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US Tax Implications of Drop Shipping and Amazon FBA Retailing

I am constantly meeting entrepreneurs and business owners who are running great businesses online. They tell me that US taxes are a nightmare for them. They are unable to find one place where they can get all the answers they seek –

  • If I’m a digital nomad, spending time in Bali or Chiang Mai or Penang – what, if any, is my tax exposure in the jurisdiction in which I am spending time?
  • If I’m a US citizen or green card holder, what, if any is my tax exposure given that I am spending months or years away from the US?
  • If I’m British, Australian, Italian, French etc. - what, if any is my tax exposure given that I am spending months or years away from my country of origin?
  • If I am based in Asia but I’m running a Drop Shipping business focusing on the US market. What is my US tax exposure?
  • If I am based in Asia but I’m running a business using Amazon FBA, focusing on the US market. What is my US tax exposure?
  • I think that my Drop Shipping or Amazon FBA business has US tax exposure, is there one firm that can help me with US tax planning and compliance for sales taxes, use taxes, city taxes, state taxes, Federal taxes?
  • Software companies are selling me US tax compliance services, but they are not licensed tax practitioners so what happens to me and my business if the software company gets something wrong with my US taxes?

These are all valid questions and it is near impossible for a single individual to know all these answers. It is also unusual for a single firm to have all these answers as well. That’s where we come in. We are an international tax team with accredited and qualified cross border tax professionals. With that in mind, here are some answers.

If I’m a digital nomad, spending time in Bali or Chiang Mai or Penang – what, if any, is my tax exposure in the jurisdiction in which I am spending time?

Read our thoughts here - http://www.mooresrowland.tax/2018/04/tax-responsibilities-of-digital-nomads.html

And here - http://www.mooresrowland.tax/2018/03/non-us-digital-nomads-working-for.html

If I am based in Asia but I’m running a Drop Shipping business focusing on the US market. What is my US tax exposure?

The key tax to pay attention to would be sales and use tax. Unfortunately, this is one of the most complex tax structures in the US and everyone needs help in planning and compliance. This is more of an issue since the rules changed in summer 2018.

On June 21, 2018, the U.S. Supreme Court overturned decades of established law that required vendors to have a physical presence in a state before that state could require them to collect and remit sales tax on purchases by customers within the jurisdiction. The Court overturned its 1992 decision, Quill Corp. v. North Dakota, with its recent decision in South Dakota v. Wayfair, Inc., noting that "the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause." While it will take some time to completely understand the full effects of this decision, it is safe to say that this is the most important development in the sales tax world in at least 25 years.

Read more here - http://www.mooresrowland.tax/2018/12/supreme-court-abolishes-physical.html

What about US Income Taxes for Amazon Sellers or Drop Shippers who are not American and who live outside of the US?

Read more here - http://www.mooresrowland.tax/2017/03/if-im-not-american-and-i-sell-stuff.html

More Questions? Drop us an email on help@htj.tax today


More on Pre Immigration US Tax Planning

Part I- the Split family

Many of our clients moving from Asia to the US, tend to split their family in two. Some family members (especially the father) remain in Asia and others (particularly the mom and kids) make the move to the US. In such situations, it is important for them to understand the definition of residency from a tax perspective.

Section 138, Division A, of H.R. 4170 (the Tax Reform Act of 1984) amends Section 7701 of the Internal Revenue Code of 1954, as amended (“Code”), to include, as new Subsection 7701(b), a definition of resident alien and nonresident alien for Federal income tax purposes.

President Reagan signed H.R. 4170 into law on July 18, 1984. Thus, effective for tax years beginning after 1984, objective definitions of the terms residents aliens (“RAs”) and nonresidents aliens (“NRAs”) for Federal income tax purposes are incorporated into the Code.

It is very important to note however, that the new definitions do not affect the determination of residence for Federal estate and gift tax purposes (discussed later). In addition, the Joint Explanatory Statement of the Committee of Conference (the “Joint Statement”) also makes it clear that it is not intended that the definitions of RA and NRA affect the determination of whether an estate or trust is a U.S. or foreign estate or trust, “except insofar as that determination itself turns on the residence or non-residence of particular alien individuals.”

