Ross McGill

April 11, 2024|11 Minutes

Why Am I Being Asked For a W-8?

In W-8

One of the most common questions I hear from investors is ‘why am I being asked for a W-8’? It’s usually a request that you’ll know about in advance, but sometimes it can come out of the blue and leave you confused. Especially if you’re not in the US. Today’s blog is going to answer that question, and give you some context about what a W-8 is and what it’s used for.

What is a W-8?

A W-8 is a US tax form. If you’re a non-US investor and you try to open an account with a broker or a custodian bank, then you will almost certainly be asked to provide a W-8 or a W-9 if you’re an American. Some institutions will be upfront about what they’re asking for and even provide or direct you to the forms you need to fill in. Others may try to disguise what they’re asking by having you fill in a questionnaire on their website. These will ask the same questions as a W-8 would, but slightly rephrased, so it forms a kind of substitute for the W-8.

These forms can be a bit intimidating when they drop on your desk, but don’t panic! You should have all the information you need to fill them in properly. But it’s important to realise that when you fill these in, you’re signing them under penalty of perjury. This is common on most tax self-certifications, but it does mean that you’re liable if anything on the form is wrong, or doesn’t match any other information you provided to the financial institution. This set up is very useful for the financial institution, who don’t want the liability of making sure all of that information is correct.

What is a W-8 Used For?

The financial institution you’re dealing with needs the information on the W-8 in order to do their due diligence and put you into the right category of customers. Most of this is for regulatory reasons, but there are two main reasons that an institution will ask you to fill in a W-8 form:

Tax Status: The financial institution is obligated under US and domestic regulations to obtain your US tax status, even if you don’t own or plan on owning any US stocks or shares. Most investors will either be a ‘non-US person’ or a ‘non-US entity’, depending on whether you’re opening an account as an individual or a company. If you are a US person, then you’ll need to complete a W-9 form instead. But be careful – most financial institutions outside the United States won’t allow Americans to open investment accounts.

Double Tax Treaties: Once you’ve filled in a W-8 form you will be able to claim the benefits of a double tax treaty with the US. If you don’t have a valid W-8 with a treaty claim on it, then your financial institution will tax any dividends from US sources at 30%. That’s quite high, given that the most common treaty rate is 15%! So there’s a clear financial benefit for you filling one in, as long as you’re a tax resident of a country that has one of those double tax treaties with the US. As examples, China has a double tax treaty of 10%, the Philippines is 25%, and most of Europe and the UK is 15%.

W-8 vs W-8BENE

Just to confuse things, there are actually 5 forms in the W-8 series. Sadly, it’s your job to decide which one is the most relevant for you. This is because your financial institution is unlikely to be licensed to give you tax advice, so they will be unable to tell you which one to fill in. Luckily, we can give you some guidance. For individuals it will be the W-8BEN, and for entities you will need to fill in the W-8BENE – which is more complicated. There are other forms in the W-8 series, but they’re not really relevant to this topic, so I’ll cover them in another blog.

If you’re setting up an account for a company or a trust, then you’ll likely to using a W-8BENE. Don’t be daunted by the extra questions on the form for this – the US is always worried that companies and trusts can be used for tax evasion, which is why they ask more questions. In particular, if you’re going to claim treaty benefits for the company or trust, you’ll be asked to select a reason that your company or trust meets something called ‘The Limitation of Benefits’ test. Most tax treaties with the US allow treaty benefits, but limit those benefits unless your company or trust meets certain criteria. You’ll need to specify exactly which limitation on benefits provision you satisfy. This allows the financial institution to report that limitation on benefits provision to the IRS on form 1042-S.

Finally, both the W-8BEN and W-8BENE establish something called Chapter 4 (or FATCA) status. FATCA, or the Foreign Account Tax Compliance Act is the US anti tax evasion law that applies to every financial institution outside the US – which is why financial institutions almost always ask for these forms. The W-8BENE is completed by companies and certain types of trust. There are two main types of corporation, an Active non-financial foreign entity (Active NFFE) and a Passive non-financial foreign entity (Passive NFFE). The main difference lies in the proportion of the corporation’s income that comes from passive investments, such as dividends, as opposed to a normal trading activity such as making widgets for example. If the passive income is over 50% of the company’s total income, then it’s a Passive NFFE. Passive NFFEs are types of entities that are potentially more likely to be used as vehicles for tax evasion, so the IRS and your financial institution will want details of any company owners or beneficiaries of the trust that are Americans. If there are any, your financial institution will report the company and its American owners to the IRS in a FATCA report so the IRS can make sure everyone is paying the right amount of tax.

If you fall into either of these categories, you should get some professional tax advice to help you fill in the forms.

An Important Note About Dates

The date format on these forms is incredibly important. It might be one of the most important bits, so while you’d normally breeze past it, make sure you pay attention. As these are American forms, the date format on the form is written in mm/dd/yyyy, and NOT in the typical dd/mm/yyy.

If you fill in the form with the dates the wrong way round, and the financial institution doesn’t catch it, this could lead them to under or over withhold. This is because there are some dates can be transposed and work both ways. So if you’re trying to write the 7th of December, you could write this as 07/12/2023 in European dates, and an American would read it as the 12/07/2023 – the 12th of July 2023. This would put them in violation of their obligations, and could cause serious problems for both them and you.

One other thing to bear in mind. if you don’t see the phrase ‘signed under penalty of perjury’ as the last thing written on your W-8 before your signature, then it’s not a real W-8 and your financial institution can’t and shouldn’t accept it.

It’s true that these forms are complicated and can look intimidating, but your financial institution really has no choice but to ask you for these forms. The US and local regulations mean they have to do so as part of their anti tax evasion rules. So while it’s frustrating, there’s no point in getting upset or frustrated about it. It’s just a hoop you’ll have to jump through if you want to open that investment account.

In our next blog, we’ll cover some of the documents you might get asked for because of the OECD rules that have been implemented by many European jurisdictions, called the Common Reporting Standard (or CRS). In the meantime if you’re a financial institution struggling with compliance, or you have questions about a W-8, W-8BEN or W-8BENE, just get in touch with one of our experts today.

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.