Qualified Intermediary – An IRS view

Qualified Intermediary – IRS view

A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U.S. intermediary) that has entered into a QI withholding agreement with the IRS.The QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment – and can thus be treated as the payee.

In this situation, the QI is required to withhold the tax.

You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI.

QI Withholding Agreement Foreign financial institutions and foreign branches of U.S. financial institutions can enter into an agreement with the IRS to be a qualified intermediary. A QI is entitled to certain simplified withholding and reporting rules. In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment.


A QI is not required to forward documentation obtained from foreign account holders to the U.S. withholding agent from whom the QI receives a payment of U.S. source income. The QI maintains such documentation at its location and provides the U.S. withholding agent with withholding rate pools. A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding.

A QI is required to provide the U.S. withholding agent with information regarding U.S. persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding.

If a QI obtains documentary evidence under the know your customer rulesthat apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement.

Form 1042-S Reporting A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary (NQI) or a flow-through entity.

Collective Refund Procedures A QI may seek a refund on behalf of its direct account holders. The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI.

U.S. Branches of Foreign Banks and Foreign Insurance Companies Special rules apply to a U.S. branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. If you agree to treat the branch as a U.S. person, you may treat the branch as a U.S. payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U.S. branch on which the agreement is evidenced. If you treat the branch as a U.S. payee, you are not required to withhold. Even though you agree to treat the branch as a U.S. person, you must report the payment on Form 1042-S.

So basically, through the “know your client” rules, the IRS provides the few perks listed above – pooled rate and reduced withholding rate, and the QI must receive valid W8’s or W9’s in order to confirm to the IRS that there are no Americans pretending to be foreign and avoid paying taxes.  For performing this duty for the IRS, you must also have performed 2 external audits and a yearly internal audit of the QI program.

If found in violation of this agreemnt, there is a fine of up to $100,000 per offense.

Make sure to keep all records in order – provide the IRS with one main contact for the QI program and have your yearly internal audits performed.  Charging extra to clients for being their QI makes sense in order to cover the costs of the external audits.

More to come…

Author: Warren Orlans

Welcome to inTAXicating. inTAXicating has been published since 2008 to provide clarity around Canadian taxation issues, primarily related to the Canada Revenue Agency. As the primary author, Warren Orlans, has over 20-year's experience in the taxation industry, 11 of them working for the Canada Revenue Agency (CRA), and 7-years working in the private sector Managing the tax departments for large financial institutions. If you have a collections, compliance or audit issue with the CRA, inTAXicating is the place you need to contact. inTAXicating works in strategic partnership with amazing accountants, tax lawyers, insolvency practitioners, mortgage brokers, debt counselling experts and much more. If you have a tax question, email it to info@intaxicating.ca or to intaxicatingtaxservices@gmail.com.

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