If your company pays a foreign contractor and the work involves US-source income, the default rule is harsh. Under IRC sections 1441 and 1442, you must withhold 30 percent of every dollar you pay and remit it to the IRS. That is the headline rate before any treaty.
The good news is that the United States has signed income tax treaties with about 65 countries, and most of them reduce the rate on at least some income types. The bad news is that the reductions are not uniform. A 0 percent rate on interest does not imply a 0 percent rate on royalties. A treaty with one country might cut royalties to 10 percent and leave services taxable at 30. Treaty rates have to be checked income type by income type, country by country.
This guide is a practical map. It explains how the rates fit together, which income types matter most for contractor payments, and what to do when there is no treaty.
The framework
US withholding on payments to foreign persons sits in two parts of the Internal Revenue Code.
Chapter 3 (sections 1441 to 1464). This is the regular nonresident withholding regime. The default rate on most US-source FDAP is 30 percent. A treaty can lower it.
Chapter 4 (sections 1471 to 1474). This is FATCA. It adds a 30 percent withholding tax on withholdable payments to non-compliant foreign financial institutions and certain other entities, on top of Chapter 3. Treaties do not override FATCA.
When we talk about “treaty rates” we mean the Chapter 3 reduced rate, available to a foreign person who is a tax resident of a treaty country, who is the beneficial owner of the payment, and who satisfies the Limitation on Benefits article of the relevant treaty.
The IRS publishes the consolidated rate grid at the Tax Treaty Tables page. Table 1 covers passive income (dividends, interest, royalties). Table 2 covers personal services. Where this guide cites a rate, we link to the underlying treaty PDF on irs.gov so you can check the article and paragraph yourself.
What matters for contractor payments
For founders paying contractors abroad, four income types come up most.
Royalties. Payments for the use of intellectual property. Software licensing fees are usually royalties. So are payments for the use of patents, trademarks, copyrights, designs, secret formulas, or industrial know-how. Royalty rates under US treaties typically range from 0 to 15 percent.
Interest. Payments on loans, bonds, deposits. Treaty rates range from 0 to 15 percent. Pure portfolio interest is often exempt under the Internal Revenue Code itself (the portfolio interest exemption).
Dividends. Distributions on shares. Treaty rates typically range from 5 to 15 percent, often with a lower rate for direct investment (a 10 or 25 percent shareholding) and a higher rate for portfolio dividends.
Personal services / independent personal services. Compensation for work performed by a non-resident individual or company. Treaty treatment varies. Many treaties exempt independent personal services if the contractor has no permanent establishment in the United States. Most pure services performed entirely outside the US are not US-source income to begin with under IRC section 861, and so are outside the withholding regime regardless of treaty.
This last point is worth restating because it confuses founders. If your contractor works from Mumbai or Manila and never sets foot in the United States, the service fee is not US-source income. There is no Chapter 3 withholding to worry about. The 30 percent rule applies to US-source income. The rule on services is that the source is where the work is performed, not where the payer is located.
Rates by country
The rates below are the headline treaty-reduced rates for typical income types. Always verify against the treaty text and the current IRS tables before withholding, because amendments and protocols change rates over time.
India
Treaty: Convention Between the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation, signed September 12, 1989. Technical Explanation.
- Royalties (Article 12). 15 percent on most royalties, 10 percent on royalties for the use of industrial, commercial, or scientific equipment.
- Interest (Article 11). 15 percent generally, 10 percent if paid to a financial institution.
- Dividends (Article 10). 25 percent on portfolio, 15 percent on direct investment dividends (where the recipient owns at least 10 percent).
- Independent personal services (Article 15). Exempt in the US unless the Indian contractor has a fixed base in the US or is present 90 days or more in a tax year.
India is a heavy treaty user because so many US companies pay Indian contractors. The 15 percent royalty rate matters when paying for software, where the IRS can characterize the payment as a royalty rather than a service.
United Kingdom
Treaty: Convention Between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed July 24, 2001. Treasury Technical Explanation.
- Royalties (Article 12). 0 percent.
