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International Foreign Investment in US Real Estate

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Royse Law Firm discusses the tax aspects surrounding foreign investments in the U.S. Real Estate Market

Published in: Real Estate
  • Just skimmed, but these are excellent, illustrative slides--especiallyfact that it gives Big Picture (not just federal income tax consequences).
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International Foreign Investment in US Real Estate

  1. 1. FOREIGN INVESTMENT IN U.S. REAL ESTATE Royse Law Firm, PC 149 Commonwealth Dr. Menlo Park, CA 94025 rroyse@rroyselaw.com www.rroyselaw.com Skype: roger.royse
  2. 2. 2 OUTLINE 1. Introduction and Importance of Real Property Investment by Foreigners 2. Taxation: Relevant Basics and Reporting 3. Relevant Entity Tax Issues 4. FIRPTA and Related Tax Rules 5. Federal Transfer Tax Considerations 6. Tying It All Together: Structuring Foreign Investment in U.S. Real Estate 7. California State and Local Taxes 8. (End) Takeaways Unless otherwise stated, all § references are to the Internal Revenue Code of 1986, as amended
  3. 3. 3 INTRODUCTION AND IMPORTANCE OF REAL PROPERTY INVESTMENT BY FOREIGNERS
  4. 4. 4 SIZE OF THE MARKET • Numbers vary, but sources in general give a range of around $50-80B volume in cross-border transactions in the U.S. yearly • The U.S. has the world’s preeminent real estate market, with trading volume rising 25% in 2015 (to 39% of all global trading) – World property trading fell in 2015 by 2.4%, the first downturn in 6 years, as measured by $USD • Cross-border investment rose by over 70% in the U.S., helping to offset a drop in domestic activity of 5% • Overseas investors increased their market share from 10% to 18.1%, the highest on record Sources Cushman & Wakefield Capital Research Markets Publication Atlas Outlook 2016 (available online) http://nreionline.com/finance-investment/foreign-investment-us-real-estate-assets-hit-record-high
  5. 5. 5 • External drivers: The U.S. real estate market is perceived as a (relatively affordable) safe investment. Contrast: – Economic uncertainty in China; – The refugee crisis in Europe; – Brexit; and – The recession in Brazil • Internal drivers: The U.S. real estate market has a favorable legal and economic environment. Key drivers include: – Congress’s continued easing of curbs on foreign real-estate investors; – Low interest rates (which now seem likely to remain low); – A relatively stable U.S. economy (which at least is reliable for parking capital); and – The liquidity and transparency of the U.S. real estate market WHY FOREIGNERS INVEST IN U.S. REAL ESTATE Sources http://nreionline.com/finance-investment/foreign-investment-us-real-estate-assets-hit-record-high http://www.ibtimes.com/us-real-estate-attracting-more-foreign-investment-2016-new-york-city-remains-top-2247705
  6. 6. 6 • In the U.S., real estate is a tax-driven industry; it is not a coincidence the original tax shelters revolved so heavily around it – Domestically, like-kind rules, depreciation, interest deductions, loss limitations, and other tax rules can make or break real estate ventures – Foreign investors face all these usual rules, plus a bevy of additional rules covered in large part herein • If not planned for, US taxation on ownership and disposition of real estate, as well as US tax reporting requirements, can be burdensome and greatly reduce the yields of a would-be real estate investor IMPORTANCE OF THE TAX REGIME
  7. 7. 7 FEDERAL TAXATION: RELEVANT BASICS AND REPORTING
  8. 8. 8 INCOME TAX, GENERALLY • Individual rates: 10%-39.6%, – Plus employment or NIIT (if applicable) – Individuals receive special reduced rates on long- term capital gains • Corporate rates: 15%-35% – Corporations do not receive reduced long-term capital gains rates • International rules – U.S. taxpayers taxed on worldwide income – Foreign taxpayers taxed on certain U.S. related income
  9. 9. 9 NIIT AND SELF-EMPLOYMENT TAX • What is the net investment income tax (NIIT)? – As part of the Affordable Care Act, a 3.8% surtax was added to the income tax system, intended to tax passive income of high income individuals, trusts, and estates • Nonresident aliens are exempt from the NIIT. §1411(e)(1) • Self-employment tax applies to salaries from corporations and allocations from partnerships – Does not apply to allocations to limited partners (in their capacity as passive limited partners), or corporate distributions (including S- corporations, if not recharacterized as salary) • Nonresident aliens are exempt from self-employment tax. §1402(b) – Can enter into an agreement to be covered under SSA §233
