Special Instances when a Foreign Artist or Foreign Artistic Group is not Taxed
There are instances when a particular artist or artistic group meets specific criteria where federal withholding is not required.
Central Withholding Agreement
An individual NRA artist or each individual member of an artistic group may enter into a Central Withholding Agreement (CWA) with the IRS. A CWA is when the IRS has agreed to accept a smaller withholding amount based upon the foreign artist's net income rather than upon gross receipts.
Payment with a CWA
The group becomes reliable for the withholding taxes and the University of Richmond's obligation to withhold and report taxes is eliminated. No 1042 or 1042-S need be generated to report the income. If the CWA is with an agent, the reporting will be on a 1099 in the name of the agent.
A CWA is highly recommended by the IRS because this will prevent the gross payment being taxed at the normally required 30%. The documentation required is minimal because the CWA is considered to be the withholding agent. All that is required is the first and last page of the CWA.
Tax Treaty
The IRS permits, but does not encourage, the offering of tax treaty benefits when allowable to foreign entertainment groups. Most tax treaties provide special limits with respect to income earned by performing entertainers (including musicians.) If cumulative personal service income from all sources exceeds the treaty limit, including paid or reimbursed expenses, during a tax year, the NRA artist looses the treaty exemption. If the treaty exemption threshold is exceeded, the entertainer's total personal services income from the first dollar earned will be subject to U.S. tax and withholding.
Tax treaty forms:
Individual claiming tax treaty: Complete Form 8233 (SSN or ITIN required)
Artistic Group claiming tax treaty: Complete Form W-8BEN, both Part 1 and Part 2 (EIN required)
NOTE: Original signatures are required on any IRS document. Faxed and emailed sigantures will be rejected by the IRS in an audit.
The nontaxable treaty income will be reported on a 1042 and a 1042-S in the name of the NRA artists or artistic group (i.e. not the agent.)
Salaried Employees of a Foreign Producer
When the performers are salaried employees of a foreign producer, they are not the ones making the profit from the performance so the foreign entity is not a subterfuge. The rules regarding ignoring the entity receiving the funds would not apply. Tax withholding, in this case, is done by the employer.
Salaried employees of a foreign producer:
- Do not derive beneficial income from the performance itself
- Can't be an owner or have control in any way of the company (i.e. no input on scheduling, salaries, etc.)
- Can't be the ones making the profit from the performance
Required forms:
- W-9 signed by the owner of the production company. NOTE: Original signatures are required on any IRS document. Faxed and emailed sigantures will be rejected by the IRS in an audit.
- Letter stating, under penalty of perjury, that the performers are employees of the production company and that none of the performers are either an owner or have control over the actions of the corporation. (This releases UR from any tax obligation in the future.)
- List of all the performers, home addresses and social security numbers (if available)
The income will be reported on a 1042-S in the name of the NRA artist or artistic group (i.e. not an agent.)
Salaried Employees of a Foreign Producer Offered a Tax Treaty
The entity must have an U.S. EIN. The producer must provide a W-8BEN with a treaty claim that states that the entity has no permanent establishment in the US as that term is defined by the treaty. In this case, the payment to the foreign entity can be exempt from tax.
It would be the responsibility of the foreign entity to collect the Forms 8233 from their employees for exemption from U.S. tax, or alternatively, to comply with U.S. payroll obligations. NOTE: Original signatures are required on any IRS document. Faxed and emailed sigantures will be rejected by the IRS in an audit.
The treaty limit applies to total receipts in the calendar year and the foreign entity would know whether the total pay to the performers will exceed the treaty limit.
The income will be reported on a 1042-S in the name of the NRA artist or artistic group (i.e. not an agent.)
Tax Exemption
A foreign organization must prove that it is a tax-exempt organization under section 501(c) of the Internal Revenue Code, or that it would be exempt under that section if it applied for tax-exempt status, and that is not subject to a withholding tax on amounts that are not income includible. A foreign organization is not exempt from U.S. withholding tax based on its foreign tax-exempt status because many foreign countries have more liberal tax-exempt rules than the United States.
Form W-8EXP
Provided by a foreign tax-exempt organization to claim an exemption from withholding.
The IRS requires that the form include an EIN (see line #6 on Form W-8EXP and in the IRS' directions). Foreign organizations can apply for an EIN on Form SS-4, available at the IRS website. Entities with a foreign address cannot currently apply for an EIN online. NOTE: Original signatures are required on any IRS document. Faxed and emailed sigantures will be rejected by the IRS in an audit.
Proof of tax exemption:
- Copy of a tax exemption letter from the IRS Notice of Tax Exempt Status (see Line #12a on Form W-8EXP) OR
- Letter from an attorney in the U.S. who attests that the organization would likely obtain tax-exempt status from the IRS if it applied to the IRS for such status (see Line #12b on Form W-8EXP)
In addition, such a foreign tax-exempt entity must attach an affidavit stating that it is not a private foundation and so indicate in Box 12c, or indicate that it is a private foundation in Box 12d. (The 4% excise tax on private foundations is not overridden by a tax treaty exemption because excise taxes are not covered by tax treaties.)
The income will be reported on a 1042-S in the name of the NRA artist or artistic group (i.e. not an agent). It is reported under Recipient Code 07 and Exemption Code 02 on Form 1042-S. No tax return is required.
Special Provisions for Exempt Organizations
The tax treaties with Canada, Mexico, Germany, and the Netherlands include special provisions for organizations that are tax-exempt under the laws of the respective countries. Under such tax-exempt provisions, it is the tax-exempt rules of the respective treaty county that determine whether the income is exempt from tax. Companies from these four countries do not have to do the EXP or get the certifications, they can complete W-8BEN instead.
- Canada: Paragraph 1 of Article XXI
- Germany: Article 27(1)
- Mexico: Article 22(1)
- The Netherlands: Article 36(1)
The company should provide a copy of its tax-exempt paperwork from its home country. For practical reasons, an English-language translation should accompany foreign-language documentation of tax-exempt status.
The company must have a EIN.
The company must cite the treaty article that provided for the exemption in order to claim exemption based on tax-exempt status. The treaty article must be cited on Line 10 of the W-8BEN and elsewhere, the same as is done for any treaty claim. (Restrictions must be met.)
The income will be reported on a 1042-S in the name of the NRA artist or artistic group (i.e. not an agent). It is reported under Exemption Code 04. No U.S. income tax return is required for the tax-exempt claim based on these provisions.
Form W-8ECI
If the organization's income is unrelated business income under Section 512 of the Code (and therefore not tax exempt) such income may be exempt from withholding if the income is effectively connected with the conduct of a trade or business in the United States. Provided by a U.S. company to claim that unrelated business taxable income is exempt from withholding because the income is effectively connected with the conduct of a trade or business in the United States. They are making an estimated tax payment based on the net income. This form must include an EIN.
A foreign company can't use this exemption. Payments must be for activities that relate to their tax-exempt purpose; payment for unrelated business income as that term is defined for U.S. tax purposes may be exempt ECI or Treaty-Exempt ECI. NOTE: Original signatures are required on any IRS document. Faxed and emailed sigantures will be rejected by the IRS in an audit.
