U.S.-United Kingdom tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-United Kingdom treaty apart

The U.S.-U.K. treaty exempts interest and royalties at source, has a 0% rate for dividends to qualifying parents and pension schemes, and has no article for independent personal services: a U.K. contractor's fees are business profits. Two rules catch payers out more than the rates do. A U.K. resident taxed on the remittance basis gets treaty relief only on what is remitted to the U.K., and a U.K. company must pass a detailed limitation-on-benefits article, not just show it is resident.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 2004. Protocols in effect from: none listed. IRS country code UK.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-United Kingdom treaty as a payer

Documents and dates

The convention was signed in London on July 24, 2001 and amended by a protocol signed in 2002 (the protocol's own text dates it July 19, 2002; the Treasury technical explanation says July 22). The IRS tables give January 1, 2004 as the general effective date. Withholding taxes took effect earlier, for amounts paid or credited from the first day of the second month after entry into force (Art. 29(2)). The 1975 treaty could be kept for 12 more months by election, but only in its entirety.

Remittance basis

Article 1(7) is the U.K.-specific rule most payers have not met. Where a U.K. resident is taxed in the U.K. only on income remitted to or received in the U.K., the U.S. reduces its tax only on the amount that is remitted or received. The technical explanation's example: a U.K. resident who is not domiciled in the U.K. receives U.S. dividends into a brokerage account in Ireland. The U.S. may withhold 30%. Paid into a London account, the 15% treaty rate applies. A payer that knows a payee is a non-domiciled individual paying into an account outside the U.K. has reason to question the treaty rate.

Residence and transparent entities

Pension schemes, charities and qualified governmental entities are residents even though they are not taxed (Art. 4(3)). Income derived through a fiscally transparent entity counts as derived by a U.K. resident only to the extent U.K. law treats it as that resident's income (Art. 1(8)). How the U.S. or a third country classifies the entity does not matter, and members who are not U.K. residents cannot claim under this treaty. A company resident in both countries that the competent authorities do not assign gets almost no benefits (Art. 4(5)), though a dividend it pays to a U.K. shareholder still gets the treaty rate because the benefit belongs to the shareholder.

Limitation on benefits

Residence is not enough: a U.K. entity must be a qualified person under Article 23 or pass one of its other tests. Qualified persons include individuals, governmental entities, companies whose principal class of shares is listed on a U.S. or U.K. exchange and regularly traded (at least 6% of average outstanding shares traded in the prior year), subsidiaries at least 50% owned by five or fewer such companies, pension schemes with more than half their beneficiaries resident in either country, and companies passing an ownership and base erosion test.

A company that fails those can still qualify under derivative benefits (at least 95% owned by seven or fewer equivalent beneficiaries resident in the EU, EEA or NAFTA countries, plus a base erosion test) or for income connected with an active trade or business in the U.K. The technical explanation is explicit that a company acting only as a headquarters is not in an active business, and the article has no separate headquarters test. Article 23(5) limits benefits proportionately where a disproportionate class of shares tracks U.S. income and is owned by outsiders.

Dividends

The 15% general rate falls to 5% for a company owning at least 10% of the payer's voting power, with no holding period (Art. 10(2)). The 0% rate in Article 10(3)(a) needs more: at least 80% of the voting power held for the 12 months ending on the date the dividend is declared, and one of the following: the 80% was held before October 1, 1998; the parent is a listed company qualified person; it qualifies under derivative benefits; or the competent authority grants it. A parent that qualifies only under the active business or ownership test therefore needs the pre-1998 holding. Pension schemes get 0% on dividends not derived from a business (Art. 10(3)(b)).

RIC and REIT dividends never get 5% or the company 0% rate. RIC dividends get 15% (0% for a pension scheme). REIT dividends get those rates only if the holder is an individual or pension scheme owning 10% or less, owns 5% or less of a listed class, or owns 10% or less of a diversified REIT (Art. 10(4)). Dividends paid under a conduit arrangement get nothing (Art. 10(9)).

Interest and royalties

Both are taxable only in the U.K. when beneficially owned by a U.K. resident (Arts. 11(1), 12(1)). The exceptions: interest contingent on the debtor's receipts, sales, profits, cash flow or asset values may be taxed at up to 15% (Art. 11(5)); REMIC excess inclusions are taxed under U.S. law (Art. 11(6)); amounts above an arm's-length price between related parties lose the exemption; and payments under a conduit arrangement, where substantially all the income is passed to a third-country person entitled to less and obtaining the benefit was a main purpose, get none (Arts. 11(7), 12(5), 3(1)(n)).

The royalty definition covers copyright (including software and films), patents, trademarks, designs, secret formulas and know-how. The technical explanation excludes leasing of personal property, payments for services (after-sales service, technical assistance, software development, engineering), and retail "shrink-wrap" software, which is a sale. None of these is withheld on by a U.S. payer unless it is attributable to a U.S. permanent establishment.

Services

There is no independent personal services article. "Business" includes professional services (Art. 3(1)(d)), so a U.K. contractor's fees for work in the U.S. are taxable only if attributable to a U.S. permanent establishment (Art. 7). There is no services permanent establishment rule; a building, construction or installation project is a permanent establishment only if it lasts more than 12 months (Art. 5(3)).

