Do foreign investors pay capital gain tax?

Many a time, special tax treatment is accorded to foreign investors with respect to capital gains. One is liable to pay capital gains tax as a foreign investor on the basis of a number of factors, which include the country in which one has invested, residence status of the investor, and relevant tax treaties. The following is a general outline of how capital gains tax applies to most foreign investors:

1. Country of Investment: Foreign investors have their tax treatment of capital gains first and foremost governed by the country in which they make their investment. In most countries, foreign investors are levied with capital gains tax on the profits made through the sale of shares, bonds, and real estate. For instance, in the United States of America, foreign investors are generally liable for paying capital gains tax on income derived from U.S. sources, although certain regulations and rates apply.
2. Residency Status: The residency status of the investor does have an impact on their tax liabilities. Most countries have some basis of taxation based on residency, so a non-resident will generally be liable to tax only on his or her income arising in that country and, therefore, only capital gains arising in that country. In certain jurisdictions, however, tax may be imposed on the worldwide income of a non-resident depending upon the nature of the local tax.
3. Tax Treaties: International tax treaties between countries often have an impact on capital gains tax liabilities for foreign investors. The aim of these treaties is to avoid the incidence of double taxation and provide relief by laying down which country has a claim to tax certain kinds of income. For example, a tax treaty between the investor's home country and the country in which an investment is made may reduce or eliminate the capital gains tax liability for the investor.
4. Specific Asset Types: The type of asset that is sold can again affect capital gains tax. Many countries have different rules when it comes to the treatment of gains from real estate and financial instruments. For instance, there are situations where income arising from the sale of real estate gets different treatment or even enjoys exemptions, unlike in the case of shares and bonds.
5. Tax Reporting and Compliance: A foreign investor is normally subject to the local tax reporting requirement. This will require filing tax returns and the payment of capital gains tax, if any. It is, therefore, very important that investors know their reporting obligations and due dates to avoid penalties.

In summary, liability to capital gains tax by foreign investors depends upon the country of investment, residence, and taxing jurisdiction and availability and terms of relevant tax treaties. It is desirable for foreign investors to seek professional help from tax experts who would be conversant not only with the local tax laws but also with the provisions of international tax treaties, thus facilitating compliance and improvement in handling their tax liabilities.