W8-BEN form needed?

[anda valacco]

I have a question about whether I need to fill in the W8-BEN form in my situation. I am a perpetual traveller and I have a contract between my foreign-owned single member US LLC (listed on the contract as "supplier/an independent contractor specializing in providing contract service") and an agency with registered office in the UK (listed as an "employment business". My name is mentioned as "representative, the initial person engaged by the Supplier to perform services on its behalf" (no products are sold to the US, just consultancy services; I have no operations or physical presence in the US). The end client for which services are performed has the main registered office address in the US (although the team I work for is based in Germany). So there are two separate contracts: one between the UK agency and the US end client, and one between the UK agency and my US LLC. My US LLC invoices the UK-based agency, and the payments into my Wise business account are made by this UK agency. I earn no interest on my Wise bank account. In this scenario, do I need to fill in W8-BEN, or take any other actions, to prevent tax liability in the US?
Thank you.

 

[daniels27]

Has a bank it somebody asked you to do it out? The form is only sent to people that pay you or banks and only when they ask.

 

[Forester]

The form is only sent to people that pay you or banks and only when they ask.

Exactly, and it has nothing to do with your evt. tax liability in the U.S.

The question of the U.S. tax liability is quite complex but you can learn a lot e.g. here Non-US Entrepreneurs: You Can Sell Products or Services into the US Without Paying US Tax – US Tax Services
(In short, you seem no to be tax liable in the U.S. Nevertheless, I am judging only by the facts that you have posted.)

 

[daniels27]

Exactly, and it has nothing to do with your evt. tax liability in the U.S.

In this case yes. In some very limited cases it actually does have to do with tax liability.
https://www.irs.gov/publications/p570

You will be considered to have a closer connection to a territory than to the United States or to a foreign country if you have maintained more significant contacts with the territories than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant territory, the facts and circumstances to be considered include, but are not limited to, the following.
- The types of official forms and documents you file, such as Form W-8BEN or Form W-9.

The question of the U.S. tax liability is quite complex but you can learn a lot e.g. here Non-US Entrepreneurs: You Can Sell Products or Services into the US Without Paying US Tax – US Tax Services
(In short, you seem no to be tax liable in the U.S. Nevertheless, I am judging only by the facts that you have posted.)

For services sold to Germany, there should not be an issue. This Belize lad's post is about FBA and physical goods to which different rules apply. Also note that this lawyer's view is not uncontested, although I personally would back his view based on internal IRS publications.

 

[Forester]

In some very limited cases it actually does have to do with tax liability.
https://www.irs.gov/publications/p570

Well, an useful remark. This seems to be a rather rare case but I was not aware about it; good to know. Thanks for pointing at it.

Also note that this lawyer's view is not uncontested,

Yes, I am aware that there are different opinions, too.

although I personally would back his view based on internal IRS publications.

Honestly, I am not much oriented at internal IRS publications; nevertheless – AFAIK – Steve Patton can show positive results /this is not an ad, I am in no way connected to him; I just know about some outcomes of him/.

 

[daniels27]

Yes, I am aware that there are different opinions, too.

Have you come to any conclusion yourself? Based on what facts/opinion?

Honestly, I am not much oriented at internal IRS publications; nevertheless – AFAIK – Steve Patton can show positive results /this is not an ad, I am in no way connected to him; I just know about some outcomes of him/.

You used him as lawyer or CPA?

 

[Forester]

Have you come to any conclusion yourself? Based on what facts/opinion?

Frankly – I have never encountered a situation when it become uncertain wheter I was ETBUS or not, all times it was crystal clear. So until now I have had no motivation to perform some complex investigation, I just believed the trustworthy sources, like above quoted Steve Patton...

You used him as lawyer or CPA?

I am not aware about him having CPA licence; I only know that he was all his carreer working as a tax advisor.
I have not used his service personally; I only had an opportunity to see some results of his work – sorry, I cannot disclose more.
I think that also some other member has referenced to him here at forum on some occassion... but I am currently unable to recall...

 

[daniels27]

Frankly – I have never encountered a situation when it become uncertain wheter I was ETBUS or not, all times it was crystal clear. So until now I have had no motivation to perform some complex investigation, I just believed the trustworthy sources, like above quoted Steve Patton...

But how about Ross Stafford Treeby which was also recommended here numerous times? He has exact opposite opinion:
As a UK registered company trading in US selling physical goods, do we need to pay any kind of tax in US?

I was thinking of paying both for their consultation call and do a group call with them discussing it out among each other... What would you do in that situation?

 

[Forester]

But how about Ross Stafford Treeby which was also recommended here numerous times? He has exact opposite opinion:
As a UK registered company trading in US selling physical goods, do we need to pay any kind of tax in US?

Well, I have gone through it. Putting this together e.g. with this Do I have to pay any taxes in the US if I run ecommerce and have clients in the US but live in the UK? opinion of him (Ross Stafford Treeby), I conclude that the core of the difference is in understanding of the concept of a permanent establishment. Steve Patton apparently operates with the concept that the company not having any US employees, dedicated agents etc. is de facto not established in the U.S. although registered there. (It is IMO not so crazy as it may seem, if you look at the complementary cases: how companies are treated like having PE somewhere when having no formal ties to the respective country and what are the substance requirements for companies...) And, especially for some US expats, it has worked for him, AFAIK...

