1042-S Exemption Codes: Box 3a and 4a Guide
Exemption Codes are used to indicate the reason why withholding tax is not applied or is applied at a reduced rate to payments made to nonresident aliens or foreign entities. These codes are entered in Box 3a and 4a and relate to specific exemptions under U.S. tax law or tax treaties.
Code: Authority for Exemption
Chapter 3 Codes
01: Income effectively connected with a U.S. trade or business
02: Exempt under an Internal Revenue Code section (income other than portfolio interest)
03: Income is not from U.S. sources
04: Exempt under tax treaty
05: Portfolio interest exempt under an Internal Revenue Code section
06: Qualified intermediary that assumes primary withholding responsibility
07: Withholding foreign partnership or withholding foreign trust
08: U.S. branch treated as a U.S. person
09: Qualified intermediary represents income is exempt
10: QI represents that income is exempt
11: QSL that assumes primary withholding responsibility
12: Payee subjected to chapter 4 withholding
22: QDD that assumes primary withholding responsibility
23: Exempt under section 897(l)
Chapter 4 Codes
13: Grandfathered payment
14: Effectively connected income
15: Payee not subject to chapter 4 withholding
16: Excluded nonfinancial payment
17: Foreign Entity that assumes primary withholding responsibility
18: U.S. Payees-of participating FFI or registered deemed compliant FFI
19: Exempt from withholding under IGA
20: Dormant account
21: Other-payment not subject to chapter 4 withholding
Rules for Tax Rate and Exemption Code Relationship
-
When the Tax Rate Is 0%:
An exemption code must be entered in Box 6 to explain why no withholding applied. -
When the Tax Rate Is Greater Than 0% (e.g., 15%, 30%):
The exemption code in Box 6 must be 00. This means no exemption applies and tax was withheld under standard U.S. rules.