citi foreign investor tax guide
TRANSCRIPT
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Guide to U.S. Taxationof Foreign Investors
INVESTMENTS PRODUCTS: NOT FDIC INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.
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IN THIS GUIDE
I. Introduction 1
II. Are You a U.S. Resident
or Nonresident? 2
III. Taxation o U.S. Nonresidents 6
IV. Taxation o Investment Income 8Stocks 8Bank Deposits 9Debt Instruments 9Portolio Interest 9Short-Term Obligations 10
Mortgage-Backed Securities 11
Mutual Funds 11
Unit Investment Trusts 11
Options, Forward and Future Contracts
12
Listed Stock Options 12Nonequity Options 12Commodity Pools 12Futures And Forward Contracts 12
Notional Principal Contracts 12
Annuities 13
Rental Income 13
Real Property Interests 14
Partnership Income 15
V. U.S. Estate and Git Tax Planning 18
U.S. Estate Tax 18
U.S. Git Tax 19
VI. Ownership o Investments 22
Corporate Ownership 22
Benefcial Ownership
Through a Trust 23
VII. Income Tax Treaty Benefts 25
VIII.Documentation and Reporting 28
IX. Reportable Transaction
Regulations 39
2008 Citibank. Citibank, N.A. Member FDIC. Original Printing 2006 Revised: 03/2008 HB DOC # 6976 v1E
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1. IntroductionFor the oreign investor, the United States presents a myriad o
investment opportunities unavailable anywhere else in the world. This
Guide is intended to provide you with some o the undamental tax
considerations o U.S. investments and to serve as a reerence tool
that enables you to identiy investment opportunities that will help you
maximize the ater-tax earnings o your global portolio.
Taxes are a real and substantial cost o earning income.
By minimizing, or perhaps eliminating, the U.S. tax
cost o investing in U.S. stocks and securities, oreign
investors will improve the overall ater-tax yield o the
securities, proessionally managed unds and other
investments held in their global portolios. Although
many types o investment income rom U.S. sources aresubject to tax, opportunities are available to reduce or
eliminate this tax:
Certain types o nancial instruments, when held by
oreign investors, are given preerred tax treatment
under U.S. tax rules.
U.S. tax treaties with many countries reduce or
eliminate U.S. tax on dividends, interest and other
income or residents o the treaty countries.
Changing the orm o ownership (individual,
corporation, personal investment company or trust,
etc.) may reduce estate and git taxes in the U.S. andin the investors home country.
This Guide provides inormation regarding the U.S. tax
rules as they aect U.S. nonresidents who have U.S.
investment portolios. It describes how the U.S. estate
and git tax rules apply to transers o U.S. investment
property and identies opportunities to minimize or
eliminate these taxes. In addition, the Guide includes
separate sections that discuss the signicant U.S. tax
aspects o particular types o investment products. It
is intended to help you understand the theory behind,
and the potential impact o, various U.S. tax rules on
oreign investors who qualiy as nonresidents or U.S.
income tax purposes. The Guide also oers practical
tax planning ideas and highlights special situations,
which require careul consideration or consultation with
a tax or other proessional adviser. It is not intended,
nor should it be relied on, as a technical analysis o
this complex area o U.S. taxation. The U.S. tax rulesapplicable to oreign corporations are similar, but not
identical, to the rules applicable to nonresidents. Your
proessional tax adviser should be consulted regarding
the U.S. taxation o oreign corporations.
Note or Married IndividualsThis Guide only
addresses U.S. ederal taxation. It does not address
state or local tax issues, non-U.S. tax issues or the
possible interaction o U.S. tax law with non-U.S. tax
law. Further, this Guide only addresses the taxation o
investment activity, including a separate section on
legislation that was enacted in 2003 to expand reporting
requirements or investors that t within a regulatorydened concept o a tax shelter.1 Each investors
unique actual circumstances can have an impact on
the application o the rules discussed in this Guide. This
Guide is intended to provide readers with a general
understanding o U.S. ederal tax issues relating to their
investments, but does not address all o the intricacies
and exceptions that may apply. It is not a substitute or
individualized personal tax advice and each investor
should consult his or her own proessional tax adviser.
1 For urther inormation on the tax shelter disclosure regulations,please reer to section IX.
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2. Are You a U.S. Resident or Nonresident?United States taxation o oreign persons who invest in the U.S. depends
on whether they are residents or nonresidents. A person is dened
under the tax law to include an individual, a corporation, a partnership,
or a trust. Once it is determined whether such a person is a resident
or a nonresident, diferent rules apply to individuals, corporations,partnerships, and trusts.
NoteU.S. citizens, regardless o their residency,
generally are subject to U.S. tax on their worldwide
income. All reerences to nonresidents in this Guide
include individuals that are not U.S. citizens.
INDIVIDUAlS
A oreign individual who is a U.S. resident is subject toU.S. taxation on worldwide income in the same manner
as a U.S. citizen. However, a nonresident generally is
taxed only on U.S.-source income and income that
is treated as eectively connected with a U.S. trade
or business. A nonresidents income rom non-U.S.
investments (that is not treated as eectively connected
with a U.S. trade or business) generally is not subject to
U.S. ederal income taxation.
A oreign individual is generally considered a U.S.
resident or the current year and is subject to U.S.
income tax on worldwide income (net o deductions)
i he or she: (1) is a lawul permanent resident o theUnited States at any time during the taxable year (holds
a green card); (2) meets the substantial presence test;
or (3) makes a rst year election. More inormation on
physical presence ollows this section.
I at the end o the tax year, one spouse is a U.S. citizen
or a resident alien and the other is a nonresident alien,
an election may be made to treat the nonresident
spouse as a U.S. resident or the entire tax year. A joint
ederal income tax return must be led or the tax year
the choice was made. However, joint or separate returns
may be led or later years. The election to be treated
as a U.S. resident is suspended or any year neither
spouse is a U.S. citizen or a resident alien. The election
permanently ends i either spouse revokes the election,
either spouse dies or there is a legal separation.
NoteCertain ormer U.S. citizens and ormer U.S.
residents may continue to be taxed as U.S. citizens
or residents on certain income or the rst ten years
ollowing expatriation rom the United States. These
rules are beyond the scope o this Guide.
CORpORATIONS
A oreign corporation is generally subject to U.S. ederal
income tax on income that is treated as eectively
connected with a U.S. trade or business or attributable
to U.S. sources.
pARTNERShIpS AND TRUSTS
Foreign partnerships or trusts are not subject to U.S.income tax, but the benecial owners may incur U.S. tax
i the partnership or trust is considered to be conducting
a U.S. trade or business or is earning U.S.-source
income. Income o a oreign trust may be taxed either to
the trust or the trusts beneciaries.
NoteA nonresident whose spouse is a U.S. citizen or
resident may elect to be taxed as a U.S. resident.
NoteThe U.S. income tax rules applicable to an estate
are beyond the scope o this Guide.
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Physical PresenceFor individuals who do not hold a green card, the rules
which determine who is treated as a resident or a
nonresident or U.S. tax purposes are based upon the
individuals actual physical presence in the United States.
SUbSTANTIAl pRESENCE TEST
In general, an individual is treated as a U.S. resident i he
or she is present in the United States or at least 31 days
during the current calendar year and the total number
o days that he or she is present in the United States, as
calculated below, equals or exceeds 183 days:
the number o days present in the current year,
plus
one third o the days present in the preceding
year, plus
one sixth o the days present in the next
preceding year.
Generally, an individual is treated as present in the U.S.
on any day the individual is physically present in the U.S.
at any time during that day. However, an individual will
not be considered present in the U.S. i the individual is
in the U.S. or less than 24 hours while in transit between
two points outside the U.S.
90 days in the current year, plus
365 days in the frst year multiplied by one third,
or 122 days,
or a total o 213 days.
I the individual leaves the U.S. on March 31 o the
second year, the individuals U.S. residency will
terminate as o that date i certain conditions are met.
DIplOmATS, STUDENTS, TEAChERS,AThlETES AND EmplOyEES OFINTERNATIONAl ORGANIzATIONS
For the purposes o the substantial presence test,
an individual is not considered present in the U.S. on
any day on which he or she is present in the U.S. as
a student, teacher or trainee, a proessional athlete
temporarily in the U.S. to compete in a charitable
sporting event, or is temporarily present in the U.S. as
a diplomat with ull-time diplomatic or consular status.
This exception also applies to ull-time employees o
an international organization (e.g., the United Nations,
the World Bank or the International Monetary Fund),
provided that the employee is neither a U.S. citizen nor a
permanent resident o the United States (i.e., a holder o
a green card). This exception generally also includes the
immediate amily (i.e., spouse and unmarried children
under the age o 21) o employees o international
organizations and o diplomats.
