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What is the Best Brokerage for Expats?

What is the Best Brokerage for Expats?

One of the challenges for expats that leave the United States and want to invest elsewhere is that the traditional investment options available to them in the United States may not be available. As a result, there are a couple of custodians in our experience that are more “friendly” than others.

Please note that most U.S. brokerages do not accept clients internationally, or will often freeze or restrict purchases in customer accounts whenever they learn that the account holder has moved abroad. It is best to ask your financial advisor or contact the brokerage house directly to do some due diligence on your particular situation before moving forward with any of these options. For instance, some expats believe that they can just use a P.O. Box or a friend’s address, but in many cases, it is not that simple (and potentially not legal either!). It can leave the expat with very few comfortable alternatives. 

Rather than provide an exhaustive evaluation of various brokerages, we’ll provide commentary on the two brokerages that we believe, from our perspective as advisors dedicated to working with international clients and communicating with hundreds (perhaps thousands) of expats around the world and provide the most coverage for investors living overseas: Charles Schwab and Interactive Brokers. These two brokers stand apart in our opinion based upon two key criteria for international investors:

1. Their overall international footprint (the countries that they are “open” to servicing residents; and

 

2. That their international footprint applies whether the account holder works with an advisor (an “institutional” client) or goes it alone (a “retail” client).

The tools tend to differ for overseas investors utilizing a U.S. brokerage (even when that brokerage is receptive to the non-resident account holder). As products that are offered by prospectus and technically “issued” by the managing firm of the product, domestic U.S. mutual funds are generally off limits to all investors with a non-U.S. address (even if they are U.S. citizens). Accordingly, those looking for efficient means for diversification will have to look to Exchange Traded Funds (ETFs). ETFs have exploded in popularity in recent years and offer, in many cases, a low-cost, tax-efficient, diversified manner in which to invest. However, more recent regulations in the European Union have restricted, or at least limited, access to ETFs for European Union residents

Accordingly, being able to utilize a U.S. brokerage still often comes with limitations and will often require additional effort, skill, and/or attention than many retail investors may desire. The regulatory landscape, as it has evolved, has certainly required us to utilize a variety of strategies to ensure our clients are appropriately invested. We’ll now provide a brief overview of what our top choices for U.S. brokerages serving the overseas markets bring to the table for their retail and institutional clients. We’ll consider the strengths and limitations generically, but we would advise that the right choice for an investor will vary depending on both the specific country in which the investor lives, as well as their personal preferences and experience with managing their investments.

Interactive Brokers

Interactive Brokers (IB) has built its reputation as an alternative to conventional Wall Street firms and the champion of the individual investor by offering a truly global platform where individuals can trade not just on the U.S. exchanges, but around the globe on most of the world’s leading stock exchanges. In addition to individual stocks and bonds, customers of IB can purchase ETFs and, most importantly, transact in foreign currencies with very low-cost forex trading. These features can provide tremendous value to investors that live abroad and who earn their living and spend their earnings and savings in foreign currencies. In a sense, IB opened up a truly global institutional-class trading platform for retail investors.

Investors living in “difficult” jurisdictions (meaning countries where other brokers, including Schwab, will not accept clients) would be well-served to check out Interactive Brokers. IB clearly stands alone as the most accessible brokerage platform for international access to the U.S. and most foreign exchanges. There are still places where IB won’t work, including countries where the U.S. Treasury Department’s Office of Foreign Asset Control has slapped it with sanctions, and even a few “friendly nations,” but IB is open for business in more countries than any other reputable brokerage firm. 

Unfortunately, world-class access isn’t always matched with world-class customer service. Interactive Brokers receives a lower score when it comes to getting assistance on the phone, though this has actually improved with time. When there are issues with wire transfers or ACH overnight transfers, it can be frustrating to get actual help from a human being at times. Another caution for relatively inexperienced investors is that the trading platform might seem overly complex for many (particularly the downloadable trading platform known as “Trader Workstation”). 

Moreover, although the commissions are low (or even free, depending on account type), basic features widely available elsewhere, such as news streams and real-time quotations, require monthly subscriptions for IB clients.

