Structuring Foreign Investment in the U.S.
Foreign nationals (not resident in the U.S.) can generally achieve favorable income tax results on the income and gains earned on their investments. A summary of the rules applicable to foreign national investors residing outside the U.S. are outlined below. These rules assume the investor is an individual and not a business entity except where so indicated.
- The gain on the sale of corporate stock by an individual investor (including portfolio assets) is not subject to U.S. capital gains taxes (special rules may apply when real estate is held inside certain corporate structures).
- Interest paid to a foreign individual investor on portfolio debt obligations (i.e. corporate bonds, etc.) is not subject to U.S. tax when paid to a foreign national.
- Dividends paid to a foreign national are subject to a 30% withholding tax (which may be reduced if a tax treaty applies).
- Income effectively connected with a U.S. trade or business is subject to income tax at graduated rates that currently go as high as 37%.
- Gains on the sale of U.S. real estate (including real estate holding companies) are subject to a 5% withholding tax. The gain must then be reported as effectively connected income on a non-resident income tax return and subjected to tax at the graduated tax rates. Long-term capital gains are presently subject to a maximum tax rate of 20%. Short terms gains are subject to the ordinary tax rates which go as high as 37%. Once the tax is calculated it is offset by the withholding tax.
- Corporate structures are subject to the general corporate rates which also go as high as 21%. Dividend withholding taxes and branch profit taxes can also apply in the corporate environment.
- Individual investors should be aware that the U.S. estate and gift tax system can also apply to their U.S. investments. These taxes are harsh and the risks associated with them should not be underestimated.
- It is important to point out that these rules are assuming of the federal status. In many cases, state and local taxes may also apply.
We can assist the foreign investor in achieving the best result by utilizing a customized investment vehicle which minimizes the income tax consequences of the investment and which seeks to eliminate the U.S. gift and estate tax.