[Federal Register Volume 65, Number 99 (Monday, May 22, 2000)]
[Rules and Regulations]
[Pages 32152-32212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11937]



[[Page 32151]]

-----------------------------------------------------------------------

Part II





Department of the Treasury





-----------------------------------------------------------------------



Internal Revenue Service



-----------------------------------------------------------------------



26 CFR Parts 1 and 31



Revisions to Regulations Relating to Withholding of Tax on Certain U.S. 
Source Income Paid to Foreign Persons and Revisions of Information 
Reporting Regulations; Final Rule

  Federal Register / Vol. 65, No. 99 / Monday, May 22, 2000 / Rules and 
Regulations  

[[Page 32152]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8881]
RIN 1545-AX53; RIN 1545-AV27; RIN 1545-AV41


Revisions to Regulations Relating to Withholding of Tax on 
Certain U.S. Source Income Paid to Foreign Persons and Revisions of 
Information Reporting Regulations.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains amendments to final regulations 
relating to the withholding of income tax under sections 1441, 1442, 
and 1443 on certain U.S. source income paid to foreign persons and 
related requirements governing collection, deposit, refunds, and 
credits of withheld amounts under sections 1461 through 1463. 
Additionally, this document contains amendments under sections 6041, 
6041A, 6042, 6045, 6049, and 3406. This regulation affects persons 
making payments of U.S. source income to foreign persons.

DATES: These regulations are effective January 1, 2001.

FOR FURTHER INFORMATION CONTACT: Carl Cooper, Laurie Hatten-Boyd, or 
Kate Hwa (202) 622-3840 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information in these final regulations have been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1484. Responses to these collections of 
information are required to obtain a benefit (to claim an exemption to, 
or a reduction in, withholding), and to facilitate tax compliance (to 
verify entitlement to an exemption or a reduced rate). The likely 
respondents are individuals, businesses, and other for-profit 
organizations.
    Comments on the collections 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, OP:FS:FP, Washington, DC 20224.
    The estimated average annual burden per respondent and/or 
recordkeeper are reflected in the burdens of Forms W-8, 1042, 1042-S, 
1099, and the income tax return of a foreign person filed for purposes 
of claiming a refund.
    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 assigned by the Office of 
Management and Budget.
    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.

Background

    In Treasury Decision (TD) 8734 (62 FR 53387), the Treasury 
Department and the IRS issued comprehensive regulations (final 
regulations) under chapter 3 (sections 1441-1464) and subpart G of 
Subchapter A of chapter 61 (sections 6041-6050S) of the Internal 
Revenue Code. Those final regulations were amended by TD 8804 (63 FR 
72183 [1999-12 I.R.B. 5]) which delayed the effective date of the final 
regulations to payments made after December 31, 1999. The effective 
date of the regulations was again extended by TD 8856 (64 FR 73408) to 
payments made after December 31, 2000.

Need for Changes

    Since the publication of TD 8734, the IRS and Treasury have 
received numerous comments relating to technical errors in the 
regulations and ways to ease compliance while keeping the objectives of 
the regulations in place. In Notice 99-8 (1999-5 I.R.B. 26), the IRS 
and Treasury announced amendments that would be made to the 
regulations. This TD implements Notice 99-8 and contains additional 
changes made in response to comments as well as the IRS and Treasury's 
further analysis of the regulations.

Explanation of Revisions

A. Changes to Sec. 1.1441-1

1. Payments to a U.S. Branch of Certain Foreign Banks or Foreign 
Insurance Companies
    Generally, a payment to a U.S. branch of a foreign person is a 
payment to a foreign person. Under Sec. 1.1441-1(b)(2)(iv), however, a 
U.S. branch of certain foreign banks or insurance companies and a 
withholding agent may agree to treat the U.S. branch as a U.S. person 
for purposes of chapter 3 of the Internal Revenue Code. The regulation 
as initially drafted required a withholding agent to treat such a U.S. 
branch as a U.S. person for all purposes under chapter 3 of the 
Internal Revenue Code. The regulation itself, however, does not treat a 
U.S. branch as a U.S. person for all purposes under chapter 3 of the 
Internal Revenue Code. For example, a U.S. branch of a foreign bank or 
insurance company provides a withholding certificate on a Form W-8, 
which is used only by foreign persons. Further, under Sec. 1.1461-1(c), 
payments to such a branch are reportable as payments to a foreign 
person on Form 1042-S. Therefore, Sec. 1.1441-1(b)(2)(iv) has been 
amended to state that, notwithstanding the agreement between the 
withholding agent and a U.S. branch to treat the U.S. branch as a U.S. 
person, the branch is not treated as a U.S. person for purposes of 
providing documentation or for reporting payments to the branch.
2. Rules for Reliably Associating a Payment With a Withholding 
Certificate or Other Appropriate Documentation
    Section 1.1441-1(b)(2)(vii) contains rules to determine whether a 
payment can be reliably associated with valid documentation. A payment 
that cannot be reliably associated with valid documentation is subject 
to the presumption rules in Secs. 1.1441-1(b)(3), 1.1441-4(a)(2)(ii) 
and (3)(i), 1.1441-5(d) and (e)(6), 1.1441-9(b)(3), and 1.6049-5(d). 
Paragraph (b)(2)(vii) did not adequately address when a payment made to 
a nonqualified intermediary, a flow-through entity, or a U.S. branch of 
certain foreign banks and insurance companies (other than a branch that 
acts as a U.S. person) would be treated as reliably associated with 
documentation. These entities provide a withholding certificate for 
themselves and withholding certificates, documentary evidence, or other 
information for the persons on whose behalf they act. Therefore, the 
payment must be reliably associated not only with a withholding 
certificate from the intermediary, flow-through entity, or U.S. branch, 
but also with documentation from, or information relating to, the payee 
on whose behalf the entity acts.
    Paragraph (b)(2)(vii) has been amended to provide more detailed 
reliable association rules. For a payment made to a nonqualified 
intermediary, a flow-through entity, or a U.S. branch, new paragraph 
(b)(2)(vii)(B) provides that a withholding agent can reliably associate 
the payment with valid documentation if, prior to the payment, it has 
received a valid nonqualified

[[Page 32153]]

intermediary withholding certificate on Form W-8IMY; it can determine 
the portion of the payment that relates to valid documentation 
associated with the Form W-8IMY from a payee (i.e., a person other than 
a nonqualified intermediary, flow-through entity, or U.S. branch); and 
the nonqualified intermediary, flow-through entity, or U.S. branch has 
provided sufficient information for the withholding agent to report the 
payment on Form 1042-S or Form 1099, if reporting is required.
    Paragraph (b)(2)(vii)(C) provides rules for a withholding agent 
that makes a payment to a qualified intermediary that does not assume 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code or primary Form 1099 reporting and backup withholding 
responsibility under chapter 61 and section 3406 of the Internal 
Revenue Code. The payment can be reliably associated with valid 
documentation if, prior to the payment, the withholding agent receives 
a valid qualified intermediary withholding certificate on Form W-8IMY 
and a withholding statement that allocates the payment among 
withholding rate pools, including withholding rate pools for each U.S. 
non-exempt recipient for which the qualified intermediary has provided 
a valid Form W-9 (or other information if a Form W-9 has not been 
provided).
    For a payment made to a qualified intermediary that assumes primary 
withholding responsibility under chapter 3 of the Internal Revenue Code 
with respect to the payment, but does not assume primary Form 1099 
reporting and backup withholding responsibility under chapter 61 and 
section 3406 of the Internal Revenue Code, paragraph (b)(2)(vii)(D) 
provides that a withholding agent can reliably associate the payment 
with valid documentation if, prior to the payment, it receives a valid 
Form W-8IMY and the withholding statement associated with the Form W-
8IMY allocates the payment between a single withholding rate pool for 
which the qualified intermediary assumes primary withholding 
responsibility and separate withholding rate pools for each U.S. non-
exempt recipient.
    Paragraph (b)(2)(vii)(E) provides rules for a withholding agent 
that makes a payment to a qualified intermediary that assumes primary 
Form 1099 reporting and backup withholding responsibility under chapter 
61 and section 3406 of the Internal Revenue Code, but does not assume 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code. The payment can be reliably associated with valid 
documentation if, prior to the payment, the withholding agent can 
associate the payment with a valid Form W-8IMY and the withholding 
statement associated with the Form W-8IMY allocates the payment among 
the withholding rate pool or pools for which withholding responsibility 
is not assumed and the portion of payment for which the qualified 
intermediary assumes Form 1099 reporting and backup withholding 
responsibility.
    Finally, for a payment made to a qualified intermediary that 
assumes both primary withholding responsibility under chapter 3 of the 
Internal Revenue Code and primary Form 1099 reporting and backup 
withholding responsibility under chapter 61 and section 3406 of the 
Internal Revenue Code, paragraph (b)(2)(vii)(F) provides that a 
withholding agent can reliably associate the payment with valid 
documentation if, prior to the payment, it can associate the payment 
with a valid Form W-8IMY. In this case, no withholding rate pool 
allocation information is required. This same rule applies for payments 
made to a withholding foreign partnership.
3. Presumptions of Classification as Individual, Corporation, 
Partnership, etc.
    As initially drafted, Sec. 1.1441-1(b)(3)(ii) provided a 
withholding agent with presumption rules to determine a payee's 
classification (e.g., individual, corporation, partnership) if it could 
not reliably associate a payment with valid documentation. Paragraph 
(b)(3)(ii) did not, however, provide a presumption rule if a 
withholding agent could reliably associate a payment with documentary 
evidence (i.e., documentation other than a withholding certificate) 
from which it could not determine the payee's classification. For 
example, documentary evidence may indicate that a payee (other than an 
entity that is treated as a per se corporation under Sec. 301.7701-
2(b)(8)(i)) is a type of entity that can be organized so that all of 
its members have limited liability, in which case it would be treated 
as an association, or so that one or more of its members have unlimited 
liability, in which case it would be treated as a partnership. The 
determination of classification can be critical because if the entity 
is a flow-through entity, it is not the beneficial owner of the payment 
and its documentary evidence cannot be relied upon to grant a reduced 
rate of withholding.
    Section 1.1441-1(b)(3)(ii)(C) has been added to permit a 
withholding agent to treat an entity that has provided documentary 
evidence as a corporation if the classification of the entity cannot be 
determined from documentary evidence or by reference to the exempt 
recipient rules under Sec. 1.6049-4(c)(1)(ii). This presumption rule 
will reduce burdens on withholding agents that are permitted to use 
documentary evidence, such as foreign intermediaries and flow-through 
entities, which would otherwise have to request from payees additional 
information regarding U.S. tax classification. The presumption rule is 
not, however, intended to allow foreign entities to avoid making the 
correct determination of their classification and to provide the 
correct documentation. Thus, a foreign entity must make a determination 
about its classification and if it determines that it is an 
intermediary, partnership, foreign simple trust, or foreign grantor 
trust under U.S. tax law principles, it must provide an intermediary or 
flow-through withholding certificate on Form W-8IMY together with the 
appropriate information relating to its customers, partners, 
beneficiaries, owners, or other payees. Further, a withholding agent 
cannot treat an entity as a corporation if it knows, or should know, 
that the entity is a flow-through entity or intermediary. For example, 
if a particular type of collective investment vehicle provides 
documentary evidence that does not establish that it is a corporation, 
partnership, or trust, but the withholding agent knows, or has reason 
to know, that the investment vehicle is classified as a partnership for 
U.S. tax purposes, it must request a partnership withholding 
certificate from the entity.
    An entity that is presumed to be a foreign corporation under new 
paragraph (b)(2)(ii)(C) cannot be treated as the beneficial owner 
entitled to a reduced rate of withholding to the extent the documentary 
evidence indicates that it is a bank, broker, custodian, intermediary, 
or other agent unless the entity provides a statement that it is the 
beneficial owner of the income. For example, documentary evidence that 
indicates that the payee is a bank does not permit a withholding agent 
to apply the portfolio interest exception to payments of interest made 
to the bank. In addition, even though a foreign entity is treated as a 
beneficial owner for purposes of the exceptions to withholding under 
the Internal Revenue Code and regulations, it is not necessarily 
entitled to claim treaty benefits. Whether treaty benefits may be 
claimed by an entity depend on whether it meets the requirements under 
the income tax treaty and section 894.

[[Page 32154]]

4. Changes to Presumption Rules
    Several simplifying and clarifying changes have been made to the 
presumption rules in Sec. 1.1441-1(b)(3). First, the presumption rule 
applicable to pensions and annuities contained in Sec. 1.1441-
1(b)(3)(iii)(C) has been expanded to apply to individual retirement 
accounts and individual retirement annuities. Second, Sec. 1.1441-
1(b)(3)(iii)(D), which contains presumption rules applicable to 
offshore accounts, was revised to state the applicable rule more 
clearly. In addition, the restriction on applying the presumption rule 
of paragraph (b)(3)(iii)(D) to amounts that are not subject to 
withholding has been moved from that paragraph to Sec. 1.6049-5(d)(2). 
This change eliminates a conflict with Sec. 1.6049-5(d)(2), as 
previously drafted, which applied the paragraph (b)(3)(iii)(D) rule to 
amounts not subject to withholding.
    Section 1.1441-1(b)(3)(iv) contains a grace period presumption rule 
that permits a withholding agent to treat a payee as a foreign person 
in certain situations where the withholding agent would presume the 
payee to be a U.S. person. Although the grace period rule generally 
does not permit a withholding agent to apply any exceptions to 
withholding, it does permit a withholding agent to apply a reduced rate 
of withholding for 90 days to a payee that provides a withholding 
certificate that would have been valid except that it was transmitted 
by facsimile. One commentator noted that because the facsimile rule 
applied only to payees that a withholding agent could, ``in its 
discretion'' treat as a foreign person, the rule was limited to those 
situations where the presumption rules would have treated the payee as 
a U.S. person and the withholding agent was exercising its discretion 
to treat the payee as foreign. Therefore, the commentator argued, the 
rule arguably could not be applied to payees that were required to be 
treated as foreign persons under the presumption rules, e.g., an exempt 
recipient with indicia of foreign status. The regulation has been 
modified by removing the phrase ``in its discretion'' thereby 
permitting the facsimile rule to apply to payees that are treated as 
foreign payees under the presumption rules.
    Paragraph (b)(3)(v), as promulgated in TD 8734, provided several 
presumption rules that applied if a withholding agent did not receive 
from a nonqualified intermediary the withholding certificates or 
documentary evidence of the persons on whose behalf the nonqualified 
intermediary acted or did not receive information allocating the 
payment to each person. Under paragraph (b)(3)(v)(C), if the 
withholding agent could associate a payment with a group of beneficial 
owners or payees, it could treat the payment as being made in its 
entirety to the person in the group that was subject to the highest 
withholding rate or, if the rates were equal, to the payee in the group 
with the highest U.S. tax liability. If a nonqualified intermediary 
grouped persons subject to similar withholding and tax rates together 
and allocated the payment to the group, the nonqualified intermediary 
could achieve a reduced rate of withholding for its customers without 
reliably associating the payment to each of the customers that would be 
entitled to the payment. Treasury and the IRS stated in Notice 99-8 
that affording a reduced rate of withholding under these circumstances 
was inappropriate. Further, it was inappropriate to report the entire 
payment as if it were made to a single documented payee who was not 
entitled to receive the entire amount of income.
    Paragraph (b)(3)(v) has been revised so that whenever a payment to 
a nonqualified intermediary cannot be reliably associated with valid 
documentation from a specific payee, the payment is treated as made to 
an undocumented foreign payee and is subject to 30 percent withholding. 
Under Sec. 1.1461-1(c), such payments are reported to an unknown owner 
on Form 1042-S. Thus, a payment can no longer be subject to a reduced 
rate of withholding because it can be allocated to a group of 
documented payees all of whom are subject to the same reduced rate of 
withholding. Similar changes have been made to the presumption rules 
that applied to foreign partnerships under former Sec. 1.1441-
5(d)(3)(ii).
    Paragraph (b)(3)(vi), as originally drafted, was in error. It 
stated that the presumption rules that applied to foreign 
intermediaries also applied to U.S. branches of foreign banks and 
insurance companies that assumed withholding responsibility. The rule 
should have provided that the intermediary presumption rules also apply 
to U.S. branches of foreign banks and insurance companies that do not 
agree to be treated as U.S. persons. Those branches are generally 
treated in the same manner as nonqualified intermediaries under chapter 
3 of the Internal Revenue Code. Therefore, paragraph (b)(3)(vi) has 
been revised to apply only to those branches that are not treated as 
U.S. persons. Finally, paragraph (b)(3)(vii), which applies to payments 
to joint payees, has been amended to clarify the treatment of payments 
made to joint accounts.
5. Rules for Withholding and Reporting of Payments by a Foreign 
Intermediary and Certain U.S. Branches
    Section 1.1441-1(b)(6) sets forth the withholding obligations of a 
foreign intermediary and certain U.S. branches. The regulation, as 
originally drafted, stated that a qualified intermediary, a 
nonqualified intermediary, or a U.S. branch of a foreign bank or 
insurance company was deemed to have satisfied any obligation it had to 
withhold and report an amount it paid if it did not know that the 
correct amount had not been withheld. The rule did not, however, 
require a foreign intermediary or U.S. branch to report a payment if it 
knew that the withholding agent from whom it received the payment had 
not reported the payment to the persons on whose behalf the foreign 
intermediary or U.S. branch acted as long as the correct amount was 
withheld. For example, if a U.S. withholding agent withheld 30 percent 
from a payment of an amount subject to withholding made to a 
nonqualified intermediary because the nonqualified intermediary failed 
to provide documentation or allocation information relating to the 
persons for whom it acted, the rule relieved the nonqualified 
intermediary from any obligation to report the payment to those 
persons. Foreign intermediaries and U.S. branches, however, are 
withholding agents under Sec. 1.1441-7(a) and, as stated in Notice 99-
8, it is inappropriate to relieve them of any reporting responsibility 
unless they have provided another withholding agent with all of the 
information that the withholding agent needs to report amounts paid to 
the appropriate recipients of the income. In addition, paragraph (b)(6) 
should not have included qualified intermediaries, because a qualified 
intermediary has reporting responsibilities whether or not another 
withholding agent properly reported the payment made to the qualified 
intermediary.
    The regulation has been revised to provide that a nonqualified 
intermediary or U.S. branch (other than a U.S. branch treated as a U.S. 
person) is not required to withhold and report if the nonqualified 
intermediary or U.S. branch (i) has provided a valid nonqualified 
intermediary or U.S. branch withholding certificate, (ii) has provided 
all of the information required to be included in a withholding 
statement associated with its withholding certificate so that another 
withholding agent can do the required reporting on Form 1042-S or Form

[[Page 32155]]

1099, and (iii) does not know, and has no reason to know, that the 
other withholding agent did not withhold the correct amount or did not 
report the payment correctly. A qualified intermediary's obligations to 
withhold and report are determined in accordance with its qualified 
intermediary agreement.
6. Definitions
    Section 1.1441-1(c) contains the definitions of terms used in the 
regulations under chapter 3 of the Internal Revenue Code. The section 
has been significantly expanded and certain definitions have been 
consolidated in this section. New definitions, or cross-references to 
definitions, have been provided for the terms beneficial owner, payee, 
intermediary, nonqualified intermediary, qualified intermediary, 
withholding certificate, documentary evidence, documentation, payor, 
exempt recipient, non-exempt recipient, reportable amounts, flow-
through entity, foreign simple trust, foreign complex trust, foreign 
grantor trust, partnership, nonwithholding foreign partnership, and 
withholding foreign partnership.
    Paragraph (c)(6)(i) has been changed to state specifically that the 
definition of beneficial owner does not apply in cases where a reduced 
rate of withholding is being claimed under an income tax treaty. This 
change has been made to clarify that a person who is a beneficial owner 
of an item of income for purposes of these regulations would not 
necessarily beneficially own the item of income for purposes of an 
income tax treaty.
    Paragraph (c)(6), as originally drafted, did not include rules to 
determine the beneficial owner of a payment made to a foreign trust or 
estate. In general, the regulations retained the rules for foreign 
trusts and estates that existed prior to the publication of TD 8734. 
The paragraph has been revised to provide specific rules for payments 
to foreign trusts and estates. Generally, the beneficial owners of a 
payment to a foreign simple trust are the beneficiaries of the trust. 
The beneficial owners of a payment made to a foreign grantor trust are 
the owners of the trust. Foreign complex trusts and foreign estates are 
considered to be the beneficial owners of income paid to such entities.
    Paragraph (c)(12) has been added to clarify the term payee. It 
provides cross-references to those sections under which the payee of 
income is determined, and emphasizes that foreign intermediaries and 
flow-through entities are generally not considered the payees of 
income. A qualified intermediary is, however, a payee to the extent it 
assumes primary withholding responsibility with respect to a payment, 
and a flow-through entity is a payee if it is receiving income that is, 
or is treated as, effectively connected with the conduct of a U.S. 
trade or business.
    The definition of a flow-through entity has been moved from 
Sec. 1.1441-1(e)(3)(i) to paragraph (c)(23). The definition has also 
been expanded and clarified. The term flow-through entity refers to any 
entity which has an obligation to transmit documentation to another 
withholding agent. Therefore, an entity may be a flow-through entity 
whether or not the income paid to the entity is includible in the gross 
income of the entity's owners. A flow-through entity includes a 
nonwithholding foreign partnership, a foreign simple trust, a foreign 
grantor trust, or an entity that is fiscally transparent under section 
894 to the extent it provides documentation on behalf of its interest 
holders. A withholding foreign partnership and a withholding foreign 
trust are not flow-through entities. The term flow-through entity has 
replaced the term partnership in numerous places throughout the 
regulation.
7. Withholding Certificates
    a. Forms W-9. Section 1.1441-1(d) contains rules for a payee to 
establish its status as a U.S. payee. Under paragraph (d), a payee that 
provides a Form W-9 may be treated as a U.S. payee that is not subject 
to withholding under section 1441. Commentators have noted that under 
current law, there is no prohibition against a foreign person providing 
a Form W-9 to establish status as an exempt recipient. They therefore 
suggest that the regulations should be clarified to specifically state 
that providing a Form W-9 serves as a representation of U.S. status and 
should only be furnished by a U.S. person. In response to these 
comments, paragraph (d)(2) has been amended to state that furnishing a 
Form W-9 serves as a statement that the person providing the form is a 
U.S. person. Therefore, a foreign person, including a U.S. branch of a 
foreign person, should not provide a Form W-9 to a withholding agent. 
The instructions to Form W-9 will also be modified to make clear that 
providing a Form W-9 is a declaration of U.S. status.
    Paragraph (d)(3) is revised to eliminate the requirement for a 
permanent residence address. Permanent residence address is a term 
defined in Sec. 1.1441-1(e)(2)(ii) and is generally the address of a 
foreign person in the country in which the person is a resident for tax 
purposes. The term is inapplicable, and potentially misleading, as 
applied to the address a U.S. person should provide on Form W-9.
    Paragraph (d)(4), as originally drafted, provided rules to 
determine whether a payment was made to a U.S. beneficial owner. 
Generally, the regulation provided that if a customer of a foreign 
intermediary provided a Form W-9, the withholding agent could treat 
such person as a U.S. beneficial owner. A customer of a foreign 
intermediary could also be treated as a U.S. beneficial owner if it 
provided a U.S. branch withholding certificate that evidenced its 
agreement to be treated as a U.S. person. A Form W-9 and a U.S. branch 
withholding certificate, however, do not establish beneficial 
ownership. Further, it is not necessary under the regulations to 
determine whether a U.S. payee is a beneficial owner because a payment 
to a U.S. payee is not subject to withholding under chapter 3 of the 
Internal Revenue Code whether or not the payee is the beneficial owner 
of the income. Thus, the paragraph has been modified to provide that 
the withholding agent may treat the payee of a payment made to a 
foreign intermediary or a flow-through entity as a U.S. payee if the 
payee provides a Form W-9 or a U.S. branch withholding certificate that 
evidences the branch's agreement to be treated as a U.S. person.
    b. Intermediary and flow-through withholding certificates. Section 
1.1441-1(e)(3)(i) provides definitions for the terms intermediary 
withholding certificate, flow-through withholding certificate, and U.S. 
branch withholding certificate. That section originally defined a flow-
through withholding certificate as a Form W-8 furnished by a 
partnership (other than a withholding foreign partnership) or a trust 
or estate. The paragraph has been revised to conform to the definition 
of flow-through entity contained in Sec. 1.1441-1(c)(23) and the new 
rules contained in Sec. 1.1441-5(e) regarding foreign trusts and 
foreign estates, discussed in section E of this Explanation of 
Provisions. Under paragraph (e)(3)(i), as revised, a flow-through 
withholding certificate is defined as a withholding certificate on Form 
W-8 furnished by a nonwithholding foreign partnership, a foreign simple 
trust, a foreign grantor trust, or a foreign entity presenting claims 
on behalf of its interest holders for a reduced rate of withholding 
under an income tax treaty. Foreign complex trusts and foreign estates 
generally provide beneficial owner withholding certificates.
    Section 1.1441-1(e)(3)(ii) provides the requirements for a valid 
withholding certificate provided by a qualified intermediary. The 
paragraph has been

[[Page 32156]]

modified to reflect the procedures applicable to qualified 
intermediaries as set forth in Rev. Proc. 2000-12 (2004-4 I.R.B. 1).
    Section Sec. 1.1441-1(e)(3)(iii) provides rules relating to a 
nonqualified intermediary withholding certificate. Paragraph 
(e)(3)(iii) generally provided that payee documentation provided with a 
nonqualified intermediary withholding certificate needed to be attached 
to the certificate. Similar requirements existed for flow-through 
withholding certificates and U.S. branch withholding certificates. The 
regulations have been revised to require that payee documentation be 
associated with, rather than attached to, a nonqualified intermediary, 
flow-through, or U.S. branch certificate to obviate the need for a new 
withholding certificate each time payee documentation is provided to a 
withholding agent. The regulations do not set forth specific 
requirements for associating documentation. Any reasonable method may 
be used to associate documentation with its intermediary withholding 
certificate.
    Paragraph (e)(3)(iii), as originally drafted, required a 
certification that the withholding certificates or other appropriate 
documentation attached to a nonqualified intermediary withholding 
certificate represented all of the persons to whom the intermediary 
withholding certificate related or that the amounts of income allocable 
to persons for whom no documentation was provided was separately 
stated. A similar requirement applied to nonwithholding foreign 
partnership withholding certificates in Sec. 1.1441-5(c)(3)(iii)(D). 
The requirement for this certification has been eliminated. The persons 
on whose behalf a nonqualified intermediary acts will frequently change 
as persons open and close accounts with the intermediary. Thus, any 
such certification may be true at the time made, but false at a later 
point, necessitating a new withholding certificate. The elimination of 
the certification is not an elimination, however, of the requirement to 
provide payee withholding certificates to a withholding agent prior to 
a payment. The certification requirement has also been eliminated for 
nonwithholding foreign partnerships.
    Section 1.1441-1(e)(3)(iii) permits a nonqualified intermediary to 
provide payee documentation either in the form of withholding 
certificates or in the form of documentary evidence. The withholding 
agent is required to derive information from the withholding 
certificates or other documentary evidence and report payments to each 
specific payee on whose behalf the nonqualified intermediary acts. 
However, the regulations were silent on how a withholding agent was to 
determine the status (U.S. or foreign) or classification (e.g., 
corporate, partnership, trust, or estate) and other information 
required to report payments on Form 1042-S from documentary evidence, 
particularly when that documentary evidence was in a foreign language. 
Further, although the regulations require a nonqualified intermediary 
to allocate payments to each payee on whose behalf it acts so that a 
withholding agent can report payments to each payee on Form 1042-S or 
Form 1099, the regulations provided no detail on how the allocation 
information was to be provided.
    The regulations have been revised to take these considerations into 
account. Under Sec. 1.1441-1(e)(3)(iv) as revised, a nonqualified 
intermediary must associate with its nonqualified intermediary 
withholding certificate a withholding statement which sets forth the 
information a withholding agent needs to allocate a payment to each 
payee on whose behalf the nonqualified intermediary acts and to report 
the payment. Specifically, the withholding statement must contain for 
each payee the payee's name, address, country of residence, TIN (if 
any), the payee's recipient type for Form 1042-S reporting, the 
applicable rate of withholding, the type of withholding exception 
applied (if any), and the name of any other intermediary or flow-
through entity from whom the payee directly receives the income. 
Additional information is required if a reduced rate of withholding 
under an income tax treaty is claimed. The withholding statement may be 
provided in any manner that the withholding agent and nonqualified 
intermediary agree, including electronically. It must be updated as 
frequently as necessary to remain accurate prior to each payment. The 
regulation does not require a nonqualified intermediary to provide 
information for a payee unless the payee is a U.S. non-exempt 
recipient. Information regarding U.S. non-exempt recipients must be 
provided irrespective of any local laws that prohibit disclosure of an 
account holder or account information. Therefore, a nonqualified 
intermediary should obtain waivers from non-disclosure provisions from 
U.S. non-exempt recipients. To the extent payee information is not 
provided, whether for a U.S. non-exempt recipient or any other payee, 
the regulation has been clarified to state explicitly that a 
withholding agent must withhold under the presumption rules. Further, 
the nonqualified intermediary remains liable for any tax not withheld 
by a withholding agent and, unless the nonqualified intermediary itself 
files information returns, will also be held liable for penalties 
imposed for failure to file information returns under sections 6721 and 
6722.
    Many commentators have argued that it is not practical to provide 
information allocating a payment to each payee prior to each payment 
because the customers of nonqualified intermediaries are constantly 
acquiring and disposing of investments. Several commentators made 
suggestions on how the regulations might ease compliance burdens. One 
commentator suggested that no allocation information should be required 
except in the case of income subject to reduced rates of withholding 
under an income tax treaty and payments made to U.S. non-exempt 
recipients. This suggestion was rejected. The IRS has provided a 
mechanism for aggregate reporting of payments in the model qualified 
intermediary agreement in Rev. Proc. 2000-12. It is inappropriate to 
extend such treatment to nonqualified intermediaries without the 
safeguards contained in a qualified intermediary agreement. Other 
commentators suggested that a withholding agent should withhold the 
difference between 30 percent of a payment and the claimed reduced rate 
of withholding in escrow and release the amounts when allocation 
information is provided. This suggestion was also not accepted. Such a 
system would leave the escrow funds out of the control of both the IRS 
and the beneficial owners of the payments. Further, because the 
nonqualified intermediary would have to provide frequent allocations as 
soon as possible after the time of payment to have the escrow funds 
released, it appeared to provide little relief from the pressures 
inherent in providing allocation information prior to a payment. Other 
commentators argued that a reduced rate of withholding should be 
provided at the time of payment with allocation information to follow 
after the close of the year with various disincentives provided for 
failure to furnish the allocation information. The regulations 
generally adopt this approach.
    Paragraph (e)(3)(iv)(D) provides alternative procedures that permit 
a nonqualified intermediary to provide information allocating 
reportable amounts to payees (including U.S. exempt recipients) by 
January 31 of the year following the calendar year of payment. The 
alternative procedures do

[[Page 32157]]

not apply to payments made to U.S. non-exempt recipients. Therefore, 
allocation information for those persons must be provided prior to a 
payment. Under the alternative procedures, only allocation information 
may be provided after a payment is made: all other information that is 
required to be included in a withholding statement and appropriate 
payee documentation must be provided prior to a payment. The 
nonqualified intermediary may have reduced rates of withholding apply 
by identifying pools of income subject to a particular withholding rate 
(withholding rate pools) and identifying the payees with the 
appropriate withholding rate pools.
    Various penalties apply if a nonqualified intermediary fails to 
provide information to allocate payments in a withholding rate pool to 
a withholding agent by January 31. First, the withholding agent must 
commence withholding on all payments in accordance with the presumption 
rules. Therefore, 30 percent withholding applies to amounts subject to 
withholding and 31 percent backup withholding applies to payments of 
deposit interest and original issue discount on original issue discount 
obligations of 183 days or less. Under a cure provision, the withheld 
amounts may be returned, and the alternative procedures may continue to 
be used, if the nonqualified intermediary provides allocation 
information by February 14. If the nonqualified intermediary fails to 
provide allocation information by that date, withholding continues for 
the taxable year, and all subsequent taxable years, unless the 
withholding agent provides allocation information prior to a payment. 
Further, because no allocation information has been provided, the 
payments are considered never to have been reliably associated with 
valid documentation and the foreign beneficial owners and other payees 
on whose behalf the nonqualified intermediary is acting are not 
entitled to a reduced rate of withholding. Therefore, the nonqualified 
intermediary shall remain liable under section 1461 for the difference 
between the amount, if any, withheld by the withholding agent and the 
amount that should have been withheld under the presumption rules. Any 
tax due because of an allocation failure will be assessed against the 
nonqualified intermediary and, if necessary, collected from the assets 
that the nonqualified intermediary has with the withholding agent. 
Interest and penalties may also be assessed against the nonqualified 
intermediary. In particular, paragraph (e)(3)(iv)(7) states that a 
failure to provide allocation information will be presumed to be an 
intentional failure to file information returns and payee statements 
under sections 6721 and 6722. The IRS will not, however, hold the 
withholding agent liable for any tax, interest, or penalties, that are 
due solely to the failure of the nonqualified intermediary to provide 
allocation information.
    The withholding statement rules and alternative allocation 
procedures have also been made applicable to U.S. branches of certain 
foreign banks and insurance companies and flow-through entities. This 
change, together with certain other changes discussed in this 
Explanation of Provisions, generally results in nonqualified 
intermediaries, U.S. branches, and flow-through entities being treated 
similarly.
    Paragraph (e)(3)(iv)(E) has been added to permit the IRS to provide 
a withholding agent with a notice prohibiting the withholding agent 
from applying the alternative procedures of paragraph (e)(3)(iv)(D) to 
an identified nonqualified intermediary (or to a flow-through entity or 
a U.S. branch of a foreign bank or foreign insurance company) thereby 
requiring allocation information prior to a payment to have a reduced 
rate of withholding apply. In addition, the IRS may, in appropriate 
circumstances issue a notice to a withholding agent prohibiting the 
withholding agent from applying a reduced rate of withholding under any 
circumstances, even if allocation information is provided prior to a 
payment. The IRS contemplates issuing these notices in situations where 
a nonqualified intermediary, flow-through entity, or U.S. branch fails 
to pay a tax due or is not applying the rules of the regulations in 
good faith.
    c. Reportable amounts. Foreign intermediaries, flow-through 
entities, and U.S. branches of foreign banks and insurance companies 
(other than U.S. branches treated as U.S. persons) are required to 
provide information with respect to reportable amounts, as defined in 
Sec. 1.1441-1(e)(3)(vi). Prior to its revision, paragraph (e)(3)(vi) 
included in the definition of reportable amounts original issue 
discount or interest (OID) paid on short-term instruments. This 
definition appeared to include interest and OID regardless of whether 
those amounts were paid on the redemption of an obligation or from the 
sale or exchange of an obligation in a transaction other than a 
redemption. Under the presumption rules, if a withholding agent makes a 
payment to a foreign intermediary of interest and OID on a short-term 
obligation and it lacks documentation for such amounts, it must presume 
that the payee is a U.S. non-exempt recipient and report the income on 
Form 1099 and backup withhold on the payment. See Sec. 1.6049-
5(d)(3)(iii). These rules proved to be impractical for sales of short-
term obligations outside the United States. Foreign intermediaries have 
contended that they do not have the appropriate systems to report gains 
from sales transactions on Forms 1099 or to provide the proper 
allocation information to U.S. payors. Moreover, treating the sale or 
exchange of short-term OID instruments as reportable interest on Form 
1099 was inconsistent with rules that treat amounts paid on the sale or 
exchange, other than redemptions, of such obligations as gross 
proceeds. See Secs. 1.6045-1(d)(3) and 31.3406(b)(2)-2. Because it is 
more appropriate to treat sales, other than redemptions, of short-term 
OID instruments as gross proceeds rather than payments of interest or 
original issue discount, the regulation has been amended to provide 
that reportable amounts do not include amounts representing interest or 
OID on the sale or exchange, other than a redemption, of a short-term 
OID instrument. Therefore, a foreign intermediary, flow-through entity, 
or U.S. branch is not required to provide information regarding these 
transactions to a withholding agent as part of its withholding 
statement.
    d. Period of validity. Section 1.1441-1(e)(4)(ii)(A) states that 
documentary evidence (i.e., documentation other than a withholding 
certificate) remains valid until ``the earlier of the last day of the 
third calendar year following the year in which the documentary 
evidence is created * * * .'' Commentators have stated that it is not 
clear if a document is ``created'' when it comes into being or when it 
is provided to a withholding agent. They also stated that basing the 
validity period on the date a document came into being would be more 
difficult to administer because they would have to calculate the 
expiration date in every case rather than assuming that it was valid 
for three years after it had been received by the withholding agent. In 
response to these comments, the rule has been amended to permit the 
validity period to be measured from the date documentation is provided 
to the withholding agent.
    Section 1.1441-1(e)(4)(ii)(B) sets forth the circumstances in which 
a Form W-8 has an indefinite validity period. Paragraph 
(e)(4)(ii)(B)(1), as originally drafted, provided that a Form W-8 that 
contained a TIN was valid indefinitely ``if the income for which such 
certificate is furnished is required to be reported''

[[Page 32158]]

on Form 1042-S. Commentators noted that a strict reading of this 
language could preclude the indefinite validity of a Form W-8 with 
respect to income that was not subject to reporting, even though other 
income paid to the same beneficial owner by the withholding agent was 
subject to reporting. The regulation has been amended to provide that 
if there is annual reporting of at least one item of income paid by a 
withholding agent to a beneficial owner, the Form W-8 remains valid 
even for payments that are not subject to reporting. However, if a 
withholding agent has a Form W-8 with a TIN but does not make any 
payments of an amount subject to withholding, for example the 
withholding agent pays only deposit interest, the form remains valid 
only for 3 calendar years after the year of receipt. In addition, 
paragraph (e)(4)(ii)(B)(8) has been added to provide an indefinite 
validity period for a withholding certificate provided by a foreign 
simple trust or foreign grantor trust for the purposes of transmitting 
withholding certificates or documentary evidence.
    e. Electronic transmission of information. These regulations 
finalize the regulations proposed in REG-107872-97 (62 FR 53504) 
relating to the electronic submission of Forms W-8 and make them 
applicable beginning January 1, 2000. Like the proposed regulations, 
the final regulations apply only to situations where there is a direct 
relationship between the withholding agent or payor and the beneficial 
owner or payee. The final regulations reserve an applicable standard 
for transmitting forms through tiers of intermediaries. Comments were 
solicited on this matter in the preamble to the proposed regulations 
but none were received. The IRS and Treasury recognize the benefits of 
allowing the electronic transmission of Forms W-8 through one or more 
intermediaries and continue to solicit comments regarding requirements 
to ensure the integrity, accuracy, and reliability of electronically 
transmitted forms through tiers of intermediaries.
    f. Requirement of taxpayer identifying number. Section 1.1441-
1(e)(4)(vii) provides guidance for when a TIN is required on a Form W-
8. Paragraph (e)(4)(vii), as originally drafted, required TINs on 
withholding certificates from all trusts or estates or the fiduciaries 
thereof. A number of commentators stated that the TIN requirement was 
burdensome and unreasonable when applied to pension trusts and large 
investment trusts. In addition, commentators noted that nonwithholding 
foreign partnerships, which are treated similarly to foreign simple 
trusts and foreign grantor trusts, are not required to have a TIN. In 
response to these comments, the regulations have been amended by 
eliminating the TIN requirement for foreign trusts other than foreign 
grantor trusts with 5 or fewer owners.
    Paragraph (e)(4)(vii) has also been modified to state that a TIN is 
required on a withholding certificate from a beneficial owner that is 
claiming an exemption based on its claim of tax exempt status under 
section 501(c) or private foundation status. This does not represent a 
change in the requirements for a withholding certificate from such a 
beneficial owner. The regulation, as originally drafted, however, 
contained the requirement only in Sec. 1.1441-9. The requirement of a 
TIN has been repeated in this paragraph for convenience. Finally, 
commentators noted that there was a conflict between paragraph 
(e)(4)(vii), which did not require a TIN on a withholding certificate 
from a nonwithholding foreign partnership, and Sec. 1.1441-
5(c)(3)(iii)(A), which stated that a TIN was required. It was never 
intended that a nonwithholding foreign partnership withholding 
certificate used to transmit documentation and information relating to 
its partners have a TIN. Section 1.1441-5(c)(3)(iii)(A) has been 
modified accordingly. TINs are required, however, if the withholding 
foreign partnership is providing a withholding certificate on which it 
claims an exemption from withholding because the income is effectively 
connected with the conduct of a trade or business or when it is 
entitled to claim treaty benefits under section 894 on income for which 
a TIN is required under Sec. 1.1441-6(b)(1).
    g. Requirement to furnish certificates for each account. Generally, 
each withholding agent that makes a payment to a beneficial owner must 
obtain a separate withholding certificate. In addition, a withholding 
agent that is a financial institution must obtain withholding 
certificates or other appropriate documentation on an account-by-
account basis from its customers. Under paragraph (e)(4)(ix)(A)(3) of 
the regulations, a withholding agent may rely on a withholding 
certificate held at another branch of the same withholding agent or of 
a person related to the withholding agent if there is a system in place 
that permits a withholding agent to access data regarding the 
withholding certificate and to transmit data that affects the validity 
of the documentation into the system. A commentator noted that the 
regulations do not contain provisions, however, to let unrelated 
withholding agents utilize such a system that they maintain in common 
or that is maintained by another person. New paragraph (e)(4)(ix)(A)(4) 
has been added to permit unrelated withholding agents to rely on such a 
system.
    h. Special rules for brokers. Section 1.1441-1(e)(4)(ix)(C) 
provided that a withholding agent may rely on the certification of a 
broker acting as the agent of a beneficial owner if the broker held a 
valid beneficial owner withholding certificate or other documentation 
for that beneficial owner. As originally drafted, the intention of this 
provision was unclear. It also appeared to be overly broad because it 
would have permitted a foreign broker to retain beneficial owner 
documentation and not transmit the documentation to a U.S. withholding 
agent.
    Paragraph (e)(4)(ix)(C) has been redrafted to clarify, and 
appropriately limit, its application. As redrafted, it applies only to 
a U.S. broker. It permits such a broker that is acting as an 
introducing or corresponding broker to provide a clearing broker with a 
certification that it holds a valid withholding certificate or other 
appropriate documentation. Without this rule, an introducing or 
corresponding broker would have to obtain multiple Forms W-8 and 
provide them to each clearing broker with whom the introducing or 
corresponding broker executes transactions. In addition, paragraph 
(e)(4)(ix)(C) has been amended to apply only to readily tradeable 
instruments, as provided in Sec. 31.3406(h)-3(d), on which it is 
modeled. An example has been added to illustrate the paragraph.
8. Qualified Intermediary Withholding Certificates
    Section 1.1441-1(e)(5) provides rules regarding qualified 
intermediaries. The rules have been redrafted to more closely conform 
with the model qualified intermediary agreement published as part of 
Rev. Proc. 2000-12. The regulation, as originally drafted, contained a 
requirement that a qualified intermediary disclose U.S. non-exempt 
recipients ``irrespective of local secrecy laws.'' The model qualified 
intermediary agreement has specific provisions contained in section 
6.04 of the agreement, as well as other sections, that govern the 
treatment of U.S. persons whenever foreign law, whether or not a 
``secrecy'' provision, may preclude disclosure of a U.S. non-exempt 
recipient. Very generally, those provisions require a qualified 
intermediary to disinvest a U.S. non-exempt recipient who does not 
waive its

[[Page 32159]]

local law non-disclosure privileges and to collect backup withholding 
on income and sales proceeds paid to such person. Therefore, the 
language stating that disclosure is required ``irrespective of local 
secrecy laws'' has been deleted to avoid creating an inconsistency 
between the model qualified intermediary agreement and the regulation.
    The provisions in paragraph (e)(5) regarding the terms of the 
withholding agreement a qualified intermediary must enter with the IRS 
have also been changed to more generally conform with the qualified 
intermediary agreement as set forth in Rev. Proc. 2000-12. The 
regulation clarifies the consequences of a qualified intermediary's 
assumption of primary withholding responsibility. Section 1.1441-
1(e)(5)(iv), as originally drafted, stated that a withholding agent 
making a payment to a qualified intermediary was required to presume 
full withholding responsibility for that payment unless the qualified 
intermediary assumed primary withholding responsibility. The regulation 
was potentially misleading because it could have been interpreted to 
mean that if a qualified intermediary did not assume primary 
withholding responsibility, only the U.S. withholding agent was 
responsible for withholding. Rev. Proc. 2000-12 makes clear, however, 
that qualified intermediaries are required to withhold in certain 
circumstances even though they have not assumed primary withholding 
responsibility. The rule that was initially in paragraph (e)(5)(iv) was 
intended to relieve a withholding agent making a payment to a qualified 
intermediary that assumed primary withholding responsibility from the 
obligation to withhold, not to relieve the qualified intermediary of 
any withholding requirement. The paragraph has been amended to reflect 
this intent.
    Paragraph (e)(5)(iv) also stated that a qualified intermediary 
generally would not be permitted to assume withholding and reporting 
responsibility under section 3406 and chapter 61 of the Internal 
Revenue Code on a payment made to a U.S. person unless the qualified 
intermediary was a foreign branch of a U.S. person or a foreign person 
that had a branch in the United States capable of performing such 
reporting and withholding. In developing the model qualified 
intermediary agreement, it became apparent that it was desirable to 
permit certain qualified intermediaries that did not meet those 
criteria to assume reporting and withholding responsibility under 
chapter 61 of the Internal Revenue Code and section 3406. For example, 
where payments are made through clearing organizations, it may be 
impractical to require a qualified intermediary to provide information 
regarding U.S. non-exempt recipients to a U.S. withholding agent. The 
language that generally limited the ability to assume reporting and 
withholding responsibility under chapter 61 of the Internal Revenue 
Code and section 3406 has been eliminated. Whether a qualified 
intermediary may assume such responsibility is left to the terms of the 
qualified intermediary agreement. See section 3 of the model qualified 
intermediary agreement in Rev. Proc. 2000-12.
    Section 1.1441-1(e)(5)(v), as originally drafted, required a 
qualified intermediary to associate a payment with one of three 
categories of assets: (i) Assets associated with documented foreign 
persons, (ii) assets associated with documented U.S. payees, and (iii) 
assets associated with undocumented payees. These three asset 
categories were subdivided into classes of assets based on withholding 
rates and reporting requirements. The asset categories did not provide 
the needed flexibility sought by qualified intermediaries. For example, 
information regarding U.S. exempt recipient payees, who are not subject 
to withholding under section 1441, could not be combined with 
information regarding foreign beneficial owner payees subject to a zero 
rate of withholding. The model qualified intermediary agreement, as 
published in Rev. Proc. 2000-12, substituted the withholding rate pool 
concept for asset classes and this concept has been reflected in the 
revised regulation. A withholding rate pool is a payment of a single 
type of income, determined in accordance with the categories of income 
reported on Form 1042-S or Form 1099, as applicable, that is subject to 
a single rate of withholding.
    Finally, the regulations permit, in accordance with Rev. Proc. 
2000-12, a qualified intermediary and a U.S. withholding agent to use a 
single withholding rate pool for U.S. non-exempt recipients for whom no 
backup withholding is required and a single withholding rate pool for 
U.S. non-exempt recipients that are subject to backup withholding 
provided that the qualified intermediary agreement permits such an 
arrangement and sufficient information is provided to the withholding 
agent no later than January 15 following the year of payment that 
allocates the reportable payments to each U.S. non-exempt recipient 
account holder. Failure to provide the allocation information timely 
may result in penalties imposed on the qualified intermediary and the 
termination of its qualified intermediary agreement. Unlike qualified 
intermediaries, nonqualified intermediaries and flow-through entities 
are not permitted to pool payments to U.S. non-exempt recipients. 
Therefore, information sufficient to allocate the payment to each U.S. 
non-exempt recipient must be provided before a payment is made or the 
withholding agent must treat the payment as made to a U.S. payee that 
has failed to provide a TIN and impose backup withholding.

