U.S. Inbound Tax Strategy: Entity Choice, Treaties, and More

In this episode, International Tax Counsel William Roberts breaks down the fundamentals of "Inbound 101" for foreign companies looking to invest or expand into the United States. Together, they untangle the complexities of U.S. tax structures, explaining how entity choice, permanent establishment rules, and treaty benefits impact daily operations and profit repatriation. From navigating passive withholding to avoiding real estate pitfalls under FIRPTA, this conversation provides a straightforward roadmap for protecting your global bottom line. 

About our Guest
William Roberts is the International Tax Counsel with Mauldin & Jenkins, LLC. He has over 20 years of tax experience, primarily focused on International taxation. He specializes in directing and implementing diverse global outbound and inbound tax strategies, compliance and reporting initiatives, for large and middle-market companies.

About our Host 
Brent Ullrich is a Partner with Mauldin & Jenkins, LLC, with over 15 years of experience in many areas of taxation and industries, most notably in healthcare, real estate, private equity, technology and professional services. He also serves as the Firm’s Tax Strategy and Research Leader, which offers technical guidance and identifies planning opportunities for the firm to support clients on complex issues across a range of technical tax areas.

Learn more about our international tax services here: https://www.mjcpa.com/services/tax/international-taxation/

Transcript

Speaker 0:03

Welcome to BeansTalk, M&J's podcast, where we are sharing and showcasing our areas of expertise through conversation with practice leaders on their knowledge and experience.

Speaker 1 0:14

Welcome back to the BeansTalk Podcast. Today I'm very excited to welcome back William Roberts, who leads our international tax practice. And today we're going to be talking about what I would probably call inbound 101, right? So, you know, foreign companies coming in, investing in the United States, whether they're expanding or just investing, you know, in whatever, we'll kind of go through the core concepts there, kind of the life cycle of that investment or that operation. And, you know, whether it's choosing your entity, whether it's you know, figuring out if you've got taxable presence, operating it efficiently, and you know, making sure you can kind of get your money home safely and efficiently, right? So we'll we'll we'll kind of talk through all that. And uh again, excited to welcome William here. Thanks for thanks for coming back.

Speaker 2 0:57

Well, Brent thanks for having me back. Appreciate it.

Speaker 1 0:59

Yeah. So uh I I think you know the biggest starting point, I think, right, is like, hey, if I'm a foreign company or and I'm I'm looking to invest in one way or another in the U.S., right, I I the first question is probably, well, how do I start? Where do how do I structure myself? Like what's the what's the starting point?

Speaker 2 1:17

Right. Well, yeah, just like any other starting point, even going outbound, you know, you have to ask yourself, what kind of entity do I want to form to go into the U.S.? I mean, you can do several things, right? You can start, you can you can form a US company uh and send your operations that way. You can not establish a US company and just come into the U.S. under like a branch. You can set up a home office or you can set up a sales kind of center. You can even, you know, just have traveling salesmen. So you don't have some sort of corporate entity, but you're here in the US, you know, with touch points and boots on the ground. You can also form a domestic partnership, or you can be uh foreign partnership doing the same thing as a corporation that doesn't have a US corporate subsidiary. So you've got a corporation, a branch, you've got a foreign partnership or a domestic partnership. Um and then so I think those those are the three. Just you know, you're playing, you know, generic kind of vehicles, and there's LLCs and all that, but basically they all can get taxed one way or the other, you know, through the check the box rules that you know people are familiar with, you can treat those as whatever you want to for the most part.

Speaker 1 2:22

Sure, sure. So so kind of walk me through what the differences would be, right, as far as operationally if I'm a flow through or a branch or you know, if I'm in the corporate setting, like how does that impact me like from the income I earn in the US and how I get the money out, right? Or you know, yeah.

Speaker 2 2:40

I mean, and from just a pure you know choice of entity aspect, you know, some people may think, well, if I set up a U.S. corporation, then I'm gonna get taxed on whatever that U.S. corporation does as a foreign investor. And that's not the case, right? It's it's your it's your standard double taxation. The U.S. corporation would be a standalone entity. It pays its own and you know, it has its own operations, pays its own income tax, files its own returns. Yep. The only way that the foreign investor is going to be taxed on its U.S. income, so to speak, would be through a distribution from the U.S. corporation. So this the standard, you know, two-level two.

Speaker 1 3:11

What people kind of call a blocker.

Speaker 2 3:13

Yeah. Right, right. So it's two level, two levels of tax standard, you know, in most transactions. There's also, like I said, you can come in as a branch, and that means you don't have an entity or a partnership. You basically just have operations here in the U.S. In that situation, you are taxed, you know, depending on whether you have a US traded business, which we'll talk about shortly, and whether then that is blocked by the treaty with the U.S., depending on whether you have that, you are taxed immediately on that income, just like any sort of flow through. Same thing with a partnership. If you set up a domestic partnership and you are a foreign partner, you will be taxed immediately on your allocable share of the profits of the partnership. Um if you're a foreign partnership coming into the US, you're almost in the same situation as if you were a foreign corporation uh that wasn't in the U.S. So you you there's it's kind of it's kind of all is flow through except for uh the U.S. corporation standards.

