United States businesses operating across foreign borders should understand the tax withholding requirements unique to the country in which they operate. By referring to the tax treaties that exist between the respective foreign country and the U.S. business receiving the cross-border payment, U.S tax residents may be able to minimize the foreign withholding significantly, under what is known as a “treaty-reduced rate”.
In order to substantiate U.S. tax residency to the foreign country or foreign withholding agent, the IRS must certify the entity via Form 6166, Certification of U.S. Tax Residency (also known as Tax Residency Certificates). Form 6166 is obtained by first filing Form 8802, Application for United States Residency Certification, along with a user fee to the IRS. Successful applicants must be an individual or business entity and must be a U.S resident for tax purposes. For flow-through entities such as partnerships, the ultimate owners must be U.S tax residents.
As of December 1, 2020, the IRS is accepting applications for 2021 U.S Tax Residency Certificates. Although the IRS’ standard processing times have historically been between 60 – 90 days many 2020 applicants have experienced processing times of significantly longer due to the backlog caused by COVID-19. Given these expected processing delays it is recommended to file your Form 8802 application for 2021 as soon as possible.
WG Observation: To streamline the application process the IRS is officially accepting electronic signatures on Form 8802 to help make the application process less cumbersome. Furthermore, even in “normal” times, there is generally no way to expedite the processing of Form 8802. This can often create a hardship as many foreign vendors will withhold more foreign tax than would otherwise be required if a tax residency certificate were available. Therefore, it may be prudent to apply for a tax residency certificate in advance if there is a possibility that one may be needed for 2021. If you have any questions about Form 8802, please contact your WilkinGuttenplan advisor.