Key tax implications for Malaysians investing in the U.S. stock market
In Malaysia, capital gains and dividends from stocks are generally not taxed. However, as a Malaysian investing in the U.S. stock market, will you be subject to taxes? This article will provide you with an overview of the key tax considerations for Malaysians investing in U.S. securities, covering dividends, capital gains, and estate tax.
Dividends
When you receive dividends from U.S. companies, the U.S. Internal Revenue Service (IRS) typically withholds 30% of the dividend payment as tax. As a result, the dividend you receive will be 30% less than the amount announced by the company. This withholding tax applies to all non-resident aliens — referring to individuals who are neither U.S. citizens nor U.S. nationals and who have not passed the green card test.
In Malaysia, dividend income from U.S. investments is classified as foreign-sourced income. According to the Inland Revenue Board of Malaysia, starting from January 2022, all foreign income received in Malaysia by a resident is subject to tax.
The good news is that for individuals, since the dividend has already been taxed by the U.S. government, the dividend income received in Malaysia is exempt from tax until the end of 2036. In short, the dividend is taxed in the U.S. but not in Malaysia during this exemption period.
Capital gains
What about the gains you receive when selling stocks in the U.S.? U.S. residents are subject to a progressive capital gains tax on their investments, including stocks, with rates of up to 20% for long-term capital gains (on assets held for more than a year) and up to 37% for short-term capital gains (on assets held for a year or less).
Malaysians who are non-resident aliens and have been in the U.S. for less than 183 days in a calendar year are exempt from U.S. capital gains tax. However, if you were present in the U.S. for 183 days or more, you would be taxed at a flat rate of 30% on your capital gains. Since there is no capital gains tax on stocks in Malaysia, Malaysians are effectively exempt from capital gains tax when investing in the U.S. market, provided they meet the non-residency requirements.
When it comes to repatriating your funds back to Malaysia, the process is relatively straightforward. The U.S. generally does not impose restrictions on transferring investment proceeds out of the country, and since it’s merely a transfer of funds between accounts without generating profit, it should not be subject to tax. However, if the amount transferred is significantly large, it may trigger reporting requirements under anti-money laundering regulations and alert authorities.
Estate tax
Next is the U.S. estate tax, which Malaysian investors should be particularly mindful of. The U.S. imposes an estate tax on U.S.-situs assets owned by non-resident aliens upon their death. U.S.-situs assets include real property, tangible property, and stocks of U.S. companies.
For most Malaysians, non-resident aliens are only allowed an exemption of up to US$60,000, which is significantly lower than the exemption available to U.S. citizens and residents. This means that if the value of your U.S.-situs assets exceeds US$60,000 at the time of your death (touch wood), your estate may be subject to U.S. estate tax at rates of up to 40%.
To mitigate the potential impact of U.S. estate tax, some investors may explore strategies such as transferring ownership of shares to a trust, using an international insurance structure, or apply for annual gift tax exclusion. Regarding the gift tax exclusion, you can transfer assets to others during your lifetime, with a limit of up to US$18,000 annually as of 2024. In Malaysia, any gifts received are not subject to tax, as the country does not impose inheritance, estate, or gift taxes.
Another strategy to avoid U.S. estate tax is to consider investing in Irish-domiciled ETFs when buying ETFs. These ETFs offer the advantage of avoiding U.S. estate tax while still providing exposure to U.S. markets. You can click to learn more about Irish-domiciled ETFs.
The fifth perspective
Investing in the U.S. market can present significant opportunities for Malaysian investors, but it comes with additional tax considerations. While this article provides a general overview, tax laws and regulations may change, and individual circumstances can vary widely. You may wish to consult with qualified tax professionals in both Malaysia and the U.S. for more detailed and personalized advice. Proper tax planning and understanding of these implications can help you make more informed investment decisions and enhance your after-tax returns.