Tax Treaty

• The United States has tax treaties with many countries in the world that reduce the amount of non-resident alien tax owed. If there is not a tax treaty or one as not been claimed on form W-8BEN then a 30 percent tax rate applies to dividends, interest, capital gains, pension, Social Security and nearly all forms of income earned. Completing form W-8BEN is crucial to claim any tax treaty benefits that apply.
  
  

Tax Rates

• The standard tax rate for income earned if there is not a tax treaty is 30 percent and the financial institution holding the investments will apply backup withholding of this amount. For countries with tax treaties, the tax rate varies according to the treaty. For example, the British Virgin Islands is a popular location to create offshore trusts, due to the favorable taxes within the country. Since the British Virgin Islands does not have a tax treaty with the United States, all income earned will be subject to 30 percent backup withholding.
  
  By contrast, the United States has a tax treaty with Russia where only dividends earned by United States corporations are subject to back withholding tax at a 10 percent rate. All other income earned is tax-free.
  
  

Tax Filing Requirements

• A foreign trust will receive form 1042S or form 1042 from the financial institution withholding the non-resident alien tax by March 15 of each year. Form 1042S is similar to a 1099, in that it shows the amount of tax withheld, any credits, or amounts repaid due to overpayment. Form 1042 is the annual withholding tax return of U.S. source income for foreign persons. Form 1042 is a tax return where refunds due are claimed or payment of tax due from underpayment of withholding is made.
  
  

Get Professional Advice

• The tax treaty tables are available in IRS Publication 901 and you can find tax treaty text through the Department of the Treasury. Tax treaty interpretation and how non-resident aliens tax occurs is complicated, so it is always prudent to seek the advice of a tax professional experienced in this area.