View Full Version : Foreign sole proprietor, royalties, EIN, W-8BEN

Jan 16, 2010, 04:12 AM

I am a registered sole proprietor in Croatia. I develop computer games which are sold by some US companies and for that I receive royalties. Croatia and USA still hasn't signed the tax treaty therefore I didn't bother (yet) to get a US TIN because with or without it 30% of my royalties must be withheld and paid to the IRS. However, recently my country joined the NATO and I have a feeling that tax treaty is soon to be signed, so I have several questions:

1. Am I correct in assuming that the proper tax identification number to get is EIN since I am not just a plain individual but a sole proprietor?

2. When preparing the SS-4 should I fill the name of the country in the line 9b?
My guess is not, because 9b is only for corporations, and IRS supposedly derive the country from the mailing address in line 4b. I suppose it shouldn't make any difference if I fill 9b too, but again, I wouldn't want to create an inconsistency of my type of entity.

3. Should I fill the section 16 (principal activity) and 17 (principal line of merchandise)?
At one place on the IRS website it says that foreign persons who apply for EIN only for the tax treaty purposes should not fill anything but 1-5b, 7a-b, 8a, 8b-c, 9a, 9b, 10 and 18, but in the instructions for the SS-4 they say that 16 and 17 must be filled. I am confused.

4. If 16 and 17 must be filled then what should I put there?
I suppose "16 other - software development", "17 - software", but I am not certain.

5. When I prepare the W-8BEN what should I put in the line 1 that asks for the "Name of the individual or organization..." - should I put my own name, or my trade name of business?

The business name of my registered sole proprietorship is different than my own name, and in the SS-4 instructions IRS says that one must use either legal name (SS-4 line 1) or trade name (SS-4 line 2) for all subsequent tax returns. In other words it seems to me that this is arbitrary, but once chosen must be stick to.

However, for example, in the past I received couple of 1042-S, and the company that withheld the 30% of my royalties have written both my trade name and my own name, one below another in that order, followed by my address. They have a form 1042-S in which 13a-e fields are joined to a one big field in which they put the aggregated recipient's (i.e. my) information.

7. Finally, am I correct in assuming that if my only income from the US is in form of royalties for which the payer withheld and paid the taxes, then I as a foreign citizen and a non-US resident do not have to file an annual tax return to the IRS?

I apologize for so many questions, but I would like to understand the US tax system better.

Thanks in advance to anyone who is willing to answer my questions.

Five Rings
Jan 17, 2010, 02:57 PM
Unless or until there is a treaty you will get hit with the 30% tax.

Don't complicate your life. As a sole proprietorship you merely apply for an ITIN and, upon receiving that, claim the treaty benefit for royalties (generally 5-10%) on the W8-BEN once a treaty is ratified by the Senate and Croatia.

Since you are a nonresident alien performing independent personal services without the United States you have no obligation to file a US tax return, your withheld tax fulfilling your tax obligation to the US.

Jan 19, 2010, 03:31 AM
Five Rings, thank you for your answer. Or should I say obrigado... ;-)

Yes, ITIN is one way to go. However, many people have had serious troubles getting ITIN. Sometimes even after several attempts they wouldn't get it and each cycle can take up to 2 months. Some of them even gave up (and that includes some UK and Australian citizens) and continued receiving royalties taxed at the 30% rate regardless of fact that their country has a better deal with the USA, simply because of some unknown reason the IRS has been refusing to issue them the ITIN.

On the other hand, getting EIN as I hear is quite easy. It seems that it can be done in 10-15 minutes over the phone, no matter from what country. Even some individuals, who doesn't have any kind of registered business in their country, managed to got it without problems and were able to use the EIN for a W-8BEN to get a reduced tax rate.

The last I heard is that some US companies that are paying royalties to photographers managed to make a deal with the IRS by which foreign authors don't need to provide any kind of US tax identification number on W-8BEN, but nevertheless get a reduced tax rate if such exists between their country and the US. Perhaps the IRS is lately overwhelmed with issuing ITINs because of foreign recipients of royalties for digital goods so they decided to made some exceptions. If this is indeed so, hopefully the same practice will eventually get from photography business into software business to. Not to mention that companies that sell rights to use photographs withhold tax only for royalties for licenses sold to USA customers, while software distributors withhold tax for each sale of software license no matter where the end customer lives.