For many aspiring or seasoned investors, diversification of investments is key to balancing risk and reward. Part of this balance usually involves investing overseas, and in many cases, the US proves a very attractive offering.
Whilst most of our articles are focused on the US tax implications for US persons, we’ll cover different ground today, on the implications for non-US person investors into the US.
Below, we’ll cover some of the two common areas for investment into the US, and the tax considerations, beginning with the stock market
US stock investments
As discussed above, US based stocks offer access to some of the worlds largest companies, such as Apple, Tesla and Microsoft. But, as a Kiwi or other non-US investor, what are the implications?
Generally speaking, they can be minimal on the US side of things. In most cases, non-US persons are free to buy and sell US based stocks without any capital gains tax being imposed in the US. Capital gains can usually be made without incurring any US tax at all.
On the other hand, dividends from US corporations will indeed generate some US tax liability for a Kiwi investor.
New Zealand and the United States do have a double taxation treaty (DTA) in place, which determines which country gets to tax the dividends when paid from a US corporation to a Kiwi investor. Generally speaking, this limits the US tax to 15%, with NZ allowing a foreign tax credit for the US tax paid (to prevent double taxation). However, this isn’t always straight forward, and tax advice should be sought before beginning a US investment journey.
Rental Property
Whilst the US property market rarely sees the types of gains that have become common in NZ, it does still offer an opportunity to purchase property at vastly reduced prices compared to New Zealand.
Again the DTA determines which country first gets to tax this rental income, which in the case of a US based property, this would be the US. However, when it comes to capital gains upon the eventual sale of the property, this becomes far more complicated. It is important to consider also, that as a tax resident of NZ, an investor may also face an NZ tax liability on US rental income.
NZ Taxation
Investing outside of New Zealand can have complex NZ tax implications, including FIF taxation alongside other complications. It is important to ensure that wherever investing in the US, local NZ advice is sought at the beginning of the process.
US Tax Forms
When investing into the USA as a non-US citizen, a series of different tax forms may be presented to you.
In the case of a foreign individual investing into the US, this would be Form W-8-BEN.
In the case of a foreign company or trust investing into the US, this would be Form W-8-BEN-E.
Both forms are used to advise the US payor of income, what rate of tax should be withheld from payments made to the investor. Both of these forms require a tax treaty disclosure, whereby the specific section of law is detailed, showing the US payor why they should withhold at a certain rate, or not withhold at all.
The US Tax Team are able to help with this form.
Tax Identification Numbers (TIN)
Whether you are considering investing through a company, or as an individual, it is wise to consider obtaining a US TIN at the beginning of this process.
The reason behind this, is to ensure that you are taxed correctly. For example, lets say a US payor of income withholds 30% tax on dividends paid to you, but the correct tax rate should’ve been 15%. They would pay this tax to the IRS, but with no identifying number for you or the payment.
When filing a US tax return to try and get this tax refunded, the IRS will have difficulties identifying that you have actually paid any tax (as no ID number was attached), and you would also have difficulties proving that you have paid tax.
As a result, it is recommended that individuals obtain an ITIN number (individual taxpayer identification number), which is similar to a social security number, at the beginning of their investment journey.
For companies or trusts, an EIN number should be obtained, which is a very straight forward process, and ensures that any tax paid is correctly recorded against the entity investing.
At the US Tax Team New Zealand, we assist a large number of Kiwi investors into the USA. Based in our Auckland offices, we hold expertise in the specific issues facing Kiwi investors into the US, through our experience with both the NZ and US tax systems. If you’re beginning or even already investing in the USA, and believe you might need some tax assistance, reach out to us today – info@usatax.nz.