NoteThere are limitations on the application o these
rules. You should consult your proessional tax adviser
to assure applicability o these rules.
mEDICAl CONDITIONS
An individual will also not be considered present in the
U.S. or any day or which the individual is unable to
leave the U.S. due to a medical condition which arose
while he or she was present in the U.S.
ClOSER CONNECTION
A oreign individual will not be treated as a U.S. resident
(even i he or she otherwise qualies under the
substantial presence test) i such person:
Is present in the U.S. on ewer than 183 days in
the current calendar year, and
Has a tax home (the center o his or her employment
or sel-employment, or, i no place o employment
exists, the place o his or her regular abode)
in a oreign country, and has a closer connection
to this tax home than to the United States.
Example A British citizen is transerred
to the United States or a 15-month period that
includes one ull calendar year and part o the
next year (January 1 through December 31 o the
irst year and January 1 through March 31 o the
next year). This individual will be a U.S. resident
or the irst year since his or her presence in the
United States exceeds 183 days. However, under
the residency ormula, he or she will also be a
resident or part o the second year, although only
three months are spent in the United States. The
days o physical presence are determined or the
second year as ollows:
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(This standard takes into consideration the
location o the individuals permanent home,
amily, personal belongings, bank accounts,
drivers license, and social and political ties in
determining whether a closer connection is
present.)
The closer connection exception does not apply i the
individual has taken steps or is currently taking steps to
obtain an immigrant visa or holds a green card.ObservationIndividuals who claim nonresident status
based on a closer connection with a oreign country
must le a statement with the IRS which substantiates
the closer connection. In general, the ailure to le this
statement will render the closer connection exception
unavailable to the individuals.
mEXICAN AND CANADIAN COmmUTERS
Residents o Canada or Mexico who regularly commute
to work in the U.S. generally are not considered present
in the U.S. or purposes o the substantial presence
test on any day during which they commute. However,wages rom U.S. employment and certain income rom
U.S. sources and income that is eectively connected
to a U.S. trade or business will remain subject to U.S.
income tax.
First-Year ElectionA oreign citizen who is not otherwise a resident o
the U.S. or the calendar year (the election year) and
who satises certain other residency requirements
can choose to be treated as a United States resident
or the election year. The individual will need to satisy
the substantial presence test or the year ollowing the
election year.
NoteI an individual becomes a nonresident
ater having been a U.S. resident or at least three
consecutive years and then again becomes a U.S.
resident, but does so beore the close o the third
ull year o non-residence, then the individual may
be subject to U.S. tax at regular graduated rates on
certain U.S.-source income during the intervening
nonresident years.
ConclusionAs illustrated by the discussion above, the U.S. rules
or determining the tax status o oreign individuals
are complex. In addition, tax treaties may provide
residence rules, which dier rom the rules discussed in
this section. I this is the case, the treaty denition may
prevail. Please reer to Section VII, Income Tax Treaty
Benets, or a discussion o some special rules that are
applicable to citizens and residents o treaty countries.
You should consult with your proessional tax adviser or
a complete analysis o your own special circumstances.
The fowchart on the ollowing page summarizes the
application o the physcial presence test.
Example A citizen and resident o Costa Ricaregularly spends ive months a year in the U.S.
However, she is employed on a ull-time basis in
Costa Rica so that it qualiies as her tax home.Also, she has a closer connection with Costa
Rica because her amily lives there, her principal
place o residence is there, and most o her
business, inancial and social contacts are there.
Because she does not spend at least 183 days in
the U.S. in any year, she should not be considered
a U.S. resident.
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Determining resiDence of foreign nationalsunDer the substantial presence test*
(Nonimmigrant Visa Holders)
Present in the U.S. or at least 31 days1in the current year?
Present in the U.S. or at least183 days in the current year?
NONRESIDENT
NOyES
Does presence in the current year and
the two preceding years equal 183 daysor more under ormula?2
RESIDENT 3
NOyES
NOyES
Tax home in a oreign country and a closerconnection to that country than the U.S.?
NONRESIDENT
yESNO
RESIDENT3
NONRESIDENT
*See preceding discussion or exceptions.1 A day includes any part o a day.2 Formula equals: current year days, plus rst preceding year days x one-third, plus second preceding year days x one-sixth.3 A treaty may apply, under which the individual may nevertheless be treated as a non-resident alien or most purposes. See Section VII, Income Tax
Treaty Benets.
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3. Taxation o U.S. NonresidentsThe material presented in Sections III through VIII o this Guide was
prepared especially or international investors who, ater application o
the rules discussed in the previous section, are considered nonresidents
or U.S. income tax purposes.
Nonresidents generally are taxed only on their
investment income rom U.S. sources and on certain
other income that is treated as eectively connected
with a trade or business conducted in the United States.
Dierent tax rules apply depending on whether income
is derived rom investments or rom business activities
in the United States.
Certain ormer green card holders (lawul permanent
residents) and ormer U.S. citizens may continue to be
subject to U.S. taxation as U.S. citizens or residents on
certain income under the expatriation regime.
INVESTmENT INCOmE
Generally, investment income is taxed at a at rate
o 30 percent o gross income (withholding at the
source), unless: (1) the rate is reduced by an income
tax treaty between the U.S. and the investors country
o residence; or (2) the income is rom an investment
product which is given preerred tax treatment underU.S. domestic tax law.
WIThhOlDING AT ThE SOURCE
Nonresidents who are not engaged in a trade or
business in the U.S. are generally not required to
le U.S. income tax returns. Rather, the U.S. tax law
provides or the withholding o tax at the source on
certain types o income paid or credited to the account
o the nonresident.
The person (e.g., a nancial institution) who pays
items o U.S. source income to a nonresident must
withhold the appropriate rate o tax (30 percent or
lower treaty rate) on the total amount o each item o
U.S.-source income paid, without deduction or any
expenses (e.g., margin interest) paid or incurred by the
nonresident in the production o the income. The tax iswithheld at the time the income is paid or credited to
the nonresidents account. Payments made to oreign
corporations, partnerships and trusts are generally
subject to the same U.S. tax withholding rules that apply
to nonresident individuals.
Example A nonresident investor owns 100shares o stock in a U.S. company. The shares are
held in an account with a U.S. inancial institution.
The U.S. company pays a cash dividend o one
dollar per share. Under the tax rules applicableto U.S. nonresidents, the inancial institution
must withhold 30 percent o the cash dividend
and deposit such amount on a timely basis with
the U.S. government. Absent a treaty between
the U.S. and the oreign investors country o
residence providing or a lower withholding rate,
the oreign investor is entitled to receive, or have
credited to his account, $70 o the $100 dividend.
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EFFECTIVEly CONNECTED INCOmE
Income that is eectively connected with a U.S.
trade or business is taxed on a net basis (income
minus allowable deductions) at the same ederal
income tax rates that apply to U.S. citizens or
residents (generally 15 percent or capital gains
(assuming the assets are held or at least one
year) or up to 35 percent (beginning in 2003) or
individuals and 35 percent or corporations). State
and local taxes may increase the eective tax rate on
income rom a U.S. trade or business.
Nonresident individuals engaged in a trade or businesswithin the U.S. during the taxable year are required to
le a return and pay tax at regular U.S. progressive tax
rates on income deemed to be eectively connected
with such trade or business (generally 15 percent or
capital gain income and up to 35 percent or ordinary
business income (beginning in 2003)). Although the
perormance o personal services within the U.S.
during the taxable year will generally be treated as
a U.S. trade or business, the determination as to
whether a nonresident is engaged in a U.S. trade or
business is otherwise a subjective test based on the
persons activities.
Income eectively connected with a U.S. trade or
business may not be subject to U.S. tax i there is
an income tax treaty in eect with the nonresidents
country o residence. Pursuant to most treaties
entered into by the U.S., business prots o a
nonresident are not subject to U.S. tax unless
attributable to a permanent establishment in thiscountry. Generally, a permanent establishment is a
xed place o business (such as an ofce, actory, mine
or place o management) through which a nonresident
wholly or partly carries on its activities.
NoteA nonresident will generally not be treated as
engaged in a U.S. trade or business merely by trading in
U.S. stocks, other securities or commodities.
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4. Taxation o Investment IncomeThis section discusses the U.S. tax treatment o particular U.S.
investment products when owned by U.S. nonresidents.
Unless otherwise noted, it is assumed that any
investment income is not treated as eectively
connected to a U.S. trade or business. Please reer
to Section VII, Income Tax Treaty Benets, or an
appropriate discussion o possible treaty benets. Any
discussion herein o gain rom disposition o a security
assumes that the security does not constitute a U.S.real property interest. Please reer to the discussion o
real property interest below.
