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a friend of mine, who spends less than 183 a year outside the US, is interested in investing in US stock market. He wanted to find out the tax complication of foreigner's holding US stock asset. I understand the dividend is subject to a flat rate of 30%. What if he makes capital gains from trading no-dividend stocks, like technology focused ones? Has anyone had experience in " helping" a friend to invest in the stock market for the tax purpose?

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Watch out for mutual funds' end of year distributions too - those get withheld at 30% too.

davidbeckham said: a friend of mine, who spends less than 183 a year outside the US, is interested in investing in US stock market. He wanted to find out the tax complication of foreigner's holding US stock asset. I understand the dividend is subject to a flat rate of 30%. What if he makes capital gains from trading no-dividend stocks, like technology focused ones? Has anyone had experience in " helping" a friend to invest in the stock market for the tax purpose?

Short answer: Your friend will NOT be subject to US capital gains tax.

Correct answer: See below.

1. Determine if your friend is taxable as a US person or not. A US tax person is taxed just like a US citizen. A non-US tax person is taxed differently (see #2 below). Your reference to dividend withholding tax implies that you believe that he is NOT a US tax person. Yet you imply that he spends MORE than 183 days a year in the US -- that may well make him a US tax person. I am not an expert on what makes a non-citizen, non-permanent resident a US tax person. But do not assume that your friend is not a US tax person simply because he is a "foreigner."

2. Non-US tax persons are taxed as follows: (a) suffer a withholding tax on certain types of distributions (generally there IS withholding on dividends and there is NOT withholding on interest); (b) taxed just like a US citizen on any income that is effectively connected with your friend's US trade or business.

Thus if your friend is NOT a US tax person and if he does not have a US trade or business (or if he does, if his stock investments have nothing to do with his US business), then he will not be subject to US tax on his capital gains.

why not just take Posh back home to England

I beg to differ with Matthew53. Your "friend" is classified as either a residennt alien or a non-resident alien depending on how much time he spends in the US and if he has a green card. See Pub 519 for US tax requirements for resident and non-resident aliens.

Also, from a search at IRS website:

I.R.C. 871(a)(2) imposes a flat tax of 30% on capital gains in the hands of nonresident alien individuals physically present in the United States for 183 days or more during the taxable year.

Your friend might want to contact a tax advisor familiar with tax laws that affect foreigners.

GotRocks said: I beg to differ with Matthew53. Your "friend" is classified as either a residennt alien or a non-resident alien depending on how much time he spends in the US and if he has a green card. See Pub 519 for US tax requirements for resident and non-resident aliens.

Also, from a search at IRS website:

I.R.C. 871(a)(2) imposes a flat tax of 30% on capital gains in the hands of nonresident alien individuals physically present in the United States for 183 days or more during the taxable year.

Your friend might want to contact a tax advisor familiar with tax laws that affect foreigners.


My goodness GotRocks, I would hardly call what you have added differing with me. I said that there were 2 classifications, (1)US tax person and (2) non-US tax person. I then said that if the friend was a non-US tax person (and I made it clear that I doubted he was) AND the friend's capital gains were not effectively connected with the friend's US trade or business, that the friend would not be subject to withholding on his capital gains.

You, quite rightly, point out that there is a third category -- a non-US tax person who is in the US for 183 days or more. Such a person is indeed taxed on capital gains. That is not differing with me, it's simply adding something. If the friend falls into this third category, this is, of course, very important. (And I should have pointed it out.) But I have a strong hunch that the friend is a full fledged US tax person and is confusing his immigration status with his tax status.

Note that I quite intentionally do not use the code's language of "non-resident alien." This is because most people would assume that "non-resident alien" for tax means the same thing as it means to INS/Homeland Security. And this would be a BIG mistake.

Again, I should have added the 871(a)(2) point. Good catch.

Matthew

Note: The 183 days test does not include days in the US as an "exempt individual". See IRS pub 519 (posted above) for details.

