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.