Using Offshore Companies for International Investors

[Account Closed]

In the last few years I have been fortunate to have a number of international (non-US) persons invest in real estate with me.

One of the biggest concerns that international investors have is the tax burden that exists when investing in the US, especially on personal income taxes. Foreigners, especially from Asia, are not used to paying the high income taxes we have here in the US, not to mention estate taxes. In comparison to other Western European countries the US tax code is very tough on those who are from overseas that invest in the US, as well as US citizens living and working overseas. For example, in the UK there is no capital gains tax on foreign citizens and companies. Furthermore, the US is the only country in the world that taxes its citizens that live overseas and whose income is earned in a foreign country.

To alleviate this concern I have sought the advise of a number of lawyers, accountants and finance professionals, and after putting it in practice, I am going to share my experience with those on the BP board especially since after running a search I haven't read much about offshore companies.

One of the best ways that I have found for non-US nationals to invest in the US is through an offshore holding company. What my investors have done is place their capital in an offshore company which then operates in the US as a foreign company. This company then owns a certain percentage of a local US LLC. The offshore company is held in what is called a "nominee trust." A nominee trust is a trust created for the purpose of holding assets for beneficiaries whose identities are kept secret (this is available in the US, not just in internationally). In this arrangement, the beneficiary of the trust (the person providing the capital and the "real" owner) designates an individual or accounting firm to be the "nominee." This means in all legal documents it appears that the trust is in possession by the accountant. This means that no one can find out who the owner is without physically breaking into the accounting firm's office and looking for the signature of the beneficiary.

In this manner, profits from real estate investments can be returned to the offshore company, but the identity of the owner can remain secret, which mitigates the tax concerns that many international investors have.

In practice, it has not been too difficult construct such an entity. At first glance it appears complicated but actually works rather elegantly. One of my investors from Hong Kong actually introduced this concept to me, as it has long been a form of mitigating tax burden for individuals. In her case:
- Nominee trust is designated as accountant in Hong Kong (far away from Washington DC)
- Offshore company is registered in the British Virgin Islands and is owned by the Trust. Apparently BVI companies are under higher scrutiny by the US IRS compared to companies located in places such as the Cayman Islands. But I guess BVI is the cheapest. Costs about $100 to register a new company. Some accounting firms have premade "shelf" companies with preselected names which can be transferred immediately. You don't get to pick the name but you can get the offshore company made quickly and since the name was generated by a firm, it is likely quite anonymous has has nothing that can identify the trust's beneficiary. ).
- This BVI company registers as a foreign company operating in your State.
- Ownership of LLC which is actually used for real estate investing is by the BVI company.
- For deals where we both had money in the deal, my LLC owned a part of the LLC vehicle used to invest.
- For deals where I just earned a fee, like a standard waterfall arrangement, my company was paid a salary out of the investment vehicle.
- Foreign Investor money is flowed through the LLC to the foreign company operating in the US, and then back to BVI after corporate level taxes have been paid.

For my own accounting, ESPECIALLY business entities used to invest international partner money, I use a Big-4 accounting firm to do the books in order to protect my own risk of IRS audit.

The use of offshore accounts should be cautioned. There is a huge push from the White House to close tax loopholes and you can sure bet that by engaging international investors you are in fact making yourself and your company a target for audit. It is for this reason I am willing to pay more for my accountants to be one of the Big 4. For more info on this take a look at the "Stop Tax Haven Abuse Act" which has been introduced in the US Congress but not passed.

US citizens should be very careful when using offshore companies for investment, especially with their own money. Of course, all US citizens must report ALL income. However, big companies often use these same methods to save tax dollars (think: being a CEO of a company, being paid to your personal Cayman account by the company's offshore subsidiary, and not reporting a cent).

For example, a US citizen could open a offshore entity and just get paid to it. It would be very difficult for the person to remit the money back to the US for one's personal use without alerting the IRS, but one could use that offshore company to continue to invest in the US. One may not neccessarily need the money because, for example, if you wanted to buy a new house, you could just use the cash offshore to purchase the property and rent it back to yourself. Of course, this is an example of what the White House is trying to avoid, and this is NOT something I have done or would recommend doing. Note that the government is in fact cracking down and is willing to prosecute international firms and individuals that hide US client or personal money offshore (think UBS in Switzerland).

I have and currently used the above structure for foreign investors to work with me in the US. Investors have found such an arrangement beneficial to them and I have actually been able to convince a few prospective partners who were on the fence to invest because of this offshore structure.

Also, this structure will not help a company skip out on taxes at the corporate level, such as capital gains and corporate taxes. Only the hiding of the identity of the final beneficiary and mitigation of their personal income tax burden.

Good luck, and make sure you speak to a very very good accountant before you do any of this.

Edit: I just realized this is my 100th post! Glad to make it a useful one instead of one of my usual sarcastic/snotty remarks.