Form 6166, Tax Residency, and Why It Matters for Your Startup

Jan 3, 2024

EARLY-STAGE-STARTUP-TAXES

Expanding your operations abroad means that your business is doing well enough to scale in a big way. It’s a major milestone. 

But it can also come with a major tax burden if you’re not careful. Once you start operating internationally, your startup could be subject to the local tax laws of your foreign customers. That could mean a higher income tax rate or more value-added tax (VAT) than you expect. 

Fortunately, with one simple step, you can seriously limit the tax surprises that come with expanding operations outside of the U.S. All you need to do is get a Form 6166 – Certification of U.S. Tax Residency. 

 

Form 6166 101

This form, which you get from the IRS, certifies to other countries that you’re complying with U.S. tax law. As the IRS explains, it’s “a computer-generated letter printed on stationery bearing the U.S. Department of Treasury letterhead certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States.”

In short, it’s a document telling other tax authorities not to withhold anything extra and not to subject you to any additional tax burdens. 

This works because the American government has established tax treaties with several other countries. These treaties usually spell out that once you have Form 6166 certification, you’re subject to U.S. tax law, not the law in the other nation in which you’re operating. 

That benefits you because many foreign countries withhold tax on income when it changes hands from a resident of their country to an international entity. American tax treaties reduce that rate, sometimes to zero. You go from having to pay the other country’s full withholding rate to a treaty-reduced rate. 

The terms of these treaties may also exempt you from any VAT charges in the applicable countries. That said, you may need to provide other documentation to those tax authorities to meet their VAT exemption requirements. 

 

When you need a certification of U.S. tax residency

We’ve encountered this situation a lot. A startup begins looking at expanding its customer base and discovers that someone international wants to use their product or service. The startup happily makes the sale.

Then, the accountant for the international company comes to the startup and says that before they pay the invoice, they need to do a local withholding. The startup suddenly might get less than it expected from the international sale. 

If they have a good accountant on their end, that person should advise them to get Form 6166 at that point. The issue is that this process often takes upwards of 90 days. During the pandemic, we even saw it extend to six months. 

In some cases, the foreign customer may be able to pay the invoice at that point using the applicable statutory withholding rate — but with a promise to refund the difference once they get Form 6166. Still, though, that means the startup is waiting on money. 

Since many startups are working with limited runway, that lag in accounts receivable can be a serious issue. That’s why we recommend getting a Form 6166 before you even begin exploring operating internationally. 

 

Getting Form 6166 with Form 8802

If you want to get more of the money you expect from international customers, you’ll need Form 6166. But that doesn’t mean you need to file Form 6166 (of course not — that would be too simple). Instead, you need to file a Form 8802 to get the 6166. 

The form is three pages long. The IRS has issued fairly thorough instructions that should answer any questions you have as you fill it out. We have a bit of guidance to help, too.

Most of our clients are corporations, so they check “corporation” box e on line 4. The majority of them file their latest 1120 tax form to validate their company, so they check the “1120” box on line 5. The latest 1120 tax form isn’t required to submit for certification.

One of the most common areas of confusion comes from the timelines required on lines 7 and 8. Usually, you’ll use line 7 to ask for Form 6166 for the current year (e.g., you might file an 8802 for a 2024 certificate on January 1, 2024). Obviously, though, you haven’t filed your 2024 taxes yet. That’s perfectly fine. You just need to list the four-digit year and two-digit month in which you submitted your last tax filing on line 8. 

Then, make sure to include a copy of your most recent 1120 with your 8802. Write “COPY — do not process” on it. 

If you’re filing Form 8802 for the current year, you’ll also need to fill out the penalty of perjury statement on line 10. It should read: “[Corporation name], EIN [EIN] is a U.S. resident and will continue to be throughout the current tax year.”

The last page is a list of all of the countries for which you want certification. We generally recommend checking all of them. You never know when having this paperwork on hand might come in handy. 

The filing for Form 8802 comes with a $185 fee. You can include a check or money order made out to the United States Treasury or you can pay it online. 

If you want to pay digitally, head to Pay.gov and enter “IRS certs” in the search box in the top-right corner (right next to the “Sign In” button). The top result should be “IRS Certs” with a description that reads “Certs User Fee for IRS payment for Form 8802. Please use the agency tracking id on the confirmation as the electronic confirmation number.” 

Complete this form to pay online. Then, enter the confirmation number you receive at the top of Form 8802 where it says “Electronic payment confirmation no.”

 

Keeping your Form 6166 Current

Your Form 6166 certification only applies to one calendar year. You need to reapply for this certification every year that you plan to continue operating internationally. The IRS opens up applications for the coming calendar year on December 1. 

Ultimately, with a little time and a payment of the $185 filing fee, you can get the Form 6166 you need to avoid hefty tax burdens when you’re working with international customers. If you want to explore this option for your startup, our team of specialists can help. We’re here to answer questions, guide you through the form, or even submit it on your behalf. Get in touch today.