  10. 10. 10 INTERNATIONAL TAX FOR FOREIGNERS Effectively Connected Income (ECI) • Net income effectively connected with a U.S. trade or business (/permanent establishment, if treaty applies) • Taxed at rates noted earlier Fixed, determinable, annual or periodical (FDAP) income • Gross income from activity not rising to level of trade or business—can include rents • 30% withholding rate, may be reduced by treaty • Does not cover gain on sales by foreigners ECI Election for Foreign Holders of U.S. Real Property • Allowed under IRC §§871(d) and 882(d) • Why use it? Because net income approach generally more favorable when holding real property, due to income sheltering from, e.g., depreciation
  11. 11. 11 NOTABLE REPORTING REQUIREMENTS • FATCA: – Non-US entities which are treated as foreign financial institutions must perform reporting, – If they do not, payors to such entities must withhold tax. • §6038A proposed regulations: – Foreign owners of U.S. disregarded entities will have to report about themselves, keep appropriate records for tax. – Already considerable reporting for other foreign-owned U.S. entities • FinCEN new reporting requirements: For title insurance companies in New York City and Miami, Dade County. – Such companies must file a FinCEN Form 8300 within 30 days of an all-cash purchase of real estate worth over $3 million in Manhattan, or over $1 million in Miami, Dade County – Identifies the purchasing entity and any individual who beneficially owns 25% or more of the purchasing entity.
  12. 12. 12 OVERVIEW OF U.S. TRANSFER TAXES APPLICABLE TO NON-RESIDENT NON-CITIZENS Transfer Type General Tax Concept Applicable Tax Base Lifetime Gift Tax on Transferor at 18% - 40% Property transferred with US situs (other than intangibles) Bequest or Devise at Death Tax on Estate at 26% - 40% of everything over $60,000 FMV Property deemed “U.S. Situs” property BEWARE-This is non-intuitive analysis! Generation- Skipping Transfer Additional Tax on Transferor (whether during lifetime or at death) at 18% - 40% Anything that is subject to Gift Tax or Estate Tax under the above rules Gifts, Bequests, or Devises to Non-citizen Spouse Estate or Gift Tax Applies per above unless transferred at death via Qualified Domestic Trust (QDOT) with U.S. Trustee All “US Situs” assets transferred as per Estate and Gift Tax base rules above; except for lifetime gift under annual exclusion ($148,000 for 2016)
  13. 13. 13 RELEVANT ENTITY TAXATION BASICS
  14. 14. 14 BASIC ENTITY REGIMES Other specialized entity regimes exist, but are beyond scope of presentation LLC Corp. LLC or Partnership Disregarded Entity As if directly owned Partnership 1x tax, entity is for accounting C-Corporation 2x tax (corp., dividend) Tax Tax Tax
  15. 15. 15 REAL PROPERTY IN CORPS. VS. PARTNERSHIPS Issue C-Corporations Partnerships Long-term capital gains rates on disposition? Not available Available Ability to pull cash out tax free after, e.g., refinancing? Not available Generally available Ability to flow through losses? Not available Available (but subject to many anti-loss rules) Tax of owners during ownership phase? No; corporation is taxed Yes; but keep in mind there is typically very little net income from real property thanks to high amount of deductions Domestically, almost always better to have a partnership as a real property investment vehicle. Foreign investors? We will see . . .
  16. 16. 16 CORPORATE AND BRANCH PROFITS (BP) TAX Foreign Person Foreign Corp. U.S. Corp. When Foreign Corp. dividends money, U.S. tax system is irrelevant When U.S. Corp dividends money to Foreign Corp., there is a withholding tax (FDAP) When U.S. Corp earns money from U.S. trade or business, it is taxed (domestic tax rules) Example #1: Corporate Foreign Person [No U.S. Corp] Same structure as Example #1, except no U.S. Corp. Like Ex. #1, no U.S. tax when Foreign Corp. makes dividend Unlike Ex #1, no U.S. Corp, so no U.S. withholding tax Foreign Corp. taxed on U.S. trade or business earnings (ECI) Example #2: Branch (in a world w/o BP Tax) U.S. Trade or Business U.S. Trade or Business Foreign Corp. But branch profits tax does exist (example #2 cannot happen under modern U.S. tax law), and causes rough parity between the two examples . . .
