[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 499
Real Estate Investments: Sales of U.S. real property interests ("USRPIs") are subject to special income tax rules under the Foreign Investment in U.S. Real Property Tax Act ("FIRPTA"). Sales of USRPIs by non-U.S. investors are subject to U.S. federal income tax. To ensure the tax is paid, a purchaser is generally required to withhold 15% of the purchase price and the non-U.S. seller is required to file a U.S. tax return to claim a refund of any amounts withheld in excess of the actual tax due. The sale of stock in a U.S. domestic corporation is treated as a USRPI if the corporation is (or was within the last five years) a U.S. real property holding corporation ("USRPHC"). In general, a U.S. domestic corporation is a USRPHC if the fair market value of USRPIs held by the corporation equals or exceeds 50% of the fair market value of: (1) its USRPIs; (2) its interests in real property located outside the U.S.; plus (3) any other of its assets which are used or held for use in a trade or business. Real Estate Investment Trusts : The U.S. provides special tax benefits for corporations that qualify as real estate investment trusts ("REITs"). REITs must satisfy strict and detailed requirements intended to ensure that their activities are primarily limited to passive investments in professionally managed real estate investments. REITs pay corporate tax only on amounts not distributed to their stockholders. To the extent that a REIT distributes its income to its stockholders, therefore, its income is subject to a single layer of tax at the stockholder level. In this respect, REITs resemble pass thru entities such as partnerships. Because REITs are treated as corporations, however, non-U.S. investors in a REIT generally are shielded from most U.S. tax and reporting requirements. Statutory Trusts: Trust relationships have existed under common law for centuries, with
courts allowing property ownership to be divided such that a fiduciary would hold legal title to property on behalf of another. Such common law trusts are not legal entities but rather simply contractual fiduciary relationships between a trustee and a beneficiary. In contrast, the Delaware Statutory Trust Act expressly designates trusts formed thereunder (“DSTs”) as legal entities and provides a statutory regime to govern their existence. Delaware’s law is flexible as to the operation, management and activities of the DST and the limited liability granted to beneficial owners, making DSTs a perfect vehicle for a diverse range of business transactions, but most prevalently for real estate transactions. Unlike a REIT, a beneficial interest in a DST that owns real estate assets is considered a "direct interest in real estate" for U.S. tax purposes, and, thus, can qualify as a tax-deferrable real estate investment by the beneficiary. 1.9 Regulatory Issues It should be noted that businesses in the United States are subject to a wide variety of regulatory schemes at both the state and federal level. For example, any company issuing equity interests (whether through private placements or public offerings) is likely subject to regulation by the Securities and Exchange Commission as well as state securities laws. Companies merging with or acquiring another company must look closely at applicable antitrust law. Any company with employees will have to consider state and federal employee protections or state workers’ compensation schemes. Moreover, companies involved in specific industries may encounter additional regulations. For example, manufacturers need to look closely at environmental regulations, communications companies must address federal communication regulatory issues, and companies engaged in providing consumer goods and services face a number of
ILN Corporate Group – Establishing a Business Entity Series
Made with FlippingBook Ebook Creator