US Tax Treaties: How to Reduce Withholding on Your US Income

Tax treaties are bilateral agreements between the US and other countries designed to prevent double taxation and reduce withholding rates. If your country has a treaty with the US, you may be leaving money on the table.

How withholding works without a treaty

When a US company pays a foreign individual, they're generally required to withhold 30% of the payment for federal income tax. This applies to:

• •Dividends
• •Interest
• •Royalties
• •Service payments (in some cases)
• •Other FDAP income

How treaties help

Tax treaties can reduce the 30% withholding rate to as low as 0%. The specific rate depends on:

• •Your country of residence

• •The type of income

• •The specific treaty article

Common treaty rates (selected countries)

Dividends:

• •Turkey: 15% (20% for portfolio dividends)
• •UK: 15%
• •Germany: 15%
• •India: 25%
• •Canada: 15%

Interest:

• •Turkey: 10%
• •UK: 0%
• •Germany: 0%
• •India: 15%
• •Canada: 10%

Royalties:

• •Turkey: 10%
• •UK: 0%
• •Germany: 0%
• •India: 15%
• •Canada: 10%

Independent personal services:

Many treaties reduce withholding on service income to 0%, provided the individual doesn't have a fixed base in the US.

How to claim treaty benefits

• •Determine eligibility. You must be a resident of a treaty country.

• •Identify the correct treaty article. Different articles cover different types of income.

• •Fill out Form W-8BEN (individuals) or W-8BEN-E (entities). Complete Part II with the treaty country, article, rate, and income type.

• •Provide the form to the US payer. They will apply the reduced rate.

Limitation on Benefits (LOB)

Most modern US tax treaties include a Limitation on Benefits article. This prevents "treaty shopping" — setting up entities in treaty countries just to get reduced rates. You must have a genuine connection to the treaty country.

When treaties don't help

• •If your income is "effectively connected" with a US trade or business, it's taxed at regular graduated rates regardless of treaties
• •Some types of income aren't covered by treaties
• •If you fail to provide a valid W-8BEN, the payer must withhold at 30%