Foreign Investment in the United States

Miami is a hub for international investment and each investor’s personal and financial circumstances are different.  These differences can radically change the way the tax law affects the investor and often create expensive traps for the unwary international investor.   We can help you anticipate these traps before they become an issue, and if you happen to encounter one of these problems, we can help you sort it out and minimize the damage.

Do any of these describe your situation?  The profile of the international investor is usually a non-resident alien or international family  with an established fortune or business in a foreign jurisdiction who comes and goes between the United States and their home country on a fairly regular basis.   The investor may or may not have plans to relocate to the United States permanently at some point in the future.  The investor may have immediate family members that permanently reside in the United States or children who are attending college with every intention of remaining in the United States after graduation.

Regardless of your particular situation, failure to properly navigate the complex web of U.S. tax laws can become a very expensive mistake.  Inform yourself.


Investing in the United States, in a tax nutshell

The four fundamental concepts.   The main difference in the tax treatment of U.S. persons from non-resident aliens is quite simple.  While U.S. persons are taxed on their entire world-wide income, non-resident aliens are only taxed by the U.S. on income that stems from its U.S. investments or business activities.  Additionally, U.S. persons are subject to the estate tax on their world-wide assets and tax on gifts of their world-wide wealth.  In a nutshell, U.S. taxation of non-resident aliens revolves around four fundamental concepts:

1.  Are you a “U.S. person”?   This may seem like a silly question, but the concept of tax residency does not necessarily have to do with what country issues your passport.  A foreign investor visiting the United States for longer than a certain time period may be treated as a resident alien for U.S. income tax purposes.   If you are not careful, this could be a very expensive trap for the unwary.

2.  Where is the income coming from?   Is the income from sources within the United States or does it come from abroad?

3.  What are you doing in the United States?   Do the activities rise to the level of a “United States trade or business” as defined by the tax laws and multitude of court cases interpreting those laws or not?

4.  What is the relationship between what you are doing in the U.S., and where and how you are making that income?    Is that income “effectively connected” to the U.S. trade or business as that term is defined under U.S. tax law?

Passive Income or Active Business Income – What are they and which one is better for you?   In plain English, the United States tax code makes a distinction between the foreign investor’s active business profits and passive investment income, such as rents, dividends, and interest.  Passive income is taxed at a flat rate of 30% of the gross revenues, while active business profits are taxed on a net (after expenses) basis at graduated tax rates, as if the foreign investor where operating a U.S. trade or business much like any other American.  So while it may look like the U.S. tax law favors active business investment over passive investment, in actuality, the issue is not as clear and will depend on an analysis of your particular circumstances.

Trump cards – the role of tax treaties.  Confused already?  Well, there’s much more.   For citizens of countries that have tax treaties with the United States, this tax treatment could be altered by the application of a relevant tax treaty provision.

In a nutshell – you have a lot of options.  Certain kinds of U.S. source investment income and capital gains may be tax-exempt to the non-resident alien.   There are also creative financing strategies that take advantage of some beneficial tax provisions that make certain types of passive, portfolio-style income tax-exempt to non-resident investors.

The point is that within this framework, you, as a foreign investor, with the proper advice, have a wide range of planning options at your disposal to effectively manage the effective tax rate paid on your activities in the United States.   Before investing in the United States, it is imperative that you seek the advice of a qualified tax lawyer.


Investing in United States Real Estate

Many foreign investors consider real estate a safe vehicle to invest their capital and the Florida real estate market usually provides a great opportunity for foreign investors to take advantage of the favorable exchange rates between the U.S. dollar and their foreign currency.  The secret to success is owning the property “correctly” in order to minimize the U.S. income and estate and gift tax consequences, as well as preserve the privacy and liability protections of the foreign investor.  Please see our page dedicated specifically to foreign investment in U.S. real estate.


Pre-Immigration Tax Planning

Moving to the U.S. is filled with many (tax) traps for the unwary.  A foreign person with world-wide assets may wish to formally immigrate to the United States and will thereafter be subject to the tax regime in place for U.S. persons.  In some unfortunate cases, a foreign person with investments in the United States, but with no intention of leaving his home country, may spend so much time tending to his U.S. investments, that his continued presence in the United States may actually trigger his being taxed as a U.S.  tax resident.  You don’t want the latter to happen by mistake and the former shouldn’t be completed without proper pre-immigration tax planning.

Pre-immigration tax planning is the strategic analysis of the foreign person’s financial and business panorama before the person becomes a U.S. tax resident in order to minimize U.S. taxation and preserve their wealth.  These tax wealth preservation goals can be accomplished via timely decisions to accelerate or defer income, gain, or loss so as to avoid preventable exposure to and minimize U.S. taxation after the person’s immigration.


If you are a foreign person considering investing in or immigrating to the United States, it is imperative that you seek proper guidance and avoid costly and completely preventable mistakes.  Give us a call us at (305) 403-0641 or email us at info@msquaredlaw.com before you make your move.