Dividends paid on U.S. stocks to foreign investors are subject to a default federal withholding tax of 30%, deducted by the broker before the money ever reaches the account. That rate can drop to 15%, 10%, or in some cases zero if the investor’s home country has an income tax treaty with the United States and the investor files Form W-8BEN with the broker to claim it. Capital gains on selling the shares are a separate story, and so is what happens to the holdings at death.
The 30% Default Rate
Federal law requires any institution paying dividends to a foreign investor to withhold 30% of the gross payment and send it to the IRS. The rule comes from two sections of the Internal Revenue Code: Section 1441 covers nonresident alien individuals, and Section 1442 applies the same treatment to foreign corporations.1Office of the Law Revision Counsel. 26 U.S. Code 1441 – Withholding of Tax on Nonresident Aliens2Office of the Law Revision Counsel. 26 U.S. Code 1442 – Withholding of Tax on Foreign Corporations
The 30% comes off the gross dividend with no deductions. A $1,000 dividend loses $300 to the IRS automatically. Foreign investors cannot subtract expenses or claim personal exemptions to reduce the amount subject to withholding, and the broker will default to the full rate if the paperwork supporting a lower rate is missing or incomplete.
What the 30% Does Not Apply To
The withholding targets recurring U.S.-source income like dividends, interest, and rent. Two categories of investment income that foreign stockholders commonly earn sit outside it.
Capital Gains on Selling U.S. Stocks
Profits from selling U.S. shares are generally not taxed for nonresident aliens. The IRS imposes tax on capital gains only if you are physically present in the United States for 183 days or more during the tax year.3Office of the Law Revision Counsel. 26 U.S. Code 871 – Tax on Nonresident Alien Individuals Stay below that threshold and your gains leave the country untaxed, regardless of whether your country has a treaty with the United States.
The 183 days are counted as a total for the year, not consecutive days. If you split time between the U.S. and home, track the count carefully. Crossing it converts what would have been tax-free gains into income taxed at 30%.
Portfolio Interest
Interest from most U.S. registered bonds qualifies for the “portfolio interest” exemption under Section 871(h), which eliminates withholding entirely as long as the beneficial owner certifies non-U.S. status.4Office of the Law Revision Counsel. 26 USC 871 – Tax on Nonresident Alien Individuals If your portfolio mixes U.S. stocks and bonds, the bond interest is likely exempt while the dividends still face withholding.
Treaty Rates on Dividends
The United States has income tax treaties with dozens of countries that reduce the 30% rate on dividends. When a treaty applies, it overrides the statutory default.5Internal Revenue Service. Tax Treaty Tables For an individual holding an ordinary portfolio position in a U.S.-listed company, some common rates are:6Internal Revenue Service. Tax Treaty Table 1 – Tax Rates on Income Other Than Personal Service Income
- United Kingdom: 15%
- Canada: 15%
- Australia: 15%
- Germany: 15%
- Japan: 10%
Corporate shareholders that own a large enough stake in the paying company often qualify for even lower rates under the same treaties, sometimes 5% or zero. The ownership threshold varies by treaty. For most individual investors, the general portfolio rate above is the number to work with.
Claiming a treaty rate requires being a tax resident of the treaty country. Citizenship alone is not always enough. The IRS looks at whether you are subject to tax in that country as a resident, which is the standard most treaties use to determine who qualifies for their benefits.7Internal Revenue Service. Claiming Tax Treaty Benefits
Filing Form W-8BEN To Get the Lower Rate
Nothing about the treaty rate is automatic. To have your broker withhold at the reduced rate instead of 30%, you file Form W-8BEN with the institution that pays your dividends. The form certifies your foreign status and your eligibility for treaty benefits.8Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) Foreign entities use the longer Form W-8BEN-E instead.
The form asks for your name, permanent residence address, country of citizenship, and date of birth. The section that actually reduces withholding is the treaty benefits claim, where you identify your country of tax residence and reference the specific treaty article providing your reduced rate. Getting the treaty article number wrong can cause the broker to reject the claim.
