Foreigners can invest in U.S. stocks by opening a U.S.-based brokerage account. Be aware of tax documentation that may be required for an international brokerage account.
Much of the information out there about taxes assumes you’re a U.S. taxpayer. But what if you’re a non-U.S. taxpayer and considering opening an international brokerage account? You probably have questions. For instance, can foreigners invest in U.S. stocks? If eligible to make contributions, can a non-U.S. resident open an individual retirement account (IRA)? Are there brokerage accounts for non-U.S. residents or non-U.S. citizens? And how does the withholding tax on U.S. stocks work if you aren’t a U.S. taxpayer?
If you’re a non-U.S. taxpayer and want to trade U.S. stocks in a brokerage account, this article is for you.
In a brokerage firm, most accounts fall into one of three broad categories: retirement, domestic, or foreign. Retirement accounts include IRAs, 401(k)s, and many others. If you’re a U.S. resident (and that could include permanent residents and non-resident aliens), you may be subject to the same tax laws as U.S. citizens and fall under domestic reporting. The third category, international brokerage accounts, can be held by non-U.S. taxpayers.
There are a couple different ways non-U.S. investors can open an international brokerage account. You could open an account with a financial services company in your country of residence that offers access to U.S. stocks. Or you might open a brokerage account for non-U.S. residents with a U.S.-based broker. But before you do that, make sure the services are available for your country of residence. Plus, know that there may be additional paperwork involved, including tax documentation. Here are some general tax considerations to keep in mind.
As a non-U.S. taxpayer, you’re subject to Chapter 3 withholding. When investing in a U.S. security, any dividend income is subject to withholding by your broker at the time of payment. You may not have a year-end tax bill, because the withholding is remitted to the IRS on your behalf when the income is deposited into your account. The statutory tax rate is 30%. Certain countries have entered into a treaty with the United States that may qualify you for a reduced rate if you’re eligible and have claimed the benefits on an IRS Form W-8BEN. To learn more about tax treaties, explore the tax treaty tables section on the IRS website.
Dividend income received from non-U.S. securities may already have the country of incorporation’s tax deducted before the income is received. The net amount is distributed to your account; additional U.S. withholding is not applicable.
In response to concerns that non-U.S. investors could avoid dividend withholding by purchasing certain equity-linked instruments, the U.S. Congress enacted a new withholding regime titled Section 871 (m) that impacts equity-linked derivatives that give rise to a “dividend equivalent payment.” For those who have Schwab brokerage accounts, this will primarily affect options. Although no income payment is actually received, the “dividend equivalent payment” is considered income and is subject to withholding. The withholding is performed at your current dividend rate and is treaty eligible. Your broker will remit the withholding to the IRS on your behalf.
There’s another withholding rule to account for—the recently enacted 1446(f) withholding on certain publicly traded partnerships (PTP). This withholding tax is separate from the existing maximum 37% withholding for individuals and 30% withholding for entity accounts (as of January 2023, for Schwab One International accounts held by non-U.S. individuals or entities, Schwab withholds an additional 10% of gross proceeds, including those generated from sales of PTPs and certain distributions by PTPs).
As a non-U.S. investor, you will be issued Form 1042-S by mid-March for the preceding tax year on any reportable activity. Any U.S. withholding that occurred, along with the income it’s attributed to, will be reported on Form 1042-S. This form is available online and is also mailed to your current mailing address on record. The form is also sent to the IRS, which then delivers it to the tax authority of your country of residence. Typically, no U.S. tax filing is necessary; however, you may be required to report certain income earnings to your country.
Non-U.S. investors with brokerage accounts are required to provide their brokerage firm with a complete and valid IRS Form W-8BEN to certify their tax status. This form expires three calendar years after the signature date, unless material account information changes (causing the form to become invalid prematurely). Without a valid W-8BEN on file, Internal Revenue Code Section 3406(a)(1)(B) will require Schwab to begin federal backup withholding at a rate of 30% on all taxable dividends, interest, sales proceeds (including those from options transactions), and other reportable distributions credited to your account. Typically, notifications are sent before your W-8BEN expires to remind you that new paperwork is needed.
The U.S. stock market is one of the pillars of our country’s economic system, and U.S. citizenship is not required to trade U.S. securities. That means non-U.S. citizens or international investors can open a brokerage account and invest in U.S. stocks. But it’s important to identify the different forms and policies that apply to non-U.S. taxpayers.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
TD Ameritrade offers different account types for non-U.S. taxpayers here.
You’ll also find several educational tools, webcasts, videos, and investing ideas to help you better understand the U.S. stock markets.