U.S. Dividends Tax Issues of Foreign Shareholders
When a U.S. subsidiary pays dividends to its foreign company shareholders, it generally withholds 30% of the dividend income tax for the foreign company shareholders. The 30% tax on dividend income may be significantly lower when the foreign company ’s shareholders?country has a tax treaty provision with the U.S. In addition, foreign company shareholders are also required to report this dividend income to the IRS. This article will briefly describe the filing requirements for U.S. subsidiaries and foreign company shareholders for dividend payments, whether foreign company shareholders are required to use the Form 1120F to report dividend income, and whether the dividend received deduction applies when foreign company shareholders receive dividend payments from their U.S. subsidiaries.
When a U.S. subsidiary pays dividends to its foreign company shareholders, it is required to file Form 1042-S with the IRS along with a copy to the foreign company shareholder. Form 1042-S will include the following basic information:
- Information regarding the amount of dividend income, the amount of dividend tax withheld, and the withholding tax rate.
- The withholding agency, that is, the basic information of the U.S. subsidiaries. It mainly includes name, address, federal tax identification number, etc.
- The receipt agency, that is, the basic information of the foreign company’s shareholders.
- Other intermediary withholding agencies and state tax related information, if any.
Before the U.S. subsidiary pays dividends to its foreign company shareholder, the foreign company shareholder is required to provide the U.S. subsidiary with Form W-8BEN-E. This form is used to certify the non-tax residency status of a foreign company shareholder. Failure of the foreign company shareholder to provide the form to the U.S. subsidiary in a timely manner may result in a 30% withholding tax on dividend income, even if there is a tax treaty provision between the foreign company shareholder’s country and the U.S. The form mainly includes the following basic information:
- The first part is the basic information of the shareholders of the foreign company. Include the name of the foreign company shareholder, country of registration, company address, mailing address, foreign tax ID, etc. In this section, please check the company type and FATCA status for the foreign company shareholder.
- Part II is only required for disregarded entities. Most foreign company shareholders do not need to complete this section.
- The third part is to apply for tax treaty provisions, if applicable. Fill in the country where the foreign company’s shareholders are located and choose the corresponding eligible tax treaty clauses.
- Section 4 should decide which item to check based on the FATCA status checked in Section 1.
Dividend payments received by a foreign company shareholder from a U.S. subsidiary can be divided into the following two situations:
- When dividend income is sourced from the U.S. and is effectively connected to income related to U.S. trade or business, foreign company shareholders need to file Form 1120F to report the dividend income.
- When dividend income is sourced from the U.S. but is not effectively connected to income related to U.S. trade or business, the foreign company shareholders may still be required to file Form 1120F to report the dividend income.
Form 1120F is not required when dividend income is sourced from the U.S. but is not effectively connected to income related to U.S. trade or business, and meets one of the following three conditions:
- The sole U.S. source income of foreign company shareholders is tax exempt from U.S. taxation under 881 (c) or (d).
- The foreign company shareholder is engaged in a U.S. trade or business and is the beneficiary of an estate or trust but would itself not need to file Form 1120F.
- During the tax year, the foreign company shareholder did not engage in U.S. trade or business, and full U.S. taxes have been withheld at source.
Foreign company shareholders may use the dividend-received deduction when dividend income is sourced from the U.S. and is effectively connected to income related to U.S. trade or business. The percentage of dividend income deduction will vary depending on the percentage of shares in the U.S. subsidiary owned by the foreign company’s shareholders, the type of shares, and the business situation of the U.S. subsidiary. Here are four common deductions for dividend income:
- When a foreign company shareholder owns less than 20% of the common stock of a U.S. subsidiary and receives dividends paid by the U.S. subsidiary, such dividend income is deductible using the 50% of the dividend received deduction.
- When a foreign company shareholder owns at least 20% of the common stock of a U.S. subsidiary and receives dividends paid by the U.S. subsidiary, such dividend income is deductible using the 65% of the dividend received deduction.
- When a foreign company shareholder owns less than 20% of certain preferred shares of a U.S. subsidiary and receives dividends paid by the U.S. subsidiary, such dividend income is deductible using the 23.3% dividend received deduction.
- When a foreign company shareholder owns at least 20% of certain preferred shares of a U.S. subsidiary and receives dividends paid by the U.S. subsidiary, such dividend income is deductible using the 26.7% dividend received deduction.
Reference:
https://www.irs.gov/pub/irs-pdf/i1042s.pdf
https://www.irs.gov/pub/irs-pdf/iw8bene.pdf
https://www.irs.gov/pub/irs-pdf/i1120f.pdf
https://www.expatustax.com/form-1120-f-for-expats/ |
