In recent years, more Israeli businesses have been required to complete Form W-8BEN-E when opening a bank account. This requirement arises from an IRS regulatory reform initiative, also adopted by Israeli tax and banking authorities. But what is this form, and why is it important?
What is Form W-8BEN-E, and Why Does It Matter?
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, aims to help the U.S. government identify foreign bank accounts held by U.S. citizens to reduce tax evasion and money laundering.
As a result, non-U.S. individual investors in the U.S. must complete Form W-8BEN, while companies and partnerships must fill out Form W-8BEN-E. This form classifies non-U.S. business entities for tax purposes and determines tax withholding requirements on their income.
For Israeli financial institutions, Form W-8BEN-E is essential for identifying taxable foreign entities and distinguishing them from U.S. taxpayers.
Purpose of Form W-8BEN-E
The form serves two key functions:
- Classifying Foreign Companies and Partnerships – Identifies non-U.S. entities for tax purposes.
- Determining Withholding Tax Rates – Establishes the applicable tax rate on U.S.-sourced income.
Certain income types, such as interest, dividends, rental income, and U.S.-based service revenue, are subject to a standard 30% withholding tax for foreign investors. Since the form includes 31 classification options, professional guidance from a U.S. tax expert is recommended.
Company Classifications on Form W-8BEN-E
The form classifies companies into two main categories:
- Foreign Financial Institution (FFI) – Includes banks, investment funds, and insurance companies.
- Non-Financial Foreign Entity (NFFE) – Divided into:
- Passive NFFE – Earns more than 50% of income from passive sources (e.g., interest, dividends, capital gains, rental income).
- Active NFFE – Earns more than 50% of income from active business operations.
Passive NFFE entities must identify all U.S. shareholders. Each classification requires specific information to be completed in designated sections.
Risks of Incorrectly Completing Form W-8BEN-E
Accurate completion of the form generally does not affect Israeli companies’ tax obligations unless they have passive U.S.-sourced income subject to withholding tax.
However, many Israeli bankers and accountants are unfamiliar with U.S. tax regulations, leading to potential mistakes. Errors such as incorrect classification or incomplete details can result in penalties, sanctions, or unnecessary withholding taxes. This underscores the importance of consulting a qualified U.S. tax professional.
Consequences of Not Submitting Form W-8BEN-E
Refusing to complete the form can result in:
- Bank account denial or closure.
- Automatic 30% withholding on U.S.-sourced income.
Types of U.S. Income Subject to Withholding Tax
The following income types are subject to a 30% withholding tax for foreign entities:
- Interest earnings from U.S. sources.
- Capital gains from U.S. investments.
- Royalties from U.S.-based intellectual property.
- Rental income from U.S. properties.
- Fees for services provided in the U.S.
Differences Between Forms W-8BEN-E and W-8BEN
Form W-8BEN (for individuals) is relatively simple, requiring only basic personal details and a signature. In contrast, Form W-8BEN-E is more complex, offering 31 classification options with unique reporting requirements. Incorrect classification can have severe financial and legal repercussions.
Completing Form W-8BEN-E: Key Considerations
For Individuals and Sole Proprietors
Form W-8BEN requires:
- Full name
- Address
- Country of residency
- Tax treaty details (if applicable)
Israeli residents can benefit from the U.S.-Israel tax treaty, which may lower their withholding tax rate. A U.S. tax professional can provide details.
For Companies and Business Entities
Form W-8BEN-E requires:
- Proper classification under FATCA (FFI or NFFE)
- Identification of shareholders for Passive NFFE entities
- A legally authorized signature
Only a company director, CEO, or officer—not just an attorney or accountant—can sign the form. Once completed, it must be submitted to the bank managing the corporate account. Most banks require an updated form annually.
Conclusion
Any Israeli entity engaged in U.S.-related financial or business activities may need to complete Form W-8BEN-E (for companies) or Form W-8BEN (for individuals). Since improper filing can result in sanctions and penalties, professional assistance is highly recommended.
Israeli banks often lack the expertise to help complete these forms correctly. Therefore, consulting a firm specializing in U.S. tax compliance and advice in Israel, such as MasAmerica, can ensure accurate filing and prevent costly errors.
