Dividends to Nonresidents: Default 30% Withholding vs. Treaty Rates (Pub. 515 / NRA Tax Rules)

Introduction: Dividend Withholding for NRAs

Nonresident aliens (NRAs) investing in U.S. stocks or funds often face dividend withholding taxes. By law, the U.S. requires payors (companies, brokers, or intermediaries) to withhold 30% of dividend payments to foreign investors. However, income tax treaties between the U.S. and other countries may reduce this rate, sometimes as low as 0%–15%. IRS Publication 515 provides detailed rules on how this system works.

Default Rule: 30% Withholding

By default, under IRC §§ 871 and 881, dividends paid to NRAs are classified as Fixed, Determinable, Annual, or Periodical (FDAP) income. This makes them subject to a flat 30% withholding tax. The key points include:

• Applies to dividends from U.S. corporations.
• Applies to mutual fund and ETF distributions of U.S.-source dividends.
• No deductions allowed—tax is withheld at source.

Example: If a nonresident receives $10,000 in dividends from a U.S. company, the broker must withhold $3,000 unless a treaty benefit applies.

Reduced Rates Under Tax Treaties

Many countries have tax treaties with the U.S. that lower dividend withholding rates. For eligible residents, treaty rates usually range between 5%–15%. To claim treaty benefits:

• The NRA must reside in a treaty country.
• A valid Form W-8BEN must be provided to the broker or payer.
• The NRA must meet any limitation-on-benefits (LOB) rules in the treaty.

Example: A resident of the U.K. generally faces only a 15% rate on U.S.-source dividends instead of the default 30%.

IRS Publication 515: Key Guidance

IRS Pub. 515 explains how withholding agents (such as brokers and U.S. corporations) apply the 30% default rate and when they can reduce withholding under treaty claims. Key responsibilities include:

• Collecting Form W-8BEN or other documentation from the NRA.
• Applying the correct treaty rate if eligible.
• Reporting dividend income on Form 1042-S to both the IRS and the foreign investor.

If no valid W-8BEN is on file, payors must withhold the full 30%—even if the NRA is treaty-eligible.

Tax Filing Obligations for NRAs

Most NRAs do not need to file a U.S. tax return solely for dividend income if withholding is correctly applied. However, filing Form 1040-NR may be beneficial if:

• Too much was withheld, and a refund is due.
• There is effectively connected income (ECI) requiring reporting.
• They wish to claim treaty benefits retroactively (if not properly applied at withholding).

Filing ensures compliance and may reduce tax costs if mistakes were made by withholding agents.

Common Issues and Pitfalls

• Failure to file W-8BEN: results in 30% withholding even if a treaty applies.
• Expired W-8BEN: must be renewed every 3 years.
• Treaty misuse: IRS audits may challenge treaty claims if residency is not proven.
• Dividend equivalents: Payments on equity swaps or derivatives may also be subject to withholding.

Tax Planning Tips for Nonresidents in 2025

• Confirm residency in a treaty country to access reduced rates.
• Submit Form W-8BEN to brokers promptly.
• Use tax treaties strategically when structuring portfolios.
• File Form 1040-NR if eligible for a refund of excess withholding.

Conclusion

For nonresident aliens investing in U.S. securities, understanding the default 30% withholding on dividends and the potential reduced treaty rates is essential. IRS Pub. 515 and proper filing of Form W-8BEN ensure correct withholding, compliance, and potentially significant tax savings. In 2025, proactive compliance remains the key to maximizing after-tax returns on U.S.-source dividends.