Changes in US Withholding Tax Rules

October 2000

US custodians are generally obligated to withhold an appropriate amount from payments sourced in the U.S. under the Internal Revenue Code. The regulations in relation to withholding tax have been amended and the new treasury regulations will become effective 1 January 2001.

The new regulations identify two types of withholding tax: withholding tax applicable to accounts where the beneficial owner is a non US person and back up withholding tax applicable to accounts that are presumed to be that of a US person. The term beneficial owner usually refers to the owner of the income for tax purposes.

Back up withholding tax is directed at collecting from US persons who have not provided sufficient information to a US custodian or where the account holder is presumed to be a US person because insufficient information on the account holder has been provided. The back up withholding tax rate is set at 31%.

A US custodian is required to withhold a percentage of all payments made to a foreign payee unless reliable documentation has been given to the US custodian indicating that the payment is being made to a foreign person entitled to a reduced rate of withholding or relief through tax treaties.

The withholding tax applicable to payments to non US persons is generally 30% on income received from sources within the US that is not connected with trade or business in the US. Dividends from a US investment account would therefore usually be subject to a 30% withholding tax.

Under the old regulations, each beneficial owner was required to complete a W8 form and provide this form to the US custodian. As a result of the new regulations, all existing W8 forms will expire at the end of year 2000 and clients must ensure that proper documentation is completed by the end of the year. Failure to do so will mean that back up withholding tax will be deducted.

Under the new regulations, a foreign financial institution which is classified as a "qualified intermediary" will be allowed some flexibility in the documentation it provides to a US custodian. The status of qualified intermediary allows a foreign financial institution to provide a US custodian with a summary of the accounts it administers for non US account holders rather than specific information about each individual non US account holder. In addition, the qualified intermediary may rely on procedures which are approved by US regulators to collect information on the beneficial owners. The qualified intermediaries will therefore be able to preserve the confidentiality of these accounts holders by not revealing the identity of the non US account holders to US custodians.

If a foreign financial institution that is investing in the US does not obtain qualified intermediary status then it will be required to provide its US custodian with full details of the beneficial owner of each of its accounts. If it does not do so, then the backup withholding tax at 31% will be deducted from payments made to the foreign financial institution. This deduction will apply to the gross proceeds of the sale of shares – not simply the profit element.

A number of foreign financial institutions including foreign private banks have be granted or have taken steps to apply for the status of qualified intermediary. Each individual should assess the advantages of dealing with a qualified intermediary based on his/her specific circumstances and we strongly recommend that each client reassess his/ her situation well before the end of the year 2000. Failure to do so may have wide ranging and unforeseen implications.

In summary:

• Non US account holders who are investing through non qualified intermediary will either need to provide complete disclosure to their US custodian or have 31% backup withholding tax deducted.

• All non US account holders need to complete new W8 forms by 31 December 2000 – if these are not completed and filed then backup withholding tax will be deducted.

• Non US account holders who invest through a qualified intermediary will continue to have confidentially preserved as full disclosure of beneficial ownership is not required to be made to the US custodian.

If you would like to know more about the new regulations or require assistance in identifying an appropriate qualified intermediary please do not hesitate to contact us.