We frequently get calls from our business clients which go something like this: “A customer located in a foreign country owes me money and is saying they are going to withhold foreign taxes unless I give them a “US Residency Certificate”. What is this and can you get me one ASAP!?”
Businesses that operate internationally are subject to the withholding rates of the foreign countries in which they maintain operations. In some cases, foreign countries withhold tax on income paid from internal sources to residents of other countries, regardless of their residency, for tax purposes. While withholding rates are generally set by the laws of individual countries, tax treaties between the United States and other nations may reduce the rates – sometimes to as low as zero percent – for certain types of income paid to residents of the U.S.
These reduced rates are known as “treaty-reduced rates.” However, in order to claim the benefits provided under these treaties, some nations require that the person requesting these benefits provide proof of residency. This proof comes in the form of a Tax Residency Certificate (TRC), and is also referred to as IRS Form 6166, Certification of U.S. Tax Residency. It can be obtained by filing Form 8802, Application for United States Residency Certification.
While completing Form 8802 is generally straightforward, it can take 6 weeks or longer for the IRS to issue a TRC, assuming that there are no issues with the application. It is important to take great care in completing the form, as any questions from the IRS regarding an incomplete submission of Form 8802 will cause further delays. Unfortunately, there is no current method available for expedited processing, which can produce a cash flow problem for a U.S. business. They must either choose to wait until they receive the TRC from the IRS, or accept a reduced payment, net of foreign withholding tax, from the foreign party.
The IRS starts processing Form 8802 for the subsequent calendar year on December 1st of the preceding calendar year. For example, a business seeking a 2016 TRC can file Form 8802 as early as (but not earlier) than December 1, 2015.
We recommend to our clients that if it is conceivable that they might need a TRC at any time during the year, they file Form 8802 as soon as possible and not wait until a foreign customer or vendor requests one. There is an $85 IRS fee to obtain a TRC, but it usually a small price to pay for the benefits which having a TRC provides.