An employee is exempt on pay for U.S. work only if present no more than 183 days in any 12-month period beginning or ending in the tax year, paid by or for an employer that is not a U.S. resident, and the pay is not borne by a U.S. permanent establishment (Art. 14(2)). The technical explanation counts any part of a day, weekends and holidays spent in the U.S. Directors' fees from a U.S. company may be taxed by the U.S. without limit (Art. 15).

Performers and athletes are taxable in the U.S. if gross receipts for the year, including reimbursed expenses, exceed $20,000; above that, all of it is taxable, and the payer may withhold during the year and refund later (Art. 16(1)).

Pensions, lump sums and Social Security

Periodic pensions are taxable only in the country of residence (Art. 17(1)), but lump sums from a pension scheme are taxable only where the scheme is established (Art. 17(2)). A lump-sum distribution from a U.S. 401(k) to a U.K. resident is therefore U.S.-taxable and withheld on under the Code. U.S. Social Security and tier 1 Railroad Retirement paid to a U.K. resident are taxable only in the U.K. (Art. 17(3)). Purchased annuities are taxable only in the residence country (Art. 17(4)).

Teachers, students and other income

Article 20A, added by the 2002 protocol, exempts a visiting U.K. teacher or researcher at a recognized educational institution for up to two years. If the visit runs past two years, the exemption is lost for the whole period (TE Art. 20A), and research primarily for private benefit does not qualify. Students are exempt only on payments from outside the U.S. for maintenance, education or training; apprentices and trainees for one year (Art. 20).

Other income, including gambling winnings, punitive damages and covenants not to compete, is taxable only in the U.K. (Art. 22(1)), subject to the same arm's-length and conduit limits as interest. Gains other than on U.S. real property are taxable only in the residence country (Art. 13).

Where payers get it wrong

• Withholding 15% or 10% on interest or royalties. Both are 0%. Contingent interest (15%), REMIC excess inclusions and conduit arrangements are the only exceptions.
• Granting 0% on a parent dividend because ownership is 80%. The 12-month holding and one of the Article 10(3)(a) conditions are also required; a parent qualifying only on the active business test needs a pre-October 1998 holding.
• Ignoring the remittance basis. A non-domiciled U.K. individual paid into a non-U.K. account may get no treaty relief at all (Art. 1(7)).
• Treating equipment rent or retail software as royalties, or withholding on a contractor's on-site fees. None is a royalty, and contractor fees are business profits exempt without a permanent establishment.
• Exempting only the excess over $20,000 for a performer. Once gross receipts including reimbursed expenses pass $20,000, the whole amount is taxable.

Read from the treaty documents: Convention of July 24, 2001; Protocol of 2002; Treasury Technical Explanation of the Convention as amended by the Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the United Kingdom treaty's LOB provision is Article 23).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• f Includes alimony.
• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• ii In Canada, the 15% rate does not apply to a lump-sum payment. In Italy, the exemption does not apply to lump-sum or severance payments received if the applicable past employment was performed in the United States while such person was a resident of the United States. In the Netherlands, the exemption does not apply if (1) the recipient was a U.S. resident during the 5-year period before the date of payment, (2) the amount was paid for employment performed in the United States, and (3) the amount is not a periodic payment, or is a lump-sum payment in lieu of a right to receive an annuity. In the United Kingdom, the exemption does not apply to a lump-sum distribution derived from a U.S. pension plan. In India, the exemption does not apply to a lump-sum payment.
• jj The rate is 15% (10% for Bulgaria and Spain; 30% for Austria, Germany, and Switzerland) for contingent interest that does not qualify as portfolio interest. In general, contingent interest is interest that is determined with reference to (a) receipts, sales, income, profits or other cash flow of the debtor or a related person, (b) any change in the value of any property of the debtor or a related person, or (c) any dividend, partnership distribution, or similar payment made by the debtor or related person. For Sweden and Germany, contingent interest is covered by the dividends article of the treaty.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
• oo Dividends received from an 80% owned corporate subsidiary are exempt if certain ownership period and limitation on benefits conditions are met by the recipient. For Japan, greater than 50% ownership is necessary. See specific treaty article to determine other conditions.

Notes to the services table (IRS Table 2)

• 4 Does not apply to compensation for research work primarily for private benefit.
• 11 Applies only to full-time student or trainee.
• 12 Fees paid to a resident of the treaty country for services performed in the United States as a director of a U.S. corporation are subject to U.S. tax.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 25 Exemption does not apply if gross receipts (including reimbursements) exceed this amount.
• 45 The time limit pertains only to an apprentice or business trainee.
• 53 Treated as business profits under Article 7 (VII) of the treaty.
• 58 Remuneration derived by a resident of a contracting State in respect of an employment as a member of the regular compliment of a ship or aircraft operated in international traffic may only be taxed in that State.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

Other treaty countries

Australia · Austria · Bangladesh · Barbados · Belgium · Bulgaria · Canada · Chile · China · Commonwealth of Independent States · Cyprus · Czech Republic · Denmark · Egypt · Estonia · Finland · France · Germany · Greece · Iceland · India · Indonesia · Ireland · Israel · Italy · Jamaica · Japan · Kazakhstan · Latvia · Lithuania · Luxembourg · Malta · Mexico · Morocco · Netherlands · New Zealand · Norway · Pakistan · Philippines · Poland · Portugal · Romania · Slovak Republic · Slovenia · South Africa · South Korea · Spain · Sri Lanka · Sweden · Switzerland · Thailand · Trinidad and Tobago · Tunisia · Turkey · Ukraine · Venezuela