Understanding U.S. Withholding Taxes: A Key Factor Foreign Investors Cannot Ignore I:

Dividends and Withholding Taxes When a U.S. corporation pays dividends to a foreign shareholder,

those dividends are generally subject to withholding tax. The exact amount of withholding tax is affected by a number of factors, including,

among other things, whether a tax treaty exists between the U.S. and the foreign shareholder's country of residence, and the percentage of the foreign shareholder's shareholding.

Case Study: Assume that investors Doris and Bill form a partnership with a stake in a U.S. corporation; Doris resides in country X, which has a tax treaty with the U.S., and Bill resides in country Y,

which does not have such a treaty; pursuant to the agreement, residents of country X are exempt from U.S. withholding tax, while residents of country Y are subject to a 30% withholding tax.

If the U.S. corporation pays a $100 dividend to the partnership, taking into account Bill's interest, the U.S. corporation is required to withhold $15 of Bill's dividend to pay to the Internal Revenue Service (IRS),

and to pay $50 and $35 to Doris and Bill, respectively. II: Return of Capital A return of capital is when a company returns a portion of its initial investment to an investor,

which will lower the investor's adjusted tax base. Unlike a dividend, a return of capital is not taken out of a company's current or accumulated profits, and therefore is often viewed as a tax-free recovery for the investor.

Exception: Capital returns involving U.S. real estate holding companies (USRPHCs) are different. A company is considered a USRPHC if the fair market value of its interests in U.S.

real estate is more than 50% of its total assets.Such a company is subject to a 15% withholding tax on the portion of distributions in excess of its earnings and profits, on the portion of capital returned,

and on the portion that is considered to be capital gain.