B. Changes to Sec. 1.1441-2

1. Amounts Subject to Withholding
    Section 1.1441-2(a) has been amended to exclude from the definition 
of amount subject to withholding interest paid as part of the purchase 
price of an obligation sold between interest payment dates (accrued 
interest) and an amount representing original issue discount (OID) paid 
as part of the purchase price of an obligation sold in a transaction 
other than the redemption of such obligation. The exclusions do not 
apply, however, if the sale of an obligation is part of a plan the 
principal purpose of which is to avoid tax and the withholding agent 
has actual knowledge or reason to know of such plan.
    The exclusion of accrued interest and amounts representing OID paid 
as part of the purchase price of an obligation sold in a transaction 
other than a redemption were made in response to comments received on 
Sec. 1.1441-2(b)(3) of the final regulations and proposed regulation 
Sec. 1.1441-3(b) (REG-114000, 62 FR 53503). Section 1.1441-2(b)(3), as 
originally drafted, required withholding on OID to the extent the 
withholding agent had actual knowledge of the amount of the payment 
that was taxable to the beneficial owner. A withholding agent was 
treated as having actual knowledge if it had a direct account 
relationship with the holder of the obligation. Proposed regulation 
Sec. 1.1441-3(b) would have eliminated the rule that no withholding was 
required on accrued interest and replaced it with a rule that conformed 
with the rule applicable to OID on the theory that, from a withholding 
perspective, the two payments were equivalent. The withholding rules 
applicable to OID and accrued interest would have required withholding 
whenever a payment of interest or OID was not subject to an exception, 
such as the portfolio interest exception, or a payment of OID or 
accrued interest was presumed made to a foreign person and

[[Page 32160]]

the withholding agent could not reliably associate the payment with 
beneficial owner documentation. Such payments were subject to reporting 
on Form 1042-S whether or not withholding was imposed.
    In Notice 99-8, Treasury and the IRS announced that they would make 
modifications to the OID and accrued interest rules. The modifications 
were intended to address criticisms by commentators that the OID and 
accrued interest rules were unworkable. Commentators argued that debt 
obligations are often sold in delivery-versus-payment transactions 
which settle quickly and often involve multiple intermediaries. The 
requirement to withhold in absence of a beneficial owner withholding 
certificate would necessarily inhibit the speed with which sales 
transactions are normally conducted. In addition, they argued that a 
withholding agent does not necessarily know the amount of OID or 
accrued interest merely because it has a direct account relationship 
with the account holder. In addition, custodians stated that sales were 
often accounted for in systems different from those used to report 
interest and OID and therefore the reporting requirement of the 
regulations would require significant systems modifications. They 
argued that these modifications were not justified because nearly all 
accrued interest and OID would be from instruments that could qualify 
for the portfolio interest exception.
    Notice 99-8 proposed rules that were intended to require only the 
withholding agent that had a direct account relationship with a 
beneficial owner to obtain a Form W-8. Thus, the notice proposed a rule 
that would require a withholding agent to obtain a withholding 
certificate only if it received the proceeds from a sale against 
delivery of the debt obligation or, in the case of a retirement, the 
withholding agent was the person responsible for paying the owner or 
crediting its account. The notice would have prevented intermediaries 
other than the intermediary with the direct account relationship with 
the beneficial owner from having to obtain a Form W-8 by stating that 
any withholding agent that effected a transaction for a broker was 
generally not required to obtain a Form W-8. A broker was defined by 
reference to Sec. 1.6045-1(a) and generally included a person that 
makes sales of securities for customers in the ordinary course of that 
person's trade or business. In addition, the notice proposed to 
eliminate the rule that presumed knowledge of the amount of OID or 
interest accrued between interest payment dates merely because there 
was a direct account relationship with the beneficial owner of an 
obligation.
    Commentators criticized the Notice 99-8 proposal. They argued that 
the multiple broker exception did not always accomplish its intended 
purpose because certain participants in a transaction for whom a Form 
W-8 should not be required could not meet the definition of a broker, 
particularly since that definition does not include non-U.S. payors 
that effect sales of obligations at an office outside the United States 
and certain other persons, such as investment advisors, who might 
participate in the transaction but did not stand ready to effect sales 
of securities for others. In addition, the Notice did not solve the 
problem faced by custodians.
    In light of these criticisms, Treasury and the IRS have decided to 
eliminate the requirement for withholding, and reporting, on accrued 
interest and an amount representing OID paid on the sale of an OID 
obligation, other than in a redemption. This change has been effected 
by eliminating those items from the definition of amounts subject to 
withholding. Withholding is required, however, if the withholding agent 
knows or has reason to know that a sale is part of a plan to avoid tax. 
For example, if a holder of a debt obligation that pays interest that 
does not qualify for the portfolio interest exception sells the 
instrument immediately prior to an interest payment date and reacquires 
the same type of security after the interest payment date and the 
withholding agent knows, or has reason to know, of this pattern of 
sales, withholding and reporting of accrued interest is required.
    Paragraph (a) has also been amended to state that insurance 
premiums paid on a contract subject to the section 4371 excise tax are 
not amounts subject to withholding. As previously drafted, these 
amounts were excluded from the definition of fixed or determinable 
annual or periodical (FDAP) income under Sec. 1.1441-1(b)(2)(ii) and 
therefore were not included in amounts subject to withholding. 
Excluding insurance premiums from FDAP is inappropriate, however. 
Insurance premiums fall within the definition of FDAP provided in 
paragraph (b)(1). Therefore, the better means for exempting premiums 
subject to the section 4371 excise tax from withholding is to exclude 
them from the definition of amounts subject to withholding.
2. Fixed or Determinable Annual or Periodical Income
    Section 1.1441-2(b)(1)(i) provides the definition of fixed or 
determinable annual or periodical (FDAP) income. Such income, if from 
sources within the United States, is generally an amount subject to 
withholding and therefore also subject to reporting on Form 1042-S if 
paid to a foreign payee. Paragraph (b)(1)(i) states that amounts that 
are excluded from gross income under any provision of law ``without 
regard to the identity of the holder'' are not FDAP income. This 
provision was, in part, intended to exclude from FDAP qualified 
scholarship income under section 117. The language, however, failed to 
accomplish its intended purpose because the section 117 exclusion is 
dependent on the identity of the person receiving the income--the 
recipient must be a candidate for a degree at a certain type of 
educational organization. The paragraph has been revised to state that 
amounts that are excluded from gross income without regard to the U.S. 
or foreign status of the owner of the income is not FDAP. In addition, 
the paragraph has been changed to clarify that amounts excluded from 
gross income under sections 892 (income of foreign governments) and 115 
(income of a U.S. possession) are not excluded from the definition of 
FDAP since the foreign status of the owner of the income is 
determinative of whether the exclusions provided by those sections 
apply. Amounts subject to the section 892 and section 115 exclusions 
are, therefore, included in the scope of amounts subject to withholding 
and therefore are reportable on Form 1042-S under section 1461 even 
though not taxable under section 871 or 881.
3. Original Issue Discount
    Section 1.1441-2(b)(3) provides rules governing the treatment of 
original issue discount. Paragraph (b)(3)(i) describes the amount of 
OID subject to taxation in the hands of the owner of an OID obligation. 
Minor changes have been made to this paragraph to clarify the amount of 
OID that is taxable to the beneficial owner of the obligation.
    Paragraph (b)(3)(ii) describes the amount of OID subject to 
withholding. To conform paragraph (b)(3)(ii) to the changes discussed 
in section B.1 of this Explanation of Provisions, the paragraph has 
been revised to require a withholding agent to withhold on OID only 
upon the redemption of the original issue discount obligation or in any 
case where the withholding agent knows that a sale, other than a 
redemption, is being made with the principal purpose of avoiding tax on 
the obligation. A withholding agent is required to withhold on the 
actual amount of OID includible in the gross

[[Page 32161]]

income of the owner of an obligation if it has actual knowledge of such 
amount, or, if actual knowledge is lacking, on the entire amount of OID 
determined under Publication 1212, ``List of Original Issue Discount 
Instruments'' as if the obligation had been held since issuance.
    Paragraph (b)(3)(iii) contained a rule that required a withholding 
agent to withhold on interest and OID paid on an OID obligation even 
though it did not know the amount of OID subject to taxation if the 
withholding agent could not reliably associate the payment with valid 
documentation. The rule was designed to eliminate an exception to 
withholding that applied if a withholding agent did not have actual 
knowledge of the amount of OID that accrued to the holder of the 
obligation up to the date of sale. If the exception were not 
eliminated, it was feared that the documentation requirement for 
portfolio interest could be avoided by selling OID obligations through 
intermediaries that had no knowledge of the accrued amount of OID. The 
rule is no longer necessary. Under new Sec. 1.1441-2(a)(6), withholding 
is required if a withholding agent knows, or has reason to know, that 
an OID obligation is sold with the principal purpose of avoiding tax. 
Therefore, the rule as originally contained in paragraph (b)(3)(iii) 
has been removed. New paragraph (b)(3)(iii) contains the transition 
rule formerly found in paragraph (b)(3)(iv). The rule has been 
modified, however. As previously drafted, the rule appeared to 
eliminate any withholding responsibility by the issuer of an OID 
obligation or its agent, as formerly contained in Rev. Rul. 68-333 
(1968-1 CB 390). As revised, issuers and their agents are subject to 
any applicable withholding requirements on obligations issued before or 
after December 31, 2000. The rule now states, however, that withholding 
on OID obligations is only required by persons other than issuers or 
their agents with respect to obligations issued after December 31, 
2000.

C. Changes to Sec. 1.1441-3

1. Accrued Interest
    Section 1.1441-3 provides rules to determine the amount subject to 
withholding. In accordance with the change made in Sec. 1.1441-2(a)(5), 
which eliminates interest accrued between sales dates from amounts 
subject to withholding, Sec. 1.1441-3(b)(2) has been modified to 
eliminate the requirement that a withholding agent that pays accrued 
interest must report that interest on Form 1042-S.
32. Coordination With REIT Withholding
    As originally drafted, Sec. 1.1441-3(c)(4)(i)(C) required 
withholding under section 1441 on the portion of a Real Estate 
Investment Trust (REIT) distribution that is not designated as a 
capital gain dividend or return of basis. Therefore, Sec. 1.1441-
3(c)(4)(i)(C) inadvertently required withholding under section 1441 on 
a distribution in excess of basis, which under section 301(c)(3) is 
capital gain from the sale or exchange of stock and, therefore, not 
subject to withholding under section 1441. To correct this error, 
paragraph (c)(4)(i)(C) has been amended to provide that withholding 
under section 1441 is not required on a distribution in excess of 
basis. A distribution in excess of basis is, however, subject to 
withholding under section 1445 unless the interest in the REIT is not a 
U.S. real property interest (e.g., an interest in a domestically 
controlled REIT under section 897(h)(2)).

D. Changes to Sec. 1441-4

1. Notional Principal Contracts
    Section 1.1441-4(a)(3)(i) treats a payment of income on a notional 
principal contract made to a foreign person as income effectively 
connected with a trade or business within the United States unless the 
withholding agent can reliably associate a payment with a withholding 
certificate that certifies that the payment is not effectively 
connected. This rule is overly broad because it presumes that any 
notional principal contract payment made to a foreign person is 
effectively connected even if the foreign person has no nexus to the 
United States. As a result, Sec. 1.1441-4(a)(3)(i) has been amended to 
limit the presumption that notional principal contract income is 
effectively connected to a U.S. trade or business to those situations 
in which the income is either paid to a U.S. qualified business unit of 
a foreign person or the withholding agent otherwise knows, or has 
reason to know, that the income is effectively connected with the 
conduct of a U.S. trade or business. It is not expected that a 
withholding agent would be considered to have reason to know that a 
notional principal contract payment is effectively connected with the 
conduct of a trade or business within the United States solely because 
the foreign person receiving the payment has a qualified business unit 
in the United States to which a portion of the payment may be allocated 
pursuant to proposed regulation Sec. 1.863-3(h) (the global dealing 
regulations).
    Section 1.1441-4(a)(3)(ii), as originally drafted, stated that a 
payment to a financial institution was not treated as effectively 
connected with the conduct of a trade or business within the United 
States if the financial institution provided a representation in a 
master agreement that governs transactions in notional principal 
contracts between the parties (for example, an International Swaps and 
Derivatives Association (ISDA) Agreement) or in the confirmation on the 
particular notional principal contract transaction that the counter 
party was a U.S. person or a non-U.S. branch of a foreign person.
    Commentators requested that the master agreement and confirmation 
exceptions be expanded to apply to persons other than financial 
institutions. Section 1.1441-4(a)(3)(ii) has been amended (in the table 
or corrections at the end of the regulation) to allow any payee, not 
just a financial institution, to provide in a master agreement or 
confirmation statement a representation that the payee is a U.S. person 
or a non-U.S. branch of a foreign person.
2. Withholding on Payments From Individual Retirement Accounts
    Section 1.1441-4(b)(1)(ii), as originally drafted, provided that 
section 1441 applied to distributions from any trust described in 
section 401(a) made to a nonresident alien individual and to certain 
other retirement distributions. The result of this rule is that section 
1441, rather than section 3405, applies to retirement distributions. 
This rule considerably eases the burdens that would otherwise apply to 
retirement distributions.
    Commentators noted that the regulations did not provide the same 
rule for distributions from individual retirement accounts and 
annuities described in section 408. The regulation has been amended so 
that those distributions will be subject to section 1441 as well.

E. Changes to Sec. 1441-5

    Section 1.1441-5 of the regulations concerns payments made to 
partnerships, trusts, and estates. As originally drafted, the 
regulations contained extensive rules for payments made to U.S. and 
foreign partnerships, but applied the rules of the regulations prior to 
the publication of TD 8734 to trusts and estates. The trust and estate 
rules, however, were inconsistent with the rules contained in TD 8734 
and were also incomplete. For example, Sec. 1.1441-1(c)(6)(ii)(B) 
required a withholding agent to determine the

[[Page 32162]]

beneficial owner of income paid to a trust or estate under Sec. 1.1441-
3(f) and (g) of the regulations in effect prior to January 1, 2001. 
That section, however, did not determine the beneficial owner of income 
paid to a trust. In addition, Sec. 1.1441-1(e)(3)(i) stated that a 
trust or estate was to use a flow-through withholding certificate 
furnished under Sec. 1.1441-5(e), but that section was reserved in the 
regulation. The regulation has been revised to provide complete trust 
and estate rules. Except as noted below, the partnership rules remain 
generally unchanged; however, several changes were made to clarify 
those rules.
1. Rules Applicable to U.S. Partnerships, Trusts, and Estates
    Section 1.1441-5(b), as originally drafted, provided rules 
regarding payments to U.S. partnerships. The rules of paragraph (b) 
have been expanded to cover payments to U.S. trusts and U.S. estates as 
well. Under revised paragraph (b)(1), a payment to a U.S. partnership, 
U.S. trust, or U.S. estate is treated as a payment to a U.S. person 
and, therefore, not subject to withholding under chapter 3 of the 
Internal Revenue Code. United States partnerships, U.S. trusts, and 
U.S. estates are required, however, to withhold on payments they make 
to foreign partners, foreign beneficiaries, or, in the case of grantor 
trusts, foreign owners. Fiduciaries of U.S. trusts and U.S. estates 
should take particular note that it is the trust or the estate that is 
the withholding agent, and Forms 1042 and Forms 1042-S must be filed 
using the name and TIN of the U.S. trust or U.S. estate, not the name 
and TIN of the fiduciary.
    Under paragraph (b)(2), a U.S. partnership is a withholding agent 
for a foreign partner's distributable share of partnership income that 
consists of amounts subject to withholding. A U.S. simple trust is a 
withholding agent for the distributable net income (DNI) includible in 
the gross income of a foreign beneficiary to the extent the DNI 
consists of an amount subject to withholding. Similarly, a U.S. complex 
trust is a withholding agent on DNI includible in the gross income of a 
foreign beneficiary to the extent the DNI consists of an amount subject 
to withholding that is, or is required to be, distributed currently. 
U.S. simple trusts and complex trusts are permitted to make reasonable 
estimates of the portion of a distribution that constitute DNI 
consisting of amounts subject to withholding. A U.S. grantor trust must 
withhold on any income includible in the taxable income of a foreign 
person that is treated as an owner to the extent the amount includible 
consists of an amount subject to withholding.
    In the case of a partnership, if amounts subject to withholding are 
not actually distributed, the U.S. partnership must withhold at the 
earlier of the time the statement required under section 6031(b) (Form 
K-1) is mailed or otherwise provided to the partner or the due date for 
furnishing the statement. In addition, if an amount of income is 
required to be, but is not actually distributed to the foreign 
beneficiary of a U.S. simple or complex trust, the U.S. trust must 
withhold at the time the income is required to be reported on Form 
1042-S. A U.S. grantor trust is required to withhold at the time the 
trust receives the payment or the payment is credited to the trust's 
account.
2. Payments Made to Foreign Partnerships
    Section 1.1441-5(c) provides rules for payments made to foreign 
partnerships. Generally, the payees of a payment made to a 
nonwithholding foreign partnership are the partners of the partnership. 
Paragraph (c)(1)(ii), however, contains rules on when the partnership 
itself will be regarded as the payee of a payment. That paragraph, as 
originally drafted, permitted a partnership to be treated as the payee 
of income if the partnership provided a withholding certificate stating 
that the payment was effectively connected with the conduct of the 
partnership's U.S. trade or business. A commentator noted that the 
paragraph did not treat the partnership as the payee, however, to the 
extent the income was treated as being effectively connected under the 
presumption rules in the absence of a withholding certificate.
    The paragraph has been revised to treat the partnership as the 
payee if the income is presumed to be effectively connected in the 
absence of documentation. For example, if a nonwithholding foreign 
partnership is receiving income on a notional principal contract and 
the income is treated as effectively connected income under the 
presumption rule of Sec. 1.1441-4(b)(3)(i), the nonwithholding foreign 
partnership, and not the partners, is treated as the payee. In 
addition, the example in paragraph (c)(1)(iv) has been replaced with 
several less complex examples that better illustrate the operation of 
the rules of paragraph (c)(1).
    Section 1.1441-5(c)(2) contains rules relating to withholding 
foreign partnerships. Section 1.1441-5(c)(2)(ii)(A), together with 
Sec. 1.1461-1(c)(2)(ii)(A), required a withholding foreign partnership 
to file a Form 1065 and Forms K-1 and exempted the partnership from 
having to file Form 1042 and Forms 1042-S. The rule was incorrect. A 
withholding foreign partnership is generally required to withhold on 
payments and therefore must file a Form 1042, which is an income tax 
return, and not merely report the amounts on Form 1065. Also, because 
the IRS matches amounts reported on Forms 1042-S with amounts reported 
on Form 1042, it was incorrect to substitute Forms K-1 for Forms 1042-
S. Therefore, the regulation has been amended to require a withholding 
foreign partnership to file a tax return on Form 1042 and file 
information returns on Form 1042-S for amounts subject to withholding 
paid to, or included in the distributive share of, its foreign 
partners. A withholding foreign partnership may also be required to 
file a return on Form 1065 and make the statements on Form K-1 under 
section 6031 for its partners. However, the IRS may agree in the 
withholding agreement to modify information reporting requirements to 
avoid double reporting. A rule that was formerly contained in 
Sec. 1.1441-7(a), which permitted a withholding foreign partnership to 
arrange with a withholding agent to have the withholding agent impose 
withholding on a payment has been removed because a withholding foreign 
partnership is required to assume withholding responsibility.
    Section 1.1441-5(c)(3) provides rules relating to nonwithholding 
foreign partnerships. Paragraph (c)(3)(iv) has been revised to require 
a nonwithholding foreign partnership to provide a withholding statement 
in the same manner as a nonqualified intermediary. In addition, 
paragraph (c)(3)(v) has been revised to conform with revised 
Sec. 1.1441-1(b)(6), discussed in section A. 5 of this Explanation of 
Provisions. Thus, the regulation has been changed to make clear that a 
nonwithholding foreign partnership has an obligation to report payments 
even though another withholding agent has withheld the appropriate 
amount if the nonwithholding partnership has failed to provide adequate 
information for a withholding agent to report the payments 
appropriately on Form 1042-S and Form 1099 or the nonwithholding 
foreign partnership knows, or has reason to know, that the payments 
were not correctly reported.
    Paragraph (d) of Sec. 1.1441-5 provides presumption rules that 
apply to determine the status of a partnership and its partners if a 
payment cannot be

[[Page 32163]]

reliably associated with valid documentation. The rule in paragraph 
(d)(3)(ii), which permitted a reduced rate of withholding to be applied 
to a payment to a nonwithholding foreign partnership if the payment 
could be associated with a group of documented payees all of whom were 
subject to the same withholding rate has been removed for the reasons 
stated in connection with the changes made to Sec. 1.1441-
1(b)(3)(v)(C). See section A. 4, of this Explanation of Provisions. 
Under the revised rule, any payment of an amount subject to withholding 
paid to a foreign partnership that has not been allocated to a specific 
payee is presumed made to an undocumented foreign payee and subject to 
30 percent withholding.
3. Payments to Foreign Trusts and Estates
    Treasury Decision 8734 did not include new provisions regarding 
withholding on payments by and to foreign trusts and foreign estates. 
The IRS provided interim guidance in the instructions to Forms W-8BEN 
and W-8IMY so that withholding agents could replace documentation that 
was expiring under the withholding regulations with documentation that 
would meet the requirements of TD 8734. In addition, Notice 99-8 
announced that Treasury and the IRS intended to issue regulations that 
would clarify the withholding obligations of income paid to trusts and 
estates. Under the instructions and the notice, a payment to a foreign 
fiduciary was treated as a payment to a foreign intermediary and, 
therefore, the foreign fiduciary was required to furnish an 
intermediary withholding certificate on Form W-8IMY. If the trust was a 
trust described in section 651(a) or a trust, all or a portion of which 
was treated as owned by the grantor or other persons under sections 671 
through 679, the fiduciary was required to attach Forms W-8BEN, Forms 
W-8EXP, or Forms W-9, from the beneficiaries or owners of the trust. In 
all other cases, the foreign trustee or executor was required to attach 
a Form W-8BEN, Form W-8EXP, or if required, Form W-9, completed on 
behalf of the trust or estate.
    Several commentators objected to the requirement that a foreign 
fiduciary of a complex trust or a foreign estate provide an 
intermediary withholding certificate. They requested that a withholding 
certificate be required only from the trust or estate itself. Requiring 
documentation from a fiduciary also was not consistent with the rules 
under chapter 61, which generally require a Form W-9 from a trust or 
estate and ignore the status of the fiduciary. Finally, Notice 99-8 did 
not provide any presumption rules for payments to foreign trusts and 
foreign estates.
    The regulations now contain a comprehensive set of rules for 
payments made to foreign trusts and foreign estates in Sec. 1.1441-
5(e). A foreign complex trust (as defined in paragraph (c)(25)) and a 
foreign estate are generally considered beneficial owners of income 
under Sec. 1.1441-1(c)(6). Therefore, under Sec. 1.1441-5(e)(2), a 
foreign complex trust or a foreign estate may provide a beneficial 
owner withholding certificate or other beneficial owner documentation 
for payments for which a reduced rate of withholding is not claimed 
under a treaty. Whether such a trust or estate can provide a beneficial 
owner withholding certificate to claim a reduced rate of withholding 
under an income tax treaty will depend on whether the trust or estate 
can claim to be a resident of a treaty country, whether it derives the 
income under section 894, and the regulations thereunder, and whether 
treaty benefits are denied under a limitation on benefits provision.
    Foreign simple trusts and foreign grantor trusts are not payees or 
beneficial owners under Sec. 1.1441-5(e)(3), unless the payment is an 
amount that is treated as effectively connected with the conduct of a 
U.S. trade or business. The payees of payments to a foreign simple 
trust or a foreign grantor trust are generally the beneficiaries or 
owners of the trust. This is similar to the treatment accorded to 
payments to foreign partnerships, where the partners, rather than the 
partnership, are generally considered the payees of income paid to the 
partnership. Therefore, the documentation rules applicable to foreign 
simple trusts and foreign grantor trusts generally accord with those 
applicable to foreign partnerships. The trust itself provides a flow-
through withholding certificate with which it associates the 
withholding certificates or, if permitted, documentary evidence of its 
beneficiaries or owners. The foreign simple trust or foreign grantor 
trust must also associate with its flow-through withholding certificate 
a withholding statement identical to that provided by foreign 
partnerships and nonqualified intermediaries. The IRS may permit a 
foreign trust to function as a withholding foreign trust. A withholding 
foreign trust would generally be subject to the same provisions as a 
withholding foreign partnership.
    Section 1.1441-1(e)(6) provides presumption rules for payments of 
amounts subject to withholding to foreign trusts and estates. Whether a 
payee is a trust or estate is determined under the general presumption 
rules of Sec. 1.1441-1(b)(3)(ii). A trust or estate is presumed to be 
U.S. unless there are indicia of foreign status. If a payee is presumed 
to be a foreign trust, but its status as a complex, simple, or grantor 
trust is unknown, it will be treated as a complex trust. If the trust 
is known to be a foreign simple or grantor trust, its beneficiaries or 
owners will generally be presumed to be foreign with respect to 
payments of amounts subject to withholding.

F. Changes to Sec. 1441-6

    Section 1.1441-6 contains the provisions for claiming a reduced 
rate of withholding under an income tax treaty. Section 1.1441-6(b) has 
been revised to clarify the requirements for claiming treaty benefits. 
Specifically, the provisions of paragraph (b)(2), as originally 
drafted, which related to use of documentary evidence, have been moved 
to newly revised paragraphs (c)(1) and (2) so that all the documentary 
evidence rules appear in the same paragraph. Paragraph (b)(2) now 
contains the provisions relating to treaty claims made by interest 
holders of fiscally transparent entities. Clarifying changes to those 
rules, which appeared in former paragraph (b)(4), have also been made.
    Section 1.1441-6(c)(1) and (2), as originally drafted, required a 
foreign person to establish residency by obtaining a certified taxpayer 
identification number (certified TIN) from the IRS. Those provisions 
required a person claiming a reduced rate of withholding to submit 
either a certificate of residency or certain other prescribed 
documentation, plus affidavits regarding compliance with the limitation 
on benefits provisions of a treaty and with the regulations under 
section 894. In Notice 99-8, the IRS announced that it would not 
implement the procedures for obtaining certified TINs until January 1, 
2002.
    The certified TIN procedures have been removed. New paragraph 
(b)(3), however, provides authority for the IRS to issue guidance on 
requirements that a treaty claimant must follow to establish residency 
and compliance with other requirements imposed by treaties and the 
Internal Revenue Code, such as limitation on benefits provisions and 
the requirement that the claimant derive the income under section 894. 
Treasury and the IRS fully intend to implement such procedures. 
However, Treasury and the IRS determined that it was appropriate to 
delay

[[Page 32164]]

implementation of the requirement while withholding agents and 
beneficial owners implement other requirements under the regulation. In 
addition, the IRS will examine ways to more effectively implement the 
certified TIN requirement.
    Paragraphs (c)(3) and (4) prescribe the types of documentation that 
can be used to claim treaty benefits for income from marketable 
instruments paid outside the United States to offshore accounts. Former 
paragraph (b)(2) stated that documentary evidence could be used, in 
certain cases, to claim treaty benefits if the documentary evidence was 
accompanied by the certifications required in paragraph (c)(5). 
Paragraph (c)(5) contained a requirement that a beneficial owner 
applying for a certified TIN provide the IRS with certifications, made 
in an affidavit signed under penalties of perjury, that the beneficial 
owner was in compliance with any applicable limitation on benefits 
provisions contained in a treaty and that the beneficial owner derives 
the income for which treaty benefits will be claimed. It was unclear 
from the regulations, as drafted, whether the certifications that were 
provided to withholding agents were required to be made in affidavits 
signed under penalties of perjury or whether the affidavit requirement 
only applied to obtaining certified TINs. Although Treasury and the IRS 
believe it is important that statements regarding compliance with 
limitation on benefits provisions and section 894 be given in 
conjunction with documentary evidence provided to a withholding agent, 
a penalties of perjury requirement would impose a burden that 
undermines the use of documentary evidence. One reason for permitting 
use of documentary evidence is to eliminate, as much as possible, the 
need for a penalties of perjury statement. Thus, the affidavit and 
penalties of perjury requirements have been eliminated with respect to 
documentary evidence provided to a withholding agent. The IRS may, 
however, require an affidavit in connection with the certified TIN 
procedures that it will establish. The affidavit requirement in 
paragraph (c)(4), stating that the information on documentary evidence 
is true and complete, has also been eliminated.

G. Changes to Sec. 1.1441-7

    Section 1.1441-7 defines the term withholding agent and provides 
various rules relating to the obligations of withholding agents, 
including certain due diligence requirements regarding the 
documentation they receive from payees.
1. Withholding Agent Defined
    Sec. 1.1441-7(a) provides the definition of a withholding agent as 
well as a withholding agent's obligation to withhold the appropriate 
amount of taxes and file returns. The section has been revised by 
removing language stating that a withholding foreign partnership does 
not have to file Forms 1042-S for payments made to foreign partners 
because it is required to provide Forms K-1. The reason for this change 
is discussed in section E. 2 of this Explanation of Provisions.
    Some U.S. withholding agents commented that foreign persons, 
including U.S. branches of foreign persons, were taking the position 
that they were not withholding agents for purposes of chapter 3 of the 
Internal Revenue Code. Any person, whether U.S. or foreign, that pays, 
or has control, receipt, custody, or disposal of an amount subject to 
withholding is a withholding agent. In addition, with respect to a 
single item of income, each person that handles the payment is a 
withholding agent. Thus, there may be more than one withholding agent 
with respect to a payment of an amount subject to withholding. Examples 
have been added in new paragraph (a)(2) to illustrate these principles. 
In particular, examples were added to emphasize that foreign persons 
that pay, or have control, receipt, or custody, of amounts subject to 
withholding are withholding agents, including U.S. branches of foreign 
persons.
2. Reason To Know
    Section 1.1441-7(b)(2)(ii), as originally drafted, provided the 
exclusive rules for determining when a withholding agent that is a 
financial institution making a payment of income from marketable 
securities has reason to know that documentation provided to the 
withholding agent is unreliable. Commentators noted that the language 
of paragraph (b)(2)(ii) was inconsistent about whether the rules 
applied only to withholding certificates (i.e., Forms W-8) or also to 
documentary evidence. In addition, many commentators noted that the 
rules could not be reasonably applied to documentary evidence received 
through tiers of intermediaries, because that documentation would often 
be in a foreign language. They further argued that the rules relating 
to P.O. box addresses were unreasonable because in some countries P.O. 
box addresses are standard. Finally, commentators noted that the means 
for curing otherwise unreliable documentation were, in some instances, 
too restrictive.
    Section 1.1441-7 (b)(3) through (10) have been added to address the 
comments. Some of the changes made to paragraph (b) reflect rules in 
the model qualified intermediary agreement contained in Rev. Proc. 
2000-12. Paragraphs (b)(4) through (b)(9) relate to the obligations of 
a withholding agent for account holders that have a direct account 
relationship with the withholding agent. The rules are limited to 
direct account relationships because they often rely on account 
information that will exist only if such a relationship exists. 
However, under the rules of paragraph (b)(10), which relate to 
documentation from persons that are not direct account holders, the 
rules in paragraph (b)(4) through (9) apply to the extent that they 
rely on information contained on the face of a withholding certificate, 
documentary evidence, or a withholding statement.
    Paragraph (b)(4) contains general rules regarding the reliability 
of a withholding certificate provided on Form W-8. Paragraph (b)(5) 
contains rules for when a Form W-8 will be regarded as unreliable to 
establish a beneficial owner's foreign status and applicable cure 
provisions. Paragraph (b)(6) contains rules for when a Form W-8 will be 
regarded as unreliable to establish a beneficial owner's claim of 
treaty benefits and applicable cure provisions. Paragraph (b)(7) 
provides general rules relating to documentary evidence. Paragraphs 
(b)(8) and (b)(9) contain rules regarding documentary evidence that is 
unreliable to establish a beneficial owner's status as a foreign person 
or a resident of a treaty country, respectively.
    Paragraph (b)(10) provides rules regarding due diligence standards 
for documentation from payees received through nonqualified 
intermediaries, flow-through entities, and certain U.S. branches of 
foreign banks and insurance companies. Under paragraph (b)(10), a 
withholding agent is required to review the information contained in a 
withholding statement provided by those entities and may not rely on 
the information contained in the withholding statement to the extent it 
does not support the claims made for the payee. A withholding agent 
must also review each withholding certificate to verify that they 
support the claims made and are consistent with the information on the 
withholding statement. Under a transition rule, this review process 
does not apply to withholding certificates received before December 31, 
2001, if the payment is made prior to that date. If a withholding 
certificate received before December 31, 2001, is relevant to a payment 
made

[[Page 32165]]

after that date, it must be reviewed for accuracy and matched to the 
information contained in the withholding statement. Finally, a 
withholding agent must review documentary evidence to determine that 
there is no obvious indication that the payee is a U.S. non-exempt 
recipient or no obvious indication that the documentary evidence does 
not establish the identity of the person who provided the 
documentation.

H. Changes to Sec. 1.1441-9

    Section 1.1441-9 provides the rules for payments made to foreign 
tax-exempt entities and foreign governments. Paragraph (b)(2) of that 
section provided that if a tax-exempt organization did not have a 
determination from the IRS, it could establish its exempt status by 
attaching to its withholding certificate an opinion of counsel 
concluding that the organization is described in section 501(c) of the 
Internal Revenue Code. In addition, if the opinion concluded that the 
organization was described in section 501(c)(3) and was not a private 
foundation, an affidavit regarding the operations and support of the 
organization was required to be attached to the organization's 
withholding certificate as well. The opinion of counsel and affidavit 
was required to be renewed whenever the certificate to which it was 
attached was required to be renewed.
    Commentators stated that the requirement that the opinion of tax-
exempt status be provided by an attorney was too narrow and that an 
opinion from any federally authorized tax practitioner, as defined in 
section 7525(a)(3), should be permitted. In addition, the requirement 
that the opinion of counsel and the affidavit be renewed whenever the 
certificate was required to be renewed was confusing because a 
withholding certificate from a tax-exempt entity requires a TIN and, 
provided the income paid is subject to reporting, is valid indefinitely 
absent a change in circumstances.
    Treasury and IRS are currently considering whether an opinion 
issued by a person other than an attorney authorized to practice before 
the IRS should suffice. Although the Treasury and IRS have not yet 
concluded that a person other than an attorney should be permitted to 
provide the opinion, the regulation has been amended to permit that 
possibility in future guidance. In addition, the requirement to renew 
the opinion and affidavit has been clarified by stating that it must be 
renewed if there is a change in facts or circumstances relevant to the 
organization's status under section 501(c)(3).

I. Changes to Sec. 1.1461-1

    Section 1.1461-1 contains requirements regarding the payment and 
deposit of tax withheld under chapter 3 of the Internal Revenue Code 
and the filing of a tax return (Form 1042) and information returns 
(Forms 1042-S) by withholding agents. Generally, the paragraph has been 
amended to make a withholding agent's obligations clearer.
    Paragraphs (b)(2) and (c)(4), as originally drafted, stated that a 
withholding agent was not required to file a tax return or information 
return if another withholding agent had done so. Numerous exceptions to 
the rule were provided. These paragraphs were misleading because they 
implied that the general rule was that a tax return and information 
returns were not required if there was another withholding agent in the 
chain of payment required to file a tax return and information returns. 
The exceptions to the rule, however, required every withholding agent 
that made payments of an amount subject to withholding to a foreign 
person to file a tax return and information returns in every situation, 
except that a nonqualified intermediary or flow-through entity was not 
required to file a tax return and information returns for payments that 
it made provided that it furnished to a withholding agent sufficient 
information for the withholding agent to correctly withhold and report 
the payment. Section 1.1461-1(b) and (c) have been clarified to state 
that a withholding agent that makes a payment of an amount subject to 
reporting to a recipient must file a Form 1042-S and provide a copy to 
the recipient. The terms recipient and amount subject to reporting are 
defined in paragraphs (c)(1)(ii) and (c)(2), respectively. A recipient 
includes a beneficial owner (including a foreign complex trust and 
estate), a qualified intermediary, a withholding foreign partnership, a 
withholding foreign trust, an authorized foreign agent, a U.S. branch 
treated as a U.S. person, a nonwithholding foreign partnership or 
foreign simple trust receiving income effectively connected with a U.S. 
trade or business, any payee presumed to be a foreign person, and any 
other person for whom a Form 1042-S is required by the instructions to 
the form. A nonqualified intermediary, a disregarded entity, a flow-
through entity, and a U.S. branch that is not treated as a U.S. person 
are not recipients. Amounts paid to such entities are reported as paid 
to the persons on whose behalf the entity acts or to the interest 
holders in the entity. The term amount subject to reporting generally 
means amount subject to withholding as defined under Sec. 1.1441-2(a).
    The regulation has also been clarified by providing a more 
extensive, but not exhaustive, list of those amounts subject to 
reporting and those amounts for which there is an exception to 
reporting. See new Sec. 1.1461-1(c)(2). Paragraph (c)(2)(i)(C), as 
originally drafted, stated that the amount of effectively connected 
income that was required to be reported with respect to a notional 
principal contract was the net income described in Sec. 1.446-3(d). 
Commentators objected to this requirement because their systems are 
programmed to report cash payments, not accrued amounts. New paragraph 
(c)(2)(i)(J) now provides that the amount required to be reported is 
limited to the amount of cash paid from the notional principal 
contract.
    Finally, the section has been clarified by separately stating the 
reporting requirements of U.S. withholding agents, qualified 
intermediaries, nonqualified intermediaries, and flow-through entities. 
Withholding agents should note, in particular, that information 
regarding nonqualified intermediaries, flow-through entities, and U.S. 
branches (other than U.S. branches treated as U.S. persons) in which a 
recipient is an account holder or an interest holder must be included 
on Form 1042-S. Such information is important to the IRS's efforts to 
monitor compliance by such entities and branches with the requirements 
of the regulations.

J. Changes to the Regulations Under Section 6041

    Section 1.6041-1(d) has been revised to require that the amount of 
a notional principal contract payment reported on Form 1099 is the 
amount of cash paid on the contract for the calendar year. This change 
conforms the Form 1099 reporting rule to that under Sec. 1.1461-
1(c)(2)(i)(J).
    Section 1.6041-4(a)(3) states that a nonqualified intermediary, a 
qualified intermediary, or certain U.S. branches of foreign banks and 
insurance companies that receive payments reportable under section 6041 
(e.g., rents, notional principal contract income, and other fixed or 
determinable income) are not required to report the payments on Form 
1099 when they, in turn, make the payment to their account holders 
unless they know the payments are required to be reported and were not 
so reported. Similar exceptions apply to dividends, gross proceeds from 
sales of securities, and interest under Secs. 1.6042-3(b)(1)(vi),

[[Page 32166]]

1.6045-1(g)(v), and 1.6049-5(b)(14), respectively. These provisions 
have been modified to state that the exception does not apply to a U.S. 
branch of a foreign bank or insurance company that agrees with a 
withholding agent to be treated as a U.S. person. The exception is 
inappropriate in this case because such branches do not provide payee 
documentation on Form W-9 (or the name, address, TIN, and information 
allocating the payment to the payee) to a withholding agent. The 
exception is also inappropriate if a qualified intermediary assumes 
Form 1099 reporting responsibility. Therefore, the exception has been 
changed to exclude qualified intermediaries that assume Form 1099 
reporting. Finally, the exceptions have been amended to state that a 
nonqualified intermediary, qualified intermediary, or U.S. branch is 
deemed to know the required reporting was not done in any case where 
the intermediary or branch has failed to provide documentation or other 
information so that another payor can do the reporting.

K. Changes to Sec. 1.6041A-1

    Section 1.6041A-1(d)(3)(i)(C) has been added to provide an 
exception from reporting remuneration for services as a direct seller 
paid outside the United States. Prior to this change, remuneration for 
services was subject to reporting in absence of documentation 
establishing the direct seller's status as a foreign person because the 
presumption rules of Secs. 1.6049-5(d)(2) and 1.1441-1(b)(3)(iii) 
treated a direct seller as a U.S. non-exempt recipient. Commentators 
stated that the presumption was inaccurate because most direct sellers 
abroad are foreign persons. They also argued that obtaining 
documentation from direct sellers to rebut the presumption was overly 
burdensome.

L. Changes to Sec. 1.6045-1

    Section 1.6045-1(g) provides an exception from Form 1099 reporting 
for a broker if a customer is considered an exempt foreign person under 
that section. Under Sec. 1.6045-1(g)(1)(i), a broker may treat a 
customer as an exempt foreign person if the broker receives a 
withholding certificate or documentary evidence that establishes the 
person's status as a foreign person. As originally drafted, the last 
sentence of Sec. 1.6045-1(g)(1)(i) stated that if a withholding 
certificate was provided, a withholding agent could rely on the 
certificate to exempt the customer from reporting only if the 
certificate included a statement that the beneficial owner had not 
been, and at the time the certificate was furnished reasonably expected 
not to be, present in the United States for a period aggregating 183 
days or more during each calendar year. The regulation did not state 
whether the a statement was required if documentary evidence was 
provided.
    Two clarifying changes have been made to Sec. 1.6045-1(g)(1)(i). 
First, the regulation has been modified to require the statement 
relating to presence in the United States only from individuals. 
Second, the regulation states that the statement is not required if 
documentary evidence is provided. The statement is required on a 
withholding certificate and not on documentary evidence because a 
withholding certificate is the documentation required for an account 
maintained in the United States. Documentary evidence can only be used 
for amounts paid outside the United States to an offshore account and, 
therefore, the likelihood that the person may be present in the United 
States for the relevant period is greatly reduced.
    Clarifying changes have also been made to Sec. 1.6045-1(g)(3)(iv). 
The first sentence of that section stated that a broker could treat an 
intermediary, as defined in Sec. 1.1441-1(c)(13), as an exempt 
recipient except when the broker had actual knowledge or reason to know 
the intermediary was acting on behalf of a U.S. person. The exception 
should only apply if the intermediary is acting on behalf of a U.S. 
person who is subject to reporting on Form 1099, that is, a U.S. non-
exempt recipient. The regulation has been amended to make this clear. 
An erroneous cite to nonwithholding foreign partnerships has also been 
eliminated.
    In paragraph (g)(4) of Sec. 1.6045-1, Example 7 has been amended to 
reflect the change to the regulations that now generally treats accrued 
interest as an amount that is not subject to withholding. Under that 
example, a foreign bank that is a U.S. payor effects a sale of an 
interest bearing obligation at an office outside the United States on 
behalf of an undocumented account holder. Under the regulation, as 
originally drafted, the gross proceeds from the sale, net of accrued 
interest, were reported on Form 1099 as paid to a payee that was 
presumed to be a U.S. person. However, because the accrued interest was 
considered an amount subject to withholding, it was reportable on Form 
1042-S. Under the regulation, as revised, accrued interest is treated 
as an amount that is not subject to withholding. Therefore, both the 
gross proceeds, net of accrued interest, and the accrued interest are 
now presumed paid to a U.S. payee and reported on Form 1099 under the 
presumption rule Sec. 1.6049-5(d)(2). Two additional examples have been 
added to paragraph (g)(4) to illustrate the operation of the 
presumption rules on a sale of a short-term original issue discount 
instrument. These examples were added to make clear that a sale of an 
OID obligation outside the United States is a gross proceeds 
transaction and, therefore, under the presumption rule of Sec. 1.6049-
5(d)(2), presumed made to a U.S. person. Whether the gross proceeds are 
reportable depends on whether the exception of Sec. 1.6045-1(a) for 
sales outside the United States by a non-U.S. payor applies.

