The figure of Qualified Intermediary
- QI Definition
- Advantages and Obligations
- Loss of QI status
- Relevant payments
- Customer Identification
- Periodic reporting
The Qualified Intermediary (QI) is a non-US financial intermediary that has signed the QI Agreement with the IRS. The QI Agreement is governed by Article 1441 of the US Internal Revenue Code.
The agreement remains valid for six years and the QI entity is periodically subject to an external audit to confirm its compliance with the terms of the agreement.
The IRS issues a Qualified Intermediary Employer Identification Number (QI-EIN) to the QI. It must be used whenever it acts as a QI.
The QI can choose whether to become a Primary Withholding QI or not. A QI that assumes Primary Withholding Responsibility assumes primary responsibility for deducting, retaining and depositing the appropriate amount from a payment to the IRS.
Advantages and Obligations
The main advantage of QI status is that it has a reduced withholding tax for its non-US clients (NRA clients), which is currently 30%.
The QI, in order to be able to apply this reduced rate, has to support a number of obligations, such as:
- Identify and receive your customers’ documentation.
- Prepare the omnibus accounts, i.e. the QI accounts, for the rates to be applied under the QI regime.
- Communicate the names of customers with U.S. citizenship.
- Report annually to the IRS the U.S. proceeds of its clients and the withholding taxes applied.
- • Periodic Compliance, Governance & Review.
Loss of QI status
The QI may lose its status through unilateral notification by the IRS. Cases of loss of status are regulated in Section 11 of the QI Agreement. They mainly are:
- Changes of circumstance (acquisition of the QI, change of the business of the QI, new KYC rules that no longer comply with US regulations, etc.).
- Merger or acquisition with other QI.
- Default events (failure to perform a material duty or obligation under the QI Agreement even if the Responsible Officer was aware of it or should have been aware of it).
Relevant payments by the QI entity are US source income, typically coupon payments and US dividends deposited in dedicated QI accounts.
Relevant payments are governed by Sections 2.68 and 2.69 of the QI Agreement, and can be broken down into:
- Reportable Amounts: payments received from non-US customers (NRA Clients)
- Reportable Payments: payments received from customers resident in the United States for tax purposes.
In order to apply reduced taxation to its customers (which may also be zero), the QI must require valid documentation, defined by the QI Agreement.
A customer is documented if the QI has a valid W-8BEN form filled in by the customer, or if it has obtained all the required documentation according to the IRS-approved Know-Your-Customer Rules (KYC rules).
A customer is undocumented if the QI has not received the W-8BEN form or KYC documentation, or if they are incomplete or no longer valid.
Every year, by 15th March, the QI must send the IRS a series of tax returns on the income received by its customers during the previous calendar year.
For NRA customers, returns are:
- Forms 1042-s,where Reportable Amounts received from non-US customers are documented. Forms are divided according to the type of income, withholding applied and the type of customers (individual, FTE, NRA, etc.). It is possible to extend the deadline of 30 days, by filling in the form 8809.
- Form 1042, where the information present on all forms 1042-S is summarized. It is a fiscal document, as it identifies the eventual credit or debit balance towards the IRS. It is possible to extend the sending of six months, by filling in form 7004.