The private equity tax compliance process is a challenge, especially when there are US investors or US investments; funds with both are in for quite a show.
These funds are often required to prepare K-1s, PFIC statements, and file innumerable other paper documents via post or even fax (there are rumours the IRS earns a commission from the lumberjack union). It is like queuing to view the production “Financial Bureaucracy”, starring the US. However, the US knows it is more in demand than Margot Robbie and charges steep ticket prices for entry: federal, state, and for those people viewing the show from Broadway, a city tax as well.
Admission for those visiting from out of the country costs 30% of their US source income, unless they are able to move behind the velvet ropes to stand in the VIP queue of reduced or even nil withholding.
This ticket to tax eminence is the Form W-9 or W-8 (including the world’s most hated form the W-8BEN-E and its 8 pages of confusion), but just having a completed form doesn’t guarantee you will be bumping elbows with CalPERS. The investor needs to get past the bouncer reviewing the form (aka the US withholding agent) and there are many ways the forms will be rejected like a 17-year-old’s fake ID:
- using the wrong version
- failing to tick a box
- or providing an electronic signature on the wrong form (because they are accepted on some forms but not others).
An invalid form results in full withholding.
As these forms can appear incomprehensible and the validation rules are complex, participating in the cycle can be tiresome for investors and funds:
- Fund requests form
- Investor completes form
- Fund finds tiny validation error and re-requests form
- Investor re-submits updated form
- After 3 years form expires and the process starts anew
It is clear to see why no one shares my love of US tax forms, the value they provide gets lost in frustration. However, at the end of the day, reduced withholding tax makes everyone happy. The age old saying that life is not about the destination, it’s about the journey…. is clearly not true in dealing with US tax forms! However, as my journey is filled with these things, please reach out if you have any questions.
A quick summary of US withholding tax forms:
W-9 Form
Used for all US Persons investing into a fund with US-source income. To view the form: IRS Form W-9 (2018)
W-8BEN Form
For Non-US Individuals investing into a fund with US-source income. To view the form: IRS Form W-8BEN (2021)
W-8BEN-E Form
For Non-US Entity Beneficial Owners investing into a fund with US-source income. To view the form: IRS Form W-8BEN-E (2021)
W-8IMY Form
For Non-US Entity Intermediaries investing into a fund with US-source income. To view the form: IRS Form W-8IMY (2021)
W-8EXP Form
For Non-US Governments and Tax-Exempt Entities investing into a fund with US-source income. To view the form: IRS Form W-8EXP (2017)
W-8ECI Form
For Non-US Persons Receiving US Business Income investing into a fund with US-source income. To view the form: IRS Form W-8ECI (2021)