Speaker 1 4:06

So I mean you kind of have the option of, hey, I can I can kind of allow the income to flow into abroad, or I can kind of trap it, so to speak, right, in the corporate setting and you know, maybe control the flow of funds back. And and both and both are certainly applicable. I mean, there are certain situations where you'd have you'd prefer one over the other, right? I mean, it can you kind of talk through, hey, what's the circumstance where uh branch is better versus a blocker or you know or an LLC, you know, anything.

Speaker 2 4:33

Right. You know, and it's uh it's it's very subtle and and and in a lot of ways it's almost the same. And what the reason I say that is we talked about how the foreign, you know, the U.S. corporation, if you have a US corporate standalone, you know, subsidiary, foreign corporation is not taxed on that until a distribution. If you set up if a foreign corporation comes in the US without setting up a corporation, a U.S. corporation, then you are a branch, again, we've discussed that. Yep. But you are then subject to two levels of tax as well, because the U.S. doesn't want to give foreign corporations coming into the US a distinct advantage over U.S. corporations owned by foreign corporations. So what they what if you're a foreign branch coming to the US, you're subject initially to the 21% income tax rate, as you as a U.S. corporation is. But just like I said, when you have those distributions, if you have a US corporation standalone, you don't get taxed until you have that distribution. Under the form, under the branch rules, you have you could be subject to the branch profits tax. And what that is, is that's a 30% tax on what they call a dividend equivalent amount. So what that means is to the extent you are taking your profits after the 21% income tax and you're investing your profits back into the business. In other words, you're increasing your US assets, you're buying more, you know, more tangible manufacturing goods or buying you know additional warehouses or whatever, to the extent you're increasing your US assets, then you don't are not subject to the branch profits tax. To the extent you're decreasing your assets and it looks like you're actually repaid creating uh you know earnings back to the foreign country, that is a reduction and that would be subject to the 30% tax.

Speaker 1 6:13

So going back to what you said is like they're kind of the same.

Speaker 2 6:16

Yeah, they're kind of the same, right? It's you you think it's like, oh, we're gonna set up a branch, you know, we're not gonna set up a corporation, we're gonna set a branch. Well, to the extent you look like you're repatriating income through the reduction of your you know your asset base. And you know, because if you had a million dollars of cash at the beginning of the year, at the end of the year, you have 200, you know, $200,000. Well, and let's say that's your only assets, which obviously is very simple, but you know, that would look like the a repatriation of that $800,000, and that would be subtitled at 30%. Right. Treaties can reduce that to you know whatever rate the treaty says. So there's that. Uh US partnership. Let's say you're a foreign person, and we're not mean, let's just kind of skip foreign partnerships because that's kind of very similar. But let's say you're a US, you you have a you're a foreign person investing in a US partnership, and you think, well, I don't have a trader business in the US, it's my partnership that does. Well, that's wrong. Under the code and regs, a foreign uh the US trader business or the U.S. activities of a of a domestic partnership are attributed to the foreign partner. And whether you get cash or not, you are taxed on your allocable share of the you know the yearly profits, basically at either the 21% rate if you're a corporate taxpayer, or the 37% rate if the highest individual tax rate.

Speaker 1 7:27

So yeah. Let's let's let's dive into that a little bit. Like um, we've mentioned trader business a couple times, right? So what does that mean in this context? I mean, and and why is that important? You know, like like things to be thinking about where, hey, if I'm just investing in the US or I have a trader business in the US, like why does that matter?

Speaker 2 7:44

Right. Well, I mean, it's really kind of you know the keystone, the cornerstone of the US tax principles in an inbound situation. And the reason I say that is because there's two options. If you don't have a US trader business, you're more of a passive foreign investor, uh, and you receive dividends, interest, uh royalties from your US investments, then that's and you're not really engaged in a US trader business, then those are subject to what we call FDAP fixed determinable annual periodic withholding, 30% standard rate on the gross amount of such payment from the US sources to the foreign person. Um, and on the gross, not in the net. So if it's if your US tax liability would be lower than the 30%, then you'd have to file a tax return and get the money back. But you're still out 30% until you until or unless you do that. You may be like, well, I don't want to open up that can of worms, let's just let it lie, right? So, but that could be reduced by a treaty as well. So you have that rate. So if you're a passive investor, basically gross basis withholding. But if you have a US trader business, then you're subject to net basis taxation. So you have to file a US tax return and pay taxes on that. And it's uh it's then you're subject now to the whole umbrella of US taxation under the IRS.

Speaker 1 9:01

So and and trader business isn't really defined, right? So it's like, well, I mean, what are the characteristics like if if I'm trying to avoid that or get into that realm right of being a trader business, like what do I need to consider if I'm, you know, if I if I have some characteristics of passive investment, but also a you know an operating entity, like again, why like why is it important and and like how can I differentiate if what I have in the U.S. is a trader business? Right.

