JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

Re-domicile U.S. Realty Holding
Company to a Tax Haven

QUESTION: I am one of 3 managing partners in a family owned corporation whose assets are entirely in real estate, including farms, residential and commercial rentals. We would like to sell much of the residential and commercial properties, however, all of these properties are fully depreciated and sales place the corporation in the 34 and 39% tax brackets.

In the summary of your CFC Tax guide you have the statement "It's true that an offshore corporation is not subject to the taxing jurisdiction of the U.S. However, the U.S. shareholders of an offshore corporation are subject to the taxing jurisdiction of the U.S."

If we were to transfer our corporation to a tax free country would we avoid the corporate tax and pay only the 15% tax on dividends paid to the U.S. shareholders? Does your CFC Tax Guide answer this question?

REPLY: Your question involves an assortment of diverse tax rules and I can't provide a short and accurate answer. However, the CFC Tax Guide does deal with all of the issues that would be involved.

U.S. persons who own stock of foreign corporations are subject to current income tax on certain types of income such as investment income -- which usually includes capital gains. While this might avoid or bypass the corporate income tax, the income is generally taxed as
ordinary income rather than as qualified dividends or long term gains that are eligible for the 15% maximum tax rate.

But when a U.S. corporation changes its legal "residence" from the U.S. to a foreign country, some complex tax rules become applicable. Doing this is similar to expatriation by an individual.

Also, special rules apply to capital gains on U.S. real estate or real property interests that are owned by foreign persons -- including foreign corporations. When a foreign person/entity sells U.S. real estate, the U.S. seller is required to withhold 10% of the gross sales proceeds as a tax. A tax return can be filed to get a refund if the actual tax is less than the amount withheld.

This kind of transaction would embroil the U.S. corporation and its shareholders in a virtual spaghetti bowl of inter-twined tax rules and would most likely result in more taxes rather than less.