Taxation of US Securities

Got it from a MF SID - has language in the context of a MF that IIFL is launching. But I think the notes towards taxation are relevant for individual demat as well.

Under Section 865(a)(2) of the Code of U.S., income from the sale of personal property by a non-U.S.resident is sourced outside of the U.S., and thus generally should not be subject to U.S. federal income tax. In addition, under Section 864(b)(2)(A) trading in stock or securities for the taxpayer’s own account is generally not considered a U.S. trade or business, except when the taxpayer is a dealer in stocks or securities and effect the trades through U.S. offices directly or through the U.S. office of its agent other than an independent agent (Trading Safe Harbor). However, Section 897(a) may treat gain derived by a non-U.S resident from the disposition of a U.S Real Property Interest (USRPI) as income that is effectively connected with the conduct of a U.S trade of business and thus subjecting such gain to U.S federal income tax. Shares of a U.S. Real Property Holding Corporation (USRPHC), i.e. a company that owns substantial U.S. real estate, would generally be treated as USRPI.

The Treasury Regulations have provided exclusions from the definition of USRPI with respect to stock of a U.S. corporation that is regularly traded on an established securities market, but such exclusion only applies if the stock is held by a person who, during the 5-year look-back period, did not actually or constructively own more than 5% of that class of stock. The enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made several important changes to the FIRPTA rules. Among which, the USRPI exclusion for publicly traded stock as a USRPI for holders of 5% or less of such stock has been increased to 10% solely in the case of a publicly traded REIT. As the Trustees believe that the Scheme should not be considered as having a U.S. trade or business by reasons of its investment activities, capital gains derived by the Scheme from the sale of listed U.S. equity should not be subject to tax in U.S. provided the Scheme holds an interest of 5% or less of any class of stock or 10% in case of a publicly traded REIT. In case where the Scheme held, at sometime within the 5-year period ending on the date of disposition, more than 5% of the shares of a publicly-traded company that is also a USRPHC or 10% or more of a publicly traded REIT, gain from disposition of such interest is subject to U.S corporate income tax at a rate of 21%. The AMC shall endeavour (applying commercially reasonable efforts) that the Scheme’s exposure in a publicly-traded company that is also a USRPHC shall notexceed 5% or in case of a publicly traded REIT, shall not exceed 10%, so that the capital gains received by the Scheme are not subject to tax in U.S. Dividend income: Under Section 881(a)(1) of the Code, dividend income received by a non-resident entityfrom sources within the U.S. generally is subject to a 30% withholding tax. Thus U.S. source dividends received by the Scheme from investment in U.S. listed equity shall generally be subject to withholding tax of 30%.


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