  17. 17. 17 CORPORATE AND BRANCH PROFITS (BP) TAX Foreign Person [No U.S. Corp] Same structure as Example #2 Like Ex. #1, no tax when Foreign Corp. makes dividend Unlike Ex #1, no U.S. Corp, so no withholding tax. Instead, branch profits tax applies Foreign Corp. taxed on U.S. trade or business earnings (ECI) Example #3: Branch (with BP Tax) U.S. Trade or Business Foreign Corp. • The Branch Profits Tax essentially creates a “simulated” U.S. Corp. for dividend purposes • Branch profits slightly worse than corporate tax, because less control of timing of dividend equivalents • Core concept: Tax “dividend equivalent amount” like dividend from U.S. Corp: • Dividend equivalent amount = (ECE&P) – (increase in U.S. net equity) • ECE&P = Earnings of Foreign Corp. from U.S. Trade or Business • U.S. net equity = Amount of money deemed reinvested in U.S. Trade or Business at start and end of year • Branch profits tax triggers only if a foreign corporation has net profit in a U.S. trade or business
  18. 18. 18 TRUSTS • Only trusts used for certain non-active-business purposes will be given trust taxation – Else, may end up taxed as a corporation • Trust for income tax purposes either treated as: – Disregarded entity (grantor trust), or – Entity taxed under fiduciary income tax rules, which is taxed on income it does not distribute to beneficiaries • Special trusts exist as well • To discourage stashing income in foreign trusts, U.S. has penalty throwback rule on distributions from such trusts – Be careful • Trusts under the fiduciary income tax rules may be able to create long-term capital gains where beneficiaries (e.g., corporations) would have had the ability to do so
  19. 19. 19 FIRPTA AND RELATED TAX RULES
  20. 20. 20 THE WORLD, PRE-FIRPTA • Until 1980, a foreign person could, with planning, dispose of U.S. real property without incurring any U.S. tax liability. • Gain on sale of U.S. real property was subject to U.S. taxation in two circumstances: – If the gain was ECI; or – If the person was an individual present in the United States at least 183 days in the year, the gain would be subject to a flat 30% tax • A foreign person could always avoid U.S. taxation by dealing indirectly in U.S. real property, through ownership interests of an entity holding U.S. real property
  21. 21. 21 FIRPTA—WITHHOLDING AND TAX EFFECTS Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) • Income from disposition of U.S. Real Property Interest (USRPI) is ECI • 15% gross withholding by buyer acquiring USRPI – This is not the final tax due—it is merely an advance payment (potentially too high or too low) – 10% gross withholding for dispositions before February 17, 2016 • Exemptions from FIRPTA withholding – Affidavit of non foreign status – Non recognition transactions – Qualified foreign pension fund • 2015 addition
  22. 22. 22 DEFINING USRPIS AND USPRHCS • USRPIs are non-creditor interests in real property, either direct or through an intermediary entity – “Real property” includes land, certain natural products and improvements thereof, and personal property “associated with the use of the real property” – Includes stock in a USRPHC • A corporation is a U.S. Real Property Holding Corporation (USRPHC) if more than 50% of its assets (measured on a fair market value basis) are comprised of USRPIs at any time during a five-year period preceding the sale of its stock by its foreign owner – Cleansing exception: Interests in a USRPHC are not considered USRPI if, at the time of the sale of the USRPHC interests, the USRPHC has disposed of all U.S. real property in one or more taxable transfers.
