Tag Archives: best international tax structure

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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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.

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.

U.S. Finally Re-acts to Europe Classifying America as the Third Best Tax Haven

Saving taxes, tax planning, nominee corporation

America was voted the third best tax haven in the World.

International tax planners have used the U.S.A. as one of the premier tax havens starting in the 1960’s.

Amazingly the White House and Congress never knew the America is one of the best places to launder money and evade taxes.    But, when  the European tax authorities reading the Panama Papers, they  protested to the U.S.

President Obama was on TV the other week saying that he has told the Treasury Department to make some changes.

So, the Treasury Department (which owns the IRS) issued tax regulations requiring foreign corporations hiding behind a U.S. LLC, to file a special report.

I have the Treasury Department explanation of the regulations below.. .for those of you that like to see the detail.

Panama Papers – here is what happened. When folks want to hide money in the U.S., they formed a limited liability company.   Wyoming allows no records of manager or owner.  It is an inexpensive state with low fees.    The LLC then would open either a U.S. bank account or a foreign bank account.

The LLC owned by one person files no U.S. tax return.  This rule was written by the Treasury Department when Bill Clinton was President.  As a result, the American LLC has been used as tax haven company for twenty years.

Under the new rules, a single owner LLC will have to file a tax return if it is owned by a foreign business.  I have the Treasury Department of the new rules below in blue print.

Please note that nothing in these new rules maintains the U.S. position as a tax haven.  The new rules merely require another IRS information return.

Sections 301.7701-1 through 301.7701-3 (“the entity classification regulations”) classify a business entity with two or more members as either a corporation or a partnership, and a business entity with a single owner as either a corporation or an entity disregarded as separate from its owner (“disregarded entity”).

Certain domestic business entities, such as limited liability companies (“LLCs”), are classified by default as partnerships (if they have more than one member- see the author comment below) or as disregarded entities (if they have only one owner) but are eligible to elect for federal tax purposes to be classified as corporations. Under special rules, an entity that is otherwise disregarded is not disregarded for certain excise and employment tax purposes. Section 301.7701-2(c)(2)(iv) and (v).

Some disregarded entities are not obligated to file a return or obtain an employer identification number (“EIN”). Author Note:  This is still the rule when a domestic person owns the LLC. Sometimes you want an EIN or return.  In this case, you merely add an owner.  The owner can be related and own just 1%.  This is discussed above.

In the absence of a return filing obligation (and associated record maintenance requirements) or the identification of a responsible party as required in applying for an EIN, it is difficult for the United States to carry out the obligations it has undertaken in its tax treaties, tax information exchange agreements and similar international agreements to provide other jurisdictions with relevant information on U.S. entities with owners that are tax resident in the partner jurisdiction or otherwise have a tax nexus with respect to the partner jurisdiction.

Section 6001 of the Internal Revenue Code (“Code”) provides that every person liable for any tax imposed by the Code, or for the collection thereof, shall keep such records, render such statements, make such returns and comply with such rules and regulations as the Secretary may from time to time prescribe, and that whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax.

Thus, the Treasury Department and the IRS have broad authority under section 6001 of the Code to promulgate regulations to require the keeping of records and the reporting of information by persons who may be liable for any tax. The Code also requires many categories of persons to file returns, even if no tax is owed in a particular year. For example, all corporations organized in the United States must file annual income tax returns, which may include schedules requiring the identification of owners exceeding specified ownership thresholds. Moreover, foreign corporations engaged in a trade or business in the United States (“U.S. trade or business”) must file annual income tax returns. Section 6012(a)(2); section 1.6012-2.

Domestic partnerships must file information returns with schedules identifying each partner. Section 6031; Section 1.6031(a)-1. Also, domestic corporations that are at least 25% foreign-owned are subject to specific information reporting and record maintenance requirements. Section 6038A.

All entities, including disregarded entities, must have an EIN to file a required return. Section 6109(a)(1); see section 301.6109-1(a)(1)(ii)(C) and (b). An entity must also have an EIN to elect to change its classification. An entity that accepts its default classification and is not required to file a return need not obtain an EIN.

Because a domestic single-member LLC is classified as a disregarded entity by default rather than by election and has no separate federal tax return filing requirements, there is typically no federal tax requirement for it to obtain an EIN. Other applicable federal or state laws may require an entity to obtain an EIN. For example, under federal law, financial institutions in the United States require an entity to have an EIN to open an account. See 31 CFR 1020.220(a)(1)(i)(A)(4).