M. Changes to Sec. 1.6049-5

    Under Sec. 1.6049-5(c)(1), a withholding agent or payor may 
generally rely on documentary evidence from a foreign payee instead of 
a beneficial owner withholding certificate on Form W-8 if an amount is 
paid outside the United States to an offshore account. An offshore 
account is an account maintained at an office or branch of a U.S. or 
foreign bank or other financial institution at any location outside the 
United States and outside of a U.S. possession. Under Sec. 1.6049-5(e), 
an amount is considered paid outside the United States if the payor 
completes the acts necessary to effect payment outside the United 
States.
    The regulations do not specifically address whether partners of a 
nonwithholding foreign partnership, foreign beneficiaries of a foreign 
simple trust, or foreign owners of a foreign grantor trust can use 
documentary evidence to establish their status as foreign payees. 
Paragraph (c)(1) has been amended to permit the use of documentary 
evidence by foreign partners, beneficiaries, and owners in these 
situations. Documentary evidence can also be used for purposes of 
chapter 3 of the Internal Revenue Code by virtue of the incorporation 
of Sec. 1.6049-5(c)(1) in Sec. 1.1441-1(e)(1)(ii)(A)(2). The use of 
documentary evidence is appropriate because the regulations generally 
treat payments to foreign nonwithholding foreign partnerships, foreign 
simple trusts, and foreign grantor trusts similar to payments made to 
nonqualified intermediaries, and the latter are permitted to provide 
documentary evidence on behalf of their account holders.
    Section 1.6049-5(c)(4) provides rules that apply to U.S. payors 
that make payments outside the United States of amounts not subject to 
withholding (e.g., foreign source income and gross proceeds from the 
sale of securities) other than deposit interest and interest

[[Page 32167]]

or OID on short-term OID instruments. Non-U.S. payors are generally 
exempt from reporting these payments. There were several issues under 
paragraph (c)(4) as originally drafted. First, the paragraph was 
internally inconsistent. Paragraph (c)(4)(i) stated that a bank or 
other financial institution could establish a payee's status as a 
foreign person by relying on a written declaration made on an account 
opening statement that the payee was not a U.S. person in two 
circumstances: (i) If it was not customary in a country to obtain 
documentary evidence to establish a person's identity, or (ii) if it 
was customary to obtain documentary evidence but it was not customary 
to renew it. Paragraph (c)(4)(iv), however, stated that a bank or 
financial institution could not rely on a declaration if it was 
customary to obtain documentary evidence but not customary to renew it. 
Second, paragraph (c)(4)(i) did not permit a bank or financial 
institution to rely on documentary evidence to establish a person's 
foreign status if there was indicia of U.S. status, including 
employment by a U.S.-based multinational organization. A commentator 
noted that prohibiting use of documentary evidence merely because an 
account holder worked for a U.S.-based multinational organization was 
overly broad because such organizations commonly employ local employees 
and a withholding agent may not know whether a particular multinational 
is U.S. based. Finally, paragraph (c)(4)(iii) required a bank or 
financial institution that relied upon a declaration of foreign status 
or non-renewable documentary evidence to send a negative confirmation 
statement each year to the account holder stating that the account 
holder was being treated as a foreign payee and that the account holder 
was obligated to notify the bank or financial institution if it became 
a U.S. citizen or U.S. resident. A commentator argued that the expense 
of such a requirement was not justified. The commentator argued that if 
an account holder legitimately establishes foreign status, it is 
unlikely that the account holder will become a U.S. citizen or resident 
and that if it does, there are factors, such as a change of address, 
that will indicate a change in the person's status.
    Paragraph (c)(4) has been amended to remove the inconsistency and 
to take the commentators' comments into account. Under paragraph 
(c)(4)(ii), as revised, a declaration of foreign status may be used 
only if it is not customary to obtain documentary evidence. The 
declaration may be relied upon only if there is no address or other 
indicia of U.S. status. If it is customary in the country where a bank 
or financial institution maintains a branch or office to obtain, but 
not renew, documentary evidence, then the bank or financial institution 
may rely on the documentary evidence without the need to renew it 
provided that it may rely on the documentation to establish foreign 
status under the due diligence rules of Sec. 1.1441-7(b)(7) and (8). 
The restriction on using such documentation in the case of a U.S. based 
multinational employee has been removed. If, however, the bank or 
financial institution may rely on the documentary evidence as 
establishing foreign status even though there are indicia of U.S. 
status, it can rely on the documentary evidence only for a period of 
three full calendar years after the calendar year in which it is 
received. Finally, neither the documentation rule of paragraph 
(c)(4)(i) nor the declaration rule of paragraph (c)(4)(ii) requires a 
payor to send a negative confirmation.
    Section 1.6049-5(d) contains presumption rules that generally apply 
for chapter 61 reporting if a payor lacks required documentation from a 
payee. Paragraph (d)(2) governs payments other than payments to 
intermediaries or flow-through entities. Paragraph (d)(2)(i) has been 
clarified to state that the presumption rules of Sec. 1.1441-
1(b)(3)(iii)(D) (payments to offshore accounts) do not apply to amounts 
that are not subject to withholding. As originally drafted, paragraph 
(d)(2)(i) stated that the rules of Sec. 1.1441-1(b)(3)(iii) applied to 
all payments, irrespective of whether they were subject to withholding. 
Section 1.1441-1(b)(3)(iii)(D), however, stated that it did not apply 
to amounts that were not subject to withholding. Revised paragraph 
(d)(2)(i) eliminates the inconsistency. Therefore, payments of deposit 
interest, and interest or OID arising from the redemption of an 
obligation described in section 871(g)(1)(B)(i) paid to an offshore 
account are presumed paid to a U.S. payee. In addition, gross proceeds, 
which are not amounts subject to withholding, are also treated as paid 
to U.S. persons under Sec. 1.6045-1(g)(1)(i). Under the exceptions of 
Secs. 1.6045-1(a)(1) and 1.6045-1(g)(3), however, gross proceeds from 
the sale of a security by a non-U.S. payor effected outside the United 
States are not subject to reporting.
    The grace period rule in Sec. 1.6049-5(d)(2)(ii), as originally 
drafted, did not cover the same payments as were covered under the 
grace period rule of Sec. 1.1441-1(b)(3)(iv) even though the latter 
regulation cross-references Sec. 1.6049-5(d)(2)(ii). For example, the 
rule under the 1441 regulations, but not the rule under section 6049, 
covered dividends from any redeemable security issued by an investment 
company and amounts paid with respect to loans of securities. Paragraph 
5(d)(2)(ii) has been amended to cover the same payments as are covered 
by the grace period rule of Sec. 1.1441-1(b)(3)(iv). In addition, 
paragraph (d)(2)(ii) prior to amendment stated that the grace period 
expired on the earlier of the of the 90th day after the grace period 
began, the date on which documentation is provided, or the last day of 
the calendar year. Commentators stated that terminating the grace 
period at the end of a calendar year complicated systems programming 
because there was a shrinking grace period for payments made within 90 
days of the end of the year. The requirement to terminate the grace 
period as of the close of a calendar year has been eliminated because 
it is not necessary.
    Paragraph (d)(3) provides presumption rules for payments made to 
foreign intermediaries. With exceptions for deposit interest and 
interest and OID on short-term obligations, payments to foreign 
intermediaries are presumed made to foreign payees. Paragraph (d)(4) 
provided different presumptions for payments to partnerships. Under 
that paragraph, payments made to foreign partnerships were generally 
presumed made to U.S. payees, even if the partnership established its 
status as a foreign partnership. Commentators argued that the disparate 
treatment between intermediaries and partnerships was not justified 
because they are treated similarly for other purposes under the 
regulations. The differences also complicated payors' information 
systems. In response to these comments, the presumption rules of 
paragraph (d)(3) have been revised to apply to payments made to all 
flow-through entities (nonwithholding foreign partnerships, foreign 
simple trusts, and foreign grantor trusts).
    Paragraph (d)(3)(ii) provides rules for payments of amounts that 
are not subject to withholding (e.g., foreign source income and gross 
proceeds from the sales of securities) other than deposit interest and 
interest and OID on short-term obligations paid to foreign 
intermediaries and flow-through entities. The paragraph required a 
payor to presume that a payment was made to an exempt recipient unless 
the payor had actual knowledge that any person for whom the 
intermediary was collecting the payment was a U.S. non-

[[Page 32168]]

exempt recipient. In that case, the payment was treated as made to the 
U.S. non-exempt recipient. The last sentence of the paragraph, however, 
also appeared to require a payor to presume that a payment was made to 
a U.S. non-exempt recipient if it appeared that the payment might be 
collected on behalf of a U.S. non-exempt payee, because, for example, 
an intermediary provided Forms W-9 for some payees but did not allocate 
a payment to any particular payee. The application of the last sentence 
of the paragraph, however, was uncertain.
    Paragraph (d)(3)(ii) has been revised to generally reflect the 
principle that a payment of an amount that is not subject to 
withholding (other than short-term OID and deposit interest) made to an 
intermediary should not be subject to Form 1099 reporting by a payor if 
the payment would not be subject to Form 1099 reporting if made to a 
U.S. non-exempt recipient by an intermediary that is not a U.S. payor. 
Thus, the general rule is that a payment covered by the paragraph 
(i.e., foreign source income or gross proceeds) is presumed paid to an 
exempt recipient unless the payor has actual knowledge that the amount 
is attributable to a U.S. non-exempt recipient.
    As originally drafted, Sec. 1.6049-5(d)(3)(iii) provided special 
presumption rules for payments of deposit interest and interest or OID 
from short-term original issue discount obligations to foreign 
intermediaries. It was not clear whether the presumption rule of the 
paragraph applied to the portion of the sale proceeds representing OID 
from the sale or exchange of short-term OID instrument in a transaction 
other than a redemption.
    Under paragraph (d)(3)(iii) as revised, a payment of deposit 
interest or interest or OID on the redemption of a short-term original 
issue discount obligation paid to an intermediary or flow-through 
entity is presumed paid to a U.S. payee. The paragraph does not apply 
to sales or exchanges (other than redemption) of short-term OID 
instruments. Such sales or exchanges are treated as gross proceeds 
transactions, in conformance with the rules in Secs. 1.6045-1(c) and 
(d)(3) and 31.3406(b)(2)-2, and are subject to the general presumption 
rule for payments made to foreign intermediaries under Sec. 1.6049-
5(d)(3)(ii). Therefore, gross proceeds from the sale or exchange (other 
than a redemption) of a short-term OID instrument will generally be 
presumed paid as made to an exempt recipient. Intermediaries that are 
U.S. payors, however, may themselves be required to report such gross 
proceeds under Sec. 1.6045-1(c) and (1)(g)(i) and the presumption rule 
of Sec. 1.6049-5(d)(2), which applies to payments made to persons other 
than an intermediary because under that section gross proceeds are 
generally considered paid to U.S. payees under that section.
    Paragraph (d)(3)(iii)(B) contained a presumption rule for payments 
made to exempt recipients that had not provided documentation that they 
were acting as intermediaries. The scope and application of this rule 
were unclear. Paragraph (d)(3)(iii)(B) has been completely revised and 
now states that a payment made to an exempt recipient that the payor 
knows, or has reason to know, is acting as an intermediary is subject 
to the presumptions that apply to intermediaries.

N. Withholding Certificate Transitional Issues

    The changes made by this regulation will require revisions to 
instructions to the withholding certificates issued on Form W-8 and 
certain minor changes to the forms themselves. Until Forms W-8, and the 
instructions, are revised withholding agents may rely on Forms W-8BEN, 
W-8ECI, W-8EXP, and W-8IMY as currently in effect but should take into 
account, particularly with respect to Form W-8IMY used by 
intermediaries and flow-through entities, that the instructions to the 
form do not reflect the withholding statement requirements contained in 
this regulation. In particular, withholding agents and providers of 
Form W-8IMY should furnish a withholding statement in connection with 
the form that conforms to Sec. 1.1441-1(e)(3)(iv).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations. Finally, it has 
been determined that the Regulatory Flexibility Act (5 U.S.C. chapter 
6) does not apply to these regulations because the regulations do not 
impose a collection of information on small entities. Pursuant to 
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking 
preceding these regulations (61 FR 17614) was submitted to the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Carl Cooper, Laurie 
Hatten-Boyd, and Kate Hwa of the Office of Associate Chief Counsel 
(International).

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 compensation.

Adoption of Amendments to Regulations

    Accordingly, 26 CFR parts 1 and 31 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Par. 2. Effective January 1, 2001, Sec. 1.1441-0 is amended by:
    1. Revising the entry for Sec. 1.1441-1(b)(2)(vii).
    2. Adding entries for Sec. 1.1441-1(b)(2)(vii)(A) through (F).
    2a. Revising the entry for Sec. 1.1441-1(b)(3)(ii).
    3. Adding entries for Sec. 1.1441-1(b)(3)(ii)(A) through (C).
    4. Revising the entry for Sec. 1.1441-1(b)(3)(iv).
    5. Revising entry for Sec. 1.1441-1(b)(3)(v)(B).
    6. Revising the entry for Sec. 1.1441-1(b)(3)(vi).
    7. Adding entries for Sec. 1.1441-1(b)(3)(vii)(A) and (B).
    8. Adding entries for Sec. 1.1441-1(b)(6)(i) and (ii).
    9. Revising the entries for Sec. 1.1441-1(c)(6)(ii), (c)(6)(ii)(B), 
(c)(6)(ii)(C), and adding a new entry for Sec. 1.1441-1(c)(6)(ii)(D).
    10. Adding entries for Sec. 1.1441-1(c)(12) through (29).
    11. Revising the entry for Sec. 1.1441-1(d)(4).
    12. Revising the entry for Sec. 1.1441-1(e)(3)(iii), (e)(3)(iv), 
and (e)(3)(iv)(A) through (C).
    13. Adding entries for Sec. 1.1441-1(e)(3)(iv)(D) and (E).
    14. Adding entries for Sec. 1.1441-1(e)(4)(iv)(A), (B), and (C).
    15. Revising the entries for Sec. 1.1441-1(e)(5)(v) and 
(e)(5)(v)(B) and (C).
    16. Revising the entries for Sec. 1.1441-2(b)(3)(i) and (ii).

[[Page 32169]]

    17. Removing the entries for Sec. 1.1441-2(b)(3)(iii) and (iv).
    18. Revising the entry for Sec. 1.1441-5(a).
    19. Revising the entries for Sec. 1.1441-5(b), (b)(1), (b)(2), and 
(b)(2)(i), adding entries for Sec. 1.1441-5(b)(2)(i)(A) and 
(b)(2)(i)(B), and revising entries for Sec. 1.1441-5(b)(2)(ii), 
(b)(2)(iii), (b)(2)(iv), and (b)(2)(v).
    20. Revising the entry for Sec. 1.1441-5(c)(1)(iv).
    21. Removing the entries for Sec. 1.1441-5(c)(2)(ii)(A) and (B).
    21. Revising the entry for Sec. 1.1441-5(c)(3).
    22. Revising the entries for Sec. 1.1441-5(c)(3)(iii).
    23. Revising the entries for Sec. 1.1441-5(c)(3)(iv) and (v).
    24. Revising the entry for Sec. 1.1441-5(d).
    25. Removing the entries for Sec. 1.1441-5(d)(3)(i) through 
(d)(3)(iv).
    26. Revising the entry for Sec. 1.1441-5(d)(4).
    27. Revising the entry for Sec. 1.1441-5(e).
    28. Adding entries for Sec. 1.1441-5(e)(1), (e)(2), (e)(3), 
(e)(3)(i), (e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii), 
(e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6), (e)(6)(i), (e)(6)(ii) and 
(e)(6)(iii).
    29. Revising the entries for Sec. 1.1441-6(b)(2), (b)(2)(i) and 
(b)(2)(ii).
    30. Adding entries for Sec. 1.1441-6(b)(2)(iii) and (b)(2)(iv).
    31. Revising the entry for Sec. 1.1441-6(b)(3).
    32. Revising the entry for Sec. 1.1441-6(b)(4).
    33. Removing the entries for Sec. 1.1441-6(b)(4)(i), (b)(4)(ii), 
(b)(4)(ii)(A), (b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).
    34. Removing the entry for Sec. 1.1441-6(b)(5).
    35. Revising the entry for Sec. 1.1441-6(c).
    36. Revising the entry for Sec. 1.1441-6(c)(2).
    37. Removing the entries for Sec. 1.1441-6(c)(2)(i), (c)(2)(ii), 
and (c)(2)(iii).
    38. Revising the entries for Sec. 1.1441-6(c)(5), (c)(5)(i) and 
(c)(5)(ii).
    39. Revising the entry for Sec. 1.1441-6(e).
    40. Adding entries for Sec. 1.1441-7(a)(1) and (2).
    41. Removing the entries for Sec. 1.1441-7(b)(2)(i) and (b)(2)(ii).
    42. Revising the entry for Sec. 1.1441-7(b)(3).
    43. Adding entries for Sec. 1.1441-7(b)(4), (b)(4)(i), (b)(4)(ii), 
and (b)(5) through (b)(11).
    The additions and revisions read as follows.


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

* * * * *


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

* * * * *
    (b) * * *
    (2) * * *
    (vii) Rules for reliably associating a payment with a 
withholding certificate or other appropriate documentation.
    (A) Generally.
    (B) Special rules applicable to a withholding certificate from a 
nonqualified intermediary or flow-through entity.
    (C) Special rules applicable to a withholding certificate 
provided by a qualified intermediary that does not assume primary 
withholding responsibility.
    (D) Special rules applicable to a withholding certificate 
provided by a qualified intermediary that assumes primary 
withholding responsibility under chapter 3 of the Internal Revenue 
Code.
    (E) Special rules applicable to a withholding certificate 
provided by a qualified intermediary that assumes primary Form 1099 
reporting and backup withholding responsibility but not primary 
withholding under chapter 3.
    (F) Special rules applicable to a withholding certificate 
provided by a qualified intermediary that assumes primary 
withholding responsibility under chapter 3 and primary Form 1099 
reporting and backup withholding responsibility and a withholding 
certificate provided by a withholding foreign partnership.
    (3) * * *
    (ii) Presumptions of classification as individual, corporation, 
partnership, etc.
    (A) In general.
    (B) No documentation provided.
    (C) Documentary evidence furnished for offshore account.
* * * * *
    (iv) Grace period.
    (v) * * *
    (B) Beneficial owner documentation or allocation information is 
lacking or unreliable.
* * * * *
    (vi) U.S. branches.
    (vii) * * *
    (A) In general.
    (B) Special rule for offshore accounts.
* * * * *
    (6) * * *
    (i) In general.
    (ii) Example.
* * * * *
    (c) * * *
    (6) * * *
    (ii) Special rules.
* * * * *
    (B) Foreign partnerships.
    (C) Foreign simple trusts and foreign grantor trusts.
    (D) Other foreign trusts and foreign estates.
* * * * *
    (12) Payee.
    (13) Intermediary.
    (14) Nonqualified intermediary.
    (15) Qualified intermediary.
    (16) Withholding certificate.
    (17) Documentary evidence; other appropriate documentation.
    (18) Documentation.
    (19) Payor.
    (20) Exempt recipient.
    (21) Non-exempt recipient.
    (22) Reportable amounts.
    (23) Flow-through entity.
    (24) Foreign simple trust.
    (25) Foreign complex trust.
    (26) Foreign grantor trust.
    (27) Partnership.
    (28) Nonwithholding foreign partnership.
    (29) Withholding foreign partnership.
    (d) * * *
    (4) When a payment to an intermediary or flow-through entity may 
be treated as made to a U.S. payee.
    (e) * * *
    (3) * * *
    (iii) Intermediary withholding certificate from a nonqualified 
intermediary.
    (iv) Withholding statement provided by nonqualified 
Intermediary.
    (A) In general.
    (B) General requirements.
    (C) Content of withholding statement.
    (D) Alternative procedures.
    (E) Notice procedures.
* * * * *
    (4) * * *
    (iv) * * *
    (A) In general.
    (B) Requirements.
    (C) Special requirements for transmission of Forms W-8 by an 
intermediary. [Reserved]
* * * * *
    (5) * * *
    (v) Withholding statement.
* * * * *
    (B) Content of withholding statement.
    (C) Withholding rate pools.
* * * * *


Sec. 1.1441-2  Amounts subject to withholding.

* * * * *
    (b) * * *
    (3) * * *
    (i) Amount subject to tax.
    (ii) Amounts subject to withholding.
* * * * *


Sec. 1.1441-5  Withholding on payments to partnerships trusts, and 
estates.

    (a) In general.
    (b) Rules applicable to U.S. partnerships, trusts, and estates.
    (1) Payments to U.S. partnerships, trusts, and estates.
    (2) Withholding by U.S. payees.
    (i) U.S. partnerships.
    (A) In general.
    (B) Effectively connected income of partners.
    (ii) U.S. simple trusts.
    (iii) U.S. complex trusts and U.S. estates.
    (iv) U.S. grantor trusts.
    (v) Subsequent distribution.
    (c) * * *
    (1) * * *
    (iv) Examples.
* * * * *
    (3) Nonwithholding foreign partnerships.
* * * * *
    (iii) Withholding certificate from a nonwithholding foreign 
partnership.

[[Page 32170]]

    (iv) Withholding statement provided by nonwithholding foreign 
partnership.
    (v) Withholding and reporting by a foreign partnership.
    (d) Presumption rules.
* * * * *
    (4) Determination by a withholding foreign partnership of the 
status of its partners.
    (e) Foreign trusts and estates.
    (1) In general.
    (2) Payments to foreign complex trusts and estates.
    (3) Payees of payments to foreign simple trusts and foreign 
grantor trusts.
    (i) Payments for which beneficiaries and owners are payees.
    (ii) Payments for which trust is payee.
    (4) Reliance on claim of foreign complex trust or foreign estate 
status.
    (5) Foreign simple trust and foreign grantor trust.
    (i) Reliance on claim of foreign simple trust or foreign grantor 
trust status.
    (ii) Reliance on claim of reduced withholding by a foreign 
simple trust or foreign grantor trust for its beneficiaries or 
owners.
    (iii) Withholding certificate from foreign simple trust or 
foreign grantor trust.
    (iv) Withholding statement provided by a foreign simple trust or 
foreign grantor trust.
    (v) Withholding foreign trusts.
    (6) Presumption rules.
    (i) In general.
    (ii) Determination of status as U.S. or foreign trust or estate 
in the absence of documentation.
    (iii) Determination of beneficiary or owner's status in the 
absence of certain documentation.
* * * * *


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

* * * * *
    (b) * * *
    (2) Payment to fiscally transparent entity.
    (i) In general.
    (ii) Certification by qualified intermediary.
    (iii) Dual treatment.
    (iv) Examples.
    (3) Certified TIN.
    (4) Claim of benefits under an income tax treaty by a U.S. 
person.
    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income.
* * * * *
    (2) Income to which special rules apply.
* * * * *
    (5) Statements regarding entitlement to treaty benefits.
    (i) Statement regarding conditions under a limitation on 
benefits provision.
    (ii) Statement regarding whether the taxpayer derives the 
income.
* * * * *
    (e) Competent authority.
* * * * *


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

    (a) * * *
    (1) In general.
    (2) Examples.
    (b) * * *
    (3) Financial institutions--limits on reason to know.
    (4) Rules applicable to withholding certificates.
    (i) In general.
    (ii) Examples.
    (5) Withholding certificate--establishment of foreign status.
    (6) Withholding certificate--claim of reduced rate of 
withholding under treaty.
    (7) Documentary evidence.
    (8) Documentary evidence--establishment of foreign status.
    (9) Documentary evidence--claim of reduced rate of withholding 
under treaty.
    (10) Limits on reason to know--indirect account holders.
    (11) Additional guidance.
* * * * *
    Par. 3. Effective January 1, 2001, section 1.1441-1 is amended by:
    1. Revising the first sentence of paragraph (b)(2)(i).
    2. Revising paragraphs (b)(2)(iv)(A), (b)(2)(iv)(B)(3), and 
(b)(2)(iv)(C).
    3. Revising paragraphs (b)(2)(v)(A) and (b)(2)(v)(B).
    4. Revising paragraph (b)(2)(vii).
    5. Revising the first sentence of paragraph (b)(3)(i).
    6. Revising paragraph (b)(3)(ii).
    7. Revising paragraphs (b)(3)(iii)(C) and (b)(3)(iii)(D).
    8. Revising paragraph (b)(3)(iv).
    9. Revising paragraph (b)(3)(v).
    10. Revising paragraphs (b)(3)(vi) and (b)(3)(vii).
    11. Revising paragraph (b)(6).
    12. Revising paragraph (c)(2).
    13. Revising paragraph (c)(6).
    14. Adding paragraphs (c)(12) through (c)(29).
    15. Revising paragraphs (d)(2) through (d) (4).
    16. Revising paragraphs (e)(1)(ii)(A)(1), (e)(1)(ii)(A)(3), and 
(e)(1)(ii)(A)(4).
    17. Revising paragraph (e)(3).
    18. Revising paragraph (e)(4)(ii)(A).
    19. Revising paragraphs (e)(4)(ii)(B)(1) through (e)(4)(ii)(B)(4) 
and (e)(4)(ii)(B) (6), and adding paragraph (e)(4)(ii)(B)(8).
    20. Revising paragraph (e)(4)(iv).
    21. Revising paragraph (e)(4)(vii).
    22. Adding paragraph (e)(4)(ix)(A)(4) and revising paragraph 
(e)(4)(ix)(C).
    23. Revising paragraph (e)(5)(i) and (e)(5)(iii) through (e)(5)(v).
    The additions and revisions read as follows:


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

* * * * *
    (b) * * *
    (2) Determination of payee and payee's status--(i) In general. 
Except as otherwise provided in this paragraph (b)(2) and Sec. 1.1441-
5(c)(1) and (e)(3), a payee is the person to whom a payment is made, 
regardless of whether such person is the beneficial owner of the amount 
(as defined in paragraph (c)(6) of this section). * * *
* * * * *
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
insurance companies--(A) U.S. branch treated as a U.S. person in 
certain cases. A payment to a U.S. branch of a foreign person is a 
payment to a foreign person. However, a U.S. branch described in this 
paragraph (b)(2)(iv)(A) and a withholding agent (including another U.S. 
branch described in this paragraph (b)(2)(iv)(A)) may agree to treat 
the branch as a U.S. person for purposes of withholding on specified 
payments to the U.S. branch. Notwithstanding the preceding sentence, a 
withholding agent making a payment to a U.S. branch treated as a U.S. 
person under this paragraph (b)(2)(iv)(A) shall not treat the branch as 
a U.S. person for purposes of reporting the payment made to the branch. 
Therefore, a payment to such U.S. branch shall be reported on Form 
1042-S under Sec. 1.1461-1(c). Further, a U.S. branch that is treated 
as a U.S. person under this paragraph (b)(2)(iv)(A) shall not be 
treated as a U.S. person for purposes of the withholding certificate it 
may provide to a withholding agent. Therefore, the U.S. branch must 
furnish a U.S. branch withholding certificate on Form W-8 as provided 
in paragraph (e)(3)(v) of this section and not a Form W-9. An agreement 
to treat a U.S. branch as a U.S. person must be evidenced by a U.S. 
branch withholding certificate described in paragraph (e)(3)(v) of this 
section furnished by the U.S. branch to the withholding agent. A U.S. 
branch described in this paragraph (b)(2)(iv)(A) is any U.S. branch of 
a foreign bank subject to regulatory supervision by the Federal Reserve 
Board or a U.S. branch of a foreign insurance company required to file 
an annual statement on a form approved by the National Association of 
Insurance Commissioners with the Insurance Department of a State, a 
Territory, or the District of Columbia. The Internal Revenue Service 
(IRS) may approve a list of U.S. branches that may qualify for 
treatment as a U.S. person under this paragraph (b)(2)(iv)(A) (see 
Sec. 601.601(d)(2) of this chapter). See Sec. 1.6049-5(c)(5)(vi) for 
the treatment of U.S. branches as U.S. payors if they make a payment 
that is subject to reporting under chapter 61 of the Internal Revenue 
Code. Also see Sec. 1.6049-5(d)(1)(ii) for the treatment of

[[Page 32171]]

U.S. branches as foreign payees under chapter 61 of the Internal 
Revenue Code.
    (B) * * *
    (3) As a payment to a foreign person of income that is effectively 
connected with the conduct of a trade or business in the United States 
if the withholding agent cannot reliably associate the payment with a 
withholding certificate from the U.S. branch or any other certificate 
or other appropriate documentation from another person. See 
Sec. 1.1441-4(a)(2)(ii).
    (C) Consequences to the U.S. branch. A U.S. branch that is treated 
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be 
treated as a separate person solely for purposes of section 1441(a) and 
all other provisions of chapter 3 of the Internal Revenue Code and the 
regulations thereunder (other than for purposes of reporting the 
payment to the U.S. branch under Sec. 1.1461-1(c) or for purposes of 
the documentation such a branch must furnish under paragraph (e)(3)(v) 
of this section) for any payment that it receives as such. Thus, the 
U.S. branch shall be responsible for withholding on the payment in 
accordance with the provisions under chapter 3 of the Internal Revenue 
Code and the regulations thereunder and other applicable withholding 
provisions of the Internal Revenue Code. For this purpose, it shall 
obtain and retain documentation from payees or beneficial owners of the 
payments that it receives as a U.S. person in the same manner as if it 
were a separate entity. For example, if a U.S. branch receives a 
payment on behalf of its home office and the home office is a qualified 
intermediary, the U.S. branch must obtain a qualified intermediary 
withholding certificate described in paragraph (e)(3)(ii) of this 
section from its home office. In addition, a U.S. branch that has not 
provided documentation to the withholding agent for a payment that is, 
in fact, not effectively connected income is a withholding agent with 
respect to that payment. See paragraph (b)(6) of this section and 
Sec. 1.1441-4(a)(2)(ii).
* * * * *
    (v) Payments to a foreign intermediary--(A) Payments treated as 
made to persons for whom the intermediary collects the payment. Except 
as otherwise provided in paragraph (b)(2)(v)(B) of this section, the 
payee of a payment to a person that the withholding agent may treat as 
a foreign intermediary in accordance with the provisions of paragraph 
(b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the person or persons 
for whom the intermediary collects the payment. Thus, for example, the 
payee of a payment that the withholding agent can reliably associate 
with a withholding certificate from a qualified intermediary (defined 
in paragraph (e)(5)(ii) of this section) that does not assume primary 
withholding responsibility or a payment to a nonqualified intermediary 
are the persons for whom the qualified intermediary or nonqualified 
intermediary acts and not to the intermediary itself. See paragraph 
(b)(3)(v) of this section for presumptions that apply if the payment 
cannot be reliably associated with valid documentation. For similar 
rules for payments to flow-through entities, see Sec. 1.1441-5(c)(1) 
and (e)(3).
    (B) Payments treated as made to foreign intermediary. The payee of 
a payment to a person that the withholding agent may treat as a 
qualified intermediary is the qualified intermediary to the extent that 
the qualified intermediary assumes primary withholding responsibility 
under paragraph (e)(5)(iv) of this section for the payment. For example 
if a qualified intermediary assumes primary withholding responsibility 
under chapter 3 of the Internal Revenue Code but does not assume 
primary reporting or withholding responsibility under chapter 61 or 
section 3406 of the Internal Revenue Code and therefore provides Forms 
W-9 for U.S. non-exempt recipients, the qualified intermediary is the 
payee except to the extent the payment is reliably associated with a 
Form W-9 from a U.S. non-exempt recipient.
* * * * *
    (vii) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation--(A) Generally. The 
presumption rules of paragraph (b)(3) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d) apply to any payment, or portion of a 
payment, that a withholding agent cannot reliably associate with valid 
documentation. Generally, a withholding agent can reliably associate a 
payment with valid documentation if, prior to the payment, it holds 
valid documentation (either directly or through an agent), it can 
reliably determine how much of the payment relates to the valid 
documentation, and it has no actual knowledge or reason to know that 
any of the information, certifications, or statements in, or associated 
with, the documentation are incorrect. Special rules apply for payments 
made to intermediaries, flow-through entities, and certain U.S. 
branches. See paragraph (b)(2)(vii)(B) through (F) of this section. The 
documentation referred to in this paragraph (b)(2)(vii) is 
documentation described in paragraphs (c)(16) and (17) of this section 
upon which a withholding agent may rely to treat the payment as a 
payment made to a payee or beneficial owner, and to ascertain the 
characteristics of the payee or beneficial owner that are relevant to 
withholding or reporting under chapter 3 of the Internal Revenue Code 
and the regulations thereunder. For purposes of this paragraph 
(b)(2)(vii), documentation also includes the agreement that the 
withholding agent has in effect with an authorized foreign agent in 
accordance with Sec. 1.1441-7(c)(2)(i). A withholding agent that is not 
required to obtain documentation with respect to a payment is 
considered to lack documentation for purposes of this paragraph 
(b)(2)(vii). For example, a withholding agent paying U.S. source 
interest to a person that is an exempt recipient, as defined in 
Sec. 1.6049-4(c)(1)(ii), is not required to obtain documentation from 
that person in order to determine whether an amount paid to that person 
is reportable under an applicable information reporting provision under 
chapter 61 of the Internal Revenue Code. The withholding agent must, 
however, treat the payment as made to an undocumented person for 
purposes of chapter 3 of the Internal Revenue Code. Therefore, the 
presumption rules of paragraph (b)(3)(iii) of this section apply to 
determine whether the person is presumed to be a U.S. person (in which 
case, no withholding is required under this section), or whether the 
person is presumed to be a foreign person (in which case 30-percent 
withholding is required under this section). See paragraph (b)(3)(v) of 
this section for special reliance rules in the case of a payment to a 
foreign intermediary and Sec. 1.1441-5(d) and (e)(6) for special 
reliance rules in the case of a payment to a flow-through entity.
    (B) Special rules applicable to a withholding certificate from a 
nonqualified intermediary or flow-through entity. (1) In the case of a 
payment made to a nonqualified intermediary, a flow-through entity (as 
defined in paragraph (c)(23) of this section), and a U.S. branch 
described in paragraph (b)(2)(iv) of this section (other than a branch 
that is treated as a U.S. person), a withholding agent can reliably 
associate the payment with valid documentation only to the extent that, 
prior to the payment, the withholding agent can allocate the

[[Page 32172]]

payment to a valid nonqualified intermediary, flow-through, or U.S. 
branch withholding certificate; the withholding agent can reliably 
determine how much of the payment relates to valid documentation 
provided by a payee as determined under paragraph (c)(12) of this 
section (i.e., a person that is not itself an intermediary, flow-
through entity, or U.S. branch); and the withholding agent has 
sufficient information to report the payment on Form 1042-S or Form 
1099, if reporting is required. See paragraph (e)(3)(iii) of this 
section for the requirements of a nonqualified intermediary withholding 
certificate, paragraph (e)(3)(v) of this section for the requirements 
of a U.S. branch certificate, and Secs. 1.1441-5(c)(3)(iii) and 
(e)(5)(iii) for the requirements of a flow-through withholding 
certificate. Thus, a payment cannot be reliably associated with valid 
documentation provided by a payee to the extent such documentation is 
lacking or unreliable, or to the extent that information required to 
allocate and report all or a portion of the payment to each payee is 
lacking or unreliable. If a withholding certificate attached to an 
intermediary, U.S. branch, or flow-through withholding certificate is 
another intermediary, U.S. branch, or flow-through withholding 
certificate, the rules of this paragraph (b)(2)(vii)(B) apply by 
treating the share of the payment allocable to the other intermediary, 
U.S. branch, or flow-through entity as if the payment were made 
directly to such other entity. See paragraph (e)(3)(iv)(D) of this 
section for rules permitting information allocating a payment to 
documentation to be received after the payment is made.
    (2) The rules of paragraph (b)(2)(vii)(B)(1) of this section are 
illustrated by the following examples:

    Example 1. WH, a withholding agent, makes a payment of U.S. 
source interest to NQI, an intermediary that is a nonqualified 
intermediary. NQI provides a valid intermediary withholding 
certificate under paragraph (e)(3)(iii) of this section. NQI does 
not, however, provide valid documentation from the persons on whose 
behalf it receives the interest payment, and, therefore, the 
interest payment cannot be reliably associated with valid 
documentation provided by a payee. WH must apply the presumption 
rules of paragraph (b)(3)(v) of this section to the payment.
    Example 2. The facts are the same as in Example 1, except that 
NQI does attach valid beneficial owner withholding certificates (as 
defined in paragraph (e)(2)(i) of this section) from A, B, C, and D 
establishing their status as foreign persons. NQI does not, however, 
provide WH with any information allocating the payment among A, B, 
C, and D and, therefore, WH cannot determine the portion of the 
payment that relates to each beneficial owner withholding 
certificate. The interest payment cannot be reliably associated with 
valid documentation from a payee and WH must apply the presumption 
rules of paragraph (b)(3)(v) of this section to the payment. See, 
however, paragraph (e)(3)(iv)(D) of this section providing special 
rules permitting allocation information to be received after a 
payment is made.
    Example 3. The facts are the same as in Example 2, except that 
NQI does provide allocation information associated with its 
intermediary withholding certificate indicating that 25 percent of 
the interest payment is allocable to A and 25 percent to B. NQI does 
not provide any allocation information regarding the remaining 50 
percent of the payment. WH may treat 25 percent of the payment as 
made to A and 25 percent as made to B. The remaining 50 percent of 
the payment cannot be reliably associated with valid documentation 
from a payee, however, since NQI did not provide information 
allocating the payment. Thus, the remaining 50 percent of the 
payment is subject to the presumption rules of paragraph (b)(3)(v) 
of this section.
    Example 4. WH makes a payment of U.S. source interest to NQI1, 
an intermediary that is not a qualified intermediary. NQI1 provides 
WH with a valid nonqualified intermediary withholding certificate as 
well a valid beneficial owner withholding certificates from A and B 
and a valid nonqualified intermediary withholding certificate from 
NQI2. NQI2 has provided valid beneficial owner documentation from C 
sufficient to establish C's status as a foreign person. Based on 
information provided by NQI1, WH can allocate 20 percent of the 
interest payment to A, and 20 percent to B. Based on information 
that NQI2 provided NQI1 and that NQI1 provides to WH, WH can 
allocate 60 percent of the payment to NQI 2, but can only allocate 
one half of that payment (30 percent) to C. Therefore, WH cannot 
reliably associate 30 percent of the payment made to NQI2 with valid 
documentation and must apply the presumption rules of paragraph 
(b)(3)(v) of this section to that portion of the payment.

    (C) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that does not assume primary withholding 
responsibility. (1) If a payment is made to a qualified intermediary 
that does not assume primary withholding responsibility under chapter 3 
of the Internal Revenue Code or primary Form 1099 reporting and backup 
withholding responsibility under chapter 61 and section 3406 of the 
Internal Revenue Code for the payment, a withholding agent can reliably 
associate the payment with valid documentation only to the extent that, 
prior to the payment, the withholding agent has received a valid 
qualified intermediary withholding certificate and the withholding 
agent can reliably determine the portion of the payment that relates to 
a withholding rate pool, as defined in paragraph (e)(5)(v)(C) of this 
section. In the case of a withholding rate pool attributable to a U.S. 
non-exempt recipient, a payment cannot be reliably associated with 
valid documentation unless, prior to the payment, the qualified 
intermediary has provided the U.S. person's Form W-9 (or, in the 
absence of the form, the name, address, and TIN, if available, of the 
U.S. person) and sufficient information for the withholding agent to 
report the payment on Form 1099. See paragraph (e)(5)(v)(C)(2) of this 
section for special rules regarding allocation of payments among U.S. 
non-exempt recipients.
    (2) The rules of this paragraph (b)(2)(vii)(C) are illustrated by 
the following examples:

    Example 1. WH, a withholding agent, makes a payment of U.S. 
source dividends to QI. QI provides WH with a valid qualified 
intermediary withholding certificate on which it indicates that it 
does not assume primary withholding responsibility under chapter 3 
of the Internal Revenue Code or primary Form 1099 reporting and 
backup withholding responsibility under chapter 61 and section 3406 
of the Internal Revenue Code. QI does not provide any information 
allocating the dividend to withholding rate pools. WH cannot 
reliably associate the payment with valid payee documentation and 
therefore must apply the presumption rules of paragraph (b)(3)(v) of 
this section.
    Example 2. WH makes a payment of U.S. source dividends to QI. QI 
has 5 customers: A, B, C, D, and E. QI has obtained documentation 
from A and B establishing their entitlement to a 15 percent rate of 
tax on U.S. source dividends under an income tax treaty. C is a U.S. 
person that is an exempt recipient as defined in paragraph (c)(20) 
of this section. D and E are U.S. non-exempt recipients who have 
provided Forms W-9 to QI. A, B, C, D, and E are each entitled to 20 
percent of the dividend payment. QI provides WH with a valid 
qualified intermediary withholding certificate as described in 
paragraph (e)(2)(ii) of this section with which it associates the 
Forms W-9 from D and E. QI associates the following allocation 
information with its qualified intermediary withholding certificate: 
40 percent of the payment is allocable to the 15 percent withholding 
rate pool, and 20 percent is allocable to each of D and E. QI does 
not provide any allocation information regarding the remaining 20 
percent of the payment. WH cannot reliably associate 20 percent of 
the payment with valid documentation and, therefore, must apply the 
presumption rules of paragraph (b)(3)(v) of this section to that 
portion of the payment. The 20 percent of the payment allocable to 
the 15 percent withholding rate pool, and the portion of the 
payments allocable to D and E are payments that can be reliably 
associated with documentation.

    (D) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 of the Internal Revenue

[[Page 32173]]

Code. (1) In the case of a payment made to a qualified intermediary 
that assumes primary withholding responsibility under chapter 3 of the 
Internal Revenue Code with respect to that payment (but does not assume 
primary Form 1099 reporting and backup withholding responsibility under 
chapter 61 and section 3406 of the Internal Revenue Code), a 
withholding agent can reliably associate the payment with valid 
documentation only to the extent that, prior to the payment, the 
withholding agent has received a valid qualified intermediary 
withholding certificate and the withholding agent can reliably 
determine the portion of the payment that relates to the withholding 
rate pool for which the qualified intermediary assumes primary 
withholding responsibility under chapter 3 of the Internal Revenue Code 
and the portion of the payment attributable to withholding rate pools 
for each U.S. non-exempt recipient for whom the qualified intermediary 
has provided a Form W-9 (or, in absence of the form, the name, address, 
and TIN, if available, of the U.S. non-exempt recipient). See paragraph 
(e)(5)(v)(C)(2) of this section for alternative allocation procedures 
for payments made to U.S. persons that are not exempt recipients.
    (2) Examples. The following examples illustrate the rules of 
paragraph (b)(2)(vii)(D)(1) of this section:

    Example 1. WH makes a payment of U.S. source interest to QI, a 
qualified intermediary. QI provides WH with a withholding 
certificate that indicates that QI will assume primary withholding 
responsibility under chapter 3 of the Internal Revenue Code with 
respect to the payment. In addition, QI attaches a Form W-9 from A, 
a U.S. non-exempt recipient, as defined in paragraph (c)(21) of this 
section, and provides the name, address, and TIN of B, a U.S. person 
that is also a non-exempt recipient but who has not provided a Form 
W-9. QI associates a withholding statement with its qualified 
intermediary withholding certificate indicating that 10 percent of 
the payment is attributable to A, and 10 percent to B, and that QI 
will assume primary withholding responsibility with respect to the 
remaining 80 percent of the payment. WH can reliably associate the 
entire payment with valid documentation. Although under the 
presumption rule of paragraph (b)(3)(v) of this section, an 
undocumented person receiving U.S. source interest is generally 
presumed to be a foreign person, WH has actual knowledge that B is a 
U.S. non-exempt recipient and therefore must report the payment on 
Form 1099 and backup withhold on the interest payment under section 
3406.
    Example 2. The facts are the same as in Example 1, except that 
no Forms W-9 or other information have been provided for the 20 
percent of the payment that is allocable to A and B. Thus, QI has 
accepted withholding responsibility for 80 percent of the payment, 
but has provided no information for the remaining 20 percent. In 
this case, 20 percent of the payment cannot be reliably associated 
with valid documentation, and WH must apply the presumption rule of 
paragraph (b)(3)(v) of this section.

    (E) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary Form 1099 reporting 
and backup withholding responsibility but not primary withholding under 
chapter 3. (1) If a payment is made to a qualified intermediary that 
assumes primary Form 1099 reporting and backup withholding 
responsibility for the payment (but does not assume primary withholding 
responsibility under chapter 3 of the Internal Revenue Code), a 
withholding agent can reliably associate the payment with valid 
documentation only to the extent that, prior to the payment, the 
withholding agent has received a valid qualified intermediary 
withholding certificate and the withholding agent can reliably 
determine the portion of the payment that relates to a withholding rate 
pool or pools provided as part of the qualified intermediary's 
withholding statement and the portion of the payment for which the 
qualified intermediary assumes primary Form 1099 reporting and backup 
withholding responsibility.
    (2) The following example illustrates the rules of paragraph 
(b)(2)((vii)(D)(1) of this section:

    Example. WH makes a payment of U.S. source dividends to QI, a 
qualified intermediary. QI has provided WH with a valid qualified 
intermediary withholding certificate. QI states on its withholding 
statement accompanying the certificate that it assumes primary Form 
1099 reporting and backup withholding responsibility but does not 
assume primary withholding responsibility under chapter 3 of the 
Internal Revenue Code. QI represents that 15 percent of the dividend 
is subject to a 30 percent rate of withholding, 75 percent of the 
dividend is subject to a 15 percent rate of withholding, and that QI 
assumed primary Form 1099 reporting and backup withholding for the 
remaining 10 percent of the payment. The entire payment can be 
reliably associated with valid documentation.

