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US buybacks from abroad: the withholding that comes before the tax

Albert Gasull, editor · 4 October 2026

When a US company buys back its own shares by tender offer, a holder outside the United States is paid net of withholding on the whole payment, not on the gain: 24% of the gross in the Utah Medical document, even with foreign-status certification on file. Withheld is not the same as owed. Three tests decide whether the payment was a sale, and a holder who meets one may claim the money back. The tests decide whether it returns, not whether it leaves. The same document holds a second trap: its odd-lot priority carries an ownership date.

How the mechanism works

  1. US tax law does not assume that a holder who tenders into a buyback has sold. It asks whether the holder owns a smaller slice of the company afterwards: if so, the payment is a sale and only the gain matters; if not, the whole payment is treated as a dividend.
  2. A US holder settles that on a tax return. A holder abroad is taxed by withholding at the source, and on payment day the paying agent cannot know which answer applies to whom.
  3. So the depositary withholds on the gross payment to every foreign holder, unless (A) a treaty rate applies or (B) sale treatment is established to the satisfaction of the company and the depositary before payment.
  4. Three tests decide sale treatment: complete termination (every share owned is tendered and bought), a substantially disproportionate redemption (the percentage afterwards is less than 80% of the percentage before), or a “meaningful reduction”, which on the tax authority’s view quoted in the document covers any reduction of an interest under 1% with no control.
  5. How many shares are bought is a proration question, so proration decides the tests. Meeting one opens a refund claim against the US tax authority, made after the fact.

The sentence to look for

Section 3 of the offer document, under “Withholding for Foreign Stockholders”:

“Even if a foreign stockholder has provided the required certification to avoid backup withholding, the Depositary will withhold United States federal income taxes equal to 24% of the gross payments payable to a foreign stockholder or its agent unless (A) the Depositary determines that a reduced rate of withholding is available pursuant to a tax treaty … or (B) the foreign stockholder establishes to the satisfaction of the Company and the Depositary that the sale of Shares by such foreign stockholder pursuant to the Offer will qualify as a ‘sale or exchange,’ rather than as a distribution taxable as a dividend, for United States federal income tax purposes”

The second sentence is the odd-lot definition in Section 1, which covers only a person who owned fewer than 100 shares “as of the close of business on September 21, 2026” and still owns them at expiry.

Worked example: Utah Medical Products

The Offer to Purchase is a fixed-price self-tender at $75.00 a share, expiring at 17:00 New York on Wednesday 7 October 2026. Update, 5 October 2026: the company extended the expiry to 17:00 New York on Tuesday 27 October 2026; the price and the other terms are unchanged. Friday 2 October close: $74.13. With 99 shares, all bought:

  1. Spread: $75.00 − $74.13 = $0.87 a share, +1.17%, or $86.13 on 99 shares.
  2. Gross payment: 99 × $75.00 = $7,425.00.
  3. Withheld at 24% of the gross: $1,782.00, which is $18.00 a share.
  4. Cash actually paid: 99 × $57.00 = $5,643.00.
  5. Withholding ÷ spread: 20.7 times.

Now the tests. The company has 3,173,818 shares and is buying 650,000, leaving 2,523,818; 99 shares are 0.00312% of it. Test (i) passes only if all 99 are bought. Test (ii) allows at most 62 shares afterwards, so at least 37 must be bought, which holds if total tenders stay under about 1.74 million shares, 55% of the company. Test (iii) allows at most 78, so at least 21; the lowest possible proration, if every share is tendered, is 20.5%. A small holder who tenders everything therefore lands on the sale side in every case except the one where almost the entire company tenders. Until route (B) or a refund, $1,782 of a $7,339 position is out of the holder’s hands, to earn $86.

Where it goes wrong

  • Taking the certification for an exemption. The form that proves foreign status stops backup withholding only; the 24% is withheld “even if” it has been provided, and on $75.00 a share, not on the $0.87 of profit.
  • Treating the refund as automatic. Route (B) has to be established before payment, and the document does not say how a broker holding shares in its own name for a foreign client goes about it.
  • Assuming the odd-lot priority is open to a new buyer. The offer was announced after the close of 14 September, with the shares at $70.67. The ownership date is Monday 21 September; the document is dated Thursday 24 September, when the shares closed at $74.75 and 94% of the $4.33 gap had closed. A buyer at $74.13 is prorated with everyone else if more than 650,000 shares come in.
  • Carrying the rule across the border. In a Canadian issuer bid the base is the price minus paid-up capital, withheld at 25% or 15% under a treaty, and final. Here the base is the whole price and the withholding is provisional.

How to check it

  • The tax section has a paragraph for foreign stockholders: it states the rate, the base (gross payments) and whether certification changes anything.
  • The same section sets out the three tests and says a holder who meets one “may be eligible to obtain a refund of all or a portion of any tax withheld”.
  • The document gives the shares outstanding and the shares sought; the second divided by the first is the lowest possible proration.
  • The odd-lot definition says whether ownership is measured on a date, and which one.
  • The payment paragraph says when cash is sent: here, “about two weeks after the expiration date”.

Sources

Next guide: Due bills: why the record date stops deciding who is paid

Author holds: Utah Medical, no (4 October 2026). 99 Shares is information, not advice, and nothing here is a recommendation to buy, sell or tender any security. Terms of use.