RESIDENCE TESTS

Code Section 7701(b) sets forth the following two (2) tests pursuant to which an alien individual will be considered a RA with respect to any calendar year if he:

  • is a lawful permanent resident of the United States at any time during the calendar year (the “Green Card Test”); or
  • is present in the U.S. for thirty-one (31) days or more during the current calendar year and has been present in the United States for a substantial period of time--one hundred eighty-three (183) days or more during a three (3) year period weighted toward the present year (the “Substantial Presence Test”).

Pursuant to Section 7701(b)(1)(A), an alien individual is to be considered a RA for any calendar year, if and only if, he satisfies the requirements of the Green Card Test, the Substantial Presence Test or the First Year Election.

  1. The Green Card Test: A lawful permanent resident is defined as an individual who has the status of having been lawfully accorded the privilege of residing permanently in the United States in accordance with the immigration laws, and if such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). Thus, a lawful permanent resident continues to be a resident for income tax purposes until he officially loses or abandons the status of lawful permanent resident.
  2. The Substantial Presence Test: An alien individual is classified as a RA as to a calendar year (the “current year”) if he is present in the United States for thirty-one (31) or more days in the current year and has been present in the United States for one hundred eighty three (183) days or more during a three (3) year period, weighted toward the current year. This weighting takes place as follows: an alien is considered a RA during the current year if the sum of the days he is present in the United States during the current year, plus one-third (1/3) of the days present during the first preceding year, plus one-sixth (1/6) of the days present during the second preceding year, equals or exceeds one hundred eighty-three (183) days. Exceptions will be discussed later.
Part II - Income Tax Planning

A United States (“U.S.”) taxpayer is subject to income, gift and estate tax on a worldwide basis with reporting obligations relating to worldwide income, gifts and assets as well. Conversely, a foreign taxpayer is subject to a more limited U.S. tax regime and to a more limited reporting regime.

U.S. Income Tax

If an individual is not a citizen of the U.S., and such individual does not satisfy the Green Card Test (the “GCT”) or the Substantial Presence Test ( the “SPT”), or does not qualify for and in addition make the First Year Election, such individual will be a U.S. income tax nonresident alien (“NRA”). If the individual does satisfy the GCT or the SPT, or qualifies for and makes the First Year Election, such individual will instead be a U.S. income tax resident (“RA”). It is also important to note that for U.S. income tax purposes, the definition of a U.S. Taxpayer includes an RA as well as a U.S. citizen.

U.S. Gift, Estate and Generation Skipping Transfer Tax (U.S. Transfer Tax)

Unlike the statutory definition that can be found to determine RA versus NRA status, there is no such definition for U.S. Transfer Tax purposes and instead the “facts and circumstances” must be reviewed in detail to determine if a client is a U.S. resident alien domiciliary (“RAD”) versus a nonresident alien domiciliary (“NRAD”).

Domestic Versus Foreign Legal Entities

Pre-Check-the-Box rules, the place of organization controlled in distinguishing domestic from foreign corporations. A domestic corporation is a corporation created or organized in the U.S., or under the law of the U.S. (including the District of Columbia), or of any State. §7701(a)(4). In contrast, a foreign corporation is one which is neither created nor organized in the U.S. nor under the law of the U.S. or any State. §§7701(a)(4), (5) and (9).

Domestic Versus Foreign Partnerships

A foreign partnership is defined in the negative, as a partnership which is not domestic. §7701(a)(5). A domestic partnership is in turn defined as one created or organized in the U.S., or under the law of the U.S. or of any State, unless the Secretary provides otherwise by regulations. §7701(a)(4). See, PLR 8635064 and PLR 8701017. Effective January 1, 1997, the Check-the-Box rules state that when

distinguishing a domestic versus a foreign entity, an entity is domestic if it is created or organized in the U.S. or under the law of the U.S. or any state, and an entity is foreign if it is not domestic. Reg. §301.7701-1(d).

Domestic Versus Foreign Situs Trusts

Before the enactment of The Small Business Job Protection Act (SBJPA) on August 20, 1996, the inquiry as to whether a trust was a foreign trust was of greater consequence than the determination of whether a partnership was a foreign partnership because, unlike a partnership, the trust itself may be a taxable entity. Thus, foreign situs may determine whether and to what extent a trust is subject to tax. Because of the difficulty in determining the status of a trust as domestic versus foreign, and the importance of that determination for federal tax purposes, SBJPA enacted a two-part objective test. A domestic trust is any trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust, and one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. A foreign trust means any trust other than a domestic trust. See §§7701(a)(30)(E) and (31)(B). The new objective test applies to tax years beginning after December 31, 1996.

