Isaac Grossman Shares Several Key US Tax Concerns Facing US Investors Abroad in Bloomberg’s Tax Management International Journal

Partner and Chair of Morrison Cohen’s Tax Practice Isaac Grossman authored an article in Bloomberg’s Tax Management International Journal entitled “Accessing US Capital:  Understanding the US Tax Perspective.”

In the article, Isaac explains how understanding some key US issues that may concern US investors can help non-US companies smoothly structure and, ultimately negotiate, a mutually beneficial arrangement with US investors, including:

US Income Tax Status of the Issuer – It is important to understand the US tax status of the Issuer because US tax consequences vary significantly between a corporation, a partnership and a sole proprietorship. Absent a special tax election made with the US tax authorities, a foreign entity will default into its US tax status based on the level of limited liability under local laws and the number of its owners.

Special US Status – If a foreign company is treated as a corporation for US income tax purposes, it may also be labeled as a passive foreign investment company (PFIC) or a controlled foreign corporation (CFC). The special rules for PFICs and CFCs were designed to limit the deferral of US tax by US taxpayers making investments through non-US corporations.

US Tax Status of the Instrument – The US tax characterization of the instrument as debt or equity will determine the US tax consequences of the investment for the US owner. Unfortunately, the US tax authorities have yet to provide clear guidelines on the distinction between debt and equity investments.

US Tax Rates – A US corporate investor will generally apply a single tax rate to all its income — passive or active. In contrast, a US individual investor will pay a lower tax rate on long term capital gains and certain dividends than the tax rate imposed on interest and pass-through operating income.

Local Tax Obligations – Many US investors are fearful of triggering local tax and tax filing obligations. As a result, most private equity funds require that the fund receives local tax advice before an investment is made in any foreign jurisdiction.

Availability of Tax Information – In order to properly report income from a foreign investment, a US taxpayer must receive basic tax information from the issuer of the investment instrument at least annually. Before making an investment, many investors will demand written assurance that additional tax information will be provided upon request.

Financial Reporting – US investors who use GAAP financial reporting may require assistance to understand the differences in the international financial reporting standards (IFRS) used by non-US companies.

Read the full article in the PDF linked below.