Investment income earned by a foreign government is not included in the gross income of the foreign government and is not subject to U.S. withholding tax. Investment income means income from investments in the United States in stocks, bonds, or other domestic securities, financial instruments held in the execution of governmental financial or monetary policy, and interest on money deposited by a foreign government in banks in the United States. A foreign government must provide a Form W-8EXP or, in the case of a payment made outside the United States to an offshore account, documentary evidence to obtain this exemption. Investment income paid to a foreign government is subject to reporting on Form 1042-S.
The following types of income received by a foreign government are subject to NRA withholding.
- Income (including investment income) received from the conduct of a commercial activity or from sources other than those stated above.
- Income received from a controlled commercial entity (including gain from the disposition of any interest in a controlled commercial entity) and income received by a controlled commercial entity.If the foreign government is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the foreign government is considered derived from a controlled commercial activity and is subject to withholding under section 1446.
- Gain derived from the disposition of a U.S. real property interest. Withholding on these gains is discussed later under U.S. Real Property Interest.
A government of a U.S. possession is exempt from U.S. tax on all U.S. source income. This income is not subject to NRA withholding. These governments should use Form W-8EXP to get this exemption. taxmap/pubs/p515-005.htm#en_us_publink1000225027
International organizations are exempt from U.S. tax on all U.S. source income. This income is not subject to withholding. International organizations are not required to provide a Form W-8 or documentary evidence to receive the exemption if the name of the payee is one that is designated as an international organization by executive order. taxmap/pubs/p515-005.htm#en_us_publink1000225028
A foreign organization that is a tax exempt organization under section 501(c) of the Internal Revenue Code is not subject to a withholding tax on amounts that are not income includible under section 512 of the Internal Revenue Code as unrelated business taxable income. However, if a foreign organization is a foreign private foundation, it is subject to a 4% withholding tax on all U.S. source investment income. For a foreign tax-exempt organization to claim an exemption from withholding because of its tax exempt status under section 501(c), or to claim withholding at a 4% rate, it must provide you with a Form W-8EXP. However, if a foreign organization is claiming an exemption from withholding under an income tax treaty, or the income is unrelated business taxable income, the organization must provide a Form W-8BEN or W-8ECI. Income paid to foreign tax-exempt organizations is subject to reporting on Form 1042-S. If the organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the organization is subject to withholding under section 1446.