US Withholding Tax When a Foreign Company Licenses Data

When a US buyer licenses a foreign company's records and uses them in the United States, the fee is a US-source royalty, and the buyer must hold back 30 percent of every payment for the IRS unless a tax treaty lowers the rate and the holder gives it a Form W-8BEN-E claiming that treaty before the payment is made. Treaty rates on a data licence run from 0 percent for a holder in the United Kingdom, Germany, Japan or Canada to 15 percent for one in India. A holder in Singapore, Brazil, Malaysia or the United Arab Emirates, none of which has an income tax treaty with the US, bears the full 30 percent. The risk sits with the buyer: a payer that should have withheld and did not is made liable for the tax, which is why the form comes before the first invoice is paid.

Licensing across the border is ordinary: of the 78 disclosed deals whose licensor's head office we could place, 32 were with a licensor outside the United States, in 13 countries. This guide is for the founder, CFO or counsel of such a company about to license records to a US AI lab or data buyer, and for the buyer's finance team. It covers how the IRS classes a data licence, the default rate, the forms, treaty rates by country, the holder's own VAT or GST, payment, sanctions, worked examples and what is unsettled. We run sales only for holders based in the United States, the United Kingdom and Canada today, so for a holder anywhere else this is a map for licensing directly, not an offer.

Contents

1. At a glance
2. Royalty, service or sale: how the IRS classes a data licence
3. The default rate: who withholds, and who pays if it goes wrong
4. The forms: W-8BEN-E, W-8BEN, and why not a W-9
5. Treaty rates by country
6. Countries with no US tax treaty
7. Your own VAT or GST on a licence to a US buyer
8. Getting paid: Stripe, wires and the buyers' own rails
9. Sanctions: who a US buyer cannot pay
10. Worked examples: one licence, four holders
11. Where the answer is uncertain
12. Questions people ask
13. What this means for you

1. At a glance

US withholding tax is a tax on the holder that the buyer collects: the buyer deducts it from the fee, sends it to the IRS and reports it after year end. That puts the burden of getting it right on the payer, and explains almost every step a US buyer asks of a holder abroad.

The table answers the questions in the order holders ask them; the sections that follow explain each line.

2. Royalty, service or sale: how the IRS classes a data licence

The Code taxes a foreign corporation at 30 percent on "fixed or determinable annual or periodical" income from US sources, a phrase that covers royalties and means, in practice, passive income not tied to a US business. A foreign individual pays the same rate under IRC section 871. Two questions decide whether a licence fee falls into that net: is it a royalty, and is it from US sources?

Source is the easier question: royalties for using "in the United States patents, copyrights, secret processes and formulas ... and other like property" are US-source under IRC 861(a)(4), and the same royalties for use abroad are foreign-source under IRC 862(a)(4); the IRS's own chart says " where the property is used". A Manchester company licensing records to a lab training in Iowa has US-source income, and a buyer that cannot tell where the data will be used must treat the amount as US-source, so write the place of training into the contract.

The rule that sorts digital content

Whether the fee is a royalty is decided by Treas. Reg. 1.861-18, the IRS's rule for digital content (a computer program or other copyright-protected content in digital form). It sorts every transfer into one of four boxes, and the box decides the tax:

• A licence of a copyright right (to copy for the public or to prepare derivative content, Reg. 1.861-18(c)). Where the holder keeps substantial rights, the transfer "will be classified as a license" and the fee is a royalty sourced where the content is used.
• A copy the buyer does not truly own. It is classified as a lease, and the rule's own example is a disk that must be destroyed after a set period. A term licence ending in a duty to delete looks exactly like that, and lease income is sourced like a royalty.
• A copy the buyer owns outright. A sale, not a royalty: delivered electronically, it is deemed sold at the buyer's billing address, and gains from a true sale are not income subject to withholding.
• Services to create new content, where the buyer is to own the copyright and carries the risk (Reg. 1.861-18(d)). Pay for services is sourced where the work is done.

The label does not decide: "neither the form adopted by the parties ... nor the classification of the transaction under copyright law, shall be determinative", under the version that applies to tax years starting on or after 14 January 2025. And the rule was written for software, books, films and music. It treats a database as a program only when it is incidental to the operation of the computer program and never mentions training data. We found no IRS regulation, ruling or notice that classes a licence of business records for model training.

