The U.S. Tax Withholding Service ensures the appropriate U.S. non-resident alien (NRA) withholding tax gets applied on U.S.-sourced income paid to non-U.S. financial institutions holding securities at the Depository Trust Company (DTC).
DTC’s U.S. Tax Withholding Service ensures the appropriate NRA withholding tax gets applied on U.S.-sourced income paid to DTC’s direct non-U.S. participants or non-U.S. subsidiaries of U.S. participants. The applicable withholding tax is determined based on the type of income being paid along with the tax forms provided by the participant.
Who Can Use the Service
DTC’s direct non-U.S. participants, including central securities depositories (CSDs) and other foreign financial institutions (FFIs) that obtain Qualified Intermediary (QI) status from the IRS are eligible to use the service. Non-U.S. subsidiaries of U.S. participants may also use the service, provided they have obtained QI status. DTC withholds tax for non-qualified intermediaries (NQI) at the maximum statutory rate.
- Fully automates the election process at various tax rate pools, via the Elective Dividend Service (EDS), and eliminates the need to set up separate accounts by tax rate pools, as all elections are affected on an omnibus basis at the time of the income payment announcement.
- Covers eligible tax rates for many countries and types of income payments.
- Allows participants to take advantage of IRS rules that permit accounts maintained at registered clearing agencies to co-mingle customer and proprietary assets for tax election purposes.
How the Service Works
In its role as a U.S. tax withholding agent, DTC provides users of the service with access to the U.S. Tax Withholding menu item on the EDS function.
DTC notifies participants of taxable events on their securities held at the depository and informs participants of the “election window” during which they must send withholding rate instructions to the depository. The election window generally extends from one day after the record date (“record date +1”) to one day before the payable date (“payable date -1”). Record date is the date established by the security issuer that determines which shareholders are entitled to dividend payments, etc.
DTC pays dividends interest, or other distributions to participants on the payable date, net of appropriate withholding tax in accordance with participants’ instructions.
As part of the service, DTC prepares settlement statements that reflect the gross distribution amounts and tax amounts withheld at each designated rate. Additionally, DTC remits the withheld tax to the IRS on a timely basis and prepares and sends year-end 1042-S tax forms to participants.
Please note: The information contained herein regarding the DTC U.S. Tax Withholding Service is not tax advice and is not intended to be a substitute for obtaining tax advice from an appropriate professional adviser. You should consult your own tax advisor regarding the applicability of any federal, state, local and non-U.S.tax laws.
For More Information
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You are hereby notified that: (a) any discussion of federal tax issues contained or referred to herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under Internal Revenue Code; and (b) as a matter of policy, DTCC does not provide tax, legal or accounting advice and accordingly, you should consult your own tax, legal, and accounting advisor before engaging in any transaction.