
United States. Under the laws of country Y, A is subject to tax at 
the entity level and, therefore, is treated as the beneficial owner 
of income it receives and as a resident of country Y for purposes of 
the U.S.-Y tax treaty. A receives U.S. source royalties from 
withholding agent R and claims a reduced rate of withholding under 
the U.S.-Y tax treaty on its own behalf (rather than on behalf of 
its interest holders). A furnishes a beneficial owner withholding 
certificate described in paragraph (b)(1) of this section claiming 
to be the beneficial owner of the royalties.
    (ii) Analysis. For purposes of claiming treaty benefits under 
the U.S.-Y treaty, A is treated as the beneficial owner of the 
royalties under Sec. 1.1441-1(c)(6)(ii)(B) since, under the tax law 
of country Y, A is required to include the royalties in income. R 
may treat A as the beneficial owner of the income for purposes of 
granting the benefit of a reduced rate under the U.S.-Y tax treaty.
    Example 2--(i) Facts. The facts are the same as under Example 1, 
except that one of A's interest holders, T, is a corporation 
residing in country X. The U.S.-X tax treaty reduces the rate on 
royalties to zero whereas the rate on royalties under the U.S.-Y tax 
treaty is only reduced to 5 percent. Under the laws of country X, A 
is taxable on a flow-through basis and not at the entity level and T 
is required to include in income its distributive share of A's 
income. T claims to be the beneficial owner of its share of the 
royalty income paid to A and provides a beneficial owner certificate 
to A claiming the benefit of a zero rate under the U.S.-X tax 
treaty. A furnishes to R a beneficial owner withholding certificate 
for itself for the portion of the payment for which A alone claims 
to be the beneficial owner. In addition, it furnishes to R an 
intermediary withholding certificate described in Sec. 1.1441-
1(e)(3)(iii) to which it attaches T's beneficial owner withholding 
certificate for the portion of the payment for which T claims to be 
the beneficial owner.
    (ii) Analysis. For purposes of claiming treaty benefits under 
the U.S.-Y treaty, A is treated as the beneficial owner of all of 
the royalty income received from R under Sec. 1.1441-1(c)(6)(ii)(B), 
since, under the tax law of country Y (i.e., under the laws of the 
country whose treaty benefits are claimed), A is subject to tax on 
that income. However, for purposes of claiming benefits under the 
U.S.-X treaty, T may also be treated as the beneficial owner of its 
share of the royalty income under Sec. 1.1441-1(c)(6)(ii)(B), since, 
under the tax law of country X (i.e., the laws of the country whose 
treaty benefits are claimed), T is required to include in income its 
share of A's income. Therefore, R may treat the royalty payment to a 
single foreign entity (A) as beneficially owned by different persons 
as a result of claims presented under different treaties. R may, at 
its option, grant dual treatment, that is, a reduced rate of zero 
percent under the U.S.-X treaty on the portion of the royalty 
payment for which T claims to be the beneficial owner and a reduced 
rate of 5 percent under the U.S.-Y

[[Page 17651]]

treaty for the balance. However, under paragraph (b)(4)(iii) of this 
section, the withholding agent may, at its option, treat A as the 
sole beneficial owner of the royalty and grant benefits under the 
U.S.-Y treaty only.
    Example 3. (i) Entity A is a business organization formed under 
the laws of country Y. A receives from withholding agent R U.S. 
source royalties and U.S. source interest income that is potentially 
eligible for the portfolio interest exemption under section 871(h) 
and 881(c) of the Internal Revenue Code. A's interest holders are S, 
an individual who resides in country Y, T, an individual who resides 
in country X, and U, an individual resident in the United States. 
The United States has a tax treaty with both country Y and country 
X. The U.S.-Y tax treaty reduces the rate on royalties to 5 percent, 
and the U.S.-X tax treaty reduces the rate to zero. A is classified 
as a partnership under U.S. tax principles. Under the tax laws of 
country Y, A is taxable on a flow-through basis, and S is required 
to include in income her distributive share of A's income. Under the 
tax laws of country X, A is taxable on a flow-through basis and T is 
required to include in income her distributive share of A's income. 
A furnishes R an intermediary withholding certificate described in 
Sec. 1.1441-1(e)(3)(iii) to which it attaches--
    (A) A Form W-9 for U; and
    (B) Beneficial owner withholding certificates for S and T that 
claim the portfolio interest exemption and a reduced rate of 
withholding under the U.S. treaties with Y and X, respectively.
    (ii) Analysis. For purposes of claiming benefits under the U.S.-Y 
treaty, S is treated as the beneficial owner of his distributive share 
of royalty income received from R under Sec. 1.1441-1(c)(6)(ii)(B) 
since, under the tax law of country Y (i.e., the laws of the country 
whose treaty benefits are claimed in the case of S), S is the person 
required to include in income her distributive share of the royalty. 
Therefore, R may withhold on S's proportionate share of the royalty 
income paid to A at the 5 percent rate under the U.S.-Y tax treaty. For 
purposes of claiming benefits under the U.S.-X tax treaty, T is treated 
as the beneficial owner of her distributive share of royalty income 
under Sec. 1.1441-1(c)(6)(ii)(B), since, under the laws of country X 
(i.e., the laws of the country whose treaty benefits are claimed in the 
case of T), T is the person required to include in income her 
distributive share of the royalty. Therefore, R may withhold on T's 
proportionate share of the royalty income paid to A at the zero rate 
under the U.S.-X treaty, even though A is not organized in, or a 
resident of, country X. R may rely on U's Form W-9 to treat U as a U.S. 
person. Therefore, R does not withhold on U's share of the royalty 
payment. R also does not withhold on any portion of the interest paid 
to A because S and T have furnished beneficial owner certificates and U 
has furnished a Form W-9.
    (c) Proof of tax residence in a treaty country--(1) In general. A 
beneficial owner establishes proof of its tax residence in a treaty 
country for purposes of its claim to the withholding agent that a 
reduced rate of tax applies under an income tax treaty by complying 
with the procedures described in this paragraph (c) or with such other 
procedures as the Internal Revenue Service may prescribe in published 
guidance. For purposes of this section, the residence of a beneficial 
owner must be determined in accordance with the provisions of the 
applicable U.S. income tax treaty as may be clarified by any applicable 
regulations thereunder or technical explanations thereof, and any 
procedures issued by the Internal Revenue Service on the determination 
or proper method of certifying residence under particular income tax 
treaties.
    (2) Certification of taxpayer identifying number--(i) In general. A 
taxpayer may certify its taxpayer identifying number as required under 
paragraph (b)(1) of this section by having the taxpayer identifying 
number certified by the Internal Revenue Service either directly as 
provided under paragraph (c)(2)(ii) of this section or through a 
qualified intermediary as provided in paragraph (c)(2)(iii) of this 
section.
    (ii) IRS-certified TIN. The Internal Revenue Service may certify a 
taxpayer identifying number based upon a certificate of residence 
described in paragraph (c)(3) of this section or documentary evidence 
described in paragraph (c)(4) of this section. The certificate or 
documentary evidence must be furnished to the Internal Revenue Service 
by or on behalf of the beneficial owner upon application for the 
taxpayer identifying number or at any other time, as permitted under 
such procedures as the Internal Revenue Service may prescribe. If the 
tax residence of the beneficial owner changes, the beneficial owner 
shall promptly notify the Internal Revenue Service of that change. In 
addition, the Internal Revenue Service may exchange information for the 
purpose of confirming with the appropriate tax authority of the other 
country that the beneficial owner continues to be a tax resident of 
that country. The Internal Revenue Service may from time to time, in 
its discretion, request that the beneficial owner reconfirm its 
residence in the treaty country.
    (iii) Special rules for qualified intermediaries. The Internal 
Revenue Service may certify a taxpayer identifying number based upon 
the certification of a qualified intermediary described in Sec. 1.1441-
1(e)(5)(ii) regarding the tax residence of any of its account holders, 
or persons owning an interest in the qualified intermediary, under 
procedures agreed upon with the Internal Revenue Service. If a new 
account or interest holder has a taxpayer identifying number at the 
time it opens an account or acquires an interest, the qualified 
intermediary may rely on a statement by the account or interest holder 
that appropriate proof of tax residence in the treaty jurisdiction was 
previously provided to the Internal Revenue Service. In such case, the 
qualified intermediary must notify the Internal Revenue Service each 
time the account or interest holder's address changes to another 
country or when the account or interest holder terminates its 
relationship with the qualified intermediary.
    (3) Certificate of residence. A certificate of residence is 
generally a certificate issued by the competent authority (or another 
appropriate tax authority) of the treaty country of which the taxpayer 
claims to be a resident that certifies that the taxpayer has filed its 
most recent income tax return as a resident of that country. A 
certificate of residence is valid for a period of three years or such 
longer period as the Internal Revenue Service may prescribe. The 
competent authorities may agree to a different procedure for certifying 
residence, in which case such procedure shall govern for payments made 
to a person claiming to be a resident of the country with which such an 
agreement is in effect.
    (4) Documentary evidence establishing residence in the treaty 
country. Generally, documentary evidence used to establish residence in 
a treaty country must include the name, address, and photograph of the 
person seeking to prove residence, must be an official document issued 
by an authorized governmental body (i.e., a government or agency 
thereof, or a municipality), and must have been issued no more than 
three years prior to presentation to the withholding agent. A document 
older than three years may be relied upon as proof of residence only if 
it is accompanied by additional evidence of the person's residence in 
the treaty country (i.e., a bank statement, utility or medical bills). 
Documentary evidence must be in the form of original documents or a 
certified copy thereof.
    (d) Joint owners. In the case of a payment to joint owners, all 
owners must furnish a withholding certificate

[[Page 17652]]

or, if applicable, documentary evidence or a certificate of residence. 
The applicable rate of tax on a payment of income to joint owners shall 
be the highest applicable rate.
    (e) Related party dividends under certain treaties. Income tax 
treaties between the United States and Austria, Denmark, Ireland, and 
Switzerland reduce the rate of tax on dividends between related 
corporations to 5 percent subject to the condition that the 
relationship between the domestic and foreign corporations was not 
arranged or maintained for the purpose of securing the reduced rate. A 
domestic corporation that makes a distribution to a resident of one of 
these countries may treat this condition as satisfied if, prior to the 
payment, a request has been made to the Internal Revenue Service for a 
private letter ruling determining that the relationship between the 
corporation and the shareholder was not arranged or maintained for such 
purpose and the Service has either issued a favorable ruling (and the 
ruling has not been revoked) or is considering the ruling request.
    (f) Effective date--(1) General rule. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. For purposes of this section, a withholding 
agent that holds a valid Form 1001 or 8233 on the date that is 60 days 
after these regulations are published as final regulations in the 
Federal Register may treat it as a valid withholding certificate until 
its validity expires under applicable provisions as in effect on April 
22, 1996. In addition, the documentation requirements for dividends on 
stock traded on a U.S. established financial market described in 
paragraph (b)(2) of this section shall apply only to accounts 
established after the date that is 60 days after these regulations are 
published as final regulations in the Federal Register. For accounts 
established on or before that date, the documentation requirements 
under this section shall apply to payments made after December 31, 
1999.
    Par. 13. Section 1.1441-7 is revised to read as follows:


Sec. 1.1441-7   General provisions relating to withholding agents.

    (a) Withholding agent defined. For purposes of chapter 3 of the 
Internal Revenue Code, the term withholding agent means any person, 
U.S. or foreign, that has the control, receipt, custody, disposal, or 
payment of an item of income of a foreign person subject to 
withholding. See Sec. 1.1441-1(b) (dealing with general rules of 
withholding) and Sec. 1.1441-1(f) (dealing with presumptions of U.S. or 
foreign status in the absence of required documentation) for 
determining whether a payment is considered made to a foreign person. 
Any person who meets the definition of a withholding agent is required 
to deposit any tax withheld under Sec. 1.1461-1(a) and to make the 
returns prescribed by Sec. 1.1461-1(b) and (c). When several persons 
qualify as withholding agents with respect to a single payment, only 
one tax is required to be withheld and only one return (on Form 1042, 
as required under Sec. 1.1461-1(b)), is required to be made.
    (b) Standards of knowledge--(1) In general. If a withholding agent 
does not withhold the full amount even though it has actual knowledge 
or reason to know that a claim of U.S. status or of a reduced rate of 
tax under section 1441 is incorrect, the withholding agent may be 
liable for tax, interest, and penalties under sections 1461 and 1463 
and the regulations under those sections. A withholding agent that has 
received notification by the Internal Revenue Service that a claim of 
U.S. status or of a reduced rate is incorrect has actual knowledge 
beginning on the date that is 30 calendar days after the date the 
notice is received. A withholding agent that fails to act in accordance 
with the presumptions set forth in Sec. 1.1441-1(f) may be liable for 
tax, interest, and penalties. See Sec. 1.1441-1(f)(5).
    (2) Reason to know--(i) In general. A withholding agent will be 
considered to have reason to know if it has sufficient knowledge of the 
underlying facts such that a reasonably prudent person in the position 
of the withholding agent would question the claim made or if the 
withholding agent has actual knowledge of sufficient facts to put it on 
notice that the claim is false.
    (ii) Limits on duty to inquire in certain cases. In the case of 
portfolio interest, interest on deposits described in section 
871(i)(2)(A), and dividends described in Sec. 1.1441-6(b)(2), a 
withholding agent's duty to inquire with respect to a beneficial owner 
withholding certificate is limited to the circumstances listed in this 
paragraph (b)(2)(ii). Where one or more of the circumstances described 
in this paragraph (b)(2)(ii) exist for a withholding certificate, the 
withholding agent may rely on the withholding certificate only after 
documentation is provided in support of the claim of foreign status, or 
reduced rate of tax under a tax treaty, and the certificate is 
corrected, if appropriate.
    (A) The permanent residence address on the withholding certificate 
is an address in the United States.
    (B) The payment is directed to a P.O. Box, an in-care-of address, a 
U.S. address, or an account with a financial institution in the United 
States.
    (C) In the case of income for which benefits are claimed under an 
income tax treaty, the permanent residence address or mailing address 
is not in the corresponding treaty country.
    (D) The beneficial owner notifies the withholding agent of an 
address for mailing purposes and that address is--
    (1) Different from the permanent residence or mailing address 
stated on the withholding certificate provided to the withholding agent 
by or for the beneficial owner; and
    (2) The address is one that is described in paragraph 
(b)(2)(ii)(A), (B), or (C) of this section.
    (E) Such other circumstances as the Internal Revenue Service may 
prescribe in published guidance.
    (3) Universal accounts. A withholding agent that is a financial 
institution dealing with the public and with which a customer may 
open an account shall apply the rules of this paragraph (b) on an 
account-by-account basis, except to the extent it uses a universal 
account system that uses a customer identifier that can be used to 
retrieve systemically any other accounts of the customer. See 
Sec. 31.3406(c)-1(c)(3)(ii) and (c)(3)(iii)(C) of this chapter.
    (c) Authorized agent--(1) In general. The acts of an agent of a 
withholding agent (including the receipt of withholding certificates, 
the payment of amounts of income subject to withholding, and the 
deposit of tax withheld) shall be imputed to the withholding agent on 
whose behalf it is acting. However, if the agent is a foreign person, a 
withholding agent that is a U.S. person may treat the acts of the 
foreign agent as its own for purposes of determining whether it has 
complied with the provisions of this section, but only if the agent is 
an authorized foreign agent, as defined in paragraph (c)(2) of this 
section.
    (2) Authorized foreign agent. An agent is an authorized foreign 
agent only if--
    (i) There is a written agreement between the withholding agent and 
the foreign person acting as agent;
    (ii) The notification procedures described in paragraph (c)(3) of 
this section have been complied with;
    (iii) Books and records and relevant personnel of the foreign agent 
are available for examination by the Internal Revenue Service in order 
to evaluate the withholding agent's compliance with the provisions of 
chapter 3, section 3406, and chapter 61 of the Internal Revenue Code, 
and the regulations under those provisions; for this purpose, the 
foreign agent's actual knowledge or

