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Tax witholding for U.S. customer paying Israeli vendor

I work for a sole proprietor LLC based in the United States.

We don't work with many international vendors, but we are currently working with a consulting firm based in Israel.

It is my understanding that we would need to withhold 30% of their billings to be remitted to the U.S. Treasury to cover taxes for them, much like we would withhold payroll taxes for an employee is the U.S.

Can anyone confirm is my understanding is correct, or if there would be certain situations where withholding the 30% would not be required and/or appropriate?

Thank you!

Answers

Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

There might not be any US tax due. The key items to consider are the nature of the activities performed by your vendor and where they were performed. Even if the income is taxable to the Israel vendor under US statutory law, the Israel-US income tax treaty may provide benefits.

Regardless, you need to obtain one of the W-8 series of forms from the vendor. The correct form is likely W-8BEN, but I would need more facts. I'd be pleased to discuss off-line.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anon;

Check articles 16 and 17. Basically, if the person or persons performing the services are resident in the US for less than 183 days, there is an exemption. The intent (I believe) is to prevent people from working here but not reporting taxes here. If they are here in excess of 183 days, they really need to file and pay (and you need to withhold).

Cheers,

Keith
http://www.irs.gov/pub/irs-trty/israeltech.pdf

Note also the instructions for W-8 here:http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

Per Marc, have them fill out the W-8BEN and claim their exemption, then you don't need to withhold. (Note a foreign corp is a "person" when you're reading this stuff).

Anonymous
(Chief Financial Officer) |

If the service is provided outside of the US, there is no withholding requirement. If the payment is related to services provided by the vendor while visiting the US, or for intellectual property rights, royalties, etc; there might be an 20% - 30% withholding requirement, depending on the nature of the activities.

The reasoning behind the latter is that the IP is protected under the US rule of law. If you get protection, you pay for that protection. (Similar to 'no taxation, without representation').

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Having worked in this realm for years; a non-US tax resident working for a US company OUTSIDE of the US, no tax.

A non-US tax resident doing work IN the US, tax unless: a) they are a citizen of a Treaty Country and b) they provide both a W-8BEN and a Certification of Tax Citizen that a) jibes with the W-8BEN and "looks" legitimate to the company (you). However:

Then you need to read that particular Treaty and determine if the preceding is accurate.

I have rejected "Certifications" because they look either like forgeries or were from non-governmental entities, thus rejecting the W-8BEN and withholding 30% taxes. It was then up to the vendor to file with the IRS and get their money back.

By the way, a US-Resident (non-citizen) who resides here for 183 days is considered a US-Tax Resident. US-Tax Residents and US Citizens are always taxed for income from any source, from any country. Taxes paid in a foreign country can be (there are limits) claimed on your US Tax Return

Disclaimer: Seek a tax maven who is skilled in doing multi-country tax returns. I am not a Tax Maven, in fact I don't even do my own taxes.

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