I am no tax expert. But I think setting up a US corp can avoid having a foreign parent company file a US tax return. However, this US corp doesn’t necessarily eliminate the withholding tax. You would need to qualify as a portfolio loan in order to avoid withholding tax. Regardless, you shall consult with a tax accountant. In addition, having a US corp holding different assets can potentially offset the profits and the losses among them.
What are the pros and cons to setting up a U.S. corporation wholly owned by the foreign investor to avoid FIRPTA tax withholding?
We are a Chinese company. Our U.S portfolio includes mixed-use, senior living and office spaces on the West Coast and in New York. We’ll be opening a U.S. office, our first, in Los Angeles. We’re considering forming a U.S. corporation instead of a foreign subsidiary. What would be the pros and cons of doing that?
FIRPTA withholding is on the sale of U.S. real property renting, purchasing and selling. U.S. real properties are generally considered to be in the business of investment. Opening a U.S. office to manage all the U.S. properties through employees is generally considered to be business operation. For a large portfolio, the ownership of U.S. properties and management operation is generally separated into different business entities. Even though there are many business structuring methods, it would generally come down to direct ownership or indirect ownership for Foreign Shareholders. Direct Ownership means that the foreign entity owns and/or operates the U.S. Real Properties and management. Indirect Ownership means through U.S. Formed Business Entities. The actual taxation and structuring are very complex where one is not always better than the other. In another word, there may not be good or bad, but it would really depend on the ultimate goals, capital amount, financial amount, duration of the investment, and much more. For instance, U.S. entities may not be subject to FIRPTA withholding, but changing the shareholding ownership of the entity would result in a U.S. taxable transaction. On the other hand, a foreign entity may be subject to FIRPTA withholding but can generally change shareholding ownership of the entity without being a U.S. taxable transaction. Our complete taxation/structural planning would start from initial capital amount/owners to the exit plan of the investment.
The following should not be considered legal or tax advice and you should not rely on it or any other response to general questions such as yours by anyone other than someone who has been properly retained to provide such advice and has had the opportunity to understand the entire factual and legal context. The following assumes an existing Chinese entity treated as a corporation for U.S. tax purposes forms a U.S. corporate subsidiary whose assets will consist of more than fifty percent interests in U.S. real estate (whether held directly or indirectly). The response lists pros and cons of forming a US real estate holding corporation. The investors in the Chinese company are referred to as "foreign investors," below. Pros: no obligation of foreign investors to file a tax return; foreign investors should not be subject to U.S. gift or estate tax; potential to exit investment with only a single level of tax on gains if U.S. corporation sells all of its assets and liquidates. Cons: cost of maintaining two corporations; withholding tax applies to operating distributions to shareholders. This tax would not apply to an operating distribution from a U.S. branch to a mainland Chinese corporation (however, the functional equivalent of such tax would apply to an operating distribution of a U.S. branch to a Hong Kong corporation).