Withholding tax

Meaning in the treaty tables

The IRS tax treaty tables describe withholding tax as tax applied to chapter 3 income payments, which may be exempt under a treaty or taxed at a reduced rate.^[4]

Chapter 3 income is generally fixed or determinable income paid annually or periodically.^[4]

The tables include interest, dividends, royalties, pensions, annuities, and social security payments. Form 1042-S uses the related income code numbers for foreign persons' U.S. source income subject to withholding.^[4]

Treaty conditions and limits

A treaty rate or exemption depends on meeting the treaty's requirements for the income item. The tables note that a treaty may require the income to be remitted to the recipient's country of residence.^[4]

A treaty's full text can contain provisions beyond the rates and exemptions summarized in the IRS treaty tables. They also warn that rates may not be bilateral, and the other country may set a different rate or requirements for reduced withholding.^[4]

For U.S. citizens, Publication 901 explains that treaty reductions generally apply to residents of foreign countries and generally do not reduce U.S. income tax for U.S. citizens or residents, subject to stated exceptions. U.S. citizens and residents remain subject to U.S. income tax on worldwide income.^[1]

Reporting and source references

Publication 901 says a position based on a treaty that reduces U.S. tax generally must be disclosed on Form 8833, which is attached to the return. It specifies that this filing rule does not apply to reduced withholding on noneffectively connected income, including dividends, interest, rents, or royalties, nor to reduced tax on employee service pay, pensions, annuities, or social security.^[1]

The treaty tables direct withholding agents who pay foreign persons to Publication 515 for additional details. They identify Form W-8BEN and Form W-8BEN-E as forms whose filers can use the tables to determine a rate, treaty article, and applicable limitation-on-benefits article.^[4]

Questions and answers

Related terms

• Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.
• Treaty-based return position: A treaty-based position claims that a U.S. treaty overrides or reduces U.S. tax. The IRS discusses the term in Publication 901 and in the title of Form 8833.
• Income tax treaty: An income tax treaty may provide reduced U.S. tax rates or exemptions for specified U.S.-source income. Rules vary by country and income type under each treaty.
• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties.

Related guides and articles

• How income tax treaties are structured: Income tax treaty terms and structure, related U.S. reporting for U.S. citizens, the OECD Model Tax Convention description and IRS guidance on treaty positions.
• FATCA and the structure of U.S. reporting rules: FATCA terms, institutional reporting, withholding rules and links to U.S. tax forms, including Form 8938, for U.S. citizens learning about the regime.
• FATCA and foreign financial institutions: FATCA gives foreign financial institutions duties to report account information about U.S. taxpayers and entities with substantial U.S. ownership abroad.

Related pages

• Glossary: All terms.
• Treaty-based return position
• Income tax treaty
• Limitation on benefits
• Permanent establishment
• IRS forms