Avoid double taxation when selling to the U.S

Introduction

We sell digital products in AWS Marketplace, Azure Marketplace and Udemy - see our products page for detail. The end customers of our products are located around the world, including the Unites States of America. All the aforementioned platforms a located in the U.S. This means that they comply with the U.S. tax laws both on the state and federal level. Internal Revenue Service (IRS) is responsible for collecting the federal taxes, which are relevant for this article. Foreign (e.g. European) corporations that sell (digital) products or services to U.S. customers need to prove to IRS that it should not withhold federal taxes from the income coming from U.S. end customers. The goal of this article is to help European corporations (companies) avoid double taxation: first by the IRS and then by the tax office of its own home country. We have all the basic information that a typical European corporation (company) needs to do to avoid double taxation when selling services or digital products to U.S. end customers.

DISCLAIMER: we’re not legal experts, so take what we claim here with a grain of salt. Also remember to do you own research. It is your responsibility to get this right, not ours. Messing this up could have legal implications for you. Also note that we assume that your corporation is a typical limited company whose shares are owned by domestic entities (e.g. individuals). This may or may not be true in your case.

International tax treaties between the U.S. and other countries

The U.S. has signed tax treaties with many other countries to prevent double taxation. In case of Finland the relevant treaty is the income tax treaty or “Tax convetion with the republic of Finland” from 1989. Your country probably has signed a similar treaty with the U.S. which you should definitely read: the language and terms in the treaty are a key to understanding the forms you need to fill.

In this article we use Finland and the aforementioned treaty as an example as that’s our country of residence. We also assume that the corporation is a “limited [liability] company” (Osakeyhtiö in Finnish). Despite the assumptions the information here should be applicable, with small changes, to other countries in the European Union.

Avoid double taxation by filing the W-8BEN-E form

All the platforms we’ve published products in (AWS Marketplace, Azure Marketplace, Udemy) provide a “tax wizard” to guide you through filling in the relevant W-8BEN-E form. With the form you prove to IRS that your corporation should only be taxed in its home country. A corporation (company) that is 100% based in Europe and does not have a permanent presence (e.g. office) in U.S. should be able to avoid double taxation from IRS. We cover the key sections in the W-8BEN-E form below.

NOTE: if you get a question about “Withholding rate” you should select 0%. The other option is probably 30%, which is the wrong answer, because we’re interested in avoiding, not paying, double taxes.

Part I: Identification of Beneficial Owner

  • Name of organization that is the beneficial owner: the name of the corporation

  • Country of incorporation or organization: where the corporation is located (e.g. Finland)

  • Name of disregarded entity receiving the payment (if applicable, see instructions): for a limited company leave this empty. For an explanation of the term “disregarded entity” look here for example.

  • Chapter 3 Status (entity type): for a limited company select “corporation”.

  • Chapter 4 Status (FATCA status): don’t check any checkboxes. Foreign Account Tax Compliance Act (FATCA) only applies to “foreign financial Institutions and certain other non-financial foreign entities” and not a typical limited company.

  • U.S. taxpayer identification number (TIN), if required: check “not applicable”. You’re not paying taxes in the U.S.

  • GIIN: leave this empty. It is related to FATCA, above. For details look here.

  • Foreign TIN: this is the required. If necessary, select the country first, then add your corporation’s Business ID (“Y-tunnus” in Finnish) to this field. The correct format should be 1234567-1. Don’t use your corporation’s VAT ID here.

Part II: Disregarded Entity or Branch Receiving Payment.

  • This part is related to FATCA, above. You can leave it empty.

Part III: Claim of Tax Treaty Benefits

  • Check the “The beneficial owner is a resident of” checkbox. Fill in the corporation’s country of residence there.

  • Select the “The beneficial owner derives the item (or items) of income for which the treaty benefits are claimed…” checkbox. In case of a normal corporation the eligible “item of income” is “business profits” or similar. The tax treaty between your country and the U.S. should list all the applicable “items of income”. For example, Article 7 in the tax treaty between U.S. and Finland explain what “business profits” are. It is possible that the “tax wizard” of the marketplace is able to select the correct article for you as you select the country for your corporation.

  • Check the “Company that meets the ownership and base erosion test” checkbox. By doing so you claim that entities in the corporation’s home country own the majority of its shares. A more detailed explanation is available in this document.

Parts IV - XXX

These parts are not relevant for a limited company: you can just skip them. Tax wizards don’t usually even show these parts of W-8BEN-E to you, although the PDF printout you can download might include them.