TaxBandits Knowledge Base

How do chapter 3 or chapter 4 codes apply in Form 1042?

Withholding agents must enter both Chapter 3 and Chapter 4 status codes to represent their withholding responsibilities accurately. These codes correspond to the agent's current status and the payments made to foreign entities.

Chapter 3: About the Type of Income

Under Sections 1441-1443 of the IRC, Chapter 3 mandates a 30% withholding rate on U.S. source Fixed, Determinable, Annual, or Periodical (FDAP) income paid to foreign persons unless a tax treaty specifies a reduced rate or exemption. 

Chapter 4: Rules for Reporting by FFIs

Chapter 4 focuses on the Foreign Account Tax Compliance Act (FATCA) regulations, requiring a 30% withholding on payments to Foreign Financial Institutions (FFIs) unless they comply with FATCA by registering as a participating FFI, deemed-compliant FFI, or exempt beneficial owner.