Guide to Global Payroll Management - 2020 - D-84

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Guide to Global Payroll Management

Exempt beneficial owner. An exempt
beneficial owner means a person that is
described in Regulations section
1.1471-6 and includes a foreign
government, a political subdivision of a
foreign government, a wholly owned
instrumentality or agency of a foreign
government or governments, an
international organization, a wholly
owned agency or instrumentality of an
international organization, a foreign
central bank of issue, a government of a
U.S. possession, certain retirement
funds, and certain entities wholly owned
by one or more exempt beneficial
owners. In addition, an exempt
beneficial owner includes any person
treated as an exempt beneficial owner
under an applicable Model 1 IGA or
Model 2 IGA.

Exempt recipient. An exempt recipient
is any payee that is exempt from the
Form 1099 reporting requirements.
Exempt recipients are not
exempt from withholding under
CAUTION chapter 3 of the Internal
Revenue Code unless they are U.S.
persons or foreign persons entitled to an
exemption from withholding under
chapter 3.

Expatriate. A person is considered an
expatriate if he or she relinquishes U.S.
citizenship or, in the case of a long-term
resident of the United States, ceases to
be a lawful permanent resident as
defined in section 7701(b)(6).

Fiscally transparent entity. An entity
is treated as fiscally transparent with
respect to an item of income for which
treaty benefits are claimed to the extent
that the interest holders in the entity
must, on a current basis, take into
account separately their shares of an
item of income paid to the entity,
whether or not distributed, and must
determine the character of the items of
income as if they were realized directly
from the sources from which realized by
the entity. For example, partnerships,
common trust funds, and simple trusts
or grantor trusts in most cases are
considered to be fiscally transparent
with respect to items of income received
by them.

Flow-through entity. A flow-through
entity is a foreign partnership (other than
a withholding foreign partnership), a
foreign simple or grantor trust (other
than a withholding foreign trust), or, for
any payments for which a reduced rate
of withholding under an income tax
treaty is claimed, any entity to the extent
the entity is considered to be fiscally

transparent under section 894 with
respect to the payment by an interest
holder's jurisdiction.

Financial institution. A financial
institution generally means an entity that
is a depository institution, custodial
institution, investment entity, or an
insurance company (or holding
company of an insurance company) that
issues cash value insurance or annuity
contracts. See Regulations section
1.1471-5(e).

Foreign financial institution (FFI). An
FFI is an entity described in Regulations
section 1.1471-5(d) or an entity treated
as a financial institution under an
Intergovernmental Agreement (IGA).

Deemed-compliant FFI. Under
section 1471(b)(2), certain FFIs are
deemed to comply with the regulations
under chapter 4 without the need to
enter into an FFI agreement with the
IRS. However, certain
deemed-compliant FFIs are required to
register with the IRS and obtain a GIIN.
These FFIs are referred to as
registered deemed-compliant FFIs.
See Regulations section 1.1471-5(f)(1).
Registered deemed-compliant FFIs also
include certain FFIs that satisfy the
requirements of an applicable IGA.
Nonparticipating FFI. A
nonparticipating FFI is an FFI that is not
a participating FFI, deemed-compliant
FFI, or exempt beneficial owner.

Participating FFI. A participating
FFI is an FFI that has agreed to comply
with the terms of an FFI agreement with
respect to all branches of the FFI, other
than a branch that is a reporting Model 1
FFI or a U.S. branch. The term
"participating FFI" also includes a
reporting Model 2 FFI and a QI branch
of a U.S. financial institution, unless
such branch is a reporting Model 1 FFI.
Foreign person. A foreign person
includes a nonresident alien individual,
a foreign corporation, a foreign
partnership, a foreign trust, a foreign
estate, and any other person that is not
a U.S. person. The term also includes a
foreign branch or office of a U.S.
financial institution or U.S. clearing
organization if the foreign branch is a
QI. A payment to a U.S. branch of a
foreign person is treated as a payment
to a foreign person for purposes of Form
1042-S.
Global intermediary identification
number (GIIN). The GIIN is the
identification number that is assigned to
a participating FFI (including a reporting
Model 2 FFI), registered
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deemed-compliant FFI (including a
reporting Model 1 FFI), or other entity
for chapter 4 reporting purposes.

Intermediary. An intermediary is a
person that acts as a custodian, broker,
nominee, or otherwise as an agent for
another person, regardless of whether
that other person is the beneficial owner
of the amount paid, a flow-through
entity, or another intermediary.

Qualified intermediary (QI). A QI
is an intermediary or eligible entity that
is a party to a withholding agreement
with the IRS. A QI that is a financial
institution must have a chapter 4 status
described in Regulations section
1.1441-1(e)(5)(ii). An entity must
indicate its status as a QI on a Form
W-8IMY submitted to a withholding
agent. For information on a QI
withholding agreement, see Rev. Proc.
2017-15, available at IRS.gov/irb/
2017-03_IRB#RP-2017-15, and
IRS.gov/QualifiedIntermediary.
A branch of a financial institution may
not act as a QI in a country that does not
have approved know-your-customer
(KYC) rules. Countries having approved
KYC rules are listed at IRS.gov/
businesses/international-businesses/
list-of-approved-kyc-rules. Branches
that operate in non-KYC approved
jurisdictions as intermediaries are
required to act as nonqualified
intermediaries. See the Instructions for
Form W-8IMY for more information on
the definition of a QI.
Nonqualified intermediary (NQI).
An NQI is any intermediary that is not a
U.S. person and that is not a QI.

Private arrangement intermediary
(PAI). A QI that is an FFI may enter into
a contractual agreement with another
intermediary under which the other
intermediary generally agrees to
perform all of the obligations of the QI
with respect to the accounts maintained
directly by the other intermediary. See
the QI agreement for the requirements
of a PAI and a QI's agreement with a
PAI.
Nonfinancial foreign entity (NFFE).
An NFFE is a foreign entity or an entity
incorporated or organized under the
laws of any U.S. territory that is not a
financial institution.

Excepted NFFE. The term
"excepted NFFE" means an NFFE that
is described in Regulations section
1.1472-1(c)(1) and generally includes a
publicly traded corporation, certain
affiliated entities related to a publicly
traded corporation, certain territory
Instructions for Form 1042-S (2020)

Guide to Global Payroll Management - 2020

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