Foreign individuals and entities are subject to U.S. tax at a flat 30% rate on certain types of income, including but not limited to: interest, dividends, rents, royalties, and compensation for services performed that they receive from U.S. sources. However, a U.S. income tax treaty may reduce or exempt an item of income from U.S. tax.
Reductions to U.S. Tax for Foreign Individuals or Entities
The tax is withheld at source by the “withholding agent” or the payor of the income. A withholding agent can rely on a claim that a beneficial owner (the person receiving to the income) is entitled to a reduced rate of withholding tax based on a treaty if, prior to the payment, the agent receives a withholding certificate from the beneficial owner of the income. The withholding certificate is generally provided on Form W-8 BEN, Foreign Status of Beneficial Owner for United States Tax Withholding.
In situations where the foreign payee is claiming a reduced rate of withholding tax, the foreign person will be required to obtain a U.S. Tax Identification Number (TIN). Generally, Form W-8BEN furnished with a U.S. TIN will remain in effect for three years or until a change in circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, at least one payment annually to the beneficial owner who provided the Form W-8BEN.
Form W-8BEN has been split into two forms for the first time in 2014. The new 2014 Form W-8BEN (revision date 2014) is used solely by individuals and Form W-8BEN-E (revision date 2014) is for use by entities. The instructions for Form W-8BEN-E have not yet been completed. The instructions will be posted the IRS.GOV Forms and Publications Website as soon as they are completed and available.
Please contact a member of Barnes Dennig for additional information related to your withholding tax obligations.