[[Page 17653]]

reason to know shall be imputed to the U.S. withholding agent; and
    (iv) The U.S. withholding agent remains fully liable for the acts 
of its agent and does not assert any of the defenses that may otherwise 
be available under common law principles of agency in order to avoid 
tax liability under the Internal Revenue Code.
    (3) Notification. A withholding agent that appoints an authorized 
agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), for the 
withholding provisions of chapter 3 of the Internal Revenue Code, or 
for the reporting provisions of chapter 61 of the Internal Revenue 
Code, is required to file notice of such appointment with the Office of 
the Assistant Commissioner (International). Such notice shall be filed 
before the first payment for which the authorized agent acts as such.
    (4) Liability of U.S. withholding agent. A withholding agent acting 
through an authorized foreign agent is liable for any failure of the 
agent, such as failure to withhold an amount or make payment of tax, in 
the same manner and to the same extent as if the agent's failure had 
been the failure of the U.S. withholding agent. Such liability shall 
exist irrespective of the fact that the authorized foreign agent is 
also a withholding agent and is itself separately liable for failure to 
comply with the provisions of the regulations under sections 1441, 
1442, or 1443. However, liability for tax, interest, and penalties 
shall not be collected more than once.
    (5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii) 
regarding returns required to be made where a U.S. withholding agent 
acts through an authorized foreign agent.
    (d) United States obligations. If the United States is a 
withholding agent for an item of interest, including original issue 
discount, on obligations of the United States or of any agency or 
instrumentality thereof, the withholding obligation of the United 
States is assumed and discharged by--
    (1) The Commissioner of the Public Debt, for interest paid by 
checks issued through the Bureau of the Public Debt;
    (2) The Treasurer of the United States, for interest paid by him or 
her, whether by check or otherwise;
    (3) Each Federal Reserve Bank, for interest paid by it, whether by 
check or otherwise; or
    (4) Such other person as may be designated by the Internal Revenue 
Service.
    (e) Assumed obligations. If, in connection with the sale of a 
corporation's property, payment of the bonds or other obligations of 
the corporation is assumed by the assignee, the assignee, whether an 
individual, partnership, or corporation, shall be a withholding agent 
to the extent amounts subject to withholding tax are paid to a foreign 
person. Thus, the assignee shall deduct and withhold such taxes under 
Sec. 1.1441-1 as would be required to be withheld by the assignor had 
no such sale or transfer been made.
    (f) Conduit financing arrangements. [Reserved]
    (g) Effective date. This section applies to payments of income made 
after December 31, 1997.
    Par. 14. Section 1.1441-8T is amended as follows:
    1. The section heading is revised.
    2. Paragraph (b) is revised.
    3. Paragraph (c) is added.
    The revisions and additions read as follows:


Sec. 1.1441-8T   Foreign government and international organization 
exemption from withholding (temporary).

* * * * *
    (b) Statement claiming exemption. Absent actual knowledge or reason 
to know otherwise, the withholding agent may rely upon a claim of 
exemption made by the foreign government or international organization, 
if, prior to making the payment, the withholding agent satisfies the 
requirements of Sec. 1.1441-1(e)(1). For purposes of this paragraph 
(b), a beneficial owner withholding certificate means a certificate 
described in Sec. 1.1441-1(e)(2). A statement on the withholding 
certificate that the income is, or will be, exempt from taxation under 
section 892 and the regulations under that section will satisfy the 
requirement in Sec. 1.1441-1(e)(2)(ii) that the beneficial owner state 
on the certificate the basis for the claim of reduced rate.
    (c) Effective date--(1) In general. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. For purposes of this section, a withholding 
agent that holds a valid Form 8709 on the date that is 60 days after 
these regulations are published as final regulations in the Federal 
Register may treat it as a valid withholding certificate until its 
validity expires under applicable provisions as in effect on April 22, 
1996.
    Par. 15. Section 1.1441-9 is added to read as follows:


Sec. 1.1441-9   Exemption from withholding on exempt income of a 
foreign tax-exempt organization and foreign private foundations.

    (a) Income not subject to tax under section 511. No withholding of 
tax is required under Sec. 1.1441-1 on income of a foreign organization 
described in section 501(c) of the Internal Revenue Code that is not 
subject to the tax imposed by section 511 of the Internal Revenue Code 
and is exempt from tax under section 501(a). See Sec. 1.1443-1 for 
withholding rules applicable to foreign private foundations.
    (b) Statement claiming exemption. Absent actual knowledge or reason 
to know otherwise, a withholding agent may rely upon a claim of 
exemption by the foreign tax-exempt organization if, prior to making 
the payment, the withholding agent meets the requirements of 
Sec. 1.1441-1(e)(1) (except that the certificate must contain a 
taxpayer identifying number). The requirement in Sec. 1.1441-
1(e)(2)(ii) that the beneficial owner state on the certificate the 
basis for the claim of reduced rate shall be satisfied by the 
beneficial owner certifying that the income is not, or will not be, 
subject to tax under section 511 and that the Internal Revenue Service 
has issued a determination letter (and the date thereof). If the 
organization cannot certify that it has been issued such a letter, it 
must provide an opinion of counsel that it is tax exempt under section 
501(c).
    (c) Effective date--(1) In general. This section applies to 
payments of income made after December 31, 1997.
    (2) Transition rules. For purposes of this section, a withholding 
agent that holds a valid Form W-8, 1001 or 4224 on the date that is 60 
days after the date these regulations are published as final 
regulations in the Federal Register may treat it as a valid withholding 
certificate until its validity expires under applicable provisions as 
in effect on April 22, 1996.
    Par. 16. Sections 1.1442-1 and 1.1442-2 are revised to read as 
follows:


Sec. 1.1442-1  Withholding of tax on foreign corporations.

    For regulations concerning the withholding of tax at source under 
section 1442 in the case of foreign corporations, see Secs. 1.1441-1 
through 1.1441-7 and 1.1441-9.


Sec. 1.1442-2  Exemption under a tax treaty.

    For regulations providing for a claim of reduced withholding tax 
under section 1442 by certain foreign corporations pursuant to the 
provisions of an income tax treaty, see Sec. 1.1441-6.
    Par. 17. Section 1.1442-3 is added to read as follows:


Sec. 1.1442-3  Tax exempt income of a foreign tax-exempt corporation.

    For regulations providing for a claim of exemption for income 
exempt from tax under section 501(a) of a foreign tax-

[[Page 17654]]

exempt corporation, see Sec. 1.1441-9. See Sec. 1.1443-1 for 
withholding rules applicable to foreign foundations.


Sec. 1.1443-1  [Amended]

    Par. 18. Section 1.1443-1 is amended by:
    1. Amending the second sentence of paragraph (b)(4)(i) by removing 
the words ``an affidavit of the foreign organization or''.
    2. Amending the third sentence in paragraph (b)(4)(i) by removing 
the words ``an affidavit or''.
    Par. 19. Section 1.1461-1 is revised to read as follows:


Sec. 1.1461-1  Payment and returns of tax withheld.

    (a) Payment of withheld tax--(1) Deposits of tax. Every withholding 
agent who withholds tax pursuant to chapter 3 of the Internal Revenue 
Code shall deposit such amount of tax with a Federal reserve bank or 
authorized financial institution as provided in Sec. 1.6302-2(a). If 
for any reason the total amount of tax required to be returned for any 
calendar year pursuant to paragraph (b) of this section has not been 
deposited pursuant to Sec. 1.6302-2, the withholding agent shall pay 
the balance of tax due for such year at such place as the Internal 
Revenue Service shall specify. The tax shall be paid when filing the 
return required under paragraph (b)(2) of this section for such year, 
unless the Internal Revenue Service specifies otherwise. See paragraph 
(b)(2) of this section when there are multiple withholding agents.
    (2) Penalties for failure to pay tax. For penalties and additions 
to the tax for failure to timely pay the tax required to be withheld 
under chapter 3 of the Internal Revenue Code, see sections 6656, 6672, 
and 7202 and the regulations under those sections.
    (b) Income tax return--(1) General rule. A withholding agent shall 
make an income tax return on Form 1042 (or such other form as the 
Internal Revenue Service may prescribe) for income paid during the 
preceding calendar year that the withholding agent is required to 
report on an information return on Form 1042-S (or such other form as 
the Internal Revenue Service may prescribe) under paragraph (c)(1) of 
this section. See section 6011 and Sec. 1.6011-1(c). The withholding 
agent must file the return on or before February 28 of the calendar 
year following the year in which the income was paid. The return must 
show the aggregate amount of income paid and tax withheld required to 
be reported on all the Forms 1042-S for the preceding calendar year by 
the withholding agent, in addition to such information as is required 
by the form and accompanying instructions. Withholding certificates or 
other statements or information provided to a withholding agent are not 
required to be attached to the return. A return must be filed under 
this paragraph (b)(1) even though no tax was required to be withheld 
during the preceding calendar year. The withholding agent must retain a 
copy of Form 1042 for the applicable statute of limitations on 
assessments and collection with respect to the items of income required 
to be reported on the Form 1042. See section 6501 and the regulations 
thereunder for the applicable statute of limitations. Adjustments to 
the total amount of tax withheld, as described in Sec. 1.1461-2, shall 
be stated on the return as prescribed by the form and accompanying 
instructions.
    (2) Multiple withholding agents--(i) General rule. Except as 
otherwise provided in paragraphs (b)(2) (ii) and (iii) of this section, 
no Form 1042 is required to be filed under paragraph (b)(1) of this 
section if a return is filed by another withholding agent reporting the 
same income in compliance with the provisions of this paragraph (b) and 
any remaining tax due is paid with the return as required under 
paragraph (a) of this section.
    (ii) Payment to a qualified intermediary. A U.S. withholding agent 
making a payment to a qualified intermediary (as defined in 
Sec. 1.1441-1(e)(5)(ii)) must file a return under paragraph (b)(1) of 
this section, regardless of whether the qualified intermediary assumes 
primary withholding responsibility for the payment, as described in 
Sec. 1.1441-1(e)(5)(iv) and regardless of whether the qualified 
intermediary is also required to file a return under the terms of its 
agreement with the Internal Revenue Service. A qualified intermediary's 
agreement with the Internal Revenue Service shall specify the extent, 
if any, to which the intermediary is subject to filing requirements 
under this section.
    (iii) Payment to or through an authorized foreign agent. Both the 
U.S. withholding agent making a payment to or through an authorized 
foreign agent (defined in Sec. 1.1441-7(c)) and the authorized foreign 
agent are required to file a return under paragraph (b)(1) of this 
section.
    (3) Amended returns. An amended return may be filed on a Form 1042X 
or such other form as the Internal Revenue Service may prescribe. An 
amended return must include such information as the form and 
accompanying instructions shall require, including, with respect to any 
information that has changed from the time of the filing of the return, 
the information that was shown on the original return and the corrected 
information.
    (c) Information returns--(1) Filing requirement--(i) In general. A 
withholding agent must make an information return on Form 1042-S (or 
such other form as the Internal Revenue Service may prescribe) to 
report the items of income specified in paragraph (c)(2) of this 
section that were paid during the preceding calendar year. One Form 
1042-S shall be prepared for each beneficial owner (except as otherwise 
provided in paragraph (c)(4) of this section regarding multiple 
withholding agents). The Form 1042-S shall be prepared in such manner 
as the form and accompanying instructions prescribe. One copy of the 
Form 1042-S shall be filed with the Internal Revenue Service on or 
before February 28 of the calendar year following the year in which the 
item of income was paid. It shall be filed with a transmittal form as 
provided in the instructions to the Form 1042-S and the transmittal 
form. Withholding certificates or other statements or documentation 
provided to a withholding agent are not required to be attached to the 
information return. Another copy of the Form 1042-S shall be furnished 
to the payee on or before February 28 of the calendar year following 
the year in which the item of income was paid after the calendar year 
of payment. The withholding agent shall retain a copy of each Form 
1042-S for the statute of limitations on assessment and collection 
applicable to the Form 1042 to which the Form 1042-S relates.
    (ii) Joint owners. In the case of joint owners, a single Form 1042-
S may be prepared. However, any one of the owners may request that it 
be furnished its own Form 1042-S. Where more than one Form 1042-S is 
issued with respect to a single payment to joint owners, the aggregate 
amount of income and tax withheld reported on the Forms 1042-S cannot 
exceed the amount of income to the joint owners and tax withheld 
thereon. If a single Form 1042-S is prepared, the form shall state the 
name of only one owner and that name shall be that of the person whose 
status the withholding agent relied upon to determine the applicable 
rate of withholding tax.
    (2) Income subject to reporting--(i) In general. Subject to the 
exceptions in paragraph (c)(2)(ii) of this section, the items of income 
required to be reported on a Form 1042-S are income subject to 
withholding (as defined in Sec. 1.1441-2(a)), income on a notional 
principal contract described in Sec. 1.1441-4(a)(3), and amounts 
described in sections 6041

