Q. (cont.) We have received the W-8BEN-E, and they have a TIN number that matches the IRS records. They checked that they are a tax-exempt organization (nonprofit) and have indicated on Part III that they are claiming Article 12 and 0%. They don't have a permanent establishment in the U.S. Do we need to withhold the 30% or not?
A. Do we correctly infer that the payments for the license and support agreement is for software? Are you leasing the software for use by the university?
It would appear from all the facts provided, that the vendor has completed the W-8BEN-E correctly, with possibly one exception, and is claiming reduced withholding on the basis of the U.S.-U.K. Tax Treaty. The reference to Article 12 of the treaty is correct if your payments are royalty payments; but if the payments are for lease of the software (and software support services) for the university’s internal use, we believe that would be covered under Article 7—so if these are software lease payments, we think the treaty still applies, but by virtue of Article 7 rather than 12.
That the vendor is a non-profit does not necessarily relieve you of withholding and reporting, as in the U.S. on a 1099. Exemptions on foreign payments have a very limited application. Even if more detail were provided on the particulars here, we do not have the expertise here to advise you.
It appears that, non-profit status aside, you do not have to withhold, based on the W-8BEN-E treaty claim, though you must still report the payments on form 1042-S. But foreign payment withholding and reporting is a complex area, and we recommend consultation with a tax attorney.