Citi Foreign Investor Tax Guide

7/29/2019 Citi Foreign Investor Tax Guide

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Guide to U.S. Taxationof Foreign Investors

INVESTMENTS PRODUCTS: NOT FDIC INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.


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IN THIS GUIDE

I. Introduction 1

II. Are You a U.S. Resident

or Nonresident? 2

III. Taxation o U.S. Nonresidents 6

IV. Taxation o Investment Income 8Stocks 8Bank Deposits 9Debt Instruments 9Portolio Interest 9Short-Term Obligations 10

Mortgage-Backed Securities 11

Mutual Funds 11

Unit Investment Trusts 11

Options, Forward and Future Contracts

12

Listed Stock Options 12Nonequity Options 12Commodity Pools 12Futures And Forward Contracts 12

Notional Principal Contracts 12

Annuities 13

Rental Income 13

Real Property Interests 14

Partnership Income 15

V. U.S. Estate and Git Tax Planning 18

U.S. Estate Tax 18

U.S. Git Tax 19

VI. Ownership o Investments 22

Corporate Ownership 22

Benefcial Ownership

Through a Trust 23

VII. Income Tax Treaty Benefts 25

VIII.Documentation and Reporting 28

IX. Reportable Transaction

Regulations 39

2008 Citibank. Citibank, N.A. Member FDIC. Original Printing 2006 Revised: 03/2008 HB DOC # 6976 v1E


3/44SMITH BARNEY GUIDE TO U.S. TAXATION OF FOREIGN INVESTORS/

1. IntroductionFor the oreign investor, the United States presents a myriad o

investment opportunities unavailable anywhere else in the world. This

Guide is intended to provide you with some o the undamental tax

considerations o U.S. investments and to serve as a reerence tool

that enables you to identiy investment opportunities that will help you

maximize the ater-tax earnings o your global portolio.

Taxes are a real and substantial cost o earning income.

By minimizing, or perhaps eliminating, the U.S. tax

cost o investing in U.S. stocks and securities, oreign

investors will improve the overall ater-tax yield o the

securities, proessionally managed unds and other

investments held in their global portolios. Although

many types o investment income rom U.S. sources aresubject to tax, opportunities are available to reduce or

eliminate this tax:

Certain types o nancial instruments, when held by

oreign investors, are given preerred tax treatment

under U.S. tax rules.

U.S. tax treaties with many countries reduce or

eliminate U.S. tax on dividends, interest and other

income or residents o the treaty countries.

Changing the orm o ownership (individual,

corporation, personal investment company or trust,

etc.) may reduce estate and git taxes in the U.S. andin the investors home country.

This Guide provides inormation regarding the U.S. tax

rules as they aect U.S. nonresidents who have U.S.

investment portolios. It describes how the U.S. estate

and git tax rules apply to transers o U.S. investment

property and identies opportunities to minimize or

eliminate these taxes. In addition, the Guide includes

separate sections that discuss the signicant U.S. tax

aspects o particular types o investment products. It

is intended to help you understand the theory behind,

and the potential impact o, various U.S. tax rules on

oreign investors who qualiy as nonresidents or U.S.

income tax purposes. The Guide also oers practical

tax planning ideas and highlights special situations,

which require careul consideration or consultation with

a tax or other proessional adviser. It is not intended,

nor should it be relied on, as a technical analysis o

this complex area o U.S. taxation. The U.S. tax rulesapplicable to oreign corporations are similar, but not

identical, to the rules applicable to nonresidents. Your

proessional tax adviser should be consulted regarding

the U.S. taxation o oreign corporations.

Note or Married IndividualsThis Guide only

addresses U.S. ederal taxation. It does not address

state or local tax issues, non-U.S. tax issues or the

possible interaction o U.S. tax law with non-U.S. tax

law. Further, this Guide only addresses the taxation o

investment activity, including a separate section on

legislation that was enacted in 2003 to expand reporting

requirements or investors that t within a regulatorydened concept o a tax shelter.1 Each investors

unique actual circumstances can have an impact on

the application o the rules discussed in this Guide. This

Guide is intended to provide readers with a general

understanding o U.S. ederal tax issues relating to their

investments, but does not address all o the intricacies

and exceptions that may apply. It is not a substitute or

individualized personal tax advice and each investor

should consult his or her own proessional tax adviser.

1 For urther inormation on the tax shelter disclosure regulations,please reer to section IX.


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2. Are You a U.S. Resident or Nonresident?United States taxation o oreign persons who invest in the U.S. depends

on whether they are residents or nonresidents. A person is dened

under the tax law to include an individual, a corporation, a partnership,

or a trust. Once it is determined whether such a person is a resident

or a nonresident, diferent rules apply to individuals, corporations,partnerships, and trusts.

NoteU.S. citizens, regardless o their residency,

generally are subject to U.S. tax on their worldwide

income. All reerences to nonresidents in this Guide

include individuals that are not U.S. citizens.

INDIVIDUAlS

A oreign individual who is a U.S. resident is subject toU.S. taxation on worldwide income in the same manner

as a U.S. citizen. However, a nonresident generally is

taxed only on U.S.-source income and income that

is treated as eectively connected with a U.S. trade

or business. A nonresidents income rom non-U.S.

investments (that is not treated as eectively connected

with a U.S. trade or business) generally is not subject to

U.S. ederal income taxation.

A oreign individual is generally considered a U.S.

resident or the current year and is subject to U.S.

income tax on worldwide income (net o deductions)

i he or she: (1) is a lawul permanent resident o theUnited States at any time during the taxable year (holds

a green card); (2) meets the substantial presence test;

or (3) makes a rst year election. More inormation on

physical presence ollows this section.

I at the end o the tax year, one spouse is a U.S. citizen

or a resident alien and the other is a nonresident alien,

an election may be made to treat the nonresident

spouse as a U.S. resident or the entire tax year. A joint

ederal income tax return must be led or the tax year

the choice was made. However, joint or separate returns

may be led or later years. The election to be treated

as a U.S. resident is suspended or any year neither

spouse is a U.S. citizen or a resident alien. The election

permanently ends i either spouse revokes the election,

either spouse dies or there is a legal separation.

NoteCertain ormer U.S. citizens and ormer U.S.

residents may continue to be taxed as U.S. citizens

or residents on certain income or the rst ten years

ollowing expatriation rom the United States. These

rules are beyond the scope o this Guide.

CORpORATIONS

A oreign corporation is generally subject to U.S. ederal

income tax on income that is treated as eectively

connected with a U.S. trade or business or attributable

to U.S. sources.

pARTNERShIpS AND TRUSTS

Foreign partnerships or trusts are not subject to U.S.income tax, but the benecial owners may incur U.S. tax

i the partnership or trust is considered to be conducting

a U.S. trade or business or is earning U.S.-source

income. Income o a oreign trust may be taxed either to

the trust or the trusts beneciaries.

NoteA nonresident whose spouse is a U.S. citizen or

resident may elect to be taxed as a U.S. resident.

NoteThe U.S. income tax rules applicable to an estate

are beyond the scope o this Guide.


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Physical PresenceFor individuals who do not hold a green card, the rules

which determine who is treated as a resident or a

nonresident or U.S. tax purposes are based upon the

individuals actual physical presence in the United States.

SUbSTANTIAl pRESENCE TEST

In general, an individual is treated as a U.S. resident i he

or she is present in the United States or at least 31 days

during the current calendar year and the total number

o days that he or she is present in the United States, as

calculated below, equals or exceeds 183 days:

the number o days present in the current year,

plus

one third o the days present in the preceding

year, plus

one sixth o the days present in the next

preceding year.

Generally, an individual is treated as present in the U.S.

on any day the individual is physically present in the U.S.

at any time during that day. However, an individual will

not be considered present in the U.S. i the individual is

in the U.S. or less than 24 hours while in transit between

two points outside the U.S.

90 days in the current year, plus

365 days in the frst year multiplied by one third,

or 122 days,

or a total o 213 days.

I the individual leaves the U.S. on March 31 o the

second year, the individuals U.S. residency will

terminate as o that date i certain conditions are met.

DIplOmATS, STUDENTS, TEAChERS,AThlETES AND EmplOyEES OFINTERNATIONAl ORGANIzATIONS

For the purposes o the substantial presence test,

an individual is not considered present in the U.S. on

any day on which he or she is present in the U.S. as

a student, teacher or trainee, a proessional athlete

temporarily in the U.S. to compete in a charitable

sporting event, or is temporarily present in the U.S. as

a diplomat with ull-time diplomatic or consular status.