Speaker 2 9:26

Well, and and and unfortunately, U.S. trader business is not really defined in the U.S. code. Uh, it's really been developed through case law over the years. Um, for example, and when I say over the years, the the seminal case in U.S. trader business is a 1941 case. Uh so as our boys are fighting the war, the tax court is busy defining what it constitutes the U.S. trader business. And this case is called Piedras Negras. It was a it involved a Mexican radio station sitting just right across the border and you know, advertising, you know, you know, put it blasting its music directly into the U.S. and it would receive most of its money from U.S. advertisers. And so they, you know, IRS says, hey, well, that's a U.S. trader business. Well, the court said, no, it's not, because all the capital of the radio station and all the services that are being provided uh are in Mexico, so therefore it's not a US trader business. Now, this is actually not only just the US traded business, but it kind of set up under the US sourcing rules, like you know, something foreign source or US source. It it started, it was basically a reaffirmation or maybe an establishment of the fact that services are sourced to wherever they're performed, not necessarily uh wherever the recipient. Yeah, where you're not receiver in the market be or where you get paid, where your bank account is, but where the services perform. So that set up the lack of physical presence, right? Then a few, you know, several years later, in the in the in this century, uh there's been cases where foreign hedge funds have you know had a US broker, US agent that you know, you think, oh, they're you're just gonna trade on our behalf. And that's you know, if if you when we talk about trader business, if you're just trading securities on your own behalf, that's not really a trader business. So, but so that's why you know the foreign hedge funds were like, well, this person's just trading on our behalf. We don't have U.S. trader business. But this agent uh went, you know, their US agent went a little bit further than that. He was negotiating uh deals, structuring transactions, kind of like you know, some similar to like an iBanker type thing. Um, and so the court said, Well, look, we are going to attribute the actions of your dependent agent to you. So, you know, Mr. Foreign Hedge Fund, Mrs. Foreign Hedge Fund, you are now, you know, you are subject to U.S. stats because you have a US trader business. So that kind of you know started swinging the other way, and it's kind of standing for the proposition that if you have uh somebody working on your behalf, if you're a foreign person, you have somebody in the US working on your behalf, concluding and negotiating and concluding contracts, structuring deals, then that's pretty much going to make you, you know, have a trader business. And that also, and we'll talk about how permanent establishment, that is also a concept, dependent agency uh gets into establishing a permanent establishment. But the so the reason I offer those two kind of extreme examples is it's well, I guess the key takeaway is it's what just like any sort of like a state and local taxation similar, you know, similar nexus analysis, it's how many contact points do you have in the US? Continue. It has to be considerable, continuous and regular. So if you come in and you know you set up a small deal one time, maybe twice a year, that's that's that would be continuous. Yeah, it's not continuous, and depending on whether it's consider you know considerable and regular, you know, so you have to have touch points, boots in the ground. So every time, if as your former person, if you're worried about establishing a trader business, think about what are you doing in the in the US. And every time you keep on adding another layer of activity in the US, you are subjecting yourself to potential um treatment of trader business.

Speaker 1 12:47

Yeah, that makes sense. And then that ties into hey, if I've got a trader business here, well, now I all of a sudden I've got effectively connected income to the US, right? And and you mentioned permanent establishment. I mean, how you know, kind of talk through, you know, once I have a trader business and I have effectively connected income, and you know, like what what what do I need to be considering then? You know, as as I as I operate or as I you know, as I just from a cash flow perspective.

Speaker 2 13:12

That's right, right. And you know, so again, so let's say you've established the U.S. trader business. At that point, you can have the foreign person's US activities are all attributed to that US trade business. And there's you know, there's an example in the regs where I think it's if I get this backwards, you know, whatever. But if the there's there's a US company, you know, the foreign company goes into the US and it it sells electronics, right? And then it sells, and so it's got all that business going on, US trader business. But it also, because it's got touch points and continuous, you know, considerable regular, all that, it also sells wine into the US directly into the US, uh, you know, from the foreign country, which is not really part of its electronic business, but because it already has a US trader business, that wine business and that electronic business get you know put together as all the you know ECI income that they have. And so all that subject. So assumingly, hey, we're in France, we're selling wine to you know the Americans, you know, that's that's not taxable because we're not doing that. Because we're not over there. We're not yeah, they're just you know, just calling us up. Yeah, we're just shipping to them. So, but that's because you have that US trader business already, that's pulled in. So that's really the danger here of if of establishing US trader business. You know, the force of attraction rule you know attracts all your US activities.

Speaker 1 14:27

So can you structure your way around that circumstance, right? Where I've got you know one activity that that has no touch points, or you know, I've I'm just shipping in and then I have another activity, like can I segregate those? You know, are there ways to structure your what self around that?

