Legal/tax structure: buying outside the US

[John Stanley]

Hi everyone,

I'm a US citizen living in Germany (with local residency). I'm looking at buying an investment property and need to decide whether to do it as a US or German company. Does anyone have insight into the pros and cons of each from a tax/legal perspective? I'm starting to research double taxation treaties now but there are other considerations like "controlled foreign corporations" laws that I'm not familiar with yet. What's your experience?

[Charles D.]

@John Stanley What's your intention/purpose of holding the property through a legal entity as opposed to holding directly in your name?

I would think the optimal structure for holding a property ultimately depends on your goals with the property (e.g. buy and hold for rental profits, flip, etc.), what you're trying to achieve with the asset protection (i.e. why you want to hold the property in an entity) and your exit strategy with the property. Getting clear on these items would be a good place to start.

I'll assume it's US property for now. From a US tax perspective, if you set up a non-US entity where all shareholders have limited liability, by default is it a foreign corporation for US tax purposes. If you also a) hold > 10% of the vote and value of the shares and b) more than 50% is owned by US persons (which, if a German co is held 100% by you, both tests would be met), yes it would be a controlled foreign corporation ("CFC"), unless you make a check the box election to treat it as a foreign disregarded entity. There's very stringent rules on how to do that and the timing of when it needs to happen. The forms for CFCs alone are like 16 pages and it's extremely complex; they are not fun. Assuming the German co was profitable, if you held it this way and paid German tax on the rental profits, unless you make a 962 election, you can't claim a foreign tax credit for the German taxes paid on your individual US tax return so depending on your situation you could get double taxed (when considering the tax paid in both countries) if it's taxable also in Germany, since you mentioned you're a resident (although I have no idea how this would be treated under German tax law). By contrast, a US LLC 100% owned by you would be disregarded so for tax purposes the income on the property would be taxed and reported as if you owned it directly in your own name.

It's worth mentioning that the numbers expected matter. For example, alot of rental properties for buy and hold purposes will create losses for tax purposes (even if positive cash flow) primarily due to depreciation, so the above might be more academic if you're running losses for tax purposes while you're holding it. However, if you're planning to sell it, the tax consequences could vary and if there has been appreciation then the holding structure could be very relevant.

This isn't tax advice, but just a few ideas that should be discussed with a CPA and attorney. The landscape has got so complex in this area, especially in the last few years, so in my opinion it's a must. Also it's somewhat difficult to answer broad questions about structure without understanding all the facts on your individual circumstances and what you're trying to achieve, as this will certainly play into these decisions.

Hope that helps give some direction.