Withholding of Tax

In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person.

The term “chapter 3 withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443. In most cases, chapter 3 withholding describes the withholding regime that requires withholding on a payment of U.S. source income. Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to chapter 3 withholding.

Withholding may also be required on a payment to the extent required under chapter 4. “Chapter 4” refers to chapter 4 of Subtitle A (sections 1471 through 1474). See Chapter 4 Withholding Requirements, later.

Caution: Chapter 3 withholding, when referenced in (and not provided otherwise) in this publication, does not include withholding under section 1445 (see U.S. Real Property Interest , later) or under section 1446 (see Part- nership Withholding on Effectively Connected Taxable In- come (ECTI) and Section 1446(f) Withholding , later).

A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. However, a withholding agent that can reliably associate the payment with valid documentation (discussed later) from a U.S. person is not required to withhold. In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding.

If an amount subject to chapter 3 withholding is also a withholdable payment and chapter 4 withholding is applied to the payment, no withholding is required under chapter 3. See Chapter 4 Withholding Requirements , later.