Federal Estate Tax Considerations for Foreigners Investing in the United States
Ines Zemelman, EAMar-10-2016
As a foreigner holding assets in the United States, you may actually be able to benefit from the investment atmosphere in the US.
Leaving income-producing assets in the US may be advantageous for foreigners. If you are a foreigner who owns financial assets in the United States, you are not subject to the capital gains tax and interest on bank accounts is also tax free. You will, however, be charged at a rate of up to 30% for dividends. If there is a treaty between your home country and the US, then this tax rate could be reduced to 10% to 15%. You may also recover this tax as a credit in your country of residence.
Foreigners in America who acquire U.S. assets and then leave the U.S. and continue to own those assets need to be aware of Federal estates tax rules.
There is a flip side to the advantageous tax policy regarding U.S. assets held by the foreigners. The U.S. imposes a 40% estate tax rate on U.S. assets above a $60,000 exemption threshold on assets of the deceased nonresidents. Foreign estates become subject to U.S. estate taxation with respect to their U.S.-situated assets.
U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A non-resident’s stock holdings in American companies are also subject to estate taxation..
Certain assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.
The estate of a nonresident alien may deduct from the gross estate the value of property passing to the decedent’s surviving spouse if the spouse is a U.S. citizen or resident alien regardless of whether the spouse lives in the U.S. or abroad. However, if a spouse is also a non-resident alien, the unlimited spouse exemption does not apply.
Effect of Tax Treaties
A limited number of countries have estate tax treaties with the U.S. that eliminate certain types of asset situated in the U.S. from the 40% estate taxation. Only the following countries have estate/gift tax treaty with the U.S.: Australia, Austria, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. Even for those countries reduction of tax exposure is only partial.
Definition of Domicile for Estate Tax Purposes is Different from Criteria of Domicile for Income Tax Purposes
The concept of domicile allows to treat U.S. -situated estate of a non-resident as a U.S. estate with the exemption threshold of $5.4M instead of$60K. An alien is considered a U.S. resident if he or she is domiciled in the U.S. at the time of his or her death or at the time of a gift. If an alien enters the U.S. for even a brief period of time, with no definite present intention of later leaving the U.S., he or she is deemed to be domiciled in the U.S. and, therefore, is considered a U.S. resident for estate and gift tax purposes.