Active NFFE vs Passive NFFE: Classification for Form W-8BEN-E Reporting

Foreign entities are often required to complete a Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). This form has created significant confusion among owners due to the myriad of definitions and classifications it contains. However, it is very important for US tax withholding agents to receive properly completed Forms W-8BEN-E to support their withholding obligations.

How the Form is Set Up

Part I, lines 1-4, identifies the entity that is the beneficial owner, its country of incorporation and the entity type (entity type is also the Chapter 3 Status, referring to the chapter of the US Internal Revenue Code that deals with withholding taxes on non-resident aliens and foreign corporations). Line 5 requests that the owner identify its Chapter 4 Status, referring to the entity’s status under the US Foreign Account Tax Compliance Act (FATCA) provisions. There are numerous classifications available for Chapter 4 status, from which the owner must select one.

Two Chapter 4 Classifications Explained in More Detail

Most operating, non-financial institutions will be classified as Active NFFEs (Non Financial Foreign Entity). It is important to understand the definition of an Active NFFE, versus a Passive NFFE when completing the form (see box glossary for more on the terminology).

1. Active NFFE
   An entity qualifies as an Active NFFE if it is an entity and, for the preceding calendar or fiscal year, less than 50 percent of its gross income is passive income. In addition, the weighted average of the percentage of assets held by the entity that produce or are held for the production of passive income (weighted by total assets and measured quarterly) is less than 50 percent. The value of a NFFE’s assets is determined based on the fair market value or book value of the assets reflected on the NFFE’s balance sheet (as determined under either a US or an international financial accounting standard).
2. Passive NFFE
   Generally, passive income means the portion of gross income that consists of dividends, interest, income equivalent to interest, annuities, rents, and royalties (other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees), and other passive types of income. Passive income does not include:

• Any income from interest, dividends, rents or royalties received or accrued from a related person to the extent such amount is properly allocable to income of such related person that is not passive income.
• Certain property sold by a foreign entity that regularly acts as a dealer in property.

It is important to fully understand the applicable definitions in order to properly complete Form W-8BEN-E (see box “Glossary”), explain the experts at Marcum LLP*.

We will gladly assist clients in navigating sometimes complex tax forms required by the US tax authorities.

Mark Chaves, Partner, Co-Leader International Tax Services, Marcum LLP*, Miami, Florida, USA

For further information please contact:

Mark Chaves, Partner, Co-Leader International Tax Services, Marcum LLP*, Miami, Florida, USA
Email: mark.chaves@marcumllp.com

*Marcum LLP is a separate and independently owned and operated firm that cooperates with ECOVIS International and provides accounting, tax, and audits services in the United States of America. Marcum LLP is not a member of the ECOVIS International network.