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Four things a non-US resident should consider when investing in US equities

April 16th, 2024.

Did you know $5.25 trillion is invested in US equities by non-US residents every year? If you hold shares in Tesla, Apple, Nvidia, or any other US incorporated company, then the US tax man might be entitled to a significant portion of the value of those shares upon your death.

As an investor you should work with your investment adviser to understand exactly what you are hoping to achieve, and the risks involved. This way you can ensure you get the most accurate advice and your adviser can also help guide you to experts who can give you additional specialist advice – such as tax.

When considering US equities, it’s important to understand the tax environment before you invest. A tax specialist will be able to guide you through this process.

Tax specialist and Managing Director at Hotchkiss Group, Paul Hotchkiss, shares the four tips you should consider when investing in US equities:

1. Know the complexities of investing in US equities

The US has a complex tax environment combining both federal and state taxes. It may feel slightly daunting, but with careful guidance from a knowledgeable wealth planner and the correct tax advice, investing in the US should not be an issue. You just need to be aware of the rules. When investing in the US you need to understand how you will be taxed both in relation to asset ownership – for example estate and gift taxes – and also income and capital gains. For instance, the US can impose withholding taxes of 30% on certain income arising to non-US citizens. There will also be reporting obligations.

2. Understand how US estate and gift taxes can affect your investments

Non-US residents are subject to US estate taxation with respect to certain types of US assets. This can be levied at a maximum tax rate of 40%, but with a state tax exemption of $60,000, which is only available on transfers at death. This is a low threshold, so careful consideration is needed if you are overexposed to US investments.

In addition, gifting assets is something that most people expect to be able to do relatively easily. However, gift taxes can be levied on US property. Ownership considerations and choice of asset types are therefore important.

3. Learn how to choose the right assets and vehicles to access the US market

There’s no reason to avoid US investments, but it’s important to carefully evaluate how you intend to manage your assets and be careful when selecting which assets to engage with in the US market.

For example, investment in foreign pooled investment vehicles, such as foreign mutual funds, foreign exchange, traded funds, or similarly structured foreign products might offer advantages, even though such vehicles invest directly in US assets.

Asset choice is therefore key to investing in the US and Nedbank Private Wealth can help you with this.

4. Seek expert advice before you invest

Sometimes the use of a non-US incorporated company as an investment vehicle might help mitigate US tax exposure. For instance, US estate tax. In addition, the use of trusts or life products may also be tax efficient. The US may have complex laws but as with other jurisdictions such as the UK, the choice of the right investment medium can be key to mitigating some or all taxes. An example of this is that an Isle of Man company might be used in both the UK and the US to mitigate wealth taxes. As with many jurisdictions, tax laws change and therefore getting the right tax advice before you invest is essential.

Investing is a complex matter that requires expertise. Nedbank Private Wealth has extensive experience across multinational jurisdictions and partnerships with tax specialists who can advise you on your specific tax needs and requirements. Get in touch with your private banker for more information or contact our Client Services team for more information.

This document is general in nature and no action should be taken as result of it specific to tax matters discussed above. Importantly professional tax advice must be taken specific to your circumstances in advance of taking any action.