This exception also applies to ull-time employees o

an international organization (e.g., the United Nations,

the World Bank or the International Monetary Fund),

provided that the employee is neither a U.S. citizen nor a

permanent resident o the United States (i.e., a holder o

a green card). This exception generally also includes the

immediate amily (i.e., spouse and unmarried children

under the age o 21) o employees o international

organizations and o diplomats.

NoteThere are limitations on the application o these

rules. You should consult your proessional tax adviser

to assure applicability o these rules.

mEDICAl CONDITIONS

An individual will also not be considered present in the

U.S. or any day or which the individual is unable to

leave the U.S. due to a medical condition which arose

while he or she was present in the U.S.

ClOSER CONNECTION

A oreign individual will not be treated as a U.S. resident

(even i he or she otherwise qualies under the

substantial presence test) i such person:

Is present in the U.S. on ewer than 183 days in

the current calendar year, and

Has a tax home (the center o his or her employment

or sel-employment, or, i no place o employment

exists, the place o his or her regular abode)

in a oreign country, and has a closer connection

to this tax home than to the United States.

Example A British citizen is transerred

to the United States or a 15-month period that

includes one ull calendar year and part o the

next year (January 1 through December 31 o the

irst year and January 1 through March 31 o the

next year). This individual will be a U.S. resident

or the irst year since his or her presence in the

United States exceeds 183 days. However, under

the residency ormula, he or she will also be a

resident or part o the second year, although only

three months are spent in the United States. The

days o physical presence are determined or the

second year as ollows:


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(This standard takes into consideration the

location o the individuals permanent home,

amily, personal belongings, bank accounts,

drivers license, and social and political ties in

determining whether a closer connection is

present.)

The closer connection exception does not apply i the

individual has taken steps or is currently taking steps to

obtain an immigrant visa or holds a green card.ObservationIndividuals who claim nonresident status

based on a closer connection with a oreign country

must le a statement with the IRS which substantiates

the closer connection. In general, the ailure to le this

statement will render the closer connection exception

unavailable to the individuals.

mEXICAN AND CANADIAN COmmUTERS

Residents o Canada or Mexico who regularly commute

to work in the U.S. generally are not considered present

in the U.S. or purposes o the substantial presence

test on any day during which they commute. However,wages rom U.S. employment and certain income rom

U.S. sources and income that is eectively connected

to a U.S. trade or business will remain subject to U.S.

income tax.

First-Year ElectionA oreign citizen who is not otherwise a resident o

the U.S. or the calendar year (the election year) and

who satises certain other residency requirements

can choose to be treated as a United States resident

or the election year. The individual will need to satisy

the substantial presence test or the year ollowing the

election year.

NoteI an individual becomes a nonresident

ater having been a U.S. resident or at least three

consecutive years and then again becomes a U.S.

resident, but does so beore the close o the third

ull year o non-residence, then the individual may

be subject to U.S. tax at regular graduated rates on

certain U.S.-source income during the intervening

nonresident years.

ConclusionAs illustrated by the discussion above, the U.S. rules

or determining the tax status o oreign individuals

are complex. In addition, tax treaties may provide

residence rules, which dier rom the rules discussed in

this section. I this is the case, the treaty denition may

prevail. Please reer to Section VII, Income Tax Treaty

Benets, or a discussion o some special rules that are

applicable to citizens and residents o treaty countries.

You should consult with your proessional tax adviser or

a complete analysis o your own special circumstances.

The fowchart on the ollowing page summarizes the

application o the physcial presence test.

Example A citizen and resident o Costa Ricaregularly spends ive months a year in the U.S.

However, she is employed on a ull-time basis in

Costa Rica so that it qualiies as her tax home.Also, she has a closer connection with Costa

Rica because her amily lives there, her principal

place o residence is there, and most o her

business, inancial and social contacts are there.

Because she does not spend at least 183 days in

the U.S. in any year, she should not be considered

a U.S. resident.



Determining resiDence of foreign nationalsunDer the substantial presence test*

(Nonimmigrant Visa Holders)

Present in the U.S. or at least 31 days1in the current year?

Present in the U.S. or at least183 days in the current year?

NONRESIDENT

NOyES

Does presence in the current year and

the two preceding years equal 183 daysor more under ormula?2

RESIDENT 3

NOyES

NOyES

Tax home in a oreign country and a closerconnection to that country than the U.S.?

NONRESIDENT

yESNO

RESIDENT3

NONRESIDENT

*See preceding discussion or exceptions.1 A day includes any part o a day.2 Formula equals: current year days, plus rst preceding year days x one-third, plus second preceding year days x one-sixth.3 A treaty may apply, under which the individual may nevertheless be treated as a non-resident alien or most purposes. See Section VII, Income Tax

Treaty Benets.


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3. Taxation o U.S. NonresidentsThe material presented in Sections III through VIII o this Guide was

prepared especially or international investors who, ater application o

the rules discussed in the previous section, are considered nonresidents

or U.S. income tax purposes.

Nonresidents generally are taxed only on their

investment income rom U.S. sources and on certain

other income that is treated as eectively connected

with a trade or business conducted in the United States.

Dierent tax rules apply depending on whether income

is derived rom investments or rom business activities

in the United States.

Certain ormer green card holders (lawul permanent

residents) and ormer U.S. citizens may continue to be

subject to U.S. taxation as U.S. citizens or residents on

certain income under the expatriation regime.

INVESTmENT INCOmE

Generally, investment income is taxed at a at rate

o 30 percent o gross income (withholding at the

source), unless: (1) the rate is reduced by an income

tax treaty between the U.S. and the investors country

o residence; or (2) the income is rom an investment

product which is given preerred tax treatment underU.S. domestic tax law.

WIThhOlDING AT ThE SOURCE

Nonresidents who are not engaged in a trade or

business in the U.S. are generally not required to

le U.S. income tax returns. Rather, the U.S. tax law

provides or the withholding o tax at the source on

certain types o income paid or credited to the account

o the nonresident.

The person (e.g., a nancial institution) who pays

items o U.S. source income to a nonresident must

withhold the appropriate rate o tax (30 percent or

lower treaty rate) on the total amount o each item o

U.S.-source income paid, without deduction or any

expenses (e.g., margin interest) paid or incurred by the

nonresident in the production o the income. The tax iswithheld at the time the income is paid or credited to

the nonresidents account. Payments made to oreign

corporations, partnerships and trusts are generally

subject to the same U.S. tax withholding rules that apply

to nonresident individuals.

Example A nonresident investor owns 100shares o stock in a U.S. company. The shares are

held in an account with a U.S. inancial institution.

The U.S. company pays a cash dividend o one

dollar per share. Under the tax rules applicableto U.S. nonresidents, the inancial institution

must withhold 30 percent o the cash dividend

and deposit such amount on a timely basis with

the U.S. government. Absent a treaty between

the U.S. and the oreign investors country o

residence providing or a lower withholding rate,

the oreign investor is entitled to receive, or have

credited to his account, $70 o the $100 dividend.



EFFECTIVEly CONNECTED INCOmE

Income that is eectively connected with a U.S.

trade or business is taxed on a net basis (income

minus allowable deductions) at the same ederal

income tax rates that apply to U.S. citizens or

residents (generally 15 percent or capital gains

(assuming the assets are held or at least one

year) or up to 35 percent (beginning in 2003) or

individuals and 35 percent or corporations). State

and local taxes may increase the eective tax rate on

income rom a U.S. trade or business.

Nonresident individuals engaged in a trade or businesswithin the U.S. during the taxable year are required to

le a return and pay tax at regular U.S. progressive tax

rates on income deemed to be eectively connected

with such trade or business (generally 15 percent or

capital gain income and up to 35 percent or ordinary

business income (beginning in 2003)). Although the

perormance o personal services within the U.S.

during the taxable year will generally be treated as

a U.S. trade or business, the determination as to

whether a nonresident is engaged in a U.S. trade or

business is otherwise a subjective test based on the

persons activities.

Income eectively connected with a U.S. trade or

business may not be subject to U.S. tax i there is

an income tax treaty in eect with the nonresidents

country o residence. Pursuant to most treaties

entered into by the U.S., business prots o a

nonresident are not subject to U.S. tax unless

attributable to a permanent establishment in thiscountry. Generally, a permanent establishment is a

xed place o business (such as an ofce, actory, mine

or place o management) through which a nonresident

wholly or partly carries on its activities.

NoteA nonresident will generally not be treated as

engaged in a U.S. trade or business merely by trading in

U.S. stocks, other securities or commodities.


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4. Taxation o Investment IncomeThis section discusses the U.S. tax treatment o particular U.S.

investment products when owned by U.S. nonresidents.