You also need to provide a foreign tax identifying number issued by your home country. If your jurisdiction does not legally require you to obtain one or does not issue them, you can check the box on line 6b indicating that.9Internal Revenue Service. Instructions for Form W-8BEN (10/2021) Without either a valid foreign tax ID or that box checked, the broker will default to the 30% rate.
Most brokers now accept W-8BEN submissions through their online platforms. If digital filing is not offered, send a signed copy to the firm’s compliance department. Once approved, your account should reflect the treaty rate on the next dividend payment.
W-8BEN Expiration
A W-8BEN is not permanent. It expires on the last day of the third calendar year after you signed it. A form signed anywhere in 2026 expires on December 31, 2029.9Internal Revenue Service. Instructions for Form W-8BEN (10/2021) Under certain conditions the form can stay valid indefinitely until a change of circumstances, but the standard three-year cycle is what most investors deal with.
If the form lapses, the broker goes back to withholding at 30% on the next dividend, with no grace period. The fix is simply to submit a new W-8BEN before the old one expires. Setting a calendar reminder a few months out avoids months of over-withholding you then have to reclaim through a tax return.
Reclaiming Over-Withheld Tax
If your broker withheld at 30% when you were entitled to a lower treaty rate, or withheld on income that should have been exempt, you can claim a refund by filing Form 1040-NR, the U.S. Nonresident Alien Income Tax Return.10Internal Revenue Service. Taxation of Nonresident Aliens
Filing a 1040-NR requires a U.S. taxpayer identification number. Foreign investors who don’t have a Social Security number apply for an Individual Taxpayer Identification Number (ITIN) using Form W-7, which can be submitted together with the 1040-NR.11Internal Revenue Service. About Form W-7, Application for IRS Individual Taxpayer Identification Number
The deadline depends on your situation. Foreign portfolio investors without U.S. wages or a U.S. business generally get an automatic extension to June 15; those with wages subject to U.S. withholding or a U.S. office file by April 15.10Internal Revenue Service. Taxation of Nonresident Aliens A further extension is available on Form 4868, but the IRS can deny deductions and credits on returns filed more than 16 months after the due date. Professional preparation of a nonresident alien return typically runs $400 to $700, so weigh the cost against the refund; for meaningful amounts of over-withholding, filing is worth it.
U.S. Estate Tax on U.S. Stocks
One consequence catches many foreign investors off guard. U.S. stocks held by a nonresident alien at death are treated as property situated in the United States for federal estate tax.12Office of the Law Revision Counsel. 26 U.S. Code 2104 – Property Within the United States Rates reach up to 40%, and the exemption for a nonresident who is not a U.S. citizen is only $60,000, a fraction of the amount available to U.S. citizens and residents.
A foreign investor who dies holding $500,000 in U.S. stocks could expose $440,000 to estate tax at graduated rates up to 40%. The $60,000 figure is not adjusted for inflation. Shares in U.S.-listed mutual funds and ETFs structured as U.S. corporations count as U.S. situs assets under the same rule.
Estate tax treaties with a smaller group of countries, including the United Kingdom, Canada, and Germany, can soften this, sometimes by allowing the estate a proportional share of the full U.S. citizen exemption based on the ratio of U.S. assets to worldwide assets. The UK treaty is particularly generous and can effectively eliminate estate tax for UK-domiciled investors whose worldwide estate falls below the U.S. citizen exemption threshold. Investors with substantial U.S. stock holdings should check whether an estate tax treaty applies to them, because the gap between $60,000 and a proportional share of the citizen exemption is large.
Check That Your Broker Is FATCA-Compliant
The Foreign Account Tax Compliance Act (FATCA) adds a separate 30% withholding on certain U.S.-source payments made to foreign financial institutions that have not entered into a reporting agreement with the IRS.13Office of the Law Revision Counsel. 26 USC Chapter 4 – Taxes To Enforce Reporting on Certain Foreign Accounts Most major brokerages worldwide have signed FATCA agreements, so individual investors rarely feel this directly. Where it matters is with smaller or non-compliant institutions, whose clients can face FATCA withholding stacked on top of ordinary Chapter 3 withholding. Before opening an account to trade U.S. stocks, confirm the broker is FATCA-compliant; it is usually stated in the account opening documentation.