1. U.S. Commercial Property Ownership Structures for Foreign Investors Tax, Legal & Operating Considerations Las Vegas May 25, 2011 Harriet Leung 梁 詠 嫻 [email_address] Brian Rowbotham 羅 博 文 [email_address] 415-433-1177 www.rowbotham.com

2. CN BVI U.S. Properties U.S. & Non-U.S. Stocks & Bonds Typical “One-Stop Shop” Solution Ownership of U.S. real property by non-U.S. person + Estate tax protection + No gift tax on transfers of non-U.S. stock – U.S. real estate gains in BVI taxed at combined federal and state income tax rate of 40% – Possible “branch profits tax” on “dividend equivalent”

5. Tax Treaty Planning Tax Planning using the U.S. - China Income Tax Treaty - A foreign national in possession of a green card - Is subject to worldwide taxation - Exceptions may exist under the Treaty * - There is no U.S. Income Tax Treaty with: - Hong Kong - Macau - Singapore - Taiwan * Article 4 of U.S. – China Treaty can override the income tax definition.

6. EB5 Visa Planning Status - Green card issued - Wife & children reside in CA - Husband runs businesses in China - U.S. presence of 4 months per year - Dual resident U.S. Residence status in question - Green Card vs. Income Tax Treaty NR - Treaty with China: - If dual resident, competent authority will determine where individual resides U.S. Investing GP Investors/Visa Real Estate Development Ltd P/S $1 mm or $500,000

7. EB5 Planning: Allow Spouse to be Investor H & W Wealth & Business in China Investments in U.S. EB5 Investments Husband retains B-1 Visa Wife & family obtain green card (1) Husband can visit U.S. (2) Husband can apply for green card in 2 years

8. Gift and Estate Taxes: Resident in U.S. Residence: definition for gift and estate tax is “domicile”. Domicile is based on facts and circumstance to determine where one’s permanent home is located (1) Green Card, residing in the U.S. = resident (2) Green Card Holder residing outside the U.S. = Uncertain U.S. Resident Gift Tax Exemption Estate Tax Exemption Nonresident Gift Tax - U.S. Property Estate Tax – U.S. Property $5 million $5 million $13,000 per person $60,000

9. George and Cindy manage the family’s real estate holdings in Shanghai. They now want to diversify and invest in real estate in the U.S. I. They acquire an office building in Los Angeles for $10 million and finance half the property with cash and the other half with a loan from a U.S. bank. - They obtain advice on the various holding structures - The tax issues are discussed - The U.S. tax rates are reviewed - They summarize the overall approach for the family II. George and Cindy invest in a second property - What’s the best holding structure for multiple properties - They compare all the costs and select the best structure III. George’s brother, John and his wife Jane live in Hong Kong. They move to California and become U.S. residents. - Jane examines whether a partnership or corporation is best - Jane summarizes the structure for John Nonresident Strategies for Investing in U.S. Commercial Property

10. Nonresident Strategies for Investing in U.S. Commercial Property (1) (2) (3) (4) (5) (6) (7) (8) G + C G + C G + C G + C G + C G + C G + C G + C LLC U.S. LLC U.S. LP Foreign LLC Foreign Trust U.S. Inc. BVI BVI U.S. Inc. P P P P P P P P Structures Individual Tax Rates Apply to: Corporate Tax Rates Apply to: 1. Direct Investment 6. U.S. Corporation 2. U.S. Partnership 7. Foreign Corporation 3. U.S. Limited Partnership 8. Foreign Corporation with U.S. Subsidiary 4. Foreign Partnership 5. Foreign Trust

11. Ownership Structures Non-Corporate Structures Corporate Structures A. Income Tax Individual Tax Rates Top rate on operating income 35% 35% 35% 35% 35% --- --- --- Top rate on gain when sold 15% 15% 15% 15% 15% --- --- --- Corporate Tax Rates Top rate on operating income --- --- --- --- --- 35% 35% 35% Top rate on gain --- --- --- --- --- 35% 35% 35% Second tax on dividends (1) --- --- --- --- --- 30% 30% 30% Maximum combined rate --- --- --- --- --- 55% 55% 55% B. Estate Tax on U.S. Property Top rate over $5mm 35% 35% 35% -0- (2) 35% 35% -0- -0- C. Individual return to file Yes Yes Yes Yes No No No No Notes (1) A lower treaty rate may apply (2) A foreign partnership may qualify as foreign property and be exempt from U.S. estate tax . Nonresident Strategies for Investing in U.S. Commercial Property (1) (2) (3) (4) (5) (6) (7) (8)