Americans should also be very, very careful when purchasing investments on overseas exchanges to avoid the tax consequences of owning Passive Foreign Investment Companies (PFICs). This is one of the great pitfalls that expats must avoid or face daunting tax and reporting issues that are best avoided altogether. PFICs include ALL foreign-registered mutual funds AND ETFs. Often, for every large and liquid ETF that trades in the United States, there are several foreign-registered ETFs that trade on overseas exchanges and which bear the identical name to their U.S. counterparts. U.S. tax residents should be very careful to avoid purchasing ETFs on foreign exchanges in taxable brokerage accounts. Unfortunately, while all foreign-registered ETFs are PFICs, not all PFICs are ETFs (or mutual funds). There are many publicly-traded foreign companies and other entities that generate enough passive income to meet the definition of a PFIC. In this sense, IB’s incredible access to foreign markets can be a dangerous tool in the hands of the inexperienced and/or unaware. For even more information on this, check out our white paper, “Why is it so Hard to Open Investment Accounts for American Expats”.  

Finally, it should also be noted that for residents of the EU, Interactive Brokers has blocked access to U.S.-registered ETFs. Given the dangers of foreign-registered ETFs, discussed above, this leaves Americans in the EU with the daunting task of constructing their portfolios with individual securities (e.g., stocks and bonds) rather than getting their diversification through ETFs. For unsophisticated investors, or even sophisticated investors that don’t have the time or inclination to manage their own stock and bond portfolios, this is a major impediment that must be considered. IB has also made it more difficult for advisors on the IB platform to service EU-resident clients, which is particularly unfortunate given the restrictions on trading ETFs and the aforementioned complications with portfolio construction. It’s an evolving regulatory landscape that has not always been navigated with aplomb. 

Charles Schwab

The online brokerage universe has consolidated tremendously over the past few years, and perhaps the greatest single consolidation has recently arrived with Schwab’s acquisition of T.D. Ameritrade. Schwab was one of the first retail brokers to go online many years ago and today is one of the largest brokerage firms in the world. It services retail clients who do not work with advisers, it has its own advisory services business, and it is a leading institutional platform for independent advisors (including our firm and thousands of other independent firms) on the Schwab Alliance platform. 

Schwab offers a wide menu of ETFs and no commissions on ETF trades. It’s a very robust U.S. platform with thousands of dedicated customer service personnel to assist customers of all three varieties mentioned above. The technology platforms that customers can access at Schwab are very user-friendly as well, though perhaps not cutting-edge in their technological innovation (the capital has clearly gone more to M&A than R&D!).

More importantly for international investors, including U.S. expats, Charles Schwab has maintained, even expanded, account services for residents outside of the United States over the past few years. In the latter part of 2022, Schwab added quite a few countries to its list of permitted jurisdictions, including many EU countries. Of all the “big” brokerage firms, Schwab stands out for its international ambitions in an era where so many of its contemporaries have closed the accounts of expats and other foreign resident customers. Furthermore, Charles Schwab stands apart from the other majors in expanding the country menu for clients both on the retail and the institutional platform. While Fidelity offers some expanded accessibility on the institutional side to foreign residents working on its advisory platform, it has been chastised in the expat community for kicking retail customers living outside of the United States to the proverbial curb.

However, even Schwab’s international ambitions have their limits, so Schwab may or may not provide the ideal solution for the expat/international customer, depending on individual circumstances regarding the customer’s residence and/or whether the customer works with an advisor (institutional client vs. retail client). In fact, while 2022 saw many countries added to the permitted jurisdiction list at Schwab, a small group of restricted countries was further downgraded, meaning existing customers were asked to find a new custodian, further highlighting the fact that Schwab’s policies towards a given country may prove fluid, despite continued momentum toward expanding Schwab’s reach.

If you want to see whether you live in a permitted country, Schwab provides a convenient link to try to open an international account:

OPEN SCHWAB INTERNATIONAL ACCOUNT

From there, you can simply go to the drop-down menu of countries on the page and select your residence country to determine whether you can complete an application or whether Schwab is unavailable for residents in your country at this time. 

For clients living in the EU and working with U.S. independent advisors on the institutional platform, Schwab offers a key advantage: access to U.S.-registered ETFs. Unfortunately, retail Schwab customers with EU addresses will be blocked from purchasing U.S.-registered ETFs. Accordingly, just as with IB, retail customers in the Eurozone are considerably hampered by the EU rules that foreclose access to simplified diversification offered by ETFs (and mutual funds).