Speaker 2 14:40

Right. I mean, there are definitely ways to do it. And I would actually bifurcate it and I would if if under a treaty, if you if you have a okay, under a treaty, if you don't, let's say the wine business, if you don't have a permanent establishment in the in the US under the treaty, then that bus that business income is not subject to US taxation. Now, again, if you have if you have you know the electronics and you and you have you have a dependent agent and you're uh you know selling all the goods and services from a fixed place or business, then you are subject there. But really, the permanent establishment is under the treaty, it prevents you from being taxed in the US. Because we work with clients all the time that, you know, they have U.S. activities. They sell, they they sell or do a decent amount of services here in the US, but because they have no permanent establishment here, they're not taxed on. So, what is a permanent establishment? Permanent establishment is basically a fixed place of business, an office, uh, you know, kind of a kind of a bricks and mortar type operation. You and we're not talking about a permanent establishment is not the same thing as your U.S. subsidiary. If you uh either your US corporate standalone subsidiary. So by you setting up a U.S. corporate subsidiary, that is not the same thing as having

Speaker 1 15:48

It's not by default established as a permanent establishment.

Speaker 2 15:50

That's that is not a permanent establishment. That is not attributable to you. This we're talking about here a foreign entity person coming in and uh boots on the ground. Boots on the ground, you know, bricks and mortar operations. Um and also the dependent agent, right? We talked about the in the uh the foreign hedge fund having the dependent agent. If you have people coming over the US, whether they be salesmen and they're going around the country negotiating sales contracts, approving them, uh setting up deals, uh, that dependent agent is going to give you a permanent establishment. If you have even sometimes, sometimes even independent agents, seemingly independent agents, can be uh treated as dependent agents based upon you know the independent contractor type versus employee type versus dependent agent type situation. A lot of factors go in there. If you think you may be doing something like this, definitely talk to your tax advisor before you do stuff like that. Because once you get that permanent establishment, you're it's you know, game's over, you got a file. But if you don't have one, if you don't have one, say you don't have a bricks or mortar operation, say you have traveling salesmen and they're selling a billion dollars worth of goods into the US, but they're just talking, they're just you know setting up demonstrations, but all the contracts are being negotiated and approved back in the home office in the UK or France or Malaysia or wherever, then that is not a permanent establishment and you're not taxed on that income coming to the US. Now, in order to do that though, you have to, well, we we file a protective tax return, basically. And what that does is we file a tax return with you know not a whole lot of information on it, but there's a treaty-based return position statement that says, okay, look, we have this activity in the US, but under the treaty, under this provision, that provision, we are not, you know, our activities don't rise to the level of permit establishment, and that way you're protected.

Speaker 1 17:31

So you're basically file in to say, hey, we don't think we have any obligation to pay tax here. And the the filing helps, I guess, start the clock, right? Where it's like if you don't file anything, then the US could come back at any time in any point in history, right? And just say, hey, we think you know, 2018 you guys owe this tax. And that's right. And it but but but doing this filing helps just kind of protect yourselves as you know it based on the position you're taking, right? That's right.

Speaker 2 17:59

Yeah. So I mean, again, the default rule is if you're in the US and you're conducting activities that may look like a trader business, yeah, as long as you and as long as you don't have a permanent establishment and you tell the IRS you don't have a permanent establishment protective, uh, then that's that's that's not a slam dunk per se, but it's a lot better than them finding out and then saying, hey, we think you have a U.S. trader business, then you having to go through and try to establish that you had that you did not have a permanent establishment. So it we just we we like to do that, get it out in the open, say we don't think we have one, you know, it saves everything. And plus, if you if you don't file that elective return, then you don't get to take deductions.

Speaker 1 18:34

So not only from the IRS go back, but they can just say, hey, here's your gross revenue from the US and you don't get deductions. That's right.

Speaker 2 18:43

So you preserve deductions, and it's uh yeah, it's it's it's definitely something you want to do if you think you're even close or, if you think, yeah, because the IRS may disagree with you, and if the IRS disagree with you and then you got court and for some reason it doesn't end up in your favor, hey, well, hey, at least if you file a protective return, at least you can file a full-blown tax.

Speaker 1 19:00

It's worth the nominal fee if it's protective return. It's the nominal fee. For the peace of mind. That makes sense.

Speaker 2 19:05

You know, the thing about treaties though, too, is you know, not every country we don't have a treaty with every country. We have about 66, 67 or so uh treaties. And so if you're in that treaty, then you can take advantage of it of the P analysis. But if but let's say you're from a South American country or a Central American company country, then you don't have uh any protection from uh you know from the U.S. trade or business analysis.

Speaker 1 19:30

Well let's talk, let's talk through that. Like what's the scenario where I'm I'm uh from a country where I don't have where there is no treaty versus a country where there is a treaty, I have permanent establishment. Like what could the difference be there?

