If you're a foreign person earning US-source dividends, interest, or royalties, the United States withholds a flat 30% of that income at the source before you ever see it — that's the default under Internal Revenue Code Sections 1441 and 1442. But the US has income tax treaties with more than 60 countries, and those treaties frequently cut that 30% down dramatically: portfolio dividends often drop to 15%, direct dividends to a corporate parent to 5% or 0%, and interest and royalties in many treaties fall all the way to 0%. The reduction is not automatic. You have to claim it, correctly, before the money moves.
The mechanics matter as much as the rates. Treaty benefits on passive income are claimed at the source by handing the payer — the "withholding agent" — a valid Form W-8BEN or W-8BEN-E that names the treaty, the article, and the rate you're entitled to. Get the form to the payer before payment and they apply the reduced rate. Miss that window and you're stuck reclaiming the overwithheld amount by filing a US nonresident return months later. This article walks through which income qualifies, how the rate reductions work by income type, the limitation-on-benefits gate you have to clear, and the exact steps to claim the benefit without leaving money with the IRS.
What income a treaty can shelter — the FDAP category
Treaty withholding reductions apply to a specific bucket of income the IRS calls FDAP — fixed, determinable, annual, or periodical income. This is the passive, investment-type income a foreign person earns from US sources: dividends from US companies, interest from US borrowers, royalties on US-used intellectual property, and certain rents. It is taxed on a gross basis by withholding at the source, which is exactly why a treaty rate reduction is so valuable — there are no deductions to soften a gross tax.
FDAP is deliberately distinct from income "effectively connected" with a US trade or business (ECI), which is taxed on a net basis at graduated rates on a filed return. Treaties reduce withholding on FDAP; they don't apply the same way to ECI. Knowing which bucket your income falls in is the first decision, because it determines whether you're claiming a reduced withholding rate or filing a full US return.
| Income type | Typical treaty treatment | Claim mechanism |
|---|---|---|
| US-source dividends | Reduced to 15% (portfolio) or 5%/0% (direct) | W-8BEN / W-8BEN-E to payer |
| US-source interest | Often reduced to 0% | W-8BEN / W-8BEN-E to payer |
| Royalties | Often reduced to 0%–10% | W-8BEN / W-8BEN-E to payer |
| Rents (passive) | Varies; sometimes no reduction | W-8BEN / W-8BEN-E to payer |
| Effectively connected income (ECI) | Net taxation, not withholding reduction | Form 1040-NR / 1120-F |
Dividends: portfolio versus direct
Dividends are where treaties split the reduction into two tiers, and the difference is large. Most treaties set a higher rate for portfolio dividends — held by an individual or a small shareholder — and a lower rate for direct dividends, paid to a company that owns a substantial stake (commonly 10% or more of the voting stock) in the US payer. The policy logic is to avoid layering full withholding on top of corporate tax already paid at the subsidiary level.
Portfolio dividends
- Held by individuals or small shareholders
- Common treaty rate is 15%
- No minimum ownership stake required
- Claimed with W-8BEN (individual) or W-8BEN-E (entity)
- Down from the 30% statutory default
Direct dividends
- Paid to a corporate shareholder with a large stake
- Common treaty rate is 5% — sometimes 0%
- Requires meeting an ownership threshold (often 10%+)
- May require a minimum holding period
- Requires satisfying the treaty's limitation-on-benefits test
The exact percentages and ownership thresholds are written into each specific treaty and its technical explanation — there is no single universal number. Before relying on a 5% or 0% direct-dividend rate, confirm the ownership threshold, any holding-period requirement, and the LOB qualification in that country's treaty text. The 15% portfolio rate is the more common baseline that individual investors will encounter.
Interest and royalties: often reduced to zero
Interest and royalties are frequently the biggest wins. Many US treaties reduce withholding on qualifying interest and on royalties to 0%, though some set intermediate rates (for example, higher rates on certain royalty categories or on contingent interest). Where a treaty grants a 0% rate, a properly documented foreign lender or licensor can receive the full US-source payment with nothing withheld.
Do not assume a flat 0% across all interest or all royalties. Treaties often carve royalties into categories — industrial/commercial versus copyright versus film — with different rates for each. Certain "contingent interest" tied to the borrower's profits can be taxed at the full 30% rate even under a treaty. Always read the specific article and the accompanying Treasury technical explanation for the exact category and rate that applies to your payment, rather than relying on a headline number.
