Non Resident Aliens' U.S. Tax Breaks

Non-Resident Aliens
By Vernon K. Jacobs, CPA
& J. Richard Duke, J.D., LLM

Tax Myth: Non resident aliens are tax free.

This is the implicit assumption behind many offshore tax schemes.

If a U.S. person can create a non-resident alien or entity (like a foreign corporation or non-grantor foreign trust), then they can invest in the U.S. or elsewhere free of U.S. income tax.

There is some truth to this because bone-fide foreign persons (non-resident aliens) can invest in U.S. government bonds or in the accounts of U.S. banks or savings & loan companies on a tax free basis. In addition, foreign persons can purchase the securities of U.S. corporations and any gains on such securities are tax free. However, any dividends paid by U.S. corporations would be subject to a 30% withholding tax. The U.S. is a tax haven for much of the rest of the world - but not for its own citizens or permanent residents.

Therefore, it's totally understandable why many U.S. taxpayers would like to create a foreign entity that can take advantage of the tax breaks available to non-resident aliens.

The trouble is, the U.S. congress doesn't want it's citizens and permanent residents to be able to do that. They have therefore passed an assortment of laws that make it nearly impossible for U.S. persons to enjoy tax free gains from U.S. securities and tax free interest from U.S. treasury obligations or U.S. banking obligations. In fact, we only say "nearly impossible" because there are a few ways it can be done, but those methods are not really available or cost effective for most people.

The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S. Vernon Jacobs and Richard Duke are co-authors of Offshore Tax Strategies.

About the authors:

Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. J. Richard Duke, JD, LLM is an attorney who specializes in international tax law and is an Adjunct Professor of international tax law.

Sponsored by Offshore Press, Inc.., Copyright, 2006, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press Vernon K. Jacobs, Webauthor.