[[Page 17655]]

through 6050P that are paid to a foreign person and are not exempt from 
reporting under sections 6041 through 6050P or the regulations under 
those sections.
    (ii) Exceptions to reporting. The items of income listed in this 
paragraph (c)(2)(ii) are not required to be reported on a Form 1042-S.
    (A) Any item of income paid by a partnership, trust or estate to 
the extent the item of income is required to be reported by the 
partnership, trust or estate under section 6031 or 6034.
    (B) Any item required to be reported on a Form W-2, including an 
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2 
(relating to return of information as to payments to employees) or 
Sec. 1.6052-1 (relating to information regarding payment of wages in 
the form of group-term life insurance).
    (C) Any item of income required to be reported on Form 1099, and 
such other forms prescribed under sections 6041 through 6050P and the 
regulations under these sections.
    (D) Any item of income paid to foreign governments, international 
organizations, and foreign central banks of issue that are exempt from 
tax under section 892 or section 895.
    (E) Income required to be reported on Form 8288 (U.S. Withholding 
Tax Return for Dispositions by Foreign Persons of U.S. Real Property 
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax 
(Section 1446)).
    (F) Income on deposits described in section 871(i)(2)(A), unless 
actually subject to withholding or specifically subject to reporting 
under section 6049 and the regulations under that section.
    (G) Interest on a foreign-targeted registered obligation described 
in Sec. 1.871-14(e), except as otherwise provided in Sec. 1.871-
14(e)(4)(ii)(A).
    (3) Required information. Form 1042-S shall include such 
information as is required by the form and accompanying instructions. 
The information shall be based upon the information provided by or on 
behalf of the beneficial owner (e.g., a beneficial owner withholding 
certificate or documentary evidence), as corrected and supplemented 
based on the agent's actual knowledge or reason to know. In particular, 
the Form 1042-S must include the information described in this 
paragraph (c)(3), if applicable.
    (i) The name, address, and taxpayer identifying number of the 
withholding agent.
    (ii) A description of each category of income paid (e.g., interest, 
dividends, royalties, etc.) and the aggregate amount in each category 
expressed in U.S. dollars.
    (iii) The rate of withholding applied and, if applicable, the basis 
for withholding at a reduced rate.
    (iv) The name, permanent residence address, and taxpayer 
identifying number (if required under Sec. 1.1441-1(e)(4)(vii) to be 
shown on a beneficial owner withholding certificate or actually known 
to the withholding agent making the return) of the beneficial owner.
    (4) Multiple withholding agents--(i) In general. Except as 
otherwise provided in paragraph (c)(4) (ii), (iii), and (v) of this 
section, no information return is required to be filed under paragraph 
(c)(1)(i) of this section if a return is filed by another withholding 
agent reporting the same income in compliance with the provisions of 
this paragraph (c).
    (ii) Payment to a qualified intermediary. A withholding agent 
making a payment to a qualified intermediary (defined in Sec. 1.1441-
1(e)(5)(ii)) must report the payment but may do so on a single Form 
1042-S.
    (iii) Payment to an authorized foreign agent--(A) Filing obligation 
of foreign authorized agent. An authorized foreign agent (as described 
in Sec. 1.1441-7(c)(2)) is subject to the filing requirements described 
in paragraph (c)(1)(i) of this section because it is a withholding 
agent. Therefore, to the extent the U.S. withholding agent for which it 
is acting is not reporting the information required under this 
paragraph (c), it must report the information required to be reported 
under paragraph (c)(3) or (c)(4)(vi) of this section.
    (B) Filing obligations of the U.S. withholding agent. A U.S. 
withholding agent making a payment to an authorized foreign agent is 
exempted from the requirement under paragraph (c)(4)(iv) of this 
section to make a return on Form 1042-S for each beneficial owner and 
may, instead, make a single Form 1042-S to report the payment made to 
the authorized foreign agent. The exemption in this paragraph 
(c)(4)(iii)(B) shall apply only to the extent the authorized foreign 
agent complies with the filing requirements under paragraph 
(c)(4)(iii)(A) of this section.
    (iv) Payment to other foreign person not acting for its own 
account. Payment of an item of income to an agent, nominee or 
representative for the benefit of other persons in respect of whom 
Forms 1042-S are required may not be shown on a single Form 1042-S but 
must be identified on separate Forms 1042-S for each beneficial owner 
if such agent, nominee, or representative is a foreign person and is 
not a qualified intermediary or an authorized foreign agent.
    (v) Payment to a foreign partnership. Payment of an item of income 
to a foreign partnership that is not a qualified intermediary and acts 
for its own account may not be shown on a single Form 1042-S but must 
be identified on separate Forms 1042-S for each beneficial owner (or 
partner that is a qualified intermediary or authorized foreign agent).
    (vi) Required information. An information return on a Form 1042-S 
by a withholding agent reporting payments to an intermediary or to a 
foreign partnership described in paragraph (c)(4)(v) of this section 
must contain the information contained in this paragraph (c)(4)(vi). 
The information on the Form 1042-S must be based upon the withholding 
certificates furnished by the payee, as corrected and supplemented by 
the withholding agent's actual knowledge or reason to know.
    (A) The name, address, and taxpayer identifying number of the 
withholding agent.
    (B) A description of each category of income paid (e.g., interest, 
dividends, royalties, etc.) and the aggregate amount in each category 
expressed in U.S. dollars.
    (C) The rate of withholding applied.
    (D) The basis for not withholding or withholding at a reduced rate.
    (E) The name, address, and taxpayer identifying number of the 
payee.
    (F) In the case of a payment to a partnership acting for its own 
account, the name, address, and taxpayer identifying number (if 
required under Sec. 1.1441-1(e)(4)(vii) to be stated on the withholding 
certificates or actually known to the withholding agent) of the person 
for whom a Form 1042-S is required to be prepared pursuant to the 
provisions of paragraph (c)(4)(v) of this section.
    (5) Magnetic media reporting. A withholding agent that makes 250 or 
more Form 1042-S information returns for a taxable year must file Form 
1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter 
for requirements applicable to a withholding agent that files Forms 
1042-S on magnetic media and publications of the Internal Revenue 
Service relating to magnetic media filing.
    (d) Report of taxpayer identifying numbers. When so required or 
permitted under procedures issued by the Internal Revenue Service, a 
withholding agent may attach to the Form 1042 a list of all the 
taxpayer identifying numbers that have been

[[Page 17656]]

furnished to the withholding agent and upon which the withholding agent 
has relied to grant a reduced rate of withholding and that are not 
otherwise required to be reported on a Form 1042-S under the provisions 
of this section.
    (e) Indemnification of withholding agent. A withholding agent is 
indemnified against the claims and demands of any person for the amount 
of any tax it deducts and withholds in accordance with the provisions 
of chapter 3 of the Internal Revenue Code and the regulations under 
that chapter. A withholding agent that withholds based on a reasonable 
belief that such withholding is required under chapter 3 of the 
Internal Revenue Code is treated for purposes of section 1461 and this 
paragraph (e) as having withheld tax in accordance with the provisions 
of chapter 3 of the Internal Revenue Code and the regulations under 
that chapter. In addition, a withholding agent is indemnified against 
the claims and demands of any person for the amount of any payments 
made in accordance with the grace period provisions set forth in 
Sec. 1.1441-1(f)(2)(ii)(A). This paragraph (e) does not apply to 
relieve a withholding agent from tax liability under chapter 3 of the 
Internal Revenue Code.
    (f) Amounts paid not constituting gross income. Any amount withheld 
in accordance with Secs. 1.1441-3(b)(1) and 1.1441-3(d) shall be 
returned and paid in accordance with this section, even though the item 
or amount paid to the beneficial owner may not constitute gross income 
in whole or in part. For this purpose, a reference in this section to 
an item or amount of income shall, where appropriate, be deemed to 
refer to the amount subject to withholding under Secs. 1.1441-3(b)(1) 
and 1.1441-3(d).
    (g) Extensions of time for requests made for calendar year 
beginning after the date of publication of these regulations as final 
regulations in the Federal Register--(1) Extension of time to file Form 
1042. The Internal Revenue Service may grant an extension of time in 
which to file a Form 1042. Form 2758, Application for Extension of Time 
to File Certain Excise, Income, Information, and Other Returns, or such 
other form as the Internal Revenue Service may prescribe, must be used 
to request an extension of time. The request must contain a statement 
of the reasons for requesting the extension. The request must be mailed 
or delivered not later than February 28 of the year following the end 
of the calendar year for which the return will be filed.
    (2) Extension of time to file Form 1042-S. The Internal Revenue 
Service may grant an extension of time in which to file Form 1042-S. 
Form 8809, Request for Extension of Time to File Information Returns, 
or such other form as the Internal Revenue Service may prescribe, must 
be used to request an extension of time. The request must contain a 
statement of the reasons for requesting the extension. The request must 
be mailed or delivered not later than February 28 of the year following 
the calendar year for which the return will be filed.
    (3) Extension of time to furnish Forms 1042-S. The Internal Revenue 
Service may grant an extension of time in which to furnish Forms 1042-S 
to beneficial owners or intermediaries. Form 8809, request for 
Extension of Time to File Information Returns, or such other form as 
the Internal Revenue Service may prescribe, must be used to request an 
extension of time. The request must contain the withholding agent's 
name and address, the withholding agent's taxpayer identifying number, 
the type of statement and a statement of the reasons for requesting the 
extension. The request must be signed by the withholding agent or a 
person who is duly authorized to sign a return, statement, or other 
document. The request must be mailed or delivered not later than 
February 28 of the year following the end of the calendar year for 
which the statement will be furnished.
    (h) Penalties. For penalties and additions to the tax for failure 
to file returns in accordance with this section, see sections 6651, 
6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and the regulations 
under those sections.
    (i) Effective date. This section shall apply to returns required 
for payments made after December 31, 1997.
    Par. 20. Section 1.1461-2 is revised to read as follows:


Sec. 1.1461-2  Adjustments for overwithholding or underwithholding of 
tax.

    (a) Adjustments of overwithheld tax--(1) In general. A withholding 
agent that has overwithheld under chapter 3 of the Internal Revenue 
Code and made a deposit of that tax as provided in Sec. 1.6302-2(a) may 
adjust the overwithheld amount either pursuant to the reimbursement 
procedure described in paragraph (a)(2) of this section or pursuant to 
the set-off procedure described in paragraph (a)(3) of this section. 
Adjustments under this paragraph (a) may only be made within the time 
prescribed under paragraph (a) (2) or (3) of this section. After such 
time, an adjustment to the amount overwithheld can only be claimed by 
the beneficial owner with the Internal Revenue Service pursuant to the 
procedures described in chapter 65 of the Internal Revenue Code. For 
purposes of this section, the term overwithholding means any amount 
actually withheld (determined before application of the adjustment 
procedures under this section) from an item of income pursuant to 
chapter 3 of the Internal Revenue Code in excess of the actual tax 
liability due, regardless of whether such overwithholding was in error 
or appeared correct at the time it occurred.
    (2) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent may repay the beneficial owner for the 
amount overwithheld by reducing, by the amount of tax actually repaid, 
the amount of any deposit of tax made by the withholding agent under 
Sec. 1.6302-2(a)(1)(iii) for any subsequent payment period occurring 
before the end of the calendar year following the calendar year of 
overwithholding. Any such reduction that occurs for a payment period in 
the calendar year following the calendar year of overwithholding shall 
be allowed only if--
    (A) The withholding agent states, on a timely filed (not including 
extensions) Form 1042-S for the calendar year of overwithholding, the 
amount of tax withheld and the amount of any actual repayment; and
    (B) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding, that 
the filing of the Form 1042 constitutes a claim for credit in 
accordance with Sec. 1.6414-1.
    (ii) Record maintenance. If the beneficial owner is repaid an 
amount of withholding tax under the provisions of this paragraph 
(a)(2), the withholding agent shall keep as part of its records a 
receipt showing the date and amount of repayment and the withholding 
agent must provide a copy or such receipt to the beneficial owner. For 
this purpose, a canceled check or an entry in a statement is sufficient 
provided that the check or statement contains a specific notation that 
it is a refund of tax overwithheld.
    (3) Set-offs. Under the set-off procedure, the withholding agent 
may repay the beneficial owner by applying the amount overwithheld 
against any amount which otherwise would be required under chapter 3 of 
the Internal Revenue Code to be withheld from income paid by the 
withholding agent to such person before the earlier of the due date for 
filing the Form 1042-S for the calendar year of overwithholding or the 
date that the Form 1042-S is actually filed with the Internal Revenue 
Service.

