Key tax considerations for non-US persons investing in the US

What types of US sourced income are NRAs subject to US tax on?

As a NRA, you are potentially subject to US tax on certain US sourced income that is either: 

• “Fixed or Determinable Annual or Periodical income” (FDAP); or
• Certain US-source capital gains; or
• “Effectively Connected Income” (ECI) from the conduct of a “trade or business” within the US.

Generally, ECI is taxed on a net basis at graduated rates, while FDAP income is taxed only on a gross basis at a flat rate of 30%. 

US tax is often withheld from US sourced income and if you invest only in FDAP income producing assets, then you’re normally not required to file a US income tax return because tax should have been fully withheld at source. US sourced dividends will be subject to a flat rate of 30% withholding tax or potentially a lower rate if you are able to claim the benefits of a double taxation treaty  and a Form W-8BEN has been completed accordingly.

FDAP income includes passive investment income, such as US sourced dividends or interest, however there is an exemption for US sourced interest income received from bank deposits, financial institutions, and insurance companies. 

As a NRA, if you have capital gains from selling personal property this is generally not subject to US tax but you should be aware if you’re a NRA student present in the US for greater than 183 days in a year, you would be subject to a flat tax of 30% on US sourced capital gains.  Please note that gain or loss from the sale or exchange of personal property generally has its source in the US if the NRA has a tax home in the US.

Capital gains from the sale of US real property is always ECI so you’d need to file a tax return in this situation. By default, withholding tax of 15% should be applied to the sales proceeds when you sell US real estate but potential it may be possible to apply for the withholding tax to be reduced if you know that the tax due on the gain will be lower than 15% of the proceeds.  If this is not possible, then any excess withholding can be reclaimed on the tax return.

If you were to sell US real estate, the US would have the primary taxing rights on any capital gain realised, but the transaction may also be reportable and taxable in the jurisdiction where you are resident. If so, you would need to consider how your tax in that jurisdiction could be eliminated or reduced. If there is a double taxation agreement between that jurisdiction and the US, this would be a useful resource in ensuring that there is no double taxation

Rental income from US real estate can potentially be FDAP or ECI, depending on the situation, however, it is often favourable to elect to treat the rental income as ECI so that deductions can be claimed against the rental income.

What are the global tax consequences of US investments for a NRA?

When investing in the US it’s worthwhile looking at the potential US tax implications and the implications in any other jurisdictions that may be relevant.  For example, the following table explores the US and Hong Kong tax consequences of certain US investments for a citizen of Hong Kong who is resident in Hong Kong for tax purposes.

Note that Hong Kong generally taxes its residents on a territorial basis, so there are not many items in the above summary that would attract Hong Kong tax. This would apply to some other jurisdictions in the Asia Pacific Region but not to all of them. Long term residents of China or Australia, for example, would have to deal with more complex interactions between the domestic rules of those jurisdictions and the US rules, using their treaties with the US to mitigate any exposure to double taxation.

When are NRAs subject to US gift and estate tax?

As a NRA, you are subject to gift and estate tax only on US situs assets, which for estate tax purposes includes US real estate, tangible property located in the US, and stock in a US corporation. Cash in a US bank deposit/savings account does not count as a US situs asset, however, cash within an investment portfolio would count as a US situs asset. For gift tax purposes, US situs assets include only US real estate and tangible personal property and cash located in the US is considered tangible personal property.  

NRAs only have a $60,000 lifetime exclusion but are entitled to up to $16,000 of gift tax allowances each year. Only a small number of jurisdictions have estate tax treaties with the US but if one is in place with the jurisdiction where you are resident, it may be beneficial and may have an influence on your tax planning.  It will be worth checking whether there is a treaty that is applicable to you.

It’s possible that owning US real estate through a foreign entity such as a trust or corporation could have some tax advantages in terms of removing the property from the US estate tax regime. It will be worth considering this when carrying out your estate tax planning.   

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