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US US Taxation U.S. Tax Rules and Refund Guide for Foreign Investors Investing in U.S. Securities
KNOWLEDGE|
(1) |
Green Card Test
An individual who is a lawful permanent resident of the United States (i.e., Green Card holder) at any time during a calendar year is generally treated as a U.S. tax resident for that year.
In most cases, U.S. tax residency begins on the first day the individual is physically present in the United States as a lawful permanent resident. Certain individuals may elect to be treated as U.S. tax residents for the entire tax year, even if permanent resident status is obtained later in the year, provided the applicable IRS requirements are satisfied.
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(2) |
Substantial Presence Test
An individual may also become a U.S. tax resident by meeting the Substantial Presence Test, which is based on the number of days physically present in the United States. To satisfy the test, the individual must meet both of the following requirements:
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Type of Income |
Subject to U.S. Federal Income Tax? |
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Capital gains |
Generally not taxable |
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Stock dividends |
Generally subject to withholding tax |
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ETF distributions |
Depends on the character of the distribution |
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REIT distributions |
Generally subject to withholding tax |
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Interest on deposits with U.S. banks |
Generally not taxable |
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Interest on U.S. bonds |
Generally not taxable, if applicable requirements are satisfied |
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(1) |
Why Is Tax Withheld? The United States generally requires withholding on certain U.S.-source payments made to Nonresident Aliens. Under this system, the payer, such as a publicly traded company, broker, financial institution, or withholding agent is generally required to withhold the applicable U.S. federal income tax before making the payment and remit the withheld tax to the IRS. It is important to note that the amount withheld is not always equal to the investor's actual U.S. federal income tax liability. If more tax has been withheld than is legally required, the investor may be entitled to claim a refund from the IRS. |
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(2) |
Common Situations That May Qualify for a Refund
(a) A valid Form W-8BEN was not submitted to the broker in a timely manner, resulting in the failure to apply an applicable income tax treaty withholding rate.
(b) The broker applied an incorrect withholding tax rate, resulting in excess withholding.
(c) Tax was withheld from income that is exempt from U.S. federal income tax under applicable law.
(d) The income was subsequently reclassified, or other circumstances resulted in the investor's actual tax liability being lower than the amount withheld.
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(1) |
Prepare the Required Documents (a) Form 1040-NR (U.S. Nonresident Alien Income Tax Return); (b) Form W-7 (Application for IRS Individual Taxpayer Identification Number (ITIN));
(c) Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) and Form 1099-B (Proceeds From Broker and Barter Exchange Transactions), if applicable, provided by the broker or financial institution;
(d) A valid passport or other acceptable identification documents;(e) Any additional supporting documentation required by the IRS, if applicable. |
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(2) |
Submit the Tax Refund Claim
The applicant should complete Form 1040-NR based on the actual amount of income received and the U.S. federal income tax withheld, calculate the correct tax liability, and submit the return together with all required supporting documentation to the IRS. If the actual U.S. federal income tax liability is less than the amount withheld, the excess withholding may be claimed as a refund on the tax return.
After receiving the return, the IRS will review the filing and determine the amount of any refund due. If the filing is complete and approved, the refund is generally issued by paper check or, where available and eligible, by direct deposit. Processing times vary depending on the complexity of the case and the IRS's workload.
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(1) |
Time Limit for Claiming a Refund
Under the Internal Revenue Code, a claim for refund generally must be filed within three years from the date the tax return was filed, or within two years from the date the tax was paid, whichever period expires later. If the applicable statute of limitations expires, the IRS will generally not issue a refund.
Accordingly, investors who believe excessive U.S. federal income tax has been withheld from dividends or other U.S.-source income should file their refund claims promptly to avoid losing their right to recover the overpaid tax.
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(2) |
Retain Tax Records and Supporting Documents
Foreign investors should maintain complete records relating to their U.S. investment income, including tax forms and supporting documentation. These records may be needed when claiming future refunds, responding to IRS inquiries, verifying investment income, or satisfying tax reporting requirements in their home jurisdiction.
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(3) |
Timely Submit or Update Form W-8BEN
Form W-8BEN allows foreign investors to certify their status as foreign persons for U.S. tax purposes and, where applicable, claim reduced withholding rates under an income tax treaty.
Investors should ensure that the information provided on Form W-8BEN remains accurate and valid. Unless a change in circumstances occurs, a properly completed Form W-8BEN generally remains valid through the last day of the third calendar year following the year in which it is signed.
Failure to submit or timely renew Form W-8BEN may result in the broker applying the default statutory withholding rate under U.S. tax law rather than any applicable treaty-reduced rate.
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(4) |
ITIN Validity
If an investor obtains an Individual Taxpayer Identification Number (ITIN) by filing Form 1040-NR in connection with a U.S. tax refund claim, it is important to understand that an ITIN do not remain valid indefinitely.
Generally, an ITIN expires if it is not included on a U.S. federal income tax return for three consecutive tax years. Once an ITIN has expired, it must be renewed before it can be used again on a U.S. federal income tax return. Failure to renew an expired ITIN may delay the processing of the tax return or any associated refund.
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Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage. |
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