[[Page 17657]]

For purposes of making a return on Form 1042 or 1042-S (or an amended 
form) for the calendar year of overwithholding and for purposes of 
making a deposit of the amount withheld, the reduced amount shall be 
considered the amount required to be withheld from such income under 
chapter 3 of the Internal Revenue Code.
    (4) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. (i) N is a nonresident alien individual who is a 
resident of the United Kingdom. In December 1997, a domestic 
corporation C pays a dividend of $100 to N, at which time C 
Corporation withholds $30 and remits the balance of $70 to N. On 
February 10, 1998, prior to the time that C files its Form 1042, N 
advises C Corporation that, pursuant to the income tax convention 
with the United Kingdom, only $15 tax should have been withheld from 
the $100 dividend and requests reimbursement of the $15 that was 
erroneously withheld. Although C Corporation has already deposited 
the $30 that was withheld, as required by Sec. 1.6302-2(a)(1)(iv), 
such corporation repays N in the amount of $15.
    (ii) During 1997, C Corporation makes no other payments upon 
which tax is required to be withheld under chapter 3 of the Internal 
Revenue Code; accordingly, its return on Form 1042 for such year, 
which is filed on February 28, 1998, shows total tax withheld of 
$30, an adjusted total tax withheld of $15, and $30 previously paid 
for such year. Pursuant to Sec. 1.6414-1(b), C Corporation claims 
credit for the overpayment of $15 shown on the Form 1042 for 1997. 
Accordingly, it is permitted to reduce by $15 any deposit required 
by Sec. 1.6302-2 to be made of tax withheld during the calendar year 
1998. The Form 1042-S required to be filed by C Corporation with 
respect to the dividend of $100 paid to N in 1997 is required to 
show tax withheld of $30 and tax released of $15.
    (iii) During 1998, C Corporation is required to withhold $200 
under chapter 3 of the Internal Revenue Code, all of which is 
withheld in June of that year. Pursuant to Sec. 1.6302-2(a)(1)(iii), 
C Corporation deposits the amount of $185 on July 15, 1998, that is, 
$200 less the $15 for which credit is claimed on the Form 1042 for 
1997. On February 28, 1999, C Corporation files its return on Form 
1042 for calendar year 1998, which shows total tax withheld of $200, 
$185 previously deposited by C Corporation, and $15 allowable 
credit.
    Example 2. The facts are the same as in Example 1 except that 
paragraph (iii) of Example 1 does not apply and C Corporation is 
required to deposit on a quarter-monthly basis the tax withheld 
under chapter 3 of the Internal Revenue Code. C Corporation 
withholds tax of $100 between February 8 and February 15, 1998, and 
complies with the quarter-monthly deposit requirement of 
Sec. 1.6302-2(a)(1)(ii) by depositing $75 [($100 x 90 percent) less 
$15] of the withheld tax within 3 banking days after February 15, 
1998, and by depositing $10 [($100-$15) less $75] within 3 banking 
days after March 15, 1998.


    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold the tax that should have been withheld 
from previous payments from future payments made to a beneficial owner. 
Such additional withholding of tax may only be made from payments made 
before the date that the Form 1042 is required to be filed (not 
including extensions). See Sec. 1.6302-2 for making deposits of tax or 
Sec. 1.1461-1(a) for making payment of the balance of tax due for a 
calendar year.
    (c) Definition. For purposes of this section, the term payment 
period means the period for which the withholding agent is required by 
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 
of the Internal Revenue Code.
    (d) Effective date. This section applies to payments of income made 
after December 31, 1997.


Secs. 1.1461-3 and 1.1461-4  [Removed]

    Par. 21. Sections 1.1461-3 and 1.1461-4 are removed.
    Par. 22. Section 1.1462-1 is amended by:
    1. Revising paragraph (a).
    2. Adding paragraph (c).
    3. Removing the OMB parenthetical and the authority citation at the 
end of the section.
    The revision and addition read as follows:


Sec. 1.1462-1  Withheld tax as credit to recipient of income.

    (a) Creditable tax. The entire amount of the income from which the 
tax is required to be withheld (including amounts calculated under the 
gross-up formula in Sec. 1.1441-3(e)(3)) shall be included in gross 
income in the return required to be made by the beneficial owner of the 
income, without deduction for the amount required to be withheld, but 
the tax so withheld shall be allowed as a credit against the total 
income tax computed in the beneficial owner's return.
* * * * *
    (c) Effective date. This section applies to payments of income made 
after December 31, 1997.
    Par. 23. Section 1.1463-1 is revised to read as follows:


Sec. 1.1463-1  Tax paid by recipient of income.

    (a) Tax paid. If the tax required to be withheld under chapter 3 of 
the Internal Revenue Code is paid by the beneficial owner of the income 
or by the withholding agent, it shall not be re-collected from the 
other, regardless of the original liability therefor. However, this 
section does not relieve the person that did not withhold tax from 
liability for interest or any penalties or additions to tax otherwise 
applicable.
    (b) Effective date. This section applies to failures to withhold 
occurring after December 31, 1989.
    Par. 24. In Sec. 1.6041-1, the amendments to paragraph (a)(1) as 
proposed in project number INTL-52-86 published on February 29, 1988, 
at 53 FR 5993, are withdrawn.
    Par. 25. Section 1.6041-1 is amended by:
    1. Removing paragraph (a)(1)(iii).
    2. Redesignating paragraphs (a)(1) introductory text and (a)(1)(i) 
as paragraphs (a)(1)(i) introductory text and (a)(1)(i)(A).
    3. Adding a heading for paragraph (a)(1).
    4. Amending newly designated paragraph (a)(1)(i)(A) by adding the 
word ``or'' at the end of the paragraph.
    5. Redesignating paragraph (a)(1)(ii) as paragraph (a)(1)(i)(B) and 
removing the language ``; or'' at the end of the paragraph and adding a 
period in its place.
    6. Designating the concluding text immediately following newly 
designated paragraph (a)(1)(i)(B) as paragraph (a)(1)(ii).
    7. Removing the first sentence of newly designated paragraph 
(a)(1)(ii) and adding two new sentences in its place.
    8. Adding paragraph (d)(5).
    The revisions and additions read as follows:


Sec. 1.6041-1  Return of information as to payments of $600 or more

    (a) General rule--(1) Information returns required--(i) * * *
    (ii) The payments described in paragraphs (a)(1)(i)(A) and (B) of 
this section shall not include any payments with respect to which a 
statement is required by, or may be required under authority of section 
6042(a) (relating to dividends); section 6043(a)(2) (relating to 
distributions in liquidation); section 6044(a) (relating to patronage 
dividends); section 6045 (relating to brokers' transactions with 
customers); section 6049(a)(1) and (a)(2) (relating to interest); 
section 6050N(a) (relating to royalties); or section 6050P(a) or (b) 
(relating to cancellation of indebtedness). In addition, the payments 
described in paragraphs (a)(1)(i)(A) and (B) of this section shall not 
include amounts excepted from the definition of dividends under section 
6042(b)(2) and Sec. 1.6042-3(b)(1), amounts described in section 
6044(b), amounts excepted from reporting under

[[Page 17658]]

Sec. 1.6045-1(g)(1), amounts excepted from the definition of interest 
under section 6049(b)(2)(C) or (D), Sec. 1.6049-4(c)), or Sec. 1.6049-
5(b)(6) through (14). * * *
* * * * *
    (d) * * *
    (5) Amounts paid after December 31, 1997, with respect to notional 
principal contracts referred to in Sec. 1.1441-4(a)(3) that the payor 
or middleman may treat as paid to a beneficial owner that is a foreign 
person and that are not described in Sec. 1.6041-4(a)(2) or (4) shall 
be reported on a Form 1042 and 1042-S in accordance with Sec. 1.1461-1 
(b) and (c), whether or not effectively connected with the conduct of a 
trade or business in the United States. Although reportable, amounts 
described in this paragraph (d)(5) are not subject to backup 
withholding under section 3406 if paid outside the United States. See 
31.3406(g)-(1)(e) of this chapter.
* * * * *
    Par. 26. In Sec. 1.6041-3, paragraph (q), as proposed to be added 
in project number LR-3-87 on June 9, 1988, at 53 FR 21694, is 
withdrawn.
    Par. 27. Section 1.6041-3 is amended by:
    1. Revising the introductory text of the section.
    2. Revising paragraph (a).
    3. Adding paragraph (q).
    The addition and revisions read as follows:


Sec. 1.6041-3  Payments for which no return of information is required 
under section 6041.

    Returns of information are not required under section 6041 and 
Secs. 1.6041-1 and 1.6041-2 for payments described in paragraphs (a) 
through (q) of this section. See Sec. 1.6041-4 for reporting exemptions 
regarding foreign-related items.
    (a) Payments of income required to be reported on Forms 1120-S, 
941, W-2, and W-3, (however, see Sec. 1.6041-2 with respect to Forms W-
2 and W-3);
* * * * *
    (q) Payments to individuals as scholarships or fellowship grants, 
as defined in Sec. 1.117-6(c)(3). This exception does not apply to any 
amount of a scholarship or fellowship grant that represents payment for 
services, as defined in Sec. 1.117-6(d)(2). See Sec. 1.1461-1(c) for 
applicable reporting requirements with respect to amounts paid to 
foreign persons.
    Par. 28. Section 1.6041-4 is revised to read as follows:


Sec. 1.6041-4  Foreign-related items.

    (a) Exempted foreign-related items. Returns of information are not 
required under section 6041 and Secs. 1.6041-1 and 1.6041-2 for 
payments of the items described in paragraphs (a) (1) through (4) of 
this section.
    (1) Returns of information are not required for payments that a 
payor or middleman, as defined in paragraph (b)(1) of this section, may 
treat as made to a beneficial owner that is a foreign person pursuant 
to Sec. 1.1441-1(e)(1) and from which the payor or middleman is either 
required to withhold tax under section 1441 or the regulations under 
that section or would be so required but for exceptions in the 
regulations under section 1441 (such as, for example, under 
Sec. 1.1441-4 (dealing with effectively connected income) or 
Sec. 1.1441-6 (dealing with a reduction of rate of tax under an income 
tax treaty)). See Sec. 1.1441-1(e)(4)(i) in the case of payments to 
joint owners.
    (2) Returns of information are not required for payments of amounts 
from sources outside the United States made by a non-U.S. payor or non-
U.S. middleman (as defined in paragraph (b)(2) of this section) outside 
the United States. See Sec. 1.6049-5(e) for circumstances in which a 
payment is considered to be made outside the United States.
    (3) Returns of information are not required for payments of amounts 
from sources outside the United States that a payor or middleman may 
treat as paid to a beneficial owner that is a foreign person (because 
such person has furnished a certificate described in Sec. 1.6049-
5(c)(1)). For purposes of this paragraph (a)(3), the provisions in 
Sec. 1.6049-5 (c)(3) through (c)(6) (regarding operating rules related 
to the certificate of foreign status) shall apply.
    (4) Returns of information are not required for the period that the 
amounts paid represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (a)(4) shall terminate when 
payment is deemed to occur in accordance with the provisions of 
Sec. 1.1441-2(e)(3).
    (b) Definitions--(1) Payor and middleman. For purposes of this 
section, the term payor means any person who is required to make an 
information return with respect to any reportable payment, as described 
in section 3406(b), including any middleman. The term middleman means 
any person whose legal relationship to the payor or payee (including 
any other middleman) is of a kind described in Sec. 1.6049-4(f)(4) (as 
proposed in project number INTL-52-86 published in 1988-1 C.B. 892).
    (2) Non-U.S. payor and non-U.S. middleman. For purposes of this 
section, the term non-U.S. payor or non-U.S. middleman means a payor or 
middleman other than--
    (i) A person described in section 7701(a)(30);
    (ii) The government of the United States, the government of any 
State or political subdivision thereof (or any agency or 
instrumentality of any of the foregoing);
    (iii) A controlled foreign corporation within the meaning of 
section 957(a); or
    (iv) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part 
of such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States.
    (c) Applicable presumptions. The presumptions of Sec. 1.1441-1(f) 
shall apply for determining the payee's status where the required 
documentation is lacking, incorrect, or unreliable.
    (d) Joint owners. In the case of amounts paid to joint owners for 
which a certificate or documentation is required as a condition for 
being exempt from reporting under this paragraph (d), a payor or 
middleman must receive from each joint owner the required certification 
or documentation. Where any one of the joint owners has not furnished 
such certification or documentation, the payment is not exempt from 
reporting under this section.
    (e) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
    (f) Conversion into United States dollars of amounts paid in 
foreign currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (g) Effective date--(1) General rule. The provisions of this 
section apply to payments made after December 31, 1997.
    (2) Transition rules. A payor that holds a valid Form W-8 on the 
date that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.
    Par. 29. Section 1.6041A-1 as proposed to be added in project 
number LR-214-82, published on January 7, 1986, at 51 FR 626, is 
amended by adding a new paragraph (d)(3), to read as follows:


Sec. 1.6041A-1  Returns regarding payments of remuneration for services 
and certain direct sales.

