Nonresident alien taxation
|This page contains details specific to non-US investors, and does not apply to United States (US) investors. This includes US citizens and US permanent residents living outside the US.|
This page summarizes how a US nonresident alien (NRA) is taxed when investing in US domiciled ETFs. Nonresident aliens can be subject to both US withholding taxes and US estate taxes.
- 1 Who is a nonresident alien (NRA)?
- 2 Are capital gains taxable for a nonresident alien?
- 3 US domiciled ETFs tax withholding
- 4 US estate taxes
- 5 Foreign Account Tax Compliance Act (FATCA) and NRAs
- 6 See also
- 7 Notes
- 8 References
- 9 External links
Who is a nonresident alien (NRA)?
If you are an alien (not a US citizen), you are considered a nonresident alien unless you meet one of two tests. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1-December 31). 
|In short, if you are not a US citizen or green card holder and have not been in the US for 183 days (calculated over a 3 year period), you are a nonresident alien for tax purposes.|
Are capital gains taxable for a nonresident alien?
No. Capital gains from US domiciled ETFs are not taxable by the IRS. According to IRS Publication 519 :
A nonresident alien usually is subject to U.S. income tax only on U.S. source income". "If you were in the United States for less than 183 days during the tax year, capital gains are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year.
— IRS Publication 519
Also, according to a reply received for a paid consultation with Greenback Expat Tax Services Limited:
Investing in ETFs will not count as effectively connected income and therefore any capital gains from the sale of these will be tax free as a nonresident.
— Greenback Expat Tax Services Limited
US domiciled ETFs tax withholding
Tax withholding is applied to dividends paid to you as an investor. It does not apply to capital gains, nor to interest payments. The standard rate is 30%. This can be lowered (usually to 15%) if your country of residency has a tax treaty with the US, by submitting a W-8BEN form via your broker.
|Investors in countries without US tax treaties should consider using non-US domiciled ETFs instead of US domiciled ones, as a way to reduce the US tax they pay on dividends.|
Estimating tax withholding leakage
Other than the tax withholding that shows on your brokerage account's statement, the fund itself gets taxes withheld on dividends received. This is usually applicable to funds holding international equities. This number affects investors, but is mostly invisible unless you look at the annual reports.
- For more information see: Estimating Level 1 dividend tax withholding paid by US domiciled funds.
TD Ameritrade tax withholding experiment
A test in 2015 using a TD Ameritrade account and a selection of US domiciled ETFs: MUB, BIV, LQD, BNDX, VIG, VTI and VXUS, shows that all had tax withheld at 30% from the dividends distributed, with the exception of MUB and VXUS[note 1]. MUB holds US municipal bonds, which are tax-exempt from US federal taxes. VXUS holds stocks of non-US companies.
|03/06/2015 01:07:48||NON-TAXABLE DIVIDENDS (MUB)||1.20|
|03/06/2015 01:10:05||ORDINARY DIVIDEND (BIV)||1.05|
|03/06/2015 01:10:05||W-8 WITHHOLDING (BIV)||-0.32|
|03/06/2015 01:10:09||ORDINARY DIVIDEND (LQD)||1.31|
|03/06/2015 01:10:09||W-8 WITHHOLDING (LQD)||-0.39|
|03/06/2015 01:12:00||ORDINARY DIVIDEND (BNDX)||0.62|
|03/06/2015 01:12:00||W-8 WITHHOLDING (BNDX)||-0.19|
|03/27/2015 09:38:40||ORDINARY DIVIDEND (VIG)||2.75|
|03/27/2015 09:38:40||W-8 WITHHOLDING (VIG)||-0.83|
|03/31/2015 02:17:29||ORDINARY DIVIDEND (VTI)||2.54|
|03/31/2015 02:17:29||W-8 WITHHOLDING (VTI)||-0.76|
|03/31/2015 02:21:56||ORDINARY DIVIDEND (VXUS)||1.58|
US estate taxes
If your home country does not have an estate tax treaty with the US, you risk becoming liable for US estate taxes. While the US has an extensive network of income tax treaties, only a handful of countries have estate tax treaties with the US.
|Where an account holder who is a US nonresident alien passes away, the US will levy up to 40% estate tax  on US assets over the value of $60,000 USD.[note 2] This includes US domiciled holdings such as ETFs, as well as cash sums in a US-based brokerage account.|
Investors in this situation should strongly consider using non-US domiciled ETFs instead of US domiciled ones. This entirely eliminates any threat of US estate taxes.
