Tax Rates.
In Florida, individuals pay a federal income tax on net income of up to 39.6% (there is no state individual income tax) and corporations, whether foreign or domestic, pay a combined federal and state tax of approximately 40%. Dividends to foreign stockholders from Florida corporations are taxed at 30%. However, in the case of a liquidation of a corporation held by a foreigner there is usually no dividend tax. Nonresident individuals do, however, pay estate taxes after a $60,000.00 exemption on U.S. situs property, which includes U.S. real property and shares of stock of Florida corporations.
Branch Profits Tax.
A second “branch profits” tax is imposed when a foreign corporation earns income and does not liquidate, reinvest or distribute the money. Usually this occurs in a rental situation (such as a shopping center which produces positive cash flow or if a corporation owns several properties and sells only one). Thus, if multiple properties or properties generating income are held, it may be better to utilize one or more Florida corporations which in turn may be owned by a foreign corporation (in order to avoid the estate tax).
Portfolio Interest.
Taxes may be reduced through use of portfolio interest loans. In this type of loan, the interest can be deducted from taxable income for purposes of United States federal income taxes and is not taxable to the foreign lender in the United States. There are certain restrictions on these loans. For example, they cannot be made by a “10 percent shareholder.” There are also numerous formal requirements necessary to qualify for this treatment and legal counsel should be consulted in order to make sure that the documents comply with the requirements.
Anonymity.
A further consideration when investing in Florida property is anonymity. Many foreigners would prefer not to have their individual names registered either in local public records when a deed is recorded or with federal and state authorities as a result of filing tax returns. Sometimes, however, with the use of a limited partnership some partners can hold their interest in their own names (if they prefer a lower tax rate at the risk of loss of anonymity and increased estate tax liability) and others, in a company name.
Miscellaneous Considerations.
There are no federal restrictions on foreign ownership of real estate. However, some states have imposed restrictions on foreign investments in real estate in the form of limitations on the number of acres, period of ownership, or purpose for which land may be used. Other states impose reporting requirements on such investments. In Florida, each corporation, foreign corporation, or alien business organization that owns property located in the state, or that transacts business in property located in the state, must have a registered agent. Additionally, if the state authorities serve a subpoena upon the registered agent of the corporation or alien business entity, the business must disclose, among other things, the officers, directors, shareholders, or equitable owners of the firm. State authorities, however, may not disclose such information except in the case of a criminal proceeding.
Aside from the restrictions outlined above, the federal government has the exclusive jurisdiction to control immigration into the U.S., import and export of property, interstate commerce and, as stated earlier, issues that affect national resources, national security and vital sectors of the economy. Thus, foreigners conducting business in the U.S., like U.S. citizens or corporations, become subject to federal laws governing such areas as labor, securities, antitrust, products regulation, patents and trademarks.
States, counties, and municipalities are responsible for governing businesses either incorporated within their jurisdiction or simply doing business there. In Florida, there are laws regulating agriculture, banking, and finance the environment, health, insurance, public service, professional and occupational activities. The state imposes a corporate income tax, personal property tax, intangible tax, state unemployment insurance tax, and sales and use tax. Counties and municipalities may impose real property and occupational license taxes.
Reporting and Disclosure Requirements.
Although there are few U.S. regulations governing foreign investment in the U.S., the federal government does impose reporting and disclosure requirements on certain forms of foreign investments. For example, informational disclosures must be made whenever a foreign person establishes, buys, or sells a 10% or greater interest in a U.S. business enterprise or U.S. real estate; however, acquisitions of residential real estate held exclusively for personal use, or acquisition or establishment of a U.S. business enterprise when total assets of the enterprise do not exceed $1,000,000.00 and the enterprise does not own 200 acres or more of U.S. land are exempt from filing.
Examples and Suggestions.
A few illustrations of the foregoing may be helpful.
- An apartment which does not produce income would generally be held in a foreign company. If, on the other hand, it is rented and income is received, then a Florida company would avoid the double ”branch profits tax.” The shares of the Florida company would be held by a foreign company for purposes of anonymity (Florida does not allow bearer shares) and to avoid estate taxes.
- Purchase of a building or shopping center should generally be through a Florida corporation to avoid a “branch profits tax.” The shares of the Florida corporation may be held by a foreign company to avoid the estate tax on the value of the Florida corporation stock.
- If several properties are held and are to be sold separately, most likely one or more Florida companies are best as a holding entity. Once again, a foreign company would hold the shares of the Florida company. The decision to use one Florida company or multiple Florida companies usually involves a trade off. If the investor uses one Florida company, he will be able to offset losses from one property against income from others. However, distribution of profits (prior to liquidation) will be subject to the 30% withholding tax. If multiple Florida companies are used, losses and gains cannot be offset but when a single property is sold, the distribution upon liquidation of the sole Florida company is tax free (although the sale of the property is still taxable).
- Real estate developments, such as construction of a building or acquiring, repairing and selling several properties, is usually undertaken in a Florida corporation (once again with its shares held by a foreign company). If one property is sold, frequently losses on the others can offset gains.
Naturally, structuring an investment depends on each investor’s goals and frequently is more complicated than that outlined above. Alternative structures are available and involve different risks and rewards. Detailed discussion with an attorney and/or tax advisor is suggested.