Stocks
DIVIDENDS
For U.S. nonresidents, dividend income received with
respect to stock issued by a U.S. corporation is subject
to a 30 percent (or lower, i a lower rate is available
under a treaty) U.S. withholding tax.
NoteMost tax treaties with the U.S. provide or
reduced rates o tax on dividend income.
To be subject to withholding as a dividend, the payment
must be a distribution o property or money out o the
earnings and prots o a corporation. In addition, it
must be made by a corporation to a shareholder with
respect to its stock. However, distributions arising rom
a complete liquidation o a corporation are generally not
subject to U.S. withholding tax.
NoteWhere a corporation retains earnings and prots
and the investor realizes his or her pro rata share o
earnings indirectly by selling the stock, any gain on the
sale o the stock is treated as a capital gain not subject
to withholding.
NoteWhether a capital market instrument represents
debt, which pays interest, or equity, which pays
dividends, is largely a question o act. No universal
criteria exist to distinguish a debt instrument rom an
equity instrument or ederal income tax purposes.
Investors should consult the prospectus or the issuers
characterization o the instrument or ederal income
tax purposes and their proessional tax advisers. It
is important to note that the characterization o the
instrument or non-tax purposes is not controlling or
U.S. ederal income tax purposes. For example, certain
hybrid instruments (such as Monthly Income Preerred
Securities (MIPS) and Trust Originated Preerred
Securities (TOPRS)) are generally characterized asdebt instruments or ederal income tax purposes but
preerred stock or accounting and regulatory purposes.
NoteAn American Depository Receipt (an ADR)
usually evidences the deposit o ordinary shares in a
oreign corporation with a U.S. depository bank. ADRs
are denominated in U.S. dollars. Since the underlying
issuer is a oreign corporation, dividends on ADRs are
treated as oreign source income exempt rom U.S.
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withholding tax. Nevertheless, the source country may
require the withholding o a oreign tax on dividend
income paid to persons who are not resident in the
source country. The rate o oreign tax varies rom
country to country and may depend on whether the
nonresident is entitled to benets under a tax treaty with
the source country.
CApITAl GAINS AND lOSSES
When an asset, such as a share o stock (or any other
security), is held or investment, any gain or loss on its
sale or other disposition is usually considered a capital
gain or loss. When a nonresident sells investment stocks
or securities at a gain, that gain is exempt rom U.S. tax
unless the oreign investor is an individual present in the
U.S. at least 183 days during the year. The exemption
applies equally to long-term (assets held or more than
one year) capital gains and short-term capital gains.
Losses rom the sale o investment securities cannot be
used by a nonresident to oset other types o income
that are subject to U.S. tax.
As an exception to this general tax exemption, gains
rom the disposition o stock in companies with
substantial U.S. real property holdings may be subject toU.S. tax (see discussion below under the heading Real
Property Interests).
NoteLong-term capital gain distributions rom
regulated investment companies (i.e., mutual unds)
would also be exempt rom U.S. tax. On the other
hand, short-term capital gains distributed by the und
would be considered ordinary dividends subject to the
dividend U.S. withholding tax described above. Exempt
interest dividends (i.e., dividends attributable to tax-
exempt state and local debt obligations rom a und
that invests more than 50 percent o its assets in such
obligations) are not subject to U.S. tax.
ShORT SAlES
I a oreign investor sells stock or securities short
(i.e., stock or securities are borrowed by the nancial
institution or the investor to deliver to the buyer),
then any gain recognized when the short position is
closed should be a nontaxable capital gain, provided
the investor is present in the U.S. or less than 183 days
during the year. On the other hand, i a nonresident
investor is the lender o the security (i.e., the investor
has a long position) involved in a short sale and receives
a dividend equivalent or substitute payment with
respect to such stock, that payment may be subject to
U.S. withholding tax.
ObservationSuch in lieu o payment to a oreign
person generally is considered a dividend out o
corporate earnings and prots under the U.S. tax rules.
Accordingly, the reduced treaty withholding rates
that may apply to regular dividend payments may beavailable. Tax rules in this area are complex and we
recommend that you consult your proessional tax
adviser in structuring these trades.
Bank DepositsInterest earned by nonresidents on savings and
checking accounts, money market deposit accounts,
certicates o deposit rom U.S. banks or savings and
loan associations and Eurodollar certicates is exempt
rom U.S. tax. On the other hand, dividends rom U.S.-
registered money market unds (i.e., stock companies)
are usually subject to U.S. tax withholding.
Debt InstrumentsGenerally, the 30 percent (or lower treaty rate) U.S.
withholding tax applies to interest paid or accrued to
a nonresident on a debt obligation issued by a U.S.
borrower. However, several exceptions to this rule
may apply.
pORTFOlIO INTEREST
Certain U.S.-source interest income (portolio interest)
is exempt rom the 30 percent U.S. withholding tax.Portolio interest includes interest which is payable on
the ollowing types o U.S. instruments:
Obligations issued ater July 18, 1984, in registered
orm, i the oreign investor provides the paying agent
with a signed statement certiying nonresident status
(Form W-8BEN).
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Obligations issued in bearer orm (not registered)
provided there are arrangements designed to
reasonably ensure that: (1) the obligations are sold
or resold only to non-U.S. persons; (2) the interest on
the obligations is payable only outside the U.S. and its
possessions; and (3) there is a legend on the ace o the
obligation stating that any U.S. person holding the bond
will be subject to certain limitations.
Registered obligations that are targeted to oreign
markets with interest payable outside the U.S. and
its possessions.
ExceptionsThe portolio interest exemption does notapply i the oreign investor owns ten percent or more o
the corporation or partnership that issued the obligation
or i the obligation arises in the course o a banks
extension o credit. The exemption also generally does
not apply to interest paid on a debt instrument where
the amount payable varies by reerence to the issuers
(or a related partys) receipts, sales, cash ow, income,
change in property value, dividends, partnership
distributions or similar payments received. Further, the
exemption generally does not apply to registered debt
that is convertible to bearer orm.
ShORT-TERm OblIGATIONS
Interest on obligations with a stated maturity o 183
days or less (rom date o original issue) is exempt rom
the 30 percent U.S. withholding tax.
The chart on the ollowing page details the potential
tax impact o dierent types o U.S. debt obligations on
nonresident investors.
interest earnings capital gains comments
corporate bonds Generally, interest (including OID)payable on U.S. corporate bondsheld by nonresidents is subject tothe 30 percent U.S. withholdingtax. However, amounts received
by nonresidents with respect tomost publicly (registered) debtobligations o U.S. corporationsissued ater July 18, 1984, qualiy asportolio interest and are, thereore,exempt rom U.S. tax as long as theinvestor has provided the payerwith a Form W-8BEN.
Since corporate debt instrumentsare usually treated as capital assets(property held or investment), anygain on their sale or other dispositionis generally ree rom U.S. tax. Interest
or OID accrued on the bond prior tosale is taxed as interest income andnot capital gain, but it is not s ubjectto withholding.
ObservationInterest earned oncertain unregistered (or bearer)bonds that are sold only tononresidents, with the interestpayable only outside the United
States and its possessions, mayalso qualiy or the portolio interestexemption. Unlike owners oregistered obligations, owners obearer bonds acquired outside theU.S. need not provide a Form W-8BENto obtain this beneit.
u.s. government
securities
Interest (including OID) received byU.S. nonresidents on obligations othe U.S. government (e.g., Treasurybills, notes and bonds) which wereissued ater July 18, 1984 (portoliointerest obligations) is generallyexempt rom U.S. withholding tax,as long as a Form W-8BEN has beenprovided to the payer.
Capital gains on the sale o U.S.government securities held orinvestment are generally exemptrom U.S. tax.
municipal bonds Interest (including original issuediscount) earned by nonresidentinvestors on certain state andmunicipal obligations, which isexempt rom U.S. tax when earnedby a U.S. citizen or resident, is alsoexempt rom the 30 percent U.S.withholding tax.
Gains on the sale or retiremento municipal bonds generally arenontaxable capital gains.
ObvoYields on state andlocal municipal bonds are generallylower than those o similar taxableissues.
NoteAlthough municipal bondincome may be exempt rom U.S. tax,such income may not be exempt romtax in the oreign investors countryo residence.
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Mortgage-Backed SecuritiesAmounts paid to a nonresident on a regular interest
(debt) in a Real Estate Mortgage Investment Conduit
(REMIC) generally is treated as interest or OID income
and is exempt rom U.S. withholding tax under the
portolio interest exemption, provided a Form W-8BEN is
received by the payer.
