Qualified Intermediaries – Foreign Recipients of U.S. Income
Foreign financial institutions that enter into an agreement with the Internal Revenue Service, known as qualified intermediaries (Qls), may serve as withholding agents. If so, they are fully liable for all taxes owed by a foreign beneficial owner and must report the income paid to each recipient on a Form 1042S (filed annually). Without this withholding requirement, there would be no effective way to enforce taxpayer compliance because foreign recipients are generally not required to file U.S. tax returns to report U.S. income.
Nonresident aliens and other foreign persons who earn U.S.-source income are required to report this income on Form 1042-S (Foreign Persons’ U.S.-Source Income Subject to Withholding). This income is subject to a flat, statutory withholding tax rate of 30 percent. However, this rate is frequently reduced or eliminated by an income tax treaty or statutory exemption.
Income that is exempt from taxation because of a tax treaty or certain other exemptions must still be reported. U.S. individuals, corporations, or other entities paying U.S.-source income to foreign persons are required to withhold taxes on this income (except where statutory or treaty exemptions apply) or to appoint a withholding agent (normally a U.S. financial institution).