Matthew53 said: You, quite rightly, point out that there is a third category -- a non-US tax person who is in the US for 183 days or more. Such a person is indeed taxed on capital gains. That is not differing with me, it's simply adding something.Of course it is. You said he wouldn't be subject to capital gains tax; in fact, he almost certainly will.

thanks for everyone's input. to clarify, the person has never been to US and currently live outside america. So his status is definitely non resident. He is just interested in investing in US stocks and I'll be the one that actively manages his portfolio. I googled for this type of case and from my understanding, mutual funds or dividend based stocks will be taxed at a flat rate of 30% and other than that, a foreigner like him is not subject to capital gain. please correct me if i am wrong

davidbeckham said: thanks for everyone's input. to clarify, the person has never been to US and currently live outside america. So his status is definitely non resident. He is just interested in investing in US stocks and I'll be the one that actively manages his portfolio. I googled for this type of case and from my understanding, mutual funds or dividend based stocks will be taxed at a flat rate of 30% and other than that, a foreigner like him is not subject to capital gain. please correct me if i am wrong

Where is your friend locationed? Check IRC Publication 515 for the guide to non-alien resident. IIRC, on page 28-29, there is a treaty rate table which can apply to your friend. Places like England and Canada get 15% dividend tax instead of 30%. Your friend has to file a W-8BEN and claim to receive the treaty rate.

Since the expiration of Jobs Act by the end of 2007, all short term cap gain will be subject to tax starting 2008. long term cap gain and return on capital won't be tax though.

US Debt security will still be tax free.

Watch out for limited partnership distributions like Blackstone (BX), it is subject to 35% tax.

I'm a foreigner interested in investing in the U.S. stock market.

Just to be clear, I'm not in the U.S. I'm not a U.S. resident or citizen. The longest I'll ever be in the U.S. any given year is 2-3 weeks.

If I purchase stock, I'll have to pay 30% on any dividends but capital gains will be exempt if they are long term. Is that correct? If so, what amount of time makes the difference between short and long term?

Does it make any difference if I invest as an individual or through a foreign company I own? The reason I ask is because, investing through my company would ease my tax burden over here.

I understand I would need to get an ITIN number from the IRS, right? Is there anything else I would need before I could get started?

Does anyone know of an inexpensive online broker I can use? It seems most don't deal with foreigners.

eadphos, is it possible to open a brokerage account that would allow investing in the US market from within your country? A lot of countries I've been to have such accounts. Although the fees may be slightly higher than directly investing through a US broker, it would really simplify the taxes.

Question to be asked is: are you trying to invest in US stock market assets, or are you trying to open the account in the US.

In general, those who are non-US for tax purposes don't pay capital gains taxes. But I suspect you might have to pay taxes in your own country.

Also, if you don't get your paperwork right, you will get 30% with-holding on disposition. For example, by XYZ for $1000 today, sell for $1100 in 30 days. You only made $100 profit, but if your paperwork is not completed correctly, uncle sum will ask the broker to withhold 30% of $1100.

Then you have to sort things out with uncle sam.

edaphos said: I'm a foreigner interested in investing in the U.S. stock market.

Just to be clear, I'm not in the U.S. I'm not a U.S. resident or citizen. The longest I'll ever be in the U.S. any given year is 2-3 weeks.

If I purchase stock, I'll have to pay 30% on any dividends but capital gains will be exempt if they are long term. Is that correct? If so, what amount of time makes the difference between short and long term?

Does it make any difference if I invest as an individual or through a foreign company I own? The reason I ask is because, investing through my company would ease my tax burden over here.

I understand I would need to get an ITIN number from the IRS, right? Is there anything else I would need before I could get started?

Does anyone know of an inexpensive online broker I can use? It seems most don't deal with foreigners.


I believe you can open an account with any online brokerage (I have asked tradeking and ameritrade), they will need to you file a W-8BEN.
Where are you located? there is a treat rate table on IRS Pub. 515, you may qualify for treat rate benefits. the NRA(non-resident alien) tax withholding on dividends for countries like canada and UK is 15%. japan and china is 10%.
The diff. between short term and long term is you need to hold it for one year. STCG is treated as dividends, no NRA tax w/h on LTCG.

individual or foreign company is treated the same(in most case, unless when it comes to REIT), they all need to fill a W-8BEN and you can claim treaty rate benefits.

no, you do not need to get a ITIN number. All you need is opening a brokerage account, they will require you to fill out a W-8BEN. they may ask for your passport copy.

Is ameritrade $10/trade too much? there are others, zecco, tradeking, sogotrade, etc.

tolamapS said: Question to be asked is: are you trying to invest in US stock market assets, or are you trying to open the account in the US.

