n-01-11.pdf

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# Part III

## Administrative, Procedural, and Miscellaneous

Withholding and Information Reporting on Payments to Financial Institutions in
U.S. Possessions

Notice 2001-11

Corporations and partnerships that are organized under the laws of a
possession of the United States are generally treated as foreign persons for
purposes of section 1441 and the regulations thereunder (relating to the
withholding of tax on payments to foreign persons). See section 881(b)(1) for
exceptions to this general rule. Financial institutions organized under the laws of
a U.S. possession ("possessions financial institutions") have noted that, to the
extent they act as intermediaries (that is, as agents for others), the regulations
under section 1441, as in effect on January 1, 2001 (the "new withholding
regulations"), will require them to function as nonqualified intermediaries.
Payments of U.S. source income made to nonqualified intermediaries are
generally subject to 30-percent withholding (or 31-percent withholding in the case
of deposit interest and certain payments on short-term obligations) unless the
nonqualified intermediary provides documentation from, and other information
relating to, customers on whose behalf the nonqualified intermediary acts that
supports a reduced rate of withholding. See section 1.1441-1(b)(1) and 1.1441-
1(e)(3)(iii) and (iv). Possessions financial institutions have commented that the
requirement to provide a withholding agent with information relating to the

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possessions financial institution's customers should not apply to them because
they are subject to all of the withholding and information reporting requirements
that apply to U.S. withholding agents under Chapters 3 and 61 and section 3406
of the Internal Revenue Code and because they are subject to direct audit
supervision by the Internal Revenue Service.

Treasury and IRS agree that, for the reasons described above,
possessions financial institutions should not be required to act as nonqualified
intermediaries under the new withholding regulations. Accordingly, until further
notice, any possessions financial institution will be treated as a U.S. branch
under section 1.1441-1(b)(2)(iv) of the new withholding regulations. As such, it
may agree with a withholding agent from which it is receiving payments to be
treated as a U.S. person. See section 1.1441-1(b)(2)(iv)(A) and (E). Under the
general rule of section 1.1441-1(b)(1), payments of U.S. source income to a
possessions financial institution that agrees to be treated as a U.S. person will be
treated as made to a U.S. payee and therefore not subject to withholding under
section 1441. The possessions financial institution shall be subject to all of the
withholding and reporting obligations of a U.S. withholding agent under chapters
3 and 61 of the Code and section 3406. For purposes of this notice, the term
financial institution has the same meaning as in section 1.1441-1(c)(5).

A possessions financial institution that agrees to be treated as a U.S.
person must provide a withholding agent with a properly completed Form W-
8IMY on which it evidences its agreement to be treated as a U.S. person. The
possessions financial institution should not provide a Form W-9. See section
1.1441-1(b)(2)(iv). In addition, a withholding agent making a payment to a
possessions financial institution that agrees to be treated as a U.S. person must
report payments made to the institution on Form 1042-S. See section 1.1441-
1(b)(2)(iv) and 1.1461-1(c)(4)(i)(C)(1).

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# Contact Information

The principal author of this Notice is Carl Cooper of the Office of the
Associate Chief Counsel (International), Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington, D.C. 20224. For further information
regarding this Notice contact Mr. Cooper at 202-622-3840 (not a toll-free call).