When an entity, such as an LLC, is classified as a corporation or a partnership for tax purposes, general ownership and accounting information are available to the IRS through the return filing and EIN application requirements. However, a disregarded entity is not subject to a separate income or information return filing requirement. Its owner is treated as owning directly the entity’s assets and liabilities, and the information available on the disregarded entity depends on the owner’s return filings if any are required.

For a disregarded entity that is formed in the United States and wholly owned by a foreign corporation, foreign partnership, or nonresident alien individual, generally no U.S. income or information return must be filed if neither the disregarded entity nor its owner received any U.S. source income or was engaged in a U.S. trade or business during the taxable year.

Moreover, if a disregarded entity only receives certain types of U.S. source income, such as portfolio interest or U.S. source income that is fully withheld upon at source, its owner may not have a U.S. return filing requirement. Even in cases when the disregarded entity has an EIN, as well as in cases when income earned through a disregarded entity must be reported on its owner’s return (for example, income from a U.S. trade or business), it may be difficult to associate the income with the disregarded entity based solely on the owner’s return.

Although ownership and accounting information is generally available under the reporting requirements established by the U.S. federal tax system with respect to many types of domestic entities, the absence of specific return filing and associated recordkeeping requirements for foreign-owned, single-member domestic entities hinders law enforcement efforts and compliance with international standards of transparency and cooperation in the area of tax information exchange.

Author Note:  Here is where the Department of Treasury lets you know that they have screwed up for half a century.   Mexico has asked the America be placed on the blacklist of tax havens and bank secrecy. 

These difficulties have been noted in reviews of the U.S. legal system by international organizations, including the Financial Action Task Force and the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is affiliated with the Organisation for Economic Co-operation and Development. The lack of ready access to information on ownership of, and transactions involving, these entities also make it difficult for the IRS to ascertain whether the entity or its owner is liable for any federal tax.

Explanation of Provisions- Here are the new rules.

These proposed regulations would amend section 301.7701-2(c) to treat a domestic disregarded entity that is wholly owned by one foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting and record maintenance requirements (including the associated procedural compliance requirements) under section 6038A.

As with the existing special rules on employment and excise taxes, these proposed regulations would not alter the framework of the existing entity classification regulations, including the treatment of certain entities as disregarded.

These regulations are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws. Author note:  The Treasury Department is reacting to threats from European nations regarding tax treaties. 

Because the proposed regulations would treat the affected domestic entities as foreign-owned domestic corporations for the specific purposes of Section 6038A under the proposed regulations, and because such entities are foreign-owned, they would be reporting corporations within the meaning of section 6038A.

Consequently, they would be required to file the Form 5472 information return with respect to reportable transactions between the entity and its foreign owner or other foreign related parties (transactions that would have been regarded under general U.S. tax principles if the entity had been, in fact, a corporation for U.S. tax purposes) and would also be required to maintain records sufficient to establish the accuracy of the information return and the correct U.S. tax treatment of such transactions

. Also, because these entities would have a filing obligation, they would be required to obtain an EIN by filing a Form SS-4 that includes responsible party information. (Author note: Yes, our Government believes that people evading taxes are going to give the IRS a real name of a “responsible party.”  it is like trusting the Iranians not to build a bomb).

To ensure that such entities are required to report all transactions with foreign related parties, these regulations would specify as an additional reportable category of transaction for these purposes any transaction within the meaning of section 1.482-1(i)(7) (with such entities being treated as separate taxpayers for the purpose of identifying transactions and being subject to requirements under section 6038A) to the extent not already covered by another reportable category.

(Author note: for the legitimate foreign business, they will spend more money on a U.S. tax accountant. )

The term “transaction” is defined in section 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer. For example, under these proposed regulations, contributions and distributions would be considered reportable transactions on such entities.

Accordingly, a transaction between such an entity and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the section 6038A reporting and record maintenance requirements, even though, because it involves a disregarded entity, it generally would not be considered a transaction for other purposes, such as making an adjustment under section 482. The penalty provisions associated with failure to file the Form 5472 and failure to maintain records would apply to these entities as well.

The proposed regulations would also provide that the exceptions to the record maintenance requirements in Section 1.6038A-1(h) and (i) for small corporations and de minimis transactions will not apply to these entities.

Consistent with the changes contemplated by these proposed regulations, the IRS is also considering modifications to corporate, partnership, and other tax or information returns (or their instructions) to require the filer of these returns to identify all the foreign and domestic disregarded entities it owns.

The proposed regulations would impose a filing obligation on a foreign-owned disregarded entity for reportable transactions it engages in even if its foreign owner already has a duty to report the income resulting from those transactions — for example, transactions resulting in income effectively connected with the conduct of a U.S. trade or business. The Treasury Department and the IRS request comments on possible alternative methods for reporting the disregarded entity’s transactions in such cases.