Skip to content

U.S. Structuring Basics for Inbound Investors

Thought Leadership

U.S. Structuring Basics for Inbound Investors
 
The U.S. is a prime destination for foreign capital due to its deep markets and stability. But its complex tax environment requires careful planning. This article outlines considerations for structuring inbound U.S. investments, focusing on entity selection and tax efficiency.

1. Balancing Objectives
Investors must balance liability protection, tax efficiency, and administrative manageability. The right structure depends on factors like activity type, treaty position, and cash planning.


2. Investment Options
Direct Investment
Direct investment involves a foreign individual or company holding U.S. assets directly, which can include ownership through a partnership or disregarded entity. This approach subjects the investor to U.S. taxes on: (1) effectively connected income (ECI) at 21%, (2) fixed, determinable, annual, or periodic (FDAP) income (e.g., dividends, rents, royalties, interest, service fees) withheld at 30% of gross payment amount (unless reduced by treaty), and (3) U.S. real property dispositions under the foreign investment in real property tax act (FIRPTA) at 15% of gross disposition value (unless reduced by treaty). If the inbound investor is an individual, U.S. estate taxes may also apply. If the inbound investor is a foreign corporation, the structure is also subject to the branch profits tax (BPT) imposed at 30% (unless reduced by treaty) of the dividend equivalent amount (DEA). While simple, the direct investment structure exposes investors to significant U.S. tax obligations and lacks liability protection.

U.S. “Blocker” Corporation
A common strategy is using a U.S. C-corporation to hold inbound investments. This structure mitigates risk of a U.S. permanent establishment (USPE) or U.S. trade or business (USTB) of the inbound investor, absorbing ECI and avoiding BPT, with the U.S. C-corporation paying a 21% corporate tax. This structure also offers legal liability protection at the shareholder level, assuming corporate formalities are properly implemented and observed. But the blocker structure is subject to two levels of tax—21% at the corporate level, and tax at the shareholder level on dividends (withholding tax on FDAP). Treaty qualification can potentially mitigate the impact of two-level tax in the blocker structure. For most inbound U.S. investments, the blocker structure offers strong balance of the above-noted objectives.

3. Treaty Relief
Treaty relief may be available to avoid USPE or USTB (and associated ECI and BPT) and reduce or eliminate otherwise imposable taxes on: real property dispositions under FIRPTA, withholding taxes on FDAP income, and BPT liability. Foreign investors that may have non-U.S. employees traveling to and working in the U.S. should evaluate potential U.S. tax risk posed at both the company and individual level. Understanding the duration and type of activity is essential to develop and implement appropriate mitigation strategies. Proper documentation is crucial to claiming treaty benefits and may include some or all of following: residency certificates, Form W-8BEN or Form W-8BEN-E, Form 8833, other forms (Form 1120-F / protective) or agreements (e.g., secondment agreement), a formal treaty opinion.

4. Financing: Debt vs. Equity
Foreign investors often use related-party debt to capitalize U.S. ventures, aiming to deduct interest and repatriate profits. However, under U.S. common and statutory law, debt can be reclassified as equity, affecting deductions and potentially triggering other unintended results. Additionally, even assuming proper debt treatment, U.S. statutory provisions may apply to limit or alter the timing of recognition of interest expense deductions. Finally, U.S. law provides the IRS broad authority to adjust intercompany transactions where arm’s-length principles are found to be lacking. Accordingly, debt-financed inbound investments should be carefully structured, evaluated, and documented to achieve intended results.

5. State Tax Considerations
State taxes vary, with varied nexus thresholds and filing requirements. Investors should consider state-specific rules, such as combined reporting and water’s-edge elections, to optimize tax outcomes.

6. Key Takeaways
Broadly, focusing on the following key concepts can help U.S. inbound investors attain a tax efficient and limited liability structure:
  1. Use blockers and treaties to avoid, mitigate or manage USPE/USTB, ECI, BPT, FIRPTA and compliance costs.
  2. Evaluate and model financing options and tax impacts.
  3. Evaluate and model cash repatriation options and tax impacts.
  4. Document treaty qualification appropriately based on facts and circumstances.

Thinking about investing in the U.S., or adjusting or expanding your U.S. operations? Start with a consultation to evaluate your company’s readiness and identify strategies for success. Connect with Nick Eusanio, Tax & Transactions Partner at DBL Law, to learn how proper tax planning and investment structure can help achieve business goals.

U.S. Structuring Basics for Inbound Investors

Scroll To Top