- Interest (Article 11). 0 percent on most categories.
- Dividends (Article 10). 15 percent portfolio, 5 percent direct (10 percent or more ownership), 0 percent for parent-subsidiary holdings of 80 percent or more held for 12 months.
- Independent personal services. No separate article. Covered under business profits (Article 7). Taxable in the US only if attributable to a US permanent establishment.
The UK treaty is one of the most favorable for US companies paying UK contractors. Zero on royalties, zero on interest.
Germany
- Royalties (Article 12). 0 percent.
- Interest (Article 11). 0 percent on most categories.
- Dividends (Article 10). 15 percent portfolio, 5 percent direct (10 percent ownership), 0 percent for 80 percent ownership held 12 months.
- Independent personal services. Covered under business profits (Article 7) after the 2006 protocol. Taxable in the US only if attributable to a US permanent establishment.
Canada
Treaty: Convention Between Canada and the United States of America, signed September 26, 1980, as amended by protocols. Technical Explanation.
- Royalties (Article XII). 10 percent general rate. 0 percent on copyright royalties for literary, dramatic, musical, or artistic works, on payments for computer software, and on payments for patents and know-how.
- Interest (Article XI). 0 percent on most categories under the 2007 protocol.
- Dividends (Article X). 15 percent portfolio, 5 percent direct (10 percent ownership).
- Independent personal services (Article XIV). Taxable in the source country only if attributable to a fixed base there. Article XIV was deleted in a later protocol and merged into Article VII (business profits).
Australia
Treaty: Convention Between the Government of the United States of America and the Government of Australia, signed August 6, 1982, as amended by the 2003 Protocol.
- Royalties (Article 12). 5 percent after the 2003 protocol.
- Interest (Article 11). 10 percent general rate, 0 percent for certain financial institutions and government entities.
- Dividends (Article 10). 15 percent portfolio, 5 percent for direct holdings of 10 percent or more, 0 percent for 80 percent or more held for 12 months.
- Independent personal services. Covered under business profits after the 2003 protocol.
Singapore
The United States and Singapore do not have a comprehensive income tax treaty. Singapore is absent from the IRS A to Z list of US income tax treaties. There is a narrow bilateral agreement on shipping and air transport, but no broad reduction of withholding rates.
Payments of US-source FDAP to a Singapore-resident contractor are subject to the default 30 percent rate. The practical workaround for US companies paying Singapore-based software firms is to confirm whether the payment is even US-source income. Most pure services performed in Singapore are not.
Japan
Treaty: Convention Between the United States of America and Japan, signed November 6, 2003, as amended by the 2013 Protocol that entered into force August 30, 2019. Treaty PDF.
- Royalties (Article 12). 0 percent. The 0 percent rate has applied since the 2003 treaty.
- Interest (Article 11). 0 percent on most categories after the 2013 Protocol entered into force in August 2019.
- Dividends (Article 10). 10 percent portfolio, 5 percent direct (10 percent ownership for 6 months), 0 percent for 50 percent or more held for 6 months under the 2013 Protocol.
- Independent personal services. Covered under business profits (Article 7).
Philippines
- Royalties (Article 13). 25 percent generally, 15 percent on motion pictures, but a most-favored-nation clause reduces the rate to the lowest rate the Philippines grants to any other country, which is often 15 or 10 percent depending on category. Verify against the treaty text.
- Interest (Article 11). 15 percent generally, 10 percent on public-issue corporate bonds.
- Dividends (Article 10). 25 percent portfolio, 20 percent direct.
- Independent personal services (Article 15). Exempt in the US if the Filipino contractor has no fixed base in the US and is present fewer than 90 days, with a $10,000 gross compensation cap.
The Philippines treaty is one of the older and less favorable in the US network. The royalty rate is high. The personal services article has a low compensation cap.
Mexico
- Royalties (Article 12). 10 percent.
- Interest (Article 11). 15 percent generally, 10 percent for bank loans and publicly-traded bonds, 4.9 percent for certain bank and insurance company interest.
- Dividends (Article 10). 10 percent portfolio, 5 percent direct (10 percent ownership).
