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 non-U.S. participants. The applicable withholding tax is determined based on the type of income being paid along with the tax forms and certifications provided by the participant.
Who Can Use the Service
DTC’s non-U.S. participants, including central securities depositories and other foreign financial institutions that obtain Qualified Intermediary (QI) status from the IRS are eligible to use the service. To the extent allowable under U.S. federal income tax laws, DTC allows qualified intermediaries to submit withholding instructions on U.S. source income payments. DTC withholds tax for non-qualified intermediaries (NQI) at the maximum statutory rate. A non-U.S. participant with a direct account at DTC that has provided a Form W-8BEN-E may be paid at a reduced rate of withholding depending on the certifications associated with the tax form.
DTC’s Rules generally require that any DTC Participant (or applicant) that is treated as a non-U.S. entity for U.S. federal income tax purposes, must be FATCA compliant as set forth in DTC Rule 2.
- Fully automates the election process at various tax rate pools, eliminates the need to set up separate accounts by tax rate pools, and all elections are affected on an omnibus basis at the time of the income payment announcement.
- Covers all eligible treaty rates for countries and types of income payments.
- Allows QIs to take advantage of IRS rules that permit accounts maintained at clearing organizations to co-mingle customer and proprietary assets.
How the Service Works
In its role as a U.S. tax withholding agent, DTC provides users with access to the U.S. Tax Withholding service.
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.
DTC generally pays dividends, interest, or other distributions to participants on the payable date, net of appropriate withholding tax in accordance with participants’ instructions.
DTC follows the escrow procedure for distributions subject to Section 302 of the Internal Revenue Code.
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 to prepare and deliver 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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Note: Related Products and Services should include 871m, 305c and Corporate Actions Processing