How to Report Easement Payments to a Foreign Landowner: Tax Treaty and Form 1042-S Guidance

Q. Our company is paying a landowner for Trasnmission Line Easement in the United States. This landowner resides in Norway (lived in Norway his entire life and is not a U.S. citizen. Are there tax treaty benefits with Norway? Or will the landowner be subject to withholding?

A.

(Answered by IOFM's third-party tax expert)

If we think about how such a transaction would be treated if the landowner were a U.S. citizen: easements of less than 30 years are generally treated as payment of rent (box 1 of 1099-MISC). Easements of 30 years or more are generally treated as a sale of land, and Form 1099-S may be required.
 
In the case of this landowner, they are a non-citizen and clearly a non-resident: the pertinent parts of the tax treaty between the U.S. and Norway (https://www.irs.gov/pub/irs-trty/norway.pdf) would seem to be either Article 11 or Article 12, depending on the nature of the transaction. In either case, it would be U.S.-source income, thus bringing Form W-8BEN, Form 1042-S, etc. into play. Our reading of the tax treaty is that special rates for withholding only apply to interest and dividends, but of course, consultation with counsel on your side is always required before making final decisions.

Q. 

Thank you for your guidance. Another question I have is what Income Code on Form 1042-S should be used? Our payment to this Landowner is for easement. It is confirmed greater than 30 years.

I found the following when searching the web but not sure if that thought is right. Logically in my mind, I would not think this would be considered a royalty but the note below says otherwise as this would be for right of way access > 30 years so it would not fall under rental.

A.

(Answered by IOFM's third-party tax expert)

With right of way, or any "easement" transaction, royalty is not an option with taxes and information reporting. It is either treated as a payment of rent (if less than 30 years) or a sale of the land (if 30+ years). If the recipient/landowner is a U.S. citizen, the reporting would be 1099-MISC box 1 (if rent) or Form 1099-S (if a sale). Your situation is much more complex because the landowner is not a U.S. citizen or resident.

If it's a temporary easement, meaning less than 30 years, it's rent, and you report on Form 1042-S, code 14.

If it's a permanent easement and thus a property sale, then the "FIRPTA" rules apply. The transaction is not reported on Form 1042-S. Instead an entirely different set of requirements come into play. This is beyond the scope of what Ask the Experts can advise on. It is vital to seek out counsel on your side because there may be mandatory withholding, or the property owner might need an ITIN in order to use tax treaty provisions, and an entirely different set of forms is used (not 1042-S).

As you can see from our discussions here, this is extremely complicated and requires consultation with counsel.

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