Structuring options for an investor’s US-based holdings

By Patrick McCormick, Offit Kurman, Attorneys at Law

Based on a number of factors, the United States increasingly serves as a magnet for foreign investment. Global perception of the US as a financial market is considerable – existing infrastructures and relative stability of financial institutions all make the US an attractive venue for foreign funds. An additional appeal of the United States is often favourable tax rules for foreign investors. When investments are structured properly, effective global tax rates – on income generated by the investment during ownership, on gains generated from the investment’s disposition, and on gratuitous transfers either during the lifetime or at the passing of the original owner – can be markedly lower than investments made in other well-established jurisdictions.

Income subject to United States income tax by non-residents under statutory rules is income “effectively connected” to a US trade or business and to fixed or determinable annual or periodic gains. Default US income tax rules can be substantially altered through income tax treaties.

The United States also imposes an estate tax on non-citizen, nondomiciled individuals based on their property (whether tangible or intangible) located within the US; gift tax is also imposed on US-located tangible property. Both estate and gift tax can often be avoided through proper planning – specifically, the use of “blocker” entities. Estate and gift tax treaties exist but are less prevalent than income tax counterparts.

Proper ownership of US investments by foreign taxpayers is critical, as default ownership structures (i.e., individual ownership) can create drastic US income and transfer tax repercussions. Optimal ownership structures are fact-specific and incorporate both United States and foreign tax ramifications to create the best global tax result while also facilitating the nontax goals of the investor.

Published: International Taxation Newsletter, No. 16, Spring 2022 l Photo: dragan1956 - stock.adobe.com