What changes the answer

The table is our reading of how the rule applies to the deal shapes AI buyers use. The standard clauses are in our guide to data licensing agreements and on the licence terms page.

Expect a buyer to treat any licence as a royalty unless the contract plainly transfers the copy outright: the term licence with a deletion duty that most buyers sign (see buyer programs compared) is the case the lease rule describes.

When collection work is a service

Pay for work is foreign-source if performed outside the United States, so a holder paid to collect, record or label a new dataset abroad, with the buyer owning the result, is not subject to the default withholding. That matters most where there is no treaty.

It is not a loophole. A licence of existing data does not become a service because the holder cleaned or exported it, and a treaty can tax services: India's applies its 15 percent to fees for "any technical or consultancy services". Even when nothing is withheld, the holder gives a W-8 so the buyer can show the payee is foreign.

3. The default rate: who withholds, and who pays if it goes wrong

The duty sits with whoever pays. The Code tells "all persons, in whatever capacity acting" who pay US-source income to a foreign individual or partnership to withhold 30 percent of it, and applies the same rule to foreign corporations. The regulations call that person the withholding agent: any person, U.S. or foreign, that has the control, receipt, custody, disposal, or payment of the income. In a direct deal that is the buyer; where a marketplace collects and pays out, it is the marketplace, which is why AWS Data Exchange asks non-US sellers for a W-8 form, a VAT or GST number and US bank information.

The default is total until the paperwork arrives. An agent must withhold 30 percent unless it can "reliably associate the payment with documentation" supporting a lower rate, and an agent with reason to know a treaty claim is unreliable must withhold at the full 30-percent rate anyway. A treaty rate applies only to income derived by a resident of the treaty country who is the beneficial owner and meets the treaty's other tests.

Gross or net: say which in the contract

A fee is normally gross, and the holder receives it less the tax. A fixed amount "net of US tax" makes the buyer pay the tax on top, and whether that settles the matter "must be determined under all the facts and circumstances": tax paid for the holder can itself be income, to be grossed up. The clean contract states a gross fee, the rate the buyer will apply, and a copy of the buyer's year-end form to the holder. The negotiation guide and offer check compare offers on what actually arrives.

Two other rules on the same form

Backup withholding reaches a payee that fails to furnish his TIN to the payor; it is aimed at US payees, and a W-8 keeps a foreign holder out of it. FATCA, the rules in chapter 4 of the Code, uses the same default rate: a buyer may request the W-8BEN-E to establish your chapter 4 status on line 5. An operating company commonly certifies as an "active NFFE" (non-financial foreign entity), but that test counts royalties as passive income, so a holder whose income is mostly licence fees should check it before ticking the box.

4. The forms: W-8BEN-E, W-8BEN, and why not a W-9

A foreign company proves its status with Form W-8BEN-E, used by foreign entities to document their statuses. It must reach the buyer before the payment is made to you, or the buyer may have to withhold the full rate. Buyers ask for it at onboarding, as AWS Data Exchange does of every non-US seller.

The treaty claim is Part III. On line 14a the holder names its country of residence; on line 14b it certifies that it derives the income and meets the limitation on benefits provision contained in the treaty. It also needs a tax number: the home one on line 9b, or a US one. A form with no tax number, or with Part III blank, claims no treaty.

Individuals, and why a foreign holder never signs a W-9

A person (a freelancer, a sole trader) gives Form W-8BEN, which a nonresident alien who is the beneficial owner provides; its treaty claim is Part II. Buyers that pay individuals say so: Kled asks non-US residents for a W-8BEN once yearly earnings reach $600, and Troveo points international licensors to Form W-8BEN. Many US companies send every supplier a Form W-9, the form for US taxpayers, but a foreign person "may not provide a Form W-9"; signing one tells the buyer something false.

How long a form lasts, and what each side files

A W-8 remains valid until the last day of the third calendar year following the year in which it is signed, or until a change makes it wrong, so a form signed in 2026 lasts to the end of 2029. The buyer reports every payment on Form 1042-S, even when a treaty means nothing was withheld (with exemption code 04 and a valid treaty country), sends the holder its copy, and files the annual Form 1042 by 15 March.

The holder usually files nothing in the US: a foreign corporation with no US trade or business whose tax was fully withheld is not required to make a return. If too much was withheld, typically because the form came late, the buyer may repay the beneficial owner itself; otherwise the holder claims the excess on Form 1120-F.

