What is the issue?
Non-US investors are subject to different treatment on their US investments, depending on whether the investor is an individual, company or trust.
Investors should be aware of the potential US tax exposures so that they can seek advice on the consequences of existing and proposed investments and plan accordingly.
The first step is to establish whether the individual, company or trust is non-US resident, which is not covered in this note. For trusts, it is also necessary to establish whether the trust is a 'grantor' or 'non-grantor' trust, and if it is a 'grantor' trust then to establish the identity of the grantor (normally the person who settled or contributed funds to the trust). Once these facts have been established, the tax position is as follows:-
- Non-US individuals, companies and trusts are generally taxed at a flat rate of 30% on income from most passive US investments. Certain investments are exempt from income tax (e.g. bank deposit interest), and furthermore the 30% flat rate can be reduced by a treaty.
- US real estate income is taxed at 30% on gross receipts unless an election is made to tax the income with a deduction for expenses at graduated rates up to 37% for individuals and 21% for companies.
- US business profits are also taxed at graduated rates up to 37% for individuals and 21% for companies.
- Gains are generally exempt from tax for non-resident individuals, companies and trusts, the main exceptions being for US real property and property connected with a US business.
With respect to trusts, the above rates generally apply irrespective of whether the trust is a grantor or non-grantor trust. However, with a grantor trust, the tax is payable by the grantor rather than the trust.
The corporate rate was previously 35% and was reduced to 21% from 1 January 2018. Corporate ownership of US investments may therefore be more attractive than previously, particularly bearing in mind the potential estate tax benefits (see below). Note that non-US companies may also be subject to an additional "branch profits tax" of 30% on US source business profits and rental income, which can be reduced under a treaty.
Gift and estate tax
- US situs investments owned by an individual will be within the scope of the US estate (and potentially also gift) tax (40%), subject to relief under a tax treaty. A US situs investment includes real property located in the US, shares of US publicly traded and private companies, cash accounts with US brokerage firms, and tangible personal property located in the US as well as certain debts owing by a US debtor.
- By contrast, US investments owned by a non-US company should be outside of the scope of US gift and estate taxes, provided that the company is treated under US rules as a company (rather than a partnership) and also provided that the relevant corporate formalities have been respected.
- The position for US investments owned by a trust is more complicated. They may in certain circumstances be outside of the scope of US gift and estate taxes however the position must be reviewed on a case by case basis.
- Generally speaking, where the settlor of a trust is no longer living, US investments of the trust may (in some situations) be outside of the scope of US estate tax. This will also frequently be the case where the US investments are owned by the trust through a non-US company.
- By contrast, where the settlor of a trust is still alive, there
are numerous rules which could result in any US investments being
deemed to "belong" to the settlor for US estate tax
purposes, for example:
- If the trust is revocable;
- If the settlor is entitled to the trust income; or
- Where the settlor has the right to alter, revoke, amend or terminate the trust.
- In the circumstances described above, it is likely that any US investments will be exposed to US estate tax as if the settlor owned them directly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.