W-8BEN-E: What a Canadian Corporation Files to Stop US Withholding, and the Limitation-on-Benefits Box That Trips It Up

Form W-8BEN-E is the entity version of the W-8BEN: a certification by a foreign company to a US payer that it is the beneficial owner of the income, that it is a resident of a treaty country, and that it qualifies for the treaty's reduced withholding rate. A Canadian corporation that licenses software to US customers, provides services to US clients, or receives dividends from a US subsidiary gives the form to each payer; without it, the payer withholds 30% and the corporation recovers the excess only by filing a US return. The form is eight pages, most of which do not apply to a typical Canadian company, but two parts do: the chapter 4 (FATCA) status and the limitation-on-benefits certification, and both are where errors happen.

Key takeaways

• Purpose: to establish that the payee is a foreign entity (not subject to Form 1099 reporting and backup withholding), to certify its FATCA status (chapter 4), and to claim a reduced rate of chapter 3 withholding under the Canada-US treaty on dividends (5% or 15%), interest (0%), royalties (0% or 10%), and services (0% absent a US permanent establishment).
• Who files: any foreign entity receiving US-source income subject to withholding: Canadian corporations, partnerships (which file W-8IMY instead if they are flow-through for the income), trusts, and Canadian branches of foreign companies. Individuals file W-8BEN; hybrid entities may need additional statements.
• Key parts: Part I (identification, chapter 3 status as a corporation, chapter 4 FATCA status); Part III (treaty claim: country, the limitation-on-benefits provision satisfied, the article and rate for the income type); the applicable FATCA status certification part; Part XXX (signature).
• Limitation on benefits: the treaty's Article XXIX A allows benefits only to qualifying persons; a Canadian corporation typically qualifies as a company whose shares are owned more than 50% by Canadian residents and whose income is not paid substantially to non-qualifying persons (the ownership and base erosion test), or as a publicly traded company, or under the active trade or business test. The form requires the filer to check which test applies.
• Validity: the form is valid from signature through the end of the third following calendar year, unless a change in circumstances makes it incorrect.

Completing the form

Part I. Name of the corporation; country of incorporation (Canada); chapter 3 status (corporation, in almost all cases; a Canadian partnership or trust checks its own box, and a disregarded entity identifies its owner); chapter 4 status (for a Canadian operating company, typically "active NFFE" for a non-financial company deriving less than 50% passive income, or "passive NFFE" for a holding company, which must then disclose substantial US owners; Canadian financial institutions certify under the Canada-US IGA); permanent residence address; US TIN (an EIN, obtained on Form SS-4, is required to claim treaty benefits on most income) or foreign TIN (the Canadian business number).

Part III, treaty claim. Check the box; enter Canada; check the box certifying that the corporation derives the income and meets the limitation-on-benefits provision, and identify which LOB test: for a private Canadian company, usually "company that meets the ownership and base erosion test"; for a listed company, "publicly traded corporation"; for a company with an active Canadian business connected to the US income, "company that meets the active trade or business test". Then specify the treaty article and rate for the income type: Article X for dividends (5% if the corporation owns 10% or more of the payer, otherwise 15%); Article XI for interest (0%); Article XII for royalties (0% for copyright, software, patent, and know-how royalties; 10% for others); Article VII for business profits and service fees (0%, with a statement that the corporation has no US permanent establishment).

FATCA certification. The part corresponding to the chapter 4 status checked in Part I: an active NFFE certifies that less than 50% of its gross income is passive and less than 50% of its assets produce passive income; a passive NFFE certifies whether it has substantial US owners and lists them.

Part XXX. Signature by an authorized officer, with the certification under penalties of perjury.

The limitation-on-benefits test

Article XXIX A restricts treaty benefits to qualifying persons to prevent treaty shopping. A Canadian corporation qualifies if it meets one of the tests: it is publicly traded on a recognized exchange; it is owned more than 50% (by vote and value) by qualifying persons (Canadian residents, Canadian public companies, and certain others) and less than 50% of its gross income is paid to non-qualifying persons as deductible payments (the ownership and base erosion test); or it is engaged in an active trade or business in Canada and the US income is derived in connection with or incidental to that business (the active trade or business test). A Canadian corporation owned by Canadian resident individuals passes the ownership and base erosion test; one owned by residents of a third country may not, and must rely on the active trade or business test or a derivative benefits provision.