- Independent personal services (Article 14). Exempt in the US if the Mexican contractor has no fixed base in the US.
Brazil
No treaty exists. Brazil is not on the IRS A to Z list. Default 30 percent withholding applies on US-source FDAP. US-Brazil tax treaty negotiations have been discussed for decades but no convention has been concluded as of 2026.
Argentina
No treaty exists. Argentina is not on the IRS list. Default 30 percent withholding applies.
Saudi Arabia
No comprehensive income tax treaty exists. Saudi Arabia is not on the IRS list. The two countries have a tax information exchange agreement on certain matters, but no general reduction of withholding rates. Default 30 percent withholding applies.
Hong Kong
No treaty exists. Hong Kong is administered as a separate tax jurisdiction and is not covered by any treaty between the United States and China. The US-China treaty does not extend to Hong Kong. Default 30 percent withholding applies to Hong Kong recipients.
Reading a treaty in practice
When you sit down to apply a rate, four questions go in order.
Question 1. Is the recipient a tax resident of a treaty country?
The form W-8BEN or W-8BEN-E states the residency. If the recipient is dual-resident or operates through a partnership or pass-through, residency for treaty purposes can be complicated. See the relevant treaty’s residency article (usually Article 4).
Question 2. Is the income US-source?
This is the easy step to skip. Services performed outside the US are not US-source. If there is no US source, there is no Chapter 3 withholding regardless of treaty.
Question 3. Is the recipient the beneficial owner?
The treaty rate is for the beneficial owner. An agent, nominee, or conduit is not the beneficial owner. Partnerships are typically transparent, meaning the partners are the beneficial owners.
Question 4. Does the recipient meet Limitation on Benefits?
Modern US treaties include an LOB article (often Article 22) that restricts treaty benefits to a defined set of “qualified persons.” A foreign company that does not satisfy LOB does not get the treaty rate, even if it is a tax resident of the treaty country. The W-8BEN-E form requires the recipient to tick the specific LOB test they meet.
When there is no treaty
If your contractor is in Brazil, Argentina, Singapore, Saudi Arabia, Hong Kong, the UAE, Taiwan, or any other non-treaty country, two options remain.
Confirm the income is not US-source. Services performed entirely outside the US are sourced where the work is done. Most contractor work is sourced abroad and is therefore outside the US withholding net. The recipient still has tax obligations in their home country, but the US payer does not have to withhold under Chapter 3.
Withhold at 30 percent if US-source. If the income is US-source (royalties from US-licensed IP, certain service fees physically performed in the US), the default 30 percent applies. There is no workaround. The recipient may be able to file a US tax return to claim deductions or refunds, but the withholding still happens at the time of payment.
For more on the mechanics of paying foreign contractors compliantly, see our contract management product and the W-8BEN-E guide.
Practical checklist before you pay
- Collect a valid W-8BEN or W-8BEN-E before the first payment.
- Verify the country of residence on the form against the IRS treaty list. If the country is not on the list, default 30 percent applies on US-source FDAP.
- Identify the income type. Service, royalty, interest, dividend. The applicable article changes with the category.
- Find the rate in the treaty text. The IRS Tax Treaty Tables are a convenient cross-reference, but the treaty PDF is the legal source.
- Confirm the Limitation on Benefits certification is on the W-8 form.
- Report payments on Form 1042-S annually, with the treaty rate and treaty article code, even when the rate is 0 percent.
The reporting step is often missed. A 0 percent treaty rate is not a free pass to ignore Form 1042 and 1042-S. The forms still have to be filed.
Foreign withholding is one of those compliance topics that sits quietly until an audit, then becomes very loud. The amounts add up. A 30 percent under-withholding on $200,000 of treaty-eligible royalties paid to a UK vendor is a $60,000 IRS bill plus interest, paid by the US company, not the vendor.
If your AP team is matching W-8 forms to treaty rates by hand, we built our contract management product to handle this. Treaty rate lookup, automatic Form 1042-S generation, and renewal tracking on every W-8 form. See pricing for what it costs.