The United States is regarded as one of the most economically stable markets for investing, and it’s also one of the largest and most liquid capital markets in the world. As international individuals and families look to the US for investment opportunities, it’s important to understand US income tax and estate tax laws, and invest strategically and efficiently within that framework so as to ensure compliance with the laws – both in the US and your home country – while avoiding unnecessary taxation.
Below we outline some of the basic principles for non-US people to consider when investing into the US markets.
The 30 per cent Income Tax Withholding
Generally, the US imposes a steep withholding of 30 per cent on passive US income (in the absence of an applicable income tax treaty). However, certain types of passive US income earned by nonresidents are exempt from this withholding, including gains from the sale of US stocks or bonds, interest income from investments in US treasuries or qualifying US corporate bonds, and interest income earned through a US deposit account (e.g., checking, savings, CDs).
With a carefully structured portfolio, a non-US investor can establish a diverse US investment portfolio that will not require filing a US tax return, and will not be subject to the steep withholding rates imposed on passive US income.
The US Estate Tax
Generally, US estates over a certain value are subject to a significant estate tax paid upon the death of the asset owner. However, there are a number of ways that investors can look to structure assets so as to minimize the impact of this tax.
For an international investor who owns assets in the US, it's important to understand how the US imposes estate the tax on those US assets, including which types of assets are considered US-situated (also called 'US situs') assets, and which assets are subject to which tax:
- Upon the death of a foreign person not domiciled in the US (again, in the absence of an applicable US estate tax treaty), the US imposes an estate tax of up to 40 per cent of the value of US situs assets where the total value of those assets is over USD60,000.
- Some assets are specifically not considered US situs assets, and are therefore exempt from this tax for estate tax purposes. These include US treasuries and qualifying US corporate bonds, and cash held in a deposit account (e.g., checking, savings, CDs).
Using Corporate Entities and Trusts
International investors looking to acquire US assets may consider doing so through a non-US company, or through an irrevocable trust which can be established either within or outside the US. When a foreign company or irrevocable trust is properly structured, the assets owned within it will be exempt from US estate tax, even though the assets may otherwise be US situs.
When considering investments and other activities in the US, it's important to consider not only your investment objectives but also potential US tax impacts, since onerous US taxes effectively dilute the return on investment. Savvy investors therefore incorporate wealth planning early on in any US investment strategy.
HSBC Provides Planning Solutions, Wherever Your Investment May Take You
At HSBC Private Banking, we work with families and individuals around the world on the full range of their wealth planning needs. With experts on the ground in key markets around the world, we are continuously monitoring new developments, opportunities, and changes to tax laws and regulations that may impact how you invest. As you look to the US for investment opportunities, our dedicated team of Wealth Planners will work closely with you, together with your legal and tax advisors, to develop solutions that make the most of your wealth.
Contact your Relationship Manager to be put in touch with one of our wealth planning experts.