Payments to “Individuals” vs. Payments to “Businesses”
Before considering the possible exemptions to withholding and the necessary forms required to claim the exemptions, it is important to determine if the foreign artist in question will be treated as a group of individuals or a business for tax purposes. A foreign individual or foreign performing arts group cannot simply set up a foreign or domestic corporation to qualify as a business for claiming a tax treaty exemption. As noted above, the IRS looks at who is the beneficial owner of the income.
In determining what exemptions are available, the IRS will look at whether or not the performers in a group “participate in the profits” of the U.S. performances. For instance, let’s say that a French musical ensemble with five musicians incorporates itself in France. Payments for the ensemble’s services in the U.S. are made payable to the French corporation, and the corporation pays all of the tour expenses for the ensemble. After expenses, the performers split whatever profit (or loss) is left over. Here, the performers are “participating in the profits” and are treated as individuals, not a business, for tax purposes. On the other hand, if the performers receive a set fee or salary from the ensemble for the performances, and this fee or salary is not affected by any profits or loss of the U.S. performances, the performers are not “participating in the profits,” and the musical ensemble is treated as a “business” for tax purposes.
Obviously, many cases are clear cut. If one solo artist is performing, and the contract for the performance engages only that artist, the artist is considered an individual. On the other hand, when a full orchestra performs in the U.S., it will be treated as a business if the musicians receive a salary and do not “participate in the profits.” However, many groups consist of a small number of performers that require a more detailed analysis.