Foreign Nationals Investing In The American Financial Markets
Foreign Nationals Investment, unlike the difficulties of a foreign national opening an American bank account, which you can read here, there is no citizenship requirement for owning equity in the United States financial investment marketplace. There are some extra steps foreign nationals will need to go through before investing in the U.S. stock market. Additionally, non-American owners of U.S. assets are held to a slew of U.S. laws meant to protect American interests.
Additional Requirements for Non-U.S. Citizens
While many requirements of brokerage firms are implemented internally, a few conditions result from the United States Patriot Act of 2001, intended to prohibit international criminal activity from infiltrating the marketplace.
A Certificate of Status of Beneficial Owner for the United States Tax Withholding and Reporting for, also known as the “W-8BEN” form, informs the Internal Revenue Service about a foreign national’s potential tax liability resulting from entering the American marketplace. See the W-8BEN form here. Specifically, this form allows individuals to claim benefits of the tax treaty from their home country. The specific benefits depend on where the foreigner is located. Usually, the tax treaty would be clear about a special rate of withholding with their income tax associated with their newly created brokerage account.
Taxation of U.S. Investments as a Foreign National
There are a variety of differences in the treatment of investment income between domestic and international investors. Especially, non-residents are not responsible for capital gains taxes on the earning from their investments. They may, however, still be required to pay their home country’s gain taxes. Additionally, dividends are usually taxed at a flat rate (currently, 30 percent). Again, this could vary depending on the nation’s tax treaty with the United States.
International Taxation rules are complex, and oftentimes there are circumstances that could result in vastly differing tax liabilities. It is essential to speak to a knowledgeable professional before investing in a foreign market. At Nimrod Yaron & Co., we specialize in international taxation and are versed in tax treaty law around the world.
Taxation of Foreign Investments as an Israeli Citizen
Within Israel, there is a form known as the 150 forms, “Declaration of Holding in a Foreign Resident Entity Held Directly or Indirectly – Annex to Annual Tax Return.” This form is for the Israeli Tax Authority, also known as the ITA. The 150 form is for Israeli residents and companies to identify holdings in foreign countries.
Various questions regarding the qualities and structure of the assets held are asked – specifically if the company is a flow-through entity. Notably, the form asks if the foreign entity is a CFC or “controlled foreign corporation” or an FPC, “foreign professional corporation.” Generally, CFCs have less than 30 percent of their shares or other rights are listed on a stock exchange, more than half of the means of control are controlled by an Israeli company, and passive income is taxed at 15 percent. An FPC can be determined if; it has less than six shareholders, is owned by more than 3/4th Israeli residents, and there is a “special profession” within at least 1/10th or more of the shareholders.
Reporting is required by an Israeli resident who holds 10 percent or more of the means of control defined in the form. One of the law’s biggest criticisms is that it provides exemptions for new residents of Israel. Any person who has been outside Israel for over ten years is also considered a new resident and thus is exempt from reporting their CFC and FPC holdings.
Transfer pricing is also required to be reported on a separate form, Form 1385. It must be filed by any taxpayer who has international transactions with parties related to them and holds more than half of any means of control. Read more about transfer pricing here.
The Israeli government has published documentation about doing business in Israel for people interested in foreign direct investment. Read about it here.
