Subject: Trading - Non-Resident Aliens and US Exchanges

Last-Revised: 29 May 2002
Contributed-By: Chris Lott (contact me), Enzo Michelangeli (em at who.net)

It is perfectly legal for non-resident aliens to trade equities on exchanges in the United States using US brokerage houses directly. (A "non-resident alien" (NRA) is the US government's name for a citizen of a country other than the US who also lives outside the US.) The current surge in availability of on-line brokerage services has effectively eliminated the problems of different time zones and high telephone charges, and has made it really easy for people living outside the US to trade on US exchanges. This route is generally far cheaper as compared to using any bank or brokerage house in the foreign country, and therefore very attractive to many people.

Of course there are certain formalities concerning tax treatment of such accounts, and these formalities must be clarified with the brokerage house when the account is opened. Individuals who are not US citizens must complete a W-8 form, which is a certificate of foreign status, and return it to the brokerage house.

The specific rules of how these accounts are taxed are described in IRS Publication 515 (Withholding of tax on non-resident aliens) and IRS Publication 901 (Tax treaties). The tax treaty is especially important. If the individual's country of residence has an agreement (tax treaty) with the US government, those rules apply. For example, residents of Germany should not have any tax withheld on interest or

capital gains, only for dividend payments. However, if the individual's country of residence has no agreement with the US, then the individual should complete the 1001 form (exemption form), and no tax will be withheld at all.

I'm fairly certain that US citizens and green-card holders living abroad are not required to fill out either of these forms, since these individuals are required to report their world-wide income to the US annually. And none of this applies to bona fide residents of the US, regardless of citizenship, who are automatically subject to the US taxation laws.

To avoid overseas telephone charges, the internet brokerages are clearly the most attractive option. Most large brokerage firms accept foreign clients, although some brokerage houses that offer trading via the internet still require their customers to be US residents.

The following brokers once accepted non-resident aliens as customers: Ameritrade, Datek, NDB, J.B. Oxford, and Schwab.

Various instruments sold by the US Treasury are also available for purchase by NRAs. NRAs can buy, hold, and sell normal Treasury instruments through the TreasuryDirect program, and will not be charged any tax as long as they file a Form W-8BEN. However, the NRA must first get an individual tax identification number (ITIN) by submitting a Form W-7, which is required for opening a TreasuryDirect account. Second, the account holder should really have an account at a US bank to allow for direct payment of purchases and direct credit of interest and sales proceeds. Finally, note that US Savings Bonds are not available to NRAs.

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