I manage a Canadian corporation which resells non-exclusive computer software licenses on USB keys to US corporations and purchases these USB keys for resale from a Hong-Kong corporation with no place of business in the US or Canada. These licenses are similar to shrink-wrap licenses. Are these purchases by US residents subject to 30% withholding taxes in the US?
If they are, should a person that makes a payment of U.S. source income to my Canadian corporation withhold the proper amount of tax, report the payment on Form 1042-S and file a Form 1042 by March 15 of the year following the payment(s). Should the US purchasers be filing such forms even if they do not have to withhold taxes? Should we be providing them with Form W-8BEN?
Thanks
notaguru

I manage a Canadian corporation which resells non-exclusive computer software licenses on USB keys to US corporations and purchases these USB keys for resale from a Hong-Kong corporation with no place of business in the US or Canada. These licenses are similar to shrink-wrap licenses. Are these purchases by US residents subject to 30% withholding taxes in the US?===>>you mean US residents buy the the intangible assets from the Canadian corp? Then, yes; the Canadian corp is subject to US. tax at a flat 30% rate on certain kinds of income it receives from US sources. Sometimes an Income Tax Treaty negotiated with the US and canada can be used to reduce this tax rate.the US payor, also known as a ?withholding agent?, has responsibility for withholding the required tax and paying it over to the US Internal Revenue Service.


If they are, should a person that makes a payment of U.S. source income to my Canadian corporation withhold the proper amount of tax, report the payment on Form 1042-S and file a Form 1042 by March 15 of the year following the payment(s). Should the US purchasers be filing such forms even if they do not have to withhold taxes? =>> Forms 1042, 1042-S and 1042-T are the forms that a withholding agent must use to report payments to foreign persons of FDAP income that is U.S. sourced and any amounts withheld on such payments.
Form 1042 should be submitted to the IRS in order to report the total aggregate NRA payments, withholdings and deposits made by the withholding agent during the applicable year.
Form 1042-S is an information return. The withholding agent should submit these information returns to the IRS and the payee in order to report the payments and withholdings made during the year that are specific to the payee, the type of income paid and the withholding rate. Form 1042-T should be used to transmit paper Forms 1042-S to the IRS.


Should we be providing them with Form W-8BEN?======>>W8BEN-E; Foreign entities that previously provided the W-8BEN form, must now generally submit the W-8BEN-E form to U.S. withholding agents.

Many thanks for your answer. In Canada the Canadian Revenue Agency (CRA) in 2012-0441091E5, confirmed that fees paid to a non-resident for the use of custom software in Canada were exempt from Canadian withholding tax. The situation involved a non-resident company (NR Co) that designs and develops computer software programs, and retains full ownership of the programs at all times. The CRA confirmed its view that although fees for the use of the software constituted royalty payments subject to 25% withholding tax under s. 212(1)(d)(i), the exemption in s. 212(1)(d)(vi) applied. The latter provision exempts ?a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary work?. The Copyright Act defines literary work to include a computer program. I would like to know whether the US copyright rules also define literary work to include a computer program, and whether in the US payments by a US person of a royalty in respect of a copyrighted article, and the computer software program I am selling on a USB key is for a copyrighted article is not subject to US withholding taxes, in all cases or because of the existence of a US/Canadian tax treaty which deals with royalty payments.
I look forward to your views on this matter
notaguru

#1;
OK I see; Unfortunately I have no any idea about the CRA tax code for your situation in Canada.

#2I guess it depends; for example, in general, a payment for use of a software product results in the payment of rent for lease of the product or royalty for use of the intellectual property. When the property is used in the US, the source of income is considered to be U.S. source income subject to 30% withholding and reporting on Form 1042-S unless the terms of the software agreement are essentially a sale of all substantial rights to use the product (such as purchased boxed software under a shrink-wrap license)
? the location of the server providing the software service is outside the US, in which case the source of income may be foreign (the IRS has issued no guidance in these matters); the payment is exempt from tax or subject to a reduced rate of tax under an income tax treaty and the payee has submitted a Form W-8BEN-E (TIN required) with the treaty claim; The IRS has issued regulations regarding cross-border computer agreements that provide a framework for analyzing the terms and conditions of the agreement in order to determine how the transaction (or its elements) are taxed. I guess you need to contact a international tax representative at the IRS for more info in detail.

basically, Software licensing fees are classified as royalty payments by theIRS . Depending on the Income Tax Treaty provisions with the foreign company?s country of operation , these software licensing fees would be subject to withholding at a rate of 0% to 30%

Thanks for the info.
The terms of the software agreement we will be selling are essentially a sale of all substantial rights to use the product (such as purchased boxed software under a shrink-wrap license). Based on your comments to date, we are considering establishing a US company which will import and resell to US persons software under terms similar to purchased boxed software under a shrink wrap, with the supplier being located either in Canada, Hong-Kong or the Cayman Islands. How can I contact an IRS international tax representative (Phone number ?) to determine whether the payment to either of these three locations will be subject to US withholding tax or subject to a reduced rate of tax under an income tax treaty, and whether the transaction will be treated as a sale of a copyrighted article rather than the grant of a lease, as illustrated in the software regulations 1.861-18- Classification of transactions involving computer programs.
Many thanks for your help
notaguru