As an experienced advisor in the expat field, protecting clients from custodial policy changes and/or country/regional regulatory changes requires continuing relationship-building with alternative custodians and growing our menu of investment capabilities, such as considering “direct indexing” strategies where ETFs either will not work and/or fail to offer the personalized approach that clients prefer. Through those efforts, we have solutions that can help us assist U.S. clients in any and all jurisdictions saved OFAC-sanctioned countries and which can provide improved diversification and personalized opportunities to meet the evolving needs of the underserved expat market. Unfortunately, these options may not be as practical, or as available, for investors who choose to self-direct their investments.

This is by no means intended to be an exhaustive examination of the advantages and limitations of the best brokerages for expat and/or international investors who hold, or wish to open, accounts in the United States. Rather, it is our intention to provide an introduction to the brokerages that we have found to be the best solution for the largest number of foreign investors, particularly U.S. expats. As with most things related to investments, individual results and experiences will vary. Moreover, the regulatory landscape is fluid and ever-changing. 

As independent advisors who are dedicated to serving the international community from the United States, we aim to educate and inform this community on a variety of topics of which the ability to hold investment accounts ranks prominently for reasons that hopefully are now quite obvious. The decision on finding the right brokerage (or simply any U.S. brokerage) is not a one-size-fits-all proposition, but one that requires analysis of the investor’s needs, preferences, wealth, and, of course, residence status. If you would like to have a conversation with one of our advisors to see if we would be a good fit for your particular situation, we invite you to learn more about our international team by visiting our website.

The Walkner Condon U.S. Expat Team

UPDATE: This piece was originally published on Nov. 1, 2019. It has been revised to reflect changes in the international/U.S. expat investing environment to give you the most up-to-date information.

Tax Loss Harvesting for U.S. Expats & Americans Abroad

Tax Loss Harvesting for U.S. Expats & Americans Abroad

One of the many things year-end in the financial world means is tax loss harvesting.

In this episode of Gimme Some Truth for Expats, Stan Farmer, CFP, J.D., and Syl Michelin, CFA, explore the world of tax loss harvesting, particularly the case of tax loss harvesting for U.S. expats and Americans abroad.

In a sentence, tax loss harvesting simply means selling certain investments at a loss to reduce your tax bill or offset capital gains. Capital gains – either short-term or long-term – come when investments are sold and have appreciated beyond the price at which they were initially purchased. For example, you purchased Apple stock at $40.56 a share in 2018 and sold in 2022 when Apple was at $140.09. 

Stan and Syl delve more into the definition and basic components of tax loss harvesting. They follow with examples and how it applies to U.S. expats and Americans abroad. As is the case with many expat financial topics, tax loss harvesting becomes more complicated when you’re living outside the U.S. And, punctuated by Syl’s laugh about it in the episode, there’s a lot more to tax loss harvesting than meets the eye, which is how this episode ended up as nearly 40 minutes. But it is still an important financial topic for expats to explore. 

Questions about tax loss harvesting as an expat? Other questions about living abroad as an American? Send them to us, and we might feature them on a future episode of the podcast. You can also reach out to our team and speak directly with an advisor by tapping the buttons below. 

DEVELOPING A STRATEGY TO NAVIGATE THE EXPATRIATION PROCESS 

DEVELOPING A STRATEGY TO NAVIGATE THE EXPATRIATION PROCESS 

INTRODUCTION – WHY EXPATRIATE? 

Americans tend to be a relatively patriotic group, even when life’s journey takes them overseas to live. However, as many Americans become settled over time in a new country, it is only natural that they adapt to the culture, the language, the environment, etc., and adopt a new country as their “home.” Many of our expat clients acquire dual citizenship after spending significant time in a new residence country, or they are able to acquire a second passport even faster due to the nationality of their parents or grandparents. 

Unfortunately, and quite unfairly, the retention of U.S. citizenship often then becomes a special burden to them, because of the unique laws of the United States that base income tax residency on citizenship, not on actual residency. Accordingly, the U.S. “dual national,” who may feel the ties to the U.S. ever fading, is also a “dual tax resident,” meaning that they are also subject to income taxation on worldwide income, from all sources, in both their new “home” country and the United States. Moreover, should they choose to gift wealth during their lifetime, or bequeath their wealth to others at death, the gift, estate, and/or inheritance tax laws of both countries may stake a claim to tax these wealth transfers.