Domestic Versus Foreign Estates

Upon the death of an individual, estate administration will generally begin. Although an estate does not present the entity classification issues generally involved with the creation of a trust (e.g., associations taxable as corporations), an estate's situs as domestic versus foreign is an extremely important consideration when determining the appropriate U.S. tax consequences and planning alternatives. Many of the pre-SBJPA "trust" considerations continue to apply with equal weight when determining an estate's situs. As to the situs of an estate as domestic versus foreign, consider Rev. Rul. 64-307, 1964-2 C.B. 163 (placing emphasis on the residence of the decedent at the time of death); Rev. Rul. 81-112, PLR 8524010 (the estate of a U.S. citizen who resided continuously in a foreign country during several years prior to his death was held to be a foreign estate); and Rev. Rul. 62-154, 1962-2 C.B. 148, PLR 7917087 and PLR 7918118 (the citizenship, residence and activities of the ancillary administrator must also be considered).

The U.S. Taxation of Foreign Persons A. Introduction

Going back many years, Congress enacted legislation to tighten perceived tax avoidance benefitting U.S. citizens and eventually specifically defined long-term lawful permanent residents who chose to expatriate, i.e., give up such U.S. citizenship or lawful permanent resident status and convert to NRA status. Most recently, the Heroes Earnings Assistance and Relief Tax Act of 2008 introduced the most aggressive expatriation tax changes yet, which changes are oftentimes referred to as the Exit Tax with respect to U.S. income tax and the Inheritance Tax with respect to gifts and bequests received by certain U.S. taxpayers from a covered expatriate. The Exit Tax and Inheritance Tax provisions apply to any individual who expatriates on or after June 17, 2008. Consider Notice 2009-85, and more recently, the proposed regulations which appeared in the September 28, 2015 edition of the Internal Revenue Bulletin.

B. A Special Exclusion For Foreign-Earned Income

As an inducement for U.S. taxpayer individuals to accept employment abroad and to help U.S. businesses strengthen their foreign presence, consider §911.

C. Avoiding or Minimizing the Potential for Double Taxation

When a U.S. taxpayer generates income or gain from abroad, the possibility of double taxation exists and thus the U.S. taxpayer must be familiar with the foreign tax credit. Consider §§901-909.

D. Congressional Efforts to Eliminate or Minimize Tax Avoidance and Perceived Abuses and Unwarranted Deferrals

Since the introduction of taxes, taxpayers and the government have long disputed what constitutes legitimate tax planning with resulting tax avoidance or minimization versus what constitutes actual or perceived abuses. Congress has enacted and revised numerous provisions over time which comprise part of the Service’s arsenal in the Service’s efforts to “control” taxpayers. Consider the code sections dealing with outbound transfers of property and corporate inversions, Controlled Foreign Corporation (“CFC”), Passive Foreign Investment Company (“PFIC”), and the §482 transfer-pricing rules.

Part III - Transfer tax planning for NRA vs RA

U.S. Residence for U.S. Estate and Gift Tax Purposes.

The concept of “residence” for income tax purposes should not be equated with “residence” for estate and gift tax purposes. The objective residence definitions under §7701(b) (and the final regulations thereunder issued on April 24, 1992) do not affect the definition of residence for Federal estate and gift tax purposes. For estate and gift tax purposes, residence in the U.S. requires physical presence in some place in the U.S. and the intention to make that place a fixed and permanent home. Christina de Bourbon Patino, 51-1 USTC ¶9123 (4th Cir.), aff’g, 13 T.C. 816 (1949). Therefore, the determination of residence in this context must be made independently from the determination of residence for income tax purposes. Also, one’s immigration status is not determinative of such person’s U.S. estate and gift tax residence, but is merely a factor in that determination. Because the estate and gift tax regulations in this area are unclear and inconclusive, the determination of a person’s residence for estate and gift tax purposes constitutes a difficult and subjective factual determination.

  1. Intention and Overt Act.

The estate and gift tax regulations define “residence” in terms of domicile: “A ‘resident’ decedent is a decedent who, at the time of his death, had a domicile in the United States . . . A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.” See Regs. §§20.0-1(b)(1) and 25.2501-1(b).

