Repatriation and remittance planning focus on how foreign individuals move funds and assets out of the United States in a tax-efficient manner. Moving funds out of the United States may trigger complex tax, reporting, and withholding obligations.
While concepts like repatriation and remittance sound similar, they are not. Both may have different U.S. tax, reporting, and withholding issues.
First, let’s clarify the key difference between repatriation and remittance, and their importance for foreign individuals with U.S. connections.
Generally, fund transfers are made either through repatriation or through remittance. Let’s understand each of them in the next section.
Repatriation generally refers to the process of transferring money earned in the United States back to the home country. For foreign individuals, this often includes income or profits from U.S. investments, dividends, interest, or rental income.
Example:
Adam, a foreign individual from Germany, owns shares in the U.S. company Microsoft and sells them for a profit. When he transfers the sale proceeds back to Germany, it is referred to as repatriation
Remittance generally refers to the transfer of money from one person to another. For example, an individual might electronically send funds to a family member or a business located in another country. This process of transferring money across countries is referred to as an international remittance.
Example:
A foreign individual named John has a U.S. bank account at Bank of America and transfers funds electronically to someone in another country. He may send these funds for personal or business purposes. This type of transfer is commonly referred to as a remittance.
In the next section, we will examine how foreign individuals earning income in the U.S. can achieve tax efficiency when repatriating and remitting funds.
Foreign individuals may use specific U.S. tax strategies to effectively repatriate or remit funds from the United States while managing their tax exposure and compliance. We will discuss some of these strategies below:
Foreign individuals can repatriate funds from the United States in several ways. This section will explore the different methods of repatriation and their tax implications in the U.S. We will also discuss strategies that foreign individuals can use to repatriate funds while avoiding U.S. tax issues. Below are the most common methods of repatriation:
Dividends represent distributions of a company’s earnings and profits and are one of the most common methods of repatriating wealth from the U.S.
Dividend income is treated as U.S.-source income when a U.S. domestic corporation pays it to a foreign individual. As a result, such dividends are generally subject 30 Percent U.S. withholding tax, unless a lower rate applies under an income tax treaty.
When a U.S. company distributes profits to a foreign shareholder, the U.S. withholding tax is usually deducted at the time of payment. The final tax outcome depends on whether the foreign individual is eligible for treaty benefits and whether proper documentation has been filed.
Tax planning considerations for foreign individuals include reviewing applicable tax treaties and applying for reduced or exempt tax rates under such treaties.
Interest income is the interest earned by an individual on funds lent over a period of time. Generally, foreign individuals repatriate interest income earned from U.S. banks or other U.S. entities.
Foreign individuals are taxed on their U.S.-source interest income. U.S.-source interest income generally includes the following:
Such interest income is likely subject to 30 percent withholding tax, unless a tax treaty provides a reduced rate or exemption.
Generally, foreign individuals are not taxed on certain U.S. interest income if it is not connected to a U.S. trade or business. This includes interest earned on deposits from U.S. banks, savings and loan associations, credit unions, and insurance companies, as well as qualifying portfolio interest.
Tax planning considerations for foreign individuals include reviewing applicable tax treaties and applying for reduced or exempt tax rates under such treaties.
Royalties are payments for the use of a valuable right owned by an individual. These payments are income derived from the use of the owner’s property, such as intellectual property (including patents, trademarks, copyrights, software, or technical know-how) or from rights to use real estate or natural resources.
Foreign individuals may repatriate royalty payments when they grant the right to use their property in the United States. A typical structure involves a foreign individual licensing intellectual property to a U.S. business in exchange for royalty payments.
For example, a foreign individual owns a trademark. A U.S. company may use that trademark on its products and pays the foreign individual a royalty each year. The royalty payment is repatriated to the foreign individual’s home country, allowing them to withdraw funds from the U.S. for the use of their trademark.
Royalties are sourced based on where the intellectual property is used. If the property is used in the United States, the royalties are treated as U.S.-source income and are generally subject to 30 percent U.S. withholding tax, unless reduced by treaty.