* * * * *

[[Page 17659]]

    (d) Exceptions to return requirement. * * *
* * * * *
    (3) Foreign transactions--(i) In general. No return shall be 
required under paragraph (a) of this section with respect to payments 
described in this paragraph (d)(3).
    (A) Returns of information are not required for payments of 
remuneration for services that a payor or middleman, as defined in 
paragraph (d)(3)(ii)(A) of this section, may treat as made to a 
beneficial owner that is a foreign person pursuant to Sec. 1.1441-
1(e)(1) and from which the payor or middleman is either required to 
withhold tax under section 1441 or the regulations under that section 
or would be so required but for exceptions in the regulations under 
section 1441 (such as, for example, under Sec. 1.1441-4 (dealing with 
effectively connected income) or Sec. 1.1441-6 (dealing with a 
reduction of rate of tax under an income tax treaty)). See Sec. 1.1441-
1(e)(4)(i) in the case of payments to joint owners.
     (B) Returns of information are not required for payments of 
remuneration for services and certain direct sales from sources outside 
the United States made outside the United States by a non-U.S. payor or 
non-U.S. middleman (as defined in paragraph (d)(3)(ii)(B) of this 
section). See Sec. 1.6049-5(e) for circumstances in which a payment is 
considered to be made outside the United States.
    (C) Payments of services and certain direct sales from sources 
outside the United States that a payor or middleman may treat as paid 
to a beneficial owner that is a foreign person (because such person has 
furnished a certificate described in Sec. 1.6049-5(c)(1)). For purposes 
of this paragraph (d)(3)(i)(C), the provisions in Sec. 1.6049-5 (c)(3) 
through (c)(6) (regarding operating rules related to the certificate of 
foreign status) shall apply. See Sec. 1.6041-1(d)(5) for reportable 
payments made to foreign persons.
    (D) Amounts paid for services and certain direct sales for the 
period that they represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (d)(3)(i)(D) shall terminate 
when payment is deemed to occur in accordance with the provisions of 
Sec. 1.1441-2(e)(3).
    (ii) Definitions--(A) Payor and middleman. For purposes of this 
section, the term payor means any person who is required to make an 
information return with respect to any reportable payment, as described 
in section 3406(b), including any middleman and the term middleman 
means any person whose legal relationship to the payor or payee 
(including any other middleman) is of a kind described in Sec. 1.6049-
4(f)(4) (as proposed in project number INTL-52-86 published in 1988-1 
C.B. 892).
    (B) Non-U.S. payor and non-U.S. middleman. For purposes of this 
section, the term non-U.S. payor or non-U.S. middleman means a payor or 
middleman other than--
    (1) A person described in section 7701(a)(30);
    (2) The government of the United States, the government of any 
State or political subdivision thereof (or any agency or 
instrumentality of any of the foregoing);
    (3) A controlled foreign corporation within the meaning of section 
957(a); or
    (4) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part 
of such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States.
    (C) Applicable presumptions. The presumptions of Sec. 1.1441-1(f) 
shall apply for determining the payee's status where the required 
documentation is lacking, incorrect, or unreliable.
    (D) Joint owners. In the case of amounts paid to joint owners for 
which a certificate of documentation is required as a condition for 
being exempt from reporting under this paragraph (d)(3), the payor or 
middleman must receive from each joint owner the certification 
described in paragraph (d)(3)(i) (A) or (C) of this section. Where any 
one of the joint owners has not furnished such certification, the 
payment is not exempt from reporting under this section unless 
described in paragraph (d)(3)(i) (B) or (D) of this section.
    (E) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
    (iii) Effective date--(A) General rule. The provisions of this 
paragraph (d)(3) apply to payments made after December 31, 1997.
    (B) Transition rules. A payor that holds a valid Form W-8 on a date 
that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.
* * * * *
    Par. 30. In Sec. 1.6042-3, paragraph (b), as proposed to be revised 
in project number INTL-52-86, published on February 29, 1988 (53 FR 
5995) is amended by:
    1. Removing paragraphs (b)(1) and (b)(2).
    2. Redesignating paragraphs (b)(3) and (b)(4) as paragraphs 
(b)(1)(vii) and (b)(1)(viii), respectively.
    Par. 31. Section 1.6042-3 is amended by:
    1. Revising paragraph (a) introductory text.
    2. Removing paragraph (b) introductory text.
    3. Adding paragraph (b)(1) heading.
    4. Revising paragraph (b)(1) introductory text.
    5. Adding paragraphs (b)(1)(i) through (b)(1)(vi).
    6. Revising paragraphs (b)(2) through (b)(4).
    7. Adding paragraphs (b)(5) through (b)(7).
    The additions and revisions read as follows:


Sec. 1.6042-3  Dividends subject to reporting.

    (a) In general. Except as provided in paragraph (b) of this 
section, the term dividend for purposes of this section and 
Secs. 1.6042-2 and 1.6042-4 means the amounts described in paragraphs 
(a)(1) and (2) of this section.
* * * * *
    (b) Exceptions--(1) In general. Returns of information are not 
required under section 6042 and Secs. 1.6042-2 and 1.6042-4 for amounts 
described in paragraphs (b)(1) (i) through (viii) of this section.
    (i) Amounts paid by an insurance company to a policyholder, other 
than a dividend upon its capital stock.
    (ii) Payments (however denominated) by a mutual savings bank, 
savings and loan association, or similar organization, in respect of 
deposits, investment certificates, or withdrawable or repurchasable 
shares. See, however, section 6049 and the regulations under that 
section for provisions requiring reporting of these payments.
    (iii) Distributions or payments from sources within the United 
States that a payor or middleman (as defined in paragraph (b)(2) of 
this section) may treat as made to a beneficial owner that is a foreign 
person pursuant to Sec. 1.1441-1(e)(1) or, in the case of dividends 
paid on stock traded on a U.S. established financial market (as defined 
in Sec. 1.1441-6(b) (2)), pursuant to Sec. 1.1441-6(b)(2) or (3), or 
Sec. 1.6049-5(c).
    (iv) Distributions or payments from sources outside the United 
States paid outside the United States by a non-U.S. payor or a non-U.S. 
middleman (as defined in paragraph (b)(2)(ii) of this section). See 
Sec. 1.6049-5(e) for circumstances in which a payment is considered to 
be made outside the United States.

[[Page 17660]]

    (v) Distributions or payments from sources outside the United 
States that a payor or middleman may treat as paid to a beneficial 
owner that is a foreign person (because such person has furnished a 
certificate or documentary evidence as required under Sec. 1.6049-5(c) 
(1) or (2)). For purposes of this paragraph (b)(1)(v), the provisions 
in Sec. 1.6049-5 (c)(3) through (c)(6) (regarding operating rules 
related to the certificate of foreign status) shall apply.
    (vi) Distributions or payments for the period that the amounts 
represent assets blocked as described in Sec. 1.1441-2(e)(3). The 
exemption in this paragraph (b)(1)(vi) shall terminate when payment is 
deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
* * * * *
    (2) Definitions--(i) Payor and middleman. For purposes of this 
section, the term payor means any person who is required to make an 
information return with respect to any reportable payment, as described 
in section 3406(b) (including any middleman), and the term middleman 
means any person whose legal relationship to the payor or payee 
(including any other middleman) is of a kind described in Sec. 1.6049-
4(f)(4) (as proposed in project number INTL-52-86 published in 1988-1 
C.B. 892).
    (ii) Non-U.S. payor and non-U.S. middleman. For purposes of this 
section, the term non-U.S. payor or non-U.S. middleman means a payor or 
middleman other than--
    (A) A person described in section 7701(a)(30);
    (B) The government of the United States, the government of any 
State or political subdivision thereof (or any agency or 
instrumentality of any of the foregoing);
    (C) A controlled foreign corporation within the meaning of section 
957(a); or
    (D) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part 
of such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States.
    (3) Applicable presumptions. The presumptions of Sec. 1.1441-1(f) 
shall apply for determining the payee's status under Sec. 1.6042-3 
where the required documentation is lacking, incomplete, incorrect, or 
unreliable.
    (4) Joint owners. In the case of amounts paid to joint owners for 
which a certificate or documentation is required as a condition for 
being exempt from reporting under this paragraph (b), the payor or 
middleman must receive from each joint owner the required certification 
or documentation. Where any one of the joint owners has not furnished 
the required certification or documentation, the payment is not exempt 
from reporting under this section.
    (5) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
    (6) Conversion into United States dollars of amounts paid in 
foreign currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (7) Effective date--(i) General rule. The provisions of this 
paragraph (b) apply to payments made after December 31, 1997.
    (ii) Transition rules. A payor that holds a valid Form W-8 on the 
date that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.
    Par. 32. Section 1.6045-1 as proposed to be amended in project 
number INTL-52-86, published on February 29, 1988, at 53 FR 5996, is 
amended by:
    1. Removing paragraph (a)(1).
    2. Removing paragraphs (g)(1)(i), (g)(1)(ii), (g)(1)(iii) heading, 
(g)(1)(iii)(A), (g)(2), (g)(3), and (g)(4).
    3. Redesignating paragraph (g)(1)(iii)(B) as follows:

------------------------------------------------------------------------
                 Paragraph                    Redesignated as paragraph 
------------------------------------------------------------------------
(g)(1)(iii)(B)............................  (g)(1)(ii)                  
(g)(1)(iii)(B)(1) introductory text.......  (g)(1)(ii)(A) introductory  
                                             text                       
(g)(1)(iii)(B)(1)(i)......................  (g)(1)(ii)(A)(1)            
(g)(1)(iii)(B)(1)(ii).....................  (g)(1)(ii)(A)(2)            
(g)(1)(iii)(B)(2) introductory text.......  (g)(1)(ii)(B) introductory  
                                             text                       
(g)(1)(iii)(B)(2)(i)......................  (g)(1)(ii)(B)(1)            
(g)(1)(iii)(B)(2)(ii).....................  (g)(1)(ii)(B)(2)            
(g)(1)(iii)(B)(2)(iii)....................  (g)(1)(ii)(B)(3)            
(g)(1)(iii)(B)(2)(iv).....................  (g)(1)(ii)(B)(4)            
(g)(1)(iii)(B)(2)(v)......................  (g)(1)(ii)(B)(5)            
------------------------------------------------------------------------

    4. Removing in newly designated paragraph (g)(1)(ii)(A) 
introductory text the language ``subdivision 2 of this paragraph 
(g)(1)(iii)(B)'' and adding ``paragraph (g)(1)(ii)(B) introductory text 
of this section'' in its place.
    5. Removing in newly designated paragraph (g)(1)(ii)(B) 
introductory text the language ``subdivision (1) of this paragraph 
(g)(1)(iii)(B)'' and adding ``paragraph (g)(1)(ii)(A)'' in its place.
    6. Removing in newly designated paragraph (g)(1)(ii)(B)(3) the 
language ``Sec. 1.6049-5(j)(4)'' and adding ``Sec. 1.6049-5(e)'' in its 
place.
    Par. 33. Section 1.6045-1(d)(6)(iii) as proposed to be added in 
project number INTL-0015-91, published on March 17, 1992, at 57 FR 
9224, is withdrawn.
    Par. 34. Section 1.6045-1 is amended by:
    1. Revising the heading of paragraph (a) and republishing paragraph 
(a) introductory text.
    2. Revising paragraph (a)(1).
    3. Revising paragraph (d)(6).
    4. Revising paragraph (g)(1) heading; removing paragraph (g)(i) 
introductory text; and revising paragraphs (g)(1)(i) and (g)(2) through 
(g)(4).
    The revisions read as follows:


Sec. 1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Definitions. The following definitions apply for purposes of 
this section:
    (1) The term broker means any person (other than a person who is 
required to report a transaction under section 6043), U.S. or foreign, 
that, in the ordinary course of a trade or business during the calendar 
year, stands ready to effect sales to be made by others. A broker 
includes an obligor that regularly issues and retires its own debt 
obligations or a corporation that regularly redeems its own stock. 
However, with respect to a sale (including a redemption or retirement) 
effected at an office outside the United States, a broker includes only 
a person described as a U.S. payor or U.S. middleman in Sec. 1.6049-
5(d)(1). In addition, a broker does not include an international 
organization described in Sec. 1.6049-4(c)(1)(ii)(G) that redeems or 
retires an obligation of which it is the issuer.
* * * * *
    (d) * * *
    (6) Conversion into United States dollars of proceeds paid in 
foreign currency--(i) Conversion rules. When the amount subject to 
reporting is paid in a currency other than the U.S. dollar, the amount 
subject to reporting under this section shall be determined by 
converting such foreign currency into U.S. dollars on the date of 
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant 
to a reasonable spot rate convention. For example, a withholding agent 
may use a month-end spot rate or a monthly average spot rate. A spot 
rate convention must be used consistently with respect to all non-
dollar amounts withheld and from year to year. Such convention cannot 
be changed without the consent of the Commissioner or his or her 
delegate.
    (ii) Effect of identification under Sec. 1.988-5 (a), (b), or (c) 
where the taxpayer effects a sale and a hedge through the same broker--
(A) In general. In lieu of the amount reportable under paragraph 
(d)(6)(i) of this section,