    (F) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and primary Form 1099 reporting and 
backup withholding responsibility and a withholding certificate 
provided by a withholding foreign partnership. If a payment is made to 
a qualified intermediary that assumes both primary withholding 
responsibility under chapter 3 of the Internal Revenue Code and primary 
Form 1099 reporting and backup withholding responsibility under chapter 
61 and section 3406 of the Internal Revenue Code for the payment, a 
withholding agent can reliably associate a payment with valid 
documentation provided that it receives a valid qualified intermediary 
withholding certificate as described in paragraph (e)(3)(ii) of this 
section. In the case of a payment made to a withholding foreign 
partnership, the withholding agent can reliably associate the payment 
with valid documentation to the extent it can associate the payment 
with a valid withholding certificate described in Sec. 1.1441-
5(c)(2)(iv).
    (3) Presumptions regarding payee's status in the absence of 
documentation--(i) General rules. A withholding agent that cannot, 
prior to the payment, reliably associate (within the meaning of 
paragraph (b)(2)(vii) of this section) a payment of an amount subject 
to withholding (as described in Sec. 1.1441-2(a)) with valid 
documentation may rely on the presumptions of this paragraph (b)(3) to 
determine the status of the payee as a U.S. or a foreign person and the 
payee's other relevant characteristics (e.g., as an owner or 
intermediary, as an individual, trust, partnership, or corporation). * 
* *
    (ii) Presumptions of classification as individual, corporation, 
partnership, etc. (A) In general. A withholding agent that cannot 
reliably associate a payment with a valid withholding certificate or 
that has received valid documentary evidence under Secs. 1.1441-
1(e)(1)(ii)(2) and 1.6049-5(c)(1) or (4) but cannot determine a payee's 
classification from the documentary evidence must apply the rules of 
this paragraph (b)(3)(ii) to determine the payee's classification as an 
individual, trust, estate, corporation, or partnership. The fact that a 
payee is presumed to have a certain status under the provisions of this 
paragraph (b)(3)(ii) does not mean that it is excused from furnishing 
documentation if documentation is otherwise required to obtain a 
reduced rate of withholding under this section. For example, if, for 
purposes of this paragraph (b)(3)(ii), a payee is presumed to be a tax-
exempt organization based on Sec. 1.6049-4(c)(1)(ii)(B), the 
withholding agent cannot rely on this presumption to reduce the rate of 
withholding on payments to such person (if such person is also presumed 
to be a foreign person under paragraph (b)(3)(iii)(A) of this section) 
because a reduction in the rate of withholding for payments to a 
foreign tax-exempt organization generally requires that a valid Form W-
8

[[Page 32174]]

described in Sec. 1.1441-9(b)(2) be furnished to the withholding agent.
    (B) No documentation provided. If the withholding agent cannot 
reliably associate a payment with a valid withholding certificate or 
valid documentary evidence, it must presume that the payee is an 
individual, a trust, or an estate, if the payee appears to be such 
person (e.g., based on the payee's name or other indications). In the 
absence of reliable indications that the payee is an individual, trust, 
or an estate, the withholding agent must presume that the payee is a 
corporation or one of the persons enumerated under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) if it can be so treated under Sec. 1.6049-
4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) without the need to furnish documentation. 
If the withholding agent cannot treat a payee as a person described in 
Sec. 1.6049-4(c)(1)(ii)(A)(1) through (Q), then the payee shall be 
presumed to be a partnership. If such a partnership is presumed to be 
foreign, it is not the beneficial owner of the income paid to it. See 
paragraph (c)(6) of this section. If such a partnership is presumed to 
be domestic, it is a U.S. non-exempt recipient for purposes of chapter 
61 of the Internal Revenue Code.
    (C) Documentary evidence furnished for offshore account. If the 
withholding agent receives valid documentary evidence, as described in 
Sec. 1.6049-5(c)(1) or (4), with respect to an offshore account from an 
entity but the documentary evidence does not establish the entity's 
classification as a corporation, trust, estate, or partnership, the 
withholding agent may presume (in the absence of actual knowledge 
otherwise) that the entity is the type of person enumerated under 
Sec. 1.6049-4(c)(1)(ii)(B) through (Q) if it can be so treated under 
any one of those paragraphs without the need to furnish documentation. 
If the withholding agent cannot treat a payee as a person described in 
Sec. 1.6049-4(c)(1)(ii)(B) through (Q), then the payee shall be 
presumed to be a corporation unless the withholding agent knows, or has 
reason to know, that the entity is not classified as a corporation for 
U.S. tax purposes, the withholding agent is required to presume the 
payee is a U.S. person under paragraph (b)(3)(iii) of this section, or 
there are indicia of U.S. status. If the withholding agent must presume 
the payee is a U.S. person, or there are indicia of U.S. status, the 
withholding agent shall treat the entity as a partnership, and 
therefore as a U.S. non-exempt recipient for purposes of chapter 61 of 
the Internal Revenue Code; however backup withholding under section 
3406 shall not apply if backup withholding is not required under 
Sec. 31.3406(g)-1(e) of this chapter. Indicia of U.S. status exists if 
payments are regularly made to a payee in the United States, the payee 
has an account with the same withholding agent in the United States, or 
the payee has a U.S. address. If a payee is, or is presumed to be, a 
corporation under this paragraph (b)(3)(ii)(C) and a foreign person 
under paragraph (b)(3)(iii) of this section, a withholding agent shall 
not treat the payee as the beneficial owner of income if the 
withholding agent knows, or has reason to know, that the payee is not 
the beneficial owner of the income. For this purpose, a withholding 
agent shall have reason to know that the payee is not a beneficial 
owner if the documentary evidence indicates that the payee is a bank, 
broker, intermediary, custodian, or other agent, or is treated under 
Sec. 1.6049-4(c)(1)(ii)(B) through (Q) as such a person. A withholding 
agent may, however, treat such a person as a beneficial owner if the 
foreign person provides a statement, in writing and signed by a person 
with authority to sign the statement, that is attached to the 
documentary evidence stating it is the beneficial owner of the income.
    (iii) * * *
    (C) Pensions, annuities, etc. A payment from a trust described in 
section 401(a), an annuity plan described in section 403(a), a payment 
with respect to any annuity, custodial account, or retirement income 
account described in section 403(b), or a payment from an individual 
retirement account or individual retirement annuity described in 
section 408 that a withholding agent cannot reliably associate with 
documentation is presumed to be made to a U.S. person only if the 
withholding agent has a record of a Social Security number for the 
payee and relies on a mailing address described in the following 
sentence. 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 a foreign country with which the 
United States has an income tax treaty in effect and the treaty 
provides 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 (b)(3)(iii)(C). Any payment described in this paragraph 
(b)(3)(iii)(C) that is not presumed to be made to a U.S. person is 
presumed to be made to a foreign person. A withholding agent making a 
payment to a person presumed to be a foreign person may not reduce the 
30-percent amount of withholding required on such payment unless it 
receives a withholding certificate described in paragraph (e)(2)(i) of 
this section furnished by the beneficial owner. For reduction in the 
30-percent rate, see Secs. 1.1441-4(e) or 1.1441-6(b).
    (D) Certain payments to offshore accounts. A payment is presumed 
made to a foreign payee if the payment is made outside the United 
States (as defined in Sec. 1.6049-5(e)) to an offshore account (as 
defined in Sec. 1.6049-5(c)(1)) and the withholding agent does not have 
actual knowledge that the payee is a U.S. person. See Sec. 1.6049-
5(d)(2) and (3) for exceptions to this rule.
    (iv) Grace period. A withholding agent may choose to apply the 
provisions of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period 
for purposes of this paragraph (b)(3) (by applying the term withholding 
agent instead of the term payor) to amounts described in Sec. 1.1441-
6(c)(2) and to amounts covered by a Form 8233 described in Sec. 1.1441-
4(b)(2)(ii). Thus, for these amounts, a withholding agent may choose to 
treat an account holder as a foreign person and withhold under chapter 
3 of the Internal Revenue Code (and the regulations thereunder) while 
awaiting documentation. For purposes of determining the rate of 
withholding under this section, the withholding agent must withhold at 
the unreduced 30-percent rate at the time that the amounts are credited 
to an account. However, a withholding agent who can reliably associate 
the payment with a withholding certificate that is otherwise valid 
within the meaning of the applicable provisions except for the fact 
that it is transmitted by facsimile may rely on that facsimile form for 
purposes of withholding at the claimed reduced rate. For reporting of 
amounts credited both before and after the grace period, see 
Sec. 1.1461-1(c)(4)(i)(A). The following adjustments shall be made at 
the expiration of the grace period:
    (A) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section and the account 
holder is presumed to be a U.S. non-exempt recipient, then backup 
withholding applies to amounts credited to the account after the 
expiration of the grace period only. Amounts credited to the account 
during the grace period shall be treated as owned by a foreign payee 
and adjustments must be made to correct any underwithholding on such 
amounts in the manner described in Sec. 1.1461-2.
    (B) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section, or if 
documentation is furnished that

[[Page 32175]]

does not support the claimed rate reduction, and the account holder is 
presumed to be a foreign person then adjustments must be made to 
correct any underwithholding on amounts credited to the account during 
the grace period, based on the adjustment procedures described in 
Sec. 1.1461-2.
    (v) Special rules applicable to payments to foreign 
intermediaries--(A) Reliance on claim of status as foreign 
intermediary. The presumption rules of paragraph (b)(3)(v)(B) of this 
section apply to a payment made to an intermediary (whether the 
intermediary is a qualified or nonqualified intermediary) that has 
provided a valid withholding certificate under paragraph (e)(3)(ii) or 
(iii) of this section (or has provided documentary evidence described 
in paragraph (b)(3)(ii)(C) of this section that indicates it is a bank, 
broker, custodian, intermediary, or other agent) to the extent the 
withholding agent cannot treat the payment as being reliably associated 
with valid documentation under the rules of paragraph (b)(2)(vii) of 
this section. For this purpose, a U.S. person's foreign branch that is 
a qualified intermediary defined in paragraph (e)(5)(ii) of this 
section shall be treated as a foreign intermediary. A payee that the 
withholding agent may not reliably treat as a foreign intermediary 
under this paragraph (b)(3)(v)(A) is presumed to be a payee other than 
an intermediary whose classification as an individual, corporation, 
partnership, etc., must be determined in accordance with paragraph 
(b)(3)(ii) of this section to the extent relevant. In addition, such 
payee is presumed to be a U.S. or a foreign payee based upon the 
presumptions described in paragraph (b)(3)(iii) of this section. The 
provisions of paragraph (b)(3)(v)(B) of this section are not relevant 
to a withholding agent that can reliably associate a payment with a 
withholding certificate from a person representing to be a qualified 
intermediary to the extent the qualified intermediary has assumed 
primary withholding responsibility in accordance with paragraph 
(e)(5)(iv) of this section.
    (B) Beneficial owner documentation or allocation information is 
lacking or unreliable. Any portion of a payment that the withholding 
agent may treat as made to a foreign intermediary (whether a 
nonqualified or a qualified intermediary) but that the withholding 
agent cannot treat as reliably associated with valid documentation 
under the rules of paragraph (b)(2)(vii) of this section is presumed 
made to an unknown, undocumented foreign payee. As a result, a 
withholding agent must deduct and withhold 30 percent from any payment 
of an amount subject to withholding. If a withholding certificate 
attached to an intermediary certificate is another intermediary 
withholding certificate or a flow-through withholding certificate, the 
rules of this paragraph (b)(3)(v)(B) (or Sec. 1.1441-5(d)(3) or 
(e)(6)(iii)) apply by treating the share of the payment allocable to 
the other intermediary or flow-through entity as if it were made 
directly to the other intermediary or flow-through entity. Any payment 
of an amount subject to withholding that is presumed made to an 
undocumented foreign person must be reported on Form 1042-S. See 
Sec. 1.1461-1(c). See Sec. 1.6049-5(d) for payments that are not 
subject to withholding.
    (vi) U.S. branches. The rules of paragraph (b)(3)(v)(B) of this 
section shall apply to payments to a U.S. branch described in paragraph 
(b)(2)(iv)(A) of this section that has not agreed to be treated as a 
U.S. person.
    (vii) Joint payees--(A) In general. Except as provided in paragraph 
(b)(3)(vii)(B) of this section, if a withholding agent makes a payment 
to joint payees and cannot reliably associate a payment with valid 
documentation from all payees, the payment is presumed made to an 
unidentified U.S. person. However, if one of the joint payees provides 
a Form W-9 furnished in accordance with the procedures described in 
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, the payment 
shall be treated as made to that payee. See Sec. 31.3406(h)-2 of this 
chapter for rules to determine the relevant payee if more than one Form 
W-9 is provided. For purposes of applying this paragraph (b)(3), the 
grace period rules in paragraph (b)(3)(iv) of this section shall apply 
only if each payee meets the conditions described in paragraph 
(b)(3)(iv) of this section.
    (B) Special rule for offshore accounts. If a withholding agent 
makes a payment to joint payees and cannot reliably associate a payment 
with valid documentation from all payees, the payment is presumed made 
to an unknown foreign payee if the payment is made outside the United 
States (as defined in Sec. 1.6059-5(e)) to an offshore account (as 
defined in Sec. 1.6049-5(c)(1)).
* * * * *
    (6) Rules of withholding for payments by a foreign intermediary or 
certain U.S. branches--(i) In general. A foreign intermediary described 
in paragraph (e)(3)(i) of this section or a U.S. branch described in 
paragraph (b)(2)(iv) of this section that receives an amount subject to 
withholding (as defined in Sec. 1.1441-2(a)) shall be required to 
withhold (if another withholding agent has not withheld the full amount 
required) and report such payment under chapter 3 of the Internal 
Revenue Code and the regulations thereunder except as otherwise 
provided in this paragraph (b)(6). A nonqualified intermediary or U.S. 
branch described in paragraph (b)(2)(iv) of this section (other than a 
branch that is treated as a U.S. person) shall not be required to 
withhold or report if it has provided a valid nonqualified intermediary 
withholding certificate or a U.S. branch withholding certificate, it 
has provided all of the information required by paragraph (e)(3)(iv) of 
this section (withholding statement), and it does not know, and has no 
reason to know, that another withholding agent failed to withhold the 
correct amount or failed to report the payment correctly under 
Sec. 1.1461-1(c). A qualified intermediary's obligations to withhold 
and report shall be determined in accordance with its qualified 
intermediary withholding agreement.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (b)(6)(i) of this section:

    Example 1. FB, a foreign bank, acts as intermediary for five 
different persons, A, B, C, D, and E, each of whom owns U.S. 
securities that generate U.S. source dividends. The dividends are 
paid by USWA, a U.S. withholding agent. FB furnished USWA with a 
nonqualified intermediary withholding certificate, described in 
paragraph (e)(3)(iii) of this section, to which it attached the 
withholding certificates of each of A, B, C, D, and E. The 
withholding certificates from A and B claim a 15 percent reduced 
rate of withholding under an income tax treaty. C, D, and E claim no 
reduced rate of withholding. FB provides a withholding statement 
that meets all of the requirements of paragraph (e)(3)(iv) of this 
section, including information allocating 20 percent of each 
dividend payment to each of A, B, C, D, and E. FB does not have 
actual knowledge or reason to know that USWA did not withhold the 
correct amounts or report the dividends on Forms 1042-S to each of 
A, B, C, D, and E. FB is not required to withhold or to report the 
dividends to A, B, C, D, and E.
    Example 2.  The facts are the same as in Example 1, except that 
FB did not provide any information for USWA to determine how much of 
the dividend payments were made to A, B, C, D, and E. Because USWA 
could not reliably associate the dividend payments with 
documentation under paragraph (b)(2)(vii) of this section, USWA 
applied the presumption rules of paragraph (b)(3)(v) of this section 
and withheld 30 percent from all dividend payments. In addition, 
USWA filed a single Form 1042-S reporting the payment to an unknown 
foreign payee. FB is deemed to know that USWA did not report the 
payment to A, B, C, D, and E because it did not provide all of the 
information required on

[[Page 32176]]

a withholding statement under paragraph (e)(3)(iv) of this section 
(i.e., allocation information). Although FB is not required to 
withhold on the payment because the full 30 percent withholding was 
imposed by USWA, it is required to report the payments on Forms 
1042-S to A, B, C, D, and E. FB's intentional failure to do so will 
subject it to intentional disregard penalties under sections 6721 
and 6722.

* * * * *
    (c) * * *
    (2) Foreign and U.S. 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 U.S. person described in the next sentence. Solely for 
purposes of the regulations under chapter 3 of the Internal Revenue 
Code, the term foreign person also means, with respect to a payment by 
a withholding agent, a foreign branch of a U.S. person that furnishes 
an intermediary withholding certificate described in paragraph 
(e)(3)(ii) of this section. Such a branch continues to be a U.S. payor 
for purposes of chapter 61 of the Internal Revenue Code. See 
Sec. 1.6049-5(c)(4). A U.S. person is a person described in section 
7701(a)(30), the U.S. government (including an agency or 
instrumentality thereof), a State (including an agency or 
instrumentality thereof), or the District of Columbia (including an 
agency or instrumentality thereof).
* * * * *
    (6) Beneficial owner--(i) General rule. This paragraph (c)(6) 
defines the term beneficial owner for payments of income other than a 
payment for which a reduced rate of withholding is claimed under an 
income tax treaty. The term beneficial owner means the person who is 
the owner of the income for tax purposes and who beneficially owns that 
income. A person shall be treated as the owner of the income to the 
extent that it is 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). Beneficial ownership of income is determined under the 
provisions of section 7701(l) and the regulations under that section 
and any other applicable general U.S. tax principles, including 
principles governing the determination of whether a transaction is a 
conduit transaction. Thus, a person receiving income in a capacity as a 
nominee, agent, or custodian for another person is not the beneficial 
owner of the income. In the case of a scholarship, the student 
receiving the scholarship is the beneficial owner of that scholarship. 
In the case of a payment of an amount that is not income, the 
beneficial owner determination shall be made under this paragraph 
(c)(6) as if the amount were income.
    (ii) Special rules--(A) General rule. The beneficial owners of 
income paid to an entity described in this paragraph (c)(6)(ii) are 
those persons described in paragraphs (c)(6)(ii)(B) through (D) of this 
section.
    (B) Foreign partnerships. The beneficial owners of income paid to a 
foreign partnership (whether a nonwithholding or a withholding foreign 
partnership) are the partners in the partnership, unless they 
themselves are not the beneficial owners of the income under this 
paragraph (c)(6). 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 the owner of the income under U.S. tax 
principles. Rather, the partners of the first tier partnership are the 
beneficial owners (to the extent they are not themselves persons that 
are not beneficial owners under this paragraph (c)(6)). See 
Sec. 1.1441-5(b) for applicable withholding procedures for payments to 
a domestic partnership. See also Sec. 1.1441-5(c)(3)(ii) 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.
    (C) Foreign simple trusts and foreign grantor trusts. The 
beneficial owners of income paid to a foreign simple trust, as 
described in paragraph (c)(23) of this section, are the beneficiaries 
of the trust, unless they themselves are not the beneficial owners of 
the income under this paragraph (c)(6). The beneficial owners of income 
paid to a foreign grantor trust, as described in paragraph (c)(26) of 
this section, are the persons treated as the owners of the trust, 
unless they themselves are not the beneficial owners of the income 
under this paragraph (c)(6).
    (D) Other foreign trusts and foreign estates. The beneficial owner 
of income paid to a foreign complex trust as defined in paragraph 
(c)(25) of this section or to a foreign estate is the foreign complex 
trust or estate itself.
* * * * *
    (12) Payee. For purposes of chapter 3 of the Internal Revenue Code, 
the term payee of a payment is determined under paragraph (b)(2) of 
this section, Sec. 1.1441-5(c)(1) (relating to partnerships), and 
Sec. 1.1441-5(e)(2) and (3) (relating to trusts and estates) and 
includes foreign persons, U.S. exempt recipients, and U.S. non-exempt 
recipients. A nonqualified intermediary and a qualified intermediary 
(to the extent it does not assume primary withholding responsibility) 
are not payees if they are acting as intermediaries and not the 
beneficial owner of income. In addition, a flow-through entity is not a 
payee unless the income is (or is deemed to be) effectively connected 
with the conduct of a trade or business in the United States. See 
Sec. 1.6049-5(d)(1) for rules to determine the payee for purposes of 
chapter 61 of the Internal Revenue Code. See Secs. 1.1441-1(b)(3), 
1.1441-5(d), and (e)(6) and 1.6049-5(d)(3) for presumption rules that 
apply if a payee's identity cannot be determined on the basis of valid 
documentation.
    (13) Intermediary. An intermediary means, with respect to a payment 
that it receives, a person that, for that payment, acts as a custodian, 
broker, nominee, or otherwise as an agent for another person, 
regardless of whether such other person is the beneficial owner of the 
amount paid, a flow-through entity, or another intermediary.
    (14) Nonqualified intermediary. A nonqualified intermediary means 
any intermediary that is not a qualified intermediary, as defined in 
paragraph (e)(5)(ii) of this section, or a qualified intermediary that 
is not acting in its capacity as a qualified intermediary with respect 
to a payment. For example, to the extent an entity that is a qualified 
intermediary provides another withholding agent with a foreign 
beneficial owner withholding certificate as defined in paragraph 
(e)(2)(i) of this section, the entity is not acting in its capacity as 
a qualified intermediary. Notwithstanding the preceding sentence, a 
qualified intermediary is acting as a qualified intermediary to the 
extent it provides another withholding agent with Forms W-9, or other 
information regarding U.S. non-exempt recipients pursuant to its 
qualified intermediary agreement with the IRS.
    (15) Qualified intermediary. The term qualified intermediary is 
defined in paragraph (e)(5)(ii) of this section.
    (16) Withholding certificate. The term withholding certificate 
means a Form W-8 described in paragraph (e)(2)(i) of this section 
(relating to foreign beneficial owners), paragraph (e)(3)(i) of this 
section (relating to foreign intermediaries), Sec. 1.1441-5(c)(2)(iv), 
(c)(3)(iii), and (e)(3)(iv) (relating to flow-through entities), a Form 
8233 described in Sec. 1.1441-4(b)(2), a Form W-9 as described in 
paragraph (d) of this section, a statement described in Sec. 1.871-
14(c)(2)(v) (relating to portfolio

[[Page 32177]]

interest), or any other certificates that under the Internal Revenue 
Code or regulations certifies or establishes the status of a payee or 
beneficial owner as a U.S. or a foreign person.
    (17) Documentary evidence; other appropriate documentation. The 
terms documentary evidence or other appropriate documentation refer to 
documents other than a withholding certificate that may be provided for 
payments made outside the United States to offshore accounts or any 
other evidence that under the Internal Revenue Code or regulations 
certifies or establishes the status of a payee or beneficial owner as a 
U.S. or foreign person. See Secs. 1.1441-6(b)(2), (c)(3) and (4) 
(relating to treaty benefits), and 1.6049-5(c)(1) and (4) (relating to 
chapter 61 reporting). Also see Sec. 1.1441-4(a)(3)(ii) regarding 
documentary evidence for notional principal contracts.
    (18) Documentation. The term documentation refers to both 
withholding certificates, as defined in paragraph (c)(16) of this 
section, and documentary evidence or other appropriate documentation, 
as defined in paragraph (c)(17) of this section.
    (19) Payor. The term payor is defined in Sec. 31.3406(a)-2 of this 
chapter and Sec. 1.6049-4(a)(2) and generally includes a withholding 
agent, as defined in Sec. 1.1441-7(a). The term also includes any 
person that makes a payment to an intermediary, flow-through entity, or 
U.S. branch that is not treated as a U.S. person to the extent the 
intermediary, flow-through, or U.S. branch provides a Form W-9 or other 
appropriate information relating to a payee so that the payment can be 
reported under chapter 61 of the Internal Revenue Code and, if 
required, subject to backup withholding under section 3406. This latter 
rule does not preclude the intermediary, flow-through entity, or U.S. 
branch from also being a payor.
    (20) Exempt recipient. The term exempt recipient means a person 
that is exempt from reporting under chapter 61 of the Internal Revenue 
Code and backup withholding under section 3406 and that is described in 
Secs. 1.6041-3(q), 1.6045-2(b)(2)(i), and 1.6049-4(c)(1)(ii), and 
Sec. 5f.6045-1(c)(3)(i)(B) of this chapter. Exempt recipients are not 
exempt from withholding under chapter 3 of the Internal Revenue Code 
unless they are U.S. persons or foreign persons entitled to an 
exemption from withholding under chapter 3.
    (21) Non-exempt recipient. A non-exempt recipient is any person 
that is not an exempt recipient under paragraph (c)(20) of this 
section.
    (22) Reportable amounts. Reportable amounts are defined in 
paragraph (e)(3)(vi) of this section.
    (23) Flow-through entity. A flow-through entity means any entity 
that is described in this paragraph (c)(23) and that may provide 
documentation on behalf of others to a withholding agent. The entities 
described in this paragraph are a foreign partnership (other than a 
withholding foreign partnership), a foreign simple trust (other than a 
withholding foreign trust) that is described in paragraph (c)(24) of 
this section, a foreign grantor trust (other than a withholding foreign 
trust) that is described in paragraph (c)(25) of this section, or, for 
any payments for which a reduced rate of withholding under an income 
tax treaty is claimed, any entity to the extent the entity is 
considered to be fiscally transparent under section 894 with respect to 
the payment by an interest holder's jurisdiction.
    (24) Foreign simple trust. A foreign simple trust is a foreign 
trust that is described in section 651(a).
    (25) Foreign complex trust. A foreign complex trust is a foreign 
trust other than a trust described in section 651(a) or sections 671 
through 679.
    (26) Foreign grantor trust. A foreign grantor trust is a foreign 
trust but only to the extent all or a portion of the income of the 
trust is treated as owned by the grantor or another person under 
sections 671 through 679.
    (27) Partnership. The term partnership means any entity treated as 
a partnership under Sec. 301.7701-2 or -3 of this chapter.
    (28) Nonwithholding foreign partnership. A nonwithholding foreign 
partnership is a foreign partnership that is not a withholding foreign 
partnership, as defined in Sec. 1.1441-5(c)(2)(i).
    (29) Withholding foreign partnership. A withholding foreign 
partnership is defined in Sec. 1.1441-5(c)(2)(i).
    (d) * * *
    (2) Payments for which a Form W-9 is otherwise required. A 
withholding agent may treat as a U.S. payee any person who is required 
to furnish a Form W-9 and who furnishes it in accordance with the 
procedures described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this 
chapter (including the requirement that the payee furnish its taxpayer 
identifying number (TIN)) if 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. Providing a Form W-9 or 
valid substitute form shall serve as a statement that the person whose 
name is on the form is a U.S. person. Therefore, a foreign person, 
including a U.S. branch treated as a U.S. person under paragraph 
(b)(2)(iv) of this section, shall not provide a Form W-9. A U.S. branch 
of a foreign person may establish its status as a foreign person exempt 
from reporting under chapter 61 and backup withholding under section 
3406 by providing a withholding certificate on Form W-8.
    (3) Payments for which a Form W-9 is not otherwise required. In the 
case of a payee who is not required to furnish a Form W-9 under section 
3406 (e.g., a person exempt from reporting under chapter 61 of the 
Internal Revenue Code), the withholding agent may treat the payee as a 
U.S. payee if the payee provides the withholding agent with a Form W-9 
or a substitute form described in Sec. 31.3406(h)-3(c)(2) of this 
chapter (relating to forms for exempt recipients) that contains the 
payee's name, address, and TIN. The form must be signed under penalties 
of perjury by the payee if so required by the form or by 
Sec. 31.3406(h)-3 of this chapter. Providing a Form W-9 or valid 
substitute form shall serve as a statement that the person whose name 
is on the certificate is a U.S. person. A Form W-9 or valid substitute 
form shall not be provided by a foreign person, including any U.S. 
branch of a foreign person whether or not the branch is treated as a 
U.S. person under paragraph (b)(2)(iv) of this section. See paragraph 
(e)(3)(v) of this section for withholding certificates provided by U.S. 
branches described in paragraph (b)(2)(iv) of this section. The 
procedures described in Sec. 31.3406(h)-2(a) of this chapter shall 
apply to payments to joint payees. A withholding agent that receives a 
Form W-9 to satisfy this paragraph (d)(3) must retain the form in 
accordance with the provisions of Sec. 31.3406(h)-3(g) of this chapter, 
if applicable, or of paragraph (e)(4)(iii) of this section (relating to 
the retention of withholding certificates) if Sec. 31.3406(h)-3(g) of 
this chapter does not apply. The rules of this paragraph (d)(3) are 
only intended to provide a method by which a withholding agent may 
determine that a payee is a U.S. person and do not otherwise impose a 
requirement that documentation be furnished by a person who is 
otherwise treated as an exempt recipient for purposes of the applicable 
information reporting provisions under chapter 61 of the Internal 
Revenue Code (e.g., Sec. 1.6049-4(c)(1)(ii) for payments of interest).
    (4) When a payment to an intermediary or flow-through entity may be 
treated as made to a U.S. payee. A withholding agent that makes a 
payment to an intermediary (whether a qualified intermediary or 
nonqualified intermediary), a flow-through entity, or

[[Page 32178]]

a U.S. branch described in paragraph (b)(2)(iv) of this section may 
treat the payment as made to a U.S. payee to the extent that, prior to 
the payment, the withholding agent can reliably associate the payment 
with a Form W-9 described in paragraph (d)(2) or (3) of this section 
attached to a valid intermediary, flow-through, or U.S. branch 
withholding certificate described in paragraph (e)(3)(i) of this 
section or to the extent the withholding agent can reliably associate 
the payment with a Form W-8 described in paragraph (e)(3)(v) of this 
section that evidences an agreement to treat a U.S. branch described in 
paragraph (b)(2)(iv) of this section as a U.S. person. In addition, a 
withholding agent may treat the payment as made to a U.S. payee only if 
it complies with the electronic confirmation procedures described in 
paragraph (e)(4)(v) of this section, if required, and it has not been 
notified by the IRS that any of the information on the withholding 
certificate or other documentation is incorrect or unreliable. In the 
case of a Form W-9 that is required to be furnished for a reportable 
payment that may be subject to backup withholding, the withholding 
agent may be notified in accordance with section 3406(a)(1)(B) and the 
regulations under that section. See applicable procedures under section 
3406(a)(1)(B) and the regulations under that section for payors who 
have been notified with regard to such a Form W-9. Withholding agents 
who have been notified in relation to other Forms W-9, including under 
section 6724(b) pursuant to section 6721, may rely on the withholding 
certificate or other documentation only to the extent provided under 
procedures as prescribed by the IRS (see Sec. 601.601(d)(2) of this 
chapter).
    (e) * * * (1) * * *
    (ii) * * * (A) * * *
    (1) That the withholding agent can reliably associate the payment 
with a beneficial owner withholding certificate described in paragraph 
(e)(2) of this section furnished by the person whose name is on the 
certificate or attached to a valid foreign intermediary, flow-through, 
or U.S. branch withholding certificate;
* * * * *
    (3) That the withholding agent can reliably associate the payment 
with a valid qualified intermediary withholding certificate, as 
described in paragraph (e)(3)(ii) of this section, and the qualified 
intermediary has provided sufficient information for the withholding 
agent to allocate the payment to a withholding rate pool other than a 
withholding rate pool or pools established for U.S. non-exempt 
recipients;
    (4) That the withholding agent can reliably associate the payment 
with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii) or 
(e)(5)(iii) from a flow-through entity claiming the income is 
effectively connected income;
* * * * *
    (3) Intermediary, flow-through, or U.S. branch withholding 
certificate--(i) In general. An intermediary withholding certificate is 
a Form W-8 by which a payee represents that it is a foreign person and 
that it is an intermediary (whether a qualified or nonqualified 
intermediary) with respect to a payment and not the beneficial owner. 
See paragraphs (e)(3)(ii) and (iii) of this section. A flow-through 
withholding certificate is a Form W-8 used by a flow-through entity as 
defined in paragraph (c)(23) of this section. See Sec. 1.1441-
5(c)(3)(iii) (a nonwithholding foreign partnership), Sec. 1.1441-
5(e)(5)(iii) (a foreign simple trust or foreign grantor trust) or 
Sec. 1.1441-6(b)(2) (foreign entity presenting claims on behalf of its 
interest holders for a reduced rate of withholding under an income tax 
treaty). A U.S. branch certificate is a Form W-8 furnished under 
paragraph (e)(3)(v) of this section by a U.S. branch described in 
paragraph (b)(2)(iv) of this section. See paragraph (e)(4)(viii) of 
this section for applicable reliance rules.
    (ii) Intermediary withholding certificate from a qualified 
intermediary. A qualified intermediary shall provide a qualified 
intermediary withholding certificate for reportable amounts received by 
the qualified intermediary. See paragraph (e)(3)(vi) of this section 
for the definition of reportable amount. A qualified intermediary 
withholding certificate is valid only if it is furnished on a Form W-8, 
an acceptable substitute form, or such other form as the IRS may 
prescribe, it is signed under penalties of perjury by a person with 
authority to sign for the qualified intermediary, its validity has not 
expired, and it contains the following information, statement, and 
certifications--
    (A) The name, permanent residence address (as described in 
paragraph (e)(2)(ii) of this section), qualified intermediary employer 
identification number (QI-EIN), and the country under the laws of which 
the intermediary is created, incorporated, or governed. A qualified 
intermediary that does not act in its capacity as a qualified 
intermediary must not use its QI-EIN. Rather the intermediary should 
provide a nonqualified intermediary withholding certificate, if it is 
acting as an intermediary, and should use the taxpayer identification 
number, if any, that it uses for all other purposes;
    (B) A certification that, with respect to accounts it identifies on 
its withholding statement (as described in paragraph (e)(5)(v) of this 
section), the qualified intermediary is not acting for its own account 
but is acting as a qualified intermediary;
    (C) A certification that the qualified intermediary has provided, 
or will provide, a withholding statement as required by paragraph 
(e)(5)(v) of this section; and
    (D) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certifications described in this paragraph 
(e)(3)(ii) or paragraph (e)(3)(v) of this section. See paragraph 
(e)(5)(v) of this section for the requirements of a withholding 
statement associated with the qualified intermediary withholding 
certificate.
    (iii) Intermediary withholding certificate from a nonqualified 
intermediary. A nonqualified intermediary shall provide a nonqualified 
intermediary withholding certificate for reportable amounts received by 
the nonqualified intermediary. See paragraph (e)(3)(vi) of this section 
for the definition of reportable amount. A nonqualified intermediary 
withholding certificate is valid only to the extent it is furnished on 
a Form W-8, an acceptable substitute form, or such other form as the 
IRS may prescribe, it is signed under penalties of perjury by a person 
authorized to sign for the nonqualified intermediary, it contains the 
information, statements, and certifications described in this paragraph 
(e)(3)(iii) and paragraph (e)(3)(iv) of this section, its validity has 
not expired, and the withholding certificates and other appropriate 
documentation for all persons to whom the certificate relates are 
associated with the certificate. Withholding certificates and other 
appropriate documentation consist of beneficial owner withholding 
certificates described in paragraph (e)(2)(i) of this section, 
intermediary and flow-through withholding certificates described in 
paragraph (e)(3)(i) of this section, withholding foreign partnership 
certificates described in Sec. 1.1441-5(c)(2)(iv), documentary evidence 
described in Secs. 1.1441-6(c)(3) or (4) and 1.6049-5(c)(1), and any 
other documentation or certificates applicable under other provisions 
of the Internal Revenue Code or regulations that certify or establish 
the status of the payee or beneficial owner as a U.S. or a foreign

[[Page 32179]]

person. If a nonqualified intermediary is acting on behalf of another 
nonqualified intermediary or a flow-through entity, then the 
nonqualified intermediary must associate with its own withholding 
certificate the other nonqualified intermediary withholding certificate 
or the flow-through withholding certificate and separately identify all 
of the withholding certificates and other appropriate documentation 
that are associated with the withholding certificate of the other 
nonqualified intermediary or flow-through entity. Nothing in this 
paragraph (e)(3)(iii) shall require an intermediary to furnish original 
documentation. Copies of certificates or documentary evidence may be 
transmitted to the U.S. withholding agent, in which case the 
nonqualified intermediary must retain the original documentation for 
the same time period that the copy is required to be retained by the 
withholding agent under paragraph (e)(4)(iii) of this section and must 
provide it to the withholding agent upon request. For purposes of this 
paragraph (e)(3)(iii), a valid intermediary withholding certificate 
also includes a statement described in Sec. 1.871-14(c)(2)(v) furnished 
for interest to qualify as portfolio interest for purposes of sections 
871(h) and 881(c). The information and certifications required on a 
Form W-8 described in this paragraph (e)(3)(iii) are as follows--
    (A) The name and permanent resident address (as described in 
paragraph (e)(2)(ii) of this section) of the nonqualified intermediary, 
and the country under the laws of which the nonqualified intermediary 
is created, incorporated, or governed;
    (B) A certification that the nonqualified intermediary is not 
acting for its own account;
    (C) If the nonqualified intermediary withholding certificate is 
used to transmit withholding certificates or other appropriate 
documentation for more than one person on whose behalf the nonqualified 
intermediary is acting, a withholding statement associated with the 
Form W-8 that provides all the information required by paragraph 
(e)(3)(iv) of this section; and
    (D) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information, certifications, and statements described in 
this paragraph (e)(3)(iii) or paragraph (e)(3)(iv) of this section.
    (iv) Withholding statement provided by nonqualified intermediary--
(A) In general. A nonqualified intermediary shall provide a withholding 
statement required by this paragraph (e)(3)(iv) to the extent the 
nonqualified intermediary is required to furnish, or does furnish, 
documentation for payees on whose behalf it receives reportable amounts 
(as defined in paragraph (e)(3)(vi) of this section) or to the extent 
it otherwise provides the documentation of such payees to a withholding 
agent. A nonqualified intermediary is not required to disclose 
information regarding persons for whom it collects reportable amounts 
unless it has actual knowledge that any such person is a U.S. non-
exempt recipient as defined in paragraph (c)(21) of this section. 
Information regarding U.S. non-exempt recipients required under this 
paragraph (e)(3)(iv) must be provided irrespective of any requirement 
under foreign law that prohibits the disclosure of the identity of an 
account holder of a nonqualified intermediary or financial information 
relating to such account holder. Although a nonqualified intermediary 
is not required to provide documentation and other information required 
by this paragraph (e)(3)(iv) for persons other than U.S. non-exempt 
recipients, a withholding agent that does not receive documentation and 
such information must apply the presumption rules of paragraph (b) of 
this section, Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) or the 
withholding agent shall be liable for tax, interest, and penalties. A 
withholding agent must apply the presumption rules even if it is not 
required under chapter 61 of the Internal Revenue Code to obtain 
documentation to treat a payee as an exempt recipient and even though 
it has actual knowledge that the payee is a U.S. person. For example, 
if a nonqualified intermediary fails to provide a withholding agent 
with a Form W-9 for an account holder that is a U.S. exempt recipient, 
the withholding agent must presume (even if it has actual knowledge 
that the account holder is a U.S. exempt recipient), that the account 
holder is an undocumented foreign person with respect to amounts 
subject to withholding. See paragraph (b)(3)(v) of this section for 
applicable presumptions. Therefore, the withholding agent must withhold 
30 percent from the payment even though if a Form W-9 had been 
provided, no withholding or reporting on the payment attributable to a 
U.S. exempt recipient would apply. Further, a nonqualified intermediary 
that fails to provide the documentation and the information under this 
paragraph (e)(3)(iv) for another withholding agent to report the 
payments on Forms 1042-S and Forms 1099 is not relieved of its 
responsibility to file information returns. See paragraph (b)(6) of 
this section. Therefore, unless the nonqualified intermediary itself 
files such returns and provides copies to the payees, it shall be 
liable for penalties under sections 6721 (failure to file information 
returns), and 6722 (failure to furnish payee statements), including the 
penalties under those sections for intentional failure to file 
information returns. In addition, failure to provide either the 
documentation or the information required by this paragraph (e)(3)(iv) 
results in a payment not being reliably associated with valid 
documentation. Therefore, the beneficial owners of the payment are not 
entitled to reduced rates of withholding and if the full amount 
required to be held under the presumption rules is not withheld by the 
withholding agent, the nonqualified intermediary must withhold the 
difference between the amount withheld by the withholding agent and the 
amount required to be withheld. Failure to withhold shall result in the 
nonqualified intermediary being liable for tax under section 1461, 
interest, and penalties, including penalties under section 6656 
(failure to deposit) and section 6672 (failure to collect and pay over 
tax).
    (B) General requirements. A withholding statement must be provided 
prior to the payment of a reportable amount and must contain the 
information specified in paragraph (e)(3)(iv)(C) of this section. The 
statement must be updated as often as required to keep the information 
in the withholding statement correct prior to each subsequent payment. 
The withholding statement forms an integral part of the withholding 
certificate provided under paragraph (e)(3)(iii) of this section, and 
the penalties of perjury statement provided on the withholding 
certificate shall apply to the withholding statement. The withholding 
statement may be provided in any manner the nonqualified intermediary 
and the withholding agent mutually agree, including electronically. If 
the withholding statement is provided electronically, there must be 
sufficient safeguards to ensure that the information received by the 
withholding agent is the information sent by the nonqualified 
intermediary and all occasions of user access that result in the 
submission or modification of the withholding statement information 
must be recorded. In addition, an electronic system must be capable of 
providing a hard copy of all withholding statements provided by the 
nonqualified

[[Page 32180]]

intermediary. A withholding agent will be liable for tax, interest, and 
penalties in accordance with paragraph (b)(7) of this section to the 
extent it does not follow the presumption rules of paragraph (b)(3) of 
this section or Secs. 1.1441-5(d) and (e)(6), and 1.6049-5(d) for any 
payment of a reportable amount, or portion thereof, for which it does 
not have a valid withholding statement prior to making a payment.
    (C) Content of withholding statement. The withholding statement 
provided by a nonqualified intermediary must contain the information 
required by this paragraph (e)(3)(iv)(C).
    (1) The withholding statement must contain the name, address, TIN 
(if any) and the type of documentation (documentary evidence, Form W-9, 
or type of Form W-8) for every person from whom documentation has been 
received by the nonqualified intermediary to the withholding agent and 
whether that person is a U.S. exempt recipient, a U.S. non-exempt 
recipient, or a foreign person. See paragraphs (c)(2), (20), and (21) 
of this section for the definitions of foreign person, U.S. exempt 
recipient, and U.S. non-exempt recipient. In the case of a foreign 
person, the statement must indicate whether the foreign person is a 
beneficial owner or an intermediary, flow-through entity, or U.S. 
branch described in paragraph (b)(2)(iv) of this section and include 
the type of recipient, based on recipient codes used for filing Forms 
1042-S, if the foreign person is a recipient as defined in Sec. 1.1461-
1(c)(1)(ii).
    (2) The withholding statement must allocate each payment, by income 
type, to every payee (including U.S. exempt recipients) for whom 
documentation has been provided. Any payment that cannot be reliably 
associated with valid documentation from a payee shall be treated as 
made to an unknown payee in accordance with the presumption rules of 
paragraph (b) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d). For this purpose, a type of income is determined by the 
types of income required to be reported on Forms 1042-S or 1099, as 
appropriate. Notwithstanding the preceding sentence, deposit interest 
(including original issue discount) described in section 871(i)(2)(A) 
or 881(d) and interest or original issue discount on short-term 
obligations as described in section 871(g)(1)(B) or 881(e) is only 
required to be allocated to the extent it is required to be reported on 
Form 1099 or Form 1042-S. See Sec. 1.6049-8 (regarding reporting of 
bank deposit interest to certain foreign persons). If a payee receives 
income through another nonqualified intermediary, flow-through entity, 
or U.S. branch described in paragraph (e)(2)(iv) of this section (other 
than a U.S. branch treated as a U.S. person), the withholding 
certificate must also state, with respect to the payee, the name, 
address, and TIN, if known, of the other nonqualified intermediary or 
U.S. branch from which the payee directly receives the payment or the 
flow-through entity in which the payee has a direct ownership interest. 
If another nonqualified intermediary, flow-through entity, or U.S. 
branch fails to allocate a payment, the name of the nonqualified 
intermediary, flow-through entity, or U.S. branch that failed to 
allocate the payment shall be provided with respect to such payment.
    (3) If a payee is identified as a foreign person, the nonqualified 
intermediary must specify the rate of withholding to which the payee is 
subject, the payee's country of residence and, if a reduced rate of 
withholding is claimed, the basis for that reduced rate (e.g., treaty 
benefit, portfolio interest, exempt under section 501(c)(3), 892, or 
895). The allocation statement must also include the taxpayer 
identification numbers of those foreign persons for whom such a number 
is required under paragraph (e)(4)(vii) of this section or Sec. 1.1441-
6(b)(1) (regarding claims for treaty benefits). In the case of a claim 
of treaty benefits, the nonqualified intermediary's withholding 
statement must also state whether the limitation on benefits and 
section 894 statements required by Sec. 1.1441-6(c)(5) have been 
provided, if required, in the beneficial owner's Form W-8 or associated 
with such owner's documentary evidence.
    (4) The withholding statement must also contain any other 
information the withholding agent reasonably requests in order to 
fulfill its obligations under chapter 3, chapter 61 of the Internal 
Revenue Code, and section 3406.
    (D) Alternative procedures--(1) In general. Under the alternative 
procedures of this paragraph (e)(3)(iv)(D), a nonqualified intermediary 
may provide information allocating a payment of a reportable amount to 
each payee (including U.S. exempt recipients) otherwise required under 
paragraph (e)(3)(iv)(B)(2) of this section after a payment is made. To 
use the alternative procedure of this paragraph (e)(3)(iv)(D), the 
nonqualified intermediary must inform the withholding agent on a 
statement associated with its nonqualified intermediary withholding 
certificate that it is using the procedure under this paragraph 
(e)(3)(iv)(D) and the withholding agent must agree to the procedure. If 
the requirements of the alternative procedure are met, a withholding 
agent, including the nonqualified intermediary using the procedures, 
can treat the payment as reliably associated with documentation and, 
therefore, the presumption rules of paragraph (b)(3) of this section 
and Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) do not apply even 
though information allocating the payment to each payee has not been 
received prior to the payment. See paragraph (e)(3)(iv)(D)(7) of this 
section, however, for a nonqualified intermediary's liability for tax 
and penalties if the requirements of this paragraph (e)(3)(iv)(D) are 
not met. These alternative procedures shall not be used for payments 
that are allocable to U.S. non-exempt recipients. Therefore, a 
nonqualified intermediary is required to provide a withholding agent 
with information allocating payments of reportable amounts to U.S. non-
exempt recipients prior to the payment being made by the withholding 
agent.
    (2) Withholding rate pools. In place of the information required in 
paragraph (e)(3)(iv)(B)(2) of this section allocating payments to each 
payee, the nonqualified intermediary must provide a withholding agent 
with withholding rate pool information prior to the payment of a 
reportable amount. The withholding statement must contain all other 
information required by paragraph (e)(3)(iv)(B) of this section. 
Further, each payee listed in the withholding statement must be 
assigned to an identified withholding rate pool. To the extent a 
nonqualified intermediary is required to, or does provide, 
documentation, the alternative procedures do not relieve the 
nonqualified intermediary from the requirement to provide documentation 
prior to the payment being made. Therefore, withholding certificates or 
other appropriate documentation and all information required by 
paragraph (e)(3)(iv)(B) of this section (other than allocation 
information) must be provided to a withholding agent before any new 
payee receives a reportable amount. In addition, the withholding 
statement must be updated by assigning a new payee to a withholding 
rate pool prior to the payment of a reportable amount. A withholding 
rate pool is a payment of a single type of income, determined in 
accordance with the categories of income used to file Form 1042-S, that 
is subject to a single rate of withholding. A withholding rate pool may 
be established by any reasonable method to which the nonqualified 
intermediary and a withholding agent agree (e.g., by establishing a 
separate

[[Page 32181]]

account for a single withholding rate pool, or by dividing a payment 
made to a single account into portions allocable to each withholding 
rate pool). The nonqualified intermediary shall determine withholding 
rate pools based on valid documentation or, to the extent a payment 
cannot be reliably associated with valid documentation, the presumption 
rules of paragraph (b)(3) of this section and Secs. 1.1441-5(d) and 
(e)(6) and 1.6049-5(d).
    (3) Allocation information. The nonqualified intermediary must 
provide the withholding agent with sufficient information to allocate 
the income in each withholding rate pool to each payee (including U.S. 
non-exempt recipients) within the pool no later than January 31 of the 
year following the year of payment. Any payments that are not allocated 
to payees for whom documentation has been provided shall be allocated 
to an undocumented payee in accordance with the presumption rules of 
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d). Notwithstanding the preceding sentence, deposit interest 
(including original issue discount) described in section 871(i)(2)(A) 
or 881(d) and interest or original issue discount on short-term 
obligations as described in section 871(g)(1)(B) or 881(e) is not 
required to be allocated to a U.S. exempt recipient or a foreign payee, 
except as required under Sec. 1.6049-8 (regarding reporting of deposit 
interest paid to certain foreign persons).
    (4) Failure to provide allocation information. If a nonqualified 
intermediary fails to provide allocation information, if required, by 
January 31 for any withholding rate pool, a withholding agent shall not 
apply the alternative procedures of this paragraph (e)(3)(iv)(D) to any 
payments of reportable amounts paid after January 31 in the taxable 
year following the calendar year for which allocation information was 
not given and any subsequent taxable year. Further, the alternative 
procedures shall be unavailable for any other withholding rate pool 
even though allocation information was given for that other pool. 
Therefore, the withholding agent must withhold on a payment of a 
reportable amount in accordance with the presumption rules of paragraph 
(b)(3) of this section, and Secs. 1.1441-5(d) and (e)(6) and 1.6049-
5(d), unless the nonqualified intermediary provides all of the 
information, including information sufficient to allocate the payment 
to each specific payee, required by paragraph (e)(3)(iv)(A) through (C) 
of this section prior to the payment. A nonqualified intermediary must 
allocate at least 90 percent of the income required to be allocated for 
each withholding rate pool or the nonqualified intermediary will be 
treated as having failed to provide allocation information for purposes 
of this paragraph (e)(3)(iv)(D). See paragraph (e)(3)(iv)(D)(7) of this 
section for liability for tax and penalties if a nonqualified 
intermediary fails to provide allocation information in whole or in 
part.
    (5) Cure provision. A nonqualified intermediary may cure any 
failure to provide allocation information by providing the required 
allocation information to the withholding agent no later than February 
14 following the calendar year of payment. If the withholding agent 
receives the allocation information by that date, it may apply the 
adjustment procedures of Sec. 1.1461-2 to any excess withholding for 
payments made on or after February 1 and on or before February 14. Any 
nonqualified intermediary that fails to cure by February 14, may 
request the ability to use the alternative procedures of this paragraph 
(e)(3)(iv)(D) by submitting a request, in writing, to the Assistant 
Commissioner (International). The request must state the reason that 
the nonqualified intermediary did not comply with the alternative 
procedures of this paragraph (e)(3)(iv)(D) and steps that the 
nonqualified intermediary has taken, or will take, to ensure that no 
failures occur in the future. If the Assistant Commissioner 
(International) determines that the alternative procedures of this 
paragraph (e)(3)(iv)(D) may apply, a determination to that effect will 
be issued by the IRS to the nonqualified intermediary.
    (6) Form 1042-S reporting in case of allocation failure. If a 
nonqualified intermediary fails to provide allocation information by 
February 14 following the year of payment for a withholding rate pool, 
the withholding agent must file Forms 1042-S for payments made to each 
payee in that pool (other than U.S. exempt recipients) in the prior 
calendar year by pro rating the payment to each payee (including U.S. 
exempt recipients) listed in the withholding statement for that 
withholding rate pool. If the nonqualified intermediary fails to 
allocate10 percent or less of an amount required to be allocated for a 
withholding rate pool, a withholding agent shall report the unallocated 
amount as paid to a single unknown payee in accordance with the 
presumption rules of paragraph (b) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d). The portion of the payment that can be 
allocated to specific recipients, as defined in Sec. 1.1461-
1(c)(1)(ii), shall be reported to each recipient in accordance with the 
rules of Sec. 1.1461-1(c).
    (7) Liability for tax, interest, and penalties. If a nonqualified 
intermediary fails to provide allocation information by February 14 
following the year of payment for all or a portion of the payments made 
to any withholding rate pool, the withholding agent from whom the 
nonqualified intermediary received payments of reportable amounts shall 
not be liable for any tax, interest, or penalties, due solely to the 
errors or omissions of the nonqualified intermediary. See Sec. 1.1441-
7(b)(2) through (10) for the due diligence requirements of a 
withholding agent. Because failure by the nonqualified intermediary to 
provide allocation information results in a payment not being reliably 
associated with valid documentation, the beneficial owners for whom the 
nonqualified intermediary acts are not entitled to a reduced rate of 
withholding. Therefore, the nonqualified intermediary, as a withholding 
agent, shall be liable for any tax not withheld by the withholding 
agent in accordance with the presumption rules, interest on the under 
withheld tax if the nonqualified intermediary fails to pay the tax 
timely, and any applicable penalties, including the penalties under 
sections 6656 (failure to deposit), 6721 (failure to file information 
returns) and 6722 (failure to file payee statements). Failure to 
provide allocation information for more than 10 percent of the payments 
made to a particular withholding rate pool will be presumed to be an 
intentional failure within the meaning of sections 6721(e) and 6722(c). 
The nonqualified intermediary may rebut the presumption.
    (8) Applicability to flow-through entities and certain U.S. 
branches. See paragraph (e)(3)(v) of this section and Sec. 1.1441-
5(c)(3)(iv) and (e)(5)(iv) for the applicability of this paragraph 
(e)(3)(iv) to U.S. branches described in paragraph (b)(2)(iv) of this 
section (other than U.S. branches treated as U.S. persons) and flow-
through entities.
    (E) Notice procedures. The IRS may notify a withholding agent that 
the alternative procedures of paragraph (e)(3)(iv)(D) of this section 
are not applicable to a specified nonqualified intermediary, a U.S. 
branch described in paragraph (b)(2)(iv) of this section, or a flow-
through entity. If a withholding agent receives such a notice, it must 
commence withholding in accordance with the presumption rules of 
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d) unless the