COMPLICATIONS FOR LONG-TERM U.S. RESIDENTS

There is another, larger group of U.S. taxpayers that may find themselves in this same situation: long-term U.S. residents. These are noncitizens that held a U.S. green card and lived in the United States for eight years in any 15-year period. Once you become a long-term resident, U.S. tax residency permanently follows you when you leave the United States, whether the long-term resident returns to their home country or elsewhere. They may let their green card expire, but the tax residency is not so easily shed.

SEVERING TIES WITH U.S. TAX RESIDENCY

There is a way out for both the U.S. citizen abroad and the U.S. long-term resident abroad that wants to sever ties with their burdensome U.S. tax residency: Formal expatriation, first through immigration filings renouncing long-term resident status (Form I-407) or citizenship (State Department Form 4079, Form 4080, Form 4081, and Form 4082), followed thereafter in a final U.S. tax resident form 1040 filing, accompanied with special expatriation tax filing form IRS Form 8854 (the Expatriation Statement). 

As a financial advisor who has had many client and prospective client discussions regarding the tax consequences, formal tax process, and tax-minimization strategies concerning expatriation, I will focus on the tax aspects of expatriation rather than get into the less familiar weeds of the surrendering of green cards or passports. I have only one point to emphasize on initiating the process through an expatriating act (Form I-407 or Forms 4079-4082): Do NOT go through with this until you have worked out the details of the tax filings and statements associated with expatriation, discussed below, and conclude that t

FORM 8854 AND “COVERED EXPAT” STATUS

Form 8854 is, essentially, a declaration of the expatriate’s complete balance sheet as of that day before they formally expatriated (the “valuation date”). It must include all the items that would be considered to be in their taxable estate if they were to have died on the day before they formally expatriated. Valuations of assets ranging the gamut, including real estate, art and jewelry, private business ownership interests, etc. must be attested to by licensed appraisers, while pensions, retirement accounts, and brokerage accounts must be listed, with their market values as of that same date. In addition to itemized valuations as of the valuation date, cost basis information must also be provided, for reasons that will be made clear below. Moreover, the expatriating individual must also make an attestation that they made full, complete, and accurate tax filings to the U.S. Department of Revenue for the last five years.

The expatriation statement, tax returns over the preceding five years, and personal attestation of complete transparency and accuracy will help determine the most critical element of expatriation, namely, whether the expatriating individual will be deemed to be a covered expatriate. This status will largely determine the financial consequences of expatriation, now and into the future. If covered expat status is avoided, the expatriating individual will pay their last U.S. federal tax bill as a tax resident (reporting worldwide income) for the year (or partial year) before expatriating and then, thereafter, would only be liable for U.S. taxes on U.S. source income, and subject to the U.S. tax withholding rules that apply to non-U.S. persons. 

However, should the circumstances trigger the key status as a covered expatriate, additional financial obligations ensue. First, the covered expatriate will owe an exit tax, above and beyond ordinary income tax obligations, in the year of expatriation. More details of the exit tax may be the subject of an article focusing on this particular subject, but, to summarize:

  • The exit tax is calculated as if the expatriating individual sold all of their assets provided on Form 8854 the day before expatriating, meaning that all unrealized gains at that time are now, in fact, realized. This is subject to a special exemption on the first $737,000 of realized gains (2020, adjusts annually); and

  • For retirement accounts, the exit tax is calculated as if the expatriating individual took full distribution of the pension, deferred compensation plan, retirement plan, or IRA account. As this is ordinary income to the expatriate, the capital gains exemption above does not reduce taxes owed from these implied distributions. For qualified retirement plans like 401(k)s, but not IRAs, there is an ability to defer the tax from this implied distribution to when actual distributions are made, subject to special conditions, including application of the 30% withholding tax on each distribution and the waiver of the future right to reduce this withholding rate by tax treaty.

The burdens do not stop with the exit tax, either. Additionally, the covered expat will be deterred in the future from gifting or bequeathing assets to U.S. tax residents, such as family members that do not expatriate. Gifts and bequests from a covered expatriate are not entitled to a gift or estate tax exemption and are taxed at the maximum tax rate by law on the entirety of the gift or bequest (currently 40%, or even 80% on generation-skipping gifts or bequests). This tax is paid by the beneficiary/recipient U.S. tax resident.