[[Page 17661]]

the amount subject to reporting shall be the integrated amount computed 
under Sec. 1.988-5 (a), (b) or (c) if--
    (1) A taxpayer effects through a broker a sale in exchange for 
nonfunctional currency (as defined in Sec. 1.988-1(c)) and hedges all 
or a part of such sale as provided in Sec. 1.988-5 (a), (b) or (c) with 
the same broker; and
    (2) The taxpayer complies with the requirements of Sec. 1.988-5 
(a), (b) or (c) and so notifies the broker prior to the end of the 
calendar year in which the sale occurs.
    (B) Effective date. The provisions of this paragraph (d)(6)(ii) 
apply to transactions entered into on or after the date that is 60 days 
after these regulations are published as final regulations in the 
Federal Register.
* * * * *
    (g) Exempt foreign persons--(1) Brokers--(i) In general. No return 
of information is required by a broker with respect to a customer who 
is considered to be an exempt foreign person under this paragraph 
(g)(1)(i). Unless it has actual knowledge or reason to know otherwise, 
a broker may treat a customer as an exempt foreign person under the 
circumstances described in paragraph (g)(1)(i) (A) through (D) of this 
section. See Sec. 1.6045-1(c)(2)(ii) for reportable proceeds paid to 
foreign persons.
    (A) With respect to a sale effected at an office of a broker inside 
the United States, the broker may treat the customer as an exempt 
foreign person if the broker complies with the procedures described in 
paragraph (g)(3) of this section.
    (B) With respect to a sale effected at an office of a broker 
outside the United States, the broker may treat the customer as an 
exempt foreign person if the broker complies with the procedures 
described in paragraph (g)(3) of this section or Sec. 1.6049-5(c)(2).
    (C) With respect to a redemption or retirement of stock or an 
obligation (the interest or original issue discount on which is 
described in Sec. 1.6049-5(b) (6), (7), (10), or (11)) or the dividends 
on which are described in Sec. 1.6042-3(b)(1)(iv)) that is effected at 
an office of a broker outside the United States by the issuer (or its 
paying or transfer agent), the broker may treat the customer as an 
exempt foreign person if the broker is not also acting in its capacity 
as a custodian, nominee, or other agent of the payee.
    (D) With respect to a sale effected by a broker at an office of the 
broker either inside or outside the United States, the broker may treat 
the customer as an exempt foreign person for the period that those 
proceeds are assets blocked as described in Sec. 1.1441-2(e)(3). For 
purposes of this paragraph (g)(1)(i)(D) and section 3406, a payment is 
deemed to occur in accordance with Sec. 1.1441-2(e)(3).
* * * * *
    (2) Barter exchange. No return of information is required by a 
barter exchange with respect to a client or a member that the barter 
exchange may treat as a foreign person pursuant to the procedures 
described in paragraph (g)(3) of this section.
    (3) Certificate of foreign status--(i) In general. For purposes of 
this paragraph (g), a broker may treat a customer as an exempt foreign 
person if the broker complies with the requirements of Sec. 1.1441-
1(e)(1) (dealing with reliance by a withholding agent on a beneficial 
owner's claim of foreign status). For purposes of this paragraph 
(g)(3)(i), the broker may rely on a beneficial owner withholding 
certificate described in Sec. 1.1441-1(e)(2). For purposes of this 
paragraph (g)(3)(i), in the case of an individual beneficial owner, the 
certificate shall include a certification that the beneficial owner has 
not been, and at the time the certificate is furnished, reasonably 
expects not to be present in the United States for a period aggregating 
183 days or more during the calendar year.
    (ii) Applicable presumptions. Absent actual knowledge or reason to 
know otherwise, the presumptions under Sec. 1.1441-1(f) shall apply in 
determining the payee's status where the required documentation is 
lacking, incorrect, or unreliable.
    (iii) Joint owners. In the case of amounts paid to joint owners for 
which a certificate or documentation is required as a condition for 
being exempt from reporting under paragraph (g)(1)(i) of this section, 
a broker or barter exchange must receive from each joint owner the 
required certification or documentation. Where any one of the joint 
owners has not furnished the required certification or documentation, 
the transaction is not exempt from reporting under paragraph (g)(1)(i) 
of this section.
    (iv) Payee. For a determination of payee, see Sec. 1.1441-1(c)(3).
    (v) Operating rules. For purposes of this paragraph (g), the 
provisions in Sec. 1.6049-5(c) (3) through (6) (regarding operating 
rules related to the certificate of foreign status) shall apply.
    (4) Effective date--(i) General rule. The provisions of this 
paragraph (g) apply to payments made after December 31, 1997.
    (ii) Transition rules. A payor that holds a valid Form W-8 on a 
date that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.
* * * * *
    Par. 35. In Sec. 1.6049-4, paragraphs (c)(1)(ii)(A) and 
(c)(1)(ii)(G), as proposed in project number INTL-52-86, published on 
February 29, 1988, at 53 FR 6000, are revised to read as follows:


Sec. 1.6049-4  Return of information as to interest paid and original 
issue discount includible in gross income after December 31, 1982.

* * * * *
    (c) * * * (1)* * *
    (ii) * * *
    (A) Corporation. A corporation, as defined in section 7701(a)(3), 
whether domestic or foreign, is an exempt recipient. In addition, for 
purposes of this paragraph (c)(1), the term corporation includes a 
partnership all of whose members are corporations described in this 
paragraph (c)(1)(ii)(A), but only if the partnership files with the 
payor a certificate meeting the certification requirements set out 
below. Absent actual knowledge or reason to know otherwise, a payor may 
treat a payee as a corporation (and, therefore, as an exempt recipient) 
if one of the requirements of paragraph (c)(1)(ii)(A) (1), (2), (3), 
(4), (5), or (6) of this section are met before a payment is made.
    (1) For payments other than interest, dividends, or broker 
proceeds, the name of the payee contains an unambiguous expression of 
corporate status that is ``Incorporated,'' ``Inc.,'' ``Corporation,'' 
``Corp.,'' ``P.C.,'' (but not ``Company'' or ``Co.'') or contains the 
term indemnity company, reinsurance company, or assurance company.
    (2) For payments of interest, dividends or broker proceeds that are 
paid to a person with whom the payor does not have an account 
relationship, the payor may rely on the test of paragraph 
(c)(1)(ii)(A)(1) of this section if the payor also has a mailing 
address of the payee in the United States.
    (3) The payor has on file a corporate resolution or similar 
document clearly indicating corporate status.
    (4) The payor receives a Form W-9 which includes an EIN and a 
statement from the payee that it is a domestic corporation.
    (5) The payor receives a withholding certificate described in 
Sec. 1.1441-1(e)(2), that includes an employer identification number 
and a statement from the payee that it is a foreign corporation.
    (6) The payor maintains an account for an entity claiming to be a

[[Page 17662]]

corporation and the account was established on or before a date that is 
60 days after these regulations are published as final regulations in 
the Federal Register and the name of the payee contains an unambiguous 
expression of corporate status that is ``Incorporated,'' ``Inc.,'' 
``Corporation,'' ``Corp.,'' or ``P.C.'' (but not Company or Co.), or 
contains the term insurance company, indemnity company, reinsurance 
company, or assurance company.
* * * * *
    (G) International organization. An international organization and 
any wholly owned agency or instrumentality thereof are exempt 
recipients. The term international organization shall have the meaning 
ascribed to it in section 7701(a)(18). Without requiring a certificate, 
a payor may treat a payee as an international organization if the payee 
is designated as an international organization by executive order 
(pursuant to 22 U.S.C. 288 through 288(f)).
* * * * *
    Par. 36. Section 1.6049-4 is amended by revising paragraph (d)(3) 
to read as follows:
* * * * *
    (d) * * *
    (3) Conversion into United States dollars of amounts paid in 
foreign currency--(i) Conversion rules. When the amount subject to 
reporting is paid in a currency other than the U.S. dollar, the amount 
subject to reporting under this section shall be determined by 
converting such foreign currency into U.S. dollars on the date of 
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant 
to a reasonable spot rate convention. For example, a withholding agent 
may use a month-end spot rate or a monthly average spot rate. A spot 
rate convention must be used consistently with respect to all non-
dollar amounts withheld and from year to year. Such convention cannot 
be changed without the consent of the Commissioner or delegate.
    (ii) Special rule for Sec. 1.988-5(a) transactions where the payor 
on both components of a qualified hedging transaction is the same 
person--(A) In general. Interest or original issue discount on a 
qualified debt instrument that is part of a qualified hedging 
transaction under Sec. 1.988-5(a) shall be computed for section 6049 
reporting purposes under the rules described in Sec. 1.988-5(a)(9)(ii) 
if--
    (1) The payor on the qualified debt instrument and the counterparty 
to the Sec. 1.988-5(a) hedge are the same person; and
    (2) The payee complies with the requirements of Sec. 1.988-5(a) and 
so notifies its payor prior to the date required for filing Form 1099 
as required by this section.
    (B) Effective date. The provisions of this paragraph (d)(3)(ii) 
apply to transactions entered into on or after December 31, 1997.
* * * * *
    Par. 37. Section 1.6049-5, as proposed to be amended in project 
number INTL-52-86, published on February 29, 1988, at 53 FR 6003, is 
amended as follows:
    1. Revising paragraphs (b) introductory text and (b)(6) through 
(b)(8).
    2. Adding paragraphs (b)(10) through (b)(14).
    3. Revising paragraphs (c) and (d).
    4. Removing paragraph (e) and redesignating paragraph (j) as new 
paragraph (e).
    5. Removing and reserving paragraph (f).
    6. Revising paragraph (g).
    7. Removing paragraphs (h) and (i).
    8. Redesignating paragraph (k) as paragraph (f) and removing the 
last sentence.
    9. Removing paragraph (l).
    The revisions and additions read as follows:


Sec. 1.6049-5  Interest and original issue discount subject to 
reporting after December 31, 1982.

* * * * *
    (b) Interest excluded from reporting requirement. The term interest 
or original issue discount (OID) does not include--
* * * * *
    (6) Amounts from sources outside the United States paid outside the 
United States by a non-U.S. payor or a non-U.S. middleman (as defined 
in paragraph (d)(2) of this section).
    (7) Portfolio interest, as defined in Sec. 1.871-14(b)(1), paid 
with respect to bearer obligations described in section 871(h)(2)(A) or 
881(c)(2)(A) or with respect to a foreign- targeted registered 
obligation defined in Sec. 1.6049-5(j)(4) (as proposed in project 
number INTL-52-86 (1988-1 C.B. 892)) (other than by a U.S. middleman 
(as defined in paragraph (d)(1) of this section) that, as a custodian 
or nominee of the payee, collects the amount for, or on behalf of, the 
payee, regardless of whether the middleman is also acting as agent of 
the payor).
    (8) Portfolio interest, as defined in Sec. 1.871-14(c)(1), paid 
with respect to registered obligations described in section 
871(h)(2)(B) or 881(c)(2)(B).
* * * * *
    (10) Amounts paid outside the United States (other than by a U.S. 
middleman (as defined in paragraph (d)(1) of this section) that, as a 
custodian or nominee or other agent of the payee, collects the amount 
for, or on behalf of, the payee, regardless of whether the middleman is 
also acting as agent of the payor) with respect to an obligation that: 
has a face amount or principal amount of not less than $500,000; has a 
maturity (at issue) of 183 days or less; satisfies the requirements of 
sections 163(f)(2)(B)(i) and (ii)(I) (as if it were a registration-
required obligation within the meaning of section 163(f)(2)(A)) and is 
issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i)(D); 
and has on its face the following statement (or a similar statement 
having the same effect)--``By accepting this obligation, the holder 
represents and warrants that it is not a United States person (other 
than an exempt recipient described in section 6049(b)(4) of the 
Internal Revenue Code and regulations thereunder) and that it is not 
acting for or on behalf of a United States person (other than an exempt 
recipient described in section 6049(b)(4) of the Internal Revenue Code 
and the regulations thereunder).'' If the obligation is in registered 
form, it must be registered in the name of an exempt recipient 
described in Sec. 1.6049-4(c)(1)(ii). For purposes of this paragraph 
(b)(10), a middleman may treat an obligation as described in section 
163(f)(2)(B) (i) and (ii)(I) and the regulations under that section if 
the obligation, or coupons detached therefrom, whichever is presented 
for payment, contains the statement described in this paragraph 
(b)(10).
    (11) Amounts paid with respect to an account or deposit with a U.S. 
or foreign branch of a domestic or foreign corporation or partnership 
that is paid with respect to an obligation described in paragraph 
(b)(11) (i) or (ii) of this section, if the branch is engaged in the 
commercial banking business; and the interest or OID is paid outside 
the United States (other than by a U.S. middleman (as defined in 
paragraph (d)(1) of this section) that acts as a custodian, nominee, or 
other agent of the payee, and collects the amount for, or on behalf of, 
the payee, regardless of whether the middleman is also acting as agent 
of the payor).
    (i) An obligation is described in this paragraph (b)(11)(i) if it 
is not in registered form (within the meaning of section 163(f) and the 
regulations under that section), is described in section 163(f)(2)(B) 
and issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i) 
(C) or (D), and, in the case of a U.S. branch, is part of a larger 
single public

[[Page 17663]]

