Each transaction that takes place contains numerous complicated tax components. When examining the tax aspects related to the transaction, the type of the incorporation in question, the structure of the activity, the nature of the activity, the reporting obligations and the taxation threshold that may apply to the transaction are only some of the influencing aspects.
Each of these questions requires thought, discretion and professionalism. However, in the article before you we will put these questions aside and focus only on a single taxation aspect that will affect the feasibility of your transactions: the taxation of capital gains and dividends in the United States.
As any investor knows – junior or senior, expanding business activity to the United States or alternatively taking part in real estate investment in the United States – should take into account questions such as demand, supply, costs, pricing and potential profit. However, an experienced investor knows that there are other critical aspects to be considered when deciding about engaging in business activity in the United States. When making such a decision, the tax aspects related to the activity should be taken in account. We will now focus on the taxation of capital gains and dividends in the United States.
Capital gains
What are capital gains?
A Capital gain is an increase in value generated at the time of the sale of the property, meaning the difference between the value received for the property and the price of its purchase. The term property refers not only a real estate property but also to financial assets. Thus, the difference between the value and the purchase price when selling financial assets such as stocks, mutual funds, bonds, etc. will be defined as capital gains.
What is the tax that will apply to capital gains generated in the United States?
For capital gains, as defined in the previous sections, a capital gains tax rate will be applied.
In order to determine the tax rates that will apply to capital gains, U.S. law distinguishes between assets sold within one year of their purchase (short term capital gains) and assets sold within one year of their purchase (long term capital gain). In order to incentivize investors to hold the assets and not sell them immediately after buying them, U.S. law sets lower capital gains tax rates in cases where the property has been held for more than a year.
Capital gains tax rates:
As noted, the capital gain from a property sold within one year of its purchase will be taxed at the “regular” income tax rate. As for individuals or partners in an L.L.C (that bear the company’s tax liability), the tax rate will be the marginal tax rate that applies to the taxpayer in accordance with its total income – between 10%-37%. When it comes to companies (foreign or local), the tax rate is the corporate tax rate – 21%.
Capital gains from a property sold within a year of its purchase will be taxed at beneficiary capital gains tax rates. As for individuals or partners at L.L.C, the rates will be determined as follows:
A rate of 28%
This is the tax rate on capital gains derived from the sale of collections or sale of a Qualified small business stock.
A rate of 25%
This is the tax rate that applies to the depreciation share from capital gains.
A rate between 0-20%
These rates will be applied on capital gains that do not meet one of the above definitions, all in accordance with the taxpayer income level.
So far, the taxation of capital gains of individuals and partnerships regarding assets held in the range over one year from the time they were purchased were discussed. Companies – local or foreign – will not enjoy favorable rates of capital gains, even with regard to assets held by them for over a year.
Summary of capital gains tax rates
| Individuals (also partners in L.L.C) | Companies (local and foreign) | |
| Short-term held assets | The marginal tax rate according to the tax bracket is between 10-37%. | Corporate tax rate – 21% |
| Long-term held assets | Reduced rates – between 0-28% | Corporate tax rate – 21% |
Dividend taxation
What is a dividend?
A dividend is a payment that a company transfers from its gains and profits to its shareholders. In practice, the dividend is an additional income that is included within the annual income of the recipient of the dividend. Therefore, the dividend tax is a tax that applies to the recipient of the dividend and not to the company that gave it away.
What is the dividend tax rate in the United States?
Dividend taxation is similar to capital gains taxation, but instead of distinguishing based on the range of time the asset was held, there is a distinction between dividend types: qualified dividends and ordinary dividends. An ordinary dividend will be taxed at the “regular” tax rate applicable to the taxpayer – whether it is individuals or partners in an L.L.C, this is the marginal tax rate that applies to them according to their income (between 10-37%).
On the other hand, when it comes to a company – local or foreign – the tax is a corporate tax and the rate will be 21%.
When it comes to Qualified Dividends, there are preferable tax rates similar to capital gains tax rates. Thus, if it is individuals or partners, the dividend will be taxed at a rate between 0-20%. On the other hand, for foreign companies and local companies – the dividend will be taxed at a corporate tax rate of 21%. There is an exception to this rule: where the dividend was received from a foreign subsidiary held at a rate of over 10% for a period of more than one year, the parent company will be entitled to a dividend tax exemption.
Summary of dividend tax rates
| Individuals (also partners in L.L.C) | Companies (local and foreign) | |
| Ordinary Dividends | Marginal tax rate applicable according to income levels – 10-37% | A corporate tax rate – 21% |
| Qualified Dividends | A tax rate between 0-20% | A corporate tax rate – 21%. Exception: Tax exemption for a parent company that received a dividend from a foreign subsidiary held for more than a year at a rate of at least 10%. |
Do you have any questions? The MasAmerica team will be happy to advise you and help you to plan and operate the tax aspects of your business activities in the United States.
