Individuals and businesses without US residency or citizenship are generally subject to a flat tax rate of 30% on all US-sourced income. This tax is withheld by the payor, or withholding agent, before any distributions are made – which can make the tax particularly burdensome. Form W-8 and its variations are available to eliminate or reduce this withholding.
Form W-8 – The Basics
Each variation of the form has its own requirements and benefits, but the main purpose of Form W-8 is for foreign persons to certify their foreign tax paying status in order to avoid double taxation and certain automatic tax withholdings. The form is available to non-resident aliens and foreign entities who earn income in the US. It can also be filed by anyone working for a US company who is currently living in a foreign country. Most countries are party to an income tax treaty with the US, which means that those who work for a US company abroad, should expect their employer to request a W-8 to take advantage of treaty provisions. Although a W-8 is an IRS form, it is not actually sent to the IRS but rather to the employer or payor requesting it.
Which form should you submit?
Although there are five W-8 forms in total, Form W-8BEN is the most common and should be filed by anyone in a foreign country that has a tax treaty with the US. To properly complete the form, a taxpayer must provide a US tax identification number and certify the following:
- Proof of residency in foreign country
- Beneficial ownership of the income
Once this form is filed, a reduced rate of withholding is then applied. For example, a Canadian resident can claim a reduced withholding rate of 15% on dividend income generated in the US as opposed to the default rate of 30%. Additionally, the taxpayer will generally be allowed to deduct the US withholding on their Canadian tax return.
This form does not have to be filed annually. If originally filed with a US tax identification number, the form will remain valid until any of the information changes. If filed without a US tax identification number, it will remain valid from the date signed until the last day of the third succeeding year, so long as all the information originally filed remains correct.
Another common form is Form W-8ECI, which should be completed by any foreign individual or entity that has income linked to work done in the US. Work that is effectively connected to the conduct of trade or business in the US is not subject to withholding once Form W-8ECI is complete, as it will be includable in the beneficial owner’s gross income for the tax year. Filing this form can prove to be an effective way to increase short-term cash flow and avoid excessive up-front withholdings.
While the IRS notes that at a glance all of these forms may appear “deceptively simple,” it is important to make sure all information provided is complete and free from error. We strongly recommend a thorough review of all information available in order to secure any tax benefits that apply to you. If you have any questions with regards to foreign taxation, or any other tax matters, please feel free to contact your L&B professional at (858) 558-9200.