The United States offers a variety of tax benefits that can be very attractive to foreign investors. Not only do these incentives facilitate the expansion of international business, but they also offer significant opportunities for tax savings.
This article explores the key benefits and tax considerations for foreign investors in 2024.
Key tax benefits
Capital Gains Tax Exemption
Foreign investors are generally not required to pay taxes on capital gains earned from investments that do not involve a significant stay (more than 183 days) in the United States during the tax year. However, it is important to consider the laws in your country of residence that could impose taxes on these gains.
Tax treatment of dividends and interest
Although dividends and interest from U.S. sources are typically subject to a 30% withholding tax, this percentage can be greatly reduced under tax treaties between the U.S. and the investor’s country of residence.
Benefits of tax treaties
The United States has tax treaties with several countries that can reduce or exempt foreign investors from certain U.S. taxes, helping to avoid double taxation and providing clarity on tax obligations.
Real Estate Investments
Investing in U.S. real estate allows foreign investors to take advantage of deductions for depreciation, mortgage interest, and other property-related expenses. These deductions can significantly reduce the tax burden.
Exemptions under FIRPTA
The Foreign Investment Real Estate Tax Act (FIRPTA) usually imposes taxes on foreigners on gains made from the sale of real estate in the U.S. However, there are important exemptions under this law, especially for some types of foreign pension funds and certain entities that may be completely exempt from this tax. It is important to evaluate whether an investment and the investor’s profile qualify for these exemptions, which could represent a significant tax savings.
Additional considerations
Tax Residency Status
Tax residency status can significantly affect the tax burden in the U.S. It is crucial to understand whether you qualify as a resident or non-resident for tax purposes, as this will determine the extent of the tax liability in the country.
Tax Resident:
Generally, a tax resident is considered to be anyone who meets the “substantial presence test” or who is a holder of a permanent resident card (Green Card). The substantial presence test involves being physically present in the United States for at least 31 days during the current year and 183 days during a three-year period that includes the current year and the two preceding years, counting all days of presence in the current year, one-third of the days of presence in the first previous year, and a sixth of the days in the second previous year. As a tax resident, you are required to report and possibly pay worldwide income taxes to U.S. taxing authorities, including income that is generated outside the country.
Non-Tax Resident:
Individuals who do not meet the substantial presence test and do not have a Green Card are generally classified as tax nonresidents. Nonresidents are only taxed on their income that comes from sources within the United States. This includes, but is not limited to, wages for work performed in the U.S., gains from investments in U.S. assets, and any other income generated by business activities within the country.
Need for professional tax advice
Due to the complexity of U.S. tax law and constantly changing regulations, it is advisable for investors to seek guidance from tax professionals who specialize in international law.
Tax benefits for foreign investors in the United States present considerable opportunities, but they also require a detailed understanding of applicable regulations and treaties.
Taking advantage of these benefits can maximize returns on investments and minimize tax liabilities. At Interlink FBC we highly recommend consulting with international tax experts to successfully navigate the complex U.S. tax landscape.