  23. 23. 23 NOTABLE WITHHOLDING MECHANICS • IRC § 1445 imposes the FIRPTA withholding tax – 15% gross income advance payments – Due 20 days after transfer date • IRC § 1446 imposes withholding tax for a domestic partnership that receives ECI allocable to its foreign partners – Tax is calculated at the partner’s highest statutory rate, based on net ECI so allocated – Withholding done quarterly • §1446 preempts §1445 where both apply – This means you can essentially elect between two different withholding regimes; choose the one that is best for you
  24. 24. 24 LIKE-KIND EXCHANGE TRANSACTIONS • Section 1031 like-kind exchange transactions – Permits tax deferral—a type of nonrecognition transaction – U.S. property is only “like-kind” to other U.S. property, and foreign property is only “like-kind” to other foreign property
  25. 25. 25 FIRPTA STRUCTURING CONCERNS • FIRPTA generally overrules non-recognition provisions (such as contributions to corporations or partnerships) and makes them taxable, unless: – The foreign transferor receives a USRPI in exchange for the transferred USRPI; – The USRPI received in the exchange, immediately following the exchange, would be subject to U.S. tax upon its disposition; and – The foreign transferor complies with certain IRS filing requirements • FIRPTA regulations include specific exceptions to the general recognition rule as well • Beware of §§367 and 7874 when performing structuring
  26. 26. 26 FEDERAL TRANSFER TAX CONSIDERATIONS
  27. 27. 27 ESTATE AND GIFT TAX RATES Applicable to U.S. Citizens or Domiciliaries*: Year Lifetime Estate & Gift Tax Exemption Amount Annual Gift Tax Exclusion regardless of donee identity or citizenship Annual Gifts or Testamentary Bequests to U.S. Citizen Spouse Annual Exclusion Gift to Non-citizen Spouse 2014 $5,340,000 $14,000 Unlimited $145,000 2015 $5,430,000 $14,000 Unlimited $147,000 2016 $5,450,000 $14,000 Unlimited $148,000 *A domiciliary can be described, for this purpose, generally, as someone living in the U.S. with no present intention to ever leave
  28. 28. 28 ESTATE AND GIFT TAX RATES NON-U.S. DOMICILED NON-CITIZENS Applicable to U.S. Situs Property But, what about bequests to a non-citizen spouse? Year Lifetime Gift Tax Exemption Annual Gift Tax Exemption Annual Exclusion Gift to Non-U.S. Citizen Spouse Exemption for Gifts or Bequests to a U.S. Citizen Spouse Estate Tax Exemption Applicable Gift & Estate Tax Rates 2015 $0 $14,000 $147,000 Unlimited $60,000 18% - 40% 2016 $0 $14,000 $148,000 Unlimited $60,000 18% - 40%
  29. 29. 29 ESTATE TAX • Foreign persons subjected to US estate tax only on US situs assets that they directly hold • Planning point: Make sure foreign person holds only non-U.S. situs property. Consider using separate taxable entities as blockers (e.g., trusts, or business entities) Asset Type Situs Rule (assumes no IRS re-characterization) Authority Real property Location of real property §2103; §20.2104-1(a)(1) Corporate stock Where corporation organized §2104(a); §20.2104-1(a)(5) and (f) Partnership interest Unknown; perhaps residence of owner, or partnership’s trade or business, place of organization… Rev. Rul. 55-701; Blodgett v. Silberman, 277 US 1, 1928; §20.2104-1(a)(3); §20.2105-1(c) (if in bearer form); OECD Model Estate and Gift Tax Treaty Disregarded LLC interest Unknown; presumably equivalent to direct ownership, but may be intangible with own situs per recent authority Analogy to grantor of revocable grantor trust / sole proprietorship; or Pierre v. Commissioner, 133 T.C. 24 (2009)
  30. 30. 30 GIFT TAX Gift Tax • Foreign persons are subject to US gift tax only on gifts of US situs tangible assets* • Planning point: For foreign persons making gifts to US persons, consider converting tangible assets to intangible assets prior to gifting. • IRS will not rule on whether a partnership interest is tangible or intangible for gift tax purposes • Rev. Proc. 2016-7, § 4.01(29) • Also unclear how disregarded entity interests are treated *Gifts from certain U.S. expatriates are taxable to recipient, even if intangible asset. Mom Son IRS
  31. 31. 31 GENERATION-SKIPPING TRANSFER TAX Additional GST Tax • Foreign persons are subject to an additional, GST tax on Generation-skipping transfer of U.S. situs assets by gift or inheritance. • Annual Exclusions can apply, but No Exemption! Mom Son Grandson IRS GST & GIFT
  32. 32. 32 INBOUND GIFT OR INHERITANCE ASSET TRANSFER ISSUES • Intangible Assets – Stocks, LLC & LP interests, patents, copyrights, etc. – General rule—intangibles are located where the giver is located.* • Tangible Assets – Real estate, equipment, automobiles, jewelry, artwork, etc. – General Rule—tangible assets have situs where they are physically located. • But, what about cash, currency, bank accounts, etc.? *But watch out for corporate stock in estate tax context!
