Investments in US real property, while potentially lucrative, are sometimes too costly to individual investors outside the United States, as well as to small groups of foreign investors. Ann Irons, CPA provides tax services for foreign investors in Bellingham, MA. She explains that debt instruments are a more accessible, less prohibitive means of generating income for investors who are not residents of the United States. How do you know which instruments of debt are subject to tax and which are not?

Taxing Corporate Bonds

As a nonresident of the United States holding corporate bonds, you must pay the predetermined 30 percent withholding tax on the total interest payable. Under certain circumstances, however, a foreign investor can submit Form W-8BEN qualifying a corporation’s debt obligation as portfolio interest. If this requirement is met, the amount is exempt from taxation. Irons adds that this applies only to debt issued after the date of July 18, 1984.

The IRS considers capital assets, including corporate bonds, as exempt from taxation in most cases. Determining whether this requirement applies is complex, which emphasizes the importance of working with a CPA or tax preparer who possesses expert-level knowledge of taxation of corporate bonds for investors who are not residents of the United States.

Taxing U.S. Government Securities

When the U.S. government issues debt in the form of Treasury notes, bonds, and bills after July 18, 1984, the instrument is considered to be portfolio interest. As such, any interest earned on these instruments is not subject to withholding tax. As with corporate bonds, the investor must be able to supply a completed Form W-8BEN to claim the exemption. If the investor sells U.S. government securities, capital gains from the sale will not be taxed.

Taxing Municipal Bonds

A municipal bond is a debt instrument issued at the city, county, or state level to fund public projects. A United States citizen or resident who earns interest on a municipal bond must pay the standard 30 percent withholding tax. A foreign investor, on the other hand, is not required to pay this tax. If the bond is sold or retired, the capital gains are not taxable.

Unsure of how to report investment income? To learn more about international tax planning, or to schedule a meeting with Ann Irons, CPA, LLC, contact us at (508) 966-0700. Our Bellingham, MA tax preparation service caters to resident and nonresident investors, individuals, and companies in and around Woonsocket, Worcester, Bellingham, Milford, Medway, and the surrounding areas.