US Grants for Non-Profits and US Withholding Tax

13/11/20

The US is a large market to apply for and receive grants of funding for certain non-profits including educational institutions, NGOs, and academic hospitals (for example). When a Dutch non-profit organization receives a grant from a US party there may be US withholding tax on this grant, therefore reducing the gross amount of the grant by up to 30%. While such withholding tax can be reclaimed by way of filing a US tax return, the costs of such compliance filings can sometimes exceed the benefit of the refund. The result is lost grant income. It is therefore important to recognize when a non-profit is applying for a grant from a US party in order to analyse and certify a reduced rate of tax withholding prior to the grant being paid.

Non-profits must strike a balance in this exercise: if there is uncertainty as to whether a non-profit will receive the grant then it does not make sense to incur costs to perform this analysis until such certainty is obtained. However, if a non-profit waits until payment date to address the analysis, then they will be faced with further payment delays. In some cases, the US party paying the grant may not delay payment but instead will proceed directly to withhold 30% tax.

Getting documentation in order prior to payment of US grants

When a Dutch non-profit receives the notice that they have been awarded a US grant, the US party paying the grant will be obligated to request what is called a Form W-8 from the non-profit. There are many types of Forms W-8 but the most common is the Form W-8BEN-E, which a non-profit completes to certify to the US party that the non-profit is the beneficial owner of the grant income (and they are not acting on behalf of someone else, for example). This form is also used to certify that the non-profit is eligible for a reduced rate of tax withholding below 30%, and perhaps even 0% depending on the circumstances of the non-profit. Where a non-profit fails to complete the Form W-8, or completes it incorrectly, the US party will withhold tax at the full rate of 30%. More information and samples of Form W-8BEN-E, as well as the other types of Forms W-8, can be found at the Internal Revenue Service (“IRS”) website. https://www.irs.gov/forms-pubs/about-form-w-8-ben-e

How does a non-profit get a 0% rate of US tax withholding?

Where the Dutch entity is considered the beneficial owner of the US grant payment, a so called “treaty analysis” must be performed to determine the reduced rate of withholding tax for which the non-profit may be eligible. In many straightforward cases it is possible for Dutch non-profits to reduce the US withholding tax to 0% under the US-Netherlands double taxation treaty. A number of criteria must be met so it is important to document the application of each of those criteria before concluding eligibility for the 0% rate. These criteria include a so called “limitations on benefits” article which prevents non-Dutch residents from accessing treaty benefits (i.e. reduced tax withholding rate benefits) intended for Dutch residents. Luckily, this limitations on benefits article should not prevent a Dutch non-profit from accessing the 0% rate in the case that its main beneficiaries are resident in a third country (for example, a Dutch non-profit building schools in Ghana for the benefit of residents of Ghana).

What About FATCA?

You might observe that over 90% of the content of a Form W-8 is about the FATCA classification of the non-profit. FATCA stands for Foreign Account Tax Compliance Act and is a set of legislation aimed at preventing off-shore tax evasion. US payers must confirm that the parties they are paying are compliant with FATCA before paying them US income, otherwise the 30% withholding tax can still apply. In general, if a payment is non-financial in nature then it is not subject to FATCA at all and these sections of the Form W-8 can be left blank. However, a non-profit should confirm up front that this is how the US party paying the grant will treat the income before leaving these sections of the Form W-8 blank. A disagreement in treatment could lead to 30% withholding tax. In the case that FATCA does apply, the non-profit will not likely be classified as a Financial Institution (or “FFI”) but will still need to otherwise confirm its status as either an Active Non-Financial Entity or Passive Non-Financial Entity.

What does it mean for you?

Non-profits should balance receiving the optimal withholding rate (and thereby maximizing their grant income) with the costs to analyse their eligibility for such a rate. Assuming the non-profit is eligible for the optimal withholding rate without the proper analysis can create risk for the organisation: the authorised signatory of a Form W-8 must sign the document under penalties of perjury. Certifications are made in the signature section including that the information on the form is true, correct, and complete to the best of the signatory’s knowledge. It is important that the signatory is adequately informed as to the content and claims made within before signing. Also note that there could be other considerations for receiving US grants not covered here, such as Dutch gift tax.

Are you a Dutch non-profit actively applying for US grants? Contact our US withholding tax experts today to discuss how we can assist you in the above analysis well in advance of payment date.