offering of securities. For purposes of this paragraph (b)(11)(i), a 
middleman may treat an obligation as described in section 163(f)(2)(B) 
if the obligation, and any detachable coupons, contains the statement 
described in section 163(f)(2)(B)(ii)(II) and the regulations under 
that section.
    (ii) An obligation is described in this paragraph (b)(11)(ii) if it 
produces income described in section 871(i)(2)(A); has a face amount or 
principal amount of not less than $500,000; satisfies the requirements 
of sections 163(f)(2)(B) (i) and (ii)(I) (as if it were a registration-
required obligation within the meaning of section 163(f)(2)(A)) and is 
issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i) (C) 
or (D); has on its face, and on any detachable coupons, the following 
statement (or a similar statement having the same effect)--``By 
accepting this obligation, the holder represents and warrants that it 
is not a United States person (other than an exempt recipient described 
in section 6049(b)(4) of the Internal Revenue Code and regulations 
thereunder) and that it is not acting for or on behalf of a United 
States person (other than an exempt recipient described in section 
6049(b)(4) of the Internal Revenue Code and the regulations 
thereunder).'' If the obligation is in registered form, it must be 
registered in the name of an exempt recipient described in Sec. 1.6049-
4(c)(1)(ii). For purposes of this paragraph (b)(11)(ii), a middleman 
may treat an obligation as described in sections 163(f)(2)(B) (i) and 
(ii)(I) and the regulations under that section if the obligation, or 
any detachable coupon, contains the statement described in this 
paragraph (b)(11)(ii).
    (12) Amounts that the payor may treat as paid to a beneficial owner 
that is a foreign person pursuant to Sec. 1.1441-1(e)(1) and from which 
the payor or middleman is either required to withhold tax under section 
1441 or the regulations under that section or would be so required but 
for exceptions in the regulations under section 1441 (such as, for 
example, under Sec. 1.1441-4 (dealing with effectively connected 
income) or Sec. 1.1441-6 (dealing with a reduction of rate of tax under 
an income tax treaty)).
    (13) Amounts for the period that they represent an asset blocked as 
described in Sec. 1.1441-2(e)(3)). Payment of such amounts, including 
interest that is past due and OID on obligations that mature on or 
before the date that the assets are no longer blocked, is deemed to 
occur in accordance with the rules of Sec. 1.1441-2(e)(3).
    (14) Amounts that are from sources outside the United States or 
original issue discount on any obligation payable less than 6 months 
from the date of original issue described in section 871(g)(1)(B)(i) 
and that a payor or middleman may treat as paid to a beneficial owner 
that is a foreign person
    (because such person has furnished a certificate or documentary 
evidence as required under paragraph (c) of this section).
    (c) Treatment of payee as a foreign person--(1) On-shore accounts 
or payments inside the U.S. A payor or middleman making a payment with 
respect to an on-shore account, as defined in paragraph (d)(3) of this 
section, or making a payment inside the United States, as defined in 
paragraph (e) of this section, may treat the payment as made to a 
beneficial owner that is a foreign person if it complies with the 
requirements under Sec. 1.1441-1(e)(1) (dealing with reliance by a 
withholding agent on a beneficial owner's claim of foreign status). For 
purposes of this section, beneficial owner shall be as defined in 
Sec. 1.1441-1(c)(6)(ii)(A).
    (2) Payments made outside the United States with respect to off-
shore accounts--(i) In general. In the case of a payment made outside 
the United States with respect to an offshore account, as defined in 
paragraph (d)(3) of this section, a payor or middleman may treat a 
payment as made to a beneficial owner (as described in Sec. 1.1441-
1(b)(6)) that is a foreign person if it complies with the procedures 
described in paragraph (c)(1) of this section or complies with the 
documentary evidence procedures described in paragraph (c)(2)(ii) of 
this section.
    (ii) Documentary evidence. A payor or middleman complies with the 
documentary evidence procedures if, prior to the payment, the payor or 
middleman has established procedures to obtain, review, and maintain 
documentary evidence sufficient to establish the identity of the 
beneficial owner and the status of that person as a foreign person; and 
the payor or middleman obtains, reviews, and maintains such documentary 
evidence in accordance with those procedures. A payor or middleman 
maintains the documents reviewed by retaining the original, certified 
copy, or a photocopy of the documents reviewed and noting in its 
records the date on which and by whom the document was received and 
reviewed.
    (3) Presumptions. The presumptions of Sec. 1.1441-1(f) shall apply 
for determining the payee's status where the required documentation is 
lacking, incorrect, or unreliable.
    (4) Validity of certificates and documentary evidence. For rules 
regarding the period of validity of a withholding certificate, see 
Sec. 1.1441-1(e)(4)(ii). Documentary evidence or a certificate that 
does not include a taxpayer identifying number shall be valid for a 
period of three years from the date received by the payor or middleman. 
The three-year validity period shall start from the date that the 
certificate is signed (or the documentation is received) until the last 
day of the third succeeding calendar year. For example, a withholding 
certificate signed on September 10, 1998, remains valid through 
December 31, 2001. A beneficial owner that becomes a U.S. person must, 
however, inform a payor or middleman within 30 days of change of 
status.
    (5) Retention of withholding certificate. A payor or middleman must 
retain each withholding certificate, any applicable documentary 
evidence, and any information obtained in lieu of the withholding 
certificate as long as it may be relevant to the determination of the 
payor's or middleman's liability under the reporting provisions of this 
chapter and related provisions.
    (6) Standard of knowledge. A payor or middleman may not rely on a 
certificate or documentary evidence described in paragraph (c)(1) or 
(c)(2)(ii) of this section if it has actual knowledge that the 
representations made therein or on the basis thereof are incorrect or 
if any of the required information or certifications described in 
Sec. 1.1441-1(f)(1)(ii) are lacking from the certificate or documentary 
evidence.
    (7) Joint owners. In the case of amounts paid to joint owners and 
for which a certificate or documentation is required as a condition for 
being exempt from reporting under this paragraph (c), a payor or 
middleman must receive from each joint owner the required certification 
or documentation. Where any one of the joint owners has not furnished 
the required certification or documentation, the payment is not exempt 
from reporting under this paragraph (c).
    (8) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
    (d) Definitions--(1) Payor or middleman and U.S. payor or U.S. 
middleman. For purposes of this section, the term payor means any 
person who is required to make an information return with respect to 
any reportable payment, as described in section 3406(b) (including any 
middleman). For purposes of this section, the term middleman means any 
person whose legal relationship to the payor or payee (including any 
other

[[Page 17664]]

middleman) is of a kind described in Sec. 1.6049-4(f)(4) (as proposed 
in project number INTL-52-86 published in 1988-1 C.B. 892). Thus, a 
person who, from within the United States, forwards an interest coupon 
or discount obligation on behalf of a payee for presentation, 
collection or payment outside the United States is also a middleman for 
purposes of this section (but the transfer, although subject to 
information reporting under this section, does not make the payment 
subject to backup withholding under section 3406). For purposes of this 
section, the term U.S. payor or U.S. middleman means a payor or 
middleman that is--
    (i) A person described in section 7701(a)(30);
    (ii) The government of the United States, the government of any 
State or political subdivision thereof (or any agency or 
instrumentality of any of the foregoing);
    (iii) A controlled foreign corporation within the meaning of 
section 957(a); or
    (iv) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part 
of such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States.
    (2) Non-U.S. payor or non-U.S. middleman. A non-U.S. payor or a 
non-U.S. middleman is a payor or middleman that is not a U.S. payor or 
a U.S. middleman.
    (3) On-shore and off-shore accounts. An on-shore account means an 
account maintained at an office or branch of a payor or middleman in 
the United States. An offshore account means an account that is not an 
on-shore account.
* * * * *
    (g) Effective date--(1) General rule. The provisions of paragraphs 
(b)(6) through (b)(14), (c), (d), and (e) of this section apply to 
payments made after December 31, 1997.
    (2) Transition rules. A payor that holds a valid Form W-8 on a date 
that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.
    Par. 38. Section 1.6050N-1 is amended by:
    1. Revising the section heading.
    2. Redesignating paragraphs (c) and (d) as paragraphs (d) and (e), 
respectively.
    3. Adding a new paragraph (c).
    4. Revising newly designated paragraph (e).
    The addition and revisions read as follows:


Sec. 1.6050N-1  Statement to recipients of royalties paid after 
December 31, 1986.

* * * * *
    (c) Exempted foreign-related items--(1) In general. No return shall 
be required under paragraph (a) of this section for payments of the 
items described in paragraphs (c)(1) (i) through (iii) of this section.
    (i) Returns of information are not required for payments of 
royalties that a payor or middleman, as defined in paragraph (c)(2)(i) 
of this section, may treat as made to a beneficial owner that is a 
foreign person pursuant to Sec. 1.1441-1(e)(1) and from which the payor 
or middleman is either required to withhold tax under section 1441 or 
the regulations under that section or would be so required but for 
exceptions in the regulations under section 1441 (such as, for example, 
under Sec. 1.1441-4 (dealing with effectively connected income) or 
Sec. 1.1441-6 (dealing with a reduction of rate of tax under an income 
tax treaty)). See Sec. 1.1441-1(e)(4)(i) in the case of payments to 
joint owners.
    (ii) Returns of information are not required for payments of 
royalties from sources outside the United States made outside the 
United States by a non-U.S. payor or non-U.S. middleman (as defined in 
paragraph (c)(2)(ii) of this section). See Sec. 1.6049-5(e) for 
circumstances in which a payment is considered to be made outside the 
United States.
    (iii) Returns of information are not required for payments of 
royalties from sources outside the United States that a payor or 
middleman may treat as paid to a beneficial owner that is a foreign 
person (because such person has furnished a certificate described in 
Sec. 1.6049-5(c)(1)). For purposes of this paragraph (c)(1)(iii), the 
presumptions in Sec. 1.6049-5(c) (3) through (6) (regarding operating 
rules related to the certificate of foreign status) shall apply.
    (2) Definitions--(i) Payor and middleman. For purposes of this 
section, the term payor means any person who is required to make an 
information return with respect to any reportable payment, as described 
in section 3406(b), including any middleman. For purposes of this 
section, the term middleman means any person whose legal relationship 
to the payor or payee (including any other middleman) is of a kind 
described in Sec. 1.6049-4(f)(4) (as proposed in project number INTL-
52-86 published in 1988-1 C.B. 892).
    (ii) Non-U.S. payor and non-U.S. middleman. The term non-U.S. payor 
or non-U.S. middleman means a payor or middleman other than--
    (A) A person described in section 7701(a)(30);
    (B) The government of the United States, the government of any 
State or political subdivision thereof (or any agency or 
instrumentality of any of the foregoing);
    (C) A controlled foreign corporation within the meaning of section 
957(a); or
    (D) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part 
of such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States.
    (iii) Applicable presumptions. The presumptions of Sec. 1.1441-1(f) 
shall apply for determining the payee's status where the required 
documentation is lacking, incorrect, or unreliable.
    (iv) Joint owners. In the case of amounts paid to joint owners and 
requiring a certificate or documentation as a condition for being 
exempt from reporting under this paragraph (c), the payor or middleman 
must receive from each joint owner the required certification. Where 
any one of the joint owners has not furnished the required 
certification, the payment is not exempt from reporting under this 
section.
    (v) Payee. For determination of payee, see Sec. 1.1441-1(c)(3).
* * * * *
    (e) Effective date--(1) General rule. The provisions of paragraph 
(c) of this section apply to payments made after December 31, 1997.
    (2) Transition rules. A payor that holds a valid Form W-8 on a date 
that is 60 days after these regulations are published as final 
regulations in the Federal Register may treat it as a valid certificate 
until its validity expires under applicable provisions as in effect on 
April 22, 1996.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

    Par. 39. The authority for part 31 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 40. Section 31.3401(a)(6)-1 is amended by:
    1. Revising the section heading.
    2. Revising the heading and first sentence of paragraph (e).
    3. Adding paragraph (f).
    4. Removing the authority citation at the end of the section.

[[Page 17665]]

    The addition and revisions read as follows:


Sec. 31.3401(a)(6)-1  Remuneration for services of nonresident alien 
individuals.

* * * * *
    (e) Exemption from income tax for remuneration paid for services 
performed before January 1, 1998. Remuneration paid for services 
performed within the United States by a nonresident alien individual 
before January 1, 1998 is excepted from wages and hence is not subject 
to withholding if such remuneration is, or will be, exempt from income 
tax imposed by chapter 1 of the Internal Revenue Code by reason of a 
provision of the Internal Revenue Code or an income tax convention to 
which the United States is a party. * * *
    (f) Exemption from income tax for remuneration paid for services 
performed after December 31, 1997. Remuneration paid for services 
performed within the United States by a nonresident alien individual 
after December 31, 1997 is excepted from wages and hence is not subject 
to withholding if such remuneration is, or will be, exempt from the 
income tax imposed by chapter 1 of the Internal Revenue Code by reason 
of a provision of the Internal Revenue Code or an income tax convention 
to which the United States is a party. An employer may rely on a claim 
that the employee is entitled to an exemption from tax if it complies 
with the requirements of Sec. 1.1441-1(e)(1) of this chapter (for a 
claim based on a provision of the Internal Revenue Code) or 
Sec. 1.1441-4(b)(2) of this chapter (for a claim based on an income tax 
convention).
    Par. 41. In Sec. 31.3406(d)-3, paragraph (c) is revised to read as 
follows:


Sec. 31.3406(d)-3  Special 30-day rules for certain reportable 
payments.

* * * * *
    (c) Application to foreign payees. The rules of paragraphs (a) and 
(b) of this section also apply to a payee from whom the payor is 
required to obtain a Form W-8 (or an acceptable substitute) or is to 
obtain other evidence of foreign status (pursuant to relevant 
regulations under an applicable Internal Revenue Code section), 
provided the payee represents orally or otherwise, before or at the 
time of the acquisition or sale of the instrument or the establishment 
of the account, that the payee is not a United States citizen or 
resident. In the case of a payment made after December 31, 1997, to a 
person with respect to whom indicia of foreign ownership exists, as 
described in Sec. 1.1441-1(f)(2)(ii)(A) of this chapter, at any time 
before expiration of the 30-day grace period described in this 
paragraph (c), the procedures described in that section shall apply, 
including the special grace period. The 30-day and 90-day grace periods 
shall run concurrently. Therefore, for example, if indicia of foreign 
ownership were provided on the 28th day after a payment is credited to 
an account, the 30-day grace period would convert to a 90-day grace 
period under Sec. 1.1441-1(f)(2)(ii)(A) of this chapter, of which 28 
days would have already elapsed.
    Par. 42. In Sec. 31.3406(g)-1, paragraph (e) is added to read as 
follows:


Sec. 31.3406(g)-1  Exception for payments to certain payees and certain 
other payments.

* * * * *
    (e) Certain reportable payments made outside the United States by 
foreign persons, foreign offices of United States banks and brokers, 
and others. A payor of a reportable payment or transfer is not required 
to backup withholding under section 3406 if such reportable payment or 
transfer is of a kind that is exempt from reporting if documentary 
evidence described in Sec. 1.6049-5(2)(ii) of this chapter is provided 
to the payor, unless the payor has actual knowledge that the payee is a 
United States person. In addition, amounts paid with respect to 
notional principal contracts described in Sec. 1.6041-1(d)(5) of this 
chapter are not subject to backup withholding if they are paid outside 
the United States, unless the payor has actual knowledge that the payee 
is a United States person.
    Par. 43. Section 31.3406(h)-2 is amended by:
    1. Removing the heading of paragraph (e)(1).
    2. Removing the paragraph designation (e)(1).
    3. Removing paragraph (e)(2).
    4. Revising paragraph (a)(3)(i) to read as follows:


Sec. 31.3406(h)-2  Special rules.

