The U.S. offer investors a wide range of investment opportunities that other countries are not capable of offering. A foreign investor can earn a real tax income from a wise investment. The United State has tried to eliminate the cost of tax in securities and stock. The elimination of the cost of tax improves the after-tax yield of foreign investors (Kelle, Kleinert, Raff, & Toubal, 2013). Many investment opportunities in the Unite State are subject to tax, but there are ways to eliminate or reduce the tax burden:
- There are investments carried out by foreign investors that are subject to special tax treatment.
- The united states have entered into tax treaties with some countries. Residents of such countries are subject to reduced tax on incomes, dividends, and interests.
- A foreign investor may enjoy reduced gift and estate tax if he or she makes a change on the form of ownership.
According to the tax law, the term person may refer to four things. A Person can be a corporation, an individual, a trust, or a partnership. Different tax rule applies to such persons. A foreign individual who is non-resident is taxed on income generated from the U.S. and any other income that is related to the business. Foreign Corporation is also taxed on all incomes generated from the U.S. and any other income that can be connected to the business. A Foreign trust and partnership are not taxed on any income generate within the United State (McGill, 2013).
Types of investments in the U.S. company that trigger a taxable event
Taxable event is business operation or activity that causes a tax consequence to a party that performs the activity. Examples of taxable events are selling and buying securities for a gain, interest, and dividends. The following taxable events trigger high taxes:
- Dividend – dividend income received from a company operating in the U.S. is taxed. The tax charged on the dividend is 30 percent withholding tax. This rule applies to the non-residents in the U.S. The tax charged on dividend should be deducted the profit made by a corporation (Kelle et al, 2013).
- Interest from corporate bonds – interest earned by a foreign investor from corporate bond will be subject to thirty percent tax. If the obligation was given after 18 July 1984, then it will be classified as a portfolio interest, which is not subject to withholding tax.
- Short-term obligations – short-term obligations are subject to a tax deduction, especially if they have a maturity of 183 days or more.
Types of investments in the U.S. company that trigger less taxable event
- Portfolio interest – examples of portfolio interests are obligations that are in registered form and was given after 18 July 1984, obligation whose form is bearer and obligations that are registered and targeted in the market. The portfolio interest is not deducted 30 percent withholding tax.
- Capital gain from corporate bonds – the corporate bond is taken to be capital assets. Any gain a foreign investor makes from the sales of the corporate bonds is not subjected to the thirty percent withholding tax.
- Short-term obligation – short-term obligations that are not subject to thirty percent withholding tax are those held for less than 183 days (Casson, 2013).
Types of U.S.-sourced income that is most likely to affect the foreign investor
The client in question is not a resident of Unites State, but he or she has an idea of opening a company that sells the automobile parts. The company plans to operate in the United State. Income generated will be taxed by the government. The incomes of the foreign investor subject to taxation are:
Interest made by the business
A company is a person liable to tax. The company in question will have an obligation of paying taxes from the interest it makes annually. The tax deduction is calculated from net loss or profit. If the company distributes profits to the shareholders, tax will be charged on the distributed dividends (Gustafson, Peroni, & Pugh, 2011). This process leads to double tax deduction.
Some of the profits made by a foreign company is distributed to shareholders, according to the number of shares one owns in the company. The profit given to the shareholders is referred to as the dividend. Each time a foreign company issues dividend it is subject to a tax deduction of thirty percent.
Interest from corporate bond
The foreign investor will purchase corporate bonds in the automobile line of business. These corporate bonds have a high-interest rate. The interest made from the corporate bonds is subject to thirty percent withholding tax (Gustafson et al, 2011).
Good investment strategy involves adopting appropriate tax planning strategy. Tax planning is ordering activities of the company in a way that helps to eliminate or reduce the taxes. Good tax planning strategy will enable the company to save more money or have excess money to invest. Examples of the strategies are divorce tax planning, tax planning with SEP IRAs, and installment sales that spread capital gain. The best strategy to be adopted is installment sales that will spread the sales of asset. Installment sales will significantly reduce the taxes to be paid (Kelle et al, 2013).
Casson, M. (Ed.). (2013). The Growth of International Business (RLE International Business). London, UK: Routledge.
Gustafson, C. H., Peroni, R. J., & Pugh, R. C. (2011). Taxation of international transactions. (4th Ed.). St. Paul, MN: Thomson West Law Group.
Kelle, M., Kleinert, J., Raff, H., & Toubal, F. (2013). Cross‐border and Foreign Affiliate Sales of Services: Evidence from German Microdata. The World Economy, 36(11), 1373-1392.
McGill, R. K. (2013). US Withholding Tax: Practical Implications of QI and FATCA. New York, NY: Palgrave Macmillan.