Even where a treaty protects nonresident investors from US estate tax, there are still hurdles and delays in accessing US domiciled holdings:
Upon the death of the beneficial owner, the U.S. brokerage firm is forbidden under U.S. tax law from transferring the assets from the decedent’s account until the IRS has concluded its estate tax audit.
— Charles Schwab, U.S. Tax and Estate Disclosure to Non-U.S. Persons
A US estate tax treaty may provide protection from US estate taxes to a level equivalent to that allowed to US citizens, but the presence of a US estate tax treaty does not guarantee that this is the case. US nonresident aliens considering holding US domiciled ETFs and other US situated assets should check any applicable US estate tax treaty details very carefully before proceeding. Note that residency is not normally a sufficient condition for using a US estate tax treaty. This type of treaty is generally controlled by domicile, a legal concept that, although it includes residency as one of its components, is different and distinct from residency.
Local estate taxes may apply as well, and in the absence of a US estate tax treaty this can cause double taxation. In addition, some US estate tax treaties do not provide for estate tax credits, and this may also cause double taxation.
Foreign Account Tax Compliance Act (FATCA) and NRAs
The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that requires United States persons, including individuals who live outside the United States, to report their financial accounts held outside of the United States, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their U.S. clients. Congress enacted FATCA to make it more difficult for U.S. taxpayers to conceal assets held in offshore accounts and shell corporations, and thus to recoup federal tax revenues."  
Regarding non-US clients of a foreign financial institution (FFI) who will not provide the documentation needed for FATCA:
Generally, any account holder whose account is at least $50,000 that does not comply with reasonable requests for information necessary to determine whether its account is a United States account will be a "recalcitrant account holder" and will be subject to 30% withholding on withholdable payments and gross proceeds from the sale or disposition of U.S. assets which can produce interest or dividends". 
— Deloitte FATCA FAQs
FATCA withholding also applies to gross proceeds from the sale of U.S. securities, which are excluded from NRA withholding. In addition, FATCA withholding may not be reduced or eliminated by making a treaty claim on a Form W-8. Where an FFI is not FATCA-compliant, full 30% FATCA withholding will apply. When FATCA withholding is required, the withholding agent does not impose withholding under the existing NRA rules. Conversely, where an FFI is FATCA-compliant, FATCA withholding will not apply, and withholding under the existing NRA withholding rules will apply (subject to treaty rates)". 
— Northern Trust, FAQ for Fund Managers
To avoid running into FATCA withholding issues, use a FATCA-compliant broker where possible, and make sure your W-8BEN form is up-to-date. Most US brokers and larger international ones are FATCA-compliant. You can confirm by checking with your brokerage firm if you are investing in US domiciled securities.
- Nonresident alien with no US tax treaty & Irish ETFs
- Non-US investor's guide to navigating US tax traps
- Nonresident alien's ETF domicile decision table
- VXUS dividend witholding by the US - this seems contradictory with the expecations - It was expected that the US would withhold dividend taxes on this US-domiciled fund
- For example, a deceased nonresident alien in a country without a US estate tax treaty and who held US domiciled ETFs valued at $500,000 on death would face a US estate tax liability of $142,800, and so lose 28.56% of their assets. In comparison, a US citizen with the same holdings at the same level would pay no US estate tax at all.
- Determining Alien Tax Status
- Publication 519 U.S. Tax Guide for Aliens
- Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities
- IRS - NRA Withholding
- IRS International Tax Treaty Table, viewed March 10 2018
- See Income subject to withholding from IRS Publication 515,, Withholding of Tax on Nonresident Aliens, viewed 3 April, 2015.
- Estate and Gift Taxes for Nonresident Aliens - June 2, 2014
- Wikipedia - Estate tax in the United States
- JPM Financial Services - Estate taxation of a nonresident alien
- Charles Schwab - U.S. Tax and Estate Disclosure to Non-U.S. Persons
- Wikipedia - Foreign Account Tax Compliance Act
- IRS - Foreign Account Tax Compliance Act
- FATCA Frequently Asked Questions (FAQs) - Bullet 39
- Northern Trust - FAQ for Fund Managers - Bullet 9, page 6
- Guide to Completing Form W-8 and Complying with FATCA for Foreign Entities
- Wiki Review: NRA taxes & Ireland funds articles, forum discussion.