No ofcial guidance has been released with respect to
U.S. withholding tax on interest paid to a nonresident
holder o a Financial Asset Securitization Investment
Trust (FASIT) interest. However, since a FASIT is an
evidence o indebtedness similar to a REMIC, such
interest may also be exempt rom U.S. withholding tax.
However, interest earned in a mortgage pool
represented by pass-through certicates, such as
Ginnie Maes and Fannie Maes, is exempt rom U.S. tax
only i all o the mortgages in the pool are otherwise
eligible or the portolio interest exception (as discussed
above) and were originated ater July 18, 1984, thereby
qualiying them as portolio interest obligations.
Mutual FundsThe purchase o shares in a mutual und is generally
similar to the purchase o shares o stock in a U.S.
corporation. Distributions received rom the und are
treated as regular dividends, capital gain dividends,
distributions o tax-exempt interest, or as a return o
capital, depending upon the source rom which the
distributions are made.
Distributions treated as regular dividends are subject
to the 30 percent U.S. withholding tax, unless the
rate is reduced by a treaty between the U.S. and the
oreign investors country o residence. Capital gain
distributions (rom the unds net long-term capitalgains) and exempt interest dividends are generally not
subject to withholding. On the other hand, dividend
distributions rom the unds constituting short-term
capital gains and other ordinary income would be
subject to 30 percent (or lower treaty rate) withholding
as regular dividends.
NoteCertain money market unds also distribute
dividends and not interest income and, thereore,
withholding would be required at the 30 percent (or
lower treaty) rate on such distributions rom such unds.
OFFShORE mUTUAl FUNDS
A number o nancial institutions oer mutual unds,
which are incorporated, managed and sold outside o
the U.S. Consequently, the dividend distributions made
by these oshore mutual unds generally are exempt
rom U.S. withholding tax.
Unit Investment TrustsA unit investment trust (UIT) generally holds a xed
portolio o specied assets (e.g., U.S. stocks, U.S.
Treasuries, Ginnie Maes, corporate bonds or certicates
o deposit). The UIT issues redeemable securities,
each o which represents an undivided pro rata interest
in the assets held by the trust. The UIT pays interest
or dividend income (depending on its underlying
investments) on a periodic basis.
CApITAl GAINS
A unitholder recognizes capital gain (or loss) to theextent that all or part o his pro rata portion o a security
in the trust is disposed o (i.e., the security is sold by
the UIT or the unitholder sells his interest in the UIT or
an amount greater (or lesser) than his tax cost). This
capital gain is generally exempt rom U.S. tax.
INTEREST INCOmE
Most interest income rom UITs invested in U.S.
government and corporate debt instruments (issued
ater July 18, 1984) qualies as portolio interest and as
such would be exempt rom U.S. withholding tax.
DIVIDEND INCOmE
Dividend income rom UITs with equity investments
is subject to the 30 percent (or lower treaty rate) U.S.
withholding tax.
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OFFShORE UITS
A number o nancial institutions oer UITs, which are
incorporated, managed and sold outside o the U.S.
Consequently, the dividend distributions made by these
UITs generally are exempt rom U.S. withholding tax.
Options, Forward andFuture Contracts
lISTED STOCk OpTIONS
Listed stock options are either options to buy stock
(calls) or options to sell stock (puts) traded on a U.S.
securities exchange, such as the New York or American
Stock Exchanges. Gain rom trading in stock options
generally is treated as a capital gain upon expiration,
sale or exercise and, accordingly, generally is exempt
rom U.S. tax.
NONEqUITy OpTIONS
Gain rom trading in other types o optionsnonequity
optionsshould similarly not be subject to U.S. tax.
Listed nonequity options include:
Options on utures contracts;
The S&P 500 stock index;
The S&P 100 stock index;
Interest rate options (e.g., options on Treasury
notes and Treasury bills); and
Foreign currency options.
Gains rom trading in oreign currency options would be
considered ordinary income sourced according to the
residence o the taxpayer. Thus, such gains would be
exempt rom U.S. tax.
COmmODITy pOOlSA commodity pool is a pool o unds structured as a
limited partnership which engages in the speculative
trading o commodity interests (e.g., utures
contracts, options, physical commodities and oreign
currency orward contracts) and interests in other
commodity pools.
Since a commodity pool is organized in the orm o a
limited partnership, it will not be considered a separate
taxable entity or U.S. tax purposes and its income will
generally be taxed directly to the partners. Please reer
to the section on partnership income or a more detailed
discussion o the taxation o partnership interests.
NoteIn certain situations, a partnership, which trades
in commodities or its own account, may not always be
considered to be engaged in a U.S. trade or business.
RecommendationDue to the complex nature
o commodity pools and the varied taxation o
options and utures contracts, it is suggested thatyou contact your proessional tax adviser beore
investing in such instruments.
FUTURES AND FORWARD CONTRACTS
Futures and orward contracts are generally considered
capital assets that generate capital gain or loss. Foreign
currency utures and orwards will generate ordinary
income sourced according to the residence o the
taxpayer. Thereore, any trading gains usually are
exempt rom U.S. tax.
Notional Principal ContractsUnder current U.S. tax law, nancial instruments which
constitute notional principal contracts (NPCs) are
generally not subject to U.S. withholding tax. An NPC
generally is dened as a nancial investment that
provides or the payment o amounts by one party
to another at agreed intervals (e.g., quarterly), with
reerence to a specied index and notional amount
in exchange or specied consideration or a promise
to pay similar amounts. In general, utures contracts,
option contracts, orward contracts, oreign currency
contracts and debt instruments cannot qualiy as NPCs.Payments received by a nonresident on an NPC are
not subject to U.S. tax, unless they are eectively
connected with the conduct o a U.S. trade or
business. Thus, the use o NPCs is currently an
eective way or nonresidents to generate tax-
efcient investment income.
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NoteIn the case o a notional principal contract
involving non-periodic payments, a portion o the
consideration received in exchange or the non-periodic
payments will be considered interest potentially subject
to withholding.
NoteThe use o NPCs and their qualication or tax
purposes is a complex area. Investors should consult
their proessional tax advisers beore entering into
these transactions. It is possible that by entering into
an NPC, an investor may be treated as having made a
constructive sale o an appreciated nancial position
i the NPC is with respect to the same or substantially
identical property.
AnnuitiesAnnuity payments received by nonresidents are subject
to the 30 percent (or lower treaty rate) U.S. withholding
tax to the extent the payments are made by a U.S.
person. A portion o each annuity payment is treated as
a return o the investors cost and a portion is treated as
income rom the investment. Tax is withheld only rom
the income portion o the payment.
ObservationThe income portion o an annuity
payment generally is not interest income under U.S. tax
rules. Thus, the portolio interest exemption may not be
available or such payments.
NoteAnnuities paid to a nonresident in a treaty country
may be eligible or an exemption under the treaty.
Rental IncomeA nonresident is subject to tax on rents or the use o
real or tangible personal property located in the U.S.
These rents are generally taxable at the 30 percent at
rate. Most U.S. treaties permit no reduction in this rate
where the income is derived rom real property.
I a nonresident invests directly in rental-producing
real estate, the individual may elect to have rental
income rom the property taxed at regular U.S.
tax rates, ater deducting expenses relating to
the property (rather than at 30 percent o gross
rent received), without subjecting their worldwide
income to U.S. taxation. As a result o the deductionsallowed or depreciation, interest and other allowable
expenses, the eective U.S. tax on such income may
be reduced below 30 percent.
ObservationThis election is not available or rentals
o personal property. In addition, i rent rom leasing
either personal or real property is considered income
eectively connected to the conduct o a trade or
Example Nonresident A enters into a two-
year notional principal contract with Dealer B,
a U.S. broker-dealer, at a time when Company
XYZs stock is trading at $100 per share. Company
XYZ is a U.S. corporation whose shares trade onthe New York Stock Exchange. Pursuant to the
contract, A will pay B LIBOR plus ten basis points
on a notional amount o $5 million on a quarterly
basis and, at the end o the contract, i Company
XYZs share price is below $100, A will pay B
the depreciation in the share price times 50,000
shares. B agrees to pay A an amount equal to the
dividends on 50,000 XYZ shares on a quarterly
basis and, at the end o the contract, i Company
XYZs share price is above $100, B will pay A
the appreciation in the share price times 50,000
shares. The contract is not eectively connected
with a U.S. trade or business conducted by A.XYZ pays quarterly dividends o $0.50 per share
throughout the two-year period and is trading at
$120 per share at the end o the contract. LIBOR
plus ten basis points remains constant at 6.5%
throughout the two-year period. Pursuant to the
contract, quarterly cash low would be as ollows:
From A to B: $81,250
From B to A: $25,000
At the end o the contract, B would make a
payment to A o $1,000,000.
