US Dividend Withholding Tax for Foreign Investors

The United States imposes a dividend withholding tax on US-source dividend payments made to foreign individuals and entities. This tax ensures collection from foreign persons who are not otherwise required to file a US tax return. The responsibility for collecting this tax falls on the US entity that pays the dividend, such as a brokerage firm or financial institution.

The payer must deduct, or withhold, the tax directly from the dividend payment. The standard withholding rate is a flat 30% of the gross dividend amount, which applies unless a specific exception or a lower rate is established. This flat tax is levied regardless of the investor’s total income or tax bracket in their home country. For tax purposes, a “foreign person” includes nonresident aliens and various foreign entities.

Determining the Applicable Tax Rate

The most common way for a foreign investor to secure a lower withholding rate is through an income tax treaty. The United States maintains bilateral tax treaties with many countries, which are designed to prevent the double taxation of income. A provision in these treaties is often a reduction in the withholding tax rate on dividends.

Treaty rates on dividends frequently range from 5% to 15%. For instance, many treaties reduce the rate to 15% for most individual investors. Some treaties provide an even lower rate, such as 5%, for foreign corporations that own a significant percentage of the US company paying the dividend. In certain limited cases, a treaty might provide for a 0% rate.

The specific rate an investor is entitled to depends on the provisions of the tax treaty between the United States and the investor’s country of tax residency. An investor must be a tax resident of a country that has an active treaty with the US to claim these benefits. Without a treaty, or if the investor fails to prove eligibility, the default 30% rate applies.

Required Documentation to Claim a Reduced Rate

To claim a reduced withholding rate under a tax treaty, a foreign investor must provide documentation to the withholding agent. The primary document for individual investors is Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). This form certifies the individual is not a US person and is the beneficial owner of the income.

Before completing the form, an investor needs to provide several pieces of information:

• Full legal name
• Permanent residence address in their home country and mailing address if different
• Country of citizenship and country of tax residency
• Foreign Taxpayer Identification Number (FTIN), which is the equivalent of a Social Security Number issued by their home country’s tax authority

The official Form W-8BEN can be downloaded from the Internal Revenue Service (IRS) website. Part I of the form collects identification information, while Part II is where the investor claims tax treaty benefits. In this section, the investor must certify they are a resident of a specific treaty country and identify the article of the treaty that provides for a reduced rate on dividends, along with the specific lower rate being claimed.

Once completed and signed, the form is submitted directly to the withholding agent—the US broker or bank paying the dividends—not the IRS. The agent keeps this form on file as justification for withholding at a lower rate. Foreign entities use a different form, W-8BEN-E, which is a more complex document requiring detailed information about the entity’s status.

The Withholding and Reporting Process

Once an investor submits a valid Form W-8BEN, the withholding agent is legally obligated to deduct the correct amount of tax. This agent, typically the financial institution holding the investor’s US securities, intercepts the dividend payment to apply the appropriate tax rate based on the documentation on file.

If a valid Form W-8BEN claiming treaty benefits is on file, the agent will withhold at the reduced rate specified. If no form is on file, or if the form is incomplete or expired, the agent must withhold at the default 30% rate. The collected tax is then remitted by the withholding agent directly to the IRS on a periodic basis.

After the end of the calendar year, the agent is required to report the dividend payments and tax withheld to both the investor and the IRS. This is done using Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Each investor receives a separate Form 1042-S for each type of income they received during the year.

This form provides a detailed summary showing the gross amount of dividends paid, the withholding tax rate applied, and the total US tax withheld. Form 1042-S serves as the official record of income earned and tax paid. It is the document needed to claim a foreign tax credit in an investor’s home country or to file for a refund from the IRS.

Filing for a Refund of Over-Withheld Tax

If the amount of tax withheld from a foreign investor’s dividends is greater than the amount legally owed, the investor can reclaim the excess tax. This commonly occurs if an investor fails to submit a Form W-8BEN to their withholding agent before dividends are paid, leading the agent to withhold at the default 30% rate instead of a lower treaty rate.

To obtain a refund of over-withheld tax, the foreign investor must file a US income tax return using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form allows the investor to report their US-source dividend income and calculate their actual tax liability based on the applicable treaty rate. The difference between the tax withheld and the correct tax amount is then claimed as a refund.

To successfully complete Form 1040-NR, the investor will need the Form 1042-S they received from their withholding agent. The information on Form 1042-S, including the gross income paid and total tax withheld, must be accurately transferred to the tax return. This form serves as the primary evidence to the IRS that the income was received and that tax was paid, substantiating the refund claim.

The process involves submitting the completed Form 1040-NR, along with a copy of the corresponding Form 1042-S, to the IRS. Filing this return is the formal procedure for reconciling the amount withheld with the correct tax liability established by a treaty. It is the mechanism for a foreign investor to recover funds that were over-withheld by a US paying agent.