Guide to Global Payroll Management - 2020 - D-88

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Guide to Global Payroll Management

procurement payments subject to
withholding under section 5000C.

Amounts That Are Not
Subject to Reporting
on Form 1042-S

Interest and OID from short-term obligations. Interest and OID from any
obligation payable 183 days or less from
the date of original issue are generally
not required to be reported on Form
1042-S. See, however, the reporting
requirements for deposit interest
described in Interest on deposits paid to
certain nonresident aliens in the bullet
list under Amounts Subject to Reporting
on Form 1042-S, earlier.
Registered obligations targeted to
foreign markets. Interest on a
registered obligation that is targeted to
foreign markets and that qualifies as
portfolio interest is not subject to
reporting if it is paid to a registered
owner that is a financial institution or
member of a clearing organization and
you have received the required
certifications.

Reporting will be required on
interest paid on any registered
CAUTION obligation (regardless of
whether targeted to foreign markets) if
the registered obligation is issued after
December 31, 2015.

Bearer obligations targeted to foreign markets. Do not file Form 1042-S
to report interest not subject to
withholding on bearer obligations if a
Form W-8 is not required.
Withholding is required on
interest paid on any bearer
CAUTION obligations targeted to foreign
markets if the obligation is issued after
March 18, 2012. You must file Form
1042-S to report this interest paid on an
obligation issued after that date.

Notional principal contract payments that are not ECI or dividend
equivalents. Do not report on Form
1042-S amounts paid on a notional
principal contract, other than a specified
notional principal contract (SNPC), if the
amounts are not effectively connected
with the conduct of a trade or business
in the United States. All amounts paid
on an SNPC that are treated as dividend
equivalent payments should be reported
as such on Form 1042-S.
Accrued interest and OID. Interest
paid on obligations sold between
interest payment dates and the part of
the purchase price of an OID obligation

that is sold or exchanged in a
transaction other than a redemption is
not subject to reporting unless the sale
or exchange is part of a plan, the
principal purpose of which is to avoid
tax, and the withholding agent has
actual knowledge or reason to know of
such plan.

Certain withholdable payments.
Withholdable payments not subject to
reporting for chapter 3 purposes (other
than bank deposit interest paid to
certain nonresident aliens) are not
required to be reported if withholding is
not applied (or required to be applied)
under chapter 4.

Distributions Attributable
to Dispositions of U.S.
Real Property Interests by
Publicly Traded Trusts
and Qualified Investment
Entities

Publicly traded trusts. In general,
when a publicly traded trust makes a
distribution to a foreign person
attributable to the disposition of a U.S.
real property interest, it must withhold
tax under section 1445. However, this
withholding liability is shifted to the
person who pays the distribution to a
foreign person (or to the account of the
foreign person) if the special notice
requirement of Regulations section
1.1445-8(f) and other requirements of
Regulations section 1.1445-8(b)(1) are
satisfied.
The amount subject to withholding
for a distribution by a publicly traded
trust is determined under the rules of
Regulations section 1.1445-5(c)(3).

Qualified investment entities (QIEs).
Special rules apply to QIEs. A QIE is
one of the following.
* A real estate investment trust (REIT).
* A regulated investment company
(RIC) that is treated as a U.S. real
property holding corporation (after
applying certain rules in section 897(h)
(4)(A)(ii)).

Look-through rule for QIEs. In most
cases, any distribution from a QIE to a
nonresident alien, foreign corporation,
or other QIE that is attributable to the
QIE's gain from the sale or exchange of
a U.S. real property interest is treated as
gain recognized by the nonresident
alien, foreign corporation, or other QIE
from the sale or exchange of a U.S. real
property interest.
A distribution by a QIE to a
nonresident alien or foreign corporation
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that is treated as gain from the sale or
exchange of a U.S. real property
interest by the shareholder is subject to
withholding at 21%.
Certain exceptions apply to the lookthrough rule for distributions by QIEs.
Any distribution by a QIE with respect to
stock regularly traded on an established
securities market in the United States is
not treated as gain from the sale or
exchange of a U.S. real property
interest if the shareholder did not own
more than 5% of that stock (or 10% of
that stock in the case of REITs) at any
time during the 1-year period ending on
the date of the distribution. A distribution
by a REIT generally is not treated as
gain from the sale or exchange of a U.S.
real property interest if the shareholder
is a qualified shareholder (as described
in section 897(k)(3)). These
distributions may be included in the
shareholder's gross income as a
dividend (income code 06) from the
QIE, not as long-term capital gain.
In addition, a qualified foreign
pension fund or an entity all of the
interests of which are held by a qualified
foreign pension fund generally is not
subject to the look-through rule for
distributions by QIEs for purposes of
section 897(h).
Use Forms 1042-S and 1042 to
report and pay over the withheld
amounts. All other withholding required
under section 1445 is reported and paid
over using Form 8288, U.S. Withholding
Tax Return for Dispositions by Foreign
Persons of U.S. Real Property Interests,
and Form 8288-A.
For more information on reporting
income from real property interests, see
U.S. Real Property Interest in Pub. 515.

Publicly Traded
Partnerships (Section
1446 Withholding Tax)

A publicly traded partnership (PTP)
(defined under Definitions, earlier) that
has effectively connected income must
pay a withholding tax under section
1446 on distributions of that income
made to its foreign partners and file
Form 1042-S using income code 27 and
chapter 4 exemption code 14. A
nominee that receives a distribution of
effectively connected income from a
PTP is treated as the withholding agent
to the extent of the amount specified in
the qualified notice received by the
nominee. For this purpose, a nominee is
a domestic person that holds an interest
in a PTP on behalf of a foreign person.

Instructions for Form 1042-S (2020)

Guide to Global Payroll Management - 2020

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