W8BEN – How To Reduce Mandatory Withholding for Expats

Purpose Of The Form W8BEN

Foreign persons, such as a nonresident alien or foreign entity, are subject to a mandatory 30% withholding rate on income received from US sources.

What Income Is Subject To 30% Withholding

Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of:

• Interest (including certain original issue discount (OID));
• Dividends;

• Rents;
• 
Royalties;
• Premiums;

• 
 Annuities;

• 
Royalties;
• 
Compensation for, or in expectation of, services
  performed;
• Substitute payments in a securities lending transaction;
• Other fixed or determinable annual or periodical gains (also known as FDAP income), profits, or income.

This tax is imposed on the gross amount paid.

US Withholding Agents

The payors of this income, known as U.S. withholding agents, are required to make this withholding from income paid to foreign payees. It is required to be withheld at source before forwarding payment of the income to the foreign person.

The withholding agent is held directly responsible to ensure that proper withholding is made and as a result most payors are very diligent to ensure that such withholding actually takes place. After all, the alternative is that the IRS could hold them personally liable for the tax that was not withheld. Thus, it is not very likely to fly under the radar and be overlooked for withholding.

Reduced Tax Withholding With The Form W8BEN

There is a silver lining for foreign persons. The 30% withholding rate can be reduced based under an applicable tax treaty for the foreign payee (foreign person receiving the payment).

However, to claim a reduction under a relevant tax treaty, the withholding agent (i.e. the payor) must receive a valid Form W8BEN from the foreign person before it grants a foreign payee (such as the nonresident alien) the withholding reduction from the tax treaty.

Related Forms In The Form W-8 Series

It’s important to note that foreign persons that foreign persons that are an individual will generally complete the Form W8BEN. However, there are several other forms in the Form W-8 series that may be applicable such as the W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY) based on the type of person sending the form (i.e. individual, entity, etc.).

U.S. persons have no responsibility to complete any form in the W8 series. Instead, they must complete Form W-9 to prevent any form of mandatory withholding.

Claiming Tax Treaty Benefits With The Form W8BEN

If a tax treaty between the United States and your country provides an exemption from, or a reduced rate of, withholding for certain items of income, a foreign person should notify the payor of the income (the withholding agent) of their foreign status to claim the benefits of the treaty. Generally, you do this by filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner For United States Withholding and Reporting (Individuals) with the withholding agent.

W8BEN Exemption from Withholding

A reduced rate of withholding applies to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the foreign person provides a U.S. Taxpayer Identification Number (TIN) (except for certain marketable securities) and certifies that:

1. They are a resident of a treaty country;
2. They are the beneficial owner of the income;
3. If it is an entity, it derives the income within the meaning of Section 894 of the Internal Revenue Code (it is not fiscally transparent); and
4. It meets any limitation on benefits provision contained in the treaty, if applicable

Limitation On Benefits Provisions

Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States (or the treaty country).

Where To Send The Form W8BEN

The Form W-8BEN must be given to the withholding agent to claim a reduced rate of withholding. It should not be sent to the IRS.

Expiration Of The Form W8BEN

In most circumstances, a Form W8BEN remains in effect until the last day of the third succeeding calendar year following the date the form was signed. For example, a Form W8BEN signed on August 5, 2015 remains valid through December 31, 2018. It is important to monitor the expiration of your forms so that inadvertent withholding does not occur. Such an oversight often results in much work and time to request (by filing a tax return) and ultimately receive a refund (from the IRS).

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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.