[[Page 32182]]

nonqualified intermediary, U.S. branch, or flow-through entity complies 
with the procedures in paragraphs (e)(3)(iv)(A) through (C) of this 
section. In addition, the IRS may notify a withholding agent, in 
appropriate circumstances, that it must apply the presumption rules of 
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d) to payments made to a nonqualified intermediary, a U.S. 
branch, or a flow-through entity even if the nonqualified intermediary, 
U.S. branch or flow-through entity provides allocation information 
prior to the payment. A withholding agent that receives a notice under 
this paragraph (e)(3)(iv)(E) must commence withholding in accordance 
with the presumption rules within 30 days of the date of the notice. 
The IRS may withdraw its prohibition against using the alternative 
procedures of paragraph (e)(3)(iv)(D) of this section, or its 
requirement to follow the presumption rules, if the nonqualified 
intermediary, U.S. branch, or flow-through entity can demonstrate to 
the satisfaction of the Assistant Commissioner (International) or his 
delegate that it is capable of complying with the rules under chapter 3 
of the Internal Revenue Code and any other conditions required by the 
Assistant Commissioner (International).
    (v) Withholding certificate from certain U.S. branches. A U.S. 
branch certificate is a withholding certificate provided by a U.S. 
branch described in paragraph (b)(2)(iv) of this section that is not 
the beneficial owner of the income. The withholding certificate is 
provided with respect to reportable amounts and must state that such 
amounts are not effectively connected with the conduct of a trade or 
business in the United States. The withholding certificate must either 
transmit the appropriate documentation for the persons for whom the 
branch receives the payment (i.e., as an intermediary) or be provided 
as evidence of its agreement with the withholding agent to be treated 
as a U.S. person with respect to any payment associated with the 
certificate. A U.S. branch withholding certificate is valid only if it 
is furnished on a Form W-8, an acceptable substitute form, or such 
other form as the IRS may prescribe, it is signed under penalties of 
perjury by a person authorized to sign for the branch, its validity has 
not expired, and it contains the information, statements, and 
certifications described in this paragraph (e)(3)(v). If the 
certificate is furnished to transmit withholding certificates and other 
documentation, it must contain the information, certifications, and 
statements described in paragraphs (e)(3)(v)(A) through (C) of this 
section and in paragraphs (e)(3)(iii) and (iv) (alternative procedures) 
of this section, applying the term U.S. branch instead of the term 
nonqualified intermediary. If the certificate is furnished pursuant to 
an agreement to treat the U.S. branch as a U.S. person, the information 
and certifications required on the withholding certificate are limited 
to the following--
    (A) The name of the person of which the branch is a part and the 
address of the branch in the United States;
    (B) A certification that the payments associated with the 
certificate are not effectively connected with the conduct of its trade 
or business in the United States; and
    (C) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certification described in this paragraph 
(e)(3)(v).
    (vi) Reportable amounts. For purposes of chapter 3 of the Internal 
Revenue Code, a nonqualified intermediary, qualified intermediary, 
flow-through entity, and U.S. branch described in paragraph (b)(2)(iv) 
of this section (other than a U.S. branch that agrees to be treated as 
a U.S. person) must provide a withholding certificate and associated 
documentation and other information with respect to reportable amounts. 
For purposes of the regulations under chapter 3 of the Internal Revenue 
Code, the term reportable amount means an amount subject to withholding 
within the meaning of Sec. 1.1441-2(a), bank deposit interest 
(including original issue discount) and similar types of deposit 
interest described in section 871(i)(2)(A) or 881(d) that are from 
sources within the United States, and any amount of interest or 
original issue discount from sources within the United States on the 
redemption of certain short-term obligations described in section 
871(g)(1)(B) or 881(e). Reportable amounts shall not include amounts 
received on the sale or exchange (other than a redemption) of an 
obligation described in section 871(g)(1)(B) or 881(e) that is effected 
at an office outside the United States. See Sec. 1.6045-1(g)(3) to 
determine whether a sale is effected at an office outside the United 
States. Reportable amounts also do not include payments with respect to 
deposits with banks and other financial institutions that remain on 
deposit for a period of two weeks or less, to amounts of original issue 
discount arising from a sale and repurchase transaction that is 
completed within a period of two weeks or less, or to amounts described 
in Sec. 1.6049-5(b)(7), (10) or (11) (relating to certain obligations 
issued in bearer form). While short-term OID and bank deposit interest 
are not subject to withholding under chapter 3 of the Internal Revenue 
Code, such amounts may be subject to information reporting under 
section 6049 if paid to a U.S. person who is not an exempt recipient 
described in Sec. 1.6049-4(c)(1)(ii) and to backup withholding under 
section 3406 in the absence of documentation. See Sec. 1.6049-
5(d)(3)(iii) for applicable procedures when such amounts are paid to a 
foreign intermediary.
    (4) * * *
    (ii) Period of validity--(A) Three-year period. A withholding 
certificate described in paragraph (e)(2)(i) of this section, or a 
certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify 
interest as portfolio interest for purposes of sections 871(h) and 
881(c)), shall remain valid until the earlier of the last day of the 
third calendar year following the year in which the withholding 
certificate is signed or the day that a change in circumstances occurs 
that makes any information on the certificate incorrect. For example, a 
withholding certificate signed on September 30, 2001, remains valid 
through December 31, 2004, unless circumstances change that make the 
information on the form no longer correct. Documentary evidence 
described in Secs. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) shall remain 
valid until the earlier of the last day of the third calendar year 
following the year in which the documentary evidence is provided to the 
withholding agent or the day that a change in circumstances occurs that 
makes any information on the documentary evidence incorrect.
    (B) * * *
    (1) A withholding certificate described in paragraph (e)(2)(ii) of 
this section that is furnished with a TIN, provided that the 
withholding agent reports at least one payment annually to the 
beneficial owner under Sec. 1.1461-1(c) or the TIN furnished on the 
certificate is reported to the IRS under the procedures described in 
Sec. 1.1461-1(d). For example, assume a withholding agent receives a 
Form W-8 in 2001 from a beneficial owner with respect to an account 
that contains bonds, the interest on which must be reported on Form 
1042-S under Sec. 1.1461-1(c). The Form W-8 contains a valid TIN and 
the withholding agent reports on Forms 1042-S interest to the 
beneficial owner for 2001 through 2005. In 2005, the beneficial owner 
sells some of the bonds. For purposes of the exemption from Form 1099 
reporting under Sec. 1.6045-1(g), the withholding

[[Page 32183]]

agent may consider the Form W-8 as valid, even though the payment of 
the sales proceeds is not reportable on Form 1042-S under Sec. 1.1461-
1(c) and even though the Form W-8 was provided more than three years 
previously.
    (2) A certificate described in paragraph (e)(3)(ii) of this section 
(a qualified intermediary withholding certificate) but not including 
the withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (3) A certificate described in paragraph (e)(3)(iii) of this 
section (a nonqualified intermediary certificate), but not including 
the withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (4) A certificate described in paragraph (e)(3)(v) of this section 
(a U.S. branch withholding certificate), but not including the 
withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
* * * * *
    (6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (a 
withholding certificate from a nonwithholding foreign partnership) but 
not including the withholding certificates, documentary evidence, 
statements or other information required to be associated with the 
certificate.
* * * * *
    (8) A withholding certificate described in Sec. 1.1441-5(e)(5)(iii) 
provided by a foreign simple trust or a foreign grantor trust to 
transmit documentation of beneficiaries or owners, but not including 
the withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
* * * * *
    (iv) Electronic transmission of information--(A) In general. A 
withholding agent may establish a system for a beneficial owner or 
payee to electronically furnish a Form W-8, an acceptable substitute 
Form W-8, or such other form as the Internal Revenue Service may 
prescribe. The system must meet the requirements described in paragraph 
(e)(4)(iv)(B) of this section. A withholding agent may accept Forms W-8 
that are furnished electronically on or after January 1, 2000, provided 
the requirements of paragraph (e)(4)(iv)(B) of this section are met.
    (B) Requirements--(1) In general. The electronic system must ensure 
that the information received is the information sent, and must 
document all occasions of user access that result in the submission 
renewal, or modification of a Form W-8. In addition, the design and 
operation of the electronic system, including access procedures, must 
make it reasonably certain that the person accessing the system and 
furnishing Form W-8 is the person named in the Form.
    (2) Same information as paper Form W-8. The electronic transmission 
must provide the withholding agent or payor with exactly the same 
information as the paper Form W-8.
    (3) Perjury statement and signature requirements. The electronic 
transmission must contain an electronic signature by the person whose 
name is on the Form W-8 and the signature must be under penalties of 
perjury in the manner described in this paragraph (e)(4)(iv)(B)(3).
    (i) Perjury statement. The perjury statement must contain the 
language that appears on the paper Form W-8. The electronic system must 
inform the person whose name is on the Form W-8 that the person must 
make the declaration contained in the perjury statement and that the 
declaration is made by signing the Form W-8. The instructions and the 
language of the perjury statement must immediately follow the person's 
certifying statements and immediately precede the person's electronic 
signature.
    (ii) Electronic signature. The act of the electronic signature must 
be effected by the person whose name is on the electronic Form W-8. The 
signature must also authenticate and verify the submission. For this 
purpose, the terms authenticate and verify have the same meanings as 
they do when applied to a written signature on a paper Form W-8. An 
electronic signature can be in any form that satisfies the foregoing 
requirements. The electronic signature must be the final entry in the 
person's Form W-8 submission.
    (4) Requests for electronic Form W-8 data. Upon request by the 
Internal Revenue Service during an examination, the withholding agent 
must supply a hard copy of the electronic Form W-8 and a statement 
that, to the best of the withholding agent's knowledge, the electronic 
Form W-8 was filed by the person whose name is on the form. The hard 
copy of the electronic Form W-8 must provide exactly the same 
information as, but need not be identical to, the paper Form W-8.
    (C) Special requirements for transmission of Forms W-8 by an 
intermediary. [Reserved]
* * * * *
    (vii) Requirement of taxpayer identifying number. A TIN must be 
stated on a withholding certificate when required by this paragraph 
(e)(4)(vii). A TIN is required to be stated on--
    (A) A withholding certificate on which a beneficial owner is 
claiming the benefit of a reduced rate under an income tax treaty 
(other than for amounts described in Sec. 1.1441-6(c)(2);
    (B) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding because income is effectively 
connected with a U.S. trade or business;
    (C) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding under section 871(f) for certain 
annuities received under qualified plans;
    (D) A withholding certificate on which a beneficial owner is 
claiming an exemption based solely on a foreign organization's claim of 
tax exempt status under section 501(c) or private foundation status 
(however, a TIN is not required from a foreign private foundation that 
is subject to the 4-percent tax under section 4948(a) on income if that 
income would be exempt from withholding but for section 4948(a) (e.g., 
portfolio interest));
    (E) A withholding certificate from a person representing to be a 
qualified intermediary described in paragraph (e)(5)(ii) of this 
section;
    (F) A withholding certificate from a person representing to be a 
withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i));
    (G) A withholding certificate from a person representing to be a 
foreign grantor trust with 5 or fewer grantors;
    (H) A withholding certificate provided by a foreign organization 
that is described in section 501(c);
    (I) A withholding certificate from a person representing to be a 
U.S. branch described in paragraph (b)(2)(iv) of this section.
* * * * *
    (ix) * * *
    (A) * * *
    (4) A withholding agent may rely on documentation furnished by a 
beneficial owner or payee to an agent of the withholding agent. The 
agent may retain the documentation as part of an information system 
maintained for a single or multiple withholding agents provided that 
the system permits any withholding agent that uses the system to easily 
access data regarding the nature of the documentation, the information 
contained in the documentation, and its validity, and must allow the 
withholding agent to easily transmit data into the system regarding any 
facts of which it becomes aware that may affect the reliability of

[[Page 32184]]

the documentation. The withholding agent must be able to establish how 
and when it has accessed the data regarding the documentation and, if 
applicable, how and when it has transmitted data regarding any facts of 
which it became aware that may affect the reliability of the 
documentation. In addition, the withholding agent must be able to 
establish that any data it has transmitted to the information system 
has been processed and appropriate due diligence has been exercised 
regarding the validity of the documentation.
* * * * *
    (C) Special rule for brokers--(1) In general. A withholding agent 
may rely on the certification of a broker that the broker holds a valid 
beneficial owner withholding certificate described in paragraph 
(e)(2)(i) of this section or other appropriate documentation for that 
beneficial owner with respect to any readily tradable instrument, as 
defined in Sec. 31.3406(h)-1(d) of this chapter, if the broker is a 
United States person (including a U.S. branch treated as a U.S. person 
under paragraph (b)(2)(iv) of this section) that is acting as the agent 
of a beneficial owner and the U.S. broker has been provided a valid 
Form W-8 or other appropriate documentation. The certification must be 
in writing or in electronic form and contain all of the information 
required of a nonqualified intermediary under paragraphs (e)(3)(iv)(B) 
and (C) of this section. If a U.S. broker chooses to use this paragraph 
(e)(4)(ix)(C), that U.S. broker will be solely responsible for applying 
the rules of Sec. 1.1441-7(b) to the withholding certificates or other 
appropriate documentation. For purposes of this paragraph 
(c)(4)(ix)(C), the term broker means a person treated as a broker under 
Sec. 1.6045-1(a).
    (2) The following example illustrates the rules of this paragraph 
(e)(4)(ix)(C):

    Example. SCO is a U.S. securities clearing organization that 
provides clearing services for correspondent broker, CB, a U.S. 
corporation. Pursuant to a fully disclosed clearing agreement, CB 
fully discloses the identity of each of its customers to SCO. Part 
of SCO's clearing duties include the crediting of income and gross 
proceeds of readily tradeable instruments (as defined in 
Sec. 31.3406(h)-1(d)) to each customer's account. For each disclosed 
customer that is a foreign beneficial owner, CB provides SCO with 
information required under paragraphs (e)(3)(iv)(B) and (C) of this 
section that is necessary to apply the correct rate of withholding 
and to file Forms 1042-S. SCO may use the representations and 
beneficial owner information provided by CB to determine the proper 
amount of withholding and to file Forms 1042-S. CB is responsible 
for determining the validity of the withholding certificates or 
other appropriate documentation under Sec. 1.1441-1(b).

* * * * *
    (5) Qualified intermediaries--(i) General rule. A qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, may 
furnish a qualified intermediary withholding certificate to a 
withholding agent. The withholding certificate provides certifications 
on behalf of other persons for the purpose of claiming and verifying 
reduced rates of withholding under section 1441 or 1442 and for the 
purpose of reporting and withholding under other provisions of the 
Internal Revenue Code, such as the provisions under chapter 61 and 
section 3406 (and the regulations under those provisions). Furnishing 
such a certificate is in lieu of transmitting to a withholding agent 
withholding certificates or other appropriate documentation for the 
persons for whom the qualified intermediary receives the payment, 
including interest holders in a qualified intermediary that is fiscally 
transparent under the regulations under section 894. Although the 
qualified intermediary is required to obtain withholding certificates 
or other appropriate documentation from beneficial owners, payees, or 
interest holders pursuant to its agreement with the IRS, it is 
generally not required to attach such documentation to the intermediary 
withholding certificate. Notwithstanding the preceding sentence a 
qualified intermediary must provide a withholding agent with the Forms 
W-9, or disclose the names, addresses, and taxpayer identifying 
numbers, if known, of those U.S. non-exempt recipients for whom the 
qualified intermediary receives reportable amounts (within the meaning 
of paragraph (e)(3)(vi) of this section) to the extent required in the 
qualified intermediary's agreement with the IRS. A person may claim 
qualified intermediary status before an agreement is executed with the 
IRS if it has applied for such status and the IRS authorizes such 
status on an interim basis under such procedures as the IRS may 
prescribe.
* * * * *
    (iii) Withholding agreement--(A) In general. The IRS 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 IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a 
qualified intermediary shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors under chapters 3 and 61 of the Internal Revenue Code, 
section 3406, the regulations under those provisions, and other 
withholding provisions of the Internal Revenue Code, except to the 
extent provided under the agreement.
    (B) Terms of the withholding agreement. Generally, the agreement 
shall specify the type of certifications and documentation upon which 
the qualified intermediary may rely to ascertain the classification 
(e.g., corporation or partnership) and status (i.e., U.S. or foreign) 
of beneficial owners and payees who receive payments collected by the 
qualified intermediary and, if necessary, entitlement to the benefits 
of a reduced rate under an income tax treaty. The agreement shall 
specify if, and to what extent, the qualified intermediary may assume 
primary withholding responsibility in accordance with paragraph 
(e)(5)(iv) of this section. It shall also specify the extent to which 
applicable return filing and information reporting requirements are 
modified so that, in appropriate cases, the qualified intermediary may 
report payments to the IRS on an aggregated basis, without having to 
disclose the identity of beneficial owners and payees. However, the 
qualified intermediary may be required to provide to the IRS the name 
and address of those foreign customers who benefit from a reduced rate 
under an income tax treaty pursuant to the qualified intermediary 
arrangement for purposes of verifying entitlement to such benefits, 
particularly under an applicable limitation on benefits provision. 
Under the agreement, a qualified intermediary may agree to act as an 
acceptance agent to perform the duties described in Sec. 301.6109-
1(d)(3)(iv)(A) of this chapter. The agreement may specify the manner in 
which applicable procedures for adjustments for underwithholding and 
overwithholding, including refund procedures, apply in the context of a 
qualified intermediary arrangement and the extent to which applicable 
procedures may be modified. In particular, a withholding agreement may 
allow a qualified intermediary to claim refunds of overwithheld 
amounts. If relevant, the agreement shall specify the manner in which 
the qualified intermediary may deal with payments to other 
intermediaries and flow-through entities. In addition, the agreement 
shall specify the manner in which the IRS will verify compliance with 
the agreement. In appropriate cases, the IRS may agree to rely on 
audits performed by an intermediary's approved auditor. In such a case, 
the IRS's audit may be

[[Page 32185]]

limited to the audit of the auditor's records (including work papers 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 the auditor 
or class of auditors that are approved. Generally, an auditor will not 
be approved if the auditor is not subject to laws, regulations, or 
rules that impose sanctions for failure to exercise its independence 
and to perform the audit competently. The agreement may include 
provisions for the assessment and collection of tax in the event that 
failure to comply with the terms of the agreement results in the 
failure by the withholding agent or the qualified intermediary to 
withhold and deposit the required amount of tax. Further, the agreement 
may specify the procedures by which deposits of amounts withheld are to 
be deposited, if different from the deposit procedures under the 
Internal Revenue Code and applicable regulations. To determine whether 
to enter a qualified intermediary withholding agreement and the terms 
of any particular withholding agreement, the IRS will consider 
appropriate factors including whether or not the foreign person agrees 
to assume primary withholding responsibility, 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), the financial condition of the foreign person, and 
whether the qualified intermediary is a resident of a country with 
which the United States has an income tax treaty.
    (iv) Assignment of primary withholding responsibility. Any person 
who meets the definition of a withholding agent under Sec. 1.1441-7(a) 
(whether a U.S. person or a foreign person) is required to withhold and 
deposit any amount withheld under Sec. 1.1461-1(a) and to make the 
returns prescribed by Sec. 1.1461-1(b) and (c). If permitted by its 
qualified intermediary agreement, a qualified intermediary agreement 
may, however, inform a withholding agent from which it receives a 
payment that it will assume the primary obligation to withhold, 
deposit, and report amounts under chapter 3 of the Internal Revenue 
Code and/or under chapter 61 of the Internal Revenue Code and section 
3406. If a withholding agent makes a payment of an amount subject to 
withholding, as defined in Sec. 1.1441-2(a), or a reportable payment, 
as defined in section 3406(b), to a qualified intermediary that 
represents to the withholding agent that it has assumed primary 
withholding responsibility for the payment, the withholding agent is 
not required to withhold on the payment. The withholding agent is not 
required to determine that the qualified intermediary agreement 
actually permits the qualified intermediary to assume primary 
withholding responsibility. A qualified intermediary that assumes 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code or primary reporting and backup withholding responsibility 
under chapter 61 and section 3406 is not required to assume primary 
withholding responsibility for all accounts it has with a withholding 
agent but must assume primary withholding responsibility for all 
payments made to any one account that it has with the withholding 
agent. A qualified intermediary may agree with the withholding agent to 
assume primary withholding responsibility under chapter 3 and section 
3406, only if expressly permitted to do so under its agreement with the 
IRS.
    (v) Withholding statement--(A) In general. A qualified intermediary 
must provide each withholding agent from which it receives reportable 
amounts, as defined in paragraph (e)(3)(vi) of this section, as a 
qualified intermediary with a written statement (the withholding 
statement) containing the information specified in paragraph 
(e)(5)(v)(B) of this section. A withholding statement is not required, 
however, if all of the information a withholding agent needs to fulfill 
its withholding and reporting requirements is contained in the 
withholding certificate. The qualified intermediary agreement may 
require, in appropriate circumstances, the qualified intermediary to 
include information in its withholding statement relating to payments 
other than payments of reportable amounts. The withholding statement 
forms an integral part of the qualified intermediary's qualified 
intermediary withholding certificate and the penalties of perjury 
statement provided on the withholding certificate shall apply to the 
withholding statement as well. The withholding statement may be 
provided in any manner, and in any form, to which qualified 
intermediary and the withholding agent mutually agree, including 
electronically. If the withholding statement is provided 
electronically, there must be sufficient safeguards to ensure that the 
information received by the withholding agent is the information sent 
by qualified intermediary and must also document all occasions of user 
access that result in the submission or modification of withholding 
statement information. In addition, the electronic system must be 
capable of providing a hard copy of all withholding statements provided 
by the qualified intermediary. The withholding statement shall be 
updated as often as necessary for the withholding agent to meet its 
reporting and withholding obligations under chapters 3 and 61 of the 
Internal Revenue Code and section 3406. A withholding agent will be 
liable for tax, interest, and penalties in accordance with paragraph 
(b)(7) of this section to the extent it does not follow the presumption 
rules of paragraph (b)(3) of this section, Secs. 1.1441-5(d) and 
(e)(6), and 1.6049-5(d) for any payment, or portion thereof, for which 
it does not have a valid withholding statement prior to making a 
payment.
    (B) Content of withholding statement. The withholding statement 
must contain sufficient information for a withholding agent to apply 
the correct rate of withholding on payments from the accounts 
identified on the statement and to properly report such payments on 
Forms 1042-S and Forms 1099, as applicable. The withholding statement 
must--
    (1) Designate those accounts for which the qualified intermediary 
acts as a qualified intermediary;
    (2) Designate those accounts for which qualified intermediary 
assumes primary withholding responsibility under chapter 3 of the 
Internal Revenue Code and/or primary reporting and backup withholding 
responsibility under chapter 61 and section 3406; and
    (3) Provide information regarding withholding rate pools, as 
described in paragraph (e)(5)(v)(C) of this section.
    (C) Withholding rate pools--(1) In general. Except to the extent it 
has assumed both primary withholding responsibility under chapter 3 of 
the Internal Revenue Code and primary reporting and backup withholding 
responsibility under chapter 61 and section 3406 with respect to a 
payment, a qualified intermediary shall provide as part of its 
withholding statement the withholding rate pool information that is 
required for the withholding agent to meet its withholding and 
reporting obligations under chapters 3 and 61 of the Internal Revenue 
Code and section 3406. A withholding rate pool is a payment of a single 
type of income, determined in accordance with the categories of income 
reported on Form 1042-S or Form 1099, as applicable,

[[Page 32186]]

that is subject to a single rate of withholding. A withholding rate 
pool may be established by any reasonable method on which the qualified 
intermediary and a withholding agent agree (e.g., by establishing a 
separate account for a single withholding rate pool, or by dividing a 
payment made to a single account into portions allocable to each 
withholding rate pool). To the extent a qualified intermediary does not 
assume primary reporting and backup withholding responsibility under 
chapter 61 and section 3406, a qualified intermediary's withholding 
statement must establish a separate withholding rate pool for each U.S. 
non-exempt recipient account holder that the qualified intermediary has 
disclosed to the withholding agent unless the qualified intermediary 
uses the alternative procedures in paragraph (e)(5)(v)(C)(2) of this 
section. A qualified intermediary shall determine withholding rate 
pools based on valid documentation that it obtains under its 
withholding agreement with the IRS, or if a payment cannot be reliably 
associated with valid documentation, under the applicable presumption 
rules. If a qualified intermediary has an account holder that is 
another intermediary (whether a qualified intermediary or a 
nonqualified intermediary) or a flow-through entity, the qualified 
intermediary may combine the account holder information provided by the 
intermediary or flow-through entity with the qualified intermediary's 
direct account holder information to determine the qualified 
intermediary's withholding rate pools.
    (2) Alternative procedure for U.S. non-exempt recipients. If 
permitted under its agreement with the IRS, a qualified intermediary 
may, by mutual agreement with a withholding agent, establish a single 
withholding rate pool (not subject to backup withholding) for all U.S. 
non-exempt recipient account holders for whom the qualified 
intermediary has provided Forms W-9 prior to the withholding agent 
paying any reportable payments, as defined in section 3406(b), and a 
separate withholding rate pool (subject to 31-percent withholding) for 
all U.S. non-exempt recipient account holders for whom a qualified 
intermediary has not provided Forms W-9 prior to the withholding agent 
paying any reportable payments. If a qualified intermediary chooses the 
alternative procedure of this paragraph (e)(5)(v)(C)(2), the qualified 
intermediary must provide sufficient information to the withholding 
agent no later than January 15 of the year following the year in which 
the reportable payments are paid that allocates the reportable payments 
to each U.S. non-exempt recipient account holder. Failure to provide 
such information will result in the application of penalties to the 
qualified intermediary under sections 6721 and 6722, as well as any 
other applicable penalties, and may result in the termination of the 
qualified intermediary's withholding agreement with the IRS. A 
withholding agent shall not be liable for tax, interest, or penalties 
for failure to backup withhold or report information under chapter 61 
of the Internal Revenue Code due solely to the errors or omissions of 
the qualified intermediary. If a qualified intermediary fails to 
provide the allocation information required by this paragraph 
(e)(5)(v)(C)(2), the withholding agent shall report the entire amount 
paid from the withholding rate pool to an unknown recipient, or 
otherwise in accordance with the appropriate Form 1099 and the 
instructions accompanying the form.
* * * * *

    Par 4. Effective January 1, 2001, Sec. 1.1441-2 is amended by:
    1. Revising paragraph (a).
    2. Revising paragraph (b)(1)(i).
    3. Removing paragraph (b)(2)(ii), redesignating paragraph 
(b)(2)(iii) as paragraph (b)(2)(ii), and adding the word ``and'' after 
the semicolon in paragraph (b)(2)(i).
    4. Revising paragraph (b)(3).
    The revisions read as follows:


Sec. 1.1441-2  Amounts subject to withholding.

    (a) In general. For purposes of the regulations under chapter 3 of 
the Internal Revenue Code, the term amounts subject to withholding 
means amounts from sources within the United States that constitute 
either fixed or determinable annual or periodical income described in 
paragraph (b) of this section or other amounts subject to withholding 
described in paragraph (c) of this section. For purposes of this 
paragraph (a), an amount shall be treated as being from sources within 
the United States if the source of the amount cannot be determined at 
the time of payment. See Sec. 1.1441-3(d)(1) for determining the amount 
to be withheld from a payment in the absence of information at the time 
of payment regarding the source of the amount. Amounts subject to 
withholding include amounts that are not fixed or determinable annual 
or periodical income and upon which withholding is specifically 
required under a provision of this section or another section of the 
regulations under chapter 3 of the Internal Revenue Code (such as 
corporate distributions upon which withholding is required under 
Sec. 1.1441-3(c)(1) that do not constitute dividend income). Amounts 
subject to withholding do not include--
    (1) Amounts described in Sec. 1.1441-1(b)(4)(i) to the extent they 
involve interest on obligations in bearer form or on foreign-targeted 
registered obligations (but, in the case of a foreign-targeted 
registered obligation, only to the extent of those amounts paid to a 
registered owner that is a financial institution within the meaning of 
section 871(h)(5)(B) or a member of a clearing organization which 
member is the beneficial owner of the obligation);
    (2) Amounts described in Sec. 1.1441-1(b)(4)(ii) (dealing with bank 
deposit interest and similar types of interest (including original 
issue discount) described in section 871(i)(2)(A) or 881(d));
    (3) Amounts described in Sec. 1.1441-1(b)(4)(iv) (dealing with 
interest or original issue discount on certain short-term obligations 
described in section 871(g)(1)(B) or 881(e));
    (4) Amounts described in Sec. 1.1441-1(b)(4)(xx) (dealing with 
income from certain gambling winnings exempt from tax under section 
871(j));
    (5) Amounts paid as part of the purchase price of an obligation 
sold or exchanged between interest payment dates, unless the sale or 
exchange is part of a plan the principal purpose of which is to avoid 
tax and the withholding agent has actual knowledge or reason to know of 
such plan;
    (6) Original issue discount paid as part of the purchase price of 
an obligation sold or exchanged in a transaction other than a 
redemption of such obligation, unless the purchase is part of a plan 
the principal purpose of which is to avoid tax and the withholding 
agent has actual knowledge or reason to know of such plan; and
    (7) Insurance premiums paid with respect to a contract that is 
subject to the section 4371 excise tax.
    (b) Fixed or determinable annual or periodical income--(1) In 
general--(i) Definition. For purposes of chapter 3 of the Internal 
Revenue Code and the regulations thereunder, fixed or determinable 
annual or periodical income includes all income included in gross 
income under section 61 (including original issue discount) except for 
the items specified in paragraph (b)(2) of this section. Items of 
income that are excluded from gross income under a provision of law 
without regard to the U.S. or foreign status of the owner of the 
income, such as interest excluded from gross income

[[Page 32187]]

under section 103(a) or qualified scholarship income under section 117, 
shall not be treated as fixed or determinable annual or periodical 
income under chapter 3 of the Internal Revenue Code. Income excluded 
from gross income under section 892 (income of foreign governments) or 
section 115 (income of a U.S. possession) is fixed or determinable 
annual or periodical income since the exclusion from gross income under 
those sections is dependent on the foreign status of the owner of the 
income. See Sec. 1.306-3(h) for treating income from the disposition of 
section 306 stock as fixed or determinable annual or periodical income.
* * * * *
    (3) Original issue discount--(i) Amount subject to tax. An amount 
representing original issue discount is fixed or determinable annual or 
periodical income that is subject to tax under sections 871(a)(1)(C) 
and 881(a)(3) to the extent provided in those sections and this 
paragraph (b)(3) if not otherwise excluded under paragraph (a) of this 
section. An amount of original issue discount is subject to tax with 
respect to a foreign beneficial owner of an obligation carrying 
original issue discount upon a sale or exchange of the obligation or 
when a payment is made on such obligation. The amount taxable is the 
amount of original issue discount that accrued while the foreign person 
held the obligation up to the time that the obligation is sold or 
exchanged or that a payment is made on the obligation, reduced by any 
amount of original issue discount that was taken into account prior to 
that time (due to a payment made on the obligation). In the case of a 
payment made on the obligation, the tax due on the amount of original 
issue discount may not exceed the amount of the payment reduced by the 
tax imposed on any portion of the payment that is qualified stated 
interest.
    (ii) Amounts subject to withholding. A withholding agent must 
withhold on the taxable amount of original issue discount paid on the 
redemption of an original issue discount obligation unless an exception 
to withholding applies (e.g., portfolio interest or treaty exception). 
In addition, withholding is required on the taxable amount of original 
issue discount upon the sale or exchange of an original issue discount 
obligation, other than in a redemption, to the extent the withholding 
agent has actual knowledge or reason to know that the sale or exchange 
is part of a plan the principal purpose of which is to avoid tax. If a 
withholding agent cannot determine the taxable amount of original issue 
discount on the redemption of an original issue discount obligation (or 
on the sale or exchange of such an obligation if the principal purpose 
of the sale is to avoid tax), then it must withhold on the entire 
amount of original issue discount accrued from the date of issue until 
the date of redemption (or the date the obligation is sold or 
exchanged) determined on the basis of the most recently published 
``List of Original Issue Discount Instruments'' (IRS Publication 1212, 
available from the IRS Forms Distribution Center) or similar list 
published by the IRS as if the beneficial owner of the obligation had 
held the obligation since its original issue.
    (iii) Exceptions to withholding. To the extent that this paragraph 
(b)(3) applies to require withholding by a person other than an issuer 
of an original issue discount obligation, or the issuer's agent, it 
shall apply only to obligations issued after December 31, 2000.
* * * * *

    Par. 5. Effective January 1, 2001, Sec. 1.1441-3 is amended by:
    1. Revising paragraph (b)(2)(i).
    2. Revising paragraph (c)(1).
    3. Revising paragraph (c)(4)(i)(C).
    The revisions read as follows:


Sec. 1.1441-3  Determination of amounts to be withheld.

* * * * *
    (b) * * *
    (2) No withholding between interest payment dates--(i) In general. 
A withholding agent is not required to withhold under Sec. 1.1441-1 
upon interest accrued on the date of a sale or exchange of a debt 
obligation when that sale occurs between two interest payment dates 
(even though the amount is treated as interest under Sec. 1.61-7(c) or 
(d) and is subject to tax under section 871 or 881). See Sec. 1.6045-
1(c) for reporting requirements by brokers with respect to sale 
proceeds. See Sec. 1.61-7(c) regarding the character of payments 
received by the acquirer of an obligation subsequent to such 
acquisition (that is, as a return of capital or interest accrued after 
the acquisition). Any exemption from withholding pursuant to this 
paragraph (b)(2)(i) applies without a requirement that documentation be 
furnished to the withholding agent. However, documentation may have to 
be furnished for purposes of the information reporting provisions under 
section 6045 or 6049 and backup withholding under section 3406. The 
exemption from withholding granted by this paragraph (b)(2) is not a 
determination that the accrued interest is not fixed or determinable 
annual or periodical income under section 871(a) or 881(a).
* * * * *
    (c) Corporate distributions--(1) General rule. A corporation making 
a distribution with respect to its stock or any intermediary (described 
in Sec. 1.1441-1(c)(13)) making a payment of such a distribution is 
required to withhold under section 1441, 1442, or 1443 on the entire 
amount of the distribution, unless it elects to reduce the amount of 
withholding under the provisions of this paragraph (c). Any exceptions 
from withholding provided by this paragraph (c) apply without any 
requirement to furnish documentation to the withholding agent. However, 
documentation may have to be furnished for purposes of the information 
reporting provisions under section 6042 or 6045 and backup withholding 
under section 3406. See Sec. 1.1461-1(c) to determine whether amounts 
excepted from withholding under this section are considered amounts 
that are subject to reporting.
* * * * *
    (4) * * * (i) * * *
    (C) Coordination with REIT withholding. Withholding is required 
under section 1441 (or 1442 or 1443) on the portion of a distribution 
from a REIT that is not designated as a capital gain dividend, a return 
of basis, or a distribution in excess of a shareholder's adjusted basis 
in the stock of the REIT that is treated as a capital gain under 
section 301(c)(3). A distribution in excess of a shareholder's adjusted 
basis in the stock of the REIT is, however, subject to withholding 
under section 1445, unless the interest in the REIT is not a U.S. real 
property interest (e.g., an interest in a domestically controlled REIT 
under section 897(h)(2)). In addition, withholding is required under 
section 1445 on the portion of the distribution designated by a REIT as 
a capital gain dividend. See Sec. 1.1445-8.
* * * * *

    Par. 6. Effective January 1, 2001, Sec. 1.1441-4 is amended by:
    1. Revising paragraph (a)(3)(i).
    2. Revising paragraph (b)(1)(ii).
    The revisions read as follows:


Sec. 1.1441-4  Exemptions from withholding for certain effectively 
connected income and other amounts.

    (a) * * *
    (3) Income on notional principal contracts--(i) General rule. A 
withholding agent that pays amounts attributable to a notional 
principal contract described in Sec. 1.863-7(a) or 1.988-2(e) shall 
have no obligation to withhold on the amounts paid under the

[[Page 32188]]

terms of the notional principal contract regardless of whether a 
withholding certificate is provided. However, a withholding agent must 
file returns under Sec. 1.1461-1(b) and (c) reporting the income that 
it must treat as effectively connected with the conduct of a trade or 
business in the United States under the provisions of this paragraph 
(a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this 
section, a withholding agent must treat the income as effectively 
connected with the conduct of a U.S. trade or business if the income is 
paid to, or to the account of, a qualified business unit of a foreign 
person located in the United States or, if the payment is paid to, or 
to the account of, a qualified business unit of a foreign person 
located outside the United States, the withholding agent knows, or has 
reason to know, the payment is effectively connected with the conduct 
of a trade or business within the United States. Income on a notional 
principal contract does not include the amount characterized as 
interest under the provisions of Sec. 1.446-3(g)(4).
* * * * *
    (b) * * * (1) * * *
    (ii) Such compensation would be subject to withholding under 
section 3402 but for the provisions of section 3401(a) (not including 
section 3401(a)(6)) 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), any annuity, custodial account, or 
retirement income account described in section 403(b), or an individual 
retirement account or individual retirement annuity described in 
section 408. Instead, these payments are subject to withholding under 
this section to the extent they are exempted from the definition of 
wages under section 3401(a)(12) or to the extent they are from an 
annuity, custodial account, or retirement income account described in 
section 403(b), or an individual retirement account or individual 
retirement annuity described in section 408. 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 section 3406.
* * * * *

    Par. 7. Effective January 1, 2001, in Sec. 1.1441-5 paragraphs (a) 
through (e) are revised to read as follows:


Sec. 1.1441-5  Withholding on payments to partnerships, trusts, and 
estates.

    (a) In general. This section describes the rules that apply to 
payments made to partnerships, trusts, and estates. Paragraph (b) of 
this section prescribes the rules that apply to a withholding agent 
making a payment to a U.S. partnership, trust, or estate. It also 
prescribes the obligations of a U.S. partnership, trust, or estate that 
makes a payment to a foreign partner, beneficiary, or owner. Paragraph 
(c) of this section prescribes rules that apply to a withholding agent 
that makes a payment to a foreign partnership. Paragraph (d) of this 
section provides presumption rules that apply to payments made to 
foreign partnerships. Paragraph (e) of this section prescribes rules, 
including presumption rules, that apply to a withholding agent that 
makes a payment to a foreign trust or foreign estate.
    (b) Rules applicable to U.S. partnerships, trusts, and estates--(1) 
Payments to U.S. partnerships, trusts, and estates. No withholding is 
required under section 1.1441-1(b)(1) on a payment of an amount subject 
to withholding (as defined in Sec. 1.1441-2(a)) that a withholding 
agent may treat as made to a U.S. payee. Therefore, if a withholding 
agent can reliably associate (within the meaning of Sec. 1.1441-
2(b)(vii)) a Form W-9 provided in accordance with Sec. 1.1441-1(d)(2) 
or (4) by a U.S. partnership, U.S. trust, or a U.S. estate the 
withholding agent may treat the payment as made to a U.S. payee and the 
payment is not subject to withholding under section 1441 even though 
the partnership, trust, or estate may have foreign partners, 
beneficiaries, or owners. A withholding agent is also not required to 
withhold under section 1441 on a payment it makes to an entity presumed 
to be a U.S. payee under paragraphs (d)(2) and (e)(6)(ii) of this 
section.
    (2) Withholding by U.S. payees--(i) U.S. partnerships--(A) In 
general. A U.S. partnership is required to withhold under Sec. 1.1441-1 
as a withholding agent on an amount subject to withholding (as defined 
in Sec. 1.1441-2(a)) that is includible in the gross income of a 
partner that is a foreign person. Subject to paragraph (b)(2)(v) of 
this section, a U.S. partnership shall withhold when any distributions 
that include amounts subject to withholding (including guaranteed 
payments made by a U.S. partnership) are made. To the extent a foreign 
partner's distributive share of income subject to withholding has not 
actually been distributed to the foreign partner, the U.S. partnership 
must withhold on the foreign partner's distributive share of the income 
on the earlier of the date that the statement required under section 
6031(b) is mailed or otherwise provided to the partner or the due date 
for furnishing the statement.
    (B) Effectively connected income of partners. Withholding on items 
of income that are effectively connected income in the hands of the 
partners who are foreign persons is governed by section 1446 and not by 
this section. In such a case, partners in a domestic partnership are 
not required to furnish a withholding certificate in order to claim an 
exemption from withholding under section 1441(c)(1) and Sec. 1.1441-4.
    (ii) U.S. simple trusts. A U.S. trust that is described in section 
651(a) (a U.S. simple trust) is required to withhold under chapter 3 of 
the Internal Revenue Code as a withholding agent on the distributable 
net income includible in the gross income of a foreign beneficiary to 
the extent the distributable net income is an amount subject to 
withholding (as defined in Sec. 1.1441-2(a)). A U.S. simple trust shall 
withhold when a distribution is made to a foreign beneficiary. The U.S. 
trust may make a reasonable estimate of the portion of the distribution 
that constitutes distributable net income consisting of an amount 
subject to withholding and apply the appropriate rate of withholding to 
the estimated amount. If, at the end of the taxable year in which the 
distribution is made, the U.S. simple trust determines that it 
underwithheld under section 1441 or 1442, the trust shall be liable as 
a withholding agent for the amount under withheld under section 1461. 
No penalties shall be imposed for failure to withhold and deposit the 
tax if the U.S. simple trust's estimate was reasonable and the trust 
pays the underwithheld amount on or before the due date of Form 1042 
under section 1461. Any payment of underwithheld amounts by the U.S. 
simple trust shall not be treated as income subject to additional 
withholding even if that amount is treated as additional income to the 
foreign beneficiary, unless the additional amount is income to the 
foreign beneficiary as a result of a contractual arrangement between 
the parties regarding the satisfaction of the foreign beneficiary's tax 
liability. To the extent a U.S. simple trust is required to, but does 
not, distribute such income to a foreign beneficiary, the U.S. trust 
must withhold on the foreign beneficiary's allocable share at the time 
the income is required (without extension) to be reported on Form 1042-
S under Sec. 1.1461-1(c).

[[Page 32189]]

    (iii) U.S. complex trusts and U.S. estates. A U.S. trust that is 
not a trust described in section 651(a) (a U.S. complex trust) is 
required to withhold under chapter 3 of the Internal Revenue Code as a 
withholding agent on the distributable net income includible in the 
gross income of a foreign beneficiary to the extent the distributable 
net income consists of an amount subject to withholding (as defined in 
Sec. 1.1441-2(a)) that is, or is required to be, distributed currently. 
The U.S. complex trust shall withhold when a distribution is made to a 
foreign beneficiary. The trust may use the same procedures regarding an 
estimate of the amount subject to withholding as a U.S. simple trust 
under paragraph (b)(2)(ii) of this section. To the extent an amount 
subject to withholding is required to be, but is not actually 
distributed, the U.S. complex trust must withhold on the foreign 
beneficiary's allocable share at the time the income is required to be 
reported on Form 1042-S under Sec. 1.1461-1(c), without extension. A 
U.S. estate is required to withhold under chapter 3 of the Internal 
Revenue Code on the distributable net income includible in the gross 
income of a foreign beneficiary to the extent the distributable net 
income consists of an amount subject to withholding (as defined in 
Sec. 1.1441-2(a)) that is actually distributed. A U.S. estate may also 
use the reasonable estimate procedures of paragraph (b)(2)(ii) of this 
section. However, those procedures apply to an estate that has a 
taxable year other than a calendar year only if the estate files an 
amended return on Form 1042 for the calendar year in which the 
distribution was made and pays the underwithheld tax and interest 
within 60 days after the close of the taxable year in which the 
distribution was made.
    (iv) U.S. grantor trusts. A U.S. trust that is described in section 
671 through 679 (a U.S. grantor trust) must withhold on any income 
includible in the gross income of a foreign person that is treated as 
an owner of the grantor trust to the extent the amount includible 
consists of an amount that is subject to withholding (as described in 
Sec. 1.1441-2(a)). The withholding must occur at the time the income is 
received by, or credited to, the trust.
    (v) Subsequent distribution. If a U.S. partnership or U.S. trust 
withholds on a foreign partner, beneficiary, or owner's share of an 
amount subject to withholding before the amount is actually distributed 
to the partner, beneficiary, or owner, withholding is not required when 
the amount is subsequently distributed.
    (c) Foreign partnerships--(1) Determination of payee--(i) Payments 
treated as made to partners. Except as otherwise provided in paragraph 
(c)(1)(ii) of this section, the payees of a payment to a person that 
the withholding agent may treat as a nonwithholding foreign partnership 
under paragraph (c)(3)(i) or (d)(2) of this section are the partners 
(looking through partners that are foreign intermediaries or flow-
through entities) as follows--
    (A) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-9 provided under 
Sec. 1.1441-1(d), the partner is a U.S. payee;
    (B) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-8, or other 
appropriate documentation, provided under Sec. 1.1441-1(e)(1)(ii), the 
partner is a payee that is a foreign beneficial owner;
    (C) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a qualified intermediary 
withholding certificate under Sec. 1.1441-1(e)(3)(ii), a nonqualified 
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(iii), or 
a U.S. branch certificate under Sec. 1.1441-1(e)(3)(v), then the rules 
of Sec. 1.1441-1(b)(2)(v) shall apply to determine who the payee is in 
the same manner as if the partner's distributive share of the payment 
had been paid directly to such intermediary or U.S. branch;
    (D) If the withholding agent can reliably associate the partner's 
distributive share with a withholding foreign partnership certificate 
under paragraph (c)(2)(iv) of this section or a nonwithholding foreign 
partnership certificate under paragraph (c)(3)(iii) of this section, 
then the rules of this paragraph (c)(1)(i) or paragraph (c)(1)(ii) of 
this section shall apply to determine whether the payment is treated as 
made to the partners of the higher-tier partnership under this 
paragraph (c)(1)(i) or to the higher-tier partnership itself (under the 
rules of paragraph (c)(1)(ii) of this section) in the same manner as if 
the partner's distributive share of the payment had been paid directly 
to the higher-tier foreign partnership;
    (E) If the withholding agent can reliably associate the partner's 
distributive share with a withholding certificate described in 
paragraph (e) of this section regarding a foreign trust or estate, then 
the rules of paragraph (e) of this section shall apply to determine who 
the payees are; and
    (F) If the withholding agent cannot reliably associate the 
partner's distributive share with a withholding certificate or other 
appropriate documentation, the partners are considered to be the payees 
and the presumptions described in paragraph (d)(3) of this section 
shall apply to determine their classification and status.
    (ii) Payments treated as made to the partnership. A payment to a 
person that the withholding agent may treat as a foreign partnership is 
treated as a payment to the foreign partnership and not to its partners 
only if--
    (A) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(2)(iv) of this 
section (withholding certificate of a withholding foreign partnership);
    (B) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(3)(iii) of this 
section (nonwithholding foreign partnership) certifying that the 
payment is income that is effectively connected with the conduct of a 
trade or business in the United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec. 1.1441-4(a)(2)(ii) 
or (3)(i).
    (iii) Rules for reliably associating a payment with documentation. 
For rules regarding the reliable association of a payment with 
documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence of 
documentation, see Secs. 1.1441-1(b)(3) and 1.6049-5(d) and paragraphs 
(d) and (e)(6) of this section for applicable presumptions.
    (iv) Examples. The rules of paragraphs (c)(1)(i) and (ii) of this 
section are illustrated by the following examples:

    Example 1. FP is a nonwithholding foreign partnership organized 
in Country X. FP has two partners, FC, a foreign corporation, and 
USP, a U.S. partnership. USWH, a U.S. withholding agent, makes a 
payment of U.S. source interest to FP. FP has provided USWH with a 
valid nonwithholding foreign partnership certificate, as described 
in paragraph (c)(3)(iii) of this section, with which it associates a 
beneficial owner withholding certificate from FC and a Form W-9 from 
USP together with the withholding statement required by paragraph 
(c)(3)(iv) of this section. USWH can reliably associate the payment 
of interest with the withholding certificates from FC and USP. Under 
paragraph (c)(1)(i) of this section, the payees of the interest 
payment are FC and USP.
    Example 2. The facts are the same as in Example 1, except that 
FP1, a nonwithholding foreign partnership, is a partner in FP rather 
than USP. FP1 has two partners, A and B, both foreign persons. FP 
provides USWH with a valid nonwithholding foreign partnership 
certificate, as described in paragraph (c)(3)(iii) of this section, 
with which it associates a beneficial owner

[[Page 32190]]

withholding certificate from FC and a nonwithholding foreign 
partnership certificate from FP1. In addition, foreign beneficial 
owner withholding certificates from A and B are associated with the 
nonwithholding foreign partnership withholding certificate from FP1. 
FP also provides the withholding statement required by paragraph 
(c)(3)(iv) of this section. USWH can reliably associate the interest 
payment with the withholding certificates provided by FC, A, and B. 
Therefore, under paragraph (c)(1)(i) of this section, the payees of 
the interest payment are FC, A, and B.
    Example 3. USWH makes a payment of U.S. source dividends to WFP, 
a withholding foreign partnership. WFP has two partners, FC1 and 
FC2, both foreign corporations. USWH can reliably associate the 
payment with a valid withholding foreign partnership withholding 
certificate from WFP. Therefore, under paragraph (c)(1)(ii)(A) of 
this section, WFP is the payee of the dividends.
    Example 4. USWH makes a payment of U.S. source royalties to FP, 
a foreign partnership. USWH can reliably associate the royalties 
with a valid withholding certificate from FP on which FP certifies 
that the income is effectively connected with the conduct of a trade 
or business in the United States. Therefore, under paragraph 
(c)(1)(ii)(B) of this section, FP is the payee of the royalties.