5. Treaty rates by country

The IRS publishes treaty rates in Table 1, in a revision dated May 2023 that was still the one on irs.gov when we read it. It warns that the table "is not a comprehensive guide to all eligibility requirements": the treaty, its limitation-on-benefits article and its technical explanation decide. Treat the rates as what a buyer applies to a valid form, not as advice that a given holder qualifies.

A data licence falls in one of two royalty columns. The IRS reports know-how under income code 10 and "other royalties (for example, copyright, software, broadcasting...)" under income code 12, per IRS Publication 515. Records licensed for their content read as copyright; records licensed for the business experience in them can be argued to be "information concerning industrial, commercial or scientific experience", which is know-how. Software takes the copyright column unless the treaty provides otherwise. The table holds every Table 1 row in our law store; the country register adds each country's privacy rules and buyers.

The footnotes that matter

Italy, Israel and South Korea tax the two columns differently. An Italian holder pays 0 percent on a copyright licence and 8 percent on know-how, and its row puts software at the 5 percent equipment rate. Israeli and South Korean holders pay 10 percent as copyright and 15 percent as know-how. The buyer picks the income code it reports, so agree the description of what is licensed before the first payment.

India's 15 percent also reaches fees for included services, payments "for the rendering of any technical or consultancy services". A licence bundled with technical work (custom labelling, evaluation sets) can bring that work inside the rate. India in turn must allow a deduction from Indian tax for the US tax "paid in the United States, whether directly or by deduction", up to the Indian tax on the same income.

Canada's treaty sets a general royalty rate that "shall not exceed 10 per cent", then makes copyright royalties, software and "information concerning industrial, commercial or scientific experience" taxable only in Canada, so a Canadian holder pays 0 percent in either column. France, the Netherlands, Ireland and Spain carry footnotes that raise the rate to 15 percent only where the income belongs to a low-taxed branch in a third country. China's 10 percent is ordinary, but China is also a country of concern under a separate federal data rule (section 9).

Most modern treaties also carry a limitation-on-benefits article, tests that differ by treaty and are aimed at companies set up in a treaty country by owners elsewhere. The holder certifies that it meets the limitation on benefits provision, so a group whose ownership crosses borders should take advice on this line.

6. Countries with no US tax treaty

Singapore, Brazil, the United Arab Emirates and Malaysia have no income tax treaty with the United States. The IRS list of treaties has no entry for Brazil, Singapore or the UAE, and goes straight from Luxembourg to Malta, with no Malaysia. For a country not on the list, the "Other Countries" row reads 30 percent in every royalty column.

A holder there still gives a W-8BEN-E, completing its status and chapter 4 lines and leaving Part III blank. The buyer withholds the full rate, deposits it and sends the holder its Form 1042-S; with no US business, the holder need not file a US return. Three levers are real:

• Where the data is used. A royalty for use abroad is foreign-source. If the buyer trains outside the US, the contract can say so.
• What is paid for. Work performed abroad to create new data the buyer will own is a service sourced abroad. That fits a commission, not a licence of an existing archive.
• The price. A holder can negotiate the gross price knowing what will come off it, or agree a net amount the buyer grosses up (section 3).

Routing the licence through a treaty-country company works only if the holder truly operates there: the rate is for a resident who is the beneficial owner. Relief at home depends on home law, with no treaty to require it, so ask a home adviser before pricing. The Singapore, Brazil, Malaysia and UAE pages cover what else changes there.

7. Your own VAT or GST on a licence to a US buyer

The holder's own sales tax is the easy part. A licence to a US company is a supply of services from one business to another, and in each place we checked it falls outside the home VAT or carries a zero rate. The holder keeps evidence that the buyer is a business outside the country; AWS Data Exchange asks non-US sellers for their VAT or GST registration number for the same reason.

Where a tax does apply, buyers' terms add it on top: micro1's say amounts are "exclusive of any applicable sales, use, or value-added tax", stated separately on the holder's invoice. We have not researched the holder's sales tax in other countries.