Speaker 2 19:43

Right. Okay, let's say you're from Colombia, uh, and you're you have a pharmaceutical business in the US, and uh you know, you have salesmen coming in selling your your products, your Colombian products, and you know, they're concluding, you know, they're they're they're they're they're selling the goods, right? They're in the U.S. selling your Colombian business.

Speaker 1 20:01

We have a trader business.

Speaker 2 20:02

Right. You have a U.S. trader business, right? You are then subject to you have to file a tax return, you have to pay taxes on your income, uh, deductions, all the whole thing. It's just as if you're a U.S. corporation, right? And uh, you know, you could be subject to all different layers of taxes. Now, let's say you're from France and you're selling your pharmaceutical goods into the US. Uh, you have traveling salesmen, but and you know, they're selling billion dollars worth of products, right? It's a big gang, you know, gangbusting, you know, kind of industry. Well, because those, because you were smart and you said to yourself, okay, well, I'm not concluding contracts, uh, and maybe the Colombians were smart too. They maybe, maybe even they said, well, you know, our Colombian you know keepers have to approve these contracts. Same thing in France. Well, in that situation in Colombia, they have the US traded business, they're stuck. The French can then say, Well, we don't have a permanent establishment, even though we're selling a business, you know, a billion dollars worth of you know our pharmaceutical goods in the US, you know, we don't have a permanent establishment, so therefore we don't have to pay taxes on it. We don't have yeah, even though we may have a US traded business, so then you follow the protective tax term and you're done. 30, you know, 21% tax rate here in Colombia, no tax rate here in France. Got it. So that's that's that's how a treaty would really kind of helps treat the kind of things.

Speaker 1 21:14

Yeah, and you don't something in there that it's just like something so small as a, hey, we complete contracts here.

Speaker 2 21:19

Right.

Speaker 1 21:19

Like, could that is that what's creating like maybe the trader business or a permanent establishment? Like, can you help me delineate the two?

Speaker 2 21:26

Yeah, and and that's and that's the thing. You know, from a US trade or business perspective, yes, a dependent agent coming in and concluding contracts does give you a US trade business. Unfortunately, even under a treaty, concluding contracts, negotiating contracts, executing in the US is the same thing. It is a permanent establishment. So what what we you know, what the best practice is is to if you if you're gonna have people coming over to the US, uh have them, you know, you you can sell your goods, you can do, you know, you can even talk about what your price terms are. You know, here's if you buy this amount, you'll get this price. If you buy this amount, you get that price, do demonstration. Administrations, you can set up a warehouse that once the sales get approved, you can ship it to your US customers. But all the negotiating for price and all the execution approving a document has to be overseas. And that way that's avoids permanently.

Speaker 1 22:15

Well, I think that's a good takeaway, right? It's like how nuanced these laws can be to just flip that switch, you know, because one and like you mentioned earlier, it's like once you flip the switch on permanent establishment, you can't really go back. And you know, just for our listeners, right? Just being aware of, hey, you know, we want to make sure that you're taking advantage of your treaties or and then not creating PE where you don't have to, because there are some real important implications of all that. So um let's go back to I guess re kind of repatriation. You can kind of mention treaties. Right, right. Um, you know, I I guess what what's kind of the standard, you know, what what what countries do we have favorable treaties with? I mean, right. What's generally going on there?

Speaker 2 22:57

Right. Well, and and this will go back to you know the beginning of the conversation we had where you have the you have the two you know the two roads you can go down to, right? If you're the passive investor or you're the um you know you have the US trade business. So let's start with the easy one first. You're a passive investor, you have you bought some stock in a US corporation, you you you know are getting dividends, or you made a loan to uh a corporation and and you're getting interest back from that. Well, if you're in a treaty country, the a lot of times the the FDAP withholding rate, the 30% gross basis, is reduced um anywhere from 15, 10, 5 down to zero, depending on how if it's a dividend, for example, how long you've owned it, how much of the company you might own. Right, how much you own, how long you've owned it, whether you meet all the treaty aspects too. And that's kind of we're glossing, I don't want to really gloss over that fact because in order to get that treaty written, you have to meet all the tests under the treaty. Uh if you're a US, if you're if you're a foreign individual, generally you you're gonna meet those. If you're a publicly traded foreign corporation, generally you're gonna meet those. But if let's say you're a closely held private corporation in a foreign country, you not only have to meet one, that you're a resident of that company, two, that you don't have a permanent establishment of that country, three, that you meet the applicable article relating to like the like for dividends, for example. Say you have if you are looking for the zero rate, then you generally get you have to own it for longer than 12 to 18 months, you own 80%, you know, take your pick, but you have to meet that one as well. And then you have to what we we meet what we call a limitation on benefits treaty, which says, okay, you're the beneficial owner of that, right? And there's all kinds of contract, I don't I don't want to get into all of the specifics, but basically you that we have to be sure that you are the person that is going to be receiving these benefits. You know, like if you're a closely held corporation, for example, then it's all the investors in that closely held corporation are citizens that would otherwise apply and receive treaty benefits on their own, right? So you can't just say, oh, we set up a you know a corporation or a partnership in France, but we're all our Colombian pharmaceutical reps, right? Right. So you can you can't you can't route money, you know, because when I have a treaty with Colombia, you can't route your Colombian pharmaceutical profits through France, right? So so you so those are the kind of things you have to think about when you're setting up uh you know applying for treaty benefits. So that's definitely before you start doing something you want to talk to your tax advisor. But so there's that that there's that you know, applying for the treaty will help you reduce those rates. So that's the that's the passive investor. The and in or in order to apply for these, again, there's always forms in the argument.

