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Why Invest in the U.S.U.S. Tax & Foreign Investors Forms Glossary

Foreign Residents Investing Guideline

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How do non-U.S. investors pay U.S. tax?

Determining Non-U.S. Person Status
What is U.S. Source Income?
What is the NRA Withholding?
IRS Form W-8BEN and NRA Withholding

Determining Non-U.S. Person Status
A non-U.S. person (or "non-resident alien") is an individual who is not a U.S. citizen or a legal resident of the United States. A foreign person includes a non-resident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person.

If any person listed in the account title is a U.S. citizen or a legal U.S. resident, the account may not be classified as a non-resident account. Instead, the account must be opened as a U.S. resident account, with the name of the U.S. person appearing first on the account title. Reportable transactions will be reported under the Tax ID of the U.S. person, who must certify their Tax ID number on an IRS Form W-9 in the U.S. resident account application form.

Clients must determine for themselves whether they are or are not residents of the United States. Schwab cannot determine residency for clients. However, if Schwab has knowledge that an owner of the account is a U.S. person, withholding rates applicable to an uncertified U.S. account will be applied to the appropriate transactions until a IRS Form W-9 is received from that person.

What Is U.S. Source Income?
"U.S. source income" is, in general terms, defined under U.S. tax regulations as dividend and interest income earned on securities issued by U.S. companies or U.S. registered mutual funds. In addition, interest earned on U.S. Treasury and U.S. Government agency securities is U.S. source income. Therefore, to the extent that you have dividends or interest from U.S. companies, U.S. registered mutual funds, the U.S. Treasury or U.S. government agencies, the amount will be included in the annual report we are required to send to the IRS.

What Is the NRA Withholding?
Generally, a foreign person is subject to U.S. tax on his/her U.S. source income. Investment income subject to tax includes dividend income paid by U.S. corporations, as well as some interest income. The non-U.S. person tax rate is 30%, although a reduced rate, including an exemption from tax, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Schwab is required to withhold this tax (NRA withholding) from payments made to the foreign person.

Brokerage firms located in the United States are required to report to the IRS once a year on IRS Form 1042-S all U.S. source income for each account at the firm. Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding.

You should consult with your own tax advisor to determine whether any U.S. tax withheld from any income credited to your account may qualify for a foreign tax credit in your jurisdiction of residence.

IRS Form W-8BEN and NRA Withholding
In order to have the correct amount of tax withheld - which can vary from 0% to 30%, depending on the account holder's country of residence - a non-U.S. person must have provided to Schwab a valid IRS Form W-8BEN along with any supporting documentation required by the IRS or by Schwab (see Required Document Checklist).

A non-U.S. person's residency status must be re-certified before December 31st of the third year following the year the IRS Form W-8BEN was submitted to Schwab, or when any information on the original IRS Form W-8BEN has changed. If we have no valid IRS Form W-8BEN on file for each account holder, we must withhold the maximum tax rate, currently 30%, on dividends and interest in that account. We must also withhold 30% of sale proceeds and of certain other payments made to an account.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax, or investment advice, or a legal opinion. Individuals should contact their own professional tax and investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action based upon this information.
The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. We believe the information provided is reliable, but Charles Schwab & Co., Inc. and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

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