Unless otherwise noted, it is assumed that any

investment income is not treated as eectively

connected to a U.S. trade or business. Please reer

to Section VII, Income Tax Treaty Benets, or an

appropriate discussion o possible treaty benets. Any

discussion herein o gain rom disposition o a security

assumes that the security does not constitute a U.S.real property interest. Please reer to the discussion o

real property interest below.

Stocks

DIVIDENDS

For U.S. nonresidents, dividend income received with

respect to stock issued by a U.S. corporation is subject

to a 30 percent (or lower, i a lower rate is available

under a treaty) U.S. withholding tax.

NoteMost tax treaties with the U.S. provide or

reduced rates o tax on dividend income.

To be subject to withholding as a dividend, the payment

must be a distribution o property or money out o the

earnings and prots o a corporation. In addition, it

must be made by a corporation to a shareholder with

respect to its stock. However, distributions arising rom

a complete liquidation o a corporation are generally not

subject to U.S. withholding tax.

NoteWhere a corporation retains earnings and prots

and the investor realizes his or her pro rata share o

earnings indirectly by selling the stock, any gain on the

sale o the stock is treated as a capital gain not subject

to withholding.

NoteWhether a capital market instrument represents

debt, which pays interest, or equity, which pays

dividends, is largely a question o act. No universal

criteria exist to distinguish a debt instrument rom an

equity instrument or ederal income tax purposes.

Investors should consult the prospectus or the issuers

characterization o the instrument or ederal income

tax purposes and their proessional tax advisers. It

is important to note that the characterization o the

instrument or non-tax purposes is not controlling or

U.S. ederal income tax purposes. For example, certain

hybrid instruments (such as Monthly Income Preerred

Securities (MIPS) and Trust Originated Preerred

Securities (TOPRS)) are generally characterized asdebt instruments or ederal income tax purposes but

preerred stock or accounting and regulatory purposes.

NoteAn American Depository Receipt (an ADR)

usually evidences the deposit o ordinary shares in a

oreign corporation with a U.S. depository bank. ADRs

are denominated in U.S. dollars. Since the underlying

issuer is a oreign corporation, dividends on ADRs are

treated as oreign source income exempt rom U.S.



withholding tax. Nevertheless, the source country may

require the withholding o a oreign tax on dividend

income paid to persons who are not resident in the

source country. The rate o oreign tax varies rom

country to country and may depend on whether the

nonresident is entitled to benets under a tax treaty with

the source country.

CApITAl GAINS AND lOSSES

When an asset, such as a share o stock (or any other

security), is held or investment, any gain or loss on its

sale or other disposition is usually considered a capital

gain or loss. When a nonresident sells investment stocks

or securities at a gain, that gain is exempt rom U.S. tax

unless the oreign investor is an individual present in the

U.S. at least 183 days during the year. The exemption

applies equally to long-term (assets held or more than

one year) capital gains and short-term capital gains.

Losses rom the sale o investment securities cannot be

used by a nonresident to oset other types o income

that are subject to U.S. tax.

As an exception to this general tax exemption, gains

rom the disposition o stock in companies with

substantial U.S. real property holdings may be subject toU.S. tax (see discussion below under the heading Real

Property Interests).

NoteLong-term capital gain distributions rom

regulated investment companies (i.e., mutual unds)

would also be exempt rom U.S. tax. On the other

hand, short-term capital gains distributed by the und

would be considered ordinary dividends subject to the

dividend U.S. withholding tax described above. Exempt

interest dividends (i.e., dividends attributable to tax-

exempt state and local debt obligations rom a und

that invests more than 50 percent o its assets in such

obligations) are not subject to U.S. tax.

ShORT SAlES

I a oreign investor sells stock or securities short

(i.e., stock or securities are borrowed by the nancial

institution or the investor to deliver to the buyer),

then any gain recognized when the short position is

closed should be a nontaxable capital gain, provided

the investor is present in the U.S. or less than 183 days

during the year. On the other hand, i a nonresident

investor is the lender o the security (i.e., the investor

has a long position) involved in a short sale and receives

a dividend equivalent or substitute payment with

respect to such stock, that payment may be subject to

U.S. withholding tax.

ObservationSuch in lieu o payment to a oreign

person generally is considered a dividend out o

corporate earnings and prots under the U.S. tax rules.

Accordingly, the reduced treaty withholding rates

that may apply to regular dividend payments may beavailable. Tax rules in this area are complex and we

recommend that you consult your proessional tax

adviser in structuring these trades.

Bank DepositsInterest earned by nonresidents on savings and

checking accounts, money market deposit accounts,

certicates o deposit rom U.S. banks or savings and

loan associations and Eurodollar certicates is exempt

rom U.S. tax. On the other hand, dividends rom U.S.-

registered money market unds (i.e., stock companies)

are usually subject to U.S. tax withholding.

Debt InstrumentsGenerally, the 30 percent (or lower treaty rate) U.S.

withholding tax applies to interest paid or accrued to

a nonresident on a debt obligation issued by a U.S.

borrower. However, several exceptions to this rule

may apply.

pORTFOlIO INTEREST

Certain U.S.-source interest income (portolio interest)

is exempt rom the 30 percent U.S. withholding tax.Portolio interest includes interest which is payable on

the ollowing types o U.S. instruments:

Obligations issued ater July 18, 1984, in registered

orm, i the oreign investor provides the paying agent

with a signed statement certiying nonresident status

(Form W-8BEN).


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Obligations issued in bearer orm (not registered)

provided there are arrangements designed to

reasonably ensure that: (1) the obligations are sold

or resold only to non-U.S. persons; (2) the interest on

the obligations is payable only outside the U.S. and its

possessions; and (3) there is a legend on the ace o the

obligation stating that any U.S. person holding the bond

will be subject to certain limitations.

Registered obligations that are targeted to oreign

markets with interest payable outside the U.S. and

its possessions.

ExceptionsThe portolio interest exemption does notapply i the oreign investor owns ten percent or more o

the corporation or partnership that issued the obligation

or i the obligation arises in the course o a banks

extension o credit. The exemption also generally does

not apply to interest paid on a debt instrument where

the amount payable varies by reerence to the issuers

(or a related partys) receipts, sales, cash ow, income,

change in property value, dividends, partnership

distributions or similar payments received. Further, the

exemption generally does not apply to registered debt

that is convertible to bearer orm.

ShORT-TERm OblIGATIONS

Interest on obligations with a stated maturity o 183

days or less (rom date o original issue) is exempt rom

the 30 percent U.S. withholding tax.

The chart on the ollowing page details the potential

tax impact o dierent types o U.S. debt obligations on

nonresident investors.

interest earnings capital gains comments

corporate bonds Generally, interest (including OID)payable on U.S. corporate bondsheld by nonresidents is subject tothe 30 percent U.S. withholdingtax. However, amounts received

by nonresidents with respect tomost publicly (registered) debtobligations o U.S. corporationsissued ater July 18, 1984, qualiy asportolio interest and are, thereore,exempt rom U.S. tax as long as theinvestor has provided the payerwith a Form W-8BEN.

Since corporate debt instrumentsare usually treated as capital assets(property held or investment), anygain on their sale or other dispositionis generally ree rom U.S. tax. Interest

or OID accrued on the bond prior tosale is taxed as interest income andnot capital gain, but it is not s ubjectto withholding.

ObservationInterest earned oncertain unregistered (or bearer)bonds that are sold only tononresidents, with the interestpayable only outside the United

States and its possessions, mayalso qualiy or the portolio interestexemption. Unlike owners oregistered obligations, owners obearer bonds acquired outside theU.S. need not provide a Form W-8BENto obtain this beneit.

u.s. government

securities

Interest (including OID) received byU.S. nonresidents on obligations othe U.S. government (e.g., Treasurybills, notes and bonds) which wereissued ater July 18, 1984 (portoliointerest obligations) is generallyexempt rom U.S. withholding tax,as long as a Form W-8BEN has beenprovided to the payer.

Capital gains on the sale o U.S.government securities held orinvestment are generally exemptrom U.S. tax.

municipal bonds Interest (including original issuediscount) earned by nonresidentinvestors on certain state andmunicipal obligations, which isexempt rom U.S. tax when earnedby a U.S. citizen or resident, is alsoexempt rom the 30 percent U.S.withholding tax.

Gains on the sale or retiremento municipal bonds generally arenontaxable capital gains.

ObvoYields on state andlocal municipal bonds are generallylower than those o similar taxableissues.

NoteAlthough municipal bondincome may be exempt rom U.S. tax,such income may not be exempt romtax in the oreign investors countryo residence.



Mortgage-Backed SecuritiesAmounts paid to a nonresident on a regular interest

(debt) in a Real Estate Mortgage Investment Conduit

(REMIC) generally is treated as interest or OID income

and is exempt rom U.S. withholding tax under the

portolio interest exemption, provided a Form W-8BEN is

received by the payer.

