US dividend withholding tax and Form W-8BEN for non-US investors

How a dividend reaches you

A dividend is a payment a company makes to its shareholders out of its profits, usually a fixed amount per share. The company announces the amount and the dates, and the cash travels to you through the chain that holds your shares — typically your broker and its custodian, which credit your account. An ETF collects dividends from the companies it holds and, depending on the fund, pays them out to you or reinvests them.

Part of a dividend can be gone before it arrives: a withholding tax, deducted at source by the payer.

The US rule: 30% unless a lower rate applies

For dividends from US sources, the US tax authority, the IRS, is direct: “Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.” Its instructions for Form W-8BEN list dividends among that income and add: “This tax is imposed on the gross amount paid and is generally collected by withholding”. The tax is taken before the money reaches you, so a 100-dollar dividend becomes 70 dollars at the 30% rate. A lower rate, or an exemption, “may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person’s country of residence and the United States.”

Form W-8BEN

W-8BEN is the form an individual uses to show the US payer that they are not a US person and, where a treaty applies, to claim the treaty rate. The IRS tells you to give it “to the withholding agent or payer if you are a foreign person and you are the beneficial owner of an amount subject to withholding”. When you hold US shares through a broker, it is normally the broker that asks you for the form. What the IRS instructions say:

• “Do not send Form W-8BEN to the IRS. Instead, give it to the person who is requesting it from you.”
• Submit it when asked “whether or not you are claiming a reduced rate of, or exemption from, withholding.”
• Without it you can be withheld at the full rate: “Failure to provide a Form W-8BEN when requested may lead to withholding at the foreign-person withholding rate of 30% or the backup withholding rate under section 3406.”
• It generally stays valid from the day you sign it until the last day of the third following calendar year. The IRS example: “a Form W-8BEN signed on September 30, 2015, remains valid through December 31, 2018.”
• If a change makes information on the form wrong — for example, you move out of the country whose treaty you claim — you must tell the payer within 30 days and file a new form.
• To claim certain treaty benefits you must give either a US taxpayer number (SSN or ITIN) or the tax identification number your own country issued you.

Tax treaties in general terms

Under US tax treaties, the IRS explains, “residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States”, and “these reduced rates and exemptions vary among countries and specific items of income.” Without a treaty, or when the treaty does not cover the income, the normal US rates apply.

On the day we checked the IRS list of treaty countries, it included Egypt, Mexico, Morocco, South Africa, Tunisia, Canada and France, among others; Nigeria, Kenya, Ghana, Senegal and the Gulf states were not on it. The IRS publishes the rate for dividends under each treaty in its tax treaty tables (Table 1), and the tables also help you find the treaty article the form asks for. We do not copy the rates here: each depends on the treaty and its conditions, so check Table 1 for your country of residence.

Tax in your own country

US withholding is not necessarily the only tax. Your country of residence may tax the same dividend, and its rules decide whether the US tax counts towards yours. Ask your national tax authority or a qualified tax adviser, and keep the dividend statements your broker provides.

A quick check of your account

1. Find the status of your W-8BEN in the account settings and note when it expires.
2. Check that the country of tax residence on the form is correct.
3. Look at a dividend on your statement: the gross amount, the tax withheld and the net amount should all be shown.
4. If the tax withheld does not match the rate you expected, ask the broker why.