The limitation-on-benefits gate you have to clear
Reduced treaty rates aren't available to anyone who merely routes income through a treaty country. Nearly every modern US treaty contains a limitation on benefits (LOB) article — an anti-treaty-shopping rule designed to deny benefits to entities that lack a genuine economic connection to the treaty country. To claim a reduced rate as an entity, you generally have to satisfy one objective LOB test.
- Publicly-traded test — the entity's principal class of shares is regularly traded on a recognized stock exchange in the treaty country
- Ownership / base-erosion test — the entity is owned by qualifying residents and doesn't erode its tax base with deductible payments to non-residents
- Active trade or business test — the income is connected to an active business conducted in the treaty country
- Derivative benefits test — available in some treaties for entities owned by residents of other qualifying treaty countries
- Competent authority determination — a discretionary grant from the tax authorities when no objective test is met
For entities, the W-8BEN-E requires you to check the specific LOB provision you qualify under. Claiming a reduced rate without meeting an LOB test is a defective claim — the payer's reduced withholding can be reversed and the tax, plus interest, recovered. Individuals generally don't face the same LOB analysis, but must still be a bona fide resident of the treaty country to claim benefits.
How to actually claim the benefit — step by step
The single most important rule: get the documentation to the withholding agent before the payment is made. Treaty benefits on FDAP income are claimed at the source, not on a return. If the correct form isn't on file when the payer processes the payment, the payer must withhold at 30% and your only recourse is a refund claim.
Confirm you're a treaty resident
Verify you're a resident of a country with a US treaty in force, and that you meet the treaty's residency definition. Entities must also identify which LOB test they satisfy.
Find the article and rate
Locate the specific treaty article and reduced rate for your income type — the dividend, interest, or royalty article — in the treaty text and its Treasury technical explanation.
Complete the right W-8
Individuals file Form W-8BEN; entities file Form W-8BEN-E. Name the treaty country, the article, the rate, and (for entities) the LOB provision in the treaty-claims section.
Deliver it to the withholding agent before payment
Give the completed form to the payer — the US broker, corporation, or licensee — so they apply the reduced rate at source. The form is not filed with the IRS.
If overwithheld, file for a refund
If 30% was withheld before your form was on file, reclaim the excess by filing Form 1040-NR (individuals) or 1120-F (corporations) for that year, reporting the treaty rate.
Because Florida has no state income tax, foreign investors and businesses operating through a Florida entity only have to manage the federal treaty analysis — there's no separate state withholding layer to reconcile on this passive income. That's one reason MK Tax & Accounting's Fort Lauderdale base is a practical advantage for inbound clients: fewer moving parts at the state level, so the treaty work is where the value is.
The 30% default is a ceiling, not a cost you have to accept. The playbook is disciplined and repeatable: identify your income as FDAP, find the exact treaty article and rate for that income type, clear the limitation-on-benefits gate if you're an entity, and — the load-bearing step — get a valid W-8BEN or W-8BEN-E to the withholding agent before the payment is made. Do it in that order and you keep 15, 25, or a full 30 points of your income that would otherwise sit with the IRS until you claim it back.
Stop leaving 30% at the source
Talk to our team about your situation — getting the paperwork right is what stands between the statutory 30% rate and the lower treaty rate you may actually qualify for.
Talk to a tax proSources
- IRS — Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (2025)
- IRC Section 1441 & Section 1442 — Withholding of tax on nonresident aliens and foreign corporations
- IRS — United States Income Tax Treaties A to Z
- IRS — About Form W-8BEN and About Form W-8BEN-E
- U.S. Department of the Treasury — Tax Treaty Documents and Technical Explanations
Frequently asked questions
30%. US-source fixed, determinable, annual, or periodical (FDAP) income — dividends, interest, royalties, rents — paid to a foreign person is subject to a flat 30% withholding tax under IRC Sections 1441 and 1442, unless a treaty or a Code exception reduces it.
It depends on the specific treaty and your ownership stake. A common pattern reduces portfolio-dividend withholding to 15% and direct-dividend withholding (for a corporate shareholder owning a large percentage of the payer) to 5% or even 0%. Interest and royalties are frequently reduced to 0% under many US treaties.
Usually not for passive FDAP income. You claim the reduced rate at the source by giving the withholding agent a valid Form W-8BEN (individuals) or W-8BEN-E (entities) before payment. If too much was withheld, you file Form 1040-NR or 1120-F to claim a refund.
A limitation on benefits (LOB) provision is an anti-treaty-shopping rule in most modern US treaties. It denies treaty benefits to entities that don't have a genuine economic connection to the treaty country — you must satisfy an objective test (like publicly-traded, ownership/base-erosion, or active-trade-or-business) to qualify.