No ofcial guidance has been released with respect to

U.S. withholding tax on interest paid to a nonresident

holder o a Financial Asset Securitization Investment

Trust (FASIT) interest. However, since a FASIT is an

evidence o indebtedness similar to a REMIC, such

interest may also be exempt rom U.S. withholding tax.

However, interest earned in a mortgage pool

represented by pass-through certicates, such as

Ginnie Maes and Fannie Maes, is exempt rom U.S. tax

only i all o the mortgages in the pool are otherwise

eligible or the portolio interest exception (as discussed

above) and were originated ater July 18, 1984, thereby

qualiying them as portolio interest obligations.

Mutual FundsThe purchase o shares in a mutual und is generally

similar to the purchase o shares o stock in a U.S.

corporation. Distributions received rom the und are

treated as regular dividends, capital gain dividends,

distributions o tax-exempt interest, or as a return o

capital, depending upon the source rom which the

distributions are made.

Distributions treated as regular dividends are subject

to the 30 percent U.S. withholding tax, unless the

rate is reduced by a treaty between the U.S. and the

oreign investors country o residence. Capital gain

distributions (rom the unds net long-term capitalgains) and exempt interest dividends are generally not

subject to withholding. On the other hand, dividend

distributions rom the unds constituting short-term

capital gains and other ordinary income would be

subject to 30 percent (or lower treaty rate) withholding

as regular dividends.

NoteCertain money market unds also distribute

dividends and not interest income and, thereore,

withholding would be required at the 30 percent (or

lower treaty) rate on such distributions rom such unds.

OFFShORE mUTUAl FUNDS

A number o nancial institutions oer mutual unds,

which are incorporated, managed and sold outside o

the U.S. Consequently, the dividend distributions made

by these oshore mutual unds generally are exempt

rom U.S. withholding tax.

Unit Investment TrustsA unit investment trust (UIT) generally holds a xed

portolio o specied assets (e.g., U.S. stocks, U.S.

Treasuries, Ginnie Maes, corporate bonds or certicates

o deposit). The UIT issues redeemable securities,

each o which represents an undivided pro rata interest

in the assets held by the trust. The UIT pays interest

or dividend income (depending on its underlying

investments) on a periodic basis.

CApITAl GAINS

A unitholder recognizes capital gain (or loss) to theextent that all or part o his pro rata portion o a security

in the trust is disposed o (i.e., the security is sold by

the UIT or the unitholder sells his interest in the UIT or

an amount greater (or lesser) than his tax cost). This

capital gain is generally exempt rom U.S. tax.

INTEREST INCOmE

Most interest income rom UITs invested in U.S.

government and corporate debt instruments (issued

ater July 18, 1984) qualies as portolio interest and as

such would be exempt rom U.S. withholding tax.

DIVIDEND INCOmE

Dividend income rom UITs with equity investments

is subject to the 30 percent (or lower treaty rate) U.S.

withholding tax.


14/4412

OFFShORE UITS

A number o nancial institutions oer UITs, which are

incorporated, managed and sold outside o the U.S.

Consequently, the dividend distributions made by these

UITs generally are exempt rom U.S. withholding tax.

Options, Forward andFuture Contracts

lISTED STOCk OpTIONS

Listed stock options are either options to buy stock

(calls) or options to sell stock (puts) traded on a U.S.

securities exchange, such as the New York or American

Stock Exchanges. Gain rom trading in stock options

generally is treated as a capital gain upon expiration,

sale or exercise and, accordingly, generally is exempt

rom U.S. tax.

NONEqUITy OpTIONS

Gain rom trading in other types o optionsnonequity

optionsshould similarly not be subject to U.S. tax.

Listed nonequity options include:

Options on utures contracts;

The S&P 500 stock index;

The S&P 100 stock index;

Interest rate options (e.g., options on Treasury

notes and Treasury bills); and

Foreign currency options.

Gains rom trading in oreign currency options would be

considered ordinary income sourced according to the

residence o the taxpayer. Thus, such gains would be

exempt rom U.S. tax.

COmmODITy pOOlSA commodity pool is a pool o unds structured as a

limited partnership which engages in the speculative

trading o commodity interests (e.g., utures

contracts, options, physical commodities and oreign

currency orward contracts) and interests in other

commodity pools.

Since a commodity pool is organized in the orm o a

limited partnership, it will not be considered a separate

taxable entity or U.S. tax purposes and its income will

generally be taxed directly to the partners. Please reer

to the section on partnership income or a more detailed

discussion o the taxation o partnership interests.

NoteIn certain situations, a partnership, which trades

in commodities or its own account, may not always be

considered to be engaged in a U.S. trade or business.

RecommendationDue to the complex nature

o commodity pools and the varied taxation o

options and utures contracts, it is suggested thatyou contact your proessional tax adviser beore

investing in such instruments.

FUTURES AND FORWARD CONTRACTS

Futures and orward contracts are generally considered

capital assets that generate capital gain or loss. Foreign

currency utures and orwards will generate ordinary

income sourced according to the residence o the

taxpayer. Thereore, any trading gains usually are

exempt rom U.S. tax.

Notional Principal ContractsUnder current U.S. tax law, nancial instruments which

constitute notional principal contracts (NPCs) are

generally not subject to U.S. withholding tax. An NPC

generally is dened as a nancial investment that

provides or the payment o amounts by one party

to another at agreed intervals (e.g., quarterly), with

reerence to a specied index and notional amount

in exchange or specied consideration or a promise

to pay similar amounts. In general, utures contracts,

option contracts, orward contracts, oreign currency

contracts and debt instruments cannot qualiy as NPCs.Payments received by a nonresident on an NPC are

not subject to U.S. tax, unless they are eectively

connected with the conduct o a U.S. trade or

business. Thus, the use o NPCs is currently an

eective way or nonresidents to generate tax-

efcient investment income.



NoteIn the case o a notional principal contract

involving non-periodic payments, a portion o the

consideration received in exchange or the non-periodic

payments will be considered interest potentially subject

to withholding.

NoteThe use o NPCs and their qualication or tax

purposes is a complex area. Investors should consult

their proessional tax advisers beore entering into

these transactions. It is possible that by entering into

an NPC, an investor may be treated as having made a

constructive sale o an appreciated nancial position

i the NPC is with respect to the same or substantially

identical property.

AnnuitiesAnnuity payments received by nonresidents are subject

to the 30 percent (or lower treaty rate) U.S. withholding

tax to the extent the payments are made by a U.S.

person. A portion o each annuity payment is treated as

a return o the investors cost and a portion is treated as

income rom the investment. Tax is withheld only rom

the income portion o the payment.

ObservationThe income portion o an annuity

payment generally is not interest income under U.S. tax

rules. Thus, the portolio interest exemption may not be

available or such payments.

NoteAnnuities paid to a nonresident in a treaty country

may be eligible or an exemption under the treaty.

Rental IncomeA nonresident is subject to tax on rents or the use o

real or tangible personal property located in the U.S.

These rents are generally taxable at the 30 percent at

rate. Most U.S. treaties permit no reduction in this rate

where the income is derived rom real property.

I a nonresident invests directly in rental-producing

real estate, the individual may elect to have rental

income rom the property taxed at regular U.S.

tax rates, ater deducting expenses relating to

the property (rather than at 30 percent o gross

rent received), without subjecting their worldwide

income to U.S. taxation. As a result o the deductionsallowed or depreciation, interest and other allowable

expenses, the eective U.S. tax on such income may

be reduced below 30 percent.

ObservationThis election is not available or rentals

o personal property. In addition, i rent rom leasing

either personal or real property is considered income

eectively connected to the conduct o a trade or

Example Nonresident A enters into a two-

year notional principal contract with Dealer B,

a U.S. broker-dealer, at a time when Company

XYZs stock is trading at $100 per share. Company

XYZ is a U.S. corporation whose shares trade onthe New York Stock Exchange. Pursuant to the

contract, A will pay B LIBOR plus ten basis points

on a notional amount o $5 million on a quarterly

basis and, at the end o the contract, i Company

XYZs share price is below $100, A will pay B

the depreciation in the share price times 50,000

shares. B agrees to pay A an amount equal to the

dividends on 50,000 XYZ shares on a quarterly

basis and, at the end o the contract, i Company

XYZs share price is above $100, B will pay A

the appreciation in the share price times 50,000

shares. The contract is not eectively connected

with a U.S. trade or business conducted by A.XYZ pays quarterly dividends o $0.50 per share

throughout the two-year period and is trading at

$120 per share at the end o the contract. LIBOR

plus ten basis points remains constant at 6.5%

throughout the two-year period. Pursuant to the

contract, quarterly cash low would be as ollows:

From A to B: $81,250

From B to A: $25,000

At the end o the contract, B would make a

payment to A o $1,000,000.

