June 02, 2016
Generally an intermediary is a person that acts as a custodian, broker, nominee, or otherwise as an agent for another person with respect to a payment it receives. There are two types of intermediaries, qualified and nonqualified. A qualified intermediary (QI) is an intermediary that has entered into a withholding agreement with the IRS. QIs may include foreign financial institutions, foreign branches of U.S. financial institutions, foreign corporations, trust companies, and other parties acceptable to the IRS. A nonqualified intermediary is any intermediary that is not a U.S. person and is not (or is not acting in its capacity as) a QI.
Qualified versus nonqualified intermediaries: in contrast to a nonqualified intermediary, a QI may provide a withholding certificate (Form W-8IMY) without providing the underlying certificates or documentary evidence (e.g., Forms W-9, W-8BEN from account holders, etc.). Such underlying documentation may, however, need to be provided to the extent the QI does not assume primary 1099 reporting or backup withholding responsibility. QIs within a chain of intermediaries will issue their withholding certificates on the strength of the withholding certificates received from other intermediaries. Also in contrast to a nonqualified intermediary, a QI may assume primary responsibility for withholding and reporting with respect to U.S. persons (i.e., 1099 reporting and backup withholding) and/or withholding with respect to foreign persons (i.e., Code section 1441, etc. withholding). A QI that does not elect to assume any such responsibilities may still benefit from only having to submit a Form W-8IMY, although it will need to provide additional "withholding rate pool" information to allow the withholding agent to fulfill its withholding obligations. And lastly, in contrast to a nonqualified intermediary, a QI uses external, rather than IRS, auditors to determine whether it has fulfilled its obligations under its withholding agreement with the IRS.