    (2) Withholding foreign partnerships--(i) Reliance on claim of 
withholding foreign partnership status. A withholding foreign 
partnership is a foreign partnership that has entered into an agreement 
with the Internal Revenue Service (IRS), as described in paragraph 
(c)(2)(ii) of this section, with respect to distributions and 
guaranteed payments it makes to its partners. A withholding agent that 
can reliably associate a payment with a certificate described in 
paragraph (c)(2)(iv) of this section may treat the person to whom it 
makes the payment as a withholding foreign partnership for purposes of 
withholding under chapter 3 of the Internal Revenue Code, information 
reporting under chapter 61 of the Internal Revenue Code, backup 
withholding under section 3406, and withholding under other provisions 
of the Internal Revenue Code. Furnishing such a certificate is in lieu 
of transmitting to a withholding agent withholding certificates or 
other appropriate documentation for its partners. Although the 
withholding foreign partnership generally will be required to obtain 
withholding certificates or other appropriate documentation from its 
partners pursuant to its agreement with the IRS, it will generally not 
be required to attach such documentation to its withholding foreign 
partnership withholding certificate. A foreign partnership may act as a 
qualified intermediary under Sec. 1.1441-1(e)(5) with respect to 
payments it makes to persons other than its partners. In addition, the 
IRS may permit a foreign partnership to act as a qualified intermediary 
under Sec. 1.1441-1(e)(5)(ii)(D) with respect to its partners in 
appropriate circumstances.
    (ii) Withholding agreement. The IRS may, upon request, enter into a 
withholding agreement with a foreign partnership pursuant to such 
procedures as the IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a 
foreign partnership shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors under chapters 3 and 61 of the Internal Revenue Code, 
section 3406, the regulations under those provisions, and other 
withholding provisions of the Internal Revenue Code, except to the 
extent provided under the agreement. Under the agreement, a foreign 
partnership may agree to act as an acceptance agent to perform the 
duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The 
agreement may specify the manner in which applicable procedures for 
adjustments for underwithholding and overwithholding, including refund 
procedures, apply to the withholding foreign partnership and its 
partners and the extent to which applicable procedures may be modified. 
In particular, a withholding agreement may allow a withholding foreign 
partnership to claim refunds of overwithheld amounts on behalf of its 
customers. In addition, the agreement must specify the manner in which 
the IRS will audit the foreign partnership's books and records in order 
to verify the partnership's compliance with its agreement. A 
withholding foreign partnership must file a return on Form 1042 and 
information returns on Form 1042-S. The withholding foreign partnership 
agreement may also require a withholding foreign partnership to file a 
partnership return under section 6031(a) and partner statements under 
6031(b).
    (iii) Withholding responsibility. A withholding foreign partnership 
must assume primary withholding responsibility under chapter 3 of the 
Internal Revenue Code. It is not required to provide information to the 
withholding agent regarding each partner's distributive share of the 
payment. The withholding foreign partnership will be responsible for 
reporting the payments under Sec. 1.1461-1(c) and chapter 61 of the 
Internal Revenue Code. A withholding agent making a payment to a 
withholding foreign partnership is not required to withhold any amount 
under chapter 3 of the Internal Revenue Code on a payment to the 
withholding foreign partnership, unless it has actual knowledge or 
reason to know that the foreign partnership is not a withholding 
foreign partnership. The withholding foreign partnership shall withhold 
the payments under the same procedures and at the same time as 
prescribed for withholding by a U.S. partnership under paragraph (b)(2) 
of this section, except that, for purposes of determining the partner's 
status, the provisions of paragraph (d)(4) of this section shall apply.
    (iv) Withholding certificate from a withholding foreign 
partnership. The rules of Sec. 1.1441-1(e)(4) shall apply to 
withholding certificates described in this paragraph (c)(2)(iv). A 
withholding certificate furnished by a withholding foreign partnership 
is valid with regard to any partner on whose behalf the certificate is 
furnished only if it is furnished on a Form W-8, an acceptable 
substitute form, or such other form as the IRS may prescribe, it is 
signed under penalties of perjury by a partner with authority to sign 
for the partnership, its validity has not expired, and it contains the 
information, statement, and certifications described in this paragraph 
(c)(2)(iv) as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
partnership, and the country under the laws of which the partnership is 
created or governed;
    (B) A certification that the partnership is a withholding foreign 
partnership within the meaning of paragraph (c)(2)(i) of this section; 
and
    (C) Any other information, certifications or statements as may be 
required by the withholding foreign partnership agreement with the IRS 
or the form or accompanying instructions in addition to, or in lieu of, 
the information, statements, and certifications described in this 
paragraph (c)(2)(iv).
    (3) Nonwithholding foreign partnerships--(i) Reliance on claim of 
foreign partnership status. A withholding agent may treat a person as a 
nonwithholding foreign partnership if it receives from that person a 
nonwithholding foreign partnership withholding certificate as described 
in paragraph (c)(3)(iii) of this section. A withholding agent that does 
not receive a nonwithholding foreign partnership withholding 
certificate, or does not receive a valid withholding certificate, from 
an entity it knows, or has reason to know, is a foreign partnership, 
must apply the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-
5(d) and

[[Page 32191]]

paragraphs (d) and (e)(6) of this section. In addition, to the extent a 
withholding agent cannot, prior to a payment, reliably associate the 
payment with valid documentation from a payee that is associated with 
the nonwithholding foreign partnership withholding certificate or has 
insufficient information to report the payment on Form 1042-S or Form 
1099, to the extent reporting is required, must also apply the 
presumption rules. See Sec. 1.1441-1(b)(2)(vii)(A) and (B) for rules 
regarding reliable association. See paragraph (c)(3)(iv) of this 
section and Sec. 1.1441-1(e)(3)(iv) for alternative procedures 
permitting allocation information to be received after a payment is 
made.
    (ii) Reliance on claim of reduced withholding by a partnership for 
its partners. This paragraph (c)(3)(ii) describes the manner in which a 
withholding agent may rely on a claim of reduced withholding when 
making a payment to a nonwithholding foreign partnership. To the extent 
that a withholding agent treats a payment to a nonwithholding foreign 
partnership as a payment to the nonwithholding foreign partnership's 
partners (whether direct or indirect) in accordance with paragraph 
(c)(1)(i) of this section, it may rely on a claim for reduced 
withholding by the partner if, prior to the payment, the withholding 
agent can reliably associate the payment (within the meaning of 
Sec. 1.1441-1(b)(2)(vii)) with a valid withholding certificate or other 
appropriate documentation from the partner that establishes entitlement 
to a reduced rate of withholding. A withholding certificate or other 
appropriate documentation that establishes entitlement to a reduced 
rate of withholding is a beneficial owner withholding certificate 
described in Sec. 1.1441-1(e)(2)(i), documentary evidence described in 
Sec. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) (for a partner claiming to 
be a foreign person and a beneficial owner, determined under the 
provisions of Sec. 1.1441-1(c)(6)), a Form W-9 described in 
Sec. 1.1441-1(d) (for a partner claiming to be a U.S. payee), or a 
withholding foreign partnership withholding certificate described in 
paragraph (c)(2)(iv) of this section. Unless a nonwithholding foreign 
partnership withholding certificate is provided for income claimed to 
be effectively connected with the conduct of a trade or business in the 
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 a partner as required under paragraph 
(c)(3)(iii)(C) of this section. When making a claim for several 
partners, the partnership may present a single nonwithholding foreign 
partnership withholding certificate to which the partners' certificates 
or other appropriate documentation are associated. Where the 
nonwithholding foreign partnership withholding certificate is provided 
for income claimed to be effectively connected with the conduct of a 
trade or business in the United States under paragraph (c)(3)(iii)(D) 
of this section, the claim may be presented without having to identify 
any partner's distributive share of the payment.
    (iii) Withholding certificate from a nonwithholding foreign 
partnership. A nonwithholding foreign partnership shall provide a 
nonwithholding foreign partnership withholding certificate with respect 
to reportable amounts received by the nonwithholding foreign 
partnership. A nonwithholding foreign partnership withholding 
certificate is valid only to the extent it is furnished on a Form W-8 
(or an acceptable substitute form or such other form as the IRS may 
prescribe), it is signed under penalties of perjury by a partner with 
authority to sign for the partnership, its validity has not expired, 
and it contains the information, statements, and certifications 
described in this paragraph (c)(3)(iii) and paragraph (c)(3)(iv) of 
this section, and the withholding certificates and other appropriate 
documentation for all the persons to whom the certificate relates are 
associated with the certificate. The rules of Sec. 1.1441-1(e)(4) shall 
apply to withholding certificates described in this paragraph 
(c)(3)(iii). No withholding certificates or other appropriate 
documentation from persons who derive income through a partnership 
(whether or not U.S. exempt recipients) are required to be associated 
with the nonwithholding foreign partnership withholding certificate if 
the certificate is furnished solely for income claimed to be 
effectively connected with the conduct of a trade or business in the 
United States. Withholding certificates and other appropriate 
documentation that may be associated with the nonwithholding foreign 
partnership withholding certificate consist of beneficial owner 
withholding certificates under Sec. 1.1441-1(e)(2)(i), intermediary 
withholding certificates under Sec. 1.1441-1(e)(3)(i), withholding 
foreign partnership withholding certificates under paragraph (c)(2)(iv) 
of this section, nonwithholding foreign partnership withholding 
certificates under this paragraph (c)(3)(iii), withholding certificates 
from foreign trusts or estates under paragraph (e) of this section, 
documentary evidence described in Sec. 1.1441-6(c)(3) or (4) or 
documentary evidence described in Sec. 1.6049-5(c)(1), and any other 
documentation or certificates applicable under other provisions of the 
Internal Revenue Code or regulations that certify or establish the 
status of the payee or beneficial owner as a U.S. or a foreign person. 
Nothing in this paragraph (c)(3)(iii) shall require a nonwithholding 
foreign partnership to furnish original documentation. Copies of 
certificates or documentary evidence may be transmitted to the U.S. 
withholding agent, in which case the nonwithholding foreign partnership 
must retain the original documentation for the same time period that 
the copy is required to be retained by the withholding agent under 
Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding agent 
upon request. The information, statement, and certifications required 
on the withholding certificate are as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
partnership, if any, and the country under the laws of which the 
partnership is created or governed;
    (B) A certification that the person whose name is on the 
certificate is a foreign partnership;
    (C) A withholding statement associated with the nonwithholding 
foreign partnership withholding certificate that provides all of the 
information required by paragraph (c)(3)(iv) of this section and 
Sec. 1.1441-1(e)(3)(iv). No withholding statement is required, however, 
for a nonwithholding foreign partnership withholding certificate 
furnished for income claimed to be effectively connected with the 
conduct of a trade or business in the United States;
    (D) A certification that the income is effectively connected with 
the conduct of a trade or business in the United States, if applicable; 
and
    (E) Any other information, certifications, or statements required 
by the form or accompanying instructions in addition to, or in lieu of, 
the information and certifications described in this paragraph 
(c)(3)(iii).
    (iv) Withholding statement provided by nonwithholding foreign 
partnership. The provisions of Sec. 1.1441-1(e)(3)(iv) (regarding a 
withholding statement) shall apply to a nonwithholding foreign 
partnership by substituting the term nonwithholding foreign partnership 
for the term nonqualified intermediary.

[[Page 32192]]

    (v) Withholding and reporting by a foreign partnership. A 
nonwithholding foreign partnership described in this paragraph (c)(3) 
that receives an amount subject to withholding (as defined in 
Sec. 1.1441-2(a)) shall be required to withhold and report such payment 
under chapter 3 of the Internal Revenue Code and the regulations 
thereunder except as otherwise provided in this paragraph (c)(3)(v). A 
nonwithholding foreign partnership shall not be required to withhold 
and report if it has provided a valid nonwithholding foreign 
partnership withholding certificate, it has provided all of the 
information required by paragraph (c)(3)(iv) of this section 
(withholding statement), and it does not know, and has no reason to 
know, that another withholding agent failed to withhold the correct 
amount or failed to report the payment correctly under Sec. 1.1461-
1(c). A withholding foreign partnership's obligations to withhold and 
report shall be determined in accordance with its withholding foreign 
partnership agreement.
    (d) Presumption rules--(1) In general. This paragraph (d) contains 
the applicable presumptions for a withholding agent (including a 
partnership) to determine the classification and status of a 
partnership and its partners in the absence of documentation. The 
provisions of Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace 
period) and Sec. 1.1441-1(b)(3)(vii) through (ix) shall apply for 
purposes of this paragraph (d).
    (2) Determination of partnership status as U.S. or foreign in the 
absence of documentation. In the absence of a valid representation of 
U.S. partnership status in accordance with paragraph (b)(1) of this 
section or of foreign partnership status in accordance with paragraph 
(c)(2)(i) or (3)(i) of this section, the withholding agent shall 
determine the classification of the payee under the presumptions set 
forth in Sec. 1.1441-1(b)(3)(ii). If the withholding agent treats the 
payee as a partnership under Sec. 1.1441-1(b)(3)(ii), the withholding 
agent shall presume the partnership to be a U.S. partnership unless 
there are indicia of foreign status. If there are indicia of foreign 
status, the withholding agent may presume the partnership to be 
foreign. Indicia of foreign status exist only if the withholding agent 
has actual knowledge of the payee's employer identification number and 
that number begins with the two digits ``98,'' the withholding agent's 
communications with the payee are mailed to an address in a foreign 
country, or the payment is made outside the United States (as defined 
in Sec. 1.6049-5(e)). For rules regarding reliable association with a 
withholding certificate from a domestic or a foreign partnership, see 
Sec. 1.1441-1(b)(2)(vii).
    (3) Determination of partners' status in the absence of certain 
documentation. If a nonwithholding foreign partnership has provided a 
nonwithholding foreign partnership withholding certificate under 
paragraph (c)(3)(iii) of this section that would be valid except that 
the withholding agent cannot reliably associate all or a portion of the 
payment with valid documentation from a partner of the partnership, 
then the withholding agent may apply the presumption rule of this 
paragraph (d)(3) with respect to all or a portion of the payment for 
which documentation has not been received. See Sec. 1.1441-
1(b)(2)(vii)(A) and (B) for rules regarding reliable association. The 
presumption rule of this paragraph (d)(3) also applies to a person that 
is presumed to be a foreign partnership under the rule of paragraph 
(d)(2) of this section. Any portion of a payment that the withholding 
agent cannot treat as reliably associated with valid documentation from 
a partner may be presumed made to a foreign payee. As a result, any 
payment of an amount subject to withholding is subject to withholding 
at a rate of 30 percent. Any payment that is presumed to be made to an 
undocumented foreign payee must be reported on Form 1042-S. See 
Sec. 1.1461-1(c).
    (4) Determination by a withholding foreign partnership of the 
status of its partners. A withholding foreign partnership shall 
determine whether the partners or some other persons are the payees of 
the partners' distributive shares of any payment made by a withholding 
foreign partnership by applying the rules of Sec. 1.1441-1(b)(2), 
paragraph (c)(1) of this section (in the case of a partner that is a 
foreign partnership), and paragraph (e)(3) of this section (in the case 
of a partner that is a foreign estate or a foreign trust). Further, the 
provisions of paragraph (d)(3) of this section shall apply to determine 
the status of partners and the applicable withholding rates to the 
extent that, at the time the foreign partnership is required to 
withhold on a payment, it cannot reliably associate the amount with 
documentation for any one or more of its partners.
    (e) Foreign trusts and estates--(1) In general. This paragraph (e) 
provides rules applicable to payments of amounts subject to withholding 
(as defined in Sec. 1.1441-2(a)) that a withholding agent may treat as 
made to any foreign trust or a foreign estate. For rules relating to 
payments to a U.S. trust or a U.S. estate, see paragraph (b) of this 
section. For the definitions of foreign simple trust, foreign complex 
trust, and foreign grantor trust, see Sec. 1.1441-1(c)(24), (25), and 
(26).
    (2) Payments to foreign complex trusts and foreign estates. Under 
Sec. 1.1441-1(c)(6)(ii)(D), a foreign complex trust or foreign estate 
is generally considered to be the beneficial owner of income paid to 
the foreign complex trust or foreign estate. See paragraph (e)(4) of 
this section for rules describing when a withholding agent may treat a 
payment as made to a foreign complex trust or a foreign estate.
    (3) Payees of payments to foreign simple trusts and foreign grantor 
trusts--(i) Payments for which beneficiaries and owners are payees. For 
purposes of the regulations under chapters 3 and 61 of the Internal 
Revenue Code and section 3406, a foreign simple trust is not a 
beneficial owner or a payee of a payment. Also, a foreign grantor trust 
(or a portion of a trust that is a foreign grantor trust) is not 
considered a beneficial owner or a payee of a payment. Except as 
otherwise provided in paragraph (e)(3)(ii) of this section, the payees 
of a payment made to a person that the withholding agent may treat as a 
foreign simple trust or a foreign grantor trust (or a portion of a 
trust that is a foreign grantor trust) are determined under the rules 
of this paragraph (e)(3)(i). The payees shall be treated as the 
beneficial owners if they may be so treated under Sec. 1.1441-
1(c)(6)(ii)(C) and they provide documentation supporting their status 
as the beneficial owners. The payees of a payment to a foreign simple 
trust or foreign grantor trust are determined as follows--
    (A) If the withholding agent can reliably associate a payment with 
a valid Form W-9 provided under Sec. 1.1441-1(d) from a beneficiary or 
owner of the foreign trust, then the beneficiary or owner is a U.S. 
payee;
    (B) If the withholding agent can reliably associate a payment with 
a valid Form W-8, or other appropriate documentation, provided under 
Sec. 1.1441-1(e)(1)(ii) from a beneficiary or owner of the foreign 
trust, then the beneficiary or owner is a payee that is a foreign 
beneficial owner;
    (C) If the withholding agent can reliably associate a payment with 
a qualified intermediary withholding certificate under Sec. 1.1441-
1(e)(3)(ii), a nonqualified intermediary withholding certificate under 
Sec. 1.1441-1(e)(3)(ii), or a U.S. branch withholding certificate under 
Sec. 1.1441-1(e)(3)(v), then the rules of Sec. 1.1441-1(b)(2)(v) shall 
apply to determine the payee in the same manner

[[Page 32193]]

as if the payment had been paid directly to such intermediary or U.S. 
branch;
    (D) If the withholding agent can reliably associate a payment with 
a withholding foreign partnership withholding certificate under 
paragraph (c)(2)(iv) of this section or a nonwithholding foreign 
partnership withholding certificate under paragraph (c)(3)(iii) of this 
section, then the rules of paragraph (c)(1)(i) or (ii) of this section 
shall apply to determine the payee;
    (E) If the withholding agent can reliably associate the payment 
with a foreign simple trust withholding certificate or a foreign 
grantor trust withholding certificate (both described in paragraph 
(e)(5)(iii) of this section) from a second or higher-tier foreign 
simple trust or foreign grantor trust, then the rules of this paragraph 
(e)(3)(i) or paragraph (e)(3)(ii) of this section shall apply to 
determine whether the payment is treated as made to a beneficiary or 
owner of the higher-tier trust or to the trust itself in the same 
manner as if the payment had been made directly to the higher-tier 
trust; and
    (F) If the withholding agent cannot reliably associate a payment 
with a withholding certificate or other appropriate documentation, the 
payees shall be determined by applying the presumptions described in 
paragraph (e)(6) of this section.
    (ii) Payments for which trust is payee. A payment to a person that 
the withholding agent may treat as made to a foreign trust under 
paragraph (e)(5)(iii) of this section is treated as a payment to the 
trust, and not to a beneficiary of the trust, only if--
    (A) The withholding agent can reliably associate the payment with a 
foreign complex trust withholding certificate under paragraph (e)(4) of 
this section;
    (B) The withholding agent can reliably associate the payment with a 
foreign simple trust withholding certificate under paragraph 
(e)(5)(iii) of this section certifying that the payment is income that 
is treated as effectively connected with the conduct of a trade or 
business in the United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec. 1.1441-4(a)(3)(i).
    (4) Reliance on claim of foreign complex trust or foreign estate 
status. A withholding agent may treat a payment as made to a foreign 
complex trust or a foreign estate if the withholding agent can reliably 
associate the payment with a beneficial owner withholding certificate 
described in Sec. 1.1441-1(e)(2)(i) or other documentary evidence under 
Sec. 1.1441-6(c)(3) or (4) (regarding a claim for treaty benefits) or 
Sec. 1.6049-5(c)(1) (regarding documentary evidence to establish 
foreign status for purposes of chapter 61 of the Internal Revenue Code) 
that establishes the foreign complex trust or foreign estate's status 
as a beneficial owner. See paragraph (e)(6) of this section for 
presumption rules if documentation is lacking.
    (5) Foreign simple trust and foreign grantor trust--(i) Reliance on 
claim of foreign simple trust or foreign grantor trust status. A 
withholding agent may treat a person as a foreign simple trust or 
foreign grantor trust if it receives from that person a foreign simple 
trust or foreign grantor trust withholding certificate as described in 
paragraph (e)(5)(iii) of this section. A withholding agent must apply 
the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-5(d) and 
paragraphs (d) and (e)(6) of this section to the extent it cannot, 
prior to the payment, reliably associate a payment (within the meaning 
of Sec. 1.1441-1(b)(2)(vii)) with a valid foreign simple trust or 
foreign grantor trust withholding certificate, it cannot reliably 
determine how much of the payment relates to valid documentation 
provided by a payee (e.g., a person that is not itself a nonqualified 
intermediary, flow-through entity, or U.S. branch) associated with the 
foreign simple trust or foreign grantor trust withholding certificate, 
or it does not have sufficient information to report the payment on 
Form 1042-S or Form 1099, if reporting is required. See Sec. 1.1441-
1(b)(2)(vii)(A) and (B).
    (ii) Reliance on claim of reduced withholding by a foreign simple 
trust or foreign grantor trust for its beneficiaries or owners. This 
paragraph (e)(5)(ii) describes the manner in which a withholding agent 
may rely on a claim of reduced withholding when making a payment to a 
foreign simple trust or foreign grantor trust. To the extent that a 
withholding agent treats a payment to a foreign simple trust or foreign 
grantor trust as a payment to payees other than the trust in accordance 
with paragraph (e)(3)(i) of this section, it may rely on a claim for 
reduced withholding by a beneficiary or owner if, prior to the payment, 
the withholding agent can reliably associate the payment (within the 
meaning of Sec. 1.1441-1(b)(2)(vii)) with a valid withholding 
certificate or other appropriate documentation from a payee or 
beneficial owner that establishes entitlement to a reduced rate of 
withholding. A withholding certificate or other appropriate 
documentation that establishes entitlement to a reduced rate of 
withholding is a beneficial owner withholding certificate described in 
Sec. 1.1441-1(e)(2)(i) or documentary evidence described in 
Sec. 1.1441-6(c)(3) or(4) or in Sec. 1.6049-5(c)(1) (for a beneficiary 
or owner claiming to be a foreign person and a beneficial owner, 
determined under the provisions of Sec. 1.1441-1(c)(6)), a Form W-9 
described in Sec. 1.1441-1(d) (for a beneficiary or owner claiming to 
be a U.S. payee), or a withholding foreign partnership withholding 
certificate described in paragraph (c)(2)(iv) of this section. Unless a 
foreign simple trust or foreign grantor trust withholding certificate 
is provided for income treated as income effectively connected with the 
conduct of a trade or business in the United States, a claim must be 
presented for each payee's portion of the payment. When making a claim 
for several payees, the trust may present a single foreign simple trust 
or foreign grantor trust withholding certificate with which the payees' 
certificates or other appropriate documentation are associated. Where 
the foreign simple trust or foreign grantor trust withholding 
certificate is provided for income that is treated as effectively 
connected with the conduct of a trade or business in the United States 
under paragraph (e)(5)(iii)(D) of this section, the claim may be 
presented without having to identify any partner's distributive share 
of the payment.
    (iii) Withholding certificate from foreign simple trust or foreign 
grantor trust. A withholding certificate furnished by a foreign simple 
trust or a foreign grantor trust that is not a withholding foreign 
trust (within the meaning of paragraph (e)(5)(v) of this section) is 
valid only if it is furnished on a Form W-8, an acceptable substitute 
form, or such other form as the IRS may prescribe, it is signed under 
penalties of perjury by a trustee, its validity has not expired, it 
contains the information, statements, and certifications required by 
this paragraph (e)(5)(iii) and Sec. 1.1441-1(e)(3)(iv), and the 
withholding certificates or other appropriate documentation for all of 
the payees (as determined under paragraph (e)(3)(i) of this section) to 
whom the certificate relates are associated with the foreign simple 
trust or foreign grantor trust withholding certificate. The rules of 
Sec. 1.1441-1(e)(4) shall apply to withholding certificates described 
in this paragraph (e)(5)(iii). No withholding certificates or other 
appropriate documentation from persons who derive income through a 
foreign simple trust or a foreign grantor trust (whether or not U.S. 
exempt

[[Page 32194]]

recipients) are required to be associated with the foreign simple trust 
or foreign grantor trust withholding certificate if the certificate is 
furnished solely for income that is treated as effectively connected 
with the conduct of a trade or business in the United States. 
Withholding certificates and other appropriate documentation (as 
determined under paragraph (e)(3)(i) of this section) that may be 
associated with a foreign simple trust or foreign grantor trust 
withholding certificate consist of beneficial owner withholding 
certificates under Sec. 1.1441-1(e)(2)(i), intermediary withholding 
certificates under Sec. 1.1441-1(e)(3)(i), withholding foreign 
partnership withholding certificates under paragraph (c)(2)(iv) of this 
section, nonwithholding foreign partnership withholding certificates 
under paragraph (c)(3)(iii) of this section, withholding certificates 
from foreign trusts or estates under paragraph (e)(4) or (5)(iii) of 
this section, documentary evidence described in Secs. 1.1441-6(c)(3) or 
(4), or 1.6049-5(c)(1), and any other documentation or certificates 
applicable under other provisions of the Internal Revenue Code or 
regulations that certify or establish the status of the payee or 
beneficial owner as a U.S. or a foreign person. Nothing in this 
paragraph (e)(5)(iii) shall require a foreign simple trust or foreign 
grantor trust to provide original documentation. Copies of certificates 
or documentary evidence may be passed up to the U.S. withholding agent, 
in which case the foreign simple trust or foreign grantor trust must 
retain the original documentation for the same time period that the 
copy is required to be retained by the withholding agent under 
Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding agent 
upon request. The information, statement, and certifications required 
on a foreign simple trust or foreign grantor trust withholding 
certificate are as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number, if 
required, of the trust and the country under the laws of which the 
trust is created;
    (B) A certification that the person whose name is on the 
certificate is a foreign simple trust or a foreign grantor trust;
    (C) A withholding statement associated with the foreign simple 
trust or foreign grantor trust withholding certificate that provides 
all of the information required by paragraph (e)(5)(iv) of this 
section. No withholding statement is required, however, for a foreign 
simple trust withholding certificate furnished for income that is 
treated as effectively connected with the conduct of a trade or 
business in the United States;
    (D) A certification on a foreign simple trust withholding 
certificate that the income is treated as effectively connected with 
the conduct of a trade or business in the United States, if applicable; 
and
    (E) Any other information, certifications, or statements required 
by the form or accompanying instructions in addition to, or in lieu of, 
the information, certifications, and statements described in this 
paragraph (e)(5)(iii);
    (iv) Withholding statement provided by a foreign simple trust or 
foreign grantor trust. The provisions of Sec. 1.1441-1(e)(3)(iv) 
(regarding a withholding statement) shall apply to a foreign simple 
trust or foreign grantor trust by substituting the term foreign simple 
trust or foreign grantor trust for the term nonqualified intermediary.
    (v) Withholding foreign trusts. The IRS may enter an agreement with 
a foreign trust to treat the trust or estate as a withholding foreign 
trust. Such an agreement shall generally follow the same principles as 
an agreement with a withholding foreign partnership under paragraph 
(c)(2)(ii) of this section. A withholding agent may treat a payment to 
a withholding foreign trust in the same manner the withholding agent 
would treat a payment to a withholding foreign partnership. The IRS may 
also enter an agreement to treat a trust as a qualified intermediary in 
appropriate circumstances. See Sec. 1.1441-1(e)(5)(ii)(D).
    (6) Presumption rules--(i) In general. This paragraph (e)(6) 
contains the applicable presumptions for a withholding agent (including 
a trust or estate) to determine the classification and status of a 
trust or estate and its beneficiaries or owners in the absence of valid 
documentation. The provisions of Sec. 1.1441-1(b)(3)(iv) (regarding the 
90-day grace period) and Sec. 1.1441-1(b)(3)(vii) through (ix) shall 
apply for purposes of this paragraph (e)(6).
    (ii) Determination of status as U.S. or foreign trust or estate in 
the absence of documentation. In the absence of valid documentation 
that establishes the U.S. status of a trust or estate under paragraph 
(b)(1) of this section and of documentation that establishes the 
foreign status of a trust or estate under paragraph (e)(4) or (5)(iii) 
of this section, the withholding agent shall determine the 
classification of the payee based upon the presumptions set forth in 
Sec. 1.1441-1(b)(3)(ii). If, based upon those presumptions, the 
withholding agent classifies the payee as a trust or estate, the trust 
or estate shall be presumed to be a U.S. trust or U.S. estate unless 
there are indicia of foreign status, in which case the trust or estate 
shall be presumed to be foreign. Indicia of foreign status exists if 
the withholding agent has actual knowledge of the payee's employer 
identification number and that number begins with the two digits 
``98,'' the withholding agent's communications with the payee are 
mailed to an address in a foreign country, or the payment is made 
outside the United States (as defined in Sec. 1.6049-5(e)). If an 
undocumented payee is presumed to be a foreign trust it shall be 
presumed to be a foreign complex trust. If a withholding agent has 
documentary evidence that establishes that an entity is a foreign 
trust, but the withholding agent cannot determine whether the foreign 
trust is a complex trust, a simple trust, or foreign grantor trust, the 
withholding agent may presume that the trust is a foreign complex 
trust.
    (iii) Determination of beneficiary or owner's status in the absence 
of certain documentation. If a foreign simple trust or foreign grantor 
trust has provided a foreign simple trust or foreign grantor trust 
withholding certificate under paragraph (e)(5)(iii) of this section but 
the payment to such trust cannot be reliably associated with valid 
documentation from a specific beneficiary or owner of the trust, then 
any portion of a payment that a withholding agent cannot treat as 
reliably associated with valid documentation from a beneficiary or 
owner may be presumed made to a foreign payee. As a result, any payment 
of an amount subject to withholding is subject to withholding at a rate 
of 30 percent. Any such payment that is presumed to be made to an 
undocumented foreign person must be reported on Form 1042-S. See 
Sec. 1.1461-1(c).
* * * * *

    Par. 8. Effective January 1, 2001, Sec. 1.1441-6 is amended by:
    1. Revising paragraphs (b)(1), (b)(2), and (b)(3).
    2. Removing paragraph (b)(4) and redesignating paragraph (b)(5) as 
new paragraph (b)(4).
    3. Revising paragraphs (c) and (e).
    The revisions read as follows:


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

* * * * *
    (b) Reliance on claim of reduced withholding under an income tax 
treaty--(1) In general. The withholding imposed under section 1441, 
1442, or

[[Page 32195]]

1443 on any payment to a foreign person is eligible for reduction under 
the terms of an income tax treaty only to the extent that such payment 
is treated as derived by a resident of an applicable treaty 
jurisdiction, such resident is a beneficial owner, and all other 
requirements for benefits under the treaty are satisfied. See section 
894 and the regulations thereunder to determine whether a resident of a 
treaty country derives the income. 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 can reliably associate the payment with a beneficial owner 
withholding certificate, described in Sec. 1.1441-1(e)(2), that 
contains the information necessary to support the claim, or, in the 
case of a payment of income described in paragraph (c)(2) of this 
section made outside the United States with respect to an offshore 
account, documentary evidence described in paragraphs (c)(3), (4) and 
(5) of this section. See Secs. 1.6049-5(e) for the definition of 
payments made outside the United States and 1.6049-5(c)(1) for the 
definition of offshore account. For purposes of this paragraph (b)(1), 
a beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) contains information necessary to support the claim for a 
treaty benefit only if it includes the beneficial owner's taxpayer 
identifying number (except as otherwise provided in paragraph (c)(1) of 
this section) and the representations that the beneficial owner derives 
the income under section 894 and the regulations thereunder, if 
required, and meets the limitation on benefits provisions of the 
treaty, if any. The withholding certificate must also contain any other 
representations required by this section and any other information, 
certifications, or statements as may be required by the form or 
accompanying instructions in addition to, or in place of, the 
information and certifications described in this section. Absent actual 
knowledge or reason to know that the claims are incorrect (and subject 
to the standards of knowledge in Sec. 1.1441-7(b)), a withholding agent 
may rely on the claims made on a withholding certificate or on 
documentary evidence. A withholding agent may also rely on the 
information contained in a withholding statement provided under 
Secs. 1.1441-1(e)(3)(iv) and 1.1441-5(c)(3)(iv) and (e)(5)(iv) to 
determine whether the appropriate statements regarding section 894 and 
limitation on benefits have been provided in connection with 
documentary evidence. If the beneficial owner is a person related to 
the withholding agent within the meaning of section 482, the 
withholding certificate must also contain a representation that the 
beneficial owner will file the statement required under Sec. 301.6114-
1(d) of this chapter (if applicable). The requirement to file an 
information statement under section 6114 for income subject to 
withholding applies only to amounts received during the calendar year 
that, in the aggregate, exceed $500,000. See Sec. 301.6114-1(d) of this 
chapter. The Internal Revenue Service (IRS) may apply the provisions of 
Sec. 1.1441-1(e)(1)(ii)(B) to notify the withholding agent that the 
certificate cannot be relied upon to grant benefits under an income tax 
treaty. See Sec. 1.1441-1(e)(4)(viii) regarding reliance on a 
withholding certificate by a withholding agent. The provisions of 
Sec. 1.1441-1(b)(3)(iv) dealing with a 90-day grace period shall apply 
for purposes of this section.
    (2) Payment to fiscally transparent entity--(i) In general. If the 
person claiming a reduced rate of withholding under an income tax 
treaty is the interest holder of an entity that is considered to be 
fiscally transparent (as defined in the regulations under section 894) 
by the interest holder's jurisdiction with respect to an item of 
income, then, with respect to such income derived by that person 
through the entity, the entity shall be treated as a flow-through 
entity and may provide a flow-through withholding certificate with 
which the withholding certificate or other documentary evidence of the 
interest holder that supports the claim for treaty benefits is 
associated. For purposes of the preceding sentence, interest holders do 
not include any direct or indirect interest holders that are themselves 
treated as fiscally transparent entities with respect to that income by 
the interest holder's jurisdiction. See Sec. 1.1441-1(c)(23) and 
(e)(3)(i) for the definition of flow-through entity and flow-through 
withholding certificate. The entity may provide a beneficial owner 
withholding certificate, or beneficial owner documentation, with 
respect to any remaining portion of the income to the extent the entity 
is receiving income and is not treated as fiscally transparent by its 
own jurisdiction. Further, the entity may claim a reduced rate of 
withholding with respect to the portion of a payment for which it is 
not treated as fiscally transparent if it meets all the requirements to 
make such a claim and, in the case of treaty benefits, it provides the 
documentation required by paragraph (b)(1) of this section. If dual 
claims, as described in paragraph (b)(2)(iii) of this section, are 
made, multiple withholding certificates may have to be furnished. 
Multiple withholding certificates may also have to be furnished if the 
entity receives income for which a reduction of withholding is claimed 
under a provision of the Internal Revenue Code (e.g., portfolio 
interest) and income for which a reduction of withholding is claimed 
under an income tax treaty.
    (ii) Certification by qualified intermediary. Notwithstanding 
paragraph (b)(2)(i) of this section, a foreign entity that is fiscally 
transparent, as defined in the regulations under section 894, that is 
also a qualified intermediary for purposes of claiming a reduced rate 
of withholding under an income tax treaty for its interest holders (who 
are deriving the income paid to the entity as residents of an 
applicable treaty jurisdiction) may furnish a single qualified 
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(ii), for amounts for which it claims a reduced rate of 
withholding under an income tax treaty on behalf of its interest 
holders.
    (iii) Dual treatment. Under paragraph (b)(2)(i) of this section, a 
withholding agent may make a payment to a foreign entity that is 
simultaneously claiming to be the beneficial owner of a portion of the 
income (whether or not it is also 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 the entity with respect to the same, or a 
different, portion of the income. If the same portion of a payment may 
be reliably associated with both the entity's claim and an interest 
holder's claim, the withholding agent may choose to reject both claims 
and request new documentation and information allocating the payment 
among the beneficial owners of the payment or the withholding agent may 
choose which claim to apply. If the entity and the interest holder's 
claims are reliably associated with separate portions of the payment, 
the withholding agent may, at its option, accept such dual claims based 
on withholding certificates or other appropriate documentation 
furnished by the entity and its interest holders with respect to their 
respective shares of the payment even though this will result in the 
withholding agent treating the entity differently with respect to 
different portions of the same payment. Alternatively, the withholding 
agent may choose to apply only the

[[Page 32196]]

claim made by the entity, provided the entity may be treated as a 
beneficial owner of the income. If the withholding agent does not 
accept claims for a reduced rate of withholding presented by any one or 
more of the interest holders, or by the entity, any interest holder or 
the entity may subsequently claim a refund or credit of any amount so 
withheld to the extent the interest holder's or entity's share of such 
withholding exceeds the amount of tax due.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (b)(2):

    Example 1. (i) Facts. Entity E is a business organization formed 
under the laws of country Y. Country Y has an income tax treaty with 
the United States. The treaty contains a limitation on benefits 
provision. E receives U.S. source royalties from withholding agent W 
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). E 
furnishes a beneficial owner withholding certificate described in 
paragraph (b)(1) of this section that represents that E is a 
resident of country Y (within the meaning of the U.S.-Y tax treaty), 
is the beneficial owner of the income, derives the income under 
section 894 and the regulations thereunder, and is not precluded 
from claiming benefits by the treaty's limitation on benefits 
provision.
    (ii) Analysis. Absent actual knowledge or reason to know 
otherwise, W may rely on the representations made by E to apply a 
reduced rate of withholding.
    Example 2. (i) Facts. The facts are the same as under Example 1, 
except that one of E's interest holders, H, is an entity organized 
in country Z. The U.S.-Z tax treaty reduces the rate on royalties to 
zero whereas the rate on royalties under the U.S.-Y tax treaty 
applicable to E is 5 percent. H is not fiscally transparent under 
country Z's tax law with respect to such income. H furnishes a 
beneficial owner withholding certificate to E that represents that H 
derives, within the meaning of section 894 and the regulations 
thereunder, its share of the royalty income paid to E as a resident 
of country Z, is the beneficial owner of the royalty income, and is 
not precluded from claiming treaty benefits by virtue of the 
limitation on benefits provision in the U.S.-Z treaty. E furnishes 
to W a flow-through withholding certificate described in 
Sec. 1.1441-1(e)(3)(i) to which it attaches H's beneficial owner 
withholding certificate and a withholding statement for the portion 
of the payment that H claims as its distributive share of the 
royalty income. E also furnishes to W a beneficial owner withholding 
certificate for itself for the portion of the payment that H does 
not claim as its distributive share.
    (ii) Analysis. Absent actual knowledge or reason to know 
otherwise, W may rely on the documentation furnished by E to treat 
the royalty payment to a single foreign entity (E) as derived by 
different residents of tax treaty countries as a result of the 
claims presented under different treaties. W may, at its option, 
grant dual treatment, that is, a reduced rate of zero percent under 
the U.S.-Z treaty on the portion of the royalty payment that H 
claims to derive as a resident of country Z and a reduced rate of 5 
percent under the U.S.-Y treaty for the balance. However, under 
paragraph (b)(2)(iii) of this section, W may, at its option, treat E 
as the only relevant person deriving the royalty and grant benefits 
under the U.S.-Y treaty only.
    Example 3. (i) Facts. E is a business organization formed under 
the laws of country X. Country X has an income tax treaty with the 
United States. E has two interest holders, H1, organized in country 
Y, and H2, organized in country Z. E receives from W, a U.S. 
withholding agent, U.S. source royalties and interest that is 
eligible for the portfolio interest exception under sections 871(h) 
and 881(c), provided W receives the appropriate beneficial owner 
statement required under section 871(h)(5). E is classified as a 
corporation under U.S. tax law principles. Country X, E's country of 
organization, treats E as an entity that is not fiscally transparent 
with respect to items of income under the regulations under section 
894. Under the U.S.-X income tax treaty, royalties are subject to 5 
percent rate of withholding. Country Y, H1's country of 
organization, treats E as fiscally transparent with respect to items 
of income under section 894 and H1 as not fiscally transparent with 
respect to items of income. Under the country Y-U.S. income tax 
treaty, royalties are exempt from U.S. tax. Country Z, H2's country 
of organization, treats E as not fiscally transparent under section 
894 with respect to items of income. E provides W with a flow-
through beneficial owner withholding certificate with which it 
associates a beneficial owner withholding certificate from H1. H1's 
withholding certificate states that H1 is a resident of country Y, 
derives the royalty income under section 894, meets the applicable 
limitations on benefits provisions of the U.S.-Y treaty, and is the 
beneficial owner of the income. The withholding statement attached 
to E's flow-through withholding certificate allocates one-half of 
the royalty payment to H1. E also provides W with a beneficial owner 
withholding certificate for the interest income and the remaining 
one-half of the royalty income. The withholding certificate states 
that E is a resident of country X, derives the royalty income under 
section 894, meets the limitation on benefits provisions of the 
U.S.-X treaty, and is the beneficial owner of the income.
    (ii) Analysis. Absent actual knowledge or reason to know that 
the claims are incorrect, W may treat one-half of the royalty 
derived by E as subject to a 5 percent withholding rate and one-half 
of the royalty as derived by H1 and subject to no withholding. 
Further, it may treat all of the interest as being paid to E and as 
qualifying for the portfolio interest exception. W can, at its 
option, treat the entire royalty as paid to E and subject it to 
withholding at a 5 percent rate of withholding. In that case, H1 
would be entitled to claim a refund with respect to its one-half of 
the royalty.

    (3) Certified TIN. The IRS may issue guidance requiring a foreign 
person claiming treaty benefits and for whom a TIN is required to 
establish with the IRS, at the time the TIN is requested or after the 
TIN is issued, that the person is a resident in a treaty country and 
meets other conditions (such as limitation on benefits provisions) of 
the treaty. See Sec. 601.601(d)(2) of this chapter.
* * * * *
    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income--(1) 
General rule. In the case of income described in paragraph (c)(2) of 
this section, a withholding agent may rely on a beneficial owner 
withholding certificate described in paragraph (b)(1) of this section 
without regard to the requirement that the withholding certificate 
include the beneficial owner's taxpayer identifying number. In the case 
of payments of income described in paragraph (c)(2) of this section 
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(c)(1)), a 
withholding agent may, as an alternative to a withholding certificate 
described in paragraph (b)(1) of this section, rely on a certificate of 
residence described in paragraph (c)(3) of this section or documentary 
evidence described in paragraph (c)(4) of this section, relating to the 
beneficial owner, that the withholding agent has reviewed and maintains 
in its records in accordance with Sec. 1.1441-1(e)(4)(iii). In the case 
of a payment to a person other than an individual, the certificate of 
residence or documentary evidence must be accompanied by the statements 
described in paragraphs (c)(5)(i) and (ii) of this section regarding 
limitation on benefits and whether the amount paid is derived by such 
person or by one of its interest holders. 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 (c)(1) shall not apply to amounts that are exempt from 
withholding based on a claim that the income is effectively connected 
with the conduct of a trade or business in the United States.
    (2) Income to which special rules apply. The income to which 
paragraph (c)(1) of this section applies is dividends and interest from 
stocks and debt obligations that are actively traded, dividends from 
any redeemable security issued by an investment company registered 
under the Investment Company Act of 1940 (15 U.S.C. 80a-1),

[[Page 32197]]

dividends, interest, or royalties from units of beneficial interest in 
a unit investment trust that are (or were upon issuance) publicly 
offered and are registered with the Securities and Exchange Commission 
under the Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with 
respect to loans of securities described in this paragraph (c)(2). For 
purposes of this paragraph (c)(2), a stock or debt obligation is 
actively traded if it is actively traded within the meaning of section 
1092(d) and Sec. 1.1092(d)-1 when documentation is provided.
    (3) Certificate of residence. A certificate of residence referred 
to in paragraph (c)(1) of this section is a certification issued by an 
appropriate tax official of the treaty country of which the taxpayer 
claims to be a resident that the taxpayer has filed its most recent 
income tax return as a resident of that country (within the meaning of 
the applicable tax treaty). The certificate of residence must have been 
issued by such official within three years prior to its being presented 
to the withholding agent, or such other period as the IRS may prescribe 
in published guidance (see Sec. 601.601(d)(2) of this chapter). See 
Sec. 1.1441-1(e)(4)(ii)(A) for the period during which a withholding 
agent may rely on a certificate of residence. 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--(i) Individuals. For an individual, the documentary evidence 
referred to in paragraph (c)(1) of this section is any documentation 
that includes the individuals name, address, and photograph, is an 
official document issued by an authorized governmental body (i.e., a 
government or agency thereof, or a municipality), and has 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 (e.g., a bank statement, 
utility bills, or medical bills). Documentary evidence must be in the 
form of original documents or certified copies thereof.
    (ii) Persons other than individuals. For a person other than an 
individual, the documentary evidence referred to in paragraph (c)(1) of 
this section is any documentation that includes the name of the entity 
and the address of its principal office in the treaty country, and is 
an official document issued by an authorized governmental body (e.g., a 
government or agency thereof, or a municipality).
    (5) Statements regarding entitlement to treaty benefits--(i) 
Statement regarding conditions under a limitation on benefits 
provision. In addition to the documentary evidence described in 
(c)(4)(ii) of this section, a taxpayer that is not an individual must 
provide a statement that it meets one or more of the conditions set 
forth in the limitation on benefits article (if any, or in a similar 
provision) contained in the applicable tax treaty.
    (ii) Statement regarding whether the taxpayer derives the income. A 
taxpayer that is not an individual must also provide, in addition to 
the documentary evidence and the statement described in paragraph 
(c)(5)(i) of this section, a statement that any income for which it 
intends to claim benefits under an applicable income tax treaty is 
income that will properly be treated as derived by itself as a resident 
of the applicable treaty jurisdiction within the meaning of section 894 
and the regulations thereunder. This requirement does not apply if the 
taxpayer furnishes a certificate of residence that certifies that fact.
* * * * *
    (e) Competent authority. 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.
* * * * *

    Par. 9. Effective January 1, 2001, Sec. 1.1441-7 is amended by:
    1. Revising paragraphs (a), (b)(2) and (b)(3).
    2. Adding paragraphs (b)(4) through (b)(11).
    The revisions and additions read as follows:


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

    (a) Withholding agent defined--(1) In general. For purposes of 
chapter 3 of the Internal Revenue Code and the regulations under such 
chapter, 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, including (but 
not limited to) a foreign intermediary described in Sec. 1.1441-
1(e)(3)(i), a foreign partnership, or a U.S. branch described in 
Sec. 1.1441-1(b)(2)(iv)(A) or (E). See Secs. 1.1441-1(b)(2) and (3) and 
1.1441-5(c), (d), and (e), for rules to determine 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), except as otherwise may be required by a 
qualified intermediary withholding agreement, a withholding foreign 
partnership agreement, or a withholding foreign trust agreement. When 
several persons qualify as withholding agents with respect to a single 
payment, only one tax is required to be withheld and deposited. See 
Sec. 1.1461-1. A person who, as a nominee described in Sec. 1.6031(c)-
1T, has furnished to a partnership all of the information required to 
be furnished under Sec. 1.6031(c)-1T(a) shall not be treated as a 
withholding agent if it has notified the partnership that it is 
treating the provision of information to the partnership as a discharge 
of its obligations as a withholding agent.

