Get Answers Support Tax Filings & Payments Other Forms Form 1042-S What are the Chapter 3 Exemption Codes of Form 1042-S, and what do they mean? Last modified 3/5/2025 7:45:19 AM EST The Chapter 3 Exemption Codes in Box 3a of Form 1042-S indicate the reason why a payment is exempt from Chapter 3 withholding tax on U.S.-sourced income paid to foreign individuals or entities. These exemptions are generally based on tax treaties, exemptions under the Internal Revenue Code, or other special provisions. Below is a table listing the exemption codes and their explanations: Chapter 3 Code Authority for Exemption Explanation 01 Effectively connected income Any recipient whose income is effectively connected with the conduct of a trade or business in the United States. For these recipients, enter this code. 02 Exempt under IRC A withholding agent should use this code only if none of the other chapter 3 exemption codes apply. 03 Income is not from U.S. sources Use this exemption code only in limited cases when the income is not from U.S. sources. 04 Exempt under tax treaty If you are exempt under the Tax treaty condition. 05 Portfolio interest exempt under IRC If the portfolio interest is exempted under IRC. 06 QI that assumes primary withholding responsibility When paying a QI that has indicated on its Form W-8IMY that it assumes primary withholding responsibility under chapters 3 and 4. 07 WFP or WFT Use this code when paying to a foreign partnership or trust that has represented on its Form W-8IMY that it is a WP or WT. 08 U.S. branch treated as U.S. person When making a payment to a U.S. branch or a territory FI, it has been represented on its Form W-8IMY that it agrees to be treated as a U.S. person. 10 QI represents that income is exempt Use this code when paying a QI that has not assumed primary withholding or backup withholding responsibility but has stated on a withholding statement with its Form W-8IMY that the income is exempt from withholding. 11 QSL that assumes primary withholding responsibility When a withholding agent makes a substitute dividend payment to a financial institution (including a QI) that has stated on its Form W-8IMY, it acts as a QSL for the associated account. 12 Payee subjected to chapter 4 withholding If the recipient is subject to chapter 4 withholding, chapter 3 withholding does not apply. When reporting a payment under chapter 4, withhold 30% tax, remit it to the IRS, and report it correctly on Form 1042-S. 22 QDD that assumes primary withholding responsibility If the payment is made to a QI acting as a QDD with respect to the payment. 23 Exempt under section 897(l) Use this code for distributions made by a QIE to a qualified foreign pension fund exempt under section 897(l). 24 Exempt under section 892 Use this code for income paid to a foreign government or an international organization exempt under section 892. Was this helpful? Yes No Related Questions How to file Form 1042-S with TaxBandits? How do I bulk upload data for Form 1042-S? What are the common errors that may occur when filing Form 1042-S? Which income code should I enter on my Form 1042-S, and what does it mean? Go to Home Page Need more help? Get in touch with our dedicated support team Contact Us (704) 684-4751 support@taxbandits.com Sign Up for a FREE TaxBandits Account! The Smart CPA Choice Register Now Already have an account? Sign in