US withholding tax is only imposed on which kind of investments?
a. Dividends received on US shares.
b. Capital gains on sale of US shares.
c. US real estate sold for proceeds less than $300,000.
d. Interest received on corporate bonds issued by a US company.
The correct answer and explanation is:
The correct answer is a. Dividends received on US shares.
US withholding tax is a tax levied on income derived from US sources that is paid to foreign individuals or entities. The tax rate varies depending on the type of income, the recipient’s country of residence, and any tax treaties between the US and the foreign country.
- Dividends received on US shares: US withholding tax applies to dividends paid to foreign investors holding shares in US companies. The standard withholding tax rate is 30%, but this rate can be reduced if there is a tax treaty between the US and the foreign investor’s country. For example, if a foreign investor is in a country with a tax treaty with the US, the withholding tax rate on dividends may be reduced to 15% or even lower.
- Capital gains on the sale of US shares: Generally, the US does not impose withholding tax on capital gains from the sale of US shares by foreign investors, unless the investor is engaged in a trade or business in the US or the shares are considered to be “US real property interests” under the Foreign Investment in Real Property Tax Act (FIRPTA).
- US real estate sold for proceeds less than $300,000: US withholding tax on real estate transactions applies under FIRPTA when a foreign person sells US real property, but only if the sale price exceeds $300,000. For sales below this amount, there is no withholding tax.
- Interest received on corporate bonds issued by a US company: Interest income earned by foreign investors on US corporate bonds is generally subject to a 30% withholding tax. However, the tax may be reduced under an applicable tax treaty.
Therefore, the main category of income subject to withholding tax for foreign investors is dividends on US shares.