Withholding Tax

Withholding tax is money taken out of a payment before it reaches you. The payer — a broker, a tenant, a company, the buyer at a closing — is made responsible for the tax, deducts it, and remits it to the revenue authority in your name. You get the remainder. There is no bill and no negotiation; the number is simply smaller than the one written into the contract.

It exists because a government cannot easily chase someone who lives somewhere else. Against its own residents a tax authority has an address, a filed return and enforcement. Against a non-resident it has none of those, so it moves the obligation onto the one party it can reach: whoever writes the cheque.

A resident is taxed on net income — revenue less expenses, graduated rates, an annual return. A non-resident collecting passive income from a country they do not live in is taxed on gross: a flat rate on the whole payment, nothing deducted for the cost of earning it. On a leveraged asset that can quietly exceed the entire economic profit, and clawing back an over-withholding means filing a return abroad and waiting.

The core US rule is short. A non-resident alien is taxed at 30% on US-source income that is fixed or determinable, annual or periodical — FDAP, in the acronym everyone uses — where it is not effectively connected with a US trade or business. Dividends, interest, rents, royalties, pensions and annuities are the usual entries. The IRS is blunt about the mechanics: deductions and netting are not allowed against FDAP income. The 30% applies to the full gross amount.

Beside it sits a different regime entirely. Income effectively connected with a US trade or business is taxed on a net basis at graduated rates after deductions, much as a resident is taxed. Two owners can draw identical cash out of the same building and be taxed under opposite systems, and which one applies is often a matter of election rather than fate.

Two carve-outs matter. Interest on deposits at a US bank, savings institution, credit union or insurance company is generally not taxed for a non-resident alien, and interest qualifying as portfolio interest is not subject to withholding — both conditional on being documented as foreign, which is what the W-8BEN does. A corporate wrapper changes nothing: the rules reach foreign entities as well as individuals, so a St. Kitts company holding US dividend-paying stock files a W-8BEN-E and is still withheld at 30% absent a treaty — a question for the structuring conversation, not the one after the account is opened.

This is where gross versus net stops being theoretical. Rental income from US real property owned by a non-resident alien is taxed at 30% of the gross rent by default, where it is not connected with a US trade or business. Mortgage interest, property tax, insurance, management fees, repairs, depreciation — none of it reduces the number. On a mortgaged condo it is entirely possible to owe 30% of gross rent in a year the property lost money.

The IRS supplies the way out itself. Under section 871(d) a non-resident alien holding US real property for the production of income may elect to treat that income as effectively connected with a US trade or business. Once the election is in place the owner can claim the deductions attributable to the real property income, and the net is taxed at graduated rates.

The mechanics are unglamorous and they matter. The election is made by attaching a statement to Form 1040-NR — properties, ownership interest, improvements, dates held, income — and a return is filed every year afterwards until it is revoked. Form W-8ECI goes to the withholding agent: the tenant, the letting agent, the property manager. If nobody hands the manager that form, the manager withholds, because the manager is the one on the hook. I raise this before a rental purchase, because it changes the yield model rather than the tax return — the point running through why Caribbean rental cashflow is harder than it looks.

When a foreign person disposes of a US real property interest, the Foreign Investment in Real Property Tax Act puts the withholding obligation on the buyer. The general rate is 15% of the amount realized — the gross sale price, not the gain. Sell at a loss and 15% of the price still leaves the closing table. The buyer is usually the withholding agent, and a buyer who fails to withhold can be left liable for the tax, which is why closing agents are inflexible about it.

Three rates run in practice, and they turn on what the buyer intends to do with the property:

The clock is short: the transferee files Form 8288 with Form 8288-A and transmits the tax by the 20th day after the date of transfer. Adjacent transactions are caught too — 10% on transfers of partnership interests under section 1446(f), 21% on certain entity distributions under section 1445(e). A US real property interest also takes in shares of certain US corporations, so holding the house inside a company does not make FIRPTA disappear. It relocates the question.

None of it is the final tax. The withholding is a deposit against a liability, and where the real tax is smaller — a modest gain, a loss, a depreciated basis — the seller can apply for a withholding certificate on Form 8288-B. The IRS normally acts within 90 days of receiving everything it needs, which is why that application belongs on the closing timetable next to the survey. Filed afterwards it becomes a refund claim in slow motion, recovered through a Form 1040-NR.