Because the payments rom B to A qualiy aspayments under a notional principal contract, no

U.S. tax should be imposed on these amounts.


16/4414

business in the U.S. by the taxpayer, such income will

be taxed on a net basis at regular U.S. tax rates (and

would require the ling o a U.S. income tax return) even

in the absence o an election.

NoteAn individual that is subject to net income

taxation in the United States is required to le an annual

income tax return (Form 1040NR). I the return is not

led within 16 months o the due date o the return

(normally June 16th o the year ollowing the tax year)

deductions and credits may be denied.

Real Property InterestsThe provisions o the Foreign Investment in Real

Property Tax Act o 1980 (FIRPTA) should be

considered by every nonresident who invests in U.S.

real property. FIRPTA applies to every disposition o

U.S. real property interests by nonresidents, including

interest o the stock o certain U.S. corporations

holding primarily U.S. real property and stock in a Real

Estate Investment Trust (REIT).

CApITAl GAINS

Under FIRPTA, gain recognized by a nonresident on

the sale or other disposition o an interest in U.S. real

property is treated as income eectively connected to

the conduct o a trade or business in the U.S. Thus, the

net gain rom the sale o a U.S. real property interest

is subject to tax at regular, graduated U.S. tax rates

(generally, 15 percent maximum rate or long-term

capital gains and up to 35 percent or individuals

(beginning in 2003) and 35 percent or corporations),

as opposed to the 30 percent U.S. withholding tax

rate. In addition to taxation at regular U.S. income tax

rates, nonresidents may be subject to an alternative

minimum tax (AMT) at graduated rates between 26

and 28 percent, based on the lesser o their alternative

minimum taxable income or their net gain rom the

disposition o their U.S. real property interest (with,

generally, a 15 percent rate on long-term capital gains).

A U.S. real property interest includes stock o a company

that, at any time within the preceding ve years

qualies as a U.S. Real Property Holding Corporation

(U.S. RPHC). A U.S. RPHC is a company whose

assets consist primarily o U.S. real property interests.

However, stocks o companies that are regularly traded

on an established exchange are not real property

interests in the hands o shareholders who do not own

more than a ve-percent interest in the company.

FIRpTA WIThhOlDING

The FIRPTA rules generally require the buyer o a U.S.

real property interest to withhold ten percent o the

consideration given i the seller is a oreign person.

Thus, the purchaser o stock in a U.S. RPHC that does

not meet the publicly-traded exception must generally

withhold tax equal to ten percent o the amount realized

by the oreign person on the disposition o the stock.

The withheld tax is applied as a credit against the oreign

sellers ultimate U.S. tax liability.

In addition, any distribution by a U.S. corporation, the

shares o which constitute a U.S. real property interest,

that is not treated as a dividend may be subject to a ten

percent U.S. withholding tax. The oreign person must

still le a regular U.S. income tax return to report the

transaction and to compute the actual U.S. tax imposed

on the gain, i any. The amount withheld can be claimed

as a credit against the actual tax due, and any over-

withheld amounts can be claimed as a reund by theoreign seller on his or her tax return.

The oreign seller, or shareholder in the case o a

corporate distribution, can apply or a withholding

exemption certicate rom the IRS on or beore closing

o the transaction to reduce or eliminate the withholding

i certain conditions are met. For example, the IRS

will permit reduced withholding i the maximum tax

expected on the sellers gain is less than the ten percent

amount otherwise required.

Special SituationSpecial rules apply when a

nonresident has an interest in a U.S. partnership that

owns U.S. real estate. Please review the next section onpartnership income or additional inormation.

SpECIAl RUlES FOR REAl ESTATEINVESTmENT TRUSTS (REITS)

The sale o stock in a REIT is subject to FIRPTA

withholding, unless the REIT shares are publicly traded

and the shareholder meets the ve-percent threshold

or the REIT is a U.S.-controlled REIT. A distribution rom

a REIT that is designated as a capital gain dividend is



generally subject to a 35 percent U.S. withholding tax

when paid to a nonresident. I the REIT designates a

distribution as a capital gain dividend ater it is paid,

then the withholding is imposed on uture distributions.

Capital gain dividends are not eligible or the same

reduced rates o withholding as ordinary dividends

under a tax treaty.

Partnership Income

INVESTmENT INCOmE

A partnership is not considered a separate taxableentity or U.S. tax purposes and, thereore, its income

is generally taxed directly to its partners. Thus, i a

nonresident invests in a U.S. partnership that receives

U.S. investment income (interest, dividends, royalties,

etc.) and the partnership itsel is not engaged in a U.S.

trade or business, the U.S. withholding tax rules are

applied as i the oreign partner had earned such U.S.-

source investment income directly. In these instances

the partnership must withhold the appropriate

amount o tax on each oreign partners distributive

share o partnership gross income (not just on cash

distributions) that is subject to U.S. tax. The partnershipwill withhold this tax on any distributions made during

the year. Any excess owed at the end o the year

must be withheld and paid over prior to April 15 o the

subsequent year.

The rate o withholding is generally 30 percent unless

a treaty between the U.S. and the investors country o

residence provides or a lower rate and the partner has

provided appropriate documentation (generally Form

W-8BEN) to the partnership prior to the time when

withholding otherwise would be required.

EFFECTIVEly CONNECTED INCOmEI the partnership is engaged in a U.S. trade or business,

a nonresident partner is treated as i he or she is

so engaged. This is true whether the nonresident is

a general or limited partner. Nonresident partners

are subject to regular U.S. income tax on their share

o partnership income derived rom a U.S. trade or

business, but are generally not subject to 30 percent

U.S. withholding tax on this income. The tax may be

eliminated i, under a treaty between the U.S. and the

oreign partners country o residence, the partner

does not have a permanent establishment in the U.S.

by virtue o the activities o the partnership. Income

eectively connected with a U.S. trade or business is

reported by the individual nonresident partner on a

U.S. Individual Nonresident Income Tax Return (Form

1040-NR). A corporate nonresident partner would

report income eectively connected with a U.S. trade

or business on a U.S. Income Tax Return o a Foreign

Corporation (Form 1120-F). The partnership generally is

required to le a Form 1065, U.S. Return o Partnership

Income, and provide Form K-1, Partners Share o

Income, Credits, Deductions, Etc., to each partner.

A partners tax basis in a partnership interest is

increased by the partners pro rata share o U.S.

eectively connected income and reduced by the

partners pro rata share o eectively connected loss.

Distributions rom the partnership reduce the tax basis

in the partnership interest.

When a partner disposes o his or her interest in a

partnership that is engaged in a U.S. trade or business,

the U.S. tax authorities take the position that the

partners gain will be considered eectively connected

income based upon the extent to which partnershipassets were used in that business.

Special SituationA partnership which trades U.S.

stock and securities or its own account may not be

considered to be engaged in a U.S. trade or business

i certain conditions are met and i the partnership is

not a dealer in securities. A similar situation applies i

the partnership is engaged in commodities trading, but

only i the commodities are customarily traded on an

organized exchange and the transaction is customary to

the exchange.

U.S. WIThhOlDING TAXA partnership must pay a U.S. withholding tax on each

oreign partners distributive share o U.S. eectively

connected taxable income. The withholding rate is the

highest rate applicable to the class o taxpayerthat

is, or individuals, 35 percent (beginning in 2003) and,

or corporations, 35 percent. No withholding is required

i the partners distributive share o income would

be exempt under a treaty. Payments are made on a


18/4416

quarterly basis during the partnerships taxable year.

The oreign partner must then le a U.S. tax return and

either pay any additional tax due or obtain a reund or

any overpayment. Capital gains, which are generally

exempt rom 30 percent withholding, are subject to

this U.S. withholding tax at 35 percent or individuals

(beginning in 2003) or 35 percent or corporations.

The withholding on a partners distributive share o

partnership income is coordinated with the withholding

required on the partnerships investment income or

FIRPTA income so that no payment should be subject to

more than one o the three withholding tax regimes.

ObservationThis U.S. withholding tax paid by the

partnership is allocated to each oreign partner and

serves as a credit against the partners U.S. tax liability

or the year. This credit is treated as a distribution to the

oreign partner and reduces the partners basis in his or

her partnership interest.

mASTER lImITED pARTNERShIpS

Income rom certain widely-held U.S. limited

partnerships, known as master limited partnerships

(MLPs) or publicly traded limited partnerships (PTPs),

is generally considered to be U.S. eectively connectedincome and, thereore, is subject to the special

withholding rules on eectively connected income.