Tax planning considerations include applying reduced or exempt rates under the tax treaty.
A Return of Capital is a distribution that represents a repayment of the shareholder’s original investment rather than income.
Under U.S. tax rules, corporate distributions generally follow a specific order, regardless of how they are labeled.
First, distributions are treated as dividends to the extent of the company’s current or accumulated earnings and profits. These amounts are generally taxable and may be subject to U.S. withholding for foreign shareholders.
Once earnings and profits are fully distributed, additional amounts are treated as a return of capital, which reduces the shareholder’s basis. A return of capital is generally not taxable when received. Instead, it reduces the shareholder’s tax basis in the stock, and U.S. withholding tax typically does not apply.
Example:
A foreign individual invests $1,000,000 in a U.S. corporation. The company has $500,000 in earnings and profits. The corporation distributes $850,000 to the foreign individual. For U.S. tax purposes, $500,000 of this distribution is treated as a dividend and is generally subject to withholding tax. The remaining $350,000 is treated as a return of capital, reducing the investor’s basis to $650,000 ($1,000,000 – $350,000).
Once the shareholder’s adjusted basis is reduced to zero, any further non-dividend distributions are treated as capital gains. A shareholder recognizes capital gain only after all earnings and profits have been distributed, and the shareholder’s adjusted basis in the stock has been fully reduced to zero.
If distributions exceed both earnings and profits and the shareholder’s basis, the excess is treated as a capital gain.
Foreign individuals may realize capital gains when they sell U.S. stocks or other securities. In that case, they may face U.S. tax consequences on the repatriation of capital gains.
Generally, capital gains from the sale of stocks or securities earned by a non-resident alien may not be taxable in the United States. However, there may be exceptions that would make such capital gains taxable. The following are the two major exceptions:
An important exception applies when the foreign individual is engaged in a U.S. trade or business, and the capital gain is effectively connected with that business. In such cases, the gain becomes taxable in the United States and is subject to graduated tax rates similar to those applicable to U.S. persons. The individual should file a U.S. income tax return to report the gain and pay the resulting tax.
Another significant exception is the 183-day presence rule. If a non-resident alien is physically present in the United States for 183 days or more during a tax year, the individual may be subject to U.S. tax on net capital gains for that year. Here, the non-resident alien should also retain their non-resident status for U.S. tax purposes.
The 183-day test applies even if the gains are not effectively connected with a U.S. trade or business. These gains are generally taxed at a flat 30 percent rate, unless a tax treaty provides relief.
Careful tracking of physical presence in the U.S. and avoiding activities that create a U.S. trade or business helps preserve capital gains exemptions.
Treaty protections may provide additional certainty. U.S. tax treaties may limit the U.S. taxing rights on certain types of capital gains or provide exemptions and reduced rates.
Many foreign investors own real estate in the United States and may plan to sell these properties, transferring any capital gains back to their home countries. However, the sale of real estate by foreign sellers in the U.S. comes with complex tax implications, primarily governed by the Foreign Investment in Real Property Tax Act (FIRPTA).
For FIRPTA purposes, U.S. real property refers to land, buildings, and improvements made to the land, including residential homes, commercial buildings, and factories. It also encompasses natural resources, such as growing crops, timber, mines, and wells. Certain personal property associated with the use of real estate, such as permanent fixtures, is included as well. Additionally, an interest in a U.S. real property holding corporation is also considered U.S. real property under FIRPTA.
FIRPTA generally requires buyers to withhold a portion of the sales price when a non-resident sells U.S. property. Generally, 15% of the total sale price is withheld and submitted to the IRS promptly.
Example:
A non-resident individual living in India purchases a residential property in the U.S. for $600,000 and later sells it for $800,000. Since the seller is a non-resident and the property is located in the United States, the sale is subject to the Foreign Investment in Real Property Tax Act (FIRPTA). At the closing of the sale, the buyer is generally required to withhold a portion of the sale price. Generally, 15% of the total sale price is withheld and submitted to the IRS.
