Tag Archives: dual resident corporation

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).

United States International Taxation for Small Business

United States international taxation  for small business has changed.  The tax laws are better than ever. Understanding the new 2018 laws on United States international taxation is essential to avoid paying more than your legal share of taxes.

These new laws allow a permanent avoidance of tax on many types of offshore.    

United States international taxation for a small business is not the same as it is for a publically traded corporation.

The average dividend rate of publically traded companies is only 2.5%.  While small businesses distribute a large portion of the profits to their owners   Publicly traded companies’ profits are taxed twice. While small business only pays tax once on their profits.  What you find on the internet is tax planning for publically traded companies.  This tax planning does not work for small business. 

Thus, small business uses a United States international taxation strategy that:
1. avoids double taxation,
2. allows for a large foreign tax credit and
3. allows for long-term capital gain on the sale of the foreign business.

United States International Taxation that Avoids Double Taxation

Surprisingly, the U.S.Treasury designed a special type of corporation for small business and their United States international taxation issues.

It works like this. Jim, an American, forms a French corporation for a new French business.    The French income taxes paid by the corporation are not available to Jim as a foreign tax credit.  This is because the French corporation is not a passed through. 

The only type of passthrough corporation are those taxed under Subchapter S.  This is where the U.S. Treasury stepped in to help small business by allowing any foreign corporation to obtain a second corporate charter.

Ideally you would do this in the first year. Don’t do this yourself.  You should hire an attorney and a tax CPA.

United States international taxation is less complicated as a Subchapter S corporation.  You also can pay less in taxes because you are allowed a larger foreign tax credit.  The foreign tax credit is a dollar for dollar reduction of your Federal income tax. 

A dual resident corporation has a second corporate charter in one of the fifty states.    Once the corporation has two charters, Jim can elect subchapter S for the corporation.

A second advantage is the complex U.S. international tax forms are not filed.  Instead, a simple form 1120S is filed.  

Now, assume the French/U.S. corporation earns $1,000,000.   The French income tax is $330,000.  Jim reports the $1,000,000 on his income tax return.  His U.S. tax is $350,000. However, he reduces the amount he owes by the French tax of $330,000.

After this reduction, Jim’s total U.S. income tax is $20,000.

A few years later, Jim sells the business.  He sells the shares of the French/U.S. corporation.  His gain is long-term capital gain.

What is international tax law for the small business?

I have included my video on the United States international taxation regarding the small business dual resident corporation.

You can learn more about United States international taxation on this link.

If you need help with your United States international taxation issues, then please contact me, Brian Dooley, CPA, MBT at [email protected]

Entrepreneur’s Best Offshore Structure for Cross Border Business

American entrepreneurs need an innovative and flexible corporate structure to maximize overseas profits and to maximize the IRS’s refund of foreign income taxes.  This is called the “foreign tax credit.”

International tax planning for the privately owned business is unique. It is different than the foreign tax planning used by publicly traded companies.  Offshore tax planning for firms like Apple does not apply to the  American owned small business doing business in Europe, Canada, and Latin America.

The “problem” for small business is double taxation.  When income is earned in a foreign country, income tax is paid by the foreign country.  Next, taxes is paid by the corporation to the U.S.    This blog explains how to avoid this double taxation. 

The solution is the IRS approved “dual resident corporation.”  The dual resident corporation eliminates double taxation. It allows for a simple tax return.  You will not file the complex Form 5471.  Lastly, it allows tax savings for foreign operating losses.    Similar to the iPhone, it is easy to operate but complex to build.  You will need to:
1.  Hire an attorney in the U.S.
2.  Apply for a tax ruling with the IRS National Office.  The ruling sets out the type of elections that the U.S. shareholder makes on his/her tax return. 

If you want to brainstorm your needs, then please give me a call for a complimentary consultation at 949-939-3414.

Spend a few minutes watching my video below and become an expert.   Learn how to maximize the foreign tax credit and simplify reporting.   You can learn more tried and true tax plans with my book, International Taxation in America for the Entrepreneur, available at Amazon.  `

We recommend that you  work with the IRS and get their okay of your tax plan with a private letter ruling (get more information on this link).

What is the Best Method to Save Taxes in Costa Rica?

While Cost Rica is known for its serene, beautiful jungle and beaches, Americans often get trapped with double taxation and IRS fines.

Here’s what is happening:

The American shareholder of a Costa Rican company must file the IRS Form 5471. Often, the American sees the company merely as a formality to acquiring the home or business. Back in the U.S., the tax law sees the company as the actual owner.   

Some new clients tell me that they have a Costa Rican limited liability company. Well, that is true for Costa Rican law; but no so here in the U.S.   The tax law provides that a foreign LLC is a  foreign corporation.   The Form 5471 must be filed for these LLC’s.  

I have referred Michael and his wife, Anna.  Last year,  they sold their home in Costa Rica.   The gain was about  $1,000,000 and the Costa Rican tax about $200,000.  They just received their tax return and owed $440,000 to the IRS.

