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Statistics show that in the last two decades alone, foreign investments in the USA have doubled. Before conducting business in America or investing in the US stock market, you should be aware that these operations will most likely require that you fill out a W-8BEN form.
Even the term W-8BEN can sound daunting. If you are not familiar with the workings of this form, we will run you through the basics in this article, and you can find the detailed instructions for filling out a W8-BEN separately.
What Is a W-8BEN Form?
A W-8BEN form is an IRS (Internal Revenue Service) tax form that certifies that your country of residence is different from the United States for tax objectives. With the help of this form, you get a reduced tax rate to be applied to your income earned in the US.
The Workings of the W-8BEN Form
US tax laws state that foreign individuals earning a US-sourced income are subject to a 30% tax rate on it. This income can have the following sources: rents, royalties, dividends, annuities, interest, premiums, substitute payments in a securities lending transaction, compensation for performing services, other set or determinable yearly or periodic gains, profits, or income. The tax is cut from the payment made to a foreigner.
It is important to note that if a tax treaty exists between the US and your country of residence, you may be subjected to a lower tax rate. For example, UK residents can use this reduced tax rate, since the UK and the US have a tax treaty.
However, filling out the W-8BEN form before buying US stocks that pay dividends reduces the standard 30% tax rate to 15% on the dividends paid out. Doubling down on the tax rate is a benefit, as it increases the returns you make on your investment. You should take some time out to fill out this form and submit it.
The form asks for details regarding the individual’s or business’s claim for a lower tax rate, which country they’re from, and the sources of income earned.
Requirements for Filling the W-8BEN Form
As mentioned before, the form needs to be filled for tax purposes by foreigners who are not US citizens or residents but gain some sort of income from the US. When you are trading US stocks through either a share dealing account or stocks and shares ISA, the W-8BEN form will be required. In contrast, if your US investments are secured in a self-invested personal pension (SIPP), it is commonly not required to fill the form. The SIPP is accepted by the IRS as an eligible pension scheme, such that all US dividends and interest held in this scheme are paid wholly and without any tax cuts.
Filling Out the W-8BEN Form
Filling and completing the form can be complicated. While the W-8BEN form asks for primary information like your name, country of birth, and your taxpayer identification number (TIN), it also requires you to provide the contact information of the organizations or businesses from which the income is received. It is advised to opt for financial consultation from an experienced tax adviser who can guide you on how to complete your W-8BEN form without making mistakes that could cost you.
The form is submitted to the withholding agent or employer before you receive the payments from them. If you fail to submit the W-8BEN form, you will be subject to the full 30% tax rate. Usually, brokers will give you the form, allowing you to fill it out online. Some might ask you to complete and submit the W-8BEN when you are creating an account or when you make an initial trade of a US stock. Note that if your broker doesn’t provide or remind you to fill out the form, you should ask them about it yourself.
Since the W-8BEN form is only valid for three years, you will need to renew it after this duration. Your broker will usually inform you when it’s time for renewal. Any change of circumstances requires you to communicate with your broker, who will then provide you with an updated form. If you have more than one broker, you will need to provide a separate form for each broker.
If you are considering working or investing as a foreigner in the US, it is advisable to sort through the legalities of this process. The tax policies might differ under different circumstances and are subject to changes in the future. It is better to seek professional guidance for filling out the W-8BEN form, as it can help make the process much less intimidating and frustrating.
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