I was thinking of paying both for their consultation call and do a group call with them discussing it out among each other...

Interesting idea.
I would probably speak at first separately with each, asking them for the second opinion / polemics with another party. This group call could be a next step, if they agreed...

 

[daniels27]

Well, I have gone through it. Putting this together e.g. with this Do I have to pay any taxes in the US if I run ecommerce and have clients in the US but live in the UK? opinion of him (Ross Stafford Treeby), I conclude that the core of the difference is in understanding of the concept of a permanent establishment. Steve Patton apparently operates with the concept that the company not having any US employees, dedicated agents etc. is de facto not established in the U.S. although registered there. (It is IMO not so crazy as it may seem, if you look at the complementary cases: how companies are treated like having PE somewhere when having no formal ties to the respective country and what are the substance requirements for companies...) And, especially for some US expats, it has worked for him, AFAIK...

Well, for ETBUS you technically can have a PE in the country of incorporation/residence outside the US and still be ETBUS. The main problem is that the IRS never clearly ruled what ETBUS is and they also won't issue any advance ruling. If you ask me, this is very wise as they can get as much tax from scared people as possible and as long as they never sue, lawyers are keen to sell free lunch for IRS to their clients.

Interesting idea.
I would probably speak at first separately with each, asking them for the second opinion / polemics with another party. This group call could be a next step, if they agreed...

Yes, but it would cost minimum $2000. Money which I feel more tempted to invest in a Lifetime Gold account.

 

[Forester]

Well, for ETBUS you technically can have a PE in the country of incorporation/residence outside the US and still be ETBUS. The main problem is that the IRS never clearly ruled what ETBUS is and they also won't issue any advance ruling. If you ask me, this is very wise as they can get as much tax from scared people as possible and as long as they never sue, lawyers are keen to sell free lunch for IRS to their clients.

Yes. I am not so much engaged in the U.S. business nowadays, nevertheless in the last time I have witnessed at least two cases when someone did something not much profitable for him just to prevent being bothered by IRS...

Well, this discussion diverged a little bit from the original question

However, OP can perhaps learn that
– the question of the U.S. tax liability is really quite complex and it is demanded to be careful here
– it is worth consulting with a tax professional and even taking a second opinion in some cases
– the final decision is sometimes to vote either for “who dares wins” or “I lose something but will have no fears”

Yes, but it would cost minimum $2000. Money which I feel more tempted to invest in a Lifetime Gold account.

I understand

(I do not know Ross Stafford Treeby's fees but Steward Patton is not among the cheapest, I think.)

 

[daniels27]

Well, this discussion diverged a little bit from the original question

Maybe continue the discussion over here?
https://www.offshorecorptalk.com/th...on-amazon-should-i-pay-us-taxes-or-not.44605/

 

[daniels27]

@Forester have you also worked with GW Carter, who has been actively recommended here:
https://www.offshorecorptalk.com/threads/filling-5472-1120-fbar-boi.44487/#post-296838https://www.offshorecorptalk.com/th...ewal-and-tax-return-filing.39912/#post-243674
Can you recommend him?

He just came to me with another long explanation:

The US tax system is difficult for anyone to understand. It is especially difficult when there are US tax "experts" providing advice that is simply wrong.

For example, one expert states: "Disregarded entities exist legally, but they don't have to pay any income taxes unless the foreign-owned SMLLCs are generating income that is FDAP or effectively connected to a US trade or business." The message, then, is that any US income that falls through the cracks between being FDAP (fixed, determinable, annual or periodic) and effectively connected to a US business is not subject to US income tax for nonresidents.

This would create what would seem to be a "loophole" - an oversight by tax writers that really smart people have found to take advantage of. However, Congressional tax writers figured out long ago how to avoid creating loopholes.

Definition of Gross Income for Nonresidents
The definition is in Internal Revenue Code (IRC) section 872(a). Please read this yourself at 26 U.S. Code § 872 - Gross income. To paraphrase, it says gross income of a nonresident alien includes all income (with exceptions detailed later in the Code section) 1) from sources in the United States that is not effectively connected with a US trade or business, and 2) gross income that is effectively connected with a US trade or business (even if not from sources in the United States).

Regulation section 1.872-1(a) puts this rule into user friendly language: "The gross income of a nonresident alien individual for any taxable year includes only (i) the gross income which is derived from sources within the United States and which is not effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual and (ii) the gross income, irrespective of whether such income is derived from sources within or without the United States, which is effectively connected for the taxable year with the conduct of a trade or business in the United States by that individual."

Income from Sources Within the United States
It's clear from section 872(a) that income from sources within the United States is subject to taxation, even if not connected with a US trade or business. The question remains, what is income from sources within the United States?

