Question

10 U.S. citizens, who are unrelated, each invest in the common shares of a new Foreign Co. at 10% ownership each. Foreign Co will buy shares of both U.S. and non-U.S. public companies. These investments will produce dividend income. What, if any, are the U.S. tax consequences that they should be concerned about?

Answer 1

When Americans buy stocks or bonds from foreign-based companies, any investment income (interest, dividends) and capital gains are subject to U.S. income tax and taxes levied by the company's home country.
The U.S. tax code offers the “foreign tax credit," which allow allows foreign taxes to offset some of your liability to Uncle sam.

The U.S. Internal Revenue Service offers a foreign tax credit or deduction to eligible investors who realize income from foreign sources. While all foreign investment income must be reported on Form 1040 in U.S. dollars, investors may file Form 1116 to receive the credit or deduction. Investors who paid less than $300 in creditable foreign taxes can usually deduct the taxes paid on Line 51 of Form 1040. According to the IRS, the following basic criteria must be met in order to be eligible:

1. The tax must be imposed on you.
2. You must have paid or accrued the tax.
3. The tax must be the legal and actual foreign tax liability.
4. The tax must be an income tax (or a tax in lieu of it).

Additional criteria, including restrictions on resident and non-resident aliens, may also apply