Speaker 1 25:35

Yeah, just the compliance for a piece of this and the withholding piece of this, and you know, I mean, there's there's a lot to to consider as you know, basically every cash distribution, you've got to be thinking, hey, do I have, you know, if unless my treaty benefit is zero percent and I finally appropriate forms, like I'm withholding to some degree and I'm reporting to some degree. And then, you know, it's you got to be thinking about that every time you send cash abroad, right?

Speaker 2 25:57

That's right. And and basically as a foreigner, you want to send the payer of that US source income uh a form that says, hey, I'm a foreign person, I meet the treaty um you know rules, uh, I mean, I'll test, and then you give it to the foreign person, gives it to the U.S. person, the U.S. person looks at it, if they can rely on it, then they read, you know, they withhold depending on whether they actually think they meet the treaty you know rates. Uh and then kind of it's kind of kind of like a 1099 W-2 type 1099 situation, at the end of the year, uh the payor will give you a uh a form that says, okay, here's what we paid you, here's what we did or did not withhold, right? Right. Uh if if you're a FDAP person, you know, then you don't have a treaty, that's 30%. And if you look at, you know, what your, if you think, if you think about what your tax rate might be if you just file US tax turn and it's like 10% as opposed to 30, and we're talking about a lot of money, then you might it might behoove you to file US tax turn and say, well, look, you know, you withheld you know $30 million, but you should have only withheld $10 million. Well, my $20 million back. If it's you know $3,000, yeah, that may not be a big deal for you. And you might it might not be worth it. But so there's that. Now, if you're US, if you have a US trader business, you are not necessarily subject to withholding under the under the general typical ECI rules. And why I say that is let's say you are a uh, you know, you have a US trader business and you're part of uh of a of an entity that and that has a US trader business, and you're getting payments from them. If you say, well, this is part of my US trader business, you file another form that says, you don't withhold on me because I have I file a U.S. tax return anyway. Or let's say you get like a dividend that would otherwise be FDAP income from you know a company or interest from a company or royalties for a company, but you have a US traded business already, you you just give them a different form that says, hey, don't withhold on me, but you you still get the same kind of 1099 type form at the end of the year, but that goes into your US tax term. So there's that. If you invest in a domestic partnership, however, as a foreign person, then you're subject to taxation immediately on you know at the end of the year based on your allocable share. And they withhold on that, uh, depending again, whether you're the 21% corporate rate or the 37% individual rate.

Speaker 1 28:12

I feel like people most people will try to structure to avoid that circumstance, right? Where you're just constantly withholding 30% on a flow-through empty share of a foreign partner.

Speaker 2 28:21

That's right. That's right. I mean, yeah. If if if you're I mean, if you're smart, and you know, and I'm not saying the people that don't or that don't do it are dummies, but you know, if you if you're thinking about what you're gonna be doing in the first place, you need to think about okay, can I apply for the treaty if I don't? And and and if you're like I said, if you're if you're you're a Colombian pharmaceutical company, you know, there's only so much you can do. Uh in which case you may think about setting up a US trader business, you may think about not setting up a trader business, but um

Speaker 1 28:44

Well it all connects, right? It's like it's not only how do I structure on the front end, it's how you know operationally and administratively how do I do it, and then on the exit, you know, like it's all gotta kind of all the dots have to be connected, right?

Speaker 2 28:55

That's right. So yeah, and you and you hit you hit it, you hit the nail right on the head. You know, you're you're coming in the US for a reason, right? You're not coming in the US just because you want to have a board meeting in in Las Vegas. Right. You know, that might be part of it. I mean, that definitely might be part of it. But you know, you're you're setting up an operation here because you think you're gonna make money. Well, and you want that money back at some point, right? So you have to ask yourself, okay, what's going in? What's my what's my repatriation strategy? And then what's my exit strategy? Yeah, different kind of things, uh, depending on what entity you have, uh and you know whether treaties apply, all that. So a lot of stuff you gotta think about as you're going to the US and repatriation of profit is one of them. Um but yeah, you know, and you know, even if you do something like, well, I want I w I want to I want to buy a nice, lovely building, you know. I want to buy a nice, lovely building in in you know, in South Florida, right? I want to use it for a little while, I want to maybe rent it out, or I just you know, just want to have it as a nice home, and then you know, for a couple years while my kids are going to school, and then I'll go back to you know wherever country I'm from.

