Tax Saver: What Should You Know About Foreign Investments Taxation?

By | February 28, 2014

Every serious investor is aware of the importance of diversification in his/her portfolio. In the past few decades, the world has transformed into a global economy and investing in emerging markets has become a common practice. Most of the top-notch investment advisers suggest investing in foreign enterprises for efficient portfolio returns. The foreign investment opportunities offer an excellent opportunity to grow your investments.

Do you understand the taxation of international investments? If you are a new investor planning to invest in a foreign enterprise, you should be aware of the taxation policies of the US government. Any returns, capital gains, or dividends that you receive from your holdings in foreign enterprises are taxable. Further, the home country of the enterprises may tax your investments making it a gamble for you.

Foreign Tax Credit can save you.

Tax Saver: What Should You Know About Foreign Investments Taxation?

Tax Saver: What Should You Know About Foreign Investments Taxation?

How Foreign Tax Credit can help you?

The tax law of different countries depends upon their current governance. Every country has different laws for treating investments from foreign investors and their respective returns or dividends. For an instance, Italy charges 20% tax on sale of stocks owned by foreign investors whereas Spain has 21% taxation on similar investments.

If you are involved in buying/selling of individual stocks or bonds in foreign countries, IRS offers a procedure to avoid double taxation on your returns. Every investor who has qualified foreign taxes (on interest, income, or dividend) can claim a deduction or tax credit in the income tax returns.

Investors with holdings in foreign markets receive a 1099-INT or 1099-DIV statement for the payee every year. According to tax experts, it is best to choose tax credit instead of deductions in your Income tax returns. For a better idea of your tax credit, you need Form 1116 and submit it to the Internal Revenue Service.

  • Qualified Foreign Taxes > U.S. Tax liability: Your maximum tax credit will be the U.S. tax due.
  • Qualified Foreign Taxes < U.S. Tax liability: Entire paid amount goes into your Foreign Tax credit.

What should you know about Overseas Fund Companies?

A majority of investors choose mutual funds for investing in foreign securities and enterprises. However, the U.S. tax regulations are different for offshore fund companies and the American investment firms offering international funds.

According to, Passive Foreign Investment Company – PFIC’ are:

A foreign-based corporation that has one of the following attributes:

1. At least 75% of the corporation’s income is considered “passive”, which is based on investments rather than standard operating business.

2. At least 50% of the company’s assets are investments that produce interest, dividends and/or capital gains

PFICs include foreign-based mutual funds, partnerships and other pooled investment vehicles that have at least one U.S. shareholder. Most investors in PFICs must pay income tax on all distributions and appreciated share values, regardless of whether capital gains tax rates would normally apply.

If you are investing with PFICs, you are at loss and might end up paying more taxes when compared with US Foreign investment funds. The best option in such cases is to stick with the US Investment firms offering foreign market exposure. You should consider professional advice from a qualified tax expert before purchasing or investing in funds operated by offshore companies.

Leave a Reply

Your email address will not be published. Required fields are marked *