Taxation of foreign investments

A question from Yahoo! Answers:

I am from Taiwan and currently live in US. I am trying to decide to invest US funds through US or taiwan broker. The management fee in taiwan is much higher but the brokers said that the capital gain is US-tax free (and tax free in taiwan too) because the fund companey is located in some specific country. I highly dought it! Does anyone know the answer?

Also, say if I invest in a Japan fund through a US broker, dose Japan takes tax on the capital gain too or only the US goverment?

First of all, whatever Taiwanese brokers tell you applies only to people who physically reside in Taiwan. Since you live in the U.S., you are to pay taxes in the U.S. on all of your income and capital gains regardless of where in the world you receive them from.

International taxation is a very confusing business, since there is no one rule that fits every situation. Many countries have tax treaties with the U.S. If that’s the case, foreign country typically taxes dividend and interest income of a U.S. investor (brokers act as withholding agents), while the U.S. gives the investor income tax credit for income taxes paid abroad, but still taxes capital gains. If there is no tax treaty, you could be up against double taxation of income (but, typically, not capital gains).

If you invest in a U.S.-registered Japan fund, it’s barely different from investing in a U.S. fund. All international complications occur at the fund level; they do not filter down to you. Japanese income taxes, if applicable, will be withheld in Japan, while you will be responsible for capital gains. You year-end account statement should give you all information necessary for preparing your tax return in the U.S.

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