  33. 33. 33 TYING IT ALL TOGETHER: STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE (FEDERAL TAX ONLY)
  34. 34. 34 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Ownership Through Foreign Corp. Foreign Person Foreign Corp. U.S. Tax System Exposure for Foreign Corp. YES Capital Gains Rate (20%) on Disposition of Real Property NO Withholding Tax on Repatriation of Funds from Foreign Corp. NO U.S. Tax-Free Disposition of Entity YES Branch Profits Tax YES Exposure to U.S. Estate Tax NO Exposure to U.S. Gift Tax NO
  35. 35. 35 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Ownership Through U.S. Corp. (USRPHC) Foreign Person U.S. Corp. U.S. Tax System Exposure for U.S. Corp and Foreign Person YES Capital Gains Rate (20%) on Disposition of Real Property NO Withholding Tax on Repatriation of Funds from U.S. Corp. YES U.S. Tax Free Disposition of Entity NO Branch Profits Tax NO Exposure to U.S. Estate Tax YES Exposure to U.S. Gift Tax NO Remember, cleansing exception can apply to allow tax free sale (including liquidation) of USRPHC
  36. 36. 36 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign Person Foreign Corp. U.S. Corp. Ownership Through Foreign Corp. and U.S. Corp. (a USRPHC) U.S. Tax System Exposure for Foreign Person NO Capital Gains Rate (20%) on Disposition of Real Property NO Withholding Tax on Repatriation of Funds from U.S. corporation YES U.S. Tax Free Disposition of Foreign Corp. YES Branch Profits Tax NO Exposure to U.S. Estate Tax NO Exposure to U.S. Gift Tax NO Cleansing exception applies, as in prior slide
  37. 37. 37 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Foreign Person Direct Ownership U.S. Tax System Exposure for Foreign Person YES Capital Gains Rate (20%) on Disposition of Real Property YES Withholding Tax on Repatriation of Funds NO U.S. Tax Free Disposition of Asset NO Branch Profits Tax NO Exposure to U.S. Estate Tax YES Exposure to U.S. Gift Tax YES *May be minimized by high amount of deductions (from depreciation, etc.) flowing through *
  38. 38. 38 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Ownership Through U.S. LLC or Foreign LLC (Disregarded Entity) Foreign Person U.S. or Foreign LLC U.S. Tax System Exposure for Foreign Person YES Capital Gains Rate (20%) on Disposition of Real Property YES Withholding Tax on Repatriation of Funds NO U.S. Tax Free Disposition of Entity NO Branch Profits Tax NO Exposure to U.S. Estate Tax ? Exposure to U.S. Gift Tax ? *May be minimized by high amount of deductions (from depreciation, etc.) flowing through *
  39. 39. 39 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Ownership Through U.S. LLC or Foreign LLC (Tax Partnership) Foreign Person U.S. Tax System Exposure for Foreign Person YES Capital Gains Rate (20%) on Disposition of Real Property YES Withholding Tax on Repatriation of Funds NO Tax Free Disposition of Entity / Asset NO Branch Profits Tax NO Exposure to U.S. Estate Tax ? Exposure to U.S. Gift Tax ? Foreign Person #2 U.S. or Foreign Tax Partnership Use of U.S. partnership will result in §1446 withholding instead of §1445 withholding * *May be minimized by high amount of deductions (from depreciation, etc.) flowing through
  40. 40. 40 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Ownership Through Two Tiers of Tax Partnerships Foreign Person U.S. Tax System Exposure for Foreign Person YES Capital Gains Rate (20%) on Disposition of Real Property YES Withholding Tax on Repatriation of Funds NO Tax Free Disposition of Entity / Asset NO Branch Profits Tax NO Exposure to U.S. Estate Tax ? Exposure to U.S. Gift Tax ? U.S. Tax Partnership Foreign Person #2 Foreign Tax Partnership Top tier foreign partnership means better arguments for favorable transfer taxation than prior * *May be minimized by high amount of deductions (from depreciation, etc.) flowing through
  41. 41. 41 ADVANCED STRUCTURING: EARNINGS STRIPPING • Funding the operating entity with debt could reduce U.S. tax and create the opportunity to repatriate earnings to the foreign investors with minimal or no U.S. withholding tax • Must be wary of: • §163(j) (potential disallowance of interest deductions for low EBITDA corporations with 60% or more capitalization from debt) • §385 proposed regulations (potential reclassification of debt as equity where, e.g., documentation improperly kept) • Can plan into portfolio interest exception (0% withholding) • Recipient cannot be “10% shareholder” of debtor. To avoid, design stock to exploit the fact that “10% shareholder” of a corporation defined as someone attributed 10% or more of the vote • This trick does not work for partnerships, as their 10% shareholder definition is more stringent (as it looks to capital or profits interests) • Remember, earnings stripping requires regular enough cash flow to pay debt (via, e.g., rent)