COVERED EXPAT STATUS “TEST”

By now, given the punitive taxation that accompanies the covered expat status, it is obviously critical to understand the test for acquiring this unfortunate status and the exceptions that otherwise prevent the triggering of covered expat status. Basically, the covered expat status is triggered by any one of three tests – fail any of the there following tests, and the expatriating individual shall be deemed a covered expat:

  • The Compliance Test – As mentioned above, the expatriating person must certify they have been compliant with federal tax laws over the past five years. Failure to certify and/or failure to submit adequate evidence to substantiate compliance will result in covered expat status. Expect extra scrutiny of these tax forms during the process.

  • High Income Tax Liability Test – Looking at those past five years of tax returns, the expatriating individual will be deemed a covered expatriate if their average federal income tax liability over the five-year period exceeds $172,000 (2021, adjusted annually). Do not confuse this with annual income or adjusted gross income – the standard is an actual tax liability on average per year exceeding $172,000, which implies high earnings and/or significant capital gains realization during part or all of those five years.

  • High Net Worth Test – Looking at the balance sheet of the individual taxpayer, as submitted in Form 8854, including substantiation of the valuation of assets and liabilities, if the expatriating person’s net worth on the valuation date exceeds $2 million, the expatriate shall be deemed a covered expat. Remember, joint assets should be apportioned between individuals, so this is an individual net worth threshold, not a joint threshold. Unlike the high-income tax liability test, the $2 million threshold does not adjust to account for inflation.

It should come as little surprise that this third test, high net worth, is more often the test that triggers covered expat status, especially considering that net worth covers every item that would fall within the expatriating person’s taxable estate. However, getting around either of those tests’ thresholds may be a matter of timing, or, especially in the case of the high net worth test, a matter of strategically repositioning family wealth among family members.

There are a couple of important exceptions for those that would otherwise fail the covered expat tests:

  • Dual nationals from birth (oftentimes considered “accidental Americans”), who have lived in the U.S. less than 10 of the previous 15 years before the year of expatriation, who continue to be citizens and tax residents of that other country for which they hold citizenship; and

  • Citizens who expatriate before the age of 18 ½, who were resident of the United States for less than 10 years.

Remember that all expatriating persons must still file Form 8854 and go through the tax process of expatriation, even though these two groups may do so without fear of being deemed a covered expatriation.

To generally recap the tax rules regarding expatriation – the procedure for eliminating tax residency based on citizenship or long-term residency status – the expatriating person must commit an expatriating act and complete the tax filing and certification process outlined above. For the citizen, this will involve forms and procedures to formally terminate citizenship, e.g., surrendering the U.S. passport. For a long-term tax resident, this might involve voluntarily surrendering your green card. Letting a green card expire without renewal, by itself, may not be an expatriating act. Therefore, the completion of Form I-401, entitled “Record of Abandonment of Lawful Permanent Resident Status,” is critical to establish intent to expatriate for long-term residents. This will then trigger the obligation to complete Form 8854 and certify compliance with U.S. federal tax laws. 

During this tax process to conclude expatriation, a critical factor determining the real cost to get out of U.S. tax residency will be whether covered expat status is triggered. Because the consequences of that status can be so punitive in the present (exit tax) and thereafter to the American beneficiaries or heirs, it seems only logical to suggest that the expatriating person get some meaningful tax and financial advice well in advance of committing the expatriating act. In particular, if there is any real possibility that the three tests for covered expatriation could be met, and the two exceptions for covered expats will not apply, then developing and implementing a comprehensive strategy for expatriation with experienced financial and tax professionals may prove pivotal to navigating this process without creating unnecessary tax burdens for the expatriating person and their American families. 

HOW WE CAN HELP

At Walkner Condon, our international team of financial advisors is here to help guide clients that want to consider the possibility of expatriation. The first step of the process may be to determine what real tax advantage would flow from successfully expatriating. This requires an analysis of both U.S. and resident country tax laws and whatever tax treaties or compacts may factor in the distribution of tax payments by the client to each country. 

If there may be financial relief to be gained through expatriation, then an evaluation of whether the client would meet the covered expat criteria, or, importantly, whether there are steps necessary before expatriation to either (a) avoid covered expatriate status, (b) at least reduce the exit tax consequences, or (c) modify estate plans to reduce the gift and/or estate tax consequences flowing from the decision to expatriate. 