IRC section 861 addresses that question. Please see26 U.S. Code § 861 - Income from sources within the United States. Notably, read section 861(a)(6), which says the sale of inventory (e.g., drop shipping) within the United States is US source income. However, if the sale of inventory in the US is US source income, but it is neither FDAP nor effectively connected with a US business, how is it treated? Please read section 864(c)(3) here:26 U.S. Code § 864 - Definitions and special rules. The paragraph explains that all US source income that is not classified as FDAP income is "treated" as effectively connected with a US trade or business. In other words, it's taxable, but it's taxed at graduated rates like effectively connected income rather than at the flat rate of 30% like FDAP that is not effectively connected.

There are nuances regarding the sale of inventory. The source of purchased inventory depends on where "title passes" and manufactured inventory is sourced where made. But generally, purchased inventory sold to US customers is taxed as effectively connected income, unless a treaty exemption applies.

 

[Wanderien]

@Forester have you also worked with GW Carter, who has been actively recommended here:
https://www.offshorecorptalk.com/threads/filling-5472-1120-fbar-boi.44487/#post-296838https://www.offshorecorptalk.com/th...ewal-and-tax-return-filing.39912/#post-243674
Can you recommend him?

He just came to me with another long explanation:

Thanks for sharing, that's interesting.

I have hired GW Carter for the first year I filed my f5472.
When I did it the next year by myself, I noticed that their team hadn't asked me the right questions to fill out the form correctly.
So that was money down the drain, for sure.

His response seems valid, and to be really honest with you, got me a little worried, again, lol.
After rereading the tax code and Stewart's article again, doing a bit of thinking and plugging in different sources from on this forum, the tax code, and his opinion into the LLM…

There’s a nuance in how §864(c)(3) interacts with §864(c)(1)(B).

---

1. The “Loophole” in §864(c)(3) vs. §864(c)(1)(B)​

• §864(c)(3) states:
  
  

  “All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) [FDAP] applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.”

• §864(c)(1)(B) states:
  
  

  “No income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the U.S. [for non-ETBUS taxpayers] unless provided in (c)(6), (c)(7), or (c)(8).”

Conflict?

• §864(c)(3) reclassifies non-FDAP U.S. source income as ECI (effectively connected income).
• §864(c)(1)(B) says non-ETBUS taxpayers (like your LLC’s owner) cannot have ECI unless the income falls under (c)(6)-(8) (e.g., deferred payments, asset disposal, or partnership interest sales).

Resolution:

• §864(c)(3) reclassifies income as ECI only if the taxpayer is ETBUS.
• If the taxpayer is not ETBUS, §864(c)(1)(B) overrides §864(c)(3) , meaning income classified as ECI under (c)(3) is not taxed in the U.S. unless the taxpayer is ETBUS.

 

[daniels27]

I personally would recommend reading the CFR instead of the Code.
https://www.law.cornell.edu/cfr/text/26/1.864-1

But in general, you are correct. It goes a but like this:

• Effectively connected income is taxable.
• If there is a trade or business, foreign source income is only treated as effectively connected if it is attributable to an office or other fixed place of business within the United States.

In any case, the keyword is ETBUS as you have correctly figured out.

 

[Wanderien]

Thanks for the share of that CFR.
The one you shared doesn't have much written, but the next ones do, cheers!

Could you tell us why you would read that over the code?
I assume it's for the clearer language, and examples given on 26 CFR § 1.864-3, 1.864-4, and so on?

 

[daniels27]

Yes, you need to check all the following ones as well.

The USC are the laws passed by congress. The CRF is the interpretation of the USC by the relevant departments. The CFR is most often more detailled with examples. In this particular case, the IRS has probably been involved in writing the CFR and thus can give a bit more details on what the IRS intends.

Also, what did GW Carter advise you on the matter, is it taxable or not and why?

 

[Wanderien]

OK, cheers for that extra coloring!

He said the following:

"I think your risk is low, since your income is exempt by treaty. The IRS would have little motivation to go after you. However, as you say, the filing requirement is very factual."

Implying that I would need to file, and would not be OK if there's no treaty country.
But he didn't address the ETBUS and ECI topics so deeply as in your response.

To be fair, my understanding of it was also not as evolved as now, to ask the right questions.
And they were selling me on the F5472 at that moment, and then did a poor job I feel.

 

[daniels27]

Sounds all a bit ood. Is it covered by a treaty or not? If it is covered by a treaty, you are exempt from 5472 and are also exempt from filing. There are CPA/lawyers that even recommend not to file in this case. But I personally would file a protective return, you have 18 months from the original due date to file and it is still considered timely filed.

In general, if the foreign corporation fails to file Form 1120-F before the earlier of the date of notification by the IRS that a return is due or 18 months after the due date under IRC 6072, it is not entitled to the deductions and credits specified under IRC 882(c)(2) and the regulations thereunder, and will instead be subject to tax under IRC 11 on its gross income at the rate provided for the applicable tax year.

You can then just file a 8833, together with a 1120-F add a schedule M (1120fm1) with the totals 0 and schedule H (1118) completely empty if needed.