FDAP Income and the 30% US Withholding Tax: A Plain-English Guide
Dividends, interest, royalties and rents paid to non-residents face 30% US withholding unless a treaty applies. What FDAP income is, how withholding works and how treaties reduce it.
Not all US income is taxed the same way. Business income connected with the USA is taxed on profits, after expenses. Passive income paid to foreign persons is treated very differently: it is usually taxed at a flat 30% on the gross amount, collected by the payer before you ever receive it.
This passive category is called FDAP income. If you are a non-resident who receives dividends, royalties, interest or rent from the USA, or a US company that pays such income to foreigners, you need to understand it.
What does FDAP stand for?
Fixed, Determinable, Annual or Periodical income. Despite the name, it does not need to be paid annually or regularly. It covers most income that is not gain from selling property and not effectively connected business income.
What counts as FDAP income?
Common examples for non-resident business owners:
- Dividends paid by a US corporation to a foreign shareholder.
- Interest on certain loans to US persons (much portfolio interest is exempt).
- Royalties for the use of software, content, music, patents or trademarks in the USA.
- Rents from US property, unless the owner elects to treat them as business income.
- Compensation for services performed in the USA, in some situations.
- Prizes and awards.
The 30% rule
FDAP income from US sources paid to a non-resident is generally subject to 30% tax on the gross amount, with no deduction for expenses. The US payer, called the withholding agent, must withhold the tax, pay it to the IRS and report it.
That last point matters: the obligation falls on the payer. If a US company fails to withhold when it should, it can become liable for the tax itself.
How tax treaties reduce the rate
The USA has income tax treaties with many countries, including India, the UK, Canada, Australia and most of Europe. Treaties often reduce withholding on:
- dividends, commonly to 15%, or 5% for substantial corporate shareholders,
- interest, sometimes to zero, and
- royalties, often to between 0% and 15%.
Rates depend on the specific treaty and the type of income, and some countries, including the UAE, have no income tax treaty with the USA. See US tax treaties with India, the UK and the UAE.
How you claim a treaty rate
To receive a reduced rate, the foreign recipient gives the US payer a certificate of foreign status and treaty eligibility before the payment is made:
- W-8BEN for individuals,
- W-8BEN-E for entities.
Without a valid form on file, the payer must withhold the full 30%. See W-8BEN vs W-8BEN-E vs W-9. Some treaty claims also need a US taxpayer number such as an ITIN; see what is an ITIN.
Common scenarios
A YouTuber or author with US royalties. Platforms withhold US tax on US-source royalties unless a valid W-8 with a treaty claim is on file. See content creators and US LLCs.
A software company licensing to US customers. Whether payments are royalties or business income depends on the arrangement; it affects whether FDAP withholding applies.
A foreign shareholder of a US corporation. Dividends are FDAP and subject to withholding at 30% or the treaty rate. See dividends from a US corporation.
A US LLC paying a foreign contractor. Payments for services performed outside the USA are generally not US-source income, so no US withholding applies; you still collect a W-8BEN for your records.
FDAP vs effectively connected income
| FDAP income | Effectively connected income (ECI) | |
|---|---|---|
| Typical examples | Dividends, royalties, interest, rent | Profits of a US trade or business |
| Tax base | Gross amount | Net profit after expenses |
| Rate | 30% or treaty rate | Graduated individual or 21% corporate rates |
| How collected | Withheld by the payer | Paid with a filed return |
See effectively connected income explained.
If your US company pays foreigners
If your US company pays dividends, royalties, interest or other FDAP income to foreign persons, it may be a withholding agent, with obligations to withhold, deposit, and file annual information returns for those payments. Getting this right matters, because the company can be liable for tax it should have withheld.
How UCB helps
We review payments into and out of your US company, help you collect the right W-8 and W-9 forms, check treaty eligibility, and prepare the related filings as part of our US tax filing service.
Receiving US royalties or dividends, or paying them to foreign persons? WhatsApp us at +91 8105 199 399 or email info@ucbsolutions.com and we will check the withholding position for you.
Let our experts handle it for you
Every business is different. Message us with your country, business type and goals, and we will recommend the right structure, state and package. We do the work; you focus on your business.
This article is general information for non-resident business owners and is not legal or tax advice. Rules and fees change; contact us to confirm what applies to your situation.
