Do you have to pay taxes on U.S. stocks? What taxes? Understand the key logic behind it in one article

Source: Brokerage China

Recently, the issue of tax declaration for overseas investment has touched the nerves of many investors.

What are the taxes involved in overseas investment? Is the CRS (Common Reporting Standard) the basis for taxation? Do financial institutions report personal overseas transaction information to the tax authorities?

In response to many questions in the market, the Securities Times China reporter interviewed several professionals to try to clarify the issues related to overseas investment tax and CRS that investors are concerned about.

The issue of tax payment in U.S. stocks continues to be controversial

What are the possible taxes on investing in U.S. stocks?

"Taking U.S. stocks as an example, if a Chinese mainland investor (not a U.S. tax resident) invests directly in U.S. stocks abroad, since there is no stamp duty on U.S. stocks, there is no tax on U.S. stock transactions, and only dividend tax will be charged when dividends are distributed. In terms of dividend tax, the dividend tax rate is 10% for Chinese mainland investors and 30% for Hong Kong and Macau investors. An expert on taxation of overseas securities companies told Chinese reporters of brokerages.

Tang Yanqian, tax partner of KPMG and head of KPMG Private and Family Business Services South China, told the brokerage China reporter that according to the US tax law, if Chinese individual investors are non-tax residents in the United States, their dividend income from investing in US stocks is subject to withholding tax in the United States, and the tax rate is 10% under the conditions of the application of the Sino-US tax treaty. U.S. broker-dealers withhold this portion of the tax when they pay dividends. When an investor sells U.S. stocks and receives capital gains gains, it will be further determined based on his or her tax residency status. In general, for non-U.S. tax residents, the tax implications of capital gains in the U.S. are relatively manageable if they are not local or engaged in trading activities in the U.S.

At the same time, Tang Yanqian said that according to the relevant tax laws of China, Chinese resident investors are required to declare their global income to the Chinese tax authorities and pay individual income tax for their domestic and foreign income.

Brokerage China reporters learned that China has relevant laws and regulations involving the income of overseas investment, but there is currently a blank area in implementation.

According to the Announcement of the Ministry of Finance and the State Administration of Taxation on Individual Income Tax Policies on Overseas Income (Announcement No. 3 [2020] of the Ministry of Finance and the State Administration of Taxation), "income obtained from the transfer of immovable property outside China, the transfer of stocks, equities and other equity assets formed by investment in enterprises and other organizations outside China, or the transfer of other property outside China" is income outside China and shall be subject to individual income tax as required.

However, on the official tax website, there are only four items of income declaration for an individual's foreign income: wages and salaries, remuneration for labor services, author's remuneration, and royalties.

Individual investors are not required to initiate a CRS return

Brokerage China reporters noticed that in a series of rumors circulating on the Internet recently, CRS is often regarded as the basis for paying taxes on overseas direct investment in U.S. stocks, and the lack of understanding of CRS has also caused some investors to worry.

The Common Reporting Standard (CRS) is an international standard developed by the Organisation for Economic Co-operation and Development (OECD) to improve tax transparency and combat cross-border tax evasion. Since its launch in 2014, CRS has been supported and implemented in 125 countries and regions around the world. After committing to join the CRS exchange country in September 2014, China conducted its first foreign exchange in September 2018 and has continued to promote it in depth.

"For individual investors, it increases tax transparency for individual investors by requiring financial institutions to automatically report specific account information to tax authorities." Tang Yanqian told the brokerage China reporter.

One of the most common questions among investors today is, who reports CRS information? In fact, CRS is not declared by individual investors themselves, but by financial institutions.

The CRS requires financial institutions to automatically report financial account information of non-resident customers to the tax authorities of their country of residence, as are reported by major financial institutions, including depository institutions (e.g., commercial banks), custodians, and investment entities (e.g., investment funds and insurance companies).

According to Tang Yanqian, when an individual investor opens an overseas financial account, that is, the individual investor has a financial account overseas, such as bank deposits, securities investment accounts, etc., the financial institution should conduct due diligence on the relevant accounts opened in the institution, identify the non-resident financial accounts, and record and report the relevant information of the non-resident financial accounts.

"According to the relevant regulations of CRS, individual investors do not need to take the initiative to declare, and they need to accurately provide tax residency information when opening financial accounts, so that financial institutions can accurately report relevant information. Financial institutions are obliged to proactively report relevant information to the tax authorities, including account information, such as account holder information, account balance and netting, total interest and total dividends, etc. Tang Yanqian said.

CRS exchange information is not a basis for taxation

The second question is, will the information reported by the CRS be used as a basis for tax purposes?

The above-mentioned overseas brokerage tax experts told the brokerage China reporter that in the content of the CRS report, in addition to the name, date of birth, tax status, tax number, ID number and other regular personal information, the financial part includes total assets (cash, stocks, funds, bonds), fund dividends, stock dividends, bond interest, total selling amount, preferential amount, etc.

"Many people's misconception is that they mistakenly believe that securities companies or banks will report all personal transaction records to the tax bureau, which is a serious misunderstanding. In fact, CRS reports data at a point in time, usually on the last day of each year. Moreover, the content of the CRS report only includes information such as total assets, dividends, dividends, and total selling amounts, which cannot reflect the customer's trading situation and profit and loss information at all. CRS is also not a basis for taxation. The above-mentioned person said.

The main position of CRS information exchange is in the bank, not the brokerage

It should be pointed out that most of the world's mainstream countries and regions have joined the CRS, but the United States is an exception.

According to the official website of OECD CRS, CRS has received participation and support from 125 countries and regions, including but not limited to EU countries, China, the United Kingdom, Canada, Australia, New Zealand, Japan, South Korea, Singapore, etc.

According to Tang Yanqian, the United States does not belong to the countries and regions issued by the OECD that have signed or promised to sign the CRS, but the United States will exchange information through the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to report U.S. taxpayer account information to the Internal Revenue Service (IRS). At present, 113 countries and regions around the world have signed FATCA agreements with the United States, and China and the United States reached an agreement on the substantive content of the FATCA intergovernmental agreement in 2014, but it has not been implemented in practice.

A senior person from an overseas brokerage told a Chinese reporter from a brokerage: "All financial institutions are obliged to exchange CRS information, and deposit account banks are the first echelon. But it's actually the banks, not the brokers, that are the clearest of the foreign income data. ”

"For example, even if you open an account with a U.S. brokerage firm (such as Interactive Brokers), as long as the withdrawal and deposit involve a non-U.S. bank, such as a Singapore bank, the bank will report the CRS, so the key here is the bank." ”

Brokerage China reporters noticed that recent rumors on the Internet such as "speculating on U.S. stocks will start to collect taxes this year", and there are even small essays saying that opening an account with a U.S.-funded brokerage can avoid relevant taxes.

Does the choice of Chinese or U.S.-funded brokerage have any impact on investors' tax payments? Brokerage China reporters interviewed and learned that the choice of which place of registration of the brokerage has no impact on tax payment, the key is the investor's own tax residency.

Editor-in-charge: Zhu Yumeng

Proofreading: Zhao Yan

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