We pay a foreign vendor an annual license fee as a subscription to their software accessed from U.S. servers. They have provided Form W-8 qualifying them for 0% withholding tax treaty benefits. Is the license fee reportable U.S. source income?

Follow

Software, depending on circumstances, can be merchandise (no reporting), a lease (rental income to payee), or royalty (!) and income source (U.S. or non-U.S.) depends on type. In this case, you’re leasing the software. Source of rent income to the payee is determined by where you (payer) use it—in this case, the U.S.  The lease payments are reportable on 1042-S (and would be withholdable, but for the treaty claim).

Have more questions? Submit a request

Comments