In the past few years, there has been an increasing number of foreign investors
in the U.S. real estate market who have been purchasing everything from
multifamily housing to commercial real estate to industrial facilities.
The largest group of these investors are from China, and they have spent
nearly $6 billion acquiring property from 2014-2015. While most foreign
investors come from Europe, Asia has been growing in influence when it
comes to foreign investment in our nation.
The most common reason that foreign investors tell us they choose the United
States for investment is because of our stability and rapidly recovering
real estate market; the low-interest environment is also another major
factor. Our laws attract foreign investment with legal security that other
markets lack worldwide. The law that governs and moderates foreign investment
here is the Foreign Investment in Real Property Tax Act (FIRPTA).
FIRPTA requires that any foreign person (individual or business) that buys
a U.S. property will have their income taxed at the same rates as U.S.
citizens. FIRPTA accomplishes this by mandating a gross-basis withholding
tax on the sale of real estate in certain cases.
The Two-Tier Corporate Structure
Because there is an additional tax on foreign entities buying real estate
here, many investors choose to employ a two-part structure to buying land
(or three parts, if there’s a group of investors). Foreign investors
will form two corporations: one in the U.S., and one in their own nation.
Their corporation will buy land through the U.S. company, which allows
it to file taxes in the U.S. directly. It also prevents the 10% withholding
that foreign companies are subjected to.
For large portfolios, we have recommended that foreign investors setup
a holding company in Barbados with a subsidiary in Norway that purchases
the U.S. real estate. This arrangement offers a few different income tax
and interest benefits for any investor. The benefits are based on the
U.S.-Norway treaty, which generally exempts investors in U.S. interests
from the FIRPTA withholding tax, and the Norway-Barbados treaty, which
exempts Barbados businesses from Norwegian income tax. The end result
is an investment structure that allows foreign buyers from anywhere to
receive income and gains with minimal taxation. Under current international
conditions, this even allows investors to avoid federal income tax on
the gains made from U.S. real estate sales.
Now, please take note that these are incredibly complex international tax
laws that even the most gifted international investors will have difficulty
fully comprehending without professional guidance. If you are looking
to establish any kind of international tax structure to benefit from international
treaties and market conditions, it is imperative that you call the international
tax lawyers at Castro & Co. today.