8. Getting paid: Stripe, wires and the buyers' own rails

The buyer pays the fee less any tax and deposits the tax; the route depends on where the holder is. Stripe Connect lets a US platform pay connected accounts only in "the US, UK, EEA, Canada, or Switzerland". That covers holders in the UK, Canada, Switzerland and the European Economic Area, and not those in India, Israel, Japan, South Korea, Australia, New Zealand, Mexico, Turkiye, Singapore, Brazil, Malaysia or the UAE. Stripe's Global Payouts reaches more countries ( Malaysia, Singapore and the UAE among them; we found no row for Brazil or South Korea), but is offered to businesses located in the United Kingdom and the United States and suits companies holding a money transmitter licence.

The route that works for any holder is an international wire in US dollars, for which a US bank asks the beneficiary's full name, address, account number, bank name and SWIFT/BIC; the conversion spread at the holder's bank is a real cost. Buyers' own rails differ: Mercor pays by wire transfer upon delivery of the anonymized dataset, Troveo through a third-party vendor, Tipalti, AWS Data Exchange monthly to the seller's bank account (one that can accept USD disbursements, or a virtual US bank account from Hyperwallet), and Nyne treats currency as a term of each offer. Which buyers take holders from which countries is in our guide to buyers that accept holders outside the US and the buyers' rules by country.

9. Sanctions: who a US buyer cannot pay

Tax decides how much of the fee arrives; sanctions decide whether the buyer may pay at all. OFAC, the Treasury's sanctions office, "does not maintain a specific list of countries that U.S. persons cannot do business with": some programmes are tied to a place, others name people and companies.

Every US company and its foreign branches must comply, and a licence is a service, so these place-based rules reach it:

Named parties and the ownership rule

Everywhere else, the test is the Specially Designated Nationals (SDN) list, and it reaches companies listed parties own: any entity owned "in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons" is blocked, named or not. Control without that ownership is not considered automatically blocked, though OFAC urges caution. OFAC "strongly encourages" a risk-based compliance programme and asks whether a company "should ... reasonably have known", so buyers screen the holder, its owners and often its bank, and keep records for at least 10 years. Their terms say so: Mercor requires users to confirm they are not on a US sanctions list or in a sanctioned country, and Prime Intellect names six excluded places.

The Justice Department's data security rule

A separate rule limits US persons dealing in Americans' sensitive data with six countries of concern: China, Cuba, Iran, North Korea, Russia and Venezuela. A company organised or based in one, or half or more owned from one, is a covered person, and a US person may not knowingly engage in a covered data transaction involving data brokerage with it.

The trigger is access: a covered transaction "involves any access by a country of concern or covered person" to US government-related data or bulk US sensitive personal data. The rule's own example says a deal in which the US person accesses data the covered person already holds "is not a covered data transaction", so on its text a pure purchase is not barred. It bites when the deal hands the holder US data: collection or labelling work for which the buyer sends bulk US sensitive personal data is a vendor agreement, restricted unless the U.S. person complies with the security requirements. The good-faith grace period ended on 8 July 2025. Records about people outside the US are not data "relating to U.S. persons", so for most holders abroad the rule is not engaged; their own privacy law is the bigger question (see the GDPR guide and privacy law by country).

10. Worked examples: one licence, four holders

Example. A 60-person software company licenses three years of support tickets, internal documentation and linked code history to a US AI lab for a two-year term. It keeps ownership; the lab trains in the US and must delete its copy at the end; the fee comes in two instalments, at a level buyers publish for a company's records, such as the $100K or more Nyne says its partnerships commonly reach. The same licence is signed by a company in the UK, one in Singapore, one in India and one in Canada, each giving a valid form before the first payment.

All four fees are the same income: a term licence with a deletion duty is a lease of a copy, so a royalty, and US-source because the lab trains in the US. What differs is the rate, the paperwork and the holder's own tax.

The UK and Canadian holders receive the whole fee for one form. The Indian holder gives up the treaty tax and recovers it through its own return, up to its Indian tax on the same income. The Singapore holder loses the full default rate with no treaty to require relief at home, and is the one for whom the deal's shape and price are worth renegotiating before signing.

Three variations show how much the facts matter:

• The UK form arrives late. The lab withholds 30 percent of the first instalment, then may repay the beneficial owner; otherwise the holder claims it on Form 1120-F.
• The Singapore holder is paid to record new data instead. A commission to record new conversations in Singapore, the lab owning the result, is pay for work performed outside the United States: foreign-source and not withheld.
• The Indian holder adds technical work. Building evaluation sets for the lab can fall within fees for included services at the same rate, so price and describe the two parts separately.