Because the payments rom B to A qualiy aspayments under a notional principal contract, no
U.S. tax should be imposed on these amounts.
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business in the U.S. by the taxpayer, such income will
be taxed on a net basis at regular U.S. tax rates (and
would require the ling o a U.S. income tax return) even
in the absence o an election.
NoteAn individual that is subject to net income
taxation in the United States is required to le an annual
income tax return (Form 1040NR). I the return is not
led within 16 months o the due date o the return
(normally June 16th o the year ollowing the tax year)
deductions and credits may be denied.
Real Property InterestsThe provisions o the Foreign Investment in Real
Property Tax Act o 1980 (FIRPTA) should be
considered by every nonresident who invests in U.S.
real property. FIRPTA applies to every disposition o
U.S. real property interests by nonresidents, including
interest o the stock o certain U.S. corporations
holding primarily U.S. real property and stock in a Real
Estate Investment Trust (REIT).
CApITAl GAINS
Under FIRPTA, gain recognized by a nonresident on
the sale or other disposition o an interest in U.S. real
property is treated as income eectively connected to
the conduct o a trade or business in the U.S. Thus, the
net gain rom the sale o a U.S. real property interest
is subject to tax at regular, graduated U.S. tax rates
(generally, 15 percent maximum rate or long-term
capital gains and up to 35 percent or individuals
(beginning in 2003) and 35 percent or corporations),
as opposed to the 30 percent U.S. withholding tax
rate. In addition to taxation at regular U.S. income tax
rates, nonresidents may be subject to an alternative
minimum tax (AMT) at graduated rates between 26
and 28 percent, based on the lesser o their alternative
minimum taxable income or their net gain rom the
disposition o their U.S. real property interest (with,
generally, a 15 percent rate on long-term capital gains).
A U.S. real property interest includes stock o a company
that, at any time within the preceding ve years
qualies as a U.S. Real Property Holding Corporation
(U.S. RPHC). A U.S. RPHC is a company whose
assets consist primarily o U.S. real property interests.
However, stocks o companies that are regularly traded
on an established exchange are not real property
interests in the hands o shareholders who do not own
more than a ve-percent interest in the company.
FIRpTA WIThhOlDING
The FIRPTA rules generally require the buyer o a U.S.
real property interest to withhold ten percent o the
consideration given i the seller is a oreign person.
Thus, the purchaser o stock in a U.S. RPHC that does
not meet the publicly-traded exception must generally
withhold tax equal to ten percent o the amount realized
by the oreign person on the disposition o the stock.
The withheld tax is applied as a credit against the oreign
sellers ultimate U.S. tax liability.
In addition, any distribution by a U.S. corporation, the
shares o which constitute a U.S. real property interest,
that is not treated as a dividend may be subject to a ten
percent U.S. withholding tax. The oreign person must
still le a regular U.S. income tax return to report the
transaction and to compute the actual U.S. tax imposed
on the gain, i any. The amount withheld can be claimed
as a credit against the actual tax due, and any over-
withheld amounts can be claimed as a reund by theoreign seller on his or her tax return.
The oreign seller, or shareholder in the case o a
corporate distribution, can apply or a withholding
exemption certicate rom the IRS on or beore closing
o the transaction to reduce or eliminate the withholding
i certain conditions are met. For example, the IRS
will permit reduced withholding i the maximum tax
expected on the sellers gain is less than the ten percent
amount otherwise required.
Special SituationSpecial rules apply when a
nonresident has an interest in a U.S. partnership that
owns U.S. real estate. Please review the next section onpartnership income or additional inormation.
SpECIAl RUlES FOR REAl ESTATEINVESTmENT TRUSTS (REITS)
The sale o stock in a REIT is subject to FIRPTA
withholding, unless the REIT shares are publicly traded
and the shareholder meets the ve-percent threshold
or the REIT is a U.S.-controlled REIT. A distribution rom
a REIT that is designated as a capital gain dividend is
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generally subject to a 35 percent U.S. withholding tax
when paid to a nonresident. I the REIT designates a
distribution as a capital gain dividend ater it is paid,
then the withholding is imposed on uture distributions.
Capital gain dividends are not eligible or the same
reduced rates o withholding as ordinary dividends
under a tax treaty.
Partnership Income
INVESTmENT INCOmE
A partnership is not considered a separate taxableentity or U.S. tax purposes and, thereore, its income
is generally taxed directly to its partners. Thus, i a
nonresident invests in a U.S. partnership that receives
U.S. investment income (interest, dividends, royalties,
etc.) and the partnership itsel is not engaged in a U.S.
trade or business, the U.S. withholding tax rules are
applied as i the oreign partner had earned such U.S.-
source investment income directly. In these instances
the partnership must withhold the appropriate
amount o tax on each oreign partners distributive
share o partnership gross income (not just on cash
distributions) that is subject to U.S. tax. The partnershipwill withhold this tax on any distributions made during
the year. Any excess owed at the end o the year
must be withheld and paid over prior to April 15 o the
subsequent year.
The rate o withholding is generally 30 percent unless
a treaty between the U.S. and the investors country o
residence provides or a lower rate and the partner has
provided appropriate documentation (generally Form
W-8BEN) to the partnership prior to the time when
withholding otherwise would be required.
EFFECTIVEly CONNECTED INCOmEI the partnership is engaged in a U.S. trade or business,
a nonresident partner is treated as i he or she is
so engaged. This is true whether the nonresident is
a general or limited partner. Nonresident partners
are subject to regular U.S. income tax on their share
o partnership income derived rom a U.S. trade or
business, but are generally not subject to 30 percent
U.S. withholding tax on this income. The tax may be
eliminated i, under a treaty between the U.S. and the
oreign partners country o residence, the partner
does not have a permanent establishment in the U.S.
by virtue o the activities o the partnership. Income
eectively connected with a U.S. trade or business is
reported by the individual nonresident partner on a
U.S. Individual Nonresident Income Tax Return (Form
1040-NR). A corporate nonresident partner would
report income eectively connected with a U.S. trade
or business on a U.S. Income Tax Return o a Foreign
Corporation (Form 1120-F). The partnership generally is
required to le a Form 1065, U.S. Return o Partnership
Income, and provide Form K-1, Partners Share o
Income, Credits, Deductions, Etc., to each partner.
A partners tax basis in a partnership interest is
increased by the partners pro rata share o U.S.
eectively connected income and reduced by the
partners pro rata share o eectively connected loss.
Distributions rom the partnership reduce the tax basis
in the partnership interest.
When a partner disposes o his or her interest in a
partnership that is engaged in a U.S. trade or business,
the U.S. tax authorities take the position that the
partners gain will be considered eectively connected
income based upon the extent to which partnershipassets were used in that business.
Special SituationA partnership which trades U.S.
stock and securities or its own account may not be
considered to be engaged in a U.S. trade or business
i certain conditions are met and i the partnership is
not a dealer in securities. A similar situation applies i
the partnership is engaged in commodities trading, but
only i the commodities are customarily traded on an
organized exchange and the transaction is customary to
the exchange.
U.S. WIThhOlDING TAXA partnership must pay a U.S. withholding tax on each
oreign partners distributive share o U.S. eectively
connected taxable income. The withholding rate is the
highest rate applicable to the class o taxpayerthat
is, or individuals, 35 percent (beginning in 2003) and,
or corporations, 35 percent. No withholding is required
i the partners distributive share o income would
be exempt under a treaty. Payments are made on a
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quarterly basis during the partnerships taxable year.
The oreign partner must then le a U.S. tax return and
either pay any additional tax due or obtain a reund or
any overpayment. Capital gains, which are generally
exempt rom 30 percent withholding, are subject to
this U.S. withholding tax at 35 percent or individuals
(beginning in 2003) or 35 percent or corporations.
The withholding on a partners distributive share o
partnership income is coordinated with the withholding
required on the partnerships investment income or
FIRPTA income so that no payment should be subject to
more than one o the three withholding tax regimes.
ObservationThis U.S. withholding tax paid by the
partnership is allocated to each oreign partner and
serves as a credit against the partners U.S. tax liability
or the year. This credit is treated as a distribution to the
oreign partner and reduces the partners basis in his or
her partnership interest.
mASTER lImITED pARTNERShIpS
Income rom certain widely-held U.S. limited
partnerships, known as master limited partnerships
(MLPs) or publicly traded limited partnerships (PTPs),
is generally considered to be U.S. eectively connectedincome and, thereore, is subject to the special
withholding rules on eectively connected income.
