Despite this country’s share of recent ups and downs, the United States is still perceived as having one of the most stable economic, banking and political systems in the world.
This perception has made our nation an attractive place for non-U.S. businesses and individuals to invest. As many countries around the world face increasing destabilization, we are seeing an increase in foreign investment as well as growing numbers of immigrants.
When dealing with these non-U.S. parties investing in or acquiring American assets, it’s important for us to understand the tax concerns that can arise for foreign buyers and domestic owners alike.
TAX CONCERNS FOR FOREIGN COMPANIES BUYING U.S. BUSINESSES
In certain “inbound” cross-border transactions, the foreign purchaser chooses to acquire the seller’s U.S.-based assets or stock through either a U.S. or foreign entity. Not surprisingly, this raises concerns you may not encounter in ordinary domestic transactions.
With any kind of cross-border transaction, foreign buyers should work with a team that has handled such transactions in the past. Both income and estate tax matters figure in to structuring any cross-border transaction.
For example, foreign buyers must be aware of the definition of “U.S. income tax residence” and its implications, along with how their tax residence may differ from their immigration status.
They should also know, in regard to U.S. estate tax regulations, that noncitizens have a $60,000 estate tax exemption (versus U.S. citizens’ $5.45 million exemption). A foreign buyer, therefore, needs a team in place that can review the relevant tax treaties between the United States and the buyer’s home country, a crucial step when planning an acquisition.
With traditional trade barriers breaking down, high net worth individuals the world over are looking to access U.S. investments.
Other items for a foreign buyer to understand include: the most efficient entity choice(s) for both the United States and ultimate owner’s home country; permanent establishment issues; withholding requirements on effectively connected income (ECI); fixed determinable annual period income (FDAPI); and state income taxes, to name a few.
What’s more, foreign countries have different accounting rules and standards, adding another layer of complexity for the buyer’s accounting team.
Beyond the tax implications, there are of course cultural differences that can add yet another level of complexity to the transaction.
TAX CONCERNS FOR INDIVIDUAL INVESTORS
The tax implications for a foreigner investing individually in an American company are different from those of a foreign business—but no less complex.
First to be determined: Is the foreigner classified as a “resident alien” or “nonresident alien”?
This is important because “resident aliens,” a.k.a. green-card holders, satisfy the sub- stantial presence (183 days) rule and may have a closer connection to the United States under a treaty tie-breaker.
In certain circumstances they can elect to be treated as U.S. tax residents, subject to federal income tax on their worldwide income and required to report any foreign financial assets that exceed certain thresholds.
A nonresident alien is subject to tax only on any U.S.-sourced income and is not required to disclose any non-U.S. financial assets, unless his/her status as a nonresident is determined as a result of a treaty position. Furthermore, nonresidents are subject to U.S. federal income tax withholding on their U.S. effectively connected income at the highest annual graduated rate, and at a flat rate of 30 percent on their gross fixed determinable annual periodic income, unless that too is reduced by a tax treaty.
THE WORLD’S WEALTH
According to the World Wealth Report 2015 by Capgemini and RBC Wealth Management, “Strong economic and equity market performance helped create 920,000 new millionaires globally in 2014.”
So, now, with traditional trade barriers breaking down, improved infrastructure and unprecedented market integration, high net worth individuals the world over are looking to access U.S. investments.
This article was co-authored by David Silver, CPA, MBAF.
This article was originally published in the August/September 2016 issue of Worth.