However, in general, the partnership is required to

withhold on distributions to each oreign partner. The

partnership may instead elect to withhold on each

oreign partners allocable share o taxable income

or the year, whether or not such amount has been

distributed. Moreover, special withholding rules may

apply to distributions made to those acting as nominees

(e.g., nancial institutions) or U.S. nonresidents holding

partnership interests.

NoteIn general, a PTP is treated as a corporation orU.S. ederal income tax purposes. However, certain

PTPs, which derive more than 90 percent o their gross

income rom interest, dividends, real property rents and

gains rom the sale o capital assets, will be taxed as

partnerships. The rules described immediately above

apply to PTPs that are not treated as corporations.

RecommendationI you have or are considering

any partnership investments, you should consult your

proessional tax adviser or an analysis o the particular

partnerships activities. It is not uncommon or a single

partnership to be engaged in both investment and trade

or business activities in the U.S.

REAl pROpERTy INVESTmENTS

Foreign partners o a partnership holding U.S. real

property will be subject to the special rules under

FIRPTA. Thus, i a oreign partner sells his or her interest

in a partnership holding U.S. real property, the gain or

loss on the disposition attributable to that property

will be subject to taxation under FIRPTA. In addition, i

the partnership sells a U.S. real property interest, the

gain rom the sale allocated to a oreign partner will be

subject to these rules as i the partner had sold his share

o the asset directly.

In certain cases, a publicly traded interest in a

partnership is considered an interest in a publicly

traded corporation. I so, the partners will be subject

to the FIRPTA rules applicable to holders o interests

in publicly traded corporations rather than the rules

relating to partnerships.

WIThhOlDING

A partnership must withhold tax at a rate o 35 percent

with respect to any gain realized by the partnership

on the disposition o a U.S. real property interest to

the extent the gain is allocable to a oreign partner.

U.S. partnerships that are subject to the withholding

requirements or eectively connected income are not

also subject to the FIRPTA withholding requirements.

In addition, a transeree acquiring a partnership interest

is required to withhold at a rate o ten percent with

respect to the disposition, but only i: (1) 50 percent

or more o the value o the partnerships gross assets

consists o U.S. real property interests, and (2) 90

percent or more o the value o the partnerships grossassets consists o U.S. real property plus cash or assets

readily convertible into cash. I these requirements are

met, the entire partnership interest is treated as U.S. real

property or FIRPTA withholding purposes. The taxpayer,

however, may apply or a withholding certicate in cases

where reduced withholding is appropriate.

NoteThe above rule applies or withholding purposes

only. The selling partner is subject to tax on the

partners gain to the extent the gain is attributable to



U.S. real property interests held by the partnership. The

tax withheld, i any, is credited against the partners

actual tax liability.

ElECTIVE ChARACTERIzATIONOF CERTAIN ENTITIES

A U.S. entity that is not in classical corporate

orm, including a U.S. partnership or a U.S. limited

liability company (LLC), may choose to be taxed as

a corporation or as a scally transparent entity. I

an investment partnership includes in its portolio

an entity such as an LLC that has chosen scally

transparent treatment and that entity is an operating

business, the partnership and each o its partners may

be considered engaged in a U.S. trade or business and,

thereore, subject to tax on a net income basis at net

graduated rates.

NoteThe U.S. tax characterization o an entity as

scally transparent or non-transparent may dier rom

the characterization o the entity or purposes o oreign

tax law. This may impact the availability o tax treaty

benets. See Section VII.


20/4418

5. U.S. Estate and Git Tax PlanningThe U.S. imposes an estate tax on the worldwide estates o U.S. citizens

and domiciliariesindividuals who are not U.S. citizens but who have a U.S.

domicile. Additionally, a git tax is imposed by the U.S. on lietime gits made

by these individuals. However, or U.S. nondomiciliariesindividuals who

are not U.S. citizens and who do not have a U.S. domicilenot all propertytransers are subject to U.S. estate and git taxes.

This section discusses some o the U.S. estate and

git tax rules and oers some planning suggestions

to help you minimize the cost o transerring your

U.S. property. Because o the complex nature o

the estate and git tax area, we urge you to consult

your proessional tax adviser beore making any

contemplated transers. Also, special U.S. estate andgit tax rules may apply to ormer citizens and ormer

long-term permanent residents (green card holders)

that change the rules discussed below.

U.S. Estate TaxGenerally, the U.S. estate tax applies to nondomiciliaries

with respect to their property situated or deemed

situated in the U.S. at the time o death. The rules

discussed in Section II regarding who is a U.S. resident

versus a nonresident or U.S. income tax purposes do

not apply to determine domicile or U.S. estate taxation.Individuals are considered domiciled in the U.S. and

are taxed on their worldwide estates i their domicile at

death is in the U.S. Individuals are generally considered

nondomiciliaries i their domicile is not in the U.S. An

individual will acquire a U.S. domicile i that person is

physically present in the U.S. and intends to remain

permanently in the U.S.

NoteThe act that a particular oreign country

considers an individual to be domiciled in that country

does not necessarily mean that the U.S. tax authorities

will agree.

NoteSome tax treaties with the United States reduce

or eliminate the application o the U.S. estate tax.

ObservationGenerally an individual who is present in

the U.S. on a nonimmigrant visa will not be considered a

U.S. domiciliary unless the individual intends to remain

permanently in the U.S. In contrast, most immigrants

and oreign individuals (e.g., green card holders) are

considered domiciliaries or U.S. estate tax purposes.

Individuals who are contemplating living in the U.S.

should consult their proessional tax advisers beore

moving to the U.S.

TAXAblE INVESTmENTS

The ollowing assets, i owned by a nondomiciliary at

death, will be subject to U.S. estate tax:

Real property located in the U.S.;

Tangible personal property, such as jewelry and

artwork, located in the U.S. (this would not include

artwork on loan or exhibition in the U.S.);

Shares o stock issued by a U.S. corporation (even

i the actual stock certifcate is not held in the U.S.)

as well as shares o U.S. mutual unds;



Debt obligations o U.S. citizens or residents,

U.S. corporations, U.S. partnerships, the U.S.

government and individual States, the interest on

which is not exempt portolio interest (regardless

o where the obligation is located). In general,

portolio interest obligations are those obligations

issued ater July 18, 1984 which meet certain

criteria (see Section IV o this pamphlet or a

discussion o the portolio interest rules); and

Deposits in U.S. banks or in U.S. branches

o oreign banks, but generally only i the

deposit is eectively connected with thenondomiciliarys U.S. trade or business.

NoteCertain items are not treated as U.S. property

even i located in the U.S. This includes lie insurance

contracts on the lie o the nondomiciliary.

ObservationShares o oshore mutual unds and

oshore UITs are generally not subject to U.S. estate

taxes assuming that the und or UIT is considered a

non-U.S. corporation under U.S. tax principles.

A general or limited interest in a U.S. partnership may

be included in the nondomiciliarys estate or U.S.

estate tax purposes, depending upon the nature othe partnership and whether it is engaged in a U.S.

trade or business.

U.S. ESTATE TAX RATES

A nondomiciliary decedents U.S. taxable estate in

excess o $60,000 is taxed at rates ranging rom 26

percent to a maximum o 49 percent (in 2003) or U.S.

taxable estates in excess o $2 million. The U.S. does

not tax the rst $60,000 o a nondomiciliary decedents

U.S. estate. The amount not taxed by the U.S. may be

higher under certain estate tax treaties.

Planning StrategyNondomiciliaries should considerholding their U.S. investments through non-U.S.

corporations to minimize the potential application o the

U.S. estate tax. More inormation is detailed in Section VI

o this Guide, Ownership o Investments. Also, i there

are U.S. heirs, consideration should be given to the tax

situation o these heirs ater the death o the individual.

U.S. Git TaxThe U.S. git tax is coordinated with the U.S. estate

tax and, thereore, provides or the same distinctions

between domiciliaries and nondomiciliaries, and or

nondomiciliaries is imposed at the same rates, except

as mentioned above in 2010.

TANGIblE pROpERTy

A nondomiciliary is subject to U.S. git tax only on

transers o real estate and tangible property situated in

the United States. Tangible property includes personal

property, such as artwork and jewelry.

INTANGIblE pROpERTy

In general, gits o intangible property, such as

corporate stock, mutual und shares, bonds and

other obligations, are not subject to U.S. git tax.

This is true even though the same property would

be subject to U.S. estate tax i the transer occurred

by reason o the death o the nondomiciliary owner.

