Qualified Intermediary (QI)

🔹 Definition

A Qualified Intermediary (QI) is a non-U.S. financial institution or intermediary that has entered into a formal agreement with the U.S. Internal Revenue Service (IRS) to withhold, report, and remit U.S. tax on certain U.S.-sourced income paid to account holders or investors.

The QI regime is designed to streamline tax compliance, protect investor confidentiality, and ensure proper withholding and documentation on behalf of non-U.S. persons investing in U.S. securities.

🔹 Frequently Asked Questions (FAQs)

Q1: What are the responsibilities of a Qualified Intermediary?

• Collect and validate Form W-8 or W-9 from account holders
• Withhold and remit appropriate U.S. withholding tax
• File IRS Forms 1042 and 1042-S annually for reportable payments
• Maintain records and ensure compliance with the QI Agreement
• If acting as a Withholding QI, assume responsibility for tax withholding
• If not, operate as a Non-Withholding QI, passing responsibility upstream

Q2: What types of institutions can become QIs?

• Banks and custodians
• Brokers and asset managers
• Insurance companies
• Investment funds or platforms
• Trust companies
  These entities must operate outside the U.S. and manage U.S.-sourced income on behalf of clients

Q3: What are the benefits of becoming a QI?

• Simplified documentation and withholding processes
• Ability to aggregate and report on a pooled basis rather than disclosing individual account holders to U.S. payers
• Enhanced client confidentiality, particularly in private banking
• Better access to reduced withholding rates under tax treaties
• Helps institutions comply with FATCA and U.S. tax rules without fully disclosing their client base

Q4: How does the QI regime relate to FATCA?

• Both involve U.S. tax compliance for non-U.S. entities
• FATCA focuses on reporting U.S. account holders to the IRS
• QI focuses on withholding and reporting U.S. income for non-U.S. persons
• Many financial institutions choose to participate in both to maintain full U.S. tax compliance

Q5: What risks are involved in QI operations?

• Non-compliance may result in termination of QI status and penalties
• Misclassification or failure to withhold can expose the QI to tax liability
• Requires robust internal controls, staff training, and periodic audits or certifications
• Increased scrutiny during IRS reviews or renewals of the QI agreement