Can a Foreigner Invest in the US Stock Market?

The US stock market is a global hub for investment, and individuals from outside the United States often seek to participate in its opportunities. Foreign nationals are permitted to invest in the US stock market, though the process involves specific procedures and tax considerations.

General Eligibility for Foreign Investors

A “non-US person” or “foreigner” in the context of US investment refers to an individual who is not a citizen or resident of the United States. This definition extends to entities not created or organized under US laws, with exceptions for those that elect to be treated as US persons for tax purposes.

To open an investment account, foreign individuals must meet basic eligibility criteria. Investors must be of legal age, which is 18 years old in most states, as signing contracts is a requirement for opening a brokerage account. Some states may set the minimum age at 21. Brokerage firms require a non-US residential address for foreign applicants.

Foreign entities such as corporations or trusts can also invest in the US market. However, the requirements and forms for entities differ from those for individuals.

Establishing an Investment Account

Opening an investment account as a non-US person involves providing specific information and documentation to a brokerage firm. You will need to provide your full legal name, date of birth, country of citizenship, and your non-US residential address. Contact information and occupation details are also required.

To verify this information, brokerage firms will ask for specific documents. A valid passport or national ID card is necessary for identity verification. Proof of address, such as a utility bill or a bank statement from your home country, will also be required.

A US Taxpayer Identification Number (TIN) or equivalent is crucial for tax reporting. Non-US individuals obtain an Individual Taxpayer Identification Number (ITIN) for this purpose. Brokerage firms also require the completion of specific tax forms to establish your foreign status and claim any applicable tax benefits.

For individuals, Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), is a key document. This form certifies that you are a foreign person for US tax purposes and confirms you are the beneficial owner of the income. The form requires your name, address, foreign tax identification number, and country of residence for tax purposes. You can obtain official W-8BEN forms from the IRS website or directly from your brokerage firm.

For foreign entities, Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), serves a similar purpose. This form is used by foreign entities like corporations or partnerships to certify their foreign status and claim treaty benefits. Both W-8BEN and W-8BEN-E are submitted to the withholding agent or payer, not directly to the IRS.

Once all preparatory information and documents are gathered, you can proceed with the application. Most brokerage firms offer online application portals, though some may still accept mail-in applications. After submitting your documents and completed forms, the brokerage will undertake a verification process. This may involve identity checks and can sometimes lead to delays.

After your account is successfully opened, you will need to fund it. International wire transfers are a common method for depositing funds. You will need to link a non-US bank account for both funding and withdrawals. Currency conversion considerations should be taken into account when transferring funds from your local currency to US dollars.

Understanding US Tax Implications

Investing in the US stock market as a non-US person involves specific tax considerations. A standard 30% statutory withholding tax rate applies to US-source dividends paid to non-US persons. This rate can also apply to certain types of interest income. The payer of this income is responsible for withholding and remitting this tax.

Tax treaties between the US and an investor’s country of residence can significantly reduce or even eliminate this withholding tax. Form W-8BEN (for individuals) or W-8BEN-E (for entities) is used to claim these treaty benefits. By submitting the appropriate form, you inform the withholding agent of your foreign status and eligibility for a lower treaty rate.

Non-resident aliens are not subject to US capital gains tax on the sale of US stocks or securities. This rule applies provided the investor is not physically present in the US for 183 days or more during the tax year the gain occurs. This exemption makes capital appreciation an attractive aspect of US stock market investment for foreign individuals.

A significant consideration for non-US persons is the US estate tax. US-situs assets, which include US stocks, held by non-resident aliens may be subject to US estate tax upon the investor’s death. The exemption threshold for non-resident aliens is relatively low, $60,000. Amounts exceeding this threshold can be taxed at rates up to 40%.

Many non-residents may not need to file a US tax return if their only US-sourced income is subject to withholding, but certain situations might necessitate it. This could include claiming a refund of over-withheld tax or if they have other types of US income not fully covered by withholding. Brokerage firms provide tax statements, such as Form 1042-S, detailing income and withholding for foreign investors.

Available Investment Instruments

Foreign investors have access to a variety of investment instruments within the US stock market. A primary option is investing in individual stocks of publicly traded US companies. This allows direct ownership in well-known corporations.

Exchange Traded Funds (ETFs) are another popular choice. ETFs are diversified baskets of assets that trade on exchanges like individual stocks. They offer an accessible way to invest in broad market indices, specific sectors, or commodities, providing diversification and liquidity. Many foreign investors find ETFs appealing due to their ease of trading and ability to gain exposure to various market segments.

Investing in bonds is also an option. Non-US persons can purchase US Treasury bonds, which are government debt securities, or corporate bonds issued by US companies. These offer fixed-income streams and can serve as a diversifying component in a portfolio.

While some US mutual funds may be accessible, many do not accept non-US investors due to various regulatory complexities. Consequently, ETFs present a more straightforward and popular alternative for foreign investors seeking diversified exposure to the US market. These options allow foreign investors to participate broadly in the US financial landscape.