Ultimately, if a general strategy map toward expatriation is formulated, we’ll make sure that clients also get the tax and legal expertise needed to successfully implement that strategy and successfully navigate the complex rules of formal expatriation. It begins with a conversation, and we’re here to provide knowledge, support, and advice that is helpful and impactful. 

 

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your situation.

ABOUT THE AUTHOR

Stan Farmer, CFP®, J.D.

Financial Advisor

Stan Farmer is a member of Walkner Condon’s team of U.S. expat-focused advisors. He is a fee-only, fiduciary financial advisor who works with Americans abroad, wherever life takes them.

College Savings for U.S. Expats and Americans Living Abroad

College Savings for U.S. Expats and Americans Living Abroad

Saving for their children’s college experience is often a financial goal that many of our clients living in the U.S. want to accomplish. But that goal becomes more convoluted when you’re an American living outside the U.S. trying to send your child to university, whether they’ll eventually be attending a school internationally or one in the U.S.

In this episode, our team of U.S. expat financial advisors – Stan Farmer, CFP®, J.D.; Syl Michelin, CFA; and Keith Poniewaz, Ph.D. – break out the lesson plan and teach you the basics about college savings and how to navigate it as a subject. Unfortunately, the investment vehicles available to Americans living in the U.S. become considerably more complex when you move away. But there are still ways to work around those complications, which we delve into, as well.

Questions about this episode or topics you’d like us to cover in future episodes of our ‘Intro to Expatriation’ series? Let us know by sending an email to [email protected]

What to Know about U.S. Estate and Income Tax for Foreign Investors

What to Know about U.S. Estate and Income Tax for Foreign Investors

Disclosure: Any specific examples listed are solely intended for educational purposes and are not intended to be tax advice. Please consult with a tax professional for specific information related to your situation.

There are many reasons for foreign investors to hold investment accounts in the United States. With its long history of property rights, efficient and regulated capital markets, and plenty of affordable investment options, the U.S. consistently ranks as one of the best global destinations for wealthy international investors.

As attractive as the U.S. may seem, foreign investors also need to be aware of potential pitfalls. In this article, I will focus on investments in financial assets, such as portfolios of stocks and bonds held through U.S. institutions, as opposed to real estate. 

In principle, the U.S. is wide open to foreign investors, and there are no laws (whether federal or state) preventing foreign nationals from holding investment accounts. However, for various reasons (complexity, risk…), many brokerage firms, banks, and financial advisors may choose to limit their services to U.S. residents, or at least apply strict restrictions on services to non-U.S. clients (such as minimum asset size requirements). So finding the right investment partners already requires some familiarity with the U.S. investment landscape. 

U.S. Estate Tax for Non-Americans

Once you’ve found the right provider, your next concern should be the U.S. estate tax. Foreigners are only subject to U.S. estate tax on U.S. assets. But, in most cases, they only benefit from a measly USD 60,000 exemption (compared to USD 12.06 million for U.S.-domiciled individuals). Therefore, if a foreign account holder dies with investments in U.S. stocks worth USD 1,000,000, their potential U.S. estate tax liability would be USD 376,000, corresponding to a tax rate of 40% on amounts in excess of USD 60,000. 

As scary as this outcome may seem, it is entirely avoidable.

Investing in Non.-U.S. Situs Assets

One of the simplest ways to avoid it is not to invest in assets that are not subject to U.S. estate tax, which can be done even in a U.S. investment account. For example, investments in non-U.S. exchange-traded funds, or mutual funds (such as UCITS funds registered in Ireland or Luxembourg), are not considered U.S. situs and are not subject to U.S. estate tax upon the death of the non-resident owner. Likewise, ADRs of foreign companies, even if traded on the New York stock exchange, would not be subject to U.S. estate tax. More surprisingly, publicly-traded bonds are also not deemed to be located in the U.S. for the purpose of estate tax assessment, meaning that U.S. treasury bonds (possibly the most American of all American assets!) would not subject the owner to U.S. estate tax. 

Creating a Corporate or Trust Structure

With some careful planning, it is possible to design investment portfolios that avoid the pitfall of U.S. estate tax, even if held at a U.S. institution. If this option isn’t available, another strategy may involve the creation of some form of corporate or trust structure to hold investments. For example, many foreign nationals will choose to open their U.S. accounts in the name of an offshore investment company. Once in place, the company can invest in U.S. situs assets such as U.S. stocks. If the owner of the offshore company dies, ownership can be transferred to their heirs without subjecting their estate to U.S. taxes. The general principle at work here is that while the underlying investments may be in U.S. shares, the company itself is a foreign entity, and therefore not U.S. situs.

