U.S. Tax Rules for Foreign Investors

Foreign Investors in the U.S.: Key Classifications

For tax purposes, foreign individuals typically fall into one of three categories:

1. Non-Resident Aliens (NRAs)

Individuals who are not U.S. tax residents and do not hold a green card.

NRAs are generally taxed only on U.S.-source income, not worldwide income.

2. U.S. Tax Residents

A foreign national may become a U.S. tax resident if they meet the Substantial Presence Test (SPT).

U.S. tax residents are taxed on worldwide income and face U.S. reporting obligations.

3. Visa Holders

Visa holders may be either:

• NRAs, or
• U.S. tax residents

depending on how much time they spend in the United States and whether they meet SPT.

Understanding classification is essential before assessing investment tax rules.

What Income Is Taxed for Non-Resident Aliens (NRAs)?

NRAs are generally taxed only on U.S.-source income:

• U.S.-source dividends
• Certain interest
• U.S. rental income
• U.S. business income
• Effectively Connected Income (ECI)
• Capital gains in specific circumstances
• Certain distributions from U.S. retirement plans

Investment income is taxed differently based on type.

How the U.S. Taxes Foreign Investors on U.S. Stock Dividends

NRAs generally pay 30% withholding tax on U.S. stock dividends

unless reduced by a tax treaty.

Withholding is taken at source

The U.S. broker or custodian typically withholds tax automatically.

Treaty rates may reduce withholding

Common treaty reductions include:

• 15%
• 10%
• 5%
• 0% (rare, treaty-specific)

The rate depends on the investor’s country of tax residence.

Filing Form W-8BEN is required

This form:

• certifies foreign status
• enables treaty withholding rates
• prevents brokers from applying backup withholding

Capital Gains Taxation for Foreign Investors

Capital gains rules differ from dividend rules. In most cases, NRAs are not taxed on gains from U.S. stocks unless:

• they are considered a U.S. tax resident
• they trade as a U.S. business
• FIRPTA applies (for real estate)

Treaty rules may override general rules

Some treaties specify capital gains treatment.

U.S. residents (foreign nationals who meet SPT)

are taxed on worldwide gains and must report all sales.

This distinction between NRAs and residents is important.

Interest Income for Foreign Investors

Portfolio interest

Many types of interest are exempt from U.S. withholding tax for NRAs.

Bank deposit interest

Generally not taxable to NRAs.

Exceptions

Some interest types may be taxable depending on:

• investment structure
• U.S. residency status
• entity classification

Certain structured products require careful evaluation.

U.S. Taxation of ETFs, Mutual Funds, and Funds

U.S.-domiciled ETFs and mutual funds:

• may distribute dividends,
• may generate capital gains,
• are taxed differently for residents and NRAs.

NRAs:

• Dividends taxed at 30% withholding (or treaty rate)
• Capital gains generally not taxed
• Interest distribution treatment varies

U.S. Tax Residents (including visa holders who meet SPT):

• taxed on global distributions
• taxed on gains
• must report PFICs if holding non-U.S. funds
• may face additional reporting obligations

U.S. Real Estate and FIRPTA Rules

U.S. real estate investments fall under FIRPTA (Foreign Investment in Real Property Tax Act).

Sales of U.S. real estate by NRAs

Generally subject to 15% withholding on the sale price.

Taxable gain is determined at filing, not at withholding.

Rental income

NRAs may elect:

• gross withholding, or
• net income taxation as ECI

Treaty rules

Some treaties adjust how real estate income is taxed.

PFIC Rules for Foreign Investors Who Become U.S. Residents

If a foreign national becomes a U.S. tax resident:

may be treated as PFICs (Passive Foreign Investment Companies).

PFIC rules can:

• change tax treatment,
• require Form 8621,
• create administrative complexity.

These rules apply once the investor becomes a U.S. tax resident.

NRAs are not subject to PFIC rules.

Retirement Plans and Foreign Nationals

Foreign nationals may hold:

• U.S. employer 401(k)s
• IRAs
• SEP/SIMPLE plans
• foreign pensions
• stock plans

Taxation depends on:

• NRA vs resident status
• treaty rules
• distribution timing
• source-of-income classification

401(k)/IRA withdrawals

Taxed under U.S. rules.

Foreign pensions

May be taxed by the U.S. depending on residency.

Visa holders

May access employer plans depending on eligibility.

Social Security for Foreign Nationals

Social Security benefits:

• may be taxed by the U.S.
• may also be taxed by treaty partners depending on treaty articles
• totalization agreements may prevent double social security contributions

Benefits may be payable to many countries.

Reporting Requirements for U.S. Residents With Foreign Investments

Once a foreign national becomes a U.S. tax resident, they may need to report:

• FBAR (FinCEN 114)
• FATCA Form 8938
• Form 8621 (PFICs)
• Form 3520/3520-A (certain trusts)
• Form 1116 (FTC)
• Schedule B for foreign interest

Reporting obligations are separate from taxation.

Common Situations Where Double Taxation Questions Arise

The following are frequent situations faced by foreign nationals:

1. Dividend withholding vs home-country tax

Some countries also tax foreign dividends.

2. Rental income taxed in both countries

FTC rules may reduce U.S. liability depending on circumstances.

3. Pension distributions taxed based on residency

Treaties may specify which country has taxing rights.

4. Gains realised while becoming a U.S. resident

Entry valuation rules may be relevant in certain jurisdictions.

5. Gains realised after leaving the U.S.

Non-residency rules differ across countries.

6. Cross-border business income

Depends on permanent establishment rules.

7. U.S. retirement plan distributions after leaving the U.S.

NRA rules and treaty articles may apply.

W-8BEN: Why It Matters

The W-8BEN form allows:

• certification of non-U.S. taxpayer status
• application of treaty withholding
• prevention of backup withholding

It must be updated every three years.

Hypothetical Examples

These do not represent actual clients or outcomes.

Example 1 - Non-Resident Investing in U.S. Stocks

Profile:

• lives outside U.S.
• buys U.S. shares

General considerations:

• dividends subject to withholding
• capital gains generally not taxed
• W-8BEN required

Example 2 - Visa Holder Becoming U.S. Tax Resident

Profile:

• moves on H-1B visa
• becomes U.S. tax resident under SPT
• holds foreign ETFs

General considerations:

• PFIC rules may apply
• worldwide income reportable
• different tax rules apply vs NRA status

Example 3 - NRA Selling U.S. Rental Property

General considerations:

• subject to FIRPTA withholding
• tax return required to reconcile gain

Example 4 - Foreign Professional Working Temporarily in U.S.

General considerations:

• income classification may vary
• treaty articles may apply
• foreign investment income is worldwide income for residents

Practical Checklist for Foreign Investors

How Skybound Wealth USA Supports Individuals

Skybound Wealth USA supports individuals with:

• cross-border investment considerations,
• global retirement planning,
• understanding U.S. tax rules for international investors,
• PFIC-aware portfolio structuring,
• coordinating planning with tax professionals when needed,
• multi-currency projections using MoneyMap,
• long-term planning for expats, NRAs, and visa holders.

Conflict Disclosure:
Skybound Wealth USA may receive advisory fees when individuals choose advisory services involving assets under management.
Individuals should evaluate all available options before making decisions.

Next Steps

If you would like to understand how U.S. investment tax rules apply to your global portfolio, you may schedule a discussion with Skybound Wealth USA.