In this case, 15% of the gross sales price of $800,000 amounts to $120,000. The buyer is responsible for withholding and remitting this amount to the IRS.
To reduce or avoid FIRPTA withholding on a U.S. real property sale, non-residents should file FORM 8288-B before closing to request a lower withholding amount based on expected gain. If withholding has already occurred, submit FORM 843 after closing for an early refund.
Non-residents are typically required to complete Form 1040NR to report the sale of property and request any potential refunds. If the sale price is $300,000 or less and the buyer plans to occupy the home for residential purposes, they may be fully exempt from FIRPTA withholding. Furthermore, non-residents can utilize tax treaties to seek exemptions or reductions from FIRPTA withholding.
For more information about FIRPTA, please refer to the following article.
Foreign investors earning income from U.S. investments may plan to repatriate it to their home country. In this process, they may be subject to taxes in both the U.S. and their home country. This may result in double taxation.
From a U.S. tax perspective, avoiding double taxation requires careful coordination between U.S. tax rules and the investor’s home-country tax system.
Effective mitigation relies on the proper use of income tax treaties, foreign tax credits, and the thoughtful structuring of the U.S. investment to ensure income is characterized and taxed efficiently.
Example:
A foreign person based in Singapore invests in a U.S. real estate and rents it out. Rental income from the property is likely subject to U.S. tax, and the investor may also be taxed in Singapore on that income. By claiming treaty benefits where available, the investor may avoid double taxation of the same income.
Foreign individuals may remit funds in or outside the United States in various ways. Let’s understand the different ways of wealth remittance and their U.S. tax consequences. Subsequently, we will analyse the strategies that foreign individuals can use to remit funds without incurring U.S. tax issues.
Foreign individuals may remit personal wealth to family members as gifts.
U.S. gift tax rules apply differently to foreign individuals than to U.S. citizens or residents.
Foreign individuals are generally not subject to the U.S. gift tax on worldwide assets. Instead, U.S. gift tax exposure depends mainly on the nature and location of the property transferred. In general, a foreign individual is subject to the U.S. gift tax only when making a gift of U.S.-situs tangible property or U.S. real estate. Let’s understand the different kinds of gifts made by foreign individuals in the next section and their U.S. tax consequences:
Gifts of U.S. Real Property
Gifts of U.S. real estate by a foreign individual are generally subject to U.S. gift tax. U.S. real property includes land and buildings located in the United States, along with permanent improvements such as residential or commercial structures.
Gifts of U.S.-Situated Tangible Personal Property
Foreign individuals may also be subject to the U.S. gift tax when gifting tangible personal property physically located in the United States at the time of transfer.
Tangible personal property includes items such as artwork, jewelry, vehicles, collectibles, and even physical cash present in the U.S.
Gifts of Intangible Property
Intangible property, such as stocks, bonds, partnership interests, and similar financial assets, is generally treated as non-U.S. situs property when owned by a foreign individual.
As a result, gifts of intangible assets by foreign individuals are typically not subject to U.S. gift tax, making intangibles a key planning tool for tax-efficient wealth remittance.
Who Pays the Tax and Who Reports?
U.S. gift tax is imposed on the donor, not the recipient. A foreign individual making a taxable gift of U.S.-situs property may be subject to U.S. gift tax.
Differences Between Gifts by Foreign and U.S. Individuals
When foreign individuals make taxable gifts of U.S.-situs property, they are entitled to the annual gift tax exclusion, allowing gifts of up to USD 18,000 per recipient in 2024. The term “situs property” refers to the legal physical location of the gifted property.
In contrast, U.S. citizens and residents are subject to U.S. gift tax on worldwide gifts, regardless of the location of the asset or recipient.
As a result, gift planning for foreign individuals focuses primarily on asset situs, while planning for U.S. individuals centres on lifetime exemptions and annual exclusions.