12. Summary 1. Individual tax rates and corporate rates on net rental income have a top rate of 35% 2. Sale of property: Individual capital gains rate is 15% compared to 35% for corporations 3. Estate tax – Advisors generally prefer #8 since there is no risk to estate tax, even though corporate capital gains are taxed as ordinary income at 35%. If the holding period is long term, tax is deferred. 4. Use of a Foreign partnership that owns a U.S. partnership that owns the real property is becoming more popular due to lower tax rates and reasonable estate tax protection. 5. Limited partnerships are used more frequently by investment groups due to general partner controls. LLCs are used more often for smaller family structures due to the limited partners will often be exposed to liability if they are active in management. Nonresident Strategies for Investing in U.S. Commercial Property

13. Structure for Multiple Properties BVI U.S. BVI U.S. 1 U.S. 2 BVI U.S. BVI U.S. P 1 P 2 (1) P 1 P 2 P 1 P 2 P 1 P 2 G C G C G C G C U.S. 1 U.S. 2 Notes For multiple structures, corporate ownership is generally preferred. While the income tax on the sale is 35%, it’s deferred. Using a U.S. holding company avoids tax issues related to intercompany loans and expenses. (1) (2) (3) (4) Nonresident Strategies for Investing in U.S. Commercial Property U.S. LLC U.S. LLC

14. Multiple Properties Comparison (1) (2) (3) (4) Foreign holding company avoids U.S. estate tax exposure Y Y Y Y Netting of income and losses from both properties allowed Y N Y Y Legal liabilities: Property in separate entity avoids liability exposure N Y Y Y Intercompany loans and expenses eliminated since U.S. companies are consolidated as one tax filing entity Y N Y Y Cost of structure factoring in tax and operating efficiency 1 3 4 2 Preferred structure  Nonresident Strategies for Investing in U.S. Commercial Property

16. U.S. Residents: John & Jane U.S. LLC P 1 P 2 P 1 P 2 J J J J Structures (1) Single Partnership (2) A separate partnership for each property [segregated liability] (3) Corporate ownership (1) (2) (3) P 1 P 2 J J U.S. Corp U.S. LLC U.S. Corp Nonresident Strategies for Investing in U.S. Commercial Property

18. Reporting Non-U.S. Investment Filing “Activities” include ownership in: Potential Penalties IRS Forms for Non-compliance (*) (1) Non-U.S. Corporation 5471 $10,000 / year per company (2) Non-U.S. Partnership 8865 $10,000/ year per entity (3) Non-U.S. Trust 3520 25% of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value, a non-U.S. corporation maximum of $10,000 (5) Non-U.S. Bank TDF 90-22.1 50% of highest balance in prior years Account Report (*) Potential criminal prosecution can result for non-reporting.

19. Brian Rowbotham is a CPA with 33 years of experience advising businesses and individuals on complex domestic and international income and estate tax planning. He is the founding partner of Rowbotham & Company LLP which is almost exclusively dedicated to businesses and investors needing both domestic and international tax and accounting services. His clients include private and public companies around the globe which consist of: U.S. and foreign institutional investors, multinational families and executives and non-U.S. investors doing business in the U.S. Mr. Rowbotham has advised clients in major domestic and international litigation and has also served on the boards of both privately held and publicly traded companies. From 1992 to 2006, he directly supervised his firm’s engagement by trustees in Europe to assist with the recoveries of funds from one of the largest frauds in U.K. history. Over the past 20 years, he has represented large European and Middle Eastern institutional investors and numerous Asian families investing in U.S. Real Estate transactions. Rowbotham & Company Accountants & International Tax Consultants Rowbotham & Company is a full service Certified Public Accounting firm that provides audit, accounting, and domestic and international tax services to individuals and businesses, both public and private. Rowbotham & Company has offices in San Francisco and Silicon Valley and is a member of Polaris International, a worldwide network of accounting and consulting firms. The firm is a member of the American Institute of Certified Public Accountants and is registered with the Public Company Accounting Oversight Board. Harriet Leung is a California CPA heads up the firm's Asian business practice engagements for private and public companies. Harriet is active advising companies with M&A transactions and international clients in the financial due diligences, audit and business advisory areas. She has substantial experience servicing companies that were seeking listings on both foreign and U.S. stock exchange markets. She has represented and worked with companies in Asia completing reverse mergers into the U.S. public companies. Harriet also has extensive experience working in restructuring international investment funds with operations in the U.S., but owned and controlled in Asia. Her client base includes companies in real estate (including domestic and foreign), international investments, science, distribution, high-tech and software. Harriet is fluent in both Cantonese and Mandarin.