  42. 42. 42 STRUCTURING FOREIGN INVESTMENT IN U.S. REAL ESTATE Earnings Stripping Technique Using Portfolio Interest Exception (PIE) Foreign Person Foreign Person #2 Foreign Tax Partnership Foreign Tax Haven Corp. U.S. Corp. Trusted Unrelated Foreign Person Repayment of Loan • Capitalization of U.S. Corp. stays over §163(j) thresholds • Trusted Unrelated Foreign Person holds 91% of vote, 1% of value, avoiding PIE 10% shareholder restriction for Foreign Tax Haven Corp. • U.S. Corp. takes low percent priority return in U.S. tax partnership (in order to get income for stripping) U.S. Tax Partnership
  43. 43. 43 CALIFORNIA STATE AND LOCAL TAX CONSIDERATIONS
  44. 44. 44 CALIFORNIA NON-INCOME TAXES • The county in which real property is located will charge a document transfer tax, due upon change of ownership • May trigger on restructuring • Property tax reassessment triggers on most changes of ownership • May trigger on restructuring • No California state inheritance or estate tax • Sales and use tax generally not relevant
  45. 45. 45 CALIFORNIA WITHHOLDING • Like FIRPTA, California’s FIRPTA, Rev. & Tax. Code § 18662, requires buyers of California real property to withhold and remit tax. • Unless exception applies, tax must always be withheld • Amount is 3 1/3% of gross, generally. Alternatively, the state will allow sellers to demand from buyers income tax withholding based on realized gain and maximum applicable tax rate. • Many more exceptions for California’s FIRPTA than Federal • California incorporates §1446 in Cal. Rev. & Tax. Code §18666, except that §18666 applies to all California-source income distributed by a partnership to out-of-California partners.
  46. 46. 46 INCOME CHARACTER AND RATES • California income tax does not distinguish between capital gains, qualified dividends, and ordinary income, which reduces the benefits of structuring for capital gains • Still, due to U.S. federal tax, there remains a 15-20% difference between capital and ordinary income tax rates • Further, California income tax rate is better for corporations (maximum of 8.84% for C-corporations versus a maximum of 13.3% for individuals). This exacerbates the slightly better federal corporate tax rates (maximum 35%) compared with individuals (maximum 39.6%) • Not clear this superior first layer of tax is worth double taxation
  47. 47. 47 SOURCE OF INCOME • Planners should look to convert California-source income to non-California source. This is often achieved via inserting intangibles (e.g., mortgages, certain kinds of equity from entities) into the structure • Rents and gains from California-located real property, California-located business income, are California-sourced • Intangible income, for California income tax purposes, is typically sourced to location of owner, but may acquire a business situs in California and become automatically taxable in California • It does not matter whether a corporation or partnership carries on business in California in determining where equity interests in the entities are sitused (although it does matter for sourcing partnership allocations) • In some cases, C-corporations (and certain other entities) may need to consider California’s “unitary business” apportionment and allocation rules, as well as “water’s edge” rules
  48. 48. 48 TAKEAWAYS
  49. 49. 49 TAKEAWAYS • Best tax structure: – Best for certainty to avoid transfer tax: Invest through a foreign corporation • This is very poor from an income tax perspective – Best income tax: Use flow-through entities • A top-tier foreign partnership may give good transfer tax results too – Earnings stripping and intangibles can create further tax efficiencies – Consider your preferred withholding between §§1445 and 1446 • Be careful when structuring due to pitfalls under: – California property and deed transfer taxes – FIRPTA anti-non-recognition, §367, and §7874
  50. 50. 50 ROYSE LAW FIRM, PC Get Connected
  51. 51. 51 ROYSE LAW FIRM, PC Contact Us MENLO PARK 149 Commonwealth Drive, Suite 1001 Menlo Park, CA 94025 LOS ANGELES 445 S Figueroa St 31st Floor Los Angeles, CA 90071 SAN FRANCISCO 135 Main Street 12th Floor San Francisco, CA 94105 Menlo Park Office: 650-813-9700 CONTACT US www.rroyselaw.com @RoyseLaw

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