Foreign investment opportunities in the US appeal to investors across the globe, most commonly in the form of stocks, commercial property, or currency. As a citizen of a country other than the United States, you must be mindful of the tax requirements set by the Internal Revenue Services.
An Overview of International Taxes
The IRS allows for several exemptions and deductions, such as the Foreign Tax Credit, aimed at reducing the burden of double taxation, which occurs when two separate jurisdictions (in this case the United States and your country of residence) attempt to levy taxes on your declared income. It is in your best interest to acquaint yourself with the basic requirements for claiming these credits, even if you opt to allow your CPA to prepare your international tax return on your behalf.
Who Must Pay Foreign Tax to the US?
The most common investment opportunities for foreign investors include exchange-traded funds, direct investment, and mutual funds. For exchange-traded funds and United States mutual funds, which can hold foreign stocks, foreign taxes are generally covered on behalf of you, the investor. It’s also possible that either of these types of funds will use foreign taxes it collects to create a tax benefit for shareholders.
Compared to mutual funds and exchange-traded funds, direct investments tend to be more complex; this includes American Depository Receipts, or ADRs. For the most part, an ADR trades much like a domestic investment. This rule does not apply for all countries, as some withhold taxes made on payment of dividends. Direct investments may also result in taxation of capital gains and dividend payments alike.