In the past few years more and more Israeli businesses are required to sign a form called w8beb-e as part of the process of opening a bank account. This requirement is a result of regulatory reform initiative by the IRS that was also adopted by the tax and banks authority in Israel. What is this all about and what does it have to do with us? Continue reading for all the information.
What is a w8ben-e form and what does it have to do with us?
In the year 2010 the law on tax enforcement on foreign accounts was passed (FATCA, which stands for “Foreign Accounts Tax Compliance Act”). This law was created to allow the identification of bank accounts held by citizens of the United States, in order to minimize the tax evasion and money laundering phenomenon in the United States.
Following this legislation foreign investors in the United States, who are not citizens of the United States or green card holders, are required to sign a designated form called w8ben. Meanwhile, companies and partnerships are required to fill out a form called w8ben-e.
This form is designed to classify business entities that are not American and other foreign corporations for the different financial and banking institutions, in order to allow withholding taxes from their income. In relation to Israeli institutions, this form is designated to identifying taxable entities that are not American and so their conduct toward the IRS is different from that of citizens and residents of the United States.
What was the w8ben-e form meant for?
The main purpose of the w8ben-e form is to allow the classification of corporations and companies as foreign (meaning tax entities founded outside the borders of the United States) and adjust their tax report requirements to the IRS according to that classification.
The purposes of the form
The w8ben-e form was meant for 2 main purposes:
- Classification of foreign companies and partnerships as non – American entities.
- Defining the amount of withholding tax taken from the income generated by these companies in the United States. It’s important to know in relation to this that there are different types of income for which there is a set rate of 30% deductible tax when it comes to a foreign investor, including interest earnings, dividends, income from rent in the United States and income from services provided in the United States.
Note that in this form the are 31 different options for classifying companies and financial entities and that is why it is recommended to use the services of a professional specializing in American taxation while filling it out.
How do we classify a company in the w8ben-e form?
The w8ben-e form has 2 options for classifying a company or financial entity and they are:
- FFI classification: which stands for Foreign Financial Institutions.
- NFFE classification: Non-Financial Foreign Entities.
In most cases Israeli companies and entities are classified under one of the following categories:
- Passive NFFE – a passive foreign entity that is not financial / banking.
- Active NFFE – an active foreign entity that is not financial / banking.
This sub-classification is decided based on the nature of the company’s activity and different income assessments.
Although as a general rule, companies that have more than half of their income generated from passive income sources in the United States (for example: interest earnings, dividends, capital gains, income from rent and such) – will be classified as belonging to the first category, while companies that have more than half of their income generated from non – passive avenues will be classified in the second category.
From the moment a certain company is classified as a passive foreign company that isn’t banking related, an identification of all stockholders who are American entities. In any case, any one of these classifications required a certain information to be filled in designated field on the w8ben-e form.
What are the ramifications of filling out a w8ben-e form incorrectly?
When a w8ben-e form is filled out in a precise and correct way, it usually won’t affect Israeli companies taxwise, unless the company has passive income coming from the United States that are bound by withholding tax.
The problem is that most bank employees as well as accountants in Israel aren’t knowledgeable enough in the American tax world. That is why, in most cases, they can’t help their clients with filling out the w8ben-e form that includes 8 pages and many sections that have to be understood in order to correctly fill out the forms.
Unfortunately, choosing the wrong classification of a company and filling the form out only partially or incorrectly can lead to fines, sanctions, and withholding taxes from receipts that are not necessarily justified.
This is where the great importance of using the help of a certified professional, who is well versed in the field of taxation in America ad know how to help fill out a w8ben-e form exactly according to the details of the taxpayer comes into play.
What could happen if there’s a refusal to sign a w8ben-e form?
Purposefully not filling out a w8ben-e form could lead to severe consequences, including:
- The closing of bank accounts or the refusal to open them to begin with.
- Withholding tax at the draconian rate of 30% on the account intake.
Types of income in the United States that are vulnerable to withholding tax
There are a few kinds of intake vulnerable to withholding tax at a 30% rate in the United States and among them are:
- Interest earnings in the United States
- Income from capital gains in the United States
- Income from royalties in the United States
- Income from profit yielding properties that create in to their owners through rent in the United States
- Income from services provided in the United States
The main differences between the w8ben-e form to the w8ben form
While a w8ben form is considered a relatively simple form that mainly requires filling in personal information and the tax – payers’ signature, a w8ben-e form is a very complicated document and filling it out correctly requires an understanding in the American tax laws. As evidence: the w8ben-e form has over 31 different options to classify the taxable entity and a variety of options for filling out the relevant information under each of them.
Choosing the wrong classification during the filling of the form is enough to create harsh sanctions for the party handling the form. This is because according to the FATCA law of enforcing taxes on foreign accounts, every entity is required to report to the IRS in accordance to different instructions and not complying with these instructions leads to fines and other punishments.
What is important to keep in mind when filling a w8ben-e form?
This is a surprise to many Israelis, but it’s important to know that if you don’t have an American passport and your business is not registered as an American company, you will be required to fill out a w8ben form (if you are independent or have and independent business) or a w8ben-e form (if you are owners of a company, partnership, or any other kind of business entity).
The form for independents and independent employers is, as mentioned, not very complicated. It consists of a single page, where you’ll be required to fill in your full name, address, and your residency.
If your country of residence has a tax treaty with the United States intended to prevent double taxation (Israel and the United States indeed have this treaty), you will be asked to fill in the withholding tax rate in the United States, in accordance to the percentage agreed upon in the treaty.
This information is available with accountants and tax advisors that specialize in American taxation. On the other hand, filling the form for companies and other types of corporations is much more complicated, as it requires a FATCA classification verdict of the entity with the FFI account ownership (NFFE, as we explained earlier).
At the end you will be required to add the handwritten signature of the person or power of attorney of your company. In this regard it is important to keep in mind that in case you are dealing with a corporate bank account registered to the company’s name, the owners would not be the stockholders but the company itself. Although, you can’t sign the form with the company signature, since the IRS is interested in identifying a single person, who takes legal responsibility for the validity of the information in the form.
That being the case, the person to sign the form has to be the director, CEO or in control of the company, and cannot be power of attorney alone (attorney or accountant). Finally, you’ll have to send the w8ben-e form to the bank where the corporate account is being handled, and most banks will ask you to fill out the form again once a year.
In summary
Every Israeli who has financial or commercial activities in the United States might be required to fill in a w8ben-e form or a w8ben form. A correct and exact handling of the form is critical, as previously mentioned, if you want to avoid unwanted sanctions and fines.
Since the banks in the country don’t provide their clients proper help in filling out these forms, in case you need assistance handing them in, it is very advisable that you contact a company dealing with American tax consultation like “America tax”, that can direct you and save you needless mistakes.
