Tag Archives: best international tax structure

Best Foreign Tax Planning for the Foreign Investor Owning United States Real Estate

The best foreign tax planning for the foreign investor owning United States real estate involves the use of an irrevocable trust.

The non-resident alien is faced with many different tax strategies and structures for an investment in U.S. real estate.   Asian and Latin American investors have difficulties because of the American estate and gift tax laws.

Some Western European investors (including those from the United Kingdom) can rely upon the estate and gift tax treaties with the United States.

This blog includes a 45 minute video explaining and diagramming the best international tax structure.  The foreign tax strategy needs to consider FIRPTA, gift taxes and estate taxes. 

Okay, you want a quick and easy answer. But, that is not American tax law.  Our tax law consists of more than 1,000,000 pages of hard to read laws.  Nothing is more complex than income tax. Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year's taxes by increasing next year's taxes.

I know you are smart, but do you think you are smarter than  Albert Einstein

As Donald Trump said, he works very hard to pay the least amount in taxes.  The wealthy know that legally avoiding taxes is hard work. They will invest $1 in professional fees to save $10 in taxes.

“The hardest  thing to understand in the World is the income tax.”   Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes.  At best, it reduces this year’s taxes by increasing next year’s taxes.

This blog’s video contains reference to sections of the Internal Revenue Code that your CPA or attorney will appreciate.  So, please consider sharing the video with him (or her).

If you need help with your international tax issues, then email me, Brian Dooley, CPA, MBT, at [email protected]

The Nevada or Delaware Limited Liability Company (LLC) for International Business

The domestic LLC is the worst entity for the small business owner with a foreign operation.  Doing business in countries that have a tax treaty, with the U.S. requires the use of a corporation or a partnership.

The limited liability company is an American tax entity.  Other countries do not have the U.S. tax concept of the LLC.    For example,  you are planning to operate in Europe.  While the Dutch has a fantastic tax treaty with the United States, the American small business owner can fail to get all of the intended tax benefits.   The major tax treaty benefit is avoidance of paying tax in the foreign country and not filing a tax return with the foreign government.

Here is the international tax problem with the LLC

The permanent establish article does not reference a limited liability company.   The small business owner is in a risky position.   If the/she can lose the U.S. foreign tax credit if they fail to pay the foreign country’s tax when the tax is due.   For example, you are based in the Netherlands and you decide not to file a dutch income tax return for the LLC for year 2017,

In 2021, the Dutch audit you.  Since you never filed a return, they can charge you the tax.   In 2023, you make the decision that the legal fees of fighting the tax are too expensive.  So, you pay the tax.   Since the U.S. taxable year was 2017, you are six years late in claiming the foreign tax credit.

You end up paying tax twice.  First, to the IRS in 2017 on the Dutch income.  Then in 2023, you pay the tax a second time to the Dutch government.

The Best Small Business International Tax Structure and Entity

The United States Department of Treasury decided to help the small business owner obtain the maximum tax benefits by allowing you to treat your foreign corporation as a domestic corporation.  This process is known as a domestication.    As a domestic corporation, the American can elect taxation as a subchapter S corporation.

Tax treaties give corporations permament establishment protection.  If you do pay a foreign income tax, the IRS foreign tax credit rules apply to a subchapter S corporation.  The foreign tax credit allows you to offset your IRS taxes with the tax you pay to a foreign government.

Below is a short video on the domesticated foreign corporation.  While the video is about Mexico, the same rules apply to Europe.

IRS Rescues Non-Resident Alien Owning U.S. Real Estate and Residences

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

The British Virgin Island (BVI) corporation is used by many non-residents aliens  (NRA) to own real estate and their personal residences in the U.S.

When the property is sold, an excessive tax is paid.   Instead of being taxed at 15% to 20%, the corporate income tax rate is 35%.  After paying the corporate income tax, a foreign corporation also pays the branch profits tax.  This tax is 30% of the net income.

Removing  the real estate from the corporation caused a “double taxation”.    A corporate (domestic or foreign) distribution of  property is taxed as if the corporation sold the property.  Second, when the shareholder receives the property, he or she is taxed as if they have received a dividend.

Estate Tax for the Non-Resident Alien owning U.S. property with a Foreign Corporation.

About 15 years ago, the IRS won estate tax cases using section 2036.  This law puts assets of a foreign corporation in the alien’s taxable estate if he can enjoy the corporate property or  the corporate income.    Since the estate tax exemption for the non-resident alien is $60,000 or less, a large estate tax is due.

Because of the foreign corporation owns the real estate,  the corporate income taxes described in the first paragraph can apply either in whole or in part.

The IRS has come up with a method to solve the income tax problems.   The method is called a “dual resident corporation.”

A dual resident corporation has two corporate charters.  One charter is issued by a foreign government.  The other charter is issued by a State.  For example, a BVI corporation owns a home.   The corporate files for a charter to be a Delaware corporation.  The corporation now has two corporate charters.

The IRS allows such a corporation (if owned by Americans and residents) to elect the be taxed under Subchapter S.  Thus, any gain on the sale of the property is taxed by the individual shareholders at the 15% or 20%  long-term capital gain rate.

The foreign corporation branch profits tax does not apply because the corporation has two corporate charters (one of which is American).

Once Caveat:  A foreign corporation converted to a Subchapter S corporation has to wait 7 years to sell its appreciated property to avoid the double taxation discussed in the first paragraph.