    (2) Examples. The following examples illustrate the rules of 
paragraph (a)(1) of this section:

    Example 1. USB is a broker organized in the United States. USB 
pays U.S. source dividends and interest, which are amounts subject 
to withholding under Sec. 1.1441-2(a), to FC, a foreign corporation 
that has an investment account with USB. USB is a withholding agent 
as defined in paragraph (a)(1) of this section.
     Example 2. USB is a bank organized in the United States. FB is 
a bank organized in country X. X has an omnibus account with USB 
through which FB invests in debt and equity instruments that pay 
amounts subject to withholding as defined in Sec. 1.1441-2(a). FB is 
a nonqualified intermediary, as defined in Sec. 1.1441-1(c)(14). 
Both USB and FB are withholding agents as defined in paragraph 
(a)(1) of this section.
    Example 3. The facts are the same as in Example 2, except that 
FB is a qualified intermediary. Both USB and FB are withholding 
agents as defined in paragraph (a)(1) of this section.
    Example 4. FB is a bank organized in country X. FB has a branch 
in the United States. FB's branch has customers that are foreign 
persons who receive amounts subject to withholding, as defined in 
Sec. 1.1441-2(a). FB is a withholding agent under paragraph (a)(1) 
of this section and is required to withhold and report payments of 
amounts subject to withholding in accordance with chapter 3 of the 
Internal Revenue Code.
    Example 5. X is a foreign corporation. X pays dividends to 
shareholders who are foreign persons. Under section 861(a)(2)(B), a 
portion of the dividends are from sources within the United States 
and constitute amounts subject to withholding within the meaning of 
Sec. 1.1441-2(a). The dividends are not subject to tax under section 
884(a). See 884(e)(3). X is a withholding agent under paragraph 
(a)(1) of this section.


[[Page 32198]]


    (b) * * *
    (2) Reason to know. A withholding agent shall be considered to have 
reason to know if its knowledge of relevant facts or of statements 
contained in the withholding certificates or other documentation is 
such that a reasonably prudent person in the position of the 
withholding agent would question the claims made.
    (3) Financial institutions--limits on reason to know. For purposes 
of this paragraph (b)(3) and paragraphs (b)(4) through (b)(10) of this 
section, the terms withholding certificate, documentary evidence, and 
documentation are defined in Sec. 1.1441-1(c)(16), (17) and (18). 
Except as otherwise provided in paragraphs (b)(4) through (b)(9) of 
this section, a withholding agent that is a financial institution 
(including a regulated investment company) that has a direct account 
relationship with a beneficial owner (a direct account holder) has a 
reason to know, with respect to amounts described in Sec. 1.1441-
6(c)(2), that documentation provided by the direct account holder is 
unreliable or incorrect only if one or more of the circumstances 
described in paragraphs (b)(4) through (b)(9) of this section exist. If 
a direct account holder has provided documentation that is unreliable 
or incorrect under the rules of paragraph (b)(4) through (b)(9) of this 
section, the withholding agent may require new documentation. 
Alternatively, the withholding agent may rely on the documentation 
originally provided if the rules of paragraphs (b)(4) through (b)(9) of 
this section permit such reliance based on additional statements and 
documentation. Paragraph (b)(10) of this section provides limits on 
reason to know for financial institutions that receive beneficial owner 
documentation from persons (indirect account holders) that have an 
account relationship with, or an ownership interest in, a direct 
account holder. For rules regarding reliance on Form W-9, see 
Sec. 31.3406(g)-3(e)(2) of this chapter.
    (4) Rules applicable to withholding certificates--(i) In general. A 
withholding agent has reason to know that a beneficial owner 
withholding certificate provided by a direct account holder in 
connection with a payment of an amount described in Sec. 1.1441-6(c)(2) 
is unreliable or incorrect if the withholding certificate is incomplete 
with respect to any item on the certificate that is relevant to the 
claims made by the direct account holder, the withholding certificate 
contains any information that is inconsistent with the direct account 
holder's claim, the withholding agent has other account information 
that is inconsistent with the direct account holder's claim, or the 
withholding certificate lacks information necessary to establish 
entitlement to a reduced rate of withholding. A withholding agent shall 
also treat a withholding certificate as unreliable or incorrect if the 
name of the person on the withholding certificate indicates that the 
person is a corporation, partnership, trust, estate, or an individual, 
and the person's claim of classification (e.g. individual, partnership, 
corporation) is not consistent with such indication and a difference in 
classification would result in a different rate of withholding or a 
difference in the person or persons to whom the payment is reported 
under Sec. 1.1461-1(c) of chapter 61 of the Internal Revenue Code. For 
purposes of establishing a direct account holder's status as a foreign 
person or resident of a treaty country a withholding certificate shall 
be considered unreliable or inconsistent with an account holder's 
claims only if it is not reliable under the rules of paragraph (b)(5) 
and (6) of this section. A withholding agent that relies on an agent to 
review and maintain a withholding certificate is considered to know or 
have reason to know the facts within the knowledge of the agent.
    (ii) Examples. The rules of paragraph (b)(4) of this section are 
illustrated by the following examples:

    Example 1. F, a foreign person that has a direct account 
relationship with USB, a bank that is a U.S. person, provides USB 
with a beneficial owner withholding certificate for the purpose of 
claiming a reduced rate of withholding on U.S. source dividends. F 
resides in a treaty country that has a limitation on benefits 
provision in its income tax treaty with the United States. The 
withholding certificate, however, does not contain a statement 
regarding limitations on benefits or deriving the income under 
section 894 as required by Sec. 1.1441-6(b)(1). USB cannot rely on 
the withholding certificate to grant a reduced rate of withholding 
because it is incomplete with respect to the claim made by F.
    Example 2. F, a foreign person that has a direct account 
relationship with USB, a broker that is a U.S. person, provides USB 
with a withholding certificate for the purpose of claiming the 
portfolio interest exception under section 881(c), which applies to 
foreign corporations. F indicates on its withholding certificate, 
however, that it is a partnership. USB may not treat F as a 
beneficial owner of the interest for purposes of the portfolio 
interest exception because F has indicated on its withholding 
certificate that it is a foreign partnership, and therefore under 
Sec. 1.1441-1(c)(6)(ii) it is not the beneficial owner of the 
interest payment.

    (5) Withholding certificate--establishment of foreign status. A 
withholding agent has reason to know that a beneficial owner 
withholding certificate (as defined in Sec. 1.1441-1(e)(2)) provided by 
a direct account holder in connection with a payment of an amount 
described in Sec. 1.1441-6(c)(2) is unreliable or incorrect for 
purposes of establishing the account holder's status as a foreign 
person if the certificate is described in paragraph (b)(5)(i) or (ii) 
of this section.
    (i) A withholding certificate is unreliable or incorrect if the 
withholding certificate has a permanent residence address (as defined 
in Sec. 1.1441-1(e)(2)(ii)) in the United States, the withholding 
certificate has a mailing address in the United States, the withholding 
agent has a residence or mailing address as part of its account 
information that is an address in the United States, or the direct 
account holder notifies the withholding agent of a new residence or 
mailing address in the United States (whether or not provided on a 
withholding certificate). A withholding agent may, however, rely on the 
beneficial owner withholding certificate as establishing the account 
holder's foreign status if it may do so under the provisions of 
paragraph (b)(5)(i)(A) or (B) of this section.
    (A) A withholding agent may treat a direct account holder as a 
foreign person if the beneficial owner withholding certificate has been 
provided by an individual and--
    (1) The withholding agent has in its possession or obtains 
documentary evidence (which does not contain a U.S. address) that is no 
more than three years old, the documentary evidence supports the claim 
of foreign status, and the direct account holder provides the 
withholding agent with a reasonable explanation, in writing, supporting 
the account holder's foreign status; or
    (2) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (B) A withholding agent may treat an account holder as a foreign 
person if the beneficial owner withholding certificate has been 
provided by an entity that the withholding agent does not know, or does 
not have reason to know, is a flow-through entity and--
    (1) The withholding agent has in its possession, or obtains, 
documentation that substantiates that the entity is actually organized 
or created under the laws of a foreign country; or

[[Page 32199]]

    (2) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (ii) A beneficial owner withholding certificate is unreliable or 
incorrect if it is provided with respect to an offshore account (as 
defined in Sec. 1.6049-5(c)(1)) and the direct account holder has 
standing instructions directing the withholding agent to pay amounts 
from its account to an address or an account maintained in the United 
States. The withholding agent may treat the direct account holder as a 
foreign person, however, if the direct account holder provides a 
reasonable explanation in writing that supports its foreign status.
    (6) Withholding certificate--claim of reduced rate of withholding 
under treaty. A withholding agent has reason to know that a withholding 
certificate (other than Form W-9) provided by a direct account holder 
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing that 
the direct account holder is a resident of a country with which the 
United States has an income tax treaty if it is described in paragraphs 
(b)(6)(i) through (iii) of this section.
    (i) A beneficial owner withholding certificate is unreliable or 
incorrect if the permanent residence address on the beneficial owner 
withholding certificate is not in the country whose treaty is invoked, 
or the direct account holder notifies the withholding agent of a new 
permanent residence address that is not in the treaty country. A 
withholding agent may, however, treat a direct account holder as 
entitled to a reduced rate of withholding under an income tax treaty if 
the direct account holder provides a reasonable explanation for the 
permanent residence address outside the treaty country (e.g., the 
address is the address of a branch of the beneficial owner located 
outside the treaty country in which the entity is a resident) or the 
withholding agent has in its possession, or obtains, documentary 
evidence that establishes residency in a treaty country.
    (ii) A beneficial owner withholding certificate is unreliable or 
incorrect if the permanent residence address on the withholding 
certificate is in the applicable treaty country but the withholding 
certificate contains a mailing address outside the treaty country or 
the withholding agent has a mailing address as part of its account 
information that is outside the treaty country. A mailing address that 
is a P.O. Box, in-care-of address, or address at a financial 
institution (if the financial institution is not a beneficial owner) 
shall not preclude a withholding agent from treating the direct account 
holder as a resident of a treaty country if such address is in the 
treaty country. If a withholding agent has a mailing address (whether 
or not contained on the withholding certificate) outside the applicable 
treaty country, the withholding agent may nevertheless treat a direct 
account holder as a resident of an applicable treaty country if--
    (A) The withholding agent has in its possession, or obtains, 
additional documentation supporting the direct account holder's claim 
of residence in the applicable treaty country (and the additional 
documentation does not contain an address outside the treaty country);
    (B) The withholding agent has in its possession, or obtains, 
documentation that establishes that the direct account holder is an 
entity organized in a treaty country (or an entity managed and 
controlled in a treaty country, if the applicable treaty so requires);
    (C) The withholding agent knows that the address outside the 
applicable treaty country (other than a P.O. box, or in-care-of 
address) is a branch of a bank or insurance company that is a resident 
of the applicable treaty country; or
    (D) The withholding agent obtains a written statement from the 
direct account holder that reasonably establishes entitlement to treaty 
benefits.
    (iii) A beneficial owner withholding certificate is unreliable or 
incorrect to establish entitlement to a reduced rate of withholding 
under an income tax treaty if the direct account holder has standing 
instructions for the withholding agent to pay amounts from its account 
to an address or an account outside the treaty country unless the 
direct account holder provides a reasonable explanation, in writing, 
establishing the direct account holder's residence in the applicable 
treaty country.
    (7) Documentary evidence. A withholding agent shall not treat 
documentary evidence provided by a direct account holder as valid if 
the documentary evidence does not reasonably establish the identity of 
the person presenting the documentary evidence. For example, 
documentary evidence is not valid if it is provided in person by a 
direct account holder that is a natural person and the photograph or 
signature on the documentary evidence, if any, does not match the 
appearance or signature of the person presenting the document. A 
withholding agent shall not rely on documentary evidence to reduce the 
rate of withholding that would otherwise apply under the presumption 
rules of Secs. 1.1441-1(b)(3), 1.1441-5(d) and (e)(6), and 1.6049-5(d) 
if the documentary evidence contains information that is inconsistent 
with the direct account holder's claim of a reduced rate of 
withholding, the withholding agent has other account information that 
is inconsistent with the direct account holder's claim, or the 
documentary evidence lacks information necessary to establish 
entitlement to a reduced rate of withholding. For example, if a direct 
account holder provides documentary evidence to claim treaty benefits 
and the documentary evidence establishes the direct account holder's 
status as a foreign person and a resident of a treaty country, but the 
account holder fails to provide the treaty statements required by 
Sec. 1.1441-6(c)(5), the documentary evidence does not establish the 
direct account holder's entitlement to a reduced rate of withholding. 
For purposes of establishing a direct account holder's status as a 
foreign person or resident of a country with which the United States 
has an income tax treaty with respect to income described in 
Sec. 1.1441-6(c)(2), documentary evidence shall be considered 
unreliable or incorrect only if it is not reliable under the rules of 
paragraph (b)(8) and (9) of this section.
    (8) Documentary evidence--establishment of foreign status. A 
withholding agent has reason to know that documentary evidence provided 
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing the 
direct account holder's status as a foreign person if the documentary 
evidence is described in paragraphs (b)(8)(i), (ii), (iii) or (iv) of 
this section.
    (i) A withholding agent shall not treat documentary evidence 
provided by an account holder after December 31, 2000, as valid for 
purposes of establishing the direct account holder's foreign status if 
the only mailing or residence address that is available to the 
withholding agent is an address at a financial institution (unless the 
financial institution is a beneficial owner of the income), an in-care-
of address, or a P.O. box. In this case, the withholding agent must 
obtain additional documentation that is sufficient to establish the 
direct account holder's status as a foreign

[[Page 32200]]

person. A withholding agent shall not treat documentary evidence 
provided by an account holder before January 1, 2001, as valid for 
purposes of establishing a direct account holder's status as a foreign 
person if it has actual knowledge that the direct account holder is a 
U.S. person or if it has a mailing or residence address for the direct 
account holder in the United States. If a withholding agent has an 
address for the direct account holder in the United States, the 
withholding agent may nevertheless treat the direct account holder as a 
foreign person if it can so treat the direct account holder under the 
rules of paragraph (b)(8)(ii) of this section. '
    (ii) Documentary evidence is unreliable or incorrect to establish a 
direct account holder's status as a foreign person if the withholding 
agent has a mailing or residence address (whether or not on the 
documentation) for the direct account holder in the United States or if 
the direct account holder notifies the withholding agent of a new 
address in the United States. A withholding agent may, however, rely on 
documentary evidence as establishing the direct account holder's 
foreign status if it may do so under the provisions of paragraph 
(b)(8)(ii)(A) or (B) of this section.
    (A) A withholding agent may treat a direct account holder that is 
an individual as a foreign person even if it has a mailing or residence 
address for the direct account holder in the United States if the 
withholding agent--
    (1) Has in its possession or obtains additional documentary 
evidence (which does not contain a U.S. address) supporting the claim 
of foreign status and a reasonable explanation in writing supporting 
the account holder's foreign status;
    (2) Has in its possession or obtains a valid beneficial owner 
withholding certificate on Form W-8 and the Form W-8 contains a 
permanent residence address outside the United States and a mailing 
address outside the United States (or if a mailing address is inside 
the United States the direct account holder provides a reasonable 
explanation in writing supporting the direct account holder's foreign 
status); or
    (3) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (B) A withholding agent may treat a direct account holder that is 
an entity (other than a flow-through entity) as a foreign person even 
if it has a mailing or residence address for the direct account holder 
in the United States if the withholding agent--
    (1) Has in its possession, or obtains, documentation that 
substantiates that the entity is actually organized or created under 
the laws of a foreign country;
    (2) Obtains a valid beneficial owner withholding certificate on 
Form W-8 and the Form W-8 contains a permanent residence address 
outside the United States and a mailing address outside the United 
States (or if a mailing address is inside the United States the direct 
account holder provides additional documentary evidence sufficient to 
establish the direct account holder's foreign status); or
    (3) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (iii) Documentary evidence is unreliable or incorrect if the direct 
account holder has standing instructions directing the withholding 
agent to pay amounts from its account to an address or an account 
maintained in the United States. The withholding agent may treat the 
direct account holder as a foreign person, however, if the account 
holder provides a reasonable explanation in writing that supports its 
foreign status.
    (9) Documentary evidence--claim of reduced rate of withholding 
under treaty. A withholding agent has reason to know that documentary 
evidence provided in connection with a payment of an amount described 
in Sec. 1.1441-6(c)(2) is unreliable or incorrect for purposes of 
establishing that a direct account holder is a resident of a country 
with which the United States has an income tax treaty if it is 
described in paragraph (b)(9)(i) or (ii) of this section.
    (i) Documentary evidence is unreliable or incorrect if the 
withholding agent has a mailing or residence address for the direct 
account holder (whether or not on the documentary evidence) that is 
outside the applicable treaty country, or the only address that the 
withholding agent has (whether in or outside of the applicable treaty 
country) is a P.O. box, an in-care-of address, or the address of a 
financial institution (if the financial institution is not the 
beneficial owner). If a withholding agent has a mailing or residence 
address for the direct account holder outside the applicable treaty 
country, the withholding agent may nevertheless treat a direct account 
holder as a resident of an applicable treaty country if the withholding 
agent--
    (A) Has in its possession, or obtains, additional documentary 
evidence supporting the direct account holder's claim of residence in 
the applicable treaty country (and the documentary evidence does not 
contain an address outside the applicable treaty country, a P.O. box, 
an in-care-of address, or the address of a financial institution);
    (B) Has in its possession, or obtains, documentary evidence that 
establishes the direct account holder is an entity organized in a 
treaty country (or an entity managed and controlled in a treaty 
country, if the applicable treaty so requires); or
    (C) Obtains a valid beneficial owner withholding certificate on 
Form W-8 that contains a permanent residence address and a mailing 
address in the applicable treaty country.
    (ii) Documentary evidence is unreliable or incorrect if the direct 
account holder has standing instructions directing the withholding 
agent to pay amounts from its account to an address or an account 
maintained outside the treaty country unless the direct account holder 
provides a reasonable explanation, in writing, establishing the direct 
account holder's residence in the applicable treaty country.
    (10) Limits on reason to know--indirect account holders. A 
financial institution that receives documentation from a payee through 
a nonqualified intermediary, a flow-through entity, or a U.S. branch 
described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch that is 
treated as a U.S. person) with respect to a payment of an amount 
described in Sec. 1.1441-6(c)(2) has reason to know that the 
documentation is unreliable or incorrect if a reasonably prudent person 
in the position of a withholding agent would question the claims made. 
This standard requires, but is not limited to, a withholding agent's 
compliance with the rules of paragraphs (b)(10)(i) through (iii).
    (i) The withholding agent must review the withholding statement 
described in Sec. 1.1441-1(e)(3)(iv) and may not rely on information in 
the statement to the extent the information does not support the claims 
made for any payee. For this purpose, a withholding agent may not treat 
a payee as a foreign person if an address in the United States is 
provided

[[Page 32201]]

for such payee and may not treat a person as a resident of a country 
with which the United States has an income tax treaty if the address 
for that person is outside the applicable treaty country. 
Notwithstanding a U.S. address or an address outside a treaty country, 
the withholding agent may treat a payee as a foreign person or a 
foreign person as a resident of a treaty country if a reasonable 
explanation is provided, in writing, by the nonqualified intermediary, 
flow-through entity, or U.S. branch supporting the payee's foreign 
status or the foreign person's residency in a treaty country.
    (ii) The withholding agent must review each withholding certificate 
in accordance with the requirements of paragraphs (b)(5) and (6) of 
this section and verify that the information on the withholding 
certificate is consistent with the information on the withholding 
statement required under Sec. 1.1441-1(e)(3)(iv). If there is a 
discrepancy between the withholding certificate and the withholding 
statement, the withholding agent may choose to rely on the withholding 
certificate, if valid, and instruct the nonqualified intermediary, 
flow-through entity, or U.S. branch to correct the withholding 
statement or apply the presumption rules of Secs. 1.1441-1(b), 1.1441-
5(d) and (e)(6), and 1.6049-5(d) to the payment allocable to the payee 
who provided the withholding certificate relates. A withholding agent 
that receives a withholding certificate before December 31, 2001, is 
not required to review the information on withholding certificates or 
determine if it is consistent with the information on the withholding 
statement until December 31, 2001. A withholding agent may withhold and 
report in accordance with a withholding statement until December 31, 
2001, unless it has actually performed the verification procedures 
required by this paragraph (b)(10)(ii) and determined that the 
withholding statement is inaccurate with respect to a particular payee.
    (iii) The withholding agent must review the documentary evidence 
provided by the nonqualified intermediary, flow-through entity, or U.S. 
branch to determine that there is no obvious indication that the payee 
is a U.S. non-exempt recipient or that the documentary evidence does 
not establish the identity of the person who provided the documentation 
(e.g., the documentary evidence does not appear to be an identification 
document).
    (11) Additional guidance. The IRS may prescribe other circumstances 
for which a withholding certificate or documentary evidence is 
unreliable or incorrect in addition to the circumstances described in 
paragraph (b) of this section to establish an account holder's status 
as a foreign person or a beneficial owner entitled to a reduced rate of 
withholding in published guidance (see Sec. 601.601(d)(2) of this 
chapter).
* * * * *

    Par. 10. Effective January 1, 2001, Sec. 1.1441-9 is amended by 
revising paragraph (b)(2) to read as follows:


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

* * * * *
    (b) * * *
    (2) Withholding certificate. A withholding certificate under this 
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition 
to other applicable requirements, the Form W-8 includes the taxpayer 
identifying number of the organization whose name is on the 
certificate, and it certifies that the Internal Revenue Service (IRS) 
has issued a favorable determination letter (and the date thereof) that 
is currently in effect, what portion, if any, of the amounts paid 
constitute income includible under section 512 in computing the 
organization's unrelated business taxable income, and, if the 
organization is described in section 501(c)(3), whether it is a private 
foundation described in section 509. Notwithstanding the preceding 
sentence, if the organization cannot certify that it has been issued a 
favorable determination letter that is still in effect, its withholding 
certificate is nevertheless valid under this paragraph (b)(2) if the 
organization attaches to the withholding certificate an opinion that is 
acceptable to the withholding agent from a U.S. counsel (or any other 
person as the IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter)) concluding that the organization 
is described in section 501(c). If the determination letter or opinion 
of counsel to which the withholding certificate refers concludes that 
the organization is described in section 501(c)(3), and the certificate 
further certifies that the organization is not a private foundation 
described in section 509, an affidavit of the organization setting 
forth sufficient facts concerning the operations and support of the 
organization for the Internal Revenue Service (IRS) to determine that 
such organization would be likely to qualify as an organization 
described in section 509(a)(1), (2), (3), or (4) must be attached to 
the withholding certificate. An organization that provides an opinion 
of U.S. counsel or an affidavit may provide the same opinion or 
affidavit to more than one withholding agent provided that the opinion 
is acceptable to each withholding agent who receives it in conjunction 
with a withholding certificate. Any such opinion of counsel or 
affidavit must be renewed whenever there is a change in facts or 
circumstances that are relevant to determine the organization's status 
under section 501(c) or, if relevant, that the organization is or is 
not a private foundation described in section 509.
* * * * *

    Par. 12. Effective January 1, 2001, Sec. 1.1461-1 is amended by:
    1. Removing the last sentence of paragraph (a)(1).
    2. Removing paragraphs (b)(2) and (b)(3) and redesignating 
paragraph (b)(4) as new paragraph (b)(2).
    3. Revising paragraphs (c)(1), (c)(2), (c)(3), and (c)(4).
    4. Removing paragraphs (c)(5), (c)(6), and (c)(7), and 
redesignating paragraph (c)(8) as new paragraph (c)(5).
    The revisions read as follows:


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

* * * * *
    (c) Information returns--(1) Filing requirement--(i) In general. A 
withholding agent (other than an individual who is not acting in the 
course of a trade or business with respect to a payment) must make an 
information return on Form 1042-S (or such other form as the IRS may 
prescribe) to report the amounts subject to reporting, as defined in 
paragraph (c)(2) of this section, that were paid during the preceding 
calendar year. Notwithstanding the preceding sentence, any person that 
withholds or is required to withhold an amount under sections 1441, 
1442, or 1443 must file a Form 1042-S for the payment withheld upon 
whether or not that person is engaged in a trade or business and 
whether or not the payment is an amount subject to reporting. A Form 
1042-S shall be prepared for each recipient of an amount subject to 
reporting. 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 IRS on or before March 15 of the calendar year 
following the year in which the amount subject to reporting was paid. 
It shall be filed with a transmittal form as provided in the 
instructions to the Form 1042-S and to the transmittal form. 
Withholding certificates, documentary evidence, or other statements or 
documentation

[[Page 32202]]

provided to a withholding agent are not required to be attached to the 
form. Another copy of the Form 1042-S must be furnished to the 
recipient for whom the form is prepared (or any other person, as 
required under this paragraph (c) or the instructions to the form) on 
or before March 15 of the calendar year following the year in which the 
amount subject to reporting was paid. The withholding agent must 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) Recipient--(A) Defined. For purposes of this section, the term 
recipient means--
    (1) A beneficial owner as defined in paragraph (c)(6) of this 
section, including a foreign estate or a foreign complex trust, as 
defined in Sec. 1.1441-1(c)(25);
    (2) A qualified intermediary as defined in Sec. 1.1441-1(e)(5)(ii);
    (3) A withholding foreign partnership as defined in Sec. 1.1441-
5(c)(2) or a withholding foreign trust under Sec. 1.1441-5(e)(5)(v);
    (4) An authorized foreign agent as defined in Sec. 1.1441-7(c);
    (5) A U.S. branch that is treated as a U.S. person under 
Sec. 1.1441-1(b)(2)(iv)(A);
    (6) A nonwithholding foreign partnership or a foreign simple trust 
as defined in Sec. 1.1441-1(c)(24), but only to the extent the income 
is (or is treated as) effectively connected with the conduct of a trade 
or business in the United States by such entity;
    (7) A payee, as defined in Sec. 1.1441-1(b)(2) that is presumed to 
be a foreign person under the presumption rules of Sec. 1.1441-1(b)(3); 
1.1441-5(d) or (e)(6), or 1.6049-5(d); and
    (8) Any other person as required on Form 1042-S or the instructions 
to the form.
    (B) Persons that are not recipients. A recipient does not include--
    (1) A nonqualified intermediary;
    (2) A payment to a wholly-owned entity that is disregarded under 
Sec. 301.7701-2(c)(2) of this chapter as an entity separate from its 
owner;
    (3) A flow-through entity, as defined in Sec. 1.1441-1(c)(23) (to 
the extent it is receiving amounts subject to reporting other than 
income effectively connected with the conduct of a trade or business in 
the United States); and
    (4) A U.S. branch described in Sec. 1.1441-1(b)(2)(iv) that is not 
treated as a U.S. person under that section.
    (2) Amounts subject to reporting--(i) In general. Subject to the 
exceptions described in paragraph (c)(2)(ii) of this section, amounts 
subject to reporting on Form 1042-S are amounts paid to a foreign payee 
(including persons presumed to be foreign) that are amounts subject to 
withholding as defined in Sec. 1.1441-2(a). Amounts subject to 
reporting include amounts subject to withholding even if no amount is 
deducted and withheld from the payment because of a treaty or Internal 
Revenue Code exception to taxation or because an amount withheld was 
reimbursed to the payee under the adjustment procedures of Sec. 1.1461-
2. In addition, amounts subject to reporting include any amounts paid 
to a foreign payee on which a withholding agent withheld an amount 
(either under chapter 3 of the Internal Revenue Code or section 3406) 
whether or not the amount is subject to withholding. Amounts subject to 
reporting include, but are not limited to, the following items--
    (A) The entire amount of a corporate distribution (whether actual 
or deemed) irrespective of any estimate of the portion of the 
distribution that represents a taxable dividend;
    (B) Interest, including the portion of a notional principal 
contract payment that is characterized as interest. Interest shall also 
be reported on Form 1042-S if it is bank deposit interest paid to 
nonresident alien individuals as required under Sec. 1.6049-8;
    (C) Rents;
    (D) Royalties;
    (E) Compensation for dependent and independent personal services 
performed in the United States;
    (F) Annuities;
    (G) Pension distributions and other deferred income;
    (H) Gambling winnings that are not exempt from tax under section 
871(j);
    (I) Income from the cancellation of indebtedness unless the 
withholding agent is unrelated to the debtor and does not have 
knowledge of the facts that give rise to the payment (see Sec. 1.1441-
2(d));
    (J) Amounts that are (or are presumed to be) effectively connected 
with the conduct of a trade or business in the United States (including 
deposit interest as defined in sections 871(i)(2)(A) and 881(d)) even 
if no withholding certificate is required to be furnished by the payee 
or beneficial owner. In the case of amounts paid on a notional 
principal contract described in Sec. 1.1441-4(a)(3) that are presumed 
to be effectively connected with the conduct of a trade or business in 
the United States, the amount required to be reported is limited to the 
amount of cash paid from the notional principal contract;
    (K) Scholarship, fellowship, or grant income and compensation for 
personal services that is not excludible from gross income under 
section 117 (whether or not the taxable scholarship, fellowship, grant 
income, or compensation for personal services is exempt from tax under 
an income tax treaty) paid to foreign students, trainees, teachers, or 
researchers;
    (L) Amounts paid to foreign governments, international 
organizations, or the Bank for International Settlements, whether or 
not documentation must be provided;
    (M) Interest (including original issue discount) paid with respect 
to foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2) to the extent the documentation requirements described in 
Sec. 1.871-14(e)(3) and (4) are required to be satisfied (taking into 
account the provisions of Sec. 1.871-14(e)(4)(ii), if applicable); and
    (N) Original issue discount paid on the redemption of an OID 
obligation. The amount to be reported is the amount of OID includible 
in the gross income of the holder of the obligation, if known, or, if 
not known, the total amount of original issue discount determined as if 
the holder held the obligation from its original issuance. A 
withholding agent may determine the total amount of OID by using the 
most recently published ``List of Original Issue Discount 
Instruments,'' (Publication 1212, available from the IRS Forms 
Distribution Centers).
    (ii) Exceptions to reporting. The amounts listed in this paragraph 
(c)(2)(ii) are not required to be reported on Form 1042-S--
    (A) Interest (including original issue discount) that is deposit 
interest under sections 871(i)(2)(A) and 881(d) and that is not 
effectively connected with the conduct of a trade or business in the 
United States, unless reporting is required under Sec. 1.6049-8 
(regarding payments to certain foreign residents) or is interest that 
is effectively connected with the conduct of a trade or business in the 
United States;
    (B) Interest or original issue discount on certain short-term 
obligations, described in section 871(g)(1)(B) or 881(a)(3);
    (C) Interest paid on obligations sold between interest payment 
dates and the portion of the purchase price of an OID obligation that 
is sold or exchanged in a transaction other than a redemption, unless 
the sale or exchange is part of a plan, the principal purpose of which 
is to avoid tax and the withholding agent has actual knowledge or 
reason to know of such plan (see Sec. 1.1441-2(a)(5) and (6));

[[Page 32203]]

    (D) 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 for payments to employees) or 
Sec. 1.6052-1 (relating to information regarding payment of wages in 
the form of group-term life insurance);
    (E) Any item required to be reported on Form 1099, and such other 
forms as are prescribed pursuant to the information reporting 
provisions of sections 6041 through 6050P and the regulations under 
those sections;
    (F) Amounts paid on a notional principal contract described in 
Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the 
conduct of a trade or business in the United States (or not treated as 
effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
    (G) Amounts 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)). A withholding agent that must report a distribution 
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to 
report the entire amount on a Form 8288 or 8804;
    (H) Interest on a registered obligation that is targeted to foreign 
markets and qualifies as portfolio interest to the extent it is paid to 
a registered owner that is a financial institution or member of a 
clearing organization that has provided the proper withholding 
certificates (see Secs. 1.1441-1(b)(4)(i) and 1.1441-2(a));
    (I) Interest on a foreign targeted bearer obligation (see 
Secs. 1.1441-1(b)(4)(i) and 1.1441-2(a));
    (J) Gain described in section 301(c)(3); and
    (K) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with 
certain amounts paid by the U.S. government).
    (3) Required information. The information required to be furnished 
under this paragraph (c)(3) shall be based upon the information 
provided by or on behalf of the recipient of an amount subject to 
reporting (as corrected and supplemented based on the withholding 
agent's actual knowledge) or the presumption rules of Secs. 1.1441-
1(b)(3), 1.1441-4(a); 1.1441-5(d) and (e); 1.1441-9(b)(3) or 1.6049-
5(d). The Form 1042-S must include the following information, if 
applicable--
    (i) The name, address, and taxpayer identifying number of the 
withholding agent;
    (ii) A description of each category of income paid based on the 
income codes provided on the form (e.g., interest, dividends, 
royalties, etc.) and the aggregate amount in each category expressed in 
U.S. dollars;
    (iii) The rate of withholding applied or the basis for exempting 
the payment from withholding (based on exemption codes provided on the 
form);
    (iv) The name and address of the recipient;
    (v) The name and address of any nonqualified intermediary, flow-
through entity, or U.S. branch as described in Sec. 1.1441-1(b)(2)(iv) 
(other than a branch that is treated as a U.S. person) to which the 
payment was made;
    (vi) The taxpayer identifying number of the recipient if required 
under Sec. 1.1441-1(e)(4)(vii) or if actually known to the withholding 
agent making the return;
    (vii) The taxpayer identifying number of a nonqualified 
intermediary or flow-through entity (to the extent it is not a 
recipient) or other flow-through entity to the extent it is known to 
the withholding agent;
    (viii) The country (based on the country codes provided on the 
form) of the recipient and of any nonqualified intermediary or flow-
through entity the name of which appears on the form; and
    (ix) Such information as the form or the instructions may require 
in addition to, or in lieu of, information required under this 
paragraph (c)(3).
    (4) Method of reporting--(i) Payments by U.S. withholding agents to 
recipients. A withholding agent that is a U.S. person (other than a 
foreign branch of a U.S. person that is a qualified intermediary as 
defined in Sec. 1.1441-1(e)(5)(ii)) and that makes payments of amounts 
subject to reporting on Form 1042-S must file a separate Form 1042-S 
for each recipient who receives such amount. For purposes of this 
paragraph (c)(4), a U.S. person includes a U.S. branch described in 
Sec. 1.1441-1(e)(2)(iv)(A) or (E) that agrees to be treated as a U.S. 
person. Except as may otherwise be required on Form 1042-S or the 
instructions to the form, only payments for which the income code, 
exemption code, withholding rate and recipient code are the same may be 
reported on a single Form 1042-S. See paragraph (c)(4)(ii) of this 
section for reporting of payments made to a person that is not a 
recipient.
    (A) Payments to beneficial owners. If a U.S. withholding agent 
makes a payment directly to a beneficial owner it must complete Form 
1042-S treating the beneficial owner as the recipient. Under the grace 
period rule of Sec. 1.1441-1(b)(3)(iv), a U.S. withholding agent may, 
under certain circumstances, treat a payee as a foreign person while 
the withholding agent awaits a valid withholding certificate. A U.S. 
withholding agent who relies on the grace period rule to treat a payee 
as a foreign person must file a Form 1042-S to report all payments on 
Form 1042-S during the period that person was presumed to be foreign 
even if that person is later determined to be a U.S. person based on 
appropriate documentation or is presumed to be a U.S. person after the 
grace period ends. In the case of joint owners, a withholding agent may 
provide a single Form 1042-S made out to the owner whose status the 
U.S. withholding agent relied upon to determine the applicable rate of 
withholding. If, however, any one of the owners requests its own Form 
1042-S, the withholding agent must furnish a Form 1042-S to the person 
who requests it. If more than one Form 1042-S is issued for a single 
payment, the aggregate amount paid and tax withheld that is reported on 
all Forms 1042-S cannot exceed the total amounts paid to joint owners 
and the tax withheld thereon.
    (B) Payments to a qualified intermediary, a withholding foreign 
partnership, or a withholding foreign trust. A U.S. withholding agent 
that makes payments to a qualified intermediary (whether or not the 
qualified intermediary assumes primary withholding responsibility), a 
withholding foreign partnership, or a withholding foreign trust shall 
complete Forms 1042-S treating the qualified intermediary or 
withholding foreign partnership as the recipient. The U.S. withholding 
agent must complete a separate Form 1042-S for each withholding rate 
pool. A withholding rate pool is a payment of a single type of income 
(determined by the income codes on Form 1042-S) that is subject to a 
single rate of withholding. A qualified intermediary that does not 
assume primary withholding responsibility on all payments it receives 
provides information regarding the proportions of income subject to a 
particular withholding rate to the withholding agent on a withholding 
statement associated with a qualified intermediary withholding 
certificate. A qualified intermediary may provide a U.S. withholding 
agent with information regarding withholding rate pools for U.S. non-
exempt recipients (as defined under Sec. 1.1441-1(c)(21)). Amounts paid 
with respect to such withholding rate pools must be reported on Form 
1099 completed for each U.S. non-exempt recipient to the extent they 
are subject to Form 1099 reporting. These amounts must not be reported 
on

[[Page 32204]]

Form 1042-S. In addition, the qualified intermediary may provide the 
U.S. withholding agent information regarding withholding rate pools for 
U.S. persons that are exempt recipients as defined under Sec. 1.1441-
1(c)(20). If such information is provided, a U.S. withholding agent 
should not report such withholding rate pools on Form 1042-S.
    (C) Amounts paid to U.S. branches treated as U.S. persons. A U.S. 
withholding agent making a payment to a U.S. branch of a foreign person 
described in Sec. 1.1441-1(b)(2)(iv) shall complete Form 1042-S as 
follows--
    (1) If the branch has provided the U.S. withholding agent with a 
withholding certificate that evidences its agreement with the 
withholding agent to be treated as a U.S. person, the U.S. withholding 
agent files Forms 1042-S treating the U.S. branch as the recipient;
    (2) If the branch has provided the U.S. withholding agent with a 
withholding certificate that transmits information regarding beneficial 
owners, qualified intermediaries, withholding foreign partnerships, or 
other recipients, the U.S. withholding agent must complete a separate 
Form 1042-S for each recipient whose documentation is associated with 
the U.S. branch's withholding certificate; or
    (3) If the U.S. withholding agent cannot reliably associate a 
payment with a valid withholding certificate from the U.S. branch, it 
shall treat the U.S. branch as the recipient and report the income as 
effectively connected with the conduct of a trade or business in the 
United States.
    (D) Amounts paid to an authorized foreign agent. If a U.S. 
withholding agent makes a payment to an authorized foreign agent, the 
withholding agent files Forms 1042-S treating the authorized foreign 
agent as the recipient, provided that the authorized foreign agent 
reports the payments on Forms 1042-S to each recipient to which it 
makes payments. If the authorized foreign agent fails to report the 
amounts paid on Forms 1042-S for each recipient to which the payment is 
made, the U.S. withholding agent remains responsible for such 
reporting.
    (E) Dual Claims. A U.S. withholding agent may make a payment to a 
foreign entity that is simultaneously claiming a reduced rate of tax on 
its own behalf for a portion of the payment and a reduced rate on 
behalf of persons in their capacity as interest holders in that entity 
on the remaining portion. See Sec. 1.1441-6(b)(2)(iii). If the claims 
are consistent and the withholding agent accepts the multiple claims, 
the withholding agent must file a separate Form 1042-S for those 
payments for which the entity is treated as the beneficial owner and 
Forms 1042-S for each of the interest holder in the entity for which 
the interest holder is treated as the recipient. For those payments for 
which the interest holder in an entity is treated as the recipient, the 
U.S. withholding agent shall prepare the Form 1042-S in the same manner 
as a payment made to a nonqualified intermediary or flow-through entity 
as set forth in paragraph (c)(4)(ii) of this section. If the claims are 
consistent but the withholding agent has not chosen to accept the 
multiple claims, or if the claims are inconsistent, the withholding 
agent must file a separate Form 1042-S for the person or persons it has 
chosen to treat as the recipients.
    (ii) Payments made by U.S. withholding agents to persons that are 
not recipients--(A) Amounts paid to a nonqualified intermediary, a 
flow-through entity, and certain U.S. branches. If a U.S. withholding 
agent makes a payment to a nonqualified intermediary, a flow-through 
entity, or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (other 
than a branch that agrees to be treated as a U.S. person), it must 
complete a separate Form 1042-S for each recipient to the extent the 
withholding agent can reliably associate a payment with valid 
documentation (within the meaning of Sec. 1.1441-1(b)(2)(vii)) from the 
recipient which is associated with the withholding certificate provided 
by the nonqualified intermediary, flow-through entity, or U.S. branch. 
If a payment is made through tiers of nonqualified intermediaries or 
flow-through entities, the withholding agent must nevertheless complete 
Form 1042-S for the recipients to the extent it can reliably associate 
the payment with documentation from the recipients. A withholding agent 
that is completing a Form 1042-S for a recipient that receives a 
payment through a nonqualified intermediary, a flow-through entity, or 
a U.S. branch must include on the Form 1042-S the name of the 
nonqualified intermediary or flow-through entity from which the 
recipient directly receives the payment. If a U.S. withholding agent 
cannot reliably associate the payment, or any portion of the payment, 
with valid documentation from a recipient either because no such 
documentation has been provided or because the nonqualified 
intermediary, flow-through entity, or U.S. branch has failed to provide 
sufficient allocation information so that the withholding agent can 
associate the payment, or any portion thereof, with valid 
documentation, then the withholding agent must report the payments as 
made to an unknown recipient in accordance with the appropriate 
presumption rules for that payment. Thus, if under the presumption 
rules the payment is presumed to be made to a foreign person, the 
withholding agent must generally withhold 30 percent of the payment and 
report the payment on Form 1042-S made out to an unknown recipient and 
shall also include the name of the nonqualified intermediary or flow-
through entity that received the payment on behalf of the unknown 
recipient. If, however, the recipient is presumed to be a U.S. non-
exempt recipient (as defined in Sec. 1.1441-1(c)(21)), the withholding 
agent must withhold on the payment as required under section 3406 and 
report the payment as made to an unknown recipient on the appropriate 
Form 1099 as required under chapter 61 of the Internal Revenue Code.
    (B) Disregarded entities. If a U.S. withholding agent makes a 
payment to a disregarded entity but receives a valid withholding 
certificate or other documentary evidence from a foreign person that is 
the single owner of a disregarded entity, the withholding agent must 
file a Form 1042-S treating the foreign single owner as the recipient. 
The taxpayer identifying number on the Form 1042-S, if required, must 
be the foreign single owner's TIN.
    (iii) Reporting by qualified intermediaries, withholding foreign 
partnerships, and withholding foreign trusts. A qualified intermediary, 
a withholding foreign partnership, and a withholding foreign trust 
shall report payments on Form 1042-S as provided in their agreements 
with the IRS and the instructions to the form.
    (iv) Reporting by a nonqualified intermediary, flow-through entity, 
and certain U.S. branches. A nonqualified intermediary, flow-through 
entity, or U.S. branch described in Sec. 1.1441-1(e)(2)(iv) (other than 
a U.S. branch that is treated as a U.S. person) is a withholding agent 
and must file Forms 1042-S for amounts paid to recipients in the same 
manner as a U.S. withholding agent. A Form 1042-S will not be required, 
however, if another withholding agent has reported the same amount to 
the same recipient for which the nonqualified intermediary, flow-
through entity, or U.S. branch would be required to file a return and 
the entire amount that should be withheld from such payment has been 
withheld. A nonqualified intermediary, flow-through entity, or U.S. 
branch must

[[Page 32205]]

report payments made to recipients to the extent it has failed to 
provide the appropriate documentation to another withholding agent 
together with the information required for that withholding agent to 
reliably associate the payment with the recipient documentation or to 
the extent it knows, or has reason to know, that less than the required 
amount has been withheld. A nonqualified intermediary or flow-through 
entity that is required to report a payment on Form 1042-S must follow 
the same rules as apply to a U.S. withholding agent under paragraph 
(c)(4)(i) and (ii) of this section.
    (v) Pro rata reporting for allocation failures. If a nonqualified 
intermediary, flow-through entity, or U.S. branch described in 
Sec. 1.1441-1(b)(2)(iv) (other than a branch treated as a U.S. person) 
that uses the alternative procedures of Sec. 1.1441-1(e)(3)(iv)(D) 
fails to provide information sufficient to allocate the amount subject 
to reporting paid to a withholding rate pool to the payees identified 
for that pool, then the withholding agent shall report the payment in 
accordance with the rule provided in Sec. 1.1441-1(e)(3)(iv)(D)(6).
    (vi) Other withholding agents. Any person that is a withholding 
agent not described in paragraph (c)(4)(i), (iii), or (iv) of this 
section (e.g., a foreign person that is not a qualified intermediary, 
flow-through entity, or U.S. branch) shall file Form 1042-S in the same 
manner as a U.S. withholding agent and in accordance with the 
instructions to the form.
* * * * *
    Par. 11. Effective January 1, 2001, Sec. 1.6041-1 is amended by 
revising paragraph (d)(5) to read as follows:


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

* * * * *
    (d) * * *
    (5) Notional principal contracts. Except as provided in paragraphs 
(b)(5)(i) and (ii) of this section, amounts paid after December 31, 
2000, with respect to notional principal contracts referred to in 
Sec. 1.863-7 or 1.988-2(e) to persons who are not described in 
Sec. 1.6049-4(c)(1)(ii) are required to be reported in returns of 
information under this section. The amount required to be reported 
under this paragraph (d)(5) is limited to the amount of cash paid from 
the notional principal contract as described in Sec. 1.446-3(d). A non-
periodic payment is reportable for the year in which an actual payment 
is made. Any amount of interest determined under the provisions of 
Sec. 1.446-3(g)(4) (dealing with interest in the case of a significant 
non-periodic payment) is reportable under this paragraph (d)(5) and not 
under section 6049 (see Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4) 
for reporting exceptions regarding payments to foreign persons. See, 
however, Sec. 1.1461-1(c)(1) for reporting amounts described under this 
paragraph (d)(5) that are paid to foreign persons. The provisions of 
Sec. 1.6049-5(d) shall apply for determining whether a payment with 
respect to a notional principal contract is made to a foreign person. 
See Sec. 1.6049-4(a) for a definition of payor. For purposes of this 
paragraph (d)(5), a payor includes a middleman defined in Sec. 1.6049-
4(f)(4).
    (i) An amount paid with respect to a notional principal contract is 
not required to be reported if the payment is made outside the United 
States (as defined in Sec. 1.6049-5(e)) by a non-U.S. payor or a non-
U.S. middleman.
    (ii) An amount paid with respect to a notional principal contract 
is not required to be reported if the payment is made outside the 
United States (as defined in Sec. 1.6049-5(e)) by a payor that has no 
actual knowledge that the payee is a U.S. person, and the payor is--
    (A) A U.S. payor or U.S. middleman that is not a U.S. person (such 
as a controlled foreign corporation defined in section 957(a) or 
certain foreign corporations or foreign partnerships engaged in a U.S. 
trade or business); or
    (B) A foreign branch of a U.S. bank. See Sec. 1.6049-5(c)(5) for a 
definition of a U.S. payor, a U.S. middleman, a non-U.S. payor, and a 
non-U.S. middleman.
* * * * *

    Par. 12. Effective January 1, 2001, Sec. 1.6041-4 is amended by 1. 
Revising paragraph (a)(3).
    2. Adding paragraph (a)(6).
    The revision and addition read as follows:


Sec. 1.6041-4  Foreign-related items and other exceptions.