Although not entirely certain, it is likely that a

partnership interest is also intangible property that

is exempt rom U.S. git tax, even i the partnership

is engaged in a U.S. business and even i all o itsproperty is located in the U.S.

CASh AND ChECkS

Cash is generally considered tangible property.

Accordingly, any git o cash or other currency, while in

the U.S., may subject the transeror to U.S. git tax. Even

a wire transer rom abroad to a U.S. bank account could

be construed to be a git subject to U.S. git tax. The

saer course may be to make the transer to the donees

oshore bank account.

ObservationWhile cash is considered tangible

property, a U.S. bank account is treated as intangibleproperty; thereore, an account transer will not be taxed.

Planning StrategyA nondomiciliary can transer

money tax-ree by opening a U.S. bank account and

assigning it to a donee (e.g., a spouse or child) or by

adding the donee to the account.


22/4420

NoteTangible personal property which is located in

the U.S. can be gited ree o U.S. git tax i the property

is removed rom the U.S. prior to making the git.

GENERAl TAX GUIDElINES

Generally, a nondomiciliary donor is not entitled to the

unied credit against git tax or a marital deduction

or gits to a spouse who is not a United States citizen.

However, $112,000 (in 2003, as indexed or ination) in

gits o U.S. situs property transerred to a non-citizen

spouse may be excluded annually rom U.S. git tax. In

addition, in calculating the git tax, the rst $11,000 (in

2003, as indexed or ination) that is gited annually

to each donee, other than a spouse, is exempt rom

U.S. git tax. Deductions or charitable contributions

are limited to gits to certain United States charities,

U.S. government bodies or certain other charitable

organizations that will use the git within the U.S.

ESTATE AND GIFT TAX TREATIES

There are a number o estate and git tax treaties that

reduce or eliminate the otherwise applicable U.S. estate

or git tax.

NoteAny o the special U.S. estate and git tax rules

may be modied by a treaty between the U.S. and a

nondomiciliarys country o domicile.

U.S. STATE REGUlATIONS

Individual U.S. states may also impose estate or

inheritance taxes at death and git taxes on lietime

transers. Foreign individuals who own property thatis potentially subject to the U.S. estate or git tax or

state tax should consult their proessional tax advisers

regarding their potential tax liabilities and whether or

not they should execute a U.S. will.



uniteD states estate taxation for nonDomiciliaries (as of 2003)

Unitied Rate Schedule

column a column b column c column D

taxable amount

over

taxable amount

not over

tax on amount

in column a

rate of tax

on excess

over amount

in column a

Exempted romestate taxation

$ 010,000

20,00040,000

$ 10,00010,000

20,00060,000

$ 01,800

3,8008,200

18%20%

22%24%

Nondomiciliariesbegin to payestate taxes romUS$60,001

$ 60,00080,000

100,000150,000250,000500,000750,000

1,000,0001,250,0001,500,0002,000,000

$ 80,000100,000150,000250,000500,000750,000

1,000,0001,250,0001,500,0002,000,000

$ 13,00018,20023,80038,80070,800

155,800248,300345,800448,300555,800780,800

26%28%30%32%34%37%39%39%41%43%

49%*

*The maximum estate and git tax rate is scheduled to decline, as ollows:

Year maximum tax rate

2003 49%

2004 48%

2005 47%

2006 46%

2007 45%

2008 45%

2009 45%

2010 0% (Estate Tax), 35% (Git Tax)

2011 55%

As indicated in the p receding table, the maximum estate andgit tax rate is scheduled to decline gradually rom 49% to 45%in 2009. Under current law, the estate tax will be repealed orone year, or those individuals dying in 2010. The git tax willremain in orce in 2010, at a maximum rate o 35%. In 2011and onwards, the estate tax is reinstated, and the maximumestate and git tax rate will climb to 55% or gits or bequests inexcess o $3,000,000. It is possible that uture legislation willeither do away with or make permanent the one-year repeal othe estate tax in 2010.

Due to the unlimited marital deduction, the value o propertylocated in the U.S. that passes rom a nondomiciliary decedentto a surviving U.S. citizen spouse is not subject to U.S estatetax. However, i the surviving spouse is not a United States

citizen, certain requirements must be met in order to claim amarital deduction.


24/4422

6. Ownership o InvestmentsChoosing the right ownership vehicle is a crucial step in the management o

an investment portolio. The decision to hold investments individually, through

a corporation and/or through a trust ofers some signicant tax and non-tax

advantages. However, the use o a corporation or trust to reduce or eliminate

U.S. tax is not without risk and should only be undertaken ater careulplanning and with the assistance o legal and tax proessionals.

Corporate Ownership

TAX TREATmENT

Generally, a oreign corporation and nonresident

individual are taxed similarly with respect to U.S.

investment income. A oreign corporation is subject

to the same 30 percent U.S. withholding tax on U.S.-

source income that is not eectively connected

with a U.S. trade or business and is also eligible or

the same exemptions rom withholding or portolio

interest, capital gains (other than gains rom the sale

o real property) and interest on bank deposits as a

nonresident individual.

ObservationThe 30 percent U.S. withholding

tax rate or both nonresident individuals and

oreign corporations may be reduced by a tax

treaty. Consult your proessional tax adviser or

the rate applicable to the investors or the oreign

corporations country o residence.

A oreign corporations income that is eectively

connected with a U.S. trade or business (such as

income rom a partnership engaged in a U.S. business),

less allowable deductions or expenses related to the

production o such income, is taxed currently at regular

U.S. corporate tax rates up to a maximum o 35 percent

plus a possible branch prots tax, discussed below.

Similarly, i earned by a nonresident individual, such

income is taxed at regular U.S. individual tax rates,

up to a maximum o 35 percent (beginning in 2003).

However, eectively connected income may be exempt

rom U.S. tax altogether under a tax treaty. Consult your

proessional tax adviser.

ObservationSince nonresident individuals and

oreign corporations are subject to the same tax on

U.S. source investment income, reduction o income

taxes generally is not a persuasive reason or corporate

ownership o investments.

Planning StrategyBy holding U.S. investment assets

through a oreign corporation, a nondomiciliary may be

able to minimize exposure to the U.S. estate tax.

Example A U.S. nonresident transers

shares o stock in a U.S. corporation to a oreigncorporation that he owns. Although the oreign

corporation is subject to 30 percent (or lower

treaty rate) withholding on any dividend income,

the shares o stock in the oreign corporation, as

tangible property, are not part o the investors

U.S. estate and at death will not be subject to U.S.

estate tax.



NoteI the oreign corporation is not administered

so that it complies with specic IRS guidelines on

preserving the integrity o the corporate entity,

it is possible that the IRS will consider it a sham

corporation. In this case, the U.S. estate tax could be

levied on many o the assets owned by the corporation.

I you are considering a corporate structure, you

should consult with a trust proessional and/or other

proessional tax adviser to determine i it would meet

these IRS guidelines.

NoteThe transer o an investment to a oreign

corporation may, in limited circumstances, be a taxableevent. You should consult with your proessional tax

adviser beore undertaking such a transer.

bRANCh pROFITS TAX

A oreign corporation engaged in trade or business

in the U.S. may also be subject to the branch prots

tax equal to as much as 30 percent o the ater-tax

earnings o the oreign corporation. Please consult your

proessional tax adviser with respect to this matter.

OThER TAX bENEFITS

Other tax benets may be available depending on

where the oreign corporation is ormed. For example,

a company organized in a jurisdiction that does not

impose a corporate tax would not be taxed in that

jurisdiction. You should consult your proessional tax

adviser beore deciding whether or not to incorporate.

Benefcial OwnershipThrough a TrustIn general, the creation o a trust requires the separation

o legal and benecial ownership o all property

transerred to the trust. The settlor o the trust transersproperty to a trustee, who maintains legal title to the

property and manages it or the benet o others (the

beneciaries), who have benecial ownership o the

trust property.

GRANTOR TRUST

I a nonresident orms a revocable trust or retains

exclusive enjoyment o the income, then, or U.S.

income tax purposes, the IRS looks through the trust

and considers the settlor to own the assets held by the

trust. The trusts income is taxed as i the settlor earned

the income directly. This arrangement is known as a

grantor trust. A trust can be, in part, a grantor trust

and, in part, a nongrantor trust.

NoteThe above paragraph is a general description

o a grantor trust and does not cover all aspects o the

denition. You should consult your proessional tax

adviser or urther details.

The ollowing property held by a nonresidents grantor

trust is not subject to U.S. income tax because thenonresident is considered to own the property directly:

Capital gains on investment property other

than real estate;

U.S. bank deposit interest and interest rom U.S.

bank money market accounts; and

Treasury bills, notes and bonds, and many

corporate obligations issued ater July 18, 1984

(portolio interest obligations as discussed in

Section IV).

