NORTHVILLE, MI (Nov. 18, 1999) -- Strolling through the Drip Companies message board this week, I ran across this post by a community member known as zhuxinwe. A resident of China living in the United Arab Emirates, zhuxinwe asked: "Does it make sense to participate in a DRIP plan by a nonresident foreign citizen. What about the difficult issue of dividend interest or other possible disadvantages?"

Excellent question. Considering the growing number of international investors joining the ranks of Fools these days, I'd like to expand upon the terrific responses posted by Bassanio, Hazhad, and tenamaxtli. (Thanks, Fools!)

The U.S. government refers to citizens of other countries that are not residing in the U.S. as "nonresident aliens." Nonresident aliens are free to invest in U.S. companies, including Drips, provided the following:

1) The country of residence has no restrictions on investing outside its borders.
2) The transfer agent (the company that facilitates the Drip) accepts investments from outside the U.S.

One should contact the government of residence regarding any limitations in investing in the U.S. to determine former, and the latter can be resolved with a quick call to the transfer agent or by flipping through Investing Without a Silver Spoon, as well as checking online at the The Moneypaper or Netstock Direct.

Once you have determined that there are no restrictions on investing in the U.S. and the companies you're interested in accept foreign investments, the next stop is IRS Publication 901, U.S. Tax Treaties. This publication will tell you if a tax treaty between the United States and a particular country exists, and whether that agreement offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that country.

If the treaty does not cover a particular type of income, or if no treaty exists, you must withhold on the income at the standard rate shown in IRS Publication 515, Withholding of Tax on Nonresident Aliens.

The standard rate of taxation of dividend income (including reinvested dividends) is 30%. Capital gains and losses as well as interest income are exempt from taxation by the U.S.; however, they may be subject to the tax regulations of the resident country. Keep in mind, though, that any treaty supersedes Publication 515.

To simplify withholding, nonresident aliens should file an IRS Form W-8, Certificate of Foreign Status, with each account held. The account will then withhold any taxes and send that money to the IRS. If Form W-8 is not submitted, you will be required to file a tax return with the IRS using Form 1040-NR, U.S. Nonresident Alien Income Tax Return, along with any taxes due.

That covers the nuts and bolts of nonresident aliens investing in the U.S. If you have any specific questions not covered here or in the publications below, you can e-mail the IRS by using this form. It's also advisable to contact your country's tax authority.

Drip on, Fools!

Related Links:
Publication 515, Withholding of Tax on Nonresident Aliens
Publication 519, U.S. Tax Guide for Aliens
Publication 901, U.S. Tax Treaties
Form 1040NR, U.S. Nonresident Alien Income Tax Return*
Form W-8, Certificate of Foreign Status*
Foreign Investors Message Board
Fool's School Tax Classroom
*requires Adobe Acrobat reader - get it free