    (a) * * *
    (3) Returns of information are not required for amounts paid by a 
foreign intermediary described in Sec. 1.1441-1(c)(13) that it has 
received in its capacity as an intermediary and that are associated 
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii) and payments made by a U.S. branch of a foreign 
bank or of a foreign insurance company described in Sec. 1.1441-
1(b)(2)(iv) (other than a U.S. branch that is treated as a U.S. person) 
that are associated with a valid withholding certificate described in 
Sec. 1.1441-1(e)(3)(v), which certificate the intermediary or branch 
has furnished to the payor or middleman from whom it has received the 
payment, unless, and to the extent, the intermediary or branch knows 
that the payments are required to be reported under Sec. 1.6041-1 and 
were not so reported. For example, if a foreign intermediary or U.S. 
branch described in Sec. 1.1441-1(b)(2)(iv) fails to provide 
information regarding U.S. persons that are not exempt from reporting 
under Sec. 1.6041-3(q) to the person from whom the intermediary or U.S. 
branch receives the payment, the foreign intermediary or U.S. branch 
must report the payment on an information return. The exception of this 
paragraph (a)(3) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
* * * * *
    (6) For rules concerning direct sellers, see Sec. 1.6041A-
1(d)(3)(i)(C).
* * * * *

    Par. 13. Effective January 1, 2001, Sec. 1.6041A-1 is amended by:
    1. Revising paragraph (d)(3)(i)(B).
    2. Adding paragraph (d)(3)(i)(C).
    The revision and addition read as follows:


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

* * * * *
    (d) * * *
    (3) * * * (i) * * *
    (B) Returns of information are not required for payments of 
remuneration for services from sources outside the United States 
(determined under the provisions of part I, subchapter N, chapter 1 of 
the Internal Revenue Code and the regulations under those provisions) 
if payments are made outside the United States by a non-U.S. payor or 
non U.S. middleman. For a definition of non U.S. payor or non-U.S. 
middleman, see Sec. 1.6049-5(c)(5). For circumstances in which a 
payment is considered to be made outside the United States, see 
Sec. 1.6049-5(e).
    (C) Returns of information are not required under sections 6041 or 
6041A for amounts paid outside of the United States (within the meaning 
of Sec. 1.6049-5(e)) as remuneration for services as a direct seller 
(within the meaning of section 3508) performed outside of the United 
States or for sales described in section 6041A(b) made outside of the 
United States of consumer products for resale outside of the United 
States.
* * * * *

    Par. 14. Effective January 1, 2001, Sec. 1.6042-3 is amended by 
revising paragraph (b)(1)(vi) to read as follows:


Sec. 1.6042-3  Dividends subject to reporting.

* * * * *
    (b) * * * (1) * * *

[[Page 32206]]

    (vi) Payments made by a foreign intermediary described in 
Sec. 1.1441-1(c)(13) of amounts that it has received in its capacity as 
an intermediary and that are associated with a valid withholding 
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) and payments 
made by a U.S. branch of a foreign bank or of a foreign insurance 
company described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch 
that is treated as a U.S. person) that are associated with a valid 
withholding certificate described in Sec. 1.1441-1(e)(3)(v), which 
certificate the intermediary or branch has furnished to the payor or 
middleman from whom it has received the payment, unless, and to the 
extent, the intermediary or branch knows that the payments are required 
to be reported under Sec. 1.6042-2 and were not so reported. For 
example, if a foreign intermediary or U.S. branch described in 
Sec. 1.1441-1(b)(2)(iv) fails to provide information regarding U.S. 
persons that are not exempt from reporting under Sec. 1.6049-
4(c)(1)(ii) to the person from whom the intermediary or U.S. branch 
receives the payment, the amount paid by the foreign intermediary or 
U.S. branch to such person is a dividend. The exception of this 
paragraph (b)(1)(vi) shall not apply to a qualified intermediary that 
assumes reporting responsibility under chapter 61 of the Internal 
Revenue Code.
* * * * *

    Par. 15. Effective January 1, 2001, Sec. 1.6045-1 is amended by:
    1. Removing the last sentence of paragraph (g)(1)(i) and adding two 
new sentences in its place.
    2. Revising paragraph (g)(3)(iv).
    3. Revising paragraph (g)(4), Example 7.
    4. Adding Examples 8 and 9 to paragraph (g)(4).
    The additions and revisions read as follows:


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

* * * * *
    (g) * * * (1) * * *
    (i) * * * For purposes of this paragraph (g)(1)(i), a broker that 
is required to obtain, or chooses to obtain, a beneficial owner 
withholding certificate described in Sec. 1.1441-1(e)(2)(i) from an 
individual may rely on the withholding certificate only to the extent 
the certificate includes 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 each calendar year to which the certificate 
pertains. The certification is not required if a broker receives 
documentary evidence under Sec. 1.6049-5(c)(1) or (4).
* * * * *
    (3) * * *
    (iv) Special rules where the customer is a foreign intermediary or 
certain U.S. branches. A foreign intermediary, as defined in 
Sec. 1.1441-1(c)(13), is an exempt foreign person, except when the 
broker has actual knowledge or reason to know (within the meaning of 
Sec. 1.6049-5(c)(3)) that the person for whom the intermediary acts is 
a U.S. person that is not exempt from reporting under Sec. 5f.6045-
1(c)(3) of this chapter or the broker is required to presume under 
Sec. 1.6049-5(d)(3) that the payee is a U.S. person that is not an 
exempt recipient. If an intermediary, as defined in Sec. 1.1441-
1(c)(13), or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (other 
than a U.S. branch that is treated as a U.S. person) receives a payment 
from a payor or middleman, which payment the payor or middleman can 
associate with a valid withholding certificate described in 
Sec. 1.1441-1(e)(3)(ii), (iii), or (v) furnished by such intermediary 
or U.S. branch, then the intermediary or U.S. branch is not required to 
report such payment when it, in turn, pays the amount to the person 
whose name is on the certificate furnished by the intermediary or U.S. 
branch to the payor or middleman, unless, and to the extent, the 
intermediary or U.S. branch knows that the payment is required to be 
reported under this section and was not so reported. For example, if a 
foreign intermediary or U.S. branch fails to provide information 
regarding U.S. persons that are not exempt from reporting under 
Sec. 5f.6045-1(c)(3) of this chapter to the person from whom the 
intermediary or U.S. branch receives the payment, the foreign 
intermediary or U.S. branch must report the payment on an information 
return. The exception of this paragraph (g)(3)(iv) shall not apply to a 
qualified intermediary that assumes reporting responsibility under 
chapter 61 of the Internal Revenue Code.
    (4) * * *
    Example 7. Customer A, an individual, owns U.S. corporate bonds 
issued in registered form after July 18, 1984 and carrying a stated 
rate of interest. The bonds are held through an account with foreign 
bank, X, and are held in street name. X is a wholly-owned subsidiary 
of a U.S. company and is not a qualified intermediary within the 
meaning of Sec. 1.1441-1(e)(5)(ii). X has no documentation regarding 
A. A instructs X to sell the bonds. In order to effect the sale, X 
acts through its agent in the United States, Y. Y sells the bonds 
and remits the sales proceeds to X. X credits A's account in the 
foreign country. X does not provide documentation to Y.
    (i) Y's obligations to withhold and report. Y treats X as the 
customer, and not A, because Y cannot treat X as an intermediary 
because it has received no documentation from X. Y is not required 
to report the sales proceeds under the multiple broker exception 
under Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is an 
exempt recipient. Further, Y is not required to report the amount of 
accrued interest paid to X on Form 1042-S under Sec. 1.1461-
1(c)(2)(ii) because accrued interest is not an amount subject to 
reporting unless the withholding agent knows that the obligation is 
being sold with a primary purpose of avoiding tax.
    (ii) X's obligations to withhold and report. Although X has 
effected, within the meaning of paragraph (a)(1) of this section, 
the sale of a security at an office outside the United States under 
paragraph (g)(3)(iii) of this section, X is treated as a broker, 
under paragraph (a)(1) of this section, because as a wholly-owned 
subsidiary of a U.S. corporation, X is a U.S. payor. See 
Sec. 1.6049-5(c)(5). Under the presumptions described in 
Sec. 1.6049-5(d)(2), X must presume that, with respect to the sales 
proceeds, A is a U.S. person who is not an exempt recipient. 
Therefore the payment of sales proceeds to A by X is reportable on a 
Form 1099 under paragraph (c)(2) of this section. X has no 
obligation to backup withhold on the payment based on the exemption 
under Sec. 31.3406(g)-1(e) of this chapter, unless X has actual 
knowledge that A is a U.S. person that is not an exempt recipient. X 
is also required to separately report the accrued interest (see 
paragraph (d)(3) of this section) on Form 1099 under section 6049 
because A is also presumed to be a U.S. person who is not an exempt 
recipient under the presumption rule in Sec. 1.6049-5(d)(2) and 
Sec. 1.1441-1(b)(3)(iii) since accrued interest is not an amount 
subject to reporting and therefore the presumption of foreign status 
for offshore accounts under Sec. 1.1441-1(b)(3)(iii)(D) does not 
apply.
    Example 8. The facts are the same as in Example 7, except that 
instead of U.S. corporate bonds that carry stated interest, A owns 
original issue discount instruments described in section 
871(g)(1)(B)(i) (i.e., obligations payable 183 days or less from the 
date of original issue). In addition, the sale is in a transaction 
other than a redemption.
    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under 
Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is an exempt 
recipient.
    (ii) X's obligations to withhold and report. Although X has 
effected, within the meaning of paragraph (a)(1) of this section, 
the sale of a security at an office outside the United States under 
paragraph (g)(3)(iii) of this section, X is treated as a broker, 
under paragraph (a)(1) of this section, because as a wholly-owned 
subsidiary of a U.S. corporation, X is a U.S. payor. See 
Sec. 1.6049-5(c)(5). Under the presumptions described in 
Sec. 1.6049-5(d)(2), X must presume that, with respect to the sales 
proceeds, A is a U.S. person who is not an exempt recipient. 
Therefore the payment of sales proceeds to A by X is reportable on a 
Form 1099 under paragraph (c)(2) of this section. X has no

[[Page 32207]]

obligation to backup withhold on the payment based on the exemption 
under Sec. 31.3406(g)-1(e) of this chapter, unless X has actual 
knowledge that A is a U.S. person that is not an exempt recipient. X 
is not required to separately report the amount of accrued original 
issue discount. See paragraph (d)(3) of this section.
    Example 9. The facts are the same as in Example 8, except that X 
is a foreign corporation that is not a U.S. payor under Sec. 1.6049-
5(c).
    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under 
Sec. 5f.6045-1(c)(3)(ii) of this chapter, because X is the person 
responsible for paying the proceeds from the sale to A.
    (ii) X's obligations to withhold and report. Although A is 
presumed to be a U.S. payee under the presumptions of Sec. 1.6049-
5(d)(2), X is not considered to be a broker under paragraph (a)(1) 
of this section because it is a not a U.S. payor under Sec. 1.6049-
5(c)(5). Therefore X is not required to report the sale under 
paragraph (c)(2) of this section.
* * * * *

    Par. 16. Effective January 1, 2001, Sec. 1.6049-4 is amended by 
revising the introductory text of paragraph (c)(1)(ii) 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) Exempt recipient defined. The term exempt recipient means any 
person described in paragraphs (c)(1)(ii)(A) through (Q) of this 
section. An exempt recipient is generally exempt from information 
reporting without filing a certificate claiming exempt status unless 
the provisions of this paragraph (c)(1)(ii) require a payee to file a 
certificate.
    A payor may, in any case, require a payee that is a U.S. person not 
otherwise required to file a certificate under this paragraph 
(c)(1)(ii) to file a certificate in order to qualify as an exempt 
recipient. See Sec. 31.3406(h)-3(a)(1)(iii) and (c)(2) of this chapter 
for the certificate that a payee that is a U.S. person must provide 
when a payor requires the certificate to treat the payee as an exempt 
recipient under this paragraph (c)(1)(ii). A payor may treat a payee as 
an exempt recipient based upon a properly completed form as described 
in Sec. 31.3406(h)-3(e)(2) of this chapter, its actual knowledge that 
the payee is a person described in this paragraph (c)(1)(ii), or the 
indicators described in this paragraph (c)(1)(ii).
* * * * *

    Par. 17. Effective January 1, 2001, Sec. 1.6049-5 is amended by:
    1. Adding a sentence at the end of paragraph (b)(10)(ii).
    2. Adding a sentence at the end of the introductory text of 
paragraph (b)(11).
    3. Revising paragraph (b)(14).
    4. Adding a sentence at the end of paragraph (c)(1).
    5. Revising paragraph (c)(4).
    6. In paragraph (c)(6), removing Example 3 and redesignating 
Examples 4 and 5 as Examples 3 and 4, respectively; in newly designated 
Example 3, revise the language ``The facts are the same as in Example 
3'' to read ``The facts are the same as in Example 2''; in addition, in 
newly designated Example 4, revise the language ``The facts are the 
same as in Example 4'' to read ``The facts are the same as in Example 
3''.
    7. Revising the first sentence of paragraph (d)(1) introductory 
text.
    8. Revising paragraphs (d)(2)(i) and (d)(2)(ii), (d)(3), and 
(d)(4).
    9. Removing paragraph (d)(5).
    The additions and revisions read as follows:


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

* * * * *
    (b) * * *
    (10) * * *
    (ii) * * * The exemption from reporting described in this paragraph 
(b)(10) shall not apply if the payor has actual knowledge that the 
payee is a U.S. person who is not an exempt recipient.
    (11) * * * The exemption from reporting described in this paragraph 
(b)(11) shall not apply if the payor has actual knowledge that the 
payee is a U.S. person who is not an exempt recipient.
* * * * *
    (14) Payments made by a foreign intermediary described in 
Sec. 1.1441-1(e)(3)(i) of amounts that it has received in its capacity 
as an intermediary and that are associated with a valid withholding 
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) and payments 
made by a U.S. branch of a foreign bank or of a foreign insurance 
company described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch 
that is treated as a U.S. person) that are associated with a valid 
withholding certificate described in Sec. 1.1441-1(e)(3)(v), which 
certificate the intermediary or branch has furnished to the payor or 
middleman from whom it has received the payment, unless, and to the 
extent, the intermediary or branch knows that the payments are required 
to be reported under Sec. 1.6049-4 and were not so reported. For 
example, if a foreign intermediary or U.S. branch described in 
Sec. 1.1441-1(b)(2)(iv) fails to provide information regarding U.S. 
persons that are not exempt from reporting under Sec. 1.6049-
4(c)(1)(ii) to the person from whom the intermediary or U.S. branch 
receives the payment, the amount paid by the foreign intermediary or 
U.S. branch to such person is interest or original issue discount. The 
exception of this paragraph (b)(14) shall not apply to a qualified 
intermediary that assumes reporting responsibility under chapter 61 of 
the Internal Revenue Code.
* * * * *
    (c) * * * (1) * * * A payor may also rely on documentary evidence 
associated with a flow-through withholding certificate for payments 
treated as made to foreign partners of a nonwithholding foreign 
partnership, as defined in Sec. 1.1441-1(c)(28), the foreign 
beneficiaries of a foreign simple trust, as defined in Sec. 1.1441-
1(c)(24), or foreign owners of a foreign grantor trust, as defined in 
Sec. 1.1441-1(c)(26), even though the partnership or trust account is 
maintained in the United States.
* * * * *
    (4) Special documentation rules for certain payments. This 
paragraph (c)(4) modifies the provisions of this paragraph (c) for 
payments to offshore accounts maintained at a bank or other financial 
institution of amounts that are not subject to withholding under 
chapter 3 of the Internal Revenue Code, other than amounts described in 
paragraph (d)(3)(iii) of this section (dealing with U.S. short-term OID 
and U.S. bank deposit interest). Amounts are not subject to withholding 
under chapter 3 of the Internal Revenue Code if they are not included 
in the definition of amounts subject to withholding under Sec. 1.1441-
2(a) (e.g., deposit interest with foreign branches of U.S. banks, 
foreign source income, or broker proceeds).
    (i) Special rule when non-renewable documentary evidence is 
customary. If it is customary in the country in which a branch or 
office of a bank or other financial institution is located to obtain 
documentary evidence described in paragraph (c)(1) of this section, but 
it is not customary for such documentary evidence to be renewed, then a 
payor may, in lieu of obtaining a withholding certificate, request such 
documentary evidence for an account maintained at such branch or 
office. The bank or other financial institution may rely on such 
documentary evidence to treat a person as a foreign person without 
renewing such documentary evidence in accordance with paragraph (c)(2) 
of this section and Sec. 1.1441-1(e)(4)(ii) if it may rely on the 
documentary evidence as sufficient to establish the person's

[[Page 32208]]

foreign status under Sec. 1.1441-7(b)(7) and (8). If, however, the bank 
or other financial institution may, under Sec. 1.1441-7(b)(8) treat a 
payee as a foreign person even though it has a residence or mailing 
address for the payee in the United States, or has standing 
instructions to pay amounts from its account to an address in the 
United States or an account maintained in the United States, then the 
payor shall rely on the documentary evidence only for a period of three 
full calendar years after the calendar year in which the documentary 
evidence is provided to the payor or, if earlier, until the payor is 
aware of a change of circumstances that affects the validity of the 
documentation as establishing the payee's status as a foreign person.
    (ii) Statement in lieu of documentary evidence. If under the local 
laws, regulations, or practices applicable to a type of account or 
transaction it is not customary to obtain documentary evidence 
described in paragraph (c)(1) of this section, the bank or other 
financial institution may, instead of obtaining a beneficial owner 
withholding certificate described in Sec. 1.1441-1(e)(2)(i) or 
documentary evidence described in paragraph (c)(1) of this section, 
establish a payee's foreign status based on the statement described in 
this paragraph (4)(ii) (or such substitute statement as the Internal 
Revenue Service may prescribe) made on an account opening form. The 
statement shall be valid only if the mailing and residence addresses of 
the payee are outside the United States and there are no other indicia 
of U.S. status. If reliance is not permitted because there are indicia 
of U.S. status then the payor must obtain either documentary evidence 
described in paragraph (c)(1) of this section or a Form W-8 described 
in Sec. 1.1441-1(e)(2)(i) to treat the customer as a foreign payee. In 
such a case, the form or documentary evidence must be renewed every 
three years in accordance with the renewal procedures set forth in 
Sec. 1.1441-1(e)(4)(ii)(A) for as long as indicia of U.S. status 
continue to be present. The statement referred to in this paragraph 
(c)(4)(i) of this section must appear near the signature line and must 
read as follows:

By opening this account and signing below, the account owner 
represents and warrants that he/she/it is not a U.S. person for 
purposes of U.S. Federal income tax and that he/she/it is not acting 
for, or on behalf of, a U.S. person. A false statement or 
misrepresentation of tax status by a U.S. person could lead to 
penalties under U.S. law. If your tax status changes and you become 
a U.S. citizen or a resident, you must notify us within 30 days.

    (iii) Continuous validity of declaration of foreign status subject 
to due diligence by financial institution. A declaration of foreign 
status described in paragraph (c)(4)(ii) of this section does not 
expire unless the bank or financial institution becomes aware of 
circumstances indicating that the customer may be a U.S. person.
    (iv) Exception for existing accounts. The rules of paragraphs 
(c)(4)(i) and (iii) of this section shall apply to accounts opened on 
or after January 1, 2001. For accounts opened before 2001, a bank or 
other financial institution may rely on the rules contained in 
Secs. 35a.9999-3(ii) Q&A 34 and 35a.9999-4T Q&A 1 and 5 of this chapter 
in effect prior to January 1, 2001 (see 26 CFR Parts 30-39 revised as 
of April 1, 2000).
* * * * *
    (d) * * * (1) Identifying the payee. The provisions of 
Secs. 1.1441-1(b)(2), 1.1441-5(c)(1), (e)(2) and (3) shall apply (by 
applying the term payor instead of the term withholding agent) to 
identify the payee for purposes of this section (and other sections of 
the regulations under this chapter to which this paragraph (d)(1) 
applies), except to the extent provided in this paragraph (d)(1) in the 
case of a payment of amounts that are not subject to withholding under 
chapter 3 of the Internal Revenue 
Code. * * *
* * * * *
    (2) Presumptions of classification and U.S. or foreign status in 
the absence of documentation--(i) In general. Except as otherwise 
provided in this paragraph (d)(2)(i), for purposes of this section (and 
other sections of regulations under this chapter to which this 
paragraph (d)(2) applies), the provisions of Sec. 1.1441-1(b)(3)(i), 
(ii), (iii), (vii), (viii), and (ix) and 1.1441-5(d) and (e)(6) shall 
apply (by applying the term payor instead of the term withholding 
agent) to determine the classification (e.g., individual, corporation, 
partnership, trust), status (i.e., a U.S. or a foreign person), and 
other relevant characteristics (e.g., beneficial owner or intermediary) 
of a payee if a payment cannot be reliably associated with valid 
documentation under Sec. 1.1441-1(b)(2)(vii) irrespective of whether 
the payments are subject to withholding under chapter 3 of the Internal 
Revenue Code. The provisions of Sec. 1.1441-1(b)(3)(iii)(D) and 
(vii)(B) shall not apply, however, to payments of amounts that are not 
subject to withholding. In addition, Sec. 1.1441-5(d)(2) shall not 
apply to treat a partnership as a foreign partnership with respect to 
amounts that are not subject to withholding unless the payor has actual 
knowledge of the payee's employer identification number and that number 
begins with the two digits ``98.'' The rules of Sec. 1.1441-
1(b)(2)(vii) shall apply for purposes of determining when a payment can 
reliably be associated with documentation, by applying the term payor 
instead of the term withholding agent. For this purpose, the 
documentary evidence or statement described in paragraph (c)(4) of this 
section can be treated as documentation with which a payment can be 
associated.
    (ii) Grace period in the case of indicia of a foreign payee. When 
the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day 
grace period provisions under section 3406(e) shall not apply and the 
provisions of this paragraph (d)(2)(ii) shall apply instead. A payor 
that, at any time during the grace period described in this paragraph 
(d)(2)(ii), credits an account with payments described in Sec. 1.1441-
6(c)(2) that are reportable under sections 6042, 6045, 6049, or 6050N 
may, instead of treating the account as owned by a U.S. person and 
applying backup withholding under section 3406, if applicable, choose 
to treat the account as owned by a foreign person if, at the beginning 
of the grace period, the address that the payor has in its records for 
the account holder is in a foreign country, the payor has been 
furnished the information contained in a withholding certificate 
described in Sec. 1.1441-1(e)(2)(i) or (3)(i) (by way of a facsimile 
copy of the certificate or other non-qualified electronic transmission 
of the information required to be stated on the certificate), or the 
payor holds a withholding certificate that is no longer reliable other 
than because the validity period as described in Sec. 1.1441-
1(e)(4)(ii)(A) has expired. In the case of a newly opened account, the 
grace period begins on the date that the payor first credits the 
account.
    In the case of an existing account for which the payor holds a Form 
W-8 or documentary evidence of foreign status, the grace period begins 
on the date that the payor first credits the account after the existing 
documentation held with regard to the account can no longer be relied 
upon (other than because the validity period described in Sec. 1.1441-
1(e)(4)(ii)(A) has expired). A new account shall be treated as an 
existing account if the account holder already holds an account at the 
branch location at which the new account is opened. It shall also be 
treated as an existing account if an account is held at another branch 
location if the institution maintains a coordinated account

[[Page 32209]]

information system described in Sec. 1.1441-1(e)(4)(ix). The grace 
period terminates on the earlier of the close of the 90th day from the 
date on which the grace period begins or the date that the 
documentation is provided. The grace period also terminates when the 
remaining balance in the account (due to withdrawals or otherwise) is 
equal to or less than 31 percent of the total amounts credited since 
the beginning of the grace period that would be subject to backup 
withholding if the provisions of this paragraph (d)(2)(ii) did not 
apply. At the end of the grace period, the payor shall treat the 
amounts credited to the account during the grace period as paid to a 
U.S. or foreign payee depending upon whether documentation has been 
furnished and the nature of any such documentation furnished upon which 
the payor may rely to treat the account as owned by a U.S. or foreign 
payee. If the documentation has not been received on or before the date 
of expiration of the grace period, the payor may also apply the 
presumptions described in this paragraph (d) to amounts credited to the 
account after the date on which the grace period expires (until such 
time as the payor can reliably associate the documentation with amounts 
credited). See Sec. 31.6413(a)-3(a)(1)(iv) of this chapter for treating 
backup withheld amounts under section 3406 as erroneously withheld when 
the documentation establishing foreign status is furnished prior to the 
end of the calendar year in which backup withholding occurs. If the 
provisions of this paragraph (d)(2)(ii) apply, the provisions of 
Sec. 31.3406(d)-3 of this chapter shall not apply. For purposes of this 
paragraph (d)(2)(ii), an account holder's reinvestment of gross 
proceeds of a sale into other instruments constitutes a withdrawal and 
a non-qualified electronic transmission of information on a withholding 
certificate is a transmission that is not in accordance with the 
provisions of Sec. 1.1441-1(e)(4)(iv). See Sec. 1.1092(d)-1 for a 
definition of the term actively traded for purposes of this paragraph 
(d)(2)(ii).
* * * * *
    (3) Payments to foreign intermediaries or flow-through entities--
(i) Payments of amounts subject to withholding under chapter 3 of the 
Internal Revenue Code. In the case of payments of amounts that the 
payor may treat as made to a foreign intermediary or flow-through 
entity in accordance with Secs. 1.1441-1(b)(3)(ii)(C) and (b)(3)(v)(A), 
1.1441-5(c) or (e) and that are subject to withholding under 
Sec. 1.1441-2(a), the provisions of Secs. 1.1441-1(b)(2)(v) and 1.1441-
5(c)(1), (e)(2), and (3) shall apply (by applying the term payor 
instead of the term withholding agent) to identify the payee. If a 
payment of an amount subject to withholding cannot be reliably 
associated with valid documentation from a payee in accordance with 
Sec. 1.1441-1(b)(2)(vii) the presumption rules of Sec. 1.1441-
1(b)(3)(v) and Sec. 1.1441-5(d) and (e)(6) shall apply to determine the 
payees status for purposes of this section (and other sections of 
regulations under this chapter to which this paragraph (d)(3) applies).
    (ii) Payments of amounts not subject to withholding under chapter 3 
of the Internal Revenue Code. Except as provided in paragraph 
(d)(3)(iii) of this section, amounts that are not subject to 
withholding under chapter 3 of the Internal Revenue Code that the payor 
may treat as paid to a foreign intermediary or flow-through entity 
shall be treated as made to an exempt recipient described in 
Sec. 1.6049-4(c) except to the extent that the payor has actual 
knowledge that any person for whom the intermediary or flow-through 
entity is collecting the payment is a U.S. person who is not an exempt 
recipient. In the case of such actual knowledge, the payor shall treat 
the payment that it knows is allocable to such U.S. person as a payment 
to a U.S. payee who is not an exempt recipient.
    (iii) Special rule for payments of certain short-term original 
issue discount and bank deposit interest--(A) General rule. A payment 
of U.S. source deposit interest described in section 871(i)(2)(A) or 
881(d)(3) or interest or original issue discount on the redemption of 
an obligation with a maturity from the date of issue of 183 days or 
less (short-term OID) described in section 871(g)(1)(B) or 881(e) that 
the payor may treat as paid to a foreign intermediary or flow-through 
entity in accordance with the provisions of Sec. 1.1441-1(b)(3)(ii)(C) 
or (v)(A) shall be treated as paid to an undocumented U.S. payee that 
is not an exempt recipient under paragraph Sec. 1.6049-4(c) unless the 
payor has documentation from the payees of the payment and the payment 
is allocated to foreign payees, as a group, and to each U.S. non-exempt 
recipient payee. See Sec. 1.1441-1(e)(3)(iv)(C)(2).
    (B) Payee may be an intermediary. If a payment is made to a person 
described in Sec. 1.6049-4(c)(1)(ii) that has not provided an 
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(i) but 
the payor knows or has reason to know that the payee may be an 
intermediary, the payor must apply the rules of paragraph 
(d)(3)(iii)(A) of this section. A payor has reason to know that such a 
person may be an intermediary if that person has provided documentation 
under Sec. 1.1441-3(b)(ii)(C) or (v)(A) for another account with the 
same payor.
    (iv) Short-term deposits and repurchase transactions. The 
provisions of paragraph (d)(3)(ii) of this section and not paragraph 
(d)(3)(iii) of this section shall apply to deposits with banks and 
other financial institutions that remain on deposit for a period of two 
weeks or less, to amounts of original issue discount arising from a 
sale and repurchase transaction that is completed within a period of 
two weeks or less, or to amounts described in paragraphs (b)(7), (10) 
and (11) of this section (relating to certain obligations issued in 
bearer form).
    (4) Examples. The rules of paragraphs (d)(1) through (3) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP pays interest from sources within the 
United States to an account maintained in the United States by X. The 
interest is not deposit interest described in sections 871(i)(2)(A) or 
881(d). USP does not have a withholding certificate from X as defined 
in Sec. 1.1441-1(c)(16). Moreover, USP cannot treat X as an exempt 
recipient, as defined in Sec. 1.6049-4(c)(1)(ii), without documentation 
and there is no indication that X is an individual, trust, or estate.
    (ii) Analysis. The U.S. source interest is an amount subject to 
withholding as defined in Sec. 1.1441-2(a). Under paragraph (d)(1) of 
this section, USP must apply the provisions of Secs. 1.1441-1(b)(2) and 
1.1441-5(c) and (e) to determine the payee of the interest. Under 
Sec. 1.1441-1(b)(2)(i), X, the person to whom the payment is made, is 
considered to be the payee, unless X is determined to be a flow-through 
entity, in which case the rules of Sec. 1.1441-5 apply to determine the 
payee. Under paragraph (d)(2)(i) of this section, the rules of 
Sec. 1.1441-1(b)(3)(ii) apply to determine the classification of a 
payee as an individual, trust, estate, corporation, or partnership. 
Under Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, 
since X does not appear to be an individual, trust or estate, and X 
cannot be presumed to be an exempt recipient in the absence of 
documentation. Paragraph (d)(2)(i) of this section requires USP to 
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to 
determine whether X is presumed to be a U.S. or foreign partnership. 
Under Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be

[[Page 32210]]

a U.S. partnership in absence of any indicia of foreign partnership 
status. The U.S. source interest paid to X is reportable under section 
6049 on Form 1099 and the interest is subject to backup withholding 
under section 3406 because X has not provided its TIN on a valid Form 
W-9.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that the interest paid by USP is from sources outside the 
United States.
    (ii) Analysis. Interest from sources outside the United States 
is not an amount subject to withholding, as defined in Sec. 1.1441-
2(a). Under paragraph (d)(1) of this section, USP must apply the 
provisions of Secs. 1.1441-1(b)(2) and 1.1441-5(c) and (e) to 
determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, the person to 
whom the payment is made, is considered to be the payee, unless X is 
determined to be a flow-through entity, in which case the rules of 
Sec. 1.1441-5(c) or (e) apply to determine the payee. Under 
paragraph (d)(2)(i) of this section, the rules of Sec. 1.1441-
1(b)(3)(ii) apply to determine the classification of a payee as an 
individual, trust, estate, corporation, or partnership. These rules 
apply irrespective of whether the payment is an amount subject to 
withholding. Under Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a 
partnership, since X does not appear to be an individual, trust or 
estate, and X cannot be presumed to be an exempt recipient in the 
absence of documentation. Paragraph (d)(2)(i) of this section 
requires USP to apply the provisions of Secs. 1.1441-1(b)(3)(iii) 
and 1.1441-5(d) to determine whether, X is presumed to be a U.S. or 
foreign partnership. Under Secs. 1.1441-1(b)(3)(iii) and 1.1441-
5(d)(2), X is presumed to be a U.S. partnership in absence of any 
indicia of foreign partnership status. The foreign source interest 
is a payment subject to reporting on Form 1099 under Sec. 1.6049-
5(a). Further, because X is a non-exempt recipient that has failed 
to provide its TIN on a valid Form W-9, the foreign source interest 
is subject to backup withholding under section 3406.
    Example 3. (i) Facts. USP is a U.S. payor as defined in 
paragraph (c)(5) of this section. USP makes a payment of U.S. source 
interest outside the United States to an offshore account of X. See 
paragraphs (c)(1) for a definition of offshore account and (e) for a 
payment outside the United States. USP does not have a withholding 
certificate from X as defined in Sec. 1.1441-1(c)(16) nor does it 
have documentary evidence as described in Sec. 1.1441-
1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1). (ii) Analysis. The interest is 
an amount subject to withholding as defined in Sec. 1.1441-2(a). 
Under paragraph (d)(1) of this section, USP must apply the 
provisions of Sec. 1.1441-1(b)(2) and Sec. 1.1441-5(c) and (e) to 
determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, the person to 
whom the payment is made, is considered to be the payee, unless X is 
determined to be a flow-through entity, in which case the rules of 
Sec. 1.1441-5(c) or (e) apply to determine the payee. Under 
paragraph (d)(2)(i) of this section, the rules of Sec. 1.1441-
1(b)(3)(ii) apply to determine the classification of a payee as an 
individual, trust, estate, corporation, or partnership. Under 
Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since 
X does not appear to be an individual, trust or estate, and X cannot 
be presumed to be an exempt recipient in the absence of 
documentation. Paragraph (d)(2)(i) of this section requires USP to 
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to 
determine whether, X is presumed to be a U.S. or foreign 
partnership. Under Secs. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2), 
X is presumed to be a foreign partnership. Therefore, under 
paragraph (d)(1) of this section and Sec. 1.1441-5(c)(1)(i)(E), the 
payees of the interest are presumed to be the partners of X. Under 
Sec. 1.1441-5(d)(3), the partners are presumed to be undocumented 
foreign persons. Therefore, USP must withhold 30 percent of the 
interest payment under Sec. 1.1441-1(b)(1) and report the payment on 
Form 1042-S in accordance with Sec. 1.1461-1(c).
    Example 4. (i) Facts. The facts are the same as in Example 3, 
except that the interest is paid by F, a non-U.S. payor. (ii) 
Analysis. The analysis and result are the same as in Example 3. F is 
a withholding agent under Sec. 1.1441-7 and its status as a non-U.S. 
payor under paragraph (c)(5) of this section is irrelevant.
    Example 5. (i) Facts. USP is a U.S. payor as defined in 
paragraph (c)(5) of this section. USP makes a payment outside the 
United States of interest from sources outside the United States to 
an offshore account of X. USP does not have a withholding 
certificate from X as defined in Sec. 1.1441-1(c)(16) nor does it 
have documentary evidence as described in Secs. 1.1441-
1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1). USP does not have actual 
knowledge of an employer identification number for X. X does not 
appear to be an individual, trust, or estate and cannot be treated 
as an exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii) in the 
absence of documentation.
    (ii) Analysis. The interest is not an amount subject to 
withholding as defined in Sec. 1.1441-2(a). Under paragraph (d)(1) 
of this section, USP must apply the rules of Secs. 1.1441-1(b)(2) 
and 1.1441-5(c) and (e) to determine the payee of the interest. 
Under Sec. 1.1441-1(b)(2)(i), X, the person to whom the payment is 
made, is considered to be the payee, unless X is determined to be a 
flow-through entity, in which case the rules of Sec. 1.1441-5(c) or 
(e) apply to determine the payee. Under paragraph (d)(2)(i) of this 
section, Sec. 1.1441-1(b)(3)(ii) applies to determine X's 
classification as an individual, trust, estate, corporation or 
partnership. Under Sec. 1.1441-1(b)(3)(ii)(B), X is treated as a 
partnership, since it does not appear to be an individual, trust, or 
estate and cannot be treated as an exempt recipient without 
documentation. Paragraph (d)(2)(i) of this section requires USP to 
apply the provisions of Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to 
determine whether, X is presumed to be a U.S. or foreign 
partnership. Paragraph (d)(2)(i) also states that the presumptions 
of foreign status for payments made to offshore accounts contained 
in Secs. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not apply to 
amounts that are not subject to withholding. Therefore, under 
Secs. 1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a 
U.S. partnership because it does not have actual knowledge that X's 
employer identification number begins with the digits ``98.'' 
Therefore, USP must treat X as a U.S. person that is not an exempt 
recipient and report the payment on Form 1099 under section 6049. 
Under Sec. 31.3406(g)-1(e) of this chapter, however, USP is not 
required to backup withhold on the payment unless it has actual 
knowledge that X is a U.S. person that is not an exempt recipient.
    Example 6. (i) Facts. The facts are the same as in Example 5, 
except that the interest is paid by F, a non-U.S. payor, as defined 
under paragraph (c)(5) of this section.
    (ii) Analysis. The analysis is the same as under Example 5. 
However, because F is a non-U.S. payor paying foreign source 
interest outside the United States, paragraph (b)(6) of this section 
exempts the payment from reporting under section 6049.
    Example 7. (i) Facts. USP, a U.S. payor as defined in paragraph 
(c)(5) of this section, makes a payment of U.S. source interest to 
NQI, a foreign corporation and a nonqualified intermediary as 
defined in Sec. 1.1441-1(c)(14). The interest is not deposit 
interest as defined in sections 871(i)(2)(A) and 881(d). The 
interest is paid inside the United States to an account maintained 
in the United States. NQI has provided USP with a nonqualified 
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(iii), but has not attached any documentation from the 
persons on whose behalf it acts or a withholding statement as 
described in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. U.S. source interest is an amount subject to 
withholding under Sec. 1.1441-2(a). USP may treat the payment as 
made to a foreign intermediary under Sec. 1.1441-1(b)(3)(v)(A) 
because USP has received a nonqualified intermediary withholding 
certificate from NQI. Under paragraph (d)(3)(i) of this section, USP 
must apply Sec. 1.1441-1(b)(2)(v) to determine the payees of the 
payment. Under Sec. 1.1441-1(b)(2)(v)(A), USP must treat the persons 
on whose behalf NQI is acting as the payees. Paragraph (d)(3)(i) of 
this section also requires USP to apply the presumption rules of 
Sec. 1.1441-1(b)(3)(v) if it cannot reliably associate the payment 
with valid documentation from a payee. See Sec. 1.1441-1(b)(2)(vii). 
Under Sec. 1.1441-1(b)(3)(v)(B), the interest is treated as paid to 
an unknown foreign payee because it cannot be reliably associated 
with documentation under Sec. 1.1441-1(b)(2)(vii). Therefore, the 
payment is not subject to reporting on Form 1099 under paragraph 
(b)(12) of this section because the payment is presumed made to a 
foreign person. The payment is subject to withholding, however, 
under Sec. 1.1441-1(b) at a rate of 30 percent and is subject to 
reporting on Form 1042-S under Sec. 1.1461-1(c).
    Example 8. (i) Facts. The facts are the same as in Example 7, 
except that the interest is paid outside the United States, as 
defined in paragraph (e) of this section to an offshore account, as 
defined in paragraph (c)(1) of this section.
    (ii) Analysis. The analysis and results are the same as in 
Example 7. The rules of

[[Page 32211]]

Sec. 1.1441-1(b)(3)(v) apply irrespective of where the account is 
maintained or the payment made.
    Example 9. (i) Facts. The facts are the same as in Example 8, 
except that the interest is paid by F, a non-U.S. payor, as defined 
in paragraph (c)(5) of this section.
    (ii) Analysis. The analysis and results are the same as in 
Example 7.
    Example 10. (i) USP, a U.S. payor as defined in paragraph (c)(5) 
of this section, makes a payment of foreign source interest to NQI, 
a foreign corporation and a nonqualified intermediary as defined in 
Sec. 1.1441-1(c)(14). NQI has provided USP with a nonqualified 
intermediary withholding certificate, as described in Sec. 1.1441-
1(e)(3)(iii), but has not attached any documentation from the 
persons on whose behalf it acts or a withholding statement as 
described in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. Foreign source interest is not an amount subject 
to withholding under chapter 3 of the Internal Revenue Code. See 
Sec. 1.1441-2(a). Under paragraph (d)(3)(ii)(A) of this section, 
amounts that are not subject to withholding under chapter 3 of the 
Internal Revenue Code that a payor may treat as paid to a foreign 
intermediary are treated as made to an exempt recipient described in 
Sec. 1.6049-4(c). Therefore, the foreign source interest is not 
subject to reporting on Form 1099.
    Example 11. (i) Facts. USP is a U.S. payor as defined in 
paragraph (c)(5) of this section. USP pays U.S. source original 
issue discount from the redemption of an obligation described in 
section 871(g)(1)(B) to NQI, a foreign corporation that is a 
nonqualified intermediary as defined in Sec. 1.1441-1(c)(14). The 
redemption proceeds are paid to an account NQI has with USP in the 
United States. NQI provides a nonqualified intermediary withholding 
certificate as described in Sec. 1.1441-1(e)(3)(iii) but does not 
attach any payee documentation or a withholding statement described 
in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. Under paragraph (d)(3)(ii)(A) of this section, 
USP must treat the payment as made to an undocumented U.S. payee 
that is not an exempt recipient and report the payment on Form 1099. 
Further, because the payment is made inside the United States, the 
exception to backup withholding for offshore accounts contained in 
Sec. 31.3406(g)-1(e) of this chapter does not apply and the payment 
is subject to backup withholding.
    Example 12. (i) Facts. P, a payor, makes a payment to NQI of 
U.S. source interest on debt obligations issued prior to July 18, 
1984. Therefore, the interest does not qualify as portfolio interest 
under section 871(h) or 881(d). NQI is a nonqualified foreign 
intermediary, as defined in Sec. 1.1441-1(c)(14), and has furnished 
P a valid nonqualified intermediary withholding certificate 
described in Sec. 1.1441-1(e)(3)(iii) to which it has attached a 
valid Form W-9 for A, and two valid beneficial owner Forms W-8, one 
for B and one for C. A is not an exempt recipient under Sec. 1.6049-
4(c). NQI furnishes a withholding statement, described in 
Sec. 1.1441-1(e)(3)(iv), in which it allocates 20 percent of the 
U.S. source interest to A, but does not allocate the remaining 80 
percent of the interest between B and C. B's withholding certificate 
indicates that B is a foreign pension fund, exempt from U.S. tax 
under the U.S. income tax treaty with Country T. C's withholding 
certificate indicates that C is a foreign corporation not entitled 
to a reduced rate of withholding.
    (ii) Analysis. Under paragraph (d)(3)(i) of this section, P 
applies the rules of Sec. 1.1441-1(b)(2)(v) to determine the payees 
of the interest. Under that section, the payees are the persons on 
whose behalf NQI acts--A, B and C. Because P can reliably associate 
20 percent of the payment with valid documentation provided by A, P 
must treat 20 percent of the interest as paid to A, a U.S. person 
not exempt from reporting, and report the payment on Form 1099. P 
cannot reliably associate the remaining 80 percent of the payment 
with valid documentation under Sec. 1.1441-1(b)(2)(vii) and, 
therefore, under paragraph (d)(3)(i) of this section must apply the 
presumption rules of Sec. 1.1441-1(b)(3)(v). Under that section, the 
interest is presumed paid to an unknown foreign payee. Under 
paragraph (b)(12) of this section, P is not required to report the 
interest presumed paid to a foreign person on Form 1099. Under 
Sec. 1.1441-1(b), 80 percent of the interest is subject to 30 
percent withholding, however, and the interest is reportable on Form 
1042-S under Sec. 1.1461-1(c).
    Example 13. (i) Facts. The facts are the same as in Example 12, 
except that P can reliably associate 30 percent of the payment of 
interest to B, but cannot reliably associate the remaining 70 
percent with A or C.
    (ii) Analysis. Under paragraph (d)(3)(i) of this section, P 
applies the rules of Sec. 1.1441-1(b)(2)(v) to determine the payees 
of the interest. Under that section, the payees are the persons on 
whose behalf NQI acts--A, B and C. Because P can reliably associate 
30 percent of the payment with B, a foreign pensions fund exempt 
from withholding under an income tax treaty, P may treat that 
payment as paid to B and not subject to reporting on Form 1099 under 
paragraph (b)(12) of this section. P cannot reliably associate the 
remaining 70 percent of the payment with valid documentation under 
Sec. 1.1441-1(b)(2)(vii) and, therefore, under paragraph (d)(3)(i) 
of this section must apply the presumption rules of Sec. 1.1441-
1(b)(3)(v). Under that section, the interest is presumed paid to an 
unknown foreign payee. Under paragraph (b)(12) of this section, P is 
not required to report the interest presumed paid to a foreign 
person on Form 1099. Under Sec. 1.1441-1(b), 80 percent of the 
interest is subject to 30 percent withholding, however, and the 
interest is reportable on Form 1042-S under Sec. 1.1461-1(c).
    Example 14. (i) Facts. The facts are the same as in Example 12, 
except that P also makes a payment of foreign source interest to 
NQI.
    (ii) Analysis. Under paragraph (d)(3)(ii)(A), P may treat the 
foreign source interest as paid to an exempt recipient as defined in 
Sec. 1.6049-4(c) and not subject to reporting on Form 1099 even 
though some or all of the foreign source interest may in fact be 
owned by A, the U.S. person that is not exempt from reporting.
* * * * *

Parts 1 and 31 [Amended]

    Par. 18. Effective January 1, 2001, in the list below, for each 
section indicated in the left column remove the language in the middle 
column and add the language in the right column:

------------------------------------------------------------------------
             Section                    Remove                Add
------------------------------------------------------------------------
1.1441-1(b)(1), first sentence..  to a beneficial     to a payee that is
                                   owner that is a     a U.S. person.
                                   U.S. person.
1.1441-1(b)(2)(iii)(A), last      1.1441-6(b)(4)....  1.1441-6(b)(2).
 sentence.
1.1441-1(b)(2)(iii)(B), third     1.1441-6(b)(4)....  1.1441-6(b)(2).
 sentence.
1.1441-1(b)(2)(vi), second        1.6049-5(c)(4)....  1.6049-5(c)(1).
 sentence.
1.1441-1(b)(4)(iii), last         Sec.  1.6049-5(c)(  Sec.  1.6049-5(c)(
 sentence.                         4).                 1).
1.1441-1(b)(4)(v), third          Sec.  1.6049-5(c)(  Sec.  1.6049-5(c).
 sentence.                         4).
1.1441-1(b)(4)(xviii), third      is required.......  is not required.
 sentence.
1.1441-1(b)(7)(i)(A)............  Sec.  1.1441-4(a)(  Sec.  1.1441-4(a)(
                                   2)(i) or (3).       2)(ii) or (3)(i).
1.1441-1(b)(7)(iii), first        Sec.  1.1441-4(a)(  Sec.  1.1441-4(a)(
 sentence.                         2)(i) or (3).       2)(ii) or (3)(i).
1.14441-1(b)(9), second sentence  a withholding       an intermediary or
                                   certificate.        flow-through
                                                       withholding
                                                       certificate.
1.1441-1(b)(9), second sentence.  a U.S. beneficial   a U.S. payee.
                                   owner.
1.1441-1(e)(1)(ii)(A)(2)........  with respect to an  to an offshore
                                   offshore account.   account.
1.1441-1(e)(2)(i), fifth          See Sec.  1.1441-   See Sec.  1.1441-
 sentence.                         6(b)(4)(ii).        6(b)(2).
1.1441-1(e)(2)(ii), sixth         See Sec.  1.1441-   See Sec.  1.1441-
 sentence.                         6(b)(4)(i).         6(b).
1.1441-1(e)(4)(viii),             Sec.  1.1441-6(b)(  Sec.  1.1441-6(c)(
 introductory text, second         2)(ii).             2).
 sentence.
1.1441-1(e)(4)(viii), third       Sec.  1.1441-6(b)(  Sec.  1.1441-6(b)(
 sentence.                         4)(ii).             1).

[[Page 32212]]

 
1.1441-3(c)(2)(i), introductory   estimate of         estimates under
 text, second sentence.            earnings and        this paragraph
                                   profits,.           (c)(2).
1.1441-4(a)(3)(ii)..............  payment to a        payment shall.
                                   foreign financial
                                   institution
                                   (within the
                                   meaning of Sec.
                                   1.165-12(c)(1)(iv
                                   )) shall.
1.1441-4(a)(3)(ii)..............  counterparty......  payee.
1.1441-7(b)(1), first sentence..  is incorrect......  is unreliable or
                                                       incorrect.
1.1441-7(b)(1), third sentence..  contained in, or    contained in, or
                                   attached to, a      associated with,
                                   withholding         a withholding
                                   certificate.        certificate.
1.1441-7(b)(1), third sentence..  are not correct     are incorrect or
                                   and.                unreliable and.
1.1461-1(b)(2), first sentence..  Form 1042X........  Form 1042.
1.6045-1(j), first sentence.....  the end of the      February 28 of the
                                   second calendar     following
                                   month following     calendar year.
                                   the close of the
                                   calendar year of
                                   such reporting
                                   period.
1.6049-4(c)(1)(ii)(A), second     meets the.........  meets one of the.
 sentence.
31.3406(h)-3(a), introductory     the payee           a payee that is a
 text, first sentence.             certifies.          U.S. person
                                                       certifies.
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-11937 Filed 5-15-00; 8:45 am]
BILLING CODE 4830-01-U