On the other hand, a nonresident is subject to U.S. tax

on income rom these items o property held by the

nonresidents grantor trust:

Dividends paid by U.S. corporations;

Any income eectively connected with the

conduct o a U.S. trade or business; and

Gain rom the sale o U.S. real estate.

ObservationU.S. securities (unless the securities

qualiy as portolio interest obligations, as described

in earlier sections o this Guide), real property or any

tangible property located in the U.S. which is owned by

the nonresident individuals grantor trust may also besubject to the U.S. estate tax.

NONGRANTOR TRUST

I a nonresident creates an irrevocable trust and does

not retain the exclusive enjoyment o the income or

principal (i.e., the trust is not a grantor trust), then

the trust is treated as a separate taxpayer or U.S.

tax purposes. Generally, the trust is subject to tax


26/4424

on its undistributed income. The maximum eective

tax rate on trust income is 35 percent (beginning in

2003). Amounts that are distributed currently by

the trust to its beneciaries are generally taxable to

the beneciary (at the beneciarys eective U.S. tax

rate) and not the trust.

ObservationWhile there is no tax disadvantage

to a U.S. grantor trust while a nonresident grantor

is alive, the U.S. trustee is required to le certain

trust inormation with the IRS, including inormation

regarding income earned by the trust and the

identication o beneciaries. In addition, a non-U.S.trustee, like the nonresident individual, may be required

to le certain inormation with the IRS, the nancial

institution where an account may be held or other

withholding agent. A trust also exposes its settlor to U.S.

estate tax, whereas a oreign corporation reduces the

possibility o such exposure.

Planning StrategyA structure that combines an

oshore trust with an oshore corporation (also known

as a private investment company or PIC) may help a

nonresident to minimize the potential application o the

U.S. estate tax while providing or estate planning and

other benets. Your Smith Barney Financial Consultant,

along with your proessional tax adviser, can guide you

with appropriate recommendations concerning this

type o structure.

RecommendationI you have set up or are considering

a trust arrangement as a vehicle or holding your U.S.

investments, we strongly recommend that you consultyour proessional tax adviser. Many o the tax and legal

aspects o establishing a trust (i.e., deciding whether

to organize a oreign or U.S. trust, or a grantor or

nongrantor trust) require a careul evaluation o your

nancial aairs and are beyond the scope o this Guide.

NoteA trust that includes U.S. citizens or residents

as beneciaries is subject to special rules. You should

consult your proessional tax adviser i the trust includes

such beneciaries.



7. Income Tax Treaty BeneftsAs discussed throughout this Guide, oreign investors may be entitled to

reduced tax rates on U.S.-source income i the U.S. has a tax treaty in orce

with their country o residence to prevent the double taxation o income.

All U.S. treaties use the same basic approach in

determining eligibility or benets, and in determining

what kinds o income and taxes the treaty will cover.

However, the details o a particular treaty can dier

rom others in very important respects (e.g., specic

rates o withholding, limitations on eligibility or treaty

benets, etc.). Thereore, nonresidents and oreigncorporations should make sure they consult with

proessional tax advisers concerning the applicability

o a U.S. treaty provision. I the nonresident does

not meet the requirements or benets under

the particular treaty, or i no treaty exists with the

investors home country, then the investor cannot

claim treaty benets and the withholding agent must

withhold on the income at the ull 30 percent rate,

unless another rate reduction rule applies.

Foreign persons must submit a certicate to the U.S.

withholding agent to claim a reduction in withholding

pursuant to a tax treaty. A withholding agent may nolonger rely on merely an address in a oreign country

to determine entitlement to a treaty rate or dividend

income. A claim or treaty benets on U.S.-source

income is made by completing Part II o Form W-8BEN

(see Section VIII, Documentation and Reporting).

ObservationThe interaction o the U.S. tax rates, home

country tax rules and applicable U.S. treaty provisions

can be very complex. Investors should consult with their

proessional tax advisers to devise a structure that best

accomplishes their business and tax objectives rom a

global perspective.

NoteWhen a non-U.S. person takes a position that a

U.S. income tax treaty reduces or eliminates the U.S. tax,

this position must be disclosed in the persons U.S. tax

return or the taxable year, or, i no return is otherwise

required, on an inormation return led solely or this

purpose. This provision does not apply to interest

and dividends received by a nonresident where the

withholding agent has properly reported the payments

to the IRS on a Form 1042-S. Other exceptions also

apply to this reporting.

The table on the ollowing pages serves to provide

current U.S. income tax withholding rates or residents

o countries that have tax treaties with the United

States.


28/4426

U.S. Income Tax Withholding Rates on Investment Incomeor Residents o Treaty CountriesThe chart below shows the treaty U.S. withholding tax rates applicable to U.S.-source income paid to residents o

the treaty country. Note that these rates apply to the nonresidents investment income and not to income eectively

connected with a U.S. trade or business. The tax rates below are available provided all conditions o the particular treaty

are satised and reect the rates in eect on September 1, 2004.

Interest (%) 1 DIVIDenD (%) 2 AnnuItIes

Australia 10 15 0

Austria 0 15 0Barbados 5 15 0

Belgium 15 15 0

Canada 10 15 15

China, Peoples Republic o 3 10 10 30

Cyprus 10 15 0

Czech Republic 0 15 0

Denmark 0 15 0

Egypt 15 15 0

Estonia 10 15 0

Finland 0 15 0

France 0 15 0

Germany, Federal Republic o 0 15 0

Greece 0 30 0

Hungary 0 15 0

Iceland 0 15 0

India 15 25 0

Indonesia 10 15 0

Ireland 0 15 0

Israel 17.5 25 0

Italy 15 15 0

Jamaica 12.5 15 0

Japan 10 10 0

Kazakhstan 10 15 0

Korea, Republic o South 12 15 0

Latvia 10 15 0

Lithuania 10 15 0

Luxembourg 0 15 0

Mexico 4.9 10 0

Morocco 15 15 0

Netherlands 0 15 0

New Zealand 10 15 0



Interest (%) 1 DIVIDenD (%) 2 AnnuItIes

Norway 0 15 0

Pakistan 30 30 0Philippines 15 25 0

Poland 0 15 30

Portugal 10 15 0

Romania 10 10 0

Russia 0 10 0

Slovak Republic 0 15 0

Slovenia 5 15 0

South Arica 0 15 0

Spain 10 15 0

Sri Lanka 10 15 0

Sweden 0 15 0

Switzerland 0 15 0

Thailand 15 15 0

Trinidad and Tobago 30 30 0

Tunisia 15 20 0

Turkey 15 20 0

Ukraine 0 15 0

United Kingdom4 0 15 0

Venezuela 10 15 30

1 Interest paid by U.S. borrowers, unless the interest qualies as portolio interest.

2 Paid by U.S. corporations (other rates may apply to corporations with substantial ownership in the U.S. corporation). A higher rate o withholding may

apply to dividends paid by Real Estate Investment Trusts (REITs).3 Residents o Hong Kong and Taiwan are not covered by the U.S.-China tax treaty.

4 Applies to the countries o England, Northern Ireland, Scotland and Wales.

U.S. Income Tax Withholding Rates (contd)

The reduced rates or exemptions apply under tax treaties currently in eect with the United States; withholding rates

are subject to change. For countries not listed, no tax treaty currently exists and the standard 30 percent withholding

rate generally applies. The above rates are those o most general applicability or the specied category o income.

Exceptions and limitations may apply under specic treaties. Please consult your proessional tax adviser.


30/4428

8. Documentation and ReportingA U.S. fnancial institution, such as Smith Barney, a division o Citigroup

Global Markets, is required to solicit, collect and maintain in its les various tax

documents to both ensure the nonresident status o its oreign account base

and to avail its clients o a lower rate o tax withholding on certain payments

made by the institution.

In January 2001, the Internal Revenue Service

(IRS) implemented comprehensive revisions to the

documentation rules. The primary objective o these

new rules is to improve the integrity and airness o

the process o claiming reduced rates and exemptions

rom U.S. withholding tax by oreign persons. Toward

this end, the rules impose new U.S. tax documentationrequirements. They are designed to identiy the ultimate

benecial owner o income and to prevent improper

claims or benets under U.S. tax treaties. To implement

these policy objectives, the IRS has replaced the old

style Forms W-8, 1001, 4224 and 8709 with a new series

o Forms W-8. The ollowing translation table may be

used to identiy the corresponding new orm among the

new series o Forms W-8.

Ater December 31, 2000, a U.S. withholding agent,

such as Smith Barney, a division o Citigroup Global

Markets, may not accept any new claim or a reduced

rate or exemption rom withhold

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