When a distribution company in the U.S. licenses a program or a movie to any TV outlet in Italy, the content seller can take a reduced eight percent withholding tax (which is down from 22.5 percent) on the total amount of the sale invoice.
This eight percent is applied in accordance with the Tax Treaty between the U.S. and Italy, but only if the selling company (licensor) in the U.S. sends its “IRS Residency Certificate 6166” to the buyer (licensee) in Italy.
All companies in the U.S. that sell content internationally must obtain the 6166 certificate from the Internal Revenue Service (or IRS, which is the tax service of the U.S. federal government) every year if they want to benefit from reduced withholding taxes.
The application (form IRS 8802) to obtain the 6166 certificate costs $185 per year and is valid for 20 countries. Not all countries require the 6166, including South Africa, which does not take a withholding tax.
The 6166 certificates have to be sent with each sale to all buyers that require it in order to obtain this reduced withholding tax. Without the 6166 certificate, the withholding tax is applied in full, which, in the case of Italy, is 22.5 percent.
With the U.K. the process is both more complex and more rewarding as in order to avoid paying the sales tax of 20 percent, the sellers have to send their 6166 certificates to the IRS together with the so-called DT forms obtained from HMRC (the U.K. tax office). The IRS then has to send both documents to the HMRC, which then exonerates the sellers from having the sales tax deducted from the sales.
In many countries, with the exception of Italy (for the eight percent reduced tax), and Australia (for five percent), if the U.S. seller just sends the IRS 6166 Residency Certificate to the buyer. There is no withholding tax.
Once the 6166 certificate is sent to the buyer, the seller in the U.S. needs to get a document from the buyer stating that the eight percent withholding tax has been deducted from the sale. In Italy, such document is delivered in March of the year following the sale. With this document from the buyer, the seller can then go to the IRS to be reimbursed in the form of a deduction from a loss. However, if the U.S. seller already operates at a loss, the withholding tax becomes purely a loss of income.
To solve this problem, some sellers use agencies based in Cyprus and/or Hungary, which invoice the buyer for the sale price minus the full withholding tax, a tax that the agencies recoup in full on behalf of the seller. This way, the seller gets the full amount, however, the agencies charge one percent of the total amount invoiced. The problem is that these companies have to act as sub-licensees, and many buyers want to deal directly with the U.S. content owners without intermediaries.