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Non-resident aliens do not have to pay capital gains tax for stocks, but they have to pay a 30% tax on cash dividends (source). Can they avoid this tax by selling the stock before the ex-dividend date and buying it back on the ex-dividend date? Since the price of the stock will fall by approximately the amount of the cash dividend, they would have produced a homemade dividend when they repurchase the stock at a lower price on the ex-dividend date. Is this method allowed?

There is one problem I can see: there is no guarantee that they would be able to repurchase the stock at a lower price on the ex-dividend date. How can they get around this problem? Can they use options for this?

(Assume that the non-resident alien lives in a tax-free jurisdiction that has no applicable tax treaties with the US.)

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  • Something to consider - tax on the capital gain is still likely to be owing in the non-resident alien's country of residence, unless you live in a low tax / tax free jurisdiction. So this still raises the problem that if you own a share that increases, say, 5% during the year and then pays a 1% dividend, you would have a capital gain in that country 5x larger than the dividend you would otherwise receive, and the combined tax on the capital gain would likely be higher than the combined tax on the dividend. All of this depends on the country of residence and other factors, of course. Oct 1 '20 at 12:38
  • @Grade'Eh'Bacon In the specific case I'm interested in, the non-resident alien lives in a tax-free jurisdiction. As such, there is only one tax to worry about: the 30% tax on dividends.
    – Flux
    Oct 1 '20 at 13:19
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+100

In absence of tax in the jurisdiction of the non-resident alien, the most efficient way is synthetic long stock position with options (Long Call, Short Put, Long Treasury), or long Single Stock Futures/CFD with Long Treasury.

If the bet is on Index instead of single stock, the best way is Index futures with Long Treasury, followed by Ireland-domiciled ETF (reduces dividend withholding to 15% but does not eliminate).

As a side note, the interest of US Treasury is exempt from withholding tax (26 U.S. Code § 871(h)) and the principal is exempt from estate tax (26 U.S. Code § 2105 (b)(3)).

Theoretically according to Dividend Irrelevance Theory, selling and rebuying stock around Ex-Dividend should work on average and in the long run, but it is best that you backtest different stock under different trend.

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  • Will the synthetic long stock position lose a lot of value due to time decay? If the investment horizon is 5 to 10 years, will the cost of rollovers be excessive?
    – Flux
    Sep 10 '20 at 5:23
  • How does time decay fit into the put-call parity? Time decay hurts your in long call, but benefits you in short put. Options always have those huge bid ask spread and a mid price execution for both the call and put would be ideal. Yes the cost of rollover is much higher than futures.
    – base64
    Sep 10 '20 at 6:10
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    @Flux The meaning of synthetic equivalence is that the returns are the same aside from trading costs; as base64 said, time decay cancels out here (if it did not, this wouldn't be a valid synthetic). But note that if you are willing to pay some time decay, you can buy some additional safety and/or leverage by omitting the short put and just buying an in-the-money call. Also, with either strategy, note that LEAPS may be available up to 3 years out, so only a couple of rollovers may be needed.
    – nanoman
    Sep 19 '20 at 21:58
  • ITM calls are subject to loss as share price drops by the amount of the dividend on the ex-div date. Oct 4 '20 at 5:10
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Share price drops by the exact amount of the dividend on the ex-div date.

Selling a stock just prior to the ex-div date and repurchasing the next morning would not be a homemade dividend. A homemade dividend involves selling a portion of ones shares and the results is ending up with fewer shares.

If one pays a 30% tax on cash dividends then one saves 30% of the amount of the dividend by doing this. That gives you some upside buffer for share repurchase.

The other penalty is the B/A slippage of selling and rebuying and possibly commissions, if you're still paying them.

Synthetic long stock (long call, short put) would hedge the possibility of being unable to repurchase the the stock at the lower ex-div price. However, options tend to have wider B/A spreads than the underlying and the synthetic has two legs. There are multiple commissions (if you're still paying them) to enter and up to two more if you exit unless you accept automatic exercise at expiration in which case, some brokers charge a fee for exercise.

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