While these types of structures aren’t necessarily cumbersome to create, they do require careful consideration and planning, so investors should consult their legal counsel to ensure proper procedures are followed. 

Estate Tax Treaties with the U.S.

With all that said, there may be no need for clever portfolio construction, or for sophisticated corporate structures, if you happen to live in one of the 15 countries to have signed a bi-lateral estate tax treaty with the U.S. In many cases, such treaties will allow residents of the foreign nation to claim a larger U.S. estate tax exemption than the default USD 60,000. Or (depending on the specific treaty), may otherwise limit the scope of U.S. estate tax to very specific assets, such as immovable property. 

Foreign countries with estate tax treaties are:

  • Australia
  • Austria
  • Canada
  • Denmark
  • Finland
  • France
  • Germany
  • Greece
  • Ireland
  • Italy
  • Japan
  • Netherlands
  • South Africa
  • Switzerland
  • United Kingdom

U.S. Income Tax for Foreign Investors

What about income tax? Unlike U.S. investors, foreigners who hold U.S. accounts do not have to file with the IRS every year. Instead, they are subject to withholding at source on the U.S. investment income they collect in the form of dividends. The default rate of withholding is 30%, but once again, with a bit of planning and know-how, this outcome can be mitigated.

To start with, depending on where you live, the 30% at source withholding on U.S. dividends may not be much of an issue. Since many countries have a tax rate higher than 30%, many investors will be able to claim a credit on their local tax return and simply pay the difference. In this case, the U.S. withholding will not result in any net increase in the investors’ tax liability. 

If that isn’t good enough, additional relief from withholding tax may be available under the terms of the various income tax treaties between the U.S. and the investor’s country of residence. The U.S. currently has 58 such treaties with foreign countries, many of which provide reduced withholding rates on dividends. For example, an investor from Norway may avail themselves of a 15% rate (instead of the standard 30%) by making a claim under article 8.2 of the USA/Norway income tax treaty. The procedure for making the claim is fairly simple and involves completing section II of form W8Ben and submitting it to the institution holding your account. 

Finally – as was the case with the estate tax – income tax withholding can be avoided by simply not holding U.S. assets. An investor could select funds or shares specifically incorporated in foreign jurisdictions and hold them through a U.S. account.  A portfolio composed, for example, of exchange-traded funds listed on the London Stock Exchange may enjoy the dual benefit of avoiding exposure to both U.S. estate tax and U.S. income tax withholding (though various tax withholdings may take place within the fund itself, dispensing on the underlying investments…).

 

Conclusion

In summary, while foreign investors can greatly benefit from holding all or part of their investment portfolio in the U.S., there are various potential mistakes to avoid, relating to both estate and income tax. Don’t hesitate to reach out to our team at Walkner Condon to discuss your specific circumstances.

Can a Non-Citizen or Foreigner Invest in the U.S.?

Can a Non-Citizen or Foreigner Invest in the U.S.?

Are you a non-resident alien or non-U.S. citizen looking to invest in the U.S.? If you are, you might be wondering if it’s even possible to invest in the U.S. as a foreigner. 

Whether you’re part of a cross-border family or simply a non-U.S. citizen trying to invest in the U.S., there are quite a few myths and misconceptions about doing so as a non-American. We haven’t touched on this subject before, but we’ve still had a recent deluge of inquiries about investing in the U.S. as a foreigner. So we thought it was time to cover this subject more in-depth in what’s likely to be a multi-part series on the podcast.

In this episode, Keith Poniewaz, Ph.D.; Stan Farmer, CFP®, J.D.; and Syl Michelin cover the background on the topic and dive into the complications of investing in the U.S. as a non-American from both an inheritance perspective and income tax perspective. And when you’re investing abroad, the situs of the assets is critical. Simply put, the situs is the jurisdiction where property belongs for legal or tax purposes – in this case, the assets in which you’re investing. Keith, Stan and Syl define U.S. situs assets and non-U.S. situs assets, and how the situs status can impact your portfolio.

Questions about investing in the U.S. as a non-U.S. citizen or nonresident alien? Send them to us, and we might feature them on a future episode of the podcast. You can also reach out to our team and speak directly with an advisor by tapping the buttons below.