However, the double taxation applies only to the amount of appreciation of the real estate (also known as “built-in gain”) at the time of converting to an S-corporation.   For example, the BVI corporation purchased a home for $100,000.  A few years later it becomes an S-corporation.  At that time the home is worth $200,000.  A few years later, the home is sold for $400,000.

The gain of $300,000 is a long-term capital gain.  An additional tax is charged on the gain of $100,000 ($200,000 minus the cost of $100,000).

One of the hidden savings of the dual resident corporation is the low cost of a domestic tax return.  A foreign corporation owning U.S. real estate must file a complicated Form 1120F.  The cost of preparing a Form 1120F is three to four times the cost of a domestic corporation tax return.    In additionally, a foreign corporation has special reporting because of a tax law known is the Foreign Investor Real Property Tax Act (FIRPTA).

Best U.S. International Tax Plan & Strategy for the German Citizen & Business (Beste deutsche US-amerikanische Steuerstruktur)

Germany outwitted the IRS in the Tax Treaty negotiations.  The German citizen and German business can save both U.S. and German income taxes with a U.S. business or by living in the United States.

The best international tax strategy of the German company is to form either a Delaware limited liability company (LLC) or a Nevada LLC as a subsidiary company  (please see the diagram below).

German Aktiengesellschaf, best U.S. German tax structure.

German Aktiengesellschaf and the best U.S. international tax structure.

The  German – U.S. tax treaty allows the U.S. corporation to operate in the German and also avoid German taxation.  Now you may think “so what”  because the German company has to pay U.S. income taxes.

Unlike Germany, the U.S. has novel tax deductions and tax credit.  A recent U.S. Senate report discovered that the average U.S. corporate tax rate was 14% (learn more and how on this link).

The tax treaty allows the German citizen domiciled in the U.S.  who does not have permanent immigration status to be treated as a non-U.S. resident.  Yes, this despite that fact that the U.K. citizen is living and is domiciled in the U.S.

Here is what’s happening.  German businesses that are innovators are paying no U.S. income tax with the new generous tax incentives such as:
1.  U.S. source gross income can be reduced by the cost of personal property (up to $500,000 a year)  such as equipment, furniture, fixtures, and leasehold improvements.
2.  A deduction or a tax credit (whichever is best for the business) of all research and development costs.
Additionally, German businesses are paying no U.S. tax on foreign source income earned by the LLC.

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Best Business and Tax Structure for a Start Up? Ask The Three Little Pigs

Starting a new business is exciting and thrilling. Over these past few years, these young entrepreneurs have had a nice ride with the tenth year of the recovery from the Great Recession.

The Best Business and Tax Structure is carefully built with an attorney and a tax CPA.

The Best Business and Tax Structure is carefully built with an attorney and a tax CPA.

They are just as happy as the “three little pigs, “ and I guess this makes me the pigs’ “mother.”

Mom warned her children (the pigs for those of you who are not Americans)  to watch out for and prepare for the Big Bad Wolf.

No, the Wolf is not the IRS. The IRS only wants a share of your profit.

The Wolf is life as a business owner.   The Wolf may be an employee out for an errand that gets into a car accident, or your new lease for bigger space or a disgruntled customer or supervisor that sexually harasses another employee.

Alan called me the other day.  As you know, I offer free brainstorming.  He called before, and he is a pleasure to talk to.  He is expanding to the U.K. and wants to know the best “tax structure.”

He got a name from Amazon of a firm in the U.K. that would incorporate his business, set him up for VAT in the U.K. and Europe and help him with VAT tax planning.  The fee $1,200.

I little reckless, I said.  It is almost as dangerous as using Legal Zoom to start your U.S. business. “Oh, Oh”, Alan said.  He did use legal zoom to form his corporation (I like legal zoom, but you still need an attorney). 

If you don’t know about the three little pigs, the mother warned them about a new big bad wolf on the prowl.  

The pigs were millennials moving out of their parent’s home. One pig built his home out of straw and had plenty of time to play.  The other used twigs.  This took a little longer, but not much, and he too played.

But the last pig worked for days, spend money, purchased bricks, concrete, and built a house out of reinforced bricks.  

 The Big Bad Wolf eventually found the three pigs playing.  Each little pig ran to his home.   The Wolf easily blew down the first two homes.  The two little pigs ran to their brothers brick home.     The Wolf huffed and puffed but could not blow the house down.

A Corporation Maybe the Best Startup and International Business and Tax Structure, but only if it is made out of bricks.

Wolfs, creditors, employees and other unknown adversaries can pierce your corporation or LLC if it is not formed and maintained.  This means that the shareholder or member (of the LLC) is personally responsible for the debts of the corporation or LLC.

You see, Alan did not know corporations primary reason for existing is to protect him from creditors.   The IRS really does not care if you have an LLC, an S-corporation or a C-corporation.

Alan and his partner each put $750 into the corporation.  They transfer money in and out as if it was not a separate legal person.  They had no corporate minutes and no corporate resolution.    Alan was in the same place as if he had no corporation; only now he and his partner must file one more tax return.

So, please, build a strong foundation for your business.  Pay money to an attorney.  Adequately capitalize the corporation, if you make a loan, then have corporate minutes and a loan agreement.  The same goes to the LLC.  While it may not exist for tax law, you want to have it exist for legal protection.

If you act as if your LLC does not exist, that is exactly what a Jury will see and believe.

Plan to meet with your attorney at least once a year and have he or she do your minutes, promissory notes and contracts.    Don’t be penny wise but dollar foolish.