11. Where the answer is uncertain

Most of this guide rests on clear text. These points do not.

1. Royalty, sale or service. The rule gives four boxes but names no data licence, and we found no IRS ruling on training data. A perpetual licence of a copy the buyer owns can be argued to be a sale, not withheld on.
2. Which column. Whether business records are a copyrighted work or commercial experience has no ruling; it changes the rate only in Italy, Israel and South Korea.
3. Where the data is used. A buyer that cannot tell must treat it as US-source.
4. Treaty eligibility. Table 1, dated May 2023, is not a comprehensive guide; we did not check later protocols.
5. India's services clause. Whether collection or labelling is a "technical" service is case by case.
6. Relief at home. It depends on home law; we have read only India's treaty article.
7. Gross or net. A buyer's payment of the tax depends on the facts and the agreement.
8. Russia, Venezuela and the data rule. Neither is under a general embargo, both are countries of concern, and no Justice Department guidance we found addresses a pure purchase from a covered holder beyond the rule's example.

Questions people ask

Does a US company have to withhold tax when it pays a foreign company for data? Yes, on a royalty for data it uses in the US: it must withhold 30 percent unless a valid form supports a treaty rate. Pay for work performed abroad is foreign-source and not withheld.

What is the US withholding rate on royalties paid to a foreign company? The statutory rate is 30 percent of the gross payment. Treaties cut it to 0 percent for the UK and much of Europe, 5 percent for Australia and 15 percent for India (section 5).

Is a data licence a royalty or a service for US tax? Usually a royalty: a licence in which the holder keeps substantial rights is a license, and a copy that must be deleted after a term is a lease. It is a service only when the holder is paid to create new content the buyer will own.

Does a foreign company fill in a W-9 or a W-8BEN-E? A W-8BEN-E, claiming its treaty in Part III; a foreign person may not provide a Form W-9. An individual gives the W-8BEN.

How do I get back US tax withheld from a licence payment? Ask the buyer first: an agent that over-withheld may repay the beneficial owner. Otherwise claim it on Form 1120-F. Tax correctly withheld at the full rate for lack of a treaty is not refundable.

Does Singapore have a tax treaty with the United States? No. Singapore is not on the IRS list of treaties, nor are Brazil, the UAE or Malaysia, so a licence fee to a holder there is withheld at 30 percent.

Do I charge VAT when I license data to a US company? Not in the EU or UK, where a business service is supplied where the customer is established. India treats it as a zero-rated export, and Canada zero-rates an IP licence to an unregistered non-resident.

Can a US AI company buy data from a company in China or Russia? Tax is not the obstacle: China's treaty rate is 10 percent. The buyer screens the holder and its owners against the sanctions list, and the data rule restricts deals giving a covered holder access to bulk US sensitive personal data, not, on its text, a pure purchase.

What this means for you

US withholding is a known cost with a known cure. Before signing with a US buyer:

1. Decide what you are selling. A licence of existing records is a royalty; paid work to create new data is a service. Make the contract match, because the label does not decide; our guide to data licensing agreements sets out the clauses.
2. Find your rate in section 5 and on your page under countries, and settle copyright or know-how if you are in Italy, Israel or South Korea.
3. Send the W-8BEN-E before the first invoice, with your tax number, Part III where a treaty applies and the right chapter 4 status, and diarise its renewal.
4. Put the tax terms in the contract: a gross fee, the rate to be applied, where the buyer trains, and a copy of the buyer's year-end form.
5. Invoice without VAT or GST where the rules allow, and keep the buyer's business details.
6. Agree the payment route and ask what conversion costs.
7. Expect sanctions questions about you and your owners, and ask your own adviser about relief at home.

Know what the data is worth first. Buyers' own estimators price a company in Europe, the UK or Canada at 0.71 times the price of the same company in the US, and one anywhere else at 0.27 times, before any tax comes off ( the location discount); the valuation works for holders anywhere and binds no one. The branch guide on selling to US AI companies from outside the US covers the rest of the journey, how much company data is worth explains price, and how to sell company data to AI labs covers the whole process. Our pricing page says how we are paid when we run a sale.

This guide is research from public sources, not legal, tax or investment advice.