Windows Phone 7 - Avoiding 30% U.S. tax withholding for Limited Companies

Red Badger are currently working with Microsoft to develop a Showcase Windows Phone 7 application. As well as the joys of developing the application for this platform there are a number of far less exciting but necessary things that also need to be set up before your application can be placed on the marketplace. Some of these may include agreeing and signing a JMA (Joint Marketing Agreement) with Microsoft, registering at the Marketplace ($99 for a year - http://developer.windowsphone.com), providing the company VAT number and registering with the IRS. This blog is a brief guide to registering with the IRS if you are a Limited Company as apposed to an individual developer.

First and foremost, you may ask why you need to do this. If you are intending on developing applications for Windows Phone 7 or for any other US company that is going to pay you money, especially interest, dividends or royalties, the US will first take 30% of that amount in tax withholding and pay it to the US Government, leaving you with 70% of the rest (Which will then also be taxed by your country before you get your share). However, the US Government has tax treaties with a number of different countries/regions (List of countries with tax treaties here: http://bit.ly/aklpyE) which can give you a discount on the 30% rate or an exemption altogether. You will then only have to pay your resident country’s tax on the full amount.

If, like Red Badger, you are a UK company you will get full exemption from paying any tax withholding. To gain this exemption you need to fill in two forms:

1) IRS Form SS-4 - http://www.irs.gov/pub/irs-pdf/fss4.pdf

2) IRS Form W-8BEN - http://www.irs.gov/pub/irs-pdf/fw8ben.pdf

Form SS-4 you will need to send to the IRS to gain an Employer Identification Number (EIN). Once you have the EIN you will then need to fill out the W-8BEN form and send it to the company that will be paying you (in Red Badger’s case the W-8BEN goes to Microsoft).

There are a number of different ways that you can send the SS-4 form to the IRS (See instructions here: http://www.irs.gov/pub/irs-pdf/iss4.pdf) but I found the telephone service very helpful. The member of staff that took me through the process asked me the appropriate questions, filled the data directly into the IRS system and provided me with an EIN number over the phone 15 minutes later. If you mail the form to the IRS it will take at least 4-5 weeks. The telephone number to call the IRS to get an EIN is: 1-269-941-1099.

Filling out the forms…

Red Badger is a Limited Company formed of 3 founding partners. We have not had an EIN before and do not require a 3rd party designee. We are also based in the UK and are VAT registered. Lastly we do not have any notional principle contracts. The advice below on filling out the forms is based on these aspects, so if your situation is different you may have to fill the form out differently as well.

The SS-4 form is made up of 18 sections of required information. Example of the SS-4 form here: SS-4 Form Example (Replace placeholders with your data). Sections 12-15 do not need to be filled in.

The W-8BEN form needs the following information:

1) Part 1 – Company details including EIN number in Part 1 Section 6.

2) Part 2 – Check 9a, b and c (fill in country of residence in 9a). In section 10 enter article 12, 0% and Royalties as the type of income. (Note that this is the type of income for Windows Phone 7 Developers in the Windows Phone Marketplace. If you are not developing for Windows Phone 7 these 3 entries may be different. For different income types see your Country’s specific Tax Treaty agreement: http://bit.ly/aklpyE)

Example of the W-8BEN form here W-8BEN Form Example (Replace placeholders with your data).

Hopefully this blog will help you out and prevent any headaches or pockets that are not quite as full as they should be due to IRS issues. Red Badger can now get on with the fun part developing a kick-ass app for the launch of Windows Phone 7 .

Cain Ullah

CEO / Founder

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