Withholding Tax Basics

Withholding tax is collected at source by the payer before remitting the net payment to a foreign recipient. It is the primary mechanism through which countries tax cross-border passive income.

How Withholding Works

1. A US company declares a $100,000 dividend to a foreign shareholder

2. Without treaty documentation, the company withholds 30% ($30,000) and remits it to the IRS

3. The shareholder receives $70,000

4. If the shareholder files a valid Form W-8BEN claiming treaty benefits, the company withholds at the treaty rate instead (e.g., 15% or 0%)

The burden of proving treaty eligibility falls on the recipient, who must provide documentation to the withholding agent before payment.

Income Types Subject to Withholding

Most treaties provide two dividend withholding rates:

A US investor holding 100 shares of a Canadian company gets the general rate (15%). A US corporation owning 15% of a Canadian subsidiary gets the qualified rate (5%).

Royalty Sub-Categories

Treaty royalty rates often vary by type:

The OECD Model would set all royalties to 0%, but actual treaties deviate — especially with developing countries that maintain higher rates on knowledge transfers.

Claim Forms by Country

Treaty Rate vs. Effective Rate

The treaty rate is the maximum withholding permitted. The effective rate may be lower because:

Common Misconceptions