However, in general, the partnership is required to
withhold on distributions to each oreign partner. The
partnership may instead elect to withhold on each
oreign partners allocable share o taxable income
or the year, whether or not such amount has been
distributed. Moreover, special withholding rules may
apply to distributions made to those acting as nominees
(e.g., nancial institutions) or U.S. nonresidents holding
partnership interests.
NoteIn general, a PTP is treated as a corporation orU.S. ederal income tax purposes. However, certain
PTPs, which derive more than 90 percent o their gross
income rom interest, dividends, real property rents and
gains rom the sale o capital assets, will be taxed as
partnerships. The rules described immediately above
apply to PTPs that are not treated as corporations.
RecommendationI you have or are considering
any partnership investments, you should consult your
proessional tax adviser or an analysis o the particular
partnerships activities. It is not uncommon or a single
partnership to be engaged in both investment and trade
or business activities in the U.S.
REAl pROpERTy INVESTmENTS
Foreign partners o a partnership holding U.S. real
property will be subject to the special rules under
FIRPTA. Thus, i a oreign partner sells his or her interest
in a partnership holding U.S. real property, the gain or
loss on the disposition attributable to that property
will be subject to taxation under FIRPTA. In addition, i
the partnership sells a U.S. real property interest, the
gain rom the sale allocated to a oreign partner will be
subject to these rules as i the partner had sold his share
o the asset directly.
In certain cases, a publicly traded interest in a
partnership is considered an interest in a publicly
traded corporation. I so, the partners will be subject
to the FIRPTA rules applicable to holders o interests
in publicly traded corporations rather than the rules
relating to partnerships.
WIThhOlDING
A partnership must withhold tax at a rate o 35 percent
with respect to any gain realized by the partnership
on the disposition o a U.S. real property interest to
the extent the gain is allocable to a oreign partner.
U.S. partnerships that are subject to the withholding
requirements or eectively connected income are not
also subject to the FIRPTA withholding requirements.
In addition, a transeree acquiring a partnership interest
is required to withhold at a rate o ten percent with
respect to the disposition, but only i: (1) 50 percent
or more o the value o the partnerships gross assets
consists o U.S. real property interests, and (2) 90
percent or more o the value o the partnerships grossassets consists o U.S. real property plus cash or assets
readily convertible into cash. I these requirements are
met, the entire partnership interest is treated as U.S. real
property or FIRPTA withholding purposes. The taxpayer,
however, may apply or a withholding certicate in cases
where reduced withholding is appropriate.
NoteThe above rule applies or withholding purposes
only. The selling partner is subject to tax on the
partners gain to the extent the gain is attributable to
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U.S. real property interests held by the partnership. The
tax withheld, i any, is credited against the partners
actual tax liability.
ElECTIVE ChARACTERIzATIONOF CERTAIN ENTITIES
A U.S. entity that is not in classical corporate
orm, including a U.S. partnership or a U.S. limited
liability company (LLC), may choose to be taxed as
a corporation or as a scally transparent entity. I
an investment partnership includes in its portolio
an entity such as an LLC that has chosen scally
transparent treatment and that entity is an operating
business, the partnership and each o its partners may
be considered engaged in a U.S. trade or business and,
thereore, subject to tax on a net income basis at net
graduated rates.
NoteThe U.S. tax characterization o an entity as
scally transparent or non-transparent may dier rom
the characterization o the entity or purposes o oreign
tax law. This may impact the availability o tax treaty
benets. See Section VII.
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5. U.S. Estate and Git Tax PlanningThe U.S. imposes an estate tax on the worldwide estates o U.S. citizens
and domiciliariesindividuals who are not U.S. citizens but who have a U.S.
domicile. Additionally, a git tax is imposed by the U.S. on lietime gits made
by these individuals. However, or U.S. nondomiciliariesindividuals who
are not U.S. citizens and who do not have a U.S. domicilenot all propertytransers are subject to U.S. estate and git taxes.
This section discusses some o the U.S. estate and
git tax rules and oers some planning suggestions
to help you minimize the cost o transerring your
U.S. property. Because o the complex nature o
the estate and git tax area, we urge you to consult
your proessional tax adviser beore making any
contemplated transers. Also, special U.S. estate andgit tax rules may apply to ormer citizens and ormer
long-term permanent residents (green card holders)
that change the rules discussed below.
U.S. Estate TaxGenerally, the U.S. estate tax applies to nondomiciliaries
with respect to their property situated or deemed
situated in the U.S. at the time o death. The rules
discussed in Section II regarding who is a U.S. resident
versus a nonresident or U.S. income tax purposes do
not apply to determine domicile or U.S. estate taxation.Individuals are considered domiciled in the U.S. and
are taxed on their worldwide estates i their domicile at
death is in the U.S. Individuals are generally considered
nondomiciliaries i their domicile is not in the U.S. An
individual will acquire a U.S. domicile i that person is
physically present in the U.S. and intends to remain
permanently in the U.S.
NoteThe act that a particular oreign country
considers an individual to be domiciled in that country
does not necessarily mean that the U.S. tax authorities
will agree.
NoteSome tax treaties with the United States reduce
or eliminate the application o the U.S. estate tax.
ObservationGenerally an individual who is present in
the U.S. on a nonimmigrant visa will not be considered a
U.S. domiciliary unless the individual intends to remain
permanently in the U.S. In contrast, most immigrants
and oreign individuals (e.g., green card holders) are
considered domiciliaries or U.S. estate tax purposes.
Individuals who are contemplating living in the U.S.
should consult their proessional tax advisers beore
moving to the U.S.
TAXAblE INVESTmENTS
The ollowing assets, i owned by a nondomiciliary at
death, will be subject to U.S. estate tax:
Real property located in the U.S.;
Tangible personal property, such as jewelry and
artwork, located in the U.S. (this would not include
artwork on loan or exhibition in the U.S.);
Shares o stock issued by a U.S. corporation (even
i the actual stock certifcate is not held in the U.S.)
as well as shares o U.S. mutual unds;
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Debt obligations o U.S. citizens or residents,
U.S. corporations, U.S. partnerships, the U.S.
government and individual States, the interest on
which is not exempt portolio interest (regardless
o where the obligation is located). In general,
portolio interest obligations are those obligations
issued ater July 18, 1984 which meet certain
criteria (see Section IV o this pamphlet or a
discussion o the portolio interest rules); and
Deposits in U.S. banks or in U.S. branches
o oreign banks, but generally only i the
deposit is eectively connected with thenondomiciliarys U.S. trade or business.
NoteCertain items are not treated as U.S. property
even i located in the U.S. This includes lie insurance
contracts on the lie o the nondomiciliary.
ObservationShares o oshore mutual unds and
oshore UITs are generally not subject to U.S. estate
taxes assuming that the und or UIT is considered a
non-U.S. corporation under U.S. tax principles.
A general or limited interest in a U.S. partnership may
be included in the nondomiciliarys estate or U.S.
estate tax purposes, depending upon the nature othe partnership and whether it is engaged in a U.S.
trade or business.
U.S. ESTATE TAX RATES
A nondomiciliary decedents U.S. taxable estate in
excess o $60,000 is taxed at rates ranging rom 26
percent to a maximum o 49 percent (in 2003) or U.S.
taxable estates in excess o $2 million. The U.S. does
not tax the rst $60,000 o a nondomiciliary decedents
U.S. estate. The amount not taxed by the U.S. may be
higher under certain estate tax treaties.
Planning StrategyNondomiciliaries should considerholding their U.S. investments through non-U.S.
corporations to minimize the potential application o the
U.S. estate tax. More inormation is detailed in Section VI
o this Guide, Ownership o Investments. Also, i there
are U.S. heirs, consideration should be given to the tax
situation o these heirs ater the death o the individual.
U.S. Git TaxThe U.S. git tax is coordinated with the U.S. estate
tax and, thereore, provides or the same distinctions
between domiciliaries and nondomiciliaries, and or
nondomiciliaries is imposed at the same rates, except
as mentioned above in 2010.
TANGIblE pROpERTy
A nondomiciliary is subject to U.S. git tax only on
transers o real estate and tangible property situated in
the United States. Tangible property includes personal
property, such as artwork and jewelry.
INTANGIblE pROpERTy
In general, gits o intangible property, such as
corporate stock, mutual und shares, bonds and
other obligations, are not subject to U.S. git tax.
This is true even though the same property would
be subject to U.S. estate tax i the transer occurred
by reason o the death o the nondomiciliary owner.
Although not entirely certain, it is likely that a
partnership interest is also intangible property that
is exempt rom U.S. git tax, even i the partnership
is engaged in a U.S. business and even i all o itsproperty is located in the U.S.
