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Tax Issues for Foreign Investors

Posted by attorney Linda Liang

Along with the surge of green-card oriented foreign investment into green-card, several taxes issues arise. It’s common question from foreign investors that what form of company should they adopt. To answer the question correctly, two factors, state formality and taxes, must be taken into consideration.

From a corporate perspective, the LLC provides the same veil protection as a legal entity to its members but is subject to fewer formalities. Non-US members’ than a traditional corporate structure but has the same limited liability protection for its members. Units or interests that are issued to non-U.S. persons do not require any formal registration under exemptions to certain federal and state securities laws.

From a U.S. income tax perspective, an LLC may be treated for tax purposes either as a disregarded entity or a partnership. The income, profit, deductions, and losses generated by the partnership generally flow through the LLC to the investor on a pretax basis as shown on a Schedule K-1. Unlike corporations that may be taxed twice, the LLC’s tax flow through members’ personal taxes, therefor is imposed once.

Domestic U.S. investors who are partners expect to pay taxes, based on their prevailing U.S. federal and state tax rates and income and cash distributions received from the LLC, as shown on each partner’s Schedule K-1. Foreign partners may not have these expectations. Indeed, how does a foreign partner who 1) is not physically located in the United States, 2) does not maintain an office in the United States? Under the Internal Revenue Code of 1986 and its accompanying regulations, if a foreign partner has business activities, offices, or employees within the United States, his or her distributive share of partnership income is deemed to be “effectively connected" with trade or business conducted within the United States.

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