Investing in US Securities as a Non-US Person

The issue

A non-citizen living abroad who holds US shares, funds and bonds with a US broker is subject to income tax and estate tax rules that were not designed together. During life the account bears little US tax, mainly withholding on dividends. At death, US shares and fund units count as US-situs property regardless of where the account is maintained, and whether that exposure is real depends on the investor’s domicile and on the estate tax treaty, if any, with that country.

Who the guide is for

The guide is written for the investor rather than the professional advisor: individuals living outside the United States who hold or intend to open a US brokerage account, and the relatives who will deal with it after a death. Its premise is an investor who is neither a citizen nor an income tax resident of the United States, and it notes where a move there would change the analysis.

Residence and domicile

For the income tax, a non-citizen is a nonresident alien unless holding a green card or meeting the substantial presence test; the estate tax looks to domicile, and the estate tax treaties add special rules for a national who lives in the other country for a limited period. The treaty outcome therefore depends on domicile at death rather than on the residence recorded when the account was opened.

Dividends, interest, gains and the Form W-8

The guide covers the 15 percent treaty rate on portfolio dividends, including those of US funds, and its limits for real estate investment trusts; the exemption of portfolio interest and bank deposit interest; fund distributions that escape withholding only if reported as exempt; dividend equivalents on derivatives; and the rule that trading for one’s own account is not a US business (I.R.C. § 864(b)(2)). It explains what Form W-8BEN secures, why actively traded securities require no US taxpayer identification number, and what follows from a missing form: an individual is treated as a US person and backup withholding of 24 percent applies.

The estate tax: the treaty first, the Code second

For most of the firm’s clients the treaty, not the Code, sets the exposure. For an investor domiciled in Austria, Denmark, France, Germany, the Netherlands or the United Kingdom who is not a US citizen, the treaty reserves the entire account, including fund units, bonds and cash, to the country of domicile (Article 9 of the estate tax treaty with Germany; Article 8 of the estate tax treaty with France). The treaties with Italy and Switzerland and the Canadian treaty leave the US tax in place but require a proportionate share of the citizen’s credit, and under the Canadian treaty no US tax falls on the securities of an estate of USD 1,200,000 or less worldwide. Where the investor’s country has no treaty, as with Belgium, Spain, Luxembourg, Portugal and Israel, the Code applies alone.

After a death, and the planning that remains

The guide describes the return, the transfer certificate and the documents a family needs, and then separates two planning cases. An investor protected by a domicile-type treaty needs preparation rather than structures; a holding company would address a problem the treaty has already solved and can cost the treaty dividend rate. An investor without that protection compares three options against their income tax and home-country costs: holding through a non-US company, using funds domiciled abroad, and shifting toward registered bonds and bank deposits.

The questions the guide answers

• Which account income does the United States tax, and at what rate under the Code and the treaties?
• Why are capital gains on US shares generally exempt, and when does the exemption not apply?
• What does Form W-8BEN secure, how long is it valid, and what happens without it?
• Which assets in the account are US property for estate tax purposes?
• How do the estate tax treaties change the result for an investor domiciled in Europe or Canada?
• What must the family file after a death before the account is released?
• When is a holding company or a non-US fund worth its cost, and when is it unnecessary?

The firm advises investors living abroad, and their families, on the US side of their holdings: status under the Code and the treaties, documentation of the account and refunds of excess withholding, the estate tax position including the pro rata credit, the estate tax return and the transfer certificate after a death, and structures for investors without treaty protection. Home-country questions are coordinated with the investor’s advisors abroad.