CASh AND ChECkS
Cash is generally considered tangible property.
Accordingly, any git o cash or other currency, while in
the U.S., may subject the transeror to U.S. git tax. Even
a wire transer rom abroad to a U.S. bank account could
be construed to be a git subject to U.S. git tax. The
saer course may be to make the transer to the donees
oshore bank account.
ObservationWhile cash is considered tangible
property, a U.S. bank account is treated as intangibleproperty; thereore, an account transer will not be taxed.
Planning StrategyA nondomiciliary can transer
money tax-ree by opening a U.S. bank account and
assigning it to a donee (e.g., a spouse or child) or by
adding the donee to the account.
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NoteTangible personal property which is located in
the U.S. can be gited ree o U.S. git tax i the property
is removed rom the U.S. prior to making the git.
GENERAl TAX GUIDElINES
Generally, a nondomiciliary donor is not entitled to the
unied credit against git tax or a marital deduction
or gits to a spouse who is not a United States citizen.
However, $112,000 (in 2003, as indexed or ination) in
gits o U.S. situs property transerred to a non-citizen
spouse may be excluded annually rom U.S. git tax. In
addition, in calculating the git tax, the rst $11,000 (in
2003, as indexed or ination) that is gited annually
to each donee, other than a spouse, is exempt rom
U.S. git tax. Deductions or charitable contributions
are limited to gits to certain United States charities,
U.S. government bodies or certain other charitable
organizations that will use the git within the U.S.
ESTATE AND GIFT TAX TREATIES
There are a number o estate and git tax treaties that
reduce or eliminate the otherwise applicable U.S. estate
or git tax.
NoteAny o the special U.S. estate and git tax rules
may be modied by a treaty between the U.S. and a
nondomiciliarys country o domicile.
U.S. STATE REGUlATIONS
Individual U.S. states may also impose estate or
inheritance taxes at death and git taxes on lietime
transers. Foreign individuals who own property thatis potentially subject to the U.S. estate or git tax or
state tax should consult their proessional tax advisers
regarding their potential tax liabilities and whether or
not they should execute a U.S. will.
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uniteD states estate taxation for nonDomiciliaries (as of 2003)
Unitied Rate Schedule
column a column b column c column D
taxable amount
over
taxable amount
not over
tax on amount
in column a
rate of tax
on excess
over amount
in column a
Exempted romestate taxation
$ 010,000
20,00040,000
$ 10,00010,000
20,00060,000
$ 01,800
3,8008,200
18%20%
22%24%
Nondomiciliariesbegin to payestate taxes romUS$60,001
$ 60,00080,000
100,000150,000250,000500,000750,000
1,000,0001,250,0001,500,0002,000,000
$ 80,000100,000150,000250,000500,000750,000
1,000,0001,250,0001,500,0002,000,000
$ 13,00018,20023,80038,80070,800
155,800248,300345,800448,300555,800780,800
26%28%30%32%34%37%39%39%41%43%
49%*
*The maximum estate and git tax rate is scheduled to decline, as ollows:
Year maximum tax rate
2003 49%
2004 48%
2005 47%
2006 46%
2007 45%
2008 45%
2009 45%
2010 0% (Estate Tax), 35% (Git Tax)
2011 55%
As indicated in the p receding table, the maximum estate andgit tax rate is scheduled to decline gradually rom 49% to 45%in 2009. Under current law, the estate tax will be repealed orone year, or those individuals dying in 2010. The git tax willremain in orce in 2010, at a maximum rate o 35%. In 2011and onwards, the estate tax is reinstated, and the maximumestate and git tax rate will climb to 55% or gits or bequests inexcess o $3,000,000. It is possible that uture legislation willeither do away with or make permanent the one-year repeal othe estate tax in 2010.
Due to the unlimited marital deduction, the value o propertylocated in the U.S. that passes rom a nondomiciliary decedentto a surviving U.S. citizen spouse is not subject to U.S estatetax. However, i the surviving spouse is not a United States
citizen, certain requirements must be met in order to claim amarital deduction.
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6. Ownership o InvestmentsChoosing the right ownership vehicle is a crucial step in the management o
an investment portolio. The decision to hold investments individually, through
a corporation and/or through a trust ofers some signicant tax and non-tax
advantages. However, the use o a corporation or trust to reduce or eliminate
U.S. tax is not without risk and should only be undertaken ater careulplanning and with the assistance o legal and tax proessionals.
Corporate Ownership
TAX TREATmENT
Generally, a oreign corporation and nonresident
individual are taxed similarly with respect to U.S.
investment income. A oreign corporation is subject
to the same 30 percent U.S. withholding tax on U.S.-
source income that is not eectively connected
with a U.S. trade or business and is also eligible or
the same exemptions rom withholding or portolio
interest, capital gains (other than gains rom the sale
o real property) and interest on bank deposits as a
nonresident individual.
ObservationThe 30 percent U.S. withholding
tax rate or both nonresident individuals and
oreign corporations may be reduced by a tax
treaty. Consult your proessional tax adviser or
the rate applicable to the investors or the oreign
corporations country o residence.
A oreign corporations income that is eectively
connected with a U.S. trade or business (such as
income rom a partnership engaged in a U.S. business),
less allowable deductions or expenses related to the
production o such income, is taxed currently at regular
U.S. corporate tax rates up to a maximum o 35 percent
plus a possible branch prots tax, discussed below.
Similarly, i earned by a nonresident individual, such
income is taxed at regular U.S. individual tax rates,
up to a maximum o 35 percent (beginning in 2003).
However, eectively connected income may be exempt
rom U.S. tax altogether under a tax treaty. Consult your
proessional tax adviser.
ObservationSince nonresident individuals and
oreign corporations are subject to the same tax on
U.S. source investment income, reduction o income
taxes generally is not a persuasive reason or corporate
ownership o investments.
Planning StrategyBy holding U.S. investment assets
through a oreign corporation, a nondomiciliary may be
able to minimize exposure to the U.S. estate tax.
Example A U.S. nonresident transers
shares o stock in a U.S. corporation to a oreigncorporation that he owns. Although the oreign
corporation is subject to 30 percent (or lower
treaty rate) withholding on any dividend income,
the shares o stock in the oreign corporation, as
tangible property, are not part o the investors
U.S. estate and at death will not be subject to U.S.
estate tax.
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NoteI the oreign corporation is not administered
so that it complies with specic IRS guidelines on
preserving the integrity o the corporate entity,
it is possible that the IRS will consider it a sham
corporation. In this case, the U.S. estate tax could be
levied on many o the assets owned by the corporation.
I you are considering a corporate structure, you
should consult with a trust proessional and/or other
proessional tax adviser to determine i it would meet
these IRS guidelines.
NoteThe transer o an investment to a oreign
corporation may, in limited circumstances, be a taxableevent. You should consult with your proessional tax
adviser beore undertaking such a transer.
bRANCh pROFITS TAX
A oreign corporation engaged in trade or business
in the U.S. may also be subject to the branch prots
tax equal to as much as 30 percent o the ater-tax
earnings o the oreign corporation. Please consult your
proessional tax adviser with respect to this matter.
OThER TAX bENEFITS
Other tax benets may be available depending on
where the oreign corporation is ormed. For example,
a company organized in a jurisdiction that does not
impose a corporate tax would not be taxed in that
jurisdiction. You should consult your proessional tax
adviser beore deciding whether or not to incorporate.
Benefcial OwnershipThrough a TrustIn general, the creation o a trust requires the separation
o legal and benecial ownership o all property
transerred to the trust. The settlor o the trust transersproperty to a trustee, who maintains legal title to the
property and manages it or the benet o others (the
beneciaries), who have benecial ownership o the
trust property.
GRANTOR TRUST
I a nonresident orms a revocable trust or retains
exclusive enjoyment o the income, then, or U.S.
income tax purposes, the IRS looks through the trust
and considers the settlor to own the assets held by the
trust. The trusts income is taxed as i the settlor earned
the income directly. This arrangement is known as a
grantor trust. A trust can be, in part, a grantor trust
and, in part, a nongrantor trust.
NoteThe above paragraph is a general description
o a grantor trust and does not cover all aspects o the
denition. You should consult your proessional tax
adviser or urther details.
The ollowing property held by a nonresidents grantor
trust is not subject to U.S. income tax because thenonresident is considered to own the property directly:
Capital gains on investment property other
than real estate;
U.S. bank deposit interest and interest rom U.S.
bank money market accounts; and
Treasury bills, notes and bonds, and many
corporate obligations issued ater July 18, 1984
(portolio interest obligations as discussed in
Section IV).