The 30% is a statutory ceiling, not a fixed price. An income tax treaty between the United States and the country where you are tax-resident can cut it, often sharply, on dividends, interest and royalties. Claiming it is a documentation exercise: an individual gives the payer Form W-8BEN, an entity Form W-8BEN-E. The form names the treaty country, carries a taxpayer identification number — a US SSN or ITIN, or a foreign TIN — and cites the treaty article where the benefit depends on more than residence. A W-8BEN generally stays in effect until the last day of the third succeeding calendar year.

Here is the part that gets misunderstood most: a Caribbean citizenship-by-investment passport does not buy you a better treaty rate. None of the five citizenship countries appears on the IRS list of United States income tax treaties — not St. Kitts and Nevis, not Antigua and Barbuda, and not Grenada, Dominica or St. Lucia. There is nothing to claim on the form. Your treaty position follows your tax residence and that country’s treaty network, not your newest passport, which is why I settle tax residency before layering citizenship by investment on top of it.

Barbados, Jamaica and Trinidad do appear on that list, so a family that genuinely becomes tax-resident in Barbados has something to work with that a new passport does not provide. Treaties also carry limitation-on-benefits conditions: relocating purely to harvest a rate is what those articles were written to catch.

One line belongs beside every sentence above. US citizens remain taxed by the United States on worldwide income regardless of a second citizenship, and none of the five Caribbean programs has a US income tax treaty — the theme of the international tax planning practice.

The same logic runs in the islands, pointing the other way, and it is easy to miss because the sums are smaller. Grenada’s Inland Revenue Division applies 15% when a person carrying on business in Grenada pays a non-resident dividends, interest, fees, management charges, rent, lease premiums, licence charges or royalties, payable within seven days. St. Lucia withholds 15% on interest to non-residents and 25% on royalties, management fees, commissions and other income payments, with reduced 15% rates for CARICOM residents. Barbados, which does hold a US treaty, sets 5% on interest and royalties and 5% or 15% on dividends by size of holding.

The instruction is the same everywhere: before you model a Caribbean rental yield, find out what the payer must deduct on the way out, because that is the number reaching your account. The rest of the ownership-side friction sits in the market guides and in what an alien landholding licence costs.

A US citizen is not a foreign person, and most of this page describes rules you sit outside. FDAP withholding does not apply to you: your broker does not strip 30% from a US dividend, and you are taxed on net income at graduated rates through your annual return. FIRPTA does not reach you as a seller either — you certify non-foreign status and the buyer withholds nothing.

What you meet instead is withholding abroad. A dividend from a French company, rent from a villa in Grenada, a distribution from a Canadian trust: each can be deducted at source, and each remains taxable in the United States, because US citizens are taxed on worldwide income regardless of where they live or what second citizenship they hold. The relief is the foreign tax credit on Form 1116 — a credit rather than a refund, offsetting US tax on the same category of foreign income and no more. Where the foreign rate runs above the US rate, the excess sits as unused credit, invisible in a brochure yield.

Expatriation changes your category rather than your rate. The day you cease to be a US person you become a foreign person for every rule above: the brokerage account starts withholding on US dividends, a later sale of the US house becomes a FIRPTA transaction, and the expatriation rules carry their own withholding mechanics for deferred compensation. The estate side moves too — for a decedent who is a non-resident and not a US citizen, a US estate tax return is required once US-situated assets at death, with adjusted taxable gifts, exceed US $60,000.

None of that argues for or against the step. It argues for reading renouncing US citizenship beside the exit tax most Americans forget and when renouncing actually makes sense, and for treating it as the last step. For families staying inside the US system, Puerto Rico’s Act 60 is what I price everything against; the wider playbook sits on second citizenship for Americans.

Withholding is not a subject families raise with me. It surfaces as a surprise — light rent, a closing statement with a line nobody explained, a broker demanding a form nobody had heard of. So the associates and I put the questions at the front of a file rather than the back. Who will own the asset, and where is that owner tax-resident? Is the gross basis a decision or an accident? We hand the defined question to your own accountants and cross-border counsel, who answer it once, and where the work runs past coordination into structuring I introduce a dedicated specialist private-capital practice.

On the property itself the standard is the one I apply everywhere. I walk the site, read the developer’s completion record, and say no in writing when the numbers do not survive the withholding assumption. A yield quoted gross is not a yield.