STRUCTURE & ENTITIES

Deciding on the appropriate structure and related entities for US investment entails applying the tax law (US tax rules, foreign tax rules, and any relevant Treaties) in relation to the proposed investment.  Tax efficiency is a major determinant of overall structure, requiring both US tax efficiency and the tax efficient integration into foreign ownership or holding structures.

From the practical perspective, the structure also needs to be efficient operationally, from the perspective of management control, and in terms of reporting lines.

Furthermore, decisions as to structure and entities entail consideration of potential liability attaching to the US investment, and in cases, liability attaching to the owners of the investment.  For example, where operations carry significant risk of liability, or a significant disparity in risk between activities or assets, this needs to be recognized and accommodated in the US structure.

In many cases, structure and entity formation also needs to address future funding and capitalization requirements, from a legal and practical perspective, as well as the perspective of future investors.

TAX EFFICIENCY

Optimal tax efficiency is reached where the worldwide taxes are at the legal minimum. This entails a US structure which is both taxed optimally in the US, and also allows tax-efficient flows of income (and capital) to non-US investors.

While corporations have traditionally been popular as operating entities within the US, in cases it may be advantageous for operations to be undertaken by one or more Limited Liability Companies (LLC’s).  LLC’s can be taxed as partnerships with the result that tax may be paid at partner / investor level, carrying the potential to eliminate multiple-tier taxation within the US.  Against this there is potential for branch profits / remittance tax in some cases where the LLC is owned directly by foreign investors.

The US structure must allow for tax efficient flows of income (and capital) to the non-US investors.  The US typically imposes withholding taxes on dividends, interest and royalties paid to non-US residents of 30%.  There may also be withholding taxes on partnership payments to foreign partners and on payments to foreign parties who dispose of US real estate interests.  In many cases withholding taxes are reduced or eliminated under a Tax Treaty between the US and country where investors reside, or between the US and a third country.  Most US Tax Treaties impose Limitation on Benefit requirements that need to be satisfied before Treaty benefits apply.

While US entities are taxed on their worldwide income, non-resident entities are generally taxed on their US source income only.  It is sometimes possible and advantageous to structure transactions by non-resident entities to fall beyond US source rules, with the result that the transactions are not subject to US tax.  US entities should comply with US thin capitalization rules to avoid exposure to disallowance of interest deductions.