Checking the wrong LOB box, or none, leads payers to reject the form and withhold 30%.

Services and the permanent establishment statement

A Canadian corporation providing services to US clients claims exemption under Article VII (business profits) on the basis that it has no US permanent establishment. Some payers require, in addition to the W-8BEN-E, a statement that the corporation has no PE; the form's Part III line for "other" treaty provisions accommodates it. Services performed in the US by the corporation's employees for extended periods can create a PE under Article V(9) and defeat the claim.

Hybrid entities

A Canadian ULC that is disregarded for US purposes, or a US LLC owned by a Canadian corporation, is a hybrid, and the treaty's Article IV(6) and (7) determine whether benefits are available. A ULC receiving US-source income files W-8BEN-E claiming benefits on behalf of the entity as a Canadian resident; the payer may require the "hybrid entity" certification in Part III. A US LLC owned by a Canadian corporation is a US entity and files W-9, not W-8; the Canadian owner's treaty claim is made at the LLC level or on distributions.

When it was not filed

The payer withheld 30% and issued a Form 1042-S. The corporation files Form 1120-F (the US return for foreign corporations) with Form 8833 claiming the treaty rate and Schedule NEC or the appropriate schedule reporting the income and the withholding, and requests the refund. The 1120-F is due by the 15th day of the fourth month after year-end (June 15 for a calendar-year foreign corporation with no US office); a refund claim can be made within three years. A protective 1120-F with Form 8833 is advisable in any year a 1042-S is issued, even if no withholding occurred, to preserve deductions and the treaty position.

Worked example

A Vancouver software corporation (owned by two BC residents) licenses its product to US customers ($800,000 a year) and receives $50,000 of dividends from a Delaware subsidiary it wholly owns.

• W-8BEN-E to each US licensee. Part I: corporation; active NFFE. Part III: Canada; ownership and base erosion test; Article XII, 0% on software royalties. EIN on the form. Valid three years.
• W-8BEN-E to the Delaware subsidiary. Same, with Article X, 5% (the corporation owns 10% or more).
• Result. No withholding on the $800,000 of licence fees; $2,500 withheld on the dividends (5%); Forms 1042-S issued at those rates.
• Without the forms. $240,000 withheld on the licence fees and $15,000 on the dividends; recoverable only on an 1120-F with Form 8833 filed by June 15 of the following year (or within three years).

Official sources

"Form W-8BEN-E is used by foreign entities to document their status for purposes of chapter 3 and chapter 4, as well as other code provisions." — Internal Revenue Service, About Form W-8BEN-E, https://www.irs.gov/forms-pubs/about-form-w-8ben-e

Exempt from source-country tax are "copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or artistic work (other than payments in respect of motion pictures and works on film, videotape or other means of reproduction for use in connection with television)"; "payments for the use of, or the right to use, computer software"; and "payments for the use of, or the right to use, any patent or any information concerning industrial, commercial or scientific experience." — Canada-United States Tax Convention, Article XII(3), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"[T]he tax so charged shall not exceed: (a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends; (b) 15 per cent of the gross amount of the dividends in all other cases." — Canada-United States Tax Convention, Article X(2), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

Practitioner note

The W-8BEN-E fails on two boxes: the FATCA status (a holding company is a passive NFFE and must list its owners) and the limitation-on-benefits test (a Canadian-owned private company checks ownership and base erosion). We complete the form for the client's corporation, get the EIN first, keep a copy for each payer, and calendar the three-year expiry. The alternative is an 1120-F refund claim eighteen months later.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the W-8BEN-E preparation for each US payer, the EIN application, the limitation-on-benefits analysis, and the Form 1120-F refund claim where withholding already occurred. See cross-border pricing or book a call.