Speaker 1 29:51

Yeah. Well you're you're getting into different rules now, you know. Switch gears here and talk about, you know, real estate investment in real estate from a foreign perspective, because I know that's kind of its own little world. Um, do you want to talk a little bit about you know kind of the history of you know the the real estate you know kind of provisions and all that? FIRPTA, you know, yeah.

Speaker 2 30:09

Absolutely, absolutely. Yeah. Uh uh, I mean you mentioned FIRPTA. FIRPTA is the Foreign Investment and Real Property Tax Act. That's right. All right. It's a silly name, right? FIRPTA. But it wasn't a silly concept. And for you know, the the viewers out there or the listeners out there that are about my age or older, uh, they remember back in the 1980s when you know the Japanese were selling cars like crazy, selling electronics like crazy, and they had all this money. They had they had nothing to do with it. Yeah, there's only so much you can buy in Japan, you know, and so they started real estate starting to look pretty nice, like a nice investment. That's right. You know, I've always wanted to live in South Florida when I leave, you know, cold northern Japan, right? So, you know, they were a lot of a lot of Japanese individuals and companies were buying, you know, real estate in the US, buildings, condos, you know, you whatever. And when they went to sell them, they weren't really paying taxes on that. And so that kind of got you know raised the the you know the hackles of a of a few congressmen and women. And so they decided, well, we don't like that. That's not fair. So they they set up this FI RPA uh regime to where if you are a foreign owner of U.S. real property interest, not necessarily and and it well, let's let's keep on going. Real property interest, and you sell that, the US buyer has to withhold 15% of the gross proceeds and remit it to the IRS, and the foreign person gets you know 85%. Well, you know, if really, because if you think about it, the selling of a property is a is a capital gain, right? Right. And you know, so so why would you withhold, you know, all this? I don't have why are you holding on withholding on this? Well, FIRPTA, what it really does, it does two things. One, it makes the sale of US real property interests treated as a US traded business. So that's the thing. A lot of people just think it's just a withholding uh provision, but and it is that, but it's not only that. The real the real bite of the FIRPA is the fact that you are now by selling that US real property interest, you have a US traded business. And because you have a US traded business, now you're subject to subject to U.S. tax. That's right. Well, you're you know, back in the day, you're this, you know, when when we didn't have internet and we couldn't hunt you down or, you know, Google your address and find out exactly where you live, you know, these people can be like, well, I'm in, I'm in, you know, northern Japan, come find me. You know, right. So uh so that's why they implemented the withholding tax. And so that's why the US person has to withhold and and then just buyer beware too. If you're the US person and you don't even know that the person you're buying it from is a foreign person and you don't withhold that 15% tax, and you're subject to that, the taxes and then penalties and interest on that. Just as an aside. Right. But for the foreign person, you you get the sale of U.S. real property interest is a uh US traded business and is subject to withholding at 15%. So what is the U.S. real property interest? Basically, it's land, buildings, uh, mines, that kind of thing. Um, and so people are saying, well, okay, well, that's great. Well, well, I'm gonna do something different. I'm going to have a US company buy the land, and once it appreciates in value, I'm gonna sell the stock of the U.S. company as opposed to land. Well, guess what? That's capital gains, you know, capital gains sourcing rules are you know, are to the source to the sometimes they can be zero percent back home, right? Right, sometimes it can be zero percent. So again, no, they weren't they weren't happy with that either, which makes sense. I wouldn't be happy with it either if I was a similarly situated individual. So what they said is okay, a share in a corporation that owns greater than 50% of its assets basically is you are U.S. real property interest. You are considered a U.S. real property holding corporation, and the stock of that U.S. real property holding corporation is a U.S. real property interest. So therefore, a foreigner that goes to sell the stock, the buyer of that stock has to withhold uh uh the 15%. So they they they shut down that that workaround. But so basically, if you're investing in US real properties or you're investing in corporation that invests in real properties, then you are subject to to these first withholdings.

Speaker 1 34:02

Are there are there any you know structures or you know strategies to minimize that or avoid it? Or, you know, I mean, just take the scenario where I sell the real estate, you know, and I own it through a corporation, I sell it, and then two years later I liquidate the company back. I mean, is that is there anything in there that avoids some of this, you know, this intended thing for FIRPTA?