    (a) * * *
    (3) Joint foreign payees--(i) In general. If the relevant payee 
listed on an account or instrument provides the penalties of perjury 
statement regarding its foreign status, withholding under section 3406 
applies unless--
    (A) Every joint payee provides the statement regarding foreign 
status (under the provisions of chapter 3 and chapter 61 of the 
Internal Revenue Code and the regulations under those provisions); or
    (B) Any one of the joint owners who has not established foreign 
status provides a taxpayer identifying number to the payor in the 
manner required in Sec. 31.3406(d)-1.
* * * * *
    Par. 44. Section 31.6413(a)-3 is amended as follows:
    1. In paragraph (a)(1)(iii), the language ``(including the 
certification relating to foreign status described in Sec. 1.6049-
5(b)(2)(iv) of this chapter or Sec. 1.6045-1(g)(1) of this chapter)'' 
is removed and ``(including the documentation required under 
Secs. 1.1441-1(e)(1), 1.6045-1(g)(3), and 1.6049-5(c) of this 
chapter)'' is added in its place.
    2. Paragraph (a)(1)(ii) is amended by removing ``or'' at the end of 
the paragraph and paragraph (a)(1)(iii) is amended by removing the 
period at the end of the paragraph and adding ``; or'' in its place.
    3. Paragraph (a)(1)(iv) is added.
    4. Paragraphs (a)(2) and (b)(2) are revised. The addition and 
revisions read as follows:


Sec. 31.6413(a)-3  Repayment by payor of tax erroneously collected from 
payee.

    (a) * * * (1) * * *
    (iv) The amount is withheld because a payor imposed backup 
withholding on a payment made to a person because the payee failed to 
furnish the required documentation described in Secs. 1.1441-1(e)(1), 
1.6045-1(g)(3), and 1.6049-5(c) of this chapter and the payee 
subsequently furnishes, completes, or corrects the required 
documentation. The required documentation must be furnished, completed, 
or corrected prior to the end of the calendar year in which the payment 
is made and prior to the time the payor furnishes a Form 1099 to the 
payee with respect to the payment for which the withholding erroneously 
occurred.
    (2) For purposes of paragraph (a)(1) of this section (other than 
erroneous withholding occurring under the circumstances described in 
paragraph (a)(1)(iv) of this section), if a payor or broker withholds 
because the payor or broker has not received a taxpayer identifying 
number or required certification and the payee subsequently provides a 
taxpayer identifying number or a required certification to the payor, 
the payor or broker may not refund the amount to the payee.
    (b) * * *
    (2) Adjustment after the deposit of the tax--(i) In general. Except 
as provided in paragraph (b)(2)(ii) of this section, if the amount 
erroneously withheld has been deposited prior to the time that the 
refund is made to the payee, the payor or broker may adjust any 
subsequent deposit of the tax collected under chapter 24 of the 
Internal Revenue Code that the payor or broker is required to

[[Page 17666]]

make in the amount of the tax that has been refunded to the payee.
    (ii) Erroneous withholding from a payee that is a foreign person. 
Where a payor withholds in error from a payee that is a nonresident 
alien or foreign person, as described in paragraph (b)(1) of this 
section, the payor may refund some or all of the amount subject to 
backup withholding under section 3406. A refund may be paid in 
accordance with the requirements of this paragraph (b)(2)(ii) where the 
required documentation is furnished, completed, or corrected prior to 
the end of the calendar year in which the payment is made and prior to 
the time the payor furnishes a Form 1099 to the payee with respect to 
the payment for which the withholding erroneously occurred. The amount 
of the refund will be the amount erroneously withheld less the amount 
of tax required to be withheld, if any, under chapter 3 of the Internal 
Revenue Code. With respect to the amount of the payment to the foreign 
person and the amount of tax required to be withheld under chapter 3 of 
the Internal Revenue Code, returns must be made in accordance with the 
requirements of Sec. 1.1461-1 (b) and (c) of this chapter.

PART 35a--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST 
AND DIVIDEND TAX COMPLIANCE ACT OF 1983

    Par. 45. The authority for part 35a is amended by removing the 
entries for Sec. 35a.9999-3, Sec. 35a.9999-3A and Sec. 35a.9999-4T to 
read in part as follows:

    Authority: 26 U.S.C. 7805 * * *


Secs. 35a.9999-1 through 35a.9999-3A, and 35a.9999-4T  [Removed]

    Par. 46. Sections 35a.9999-1 through 35a.9999-3A, and 35a.9999-4T 
are removed.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 47. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Par. 48. Section 301.6109-1 as proposed to be amended in project 
number INTL-0024-94, published on June 8, 1995, at 60 FR 30214, is 
amended as follows:
    1. Paragraph (b)(2)(iii) is amended by removing ``and'' at the end 
of the paragraph.
    2. Paragraph (b)(2)(iv) is revised.
    3. Paragraph (b)(2)(v) is added.
    4. Paragraph (c) is revised.
    The revisions and additions read as follows:


Sec. 301.6109-1   Identifying numbers.

* * * * *
    (b) * * *
    (2) * * *
    (iv) A foreign person that makes a return of tax under this title 
(including income, estate, and gift tax returns) but excluding 
information returns, statements, or documents;
    (v) A foreign person that furnishes a withholding certificate 
described in Sec. 1.1441-1 (e)(2) or (e)(3) of this chapter to the 
extent required under Sec. 1.1441-1(e)(4)(vii) of this chapter.
    (c) Requirement to furnish another's number. Every person required 
under this title to make a return, statement, or other document must 
furnish such taxpayer identifying numbers of other U.S. persons and 
foreign persons that are described in paragraph (b)(2) (i), (ii), 
(iii), or (v) of this section as required by the forms and the 
accompanying instructions. The taxpayer identifying number of any 
person furnishing a withholding certificate referred to in paragraph 
(b)(2)(v) of this section shall also be furnished if it is actually 
known to the person making a return, statement, or other document 
described in this paragraph (c). If the person making the return, 
statement, or other document does not know the taxpayer identifying 
number of the other person, and such other person is one that is 
described in paragraph (b)(2) (i), (ii), (iii), or (v) of this section, 
such person must request the other person's number. The request should 
state that the identifying number is required to be furnished under 
authority of law. When the person making the return, statement, or 
other document does not know the number of the other person, and has 
complied with the request provision of this paragraph (c), such person 
must sign an affidavit on the transmittal document forwarding such 
returns, statements, or other documents to the Internal Revenue 
Service, so stating. A person required to file a taxpayer identifying 
number shall correct any errors in such filing when such person's 
attention has been drawn to them.
* * * * *
    Par. 49. Section 301.6114-1 is amended by:
    1. Revising paragraph (a)(1)(ii).
    2. Revising paragraph (b)(4)(ii) introductory text, and adding 
paragraphs (b)(4)(ii)(C) and (b)(4)(ii)(D)
    3. Revising paragraphs (c)(1) and (d)(4)(v): The revisions read as 
follows:


Sec. 301.6114-1   Treaty-based return positions.

    (a) * * * (1) * * *
    (ii) If a return of tax would not otherwise be required to be 
filed, a return must nevertheless be filed for purposes of making the 
disclosure required by this section. For this purpose, such return need 
include only the taxpayer's name, address, taxpayer identifying number, 
and be signed under the penalties of perjury (as well as the subject 
disclosure). Also, the taxpayer's taxable year shall be deemed to be 
the calendar year (unless the taxpayer has previously established, or 
timely chooses for this purpose to establish, a different taxable 
year). In the case of a disclosable return position relating solely to 
income subject to withholding (as defined in Sec. 1.1441-2(a) of this 
chapter), however, the statement required to be filed in paragraph (d) 
of this section must instead be filed at times and in accordance with 
procedures to be published by the Internal Revenue Service.
* * * * *
    (b) * * *
    (4) * * *
    (ii) A treaty exempts from tax, or reduces the rate of tax on, 
fixed or determinable annual or periodical income subject to 
withholding under sections 1441 or 1442 that a foreign person receives 
from a U.S. person, but only if described in paragraphs (b)(4)(ii) (A) 
and (B) of this section, or paragraph (b)(4)(ii) (C) or (D) of this 
section.
* * * * *
    (C) For payments made after December 31, 1997, with respect to a 
treaty that contains a limitation on benefits article, that--
    (1) The treaty exempts from tax, or reduces the rate of tax on 
income subject to withholding (as defined in Sec. 1.1441-2(a) of this 
chapter) that is paid to a foreign person (other than a State, 
including a political subdivision or local authority) that is the 
beneficial owner of the income and the beneficial owner is related to 
the person obligated to pay the income within the meaning of sections 
267(b) and 707(b), and the income exceeds $500,000; and
    (2) A foreign person (other than an individual or a State, 
including a political subdivision or local authority) meets the 
requirements of the limitation on benefits article of the treaty; or
    (D) For payments made after December 31, 1997, with respect to a 
treaty that imposes any other conditions for the entitlement of treaty 
benefits, for example as a part of the interest, dividends, or royalty 
article, that such conditions are met;
* * * * *
    (c) Reporting requirement waived. * * *
    (1) Notwithstanding paragraph (b)(4) or (5) of this section, that a 
treaty has

[[Page 17667]]

reduced the rate of withholding tax otherwise applicable to a 
particular type of fixed or determinable annual or periodical income 
subject to withholding under section 1441 or 1442, such as dividends, 
interest, rents, or royalties to the extent such income is beneficially 
owned by an individual or a State (including a political subdivision or 
local authority);
* * * * *
    (d) * * *
    (4) * * *
    (v) The provision(s) of the limitation on benefits article (if any) 
in the treaty that the taxpayer relies upon to meet the requirements of 
that article and a statement of the relevant facts in support of the 
taxpayer's claim.
* * * * *
    Par. 50. Section 301.6402-3 is amended as follows:
    1. Paragraph (e) is revised as set forth below.
    2. Removing the OMB parenthetical and the authority citation at the 
end of the section.


Sec. 301.6402-3   Special rules applicable to income tax.

* * * * *
    (e) In the case of a nonresident alien individual or foreign 
corporation, the appropriate income tax return on which the claim for 
refund or credit is made must contain the tax identification number of 
the taxpayer required pursuant to section 6109 and the entire amount of 
income of the taxpayer subject to tax, even if the tax liability for 
that income was fully satisfied at source through withholding under 
chapter 3 of the Internal Revenue Code. Also, if the overpayment of tax 
resulted from the withholding of tax at source under chapter 3 of the 
Internal Revenue Code, a copy of the Form 1042-S required to be 
provided to the beneficial owner pursuant to Sec. 1.1461-1(c)(1)(i) of 
this chapter must be attached to the return. For purposes of claiming a 
refund, the Form 1042-S must include the taxpayer identifying number of 
the beneficial owner even if not otherwise required. No claim of refund 
or credit under chapter 65 may be made by the taxpayer for any amount 
that the withholding agent has repaid to the taxpayer pursuant to 
Sec. 1.1461-2(a)(2) of this chapter or that was subject to a set-off 
pursuant to Sec. 1.1461-2(a)(3) of this chapter. Upon request, a 
taxpayer must also submit such documentation as the Commissioner (or 
delegate), the District Director, or the Assistant Commissioner 
(International), may require establishing that the taxpayer is the 
beneficial owner of the income for which a claim of refund or credit is 
being made.

PART 502--[REMOVED]

    Par. 51. Part 502 is removed.

PART 503--[REMOVED]

    Par. 52. Part 503 is removed.

PART 509--[AMENDED]

    Par. 53. The authority citation for part 509 is revised and the 
authority citation for ``Subpart--General Income Tax'' is removed, to 
read as follows:

    Authority: 26 U.S.C. 62, 3791 and 7805.

    Par. 54. Part 509 is amended as follows:
    1. Subpart--Withholding of Tax consisting of Secs. 509.1 through 
509.10 is removed.
    2. In Sec. 509.103, paragraph (e) is removed and reserved.
    3. In Sec. 509.117, paragraph (a) is removed and reserved.
    4. Sections 509.119 and 509.122 are removed.

PART 513--[AMENDED]

    Par. 55. The authority citation for part 513 is revised to read as 
follows:

    Authority: 26 U.S.C. 62.

    Par. 56. Part 513 is amended as follows:
    1. Section 513.1 is removed.
    2. Section 513.2 is amended as follows:
    a. Paragraphs (a)(1) and (a)(2) are removed and reserved.
    b. Paragraph (a)(4) is removed.
    c. Paragraph (b) is removed and reserved.
    d. Paragraphs (c) and (d) are removed.
    3. Section 513.3 is amended as follows:
    a. Paragraph (a)(1) is removed and reserved.
    b. Paragraphs (b) and (c) are removed.
    4. Section 513.4 is amended as follows:
    a. Paragraph (a) is removed and reserved.
    b. Paragraphs (c) and (d) are removed.
    5. Section 513.5 is amended as follows:
    a. Paragraph (a) is removed and reserved.
    b. Paragraphs (c) and (d) are removed.

PART 514--[AMENDED]

    Par. 57. The authority citation for part 514 is revised to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 58. Part 514 is amended as follows:
    1. The undesignated centerheading preceding Sec. 514.1 and 
Secs. 514.1 through 514.10 are removed.
    2. Sections 514.20 through 514.21 are removed.
    3. In Sec. 514.22, paragraph (c) is removed.
    4. Sections 514.23 through 514.32 are removed.
    5. Sections 514.101 through 514.117 are removed.

PART 516--[REMOVED]

    Par. 59. Part 516 is removed.

PART 517--[REMOVED]

    Par. 60. Part 517 is removed.

PART 520--[REMOVED]

    Par. 61. Part 520 is removed.

PART 521--[AMENDED]

    Par. 62. The authority citation for part 521 is revised to read as 
follows:

    Authority: 26 U.S.C. 62, 143, 144, 211, and 231.

    Par. 63. Part 521 is amended as follows:
    1. Subpart--Withholding of Tax consisting of Secs. 521.1 through 
521.8 is removed.
    2. In Sec. 521.103, paragraph (d) is removed and reserved.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-8936 Filed 4-15-96; 10:14 am]
BILLING CODE 4830-01-P