Foreigners Who Get Investment Income from the U.S. Should Know Tax Issues
Foreigners, or named non-resident alien (NRA), are non-U.S. citizens who do not hold a green card nor meet the substantial presence test. The Substantial Presence Test involves being in the U.S. both 31 days in the current year and 183 days total in the current year and preceding two years. The days of the first preceding year are weighted by 1/3 (every 3 days stayed in the US will count as just 1 day towards the 183). The second preceding year are weighted by 1/6. Foreigners also include foreign corporations and other foreign entities.
This article will discuss the tax issues foreigners who get U.S. source investment income (dividend, interest, royalty, rental income etc.) may meet.
1.
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Income/Gains from U.S. Stocks |
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Generally, an NRA who get a dividend from a U.S. company, must pay 30% tax on the dividend amount. This rate may be lower if a tax treaty exists between U.S. and NRA’s resident country. For example, treaty countries include Austria (15%), Canada (15%), People’s Republic of China (10%), France (15%), Germany (15%), India (25%), Indonesia (15%), Italy (15%), Japan (10%), Korea (15%), Philippines (25%), etc.
An NRA who gets capital gains from the sale of stock will NOT trigger any U.S. tax liability. However, you may have to pay tax in your resident country.
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2.
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Income from U.S. Bank Deposit |
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If an NRA received interest income from bank deposit exceeds US$10, he/she will be subject to 30% withholding. This rate may be lower if a tax treaty exists between U.S. and NRA’s resident country. For example, treaty countries include Austria (0%), Canada (0%), People’s Republic of China (10%), France (0%), Germany (0%)，India (15%), Indonesia (10%), Italy (10%), Japan (0%), Korea (12%), Philippines (15%), etc.
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Royalty Income |
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Royalty income from the right to use a U.S. intellectual property is where the property is used. Royalties paid to an NRA are subject to 30% withholding, unless a tax treaty applies. For example, treaty countries include Austria (5%), Canada (0%), People’s Republic of China (10%), France (0%), Germany (0%)，India (15%), Indonesia (10%), Italy (0%), Japan (0%), Korea (10%), Philippines (15%), etc.
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Rental Income |
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The rental income from U.S. property are subject to 30% tax on gross rental income, which are collected by withholding agent. Once an NRA sell the real estate, 15% tax will be withheld on the gain.
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5.
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Amount Realized from Sale, Exchange, or Disposition of a Partnership Interest |
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There is a 10% withholding tax applicable to the amount realized from a foreign person’s sale, exchange, or disposition of a partnership interest, to the extent the foreign person would have effectively connected income (ECI, will be defined later) if the partnership had sold all of its assets.
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6.
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Effectively Connected Income (ECI) |
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The following categories of income are usually considered to relate to a trade or business in the U.S. which are treated as ECI:
- You are considered to be engaged in a trade or business in the United States if you are temporarily present in the U.S as a nonimmigrant on an "F," "J," "M," or "Q" visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in "F," "J," "M," or "Q" status is treated as effectively connected with a trade or business in the United States.
- If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the U.S, you are considered to be engaged in a trade or business in the U.S.
- You usually are engaged in a U.S. trade or business when you perform personal services in the U.S.
- If you own and operate a business in the U.S selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the U.S. For example, profit from the sale in the U.S of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income.
- Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.
- Income from the rental of real property may be treated as ECI if the taxpayer elects to do so.
An NRA should pay tax on ECI, and deductions are allowed against ECI, which is taxed at the graduated rates or applicable rate. Please note that if your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are NOT engaged in a trade or business in the United States. |
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