Speaker 2 34:24

It does, it does. And if if you if in that situation, and then there's look, there's look back rules and all the good stuff. We won't, we won't for the purpose of this conversation. Yes, if you are if you have a U.S. real property holding corporation and it goes to sell all its U.S. real property interest, it can still have foreign interest, foreign real you know, real estate interest, and it can still have you know other U.S. assets. But as long as the foreign, as long as that threshold comes below 50%, and basically you sell it your US assets, right? Your US real property, then you're not a U.S. real property holding corporation at that point. And then you can sell the stock at you know, it's capital gains, you're not subject to FIRPTA, or if you want to liquidate the company at that point, you know, it becomes either a taxable or non-taxable liquidation. So there's that's that's a real legitimate way of doing it. People are also thinking about, well, let's set up uh a partnership interest that you know, partnership that buys the real property. And I'm the foreign person. I'm like, well, guess what? I'm not gonna sell the US real property, I'm gonna sell my foreign partners, I'm gonna sell my interest in the US partnership. And so that's even though the interest in the US partnership is not a U.S. real property, the sale of a US property, uh, U.S. partnership interest that holds real property, that is basically what you're doing. Yeah, it's it's not a US real property interest, but that that sale is now a U.S. trader business, an ECI. So you gotta go with the same thing. So there's that. Now, recently, I think it was either this year, either earlier this year or later last year, but recently, uh, they've created an exception for a qualified foreign pension fund. And what that is, is it's it's a foreign pension fund, you know, a bunch of pensioners get together, they put their money into this fund, or or you know, a company sets one up or whatever, and they start investing in U.S. real property. Well, qualified foreign pension funds are not subject to FIRPA withholding, or not subject to FIRPTA. So it's created a real incentive, and it's really now as of late, the primary investing vehicle through which you would invest in you as a foreign person would invest in U.S. real property. So yeah, and then if you're a foreign government, you're not subject to FIRPTA either. But so you there are definitely ways, you know, like our our uh you know, I don't I don't I've never really thought about this, but I don't know if you of our little Columbia friends, you know, a pharmaceutical company down there, if they love these guys. Yeah, if you know if the Columbians you know set up a uh you know, if they start investing in in foreign real estate, I don't know if they would be subject, not subject to further, but I don't think they are, but irrespective, yeah. Um if you are a qualified for a pension fund, uh, and you know, we don't need to go on that for purpose of this, but if you have that, if you're one of those and you establish one of those, then you're not subject to further. Okay.

Speaker 1 36:54

So um as we wrap up, is there any anything else we you you want to talk about? I mean, I know you know there's you know, the corporate transparency act was out there. I think that feel like that went away. Um but but anything else for the listeners to kind of you know think about as their investing inbound and and reporting or just operating anything?

Speaker 2 37:12

Yeah, yeah, I would I would think, you know, find out, you know, what you know, what entity again, key takeaway points. What entity do you want to invest in? Um and then think about are you going to be establishing a US trader business? If you're gonna be establishing a trader business, do you is there a way for you to not create a permanent establishment under a treaty if you're involved in a treaty? And then think about filing protective returns, or if you are not from a treaty country, think about you know, well, how can I minimize this? Because it's once you're a US trader business, I mean, let's let's let's go with a harsher scenario. If you're not from a treaty country, you have a US trader business, then you're subject to the US tax laws. Now, that's you know, if if you're if you knew that coming in, you'd be subject to tax some at some point if you don't treat. But you also have a you know your US tax advisor who can help you avoid or not avoid, but mitigate your taxes and your and and and your reporting requirements and all that. So so yes, you are in in the taxes, but there's a lot of qualified, you know, US tax advisors that can help you minimize or mitigate um your taxes. And then I guess the second, you know, the last thing is if you don't in any respective of a passive foreign investment, we've kind of beat that up. But the thing also you gotta think about too is okay, so that's this is all we're talking about, nothing but federal taxes. But the state taxes are a huge consideration. Um, beyond the scope of this, but just suffice it to say that just because you avoid maybe federal taxes, the you know, the states don't necessarily have to conform to the federal tax treatment of this. Like California basically tells the U.S. you know to go fly a kite all the time. So if you're going into California, well then just be prepared to uh have separate bats. Yeah, yeah. Yeah.

Speaker 1 38:50

Well, I mean, yeah, I mean, just just take an operating business that operates in all 50 states. Now you're you're not just federal, you're in 51 different jurisdictions that all might have different rules and yeah, just things to consider.

Speaker 2 38:59

So that's right. And I and you know, and also you know, people think, well, the treaty, I've got the treaty, even if I'm from a treaty country, you know. Um no, no, the treaty only applies to federal taxes. Right. But you know, the treaty does not apply to state and local taxes, city municipal taxes, um, that kind of stuff. So traffic you know, tariffs, you know, that kind of thing. So plenty of layers. Right, plenty of layers.

Speaker 1 39:20

So yeah. Well, well, I I think this has been great. Uh, you know, it's just a small bite of the apple that is, you know, inbound taxation. And so I I I look forward to you know, probably de diving deeper into this later on. But uh, but I think this has been very helpful. And uh, and I hope everybody else listening uh got something from this. And like I said, I think we'll take deeper dives, but uh just kind of a a little taste of uh of what it's like to come in and and invest as a foreign investor in the U.S. Um William. Thank you for joining us.

Speaker 2 39:46

Thanks, Man.

Speaker 1 39:47 Speaker 1 39:47

All right

Speaker 2 39:48

Enjoyed it.

Speaker 1 39:48

Thank you.