Anna was upset because the real estate broker told her that the home was a capital asset and that she would owe no U.S. income taxes because she would get credit for the taxes paid to Costa Rica.   Well, the long-term capital gain tax is 20% or $200,000.   So, if they got the foreign tax credit, the real estate broker was correct.

So, who was right?  Yep, it was the CPA.  A corporation is like a tax cage.  It traps inside tax benefits.   The Costa Rica income tax does not pass through to the shareholder return.

Gain from the liquidation of the Costa Rica company is ordinary income and not capital gain.  

Costa Rica Tax Planning for the American – two methods.

The first method works if you move quickly and smartly.  Here is what to do.  The Costa Rica company needs to be in the limited liability format, and you must make a special IRS tax election within the first year of ownership.   The election is known as “check the box.”  You make it on Form 8832 (on this link).

Once completed, you will have to file one of two complex information returns with the IRS each year.  If you are late, the penalties start at $10,000.  By the way, if you are late in filing Form 5471, the IRS does have a tax amnesty.

The second method is when you did not move quickly and smartly.   This approach is known as the dual resident corporation that has elected to be taxed as Subchapter S (a pass through corporation).  Once this is done, you will file a simple Form 1120S.

Here is a link to information the tax savings of the dual resident corporation.

If you would like to brainstorm this or any other international tax question, then call me, Brian Dooley, CPA for a free one-hour brainstorming consultation at 949-939-3414 or get my book at Amazon (the Kindle is only $9.50) International Taxation in America for the Entrepreneur on this link.

tax planning, international tax strategies, foreign tax strategies, foreign tax plan, international tax plan, offshore tax,

Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods. Get the Kindle version for $9.50

U.K. Inland Revenue Explains why a U.S. LLC is a Tax Haven

United Kingdom claims U.S. LLC is a tax haven company.

United Kingdom claims U.S. LLC is a tax haven company.

The United Kingdom’s HMRC (their IRS)  allows an American LLC to be a tax haven  company with possible tax treaty benefits.  

Below, in blue, is the Inland Revenue’s explanation of the U.S. LLC. In addition, at this link is a summary of a recent United Kingdom  appeals court case explaining how to save taxes with a tax haven company in the U.S.

 To read the UK’s explanation of how to save taxes with a dual resident corporation (which the best offshore tax plan for the American  small business),  please see this link.   Want to take your tax planning to the next level, then contact me, Brian Dooley, CPA, MBT  at [email protected]

This next paragraph is what the English have to say about our tax laws.

Generally speaking, the United States federal income tax is charged on the profits of United States limited liability companies (LLCs) on the basis that they are fiscally transparent, that is, a tax is imposed on the members of the LLC and not on the LLC itself.

However, for the purposes of United Kingdom tax we have taken the view in relation to those LLCs that we have so far considered that they should be regarded as taxable entities and not as fiscally transparent.

Accordingly, we tax a United Kingdom member of an LLC by reference to distributions of profits made by the LLC and not by reference to the income of the LLC as it arises.

If tax is paid in the United States on the profits of the LLC, we regard that tax as underlying tax (INTM164010)) and credit relief is available for it if the member is a United Kingdom company which controls, directly or indirectly, at least 10 percent of the voting power in the LLC.

As indicated in DT19851A, there is no difference in substance between Article 23(2)(b) of the old Agreement and Article 24(4)(b) in the new Agreement (tax treaty). Relief for underlying tax will continue only to be available to a UK company which has at least a 10% interest in the US LLC.

If an LLC derives income from the United Kingdom, the question arises of whether it is entitled to claim relief from United Kingdom tax under the agreement.

A key issue is whether, under the conditions laid down in the agreement, which in this respect does not follow the approach of the OECD Model (DT153), the LLC can be said to be a resident of the United States.

In our view an LLC cannot be said to be a resident of the United States within the terms of the agreement: it is not a United States corporation, nor is it a person resident in the United States for the purposes of United States tax (because the United States taxes the profits of an LLC not on the LLC itself but on its members).

However, we decided as a matter of practice that,  to relieve double taxation under the agreement where a tax would otherwise be imposed on the same income both in the United Kingdom and in the United States, we will accept claims to relief from United Kingdom tax under the agreement from an LLC.

However, only to the extent that the income in question is subject to United States tax in the hands of those members of the LLC who are residents of the United States. Subject to the same condition, we will pay a full tax credit to a United States LLC, less the 15 percent deduction provided for by Article 10(2)(a)(ii) of the agreement.

Under the new Agreement, this practice is formalised by Article 1(8). The provision provides that income derived through a person that is a fiscally transparent entity under the laws of either the US or the UK will be treated as the income of a resident of a contracting state if the taxation laws of either country treat it as such. In those circumstances, treaty benefits will be available to the resident of either the US or the UK, not the fiscally transparent entity.