IRS Guidance (Pub. 515) on Tax Treaty Changes Affecting U.S. Withholding for Nonresidents
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📌 Introduction
For 2025, the IRS has confirmed that the tax treaties with Russia and Hungary have been suspended. This change significantly impacts nonresident aliens from those countries who previously enjoyed reduced withholding rates on U.S.-source income. Under IRS Publication 515, withholding agents must now apply the default 30% withholding rate on payments such as wages, dividends, royalties, and other fixed, determinable, annual, or periodic (FDAP) income.
This update matters for individual taxpayers in the U.S. who are classified as nonresidents and relied on treaty benefits for lower U.S. tax withholding.
⚖️ Background on Treaty Benefits
Generally, U.S. tax treaties provide reduced withholding rates or exemptions for residents of treaty countries. For example:
- Dividends may be taxed at 5% or 15% instead of 30%.
- Interest may be exempt from withholding under certain treaties.
- Royalties may face reduced tax rates for intellectual property payments.
With Russia and Hungary’s treaties suspended, none of these reduced rates apply for 2025.
🚫 What the Suspension Means
The suspension of treaties eliminates treaty-based claims for lower tax rates. Nonresidents from Russia and Hungary now face:
- A flat 30% withholding rate on U.S.-source FDAP income.
- No exemption for scholarships, fellowships, or grants that were previously tax-free under treaty provisions.
- Higher tax costs on dividends and interest received from U.S. payers.
This change is automatic—individual taxpayers cannot use Form W-8BEN to claim treaty benefits for these countries in 2025.
🧾 Withholding Process Under Pub. 515
Publication 515 guides withholding agents in applying the correct rate. For Russia and Hungary:
- All FDAP payments must be withheld at 30%.
- Taxpayers will receive Form 1042-S showing the income and withheld tax.
- If tax withheld exceeds actual liability, nonresidents may file Form 1040-NR to claim a refund.
Employers and payers must adjust payroll and payment systems immediately for 2025.
🌍 Example Scenarios
Example 1: A Russian student receiving a U.S. research grant in 2024 may have been exempt from tax. In 2025, the same grant is subject to 30% withholding.
Example 2: A Hungarian investor receiving $10,000 in U.S. corporate dividends now sees $3,000 withheld, compared to a possible 15% under treaty rules.
Example 3: A Russian professor teaching temporarily in the U.S. is now taxed on U.S. wages without treaty relief, increasing net tax costs.
🔍 Why It Matters for Individuals
Without treaty protection, nonresidents face higher withholding, impacting cash flow and tax compliance. This can discourage U.S. investment and create challenges for individuals studying, working, or temporarily residing in the United States.
For 2025, tax planning is essential—nonresidents must consider refund claims, potential eligibility under other treaty-based relief (through dual residency or tie-breaker rules), and keeping accurate documentation.
📝 Filing Tips for 2025
- Check IRS Pub. 515 for updated withholding rules.
- Use Form 1040-NR to claim refunds if excess withholding occurs.
- Nonresidents must provide accurate Form W-8BEN (but cannot claim treaty benefits for Russia or Hungary).
- Consider whether the Closer Connection Exception (Form 8840) or Treaty Tie-Breaker (Form 8833) may apply if multiple residencies exist.
