December 18, 2023
IRS updates Form W-8EXP to allow withholding qualified holders to assert status on form
On its website, the IRS posted an updated Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, along with updated instructions. The main substantive change is allowing withholding qualified holders (WQHs) — essentially, foreign pension funds and investment vehicles owned by foreign pension funds — to assert that status on the Form W-8EXP (rather than a separate self-created statement) to prevent Foreign Investment in Real Property Tax (FIRPTA) withholding under IRC Section 1445.
Form W-8EXP is provided by foreign investors that are exempt from tax on most US-source income to withholding agents to establish their exemption from withholding. Among the investors that have historically used the form are foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations and governments of US possessions.
The IRS released a draft Form W-8EXP on June 28, 2023, to update the version that has been in use since July 2017. The final updated form, which has a revision date of October 2023, is similar to the draft form.
Based on the timing of the new Form W-8EXP and the October revision date, withholding agents may continue to accept the prior version of Form W-8EXP (revised July 2017) until the end of six full months after the October revision date. Accordingly, foreign investors must provide the new Form W-8EXP starting on May 1, 2024 (although it can be used immediately). Forms W-8EXP obtained before this cutoff date continue to be valid for the usual validity period.
Line 3: A new check box for a "Withholding qualified holder under [IRC S]ection 1445" is now included. The new instructions allow an entity providing this form to document itself as a WQH under IRC Section 1445 and to select another check box that may apply to its status for purposes of IRC Sections 1441/1442 withholding (which applies to nonresident aliens and foreign corporations).
EY observes: This is the first time a Form W-8 has allowed two Line 3 "Type of entity" boxes to be selected on the form. Withholding agents will need to make sure they have software, processes and procedures in place to validate the Forms W-8EXP that they receive.
Line 15: The new line 15 has check boxes for a WQH that is a Qualified Foreign Pension Fund (QFPF), a Qualified Controlled Entity (QCE) or a foreign partnership, all of the interests of which are held by qualified holders. This allows WQHs to assert that status to prevent FIRPTA withholding under IRC Section 1445, which applies to withholding on dispositions of US real property interests (including real estate investment trust (REIT) capital gain distributions). This withholding tax exemption was previously claimed on a self-created certification (completed by a customer and provided along with their Form W-8).
The certification of WQH status has a validity period for the current year plus two years, rather than the usual three years that applies for purposes of IRC Section 1441/1442 withholding.
EY observes: A beneficial owner may need to provide two tax forms: (1) a Form W-8BEN-E to make treaty claims as a pension fund or entity wholly owned by a pension fund and (2) a Form W-8EXP to establish WQH status. If only a Form W-8EXP is provided asserting WQH status, additional documentation may be required to establish an exemption for IRC Sections 1441/1442 withholding.
Other changes to the form
Line 3: The Chapter 3 Status check box for a "Government of a U.S. possession" has been updated to "Government of a U.S. territory" instead.
Line 10d and 10e: Certain certifications for controlled entities of foreign sovereigns and foreign central banks of issue are moved out of the signature block and into new boxes 10d and 10e.
Instructions for Box 13c: An affidavit to substantiate private foundation status is no longer required if an opinion (from US counsel) concludes that IRC Section 509(a)(1) through (4) applies and satisfies the requirements under Revenue Procedure 2017-53.
Line 19: Exempt retirement plans of foreign governments must indicate whether the plan covers employees or nonemployees who performed services for the sponsor.
EY observes: The new form suggests that either 19a or 19b should be checked, but it is not clear why checking both boxes would be wrong from a FATCA standpoint. Treas. Reg. Section 1.1471-6(f)(6) seems to allow a plan that includes both employees and non-employees:
(f)(6) Pension fund of an exempt beneficial owner. A fund established and sponsored by an exempt beneficial owner described in paragraph (b), (c), (d), or (e) of this section or an exempt beneficial owner (other than a fund that qualifies as an exempt beneficial owner) described in an applicable Model 1 or Model 2 IGA [Intergovernmental Agreement] to provide retirement, disability, or death benefits to beneficiaries or participants that are current or former employees of the exempt beneficial owner (or persons designated by such employees), or that are not current or former employees, but the benefits provided to such beneficiaries or participants are in consideration of personal services performed for the exempt beneficial owner.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor