We commonly speak with investors from Asia and elsewhere who are interested in investing the USA.  Most commonly the investment is real estate, but we work with more sophisticated investors who have an appetite for US businesses as well.

Naturally foreign (also called Non Resident Alien or NRA) investors, want to know how investment into American business should best be structured.

If you’re an NRA investing in US Real Estate, please read this –

http://www.mooresrowland.tax/2017/05/are-you-non-american-nra-and-own-us.html

Ownership Structures for Foreign Investors 

An NRA can acquire U.S. assets using several alternative ownership structures. The NRA’s goals and priorities dictate the type of structure that is used. Each alternative has its own advantages and disadvantages – there is no perfect structure.

Direct investment (assets owned by the NRA) is simple.  Assets are held in the NRA’s own name and is subject to only one level of tax on the disposition.  If the asset is held for one year, the sale is taxed at a 15% rate (Code Section 1(h)).  The disadvantages of the direct investment are: no privacy, no liability protection, the obligation to file U.S. income tax returns, and if owned at death, the U.S. asset is subject to U.S. estate taxes.

Under an LLC/LP structure, the NRA acquires the U.S. asset through an LLC or a limited partnership. The LLC may be a disregarded entity or a tax partnership for U.S. income tax purposes. This is an improvement over the direct ownership alternative, because this structure provides the NRA with some privacy and liability protection and allows for lifetime transfers that escape the gift tax. The obligation to file U.S. income tax returns and the possibility for a U.S. estate tax on death remain. 

There’s a withholding requirement which I previously discussed here – 

http://www.mooresrowland.tax/2019/01/withholding-tax-on-foreign-partners.html

Ownership of U.S. assets through a domestic corporation (the corporation will always be a “C” corporation; a foreign shareholder precludes an “S” corporation) (Code Section 1361(b)(1)(C)) will afford privacy and liability protection, allow lifetime gift tax-free transfers, and obviate the foreigner’s need to file U.S. income tax returns. Engaging in a U.S. trade or business requires a U.S. tax return; ownership of stock will not trigger a return filing obligation.

There are three disadvantages to the ownership of U.S. assets through a domestic corporation: 

(1) federal and state corporate income tax at the corporate level will add a second layer of tax, 

(2) dividends from the domestic corporation to its foreign shareholder will be subject to 30% withholding, and 

(3) the shares of the domestic corporation will be included in the U.S. estate of the foreign shareholder. If the corporation owns primarily real estate in the U.S., on the disposition of the stock in the corporation the foreign shareholder will be subject to FIRPTA, because the corporation will be treated as a USRPHC (See FIRPTA and USRPHC discussion, above). This will require the filing of a U.S. income tax return and 10% tax withholding by the purchaser of the shares.

Ownership of the U.S. assets may be by the U.S. corporation directly, or through a U.S. partnership or disregarded entity owned by the corporation. The corporation may even be an LLC that checks-the-box to be taxed as a corporation. In turn, the ownership of the U.S. corporation by the NRA may be direct, or through a foreign partnership or disregarded entity.

Foreign corporation ownership offers the following advantages: 

(1) liability protection, 

(2) no U.S. income tax or filing requirement for the foreign shareholder, 

(3) shares in the foreign corporation are non-U.S. assets not included in the U.S. estate, 

(4) dividends are not subject to U.S. withholding, 

(5) no tax or filing requirement on the disposition of the stock, and 

(6) no gift tax on the transfer of shares of stock.

The disadvantages of using the foreign corporation are: 

(1) corporate level taxes (just like with the domestic corporation), because the foreign corporation may be deemed engaged in a U.S. trade or business; and 

(2) the foreign corporation will be subject to the branch profits tax, the largest disadvantage of ownership of U.S. real estate through a foreign corporation.

Because the branch profits tax is often not reduced or eliminated by a treaty, the most advantageous structure for ownership of U.S. assets by NRAs is through the foreign corporation-U.S. corporation structure. Here, the NRA owns a foreign corporation, which in turn owns a U.S. LLC taxed as a corporation. 

This structure affords privacy and liability protection, escapes U.S. income tax filing requirements, avoids U.S. estate taxes, allows for gift tax-free lifetime transfers and avoids the branch profits tax. Distributions from the U.S. subsidiary to the foreign parent are subject to the 30% FDAP withholding, but the timing and the amount of such dividend is within the NRA’s control. 

Further questions?  Please email us at help@htj.tax