Can Non-U.S. Citizens Invest in the U.S. Markets?

The total market capitalization between the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) comprises about half of the financial market in the world, with a total market cap of over US$50 trillion. Due to the dominance of this efficient market, successful global portfolios tend to weigh heavily on US markets allowing for better diversification, risk management, performance, and liquidity.

Participation in the U.S. markets does not require U.S. citizenship nor residency. Although U.S. investment securities are governed by U.S. law, no regulations specifically prohibit non-U.S. citizens from trading in the U.S. stock market. However, even though non-U.S. citizens can legally trade U.S. stocks and bonds, consulting with an investment firm and utilizing professional services is often necessary and advisable.

Non-U.S. investors may need to navigate additional requirements before investing in the U.S. markets. Foreign owners and holders of U.S.-based assets must comply with various U.S. laws designed to protect U.S. interests. A cross-border wealth manager can assist non-U.S. investors in ensuring they adhere to all regulations governing U.S. securities.

Opening a Brokerage Account Through a U.S. Custodian

In a brokerage firm, accounts typically fall into three main categories: retirement, domestic, or foreign. Retirement accounts encompass individual retirement accounts (IRAs), 401(k)s, and similar tax advantaged retirement accounts. U.S. residents, including permanent residents and non-resident aliens, may be subject to U.S. tax laws similar to those for U.S. citizens and fall under domestic reporting requirements. International brokerage accounts are available for non-U.S. taxpayers.

Non-U.S. investors have a few options for opening an international brokerage account. One option is to open an account with a financial services company in your country of residence that provides access to U.S. stocks. Alternatively, you could open a brokerage account tailored for non-U.S. residents with a U.S.-based custodian. Before proceeding, verify that these services are available for your country of residence. Be aware that additional paperwork, including tax documentation, may be required. Here are some general tax considerations to keep in mind:

• Tax Treaty: Check if there is a tax treaty between your country of residence and the United States that could affect how your investment income is taxed.

• Withholding Taxes: Understand potential withholding taxes on dividends, interest, and capital gains from U.S. investments.

• Reporting Obligations: Be aware of any reporting obligations both in your country of residence and to the IRS for U.S. tax purposes.

• Currency Exchange: Consider currency exchange rates and fees when converting funds for investment purposes.

Tax Repercussions of U.S. Foreign Investments

Trading U.S. through the U.S. markets may carry tax implications for non-U.S. citizens. Non-resident foreign nationals of the U.S. are generally not subject to U.S. capital gains tax on earnings from their investments. Therefore, brokerage firms typically do not withhold taxes from earnings in such accounts. However, it is important to note that many countries require their residents to pay capital gains tax on income earned from foreign markets. Non-U.S. investors may be liable for these taxes in their country of residence or where they are subject to taxation.

If you are a non-resident foreign national who invests in a company paying dividends, those dividends typically incur a flat income tax rate of 30%. However, exceptions may apply according to the tax treaty between the U.S. and the investor’s country of domicile, enabling a reduced tax rate. Likewise, certain investors may qualify for a lower tax rate on dividends categorized as interest-related earnings

Non-U.S. residents should be aware that they are subject to U.S. estate and gift taxes on specific types of U.S. assets, taxed at a maximum rate of 40%. There is an exemption of $60,000 applicable only to transfers at death. A qualified cross border wealth manager may help you avoid these estate tax issues through sophisticated strategies depending on your situation and objectives.

Due to the complexity of international taxation rules, it may be beneficial for non-U.S. investors to collaborate with a seasoned cross border wealth manager who understands the tax implications associated with investing in foreign markets.

Identity Requirements for Non-U.S. Citizens

Brokerage firms impose stricter requirements for verifying customer identities, especially for non-U.S. citizens. Some may mandate additional types of identification documents to align with their specific policies. These could include visa details, a valid Social Security number, recent utility bills, a W-8BEN form (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting), and other documents. Additionally, certain brokerages may necessitate non-U.S. citizens to submit paper applications rather than completing the process online when opening accounts.