On the other hand, a nonresident is subject to U.S. tax
on income rom these items o property held by the
nonresidents grantor trust:
Dividends paid by U.S. corporations;
Any income eectively connected with the
conduct o a U.S. trade or business; and
Gain rom the sale o U.S. real estate.
ObservationU.S. securities (unless the securities
qualiy as portolio interest obligations, as described
in earlier sections o this Guide), real property or any
tangible property located in the U.S. which is owned by
the nonresident individuals grantor trust may also besubject to the U.S. estate tax.
NONGRANTOR TRUST
I a nonresident creates an irrevocable trust and does
not retain the exclusive enjoyment o the income or
principal (i.e., the trust is not a grantor trust), then
the trust is treated as a separate taxpayer or U.S.
tax purposes. Generally, the trust is subject to tax
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on its undistributed income. The maximum eective
tax rate on trust income is 35 percent (beginning in
2003). Amounts that are distributed currently by
the trust to its beneciaries are generally taxable to
the beneciary (at the beneciarys eective U.S. tax
rate) and not the trust.
ObservationWhile there is no tax disadvantage
to a U.S. grantor trust while a nonresident grantor
is alive, the U.S. trustee is required to le certain
trust inormation with the IRS, including inormation
regarding income earned by the trust and the
identication o beneciaries. In addition, a non-U.S.trustee, like the nonresident individual, may be required
to le certain inormation with the IRS, the nancial
institution where an account may be held or other
withholding agent. A trust also exposes its settlor to U.S.
estate tax, whereas a oreign corporation reduces the
possibility o such exposure.
Planning StrategyA structure that combines an
oshore trust with an oshore corporation (also known
as a private investment company or PIC) may help a
nonresident to minimize the potential application o the
U.S. estate tax while providing or estate planning and
other benets. Your Smith Barney Financial Consultant,
along with your proessional tax adviser, can guide you
with appropriate recommendations concerning this
type o structure.
RecommendationI you have set up or are considering
a trust arrangement as a vehicle or holding your U.S.
investments, we strongly recommend that you consultyour proessional tax adviser. Many o the tax and legal
aspects o establishing a trust (i.e., deciding whether
to organize a oreign or U.S. trust, or a grantor or
nongrantor trust) require a careul evaluation o your
nancial aairs and are beyond the scope o this Guide.
NoteA trust that includes U.S. citizens or residents
as beneciaries is subject to special rules. You should
consult your proessional tax adviser i the trust includes
such beneciaries.
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7. Income Tax Treaty BeneftsAs discussed throughout this Guide, oreign investors may be entitled to
reduced tax rates on U.S.-source income i the U.S. has a tax treaty in orce
with their country o residence to prevent the double taxation o income.
All U.S. treaties use the same basic approach in
determining eligibility or benets, and in determining
what kinds o income and taxes the treaty will cover.
However, the details o a particular treaty can dier
rom others in very important respects (e.g., specic
rates o withholding, limitations on eligibility or treaty
benets, etc.). Thereore, nonresidents and oreigncorporations should make sure they consult with
proessional tax advisers concerning the applicability
o a U.S. treaty provision. I the nonresident does
not meet the requirements or benets under
the particular treaty, or i no treaty exists with the
investors home country, then the investor cannot
claim treaty benets and the withholding agent must
withhold on the income at the ull 30 percent rate,
unless another rate reduction rule applies.
Foreign persons must submit a certicate to the U.S.
withholding agent to claim a reduction in withholding
pursuant to a tax treaty. A withholding agent may nolonger rely on merely an address in a oreign country
to determine entitlement to a treaty rate or dividend
income. A claim or treaty benets on U.S.-source
income is made by completing Part II o Form W-8BEN
(see Section VIII, Documentation and Reporting).
ObservationThe interaction o the U.S. tax rates, home
country tax rules and applicable U.S. treaty provisions
can be very complex. Investors should consult with their
proessional tax advisers to devise a structure that best
accomplishes their business and tax objectives rom a
global perspective.
NoteWhen a non-U.S. person takes a position that a
U.S. income tax treaty reduces or eliminates the U.S. tax,
this position must be disclosed in the persons U.S. tax
return or the taxable year, or, i no return is otherwise
required, on an inormation return led solely or this
purpose. This provision does not apply to interest
and dividends received by a nonresident where the
withholding agent has properly reported the payments
to the IRS on a Form 1042-S. Other exceptions also
apply to this reporting.
The table on the ollowing pages serves to provide
current U.S. income tax withholding rates or residents
o countries that have tax treaties with the United
States.
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U.S. Income Tax Withholding Rates on Investment Incomeor Residents o Treaty CountriesThe chart below shows the treaty U.S. withholding tax rates applicable to U.S.-source income paid to residents o
the treaty country. Note that these rates apply to the nonresidents investment income and not to income eectively
connected with a U.S. trade or business. The tax rates below are available provided all conditions o the particular treaty
are satised and reect the rates in eect on September 1, 2004.
Interest (%) 1 DIVIDenD (%) 2 AnnuItIes
Australia 10 15 0
Austria 0 15 0Barbados 5 15 0
Belgium 15 15 0
Canada 10 15 15
China, Peoples Republic o 3 10 10 30
Cyprus 10 15 0
Czech Republic 0 15 0
Denmark 0 15 0
Egypt 15 15 0
Estonia 10 15 0
Finland 0 15 0
France 0 15 0
Germany, Federal Republic o 0 15 0
Greece 0 30 0
Hungary 0 15 0
Iceland 0 15 0
India 15 25 0
Indonesia 10 15 0
Ireland 0 15 0
Israel 17.5 25 0
Italy 15 15 0
Jamaica 12.5 15 0
Japan 10 10 0
Kazakhstan 10 15 0
Korea, Republic o South 12 15 0
Latvia 10 15 0
Lithuania 10 15 0
Luxembourg 0 15 0
Mexico 4.9 10 0
Morocco 15 15 0
Netherlands 0 15 0
New Zealand 10 15 0
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Interest (%) 1 DIVIDenD (%) 2 AnnuItIes
Norway 0 15 0
Pakistan 30 30 0Philippines 15 25 0
Poland 0 15 30
Portugal 10 15 0
Romania 10 10 0
Russia 0 10 0
Slovak Republic 0 15 0
Slovenia 5 15 0
South Arica 0 15 0
Spain 10 15 0
Sri Lanka 10 15 0
Sweden 0 15 0
Switzerland 0 15 0
Thailand 15 15 0
Trinidad and Tobago 30 30 0
Tunisia 15 20 0
Turkey 15 20 0
Ukraine 0 15 0
United Kingdom4 0 15 0
Venezuela 10 15 30
1 Interest paid by U.S. borrowers, unless the interest qualies as portolio interest.
2 Paid by U.S. corporations (other rates may apply to corporations with substantial ownership in the U.S. corporation). A higher rate o withholding may
apply to dividends paid by Real Estate Investment Trusts (REITs).3 Residents o Hong Kong and Taiwan are not covered by the U.S.-China tax treaty.
4 Applies to the countries o England, Northern Ireland, Scotland and Wales.
U.S. Income Tax Withholding Rates (contd)
The reduced rates or exemptions apply under tax treaties currently in eect with the United States; withholding rates
are subject to change. For countries not listed, no tax treaty currently exists and the standard 30 percent withholding
rate generally applies. The above rates are those o most general applicability or the specied category o income.
Exceptions and limitations may apply under specic treaties. Please consult your proessional tax adviser.
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8. Documentation and ReportingA U.S. fnancial institution, such as Smith Barney, a division o Citigroup
Global Markets, is required to solicit, collect and maintain in its les various tax
documents to both ensure the nonresident status o its oreign account base
and to avail its clients o a lower rate o tax withholding on certain payments
made by the institution.
In January 2001, the Internal Revenue Service
(IRS) implemented comprehensive revisions to the
documentation rules. The primary objective o these
new rules is to improve the integrity and airness o
the process o claiming reduced rates and exemptions
rom U.S. withholding tax by oreign persons. Toward
this end, the rules impose new U.S. tax documentationrequirements. They are designed to identiy the ultimate
benecial owner o income and to prevent improper
claims or benets under U.S. tax treaties. To implement
these policy objectives, the IRS has replaced the old
style Forms W-8, 1001, 4224 and 8709 with a new series
o Forms W-8. The ollowing translation table may be
used to identiy the corresponding new orm among the
new series o Forms W-8.
Ater December 31, 2000, a U.S. withholding agent,
such as Smith Barney, a division o Citigroup Global
Markets, may not accept any new claim or a reduced
rate or exemption rom withhold