In general, those who are non-US for tax purposes don't pay capital gains taxes. But I suspect you might have to pay taxes in your own country.

Also, if you don't get your paperwork right, you will get 30% with-holding on disposition. For example, by XYZ for $1000 today, sell for $1100 in 30 days. You only made $100 profit, but if your paperwork is not completed correctly, uncle sum will ask the broker to withhold 30% of $1100.

Then you have to sort things out with uncle sam.


What do you mean "non-US for tax purposes don't pay capital gains taxes?"

No, you can send in the correct form with an affidavit stating that this form is signed in the beginning of the year. it can be applied retroactively for the people that filed with W-8BEN.
It doesn't apply retroactively for W-9 (US resident), which you would have to sort things out with uncle sam.

Thanks for all your answers. They were all very helpful.

In response to some of your questions:

1) I live in Chile. We don't have a tax treaty with the U.S. I'll have to pay 30% on dividends. I forgot to ask: What happens if I reinvest the dividends? Do I get taxed the same?

2) I know I'll have to pay taxes here, that's why I would want to do it through a local company I own.

3) Yes, I can invest through a Chilean broker but the fees are ridiculus. They charge something like a 2% commision and the minimum trade is somewhere around $50,000. Ameritrade's $10 per trade sounds pretty good by comparison.

I'm a bit confused about the withholding paperwork. Why would the broker mess up? Why would I have to file retroactively?

edaphos said: Thanks for all your answers. They were all very helpful.

In response to some of your questions:

1) I live in Chile. We don't have a tax treaty with the U.S. I'll have to pay 30% on dividends. I forgot to ask: What happens if I reinvest the dividends? Do I get taxed the same?

2) I know I'll have to pay taxes here, that's why I would want to do it through a local company I own.

3) Yes, I can invest through a Chilean broker but the fees are ridiculus. They charge something like a 2% commision and the minimum trade is somewhere around $50,000. Ameritrade's $10 per trade sounds pretty good by comparison.

I'm a bit confused about the withholding paperwork. Why would the broker mess up? Why would I have to file retroactively?


It doesn't matter, you have to get paid the div before it got reinvested. the div payment will be withheld at 30%.

There are a lot of things can go wrong on a W-8BEN. Since Chile has no treat rate, it is withheld at the max. The case is different when you are qualified for treat rate, but the tax document is invalid, then every income payment get withheld at the max. You want to fix the document program and get back the tax withholdings that were withheld at max.

You may want to invest in debt securities(US gov't or US corp bonds). no tax withholding on ALL interest income.
You can also invest in ADRs, which is foreign companies list on US stock exchanges. there is no NRA tax withholding on these, but you may get foreign withholding.
There are some special firm such as Freeport-Mcmoran, their prospectus stated that only .45% for year 2008 is taxable income. income from foreign source is not taxable in US.

Matthew53 said:
2. Non-US tax persons are taxed as follows: ... (b) taxed just like a US citizen on any income that is effectively connected with your friend's US trade or business.


With some risk of confusing things, one point to add. Gains attributable to dispostions of US real property interests are treated as if they were gains effectively connected to a US trade or business. This may result, for instance, in taxation of capital gains on stock sales. Some REIT shares are subject to this rule; some are not. (So-called "capital gains" dividends from REITs are generally subject to this rule even if a Treaty says 0% withholding on dividends.) If the company you're interested in is a REIT or has tons of US real estate, ask to see a tax disclosure to see how this might impact you.

---

This is not tax and/or legal advice and was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties. Ask your own advisor.

edaphos said:
3) Yes, I can invest through a Chilean broker but the fees are ridiculus. They charge something like a 2% commision and the minimum trade is somewhere around $50,000. Ameritrade's $10 per trade sounds pretty good by comparison.

You may want to look at firstrade.com also. For stocks it charges $6.95 per trade. I (as a non-resident alien) was their customer and I was very satisfied with them. Customer service was really efficient and fast and their online interface was overall great.
Now, I moved to zecco because of trading fees.

I am a foreigner. If I get dividend from Non-US companies whose stocks are traded in the New York Exchanger, does US still taxes on my dividend income?

I am a foreigner. If I get dividend from Non-US companies whose stocks are traded in the New York Exchanger, does US still taxes on my dividend income?



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