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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 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 to solve this problem?

(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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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 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 at 6:10

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