  1. Illustrative Cases.

“Domicile” for estate and gift tax purposes is a rather nebulous concept. Thus, although many cases have dealt with the issue, no clear-cut rule has evolved. However, even though most of such cases are old, the decisive factors noted therein may serve as useful guidelines.

A. In Fifth Ave. Bank of New York, Ex’r., 36 B.T.A. 534 (1937):

The decedent, a U.S. citizen, was born in New York in 1870. Between 1912 and 1920 she traveled back and forth between the U.S. and France. In March 1920 she returned to France, and lived there until her death in 1932. The decedent’s purpose for remaining in France was to seek medical advice for her diabetes and to help her cousin who was experiencing marital difficulties. In addition, she had often stated to a cousin that she intended to return to the U.S. when she regained her health and her cousin’s problems were resolved. Whenever she renewed her passports, she stated her reason to travel abroad to be “temporary residence and travel” but in later renewals she stated her foreign stay to be “indefinite.” She always stated her domicile as the U.S., paid U.S. taxes until her death, and never claimed foreign citizenship. The Service attempted to classify her as a nonresident decedent for estate tax purposes by arguing that her prolonged stay in France caused her domicile to change. Under the applicable rules at the time of her death, non-resident decedent status would have adversely affected her estate’s right to an exemption and deduction of certain expenses. The Court, in finding her to be a resident decedent, stated: “Two facts must exist to effect a change over to a new domicile of choice, both residence in the new place and an intention to make the new residence a permanent home. There must be both the fact and the intent.” (at p. 538).

B. In Estate of Bloch-Sulzberger, 6 T.C.M. 1201 (1947):

The decedent, who was born in Switzerland in 1883 and died there in 1941, had stated under oath in various documents and in visas, reentry permits, and tax returns, that he was a U.S. resident. Upon the decedent’s death, the Service attempted to tax him as a U.S. resident. In addition to his dying in Switzerland, the decedent had retained his home and business interests there, and had remained active with Swiss charities and civic organizations. To the Court, the problem was not whether or not the decedent had obtained various benefits by perjured statements, but whether or not he was a resident for U.S. estate tax purposes. In finding him not to be, the Court stated: “[a] resident for estate tax purposes . . . is one who at the time of his death had his domicile in the United States. Intention of the person is extremely important. Domicile is the place which he regards as his home, and where he intends to live. His old domicile continues until it appears that he intends to live there no longer but has an intention to make his home henceforth at some other place and to remain there indefinitely.” (at p. 1203). Because the decedent died in Switzerland, retained his home and business interests there, and remained active with Swiss charities and civic organizations, the Court concluded that he intended for that country to remain his domicile.

C. In Estate of Paquette, 46 T.C.M. 1400 (1983):

The decedent, a Canadian citizen, was born in Canada in 1897. He operated two retail stores in Montreal. In addition, he owned two houses in Canada, one of which was located near his stores in Montreal. The other house was utilized by the decedent as a country house. Beginning in 1950 and up to the time of his death in 1975, the decedent made yearly vacation trips to Florida, generally during the winter months. Thus, the decedent would generally remain in Florida from October through April, returning to Canada for the summer. In 1955, the decedent retired and sold his business. In 1956, the decedent sold his house in Montreal, and in the early part of 1957 he purchased a house in Florida which was furnished with the contents of the house he had sold in Montreal. After 1971, the decedent’s wife became ill and was not able to accompany the decedent when he returned to Canada for the summer. In the fall of 1971, the decedent sold his country house because it required too much work to maintain and he intended to buy a small house or rent an apartment in Montreal. In 1972, the decedent began to experience a series of illnesses and he was hospitalized and treated in Florida. However, he continued to return to Canada to meet with his professional advisors and friends. In 1974, the decedent executed his Last Will and Testament while in Montreal and stated therein that he was a resident of Canada. He returned to Florida in November 1974, and he remained there until he died in January 1975. In concluding that the decedent was domiciled in Canada, the Court stated: “In addition to his yearly visits to Canada, decedent maintained numerous contacts with his country of citizenship which evidenced his intention to retain his Canadian domicile. Up until the date of his death, he filed income tax returns in Canada, he voted in Canada, and he maintained a valid Canadian driver’s license as well as a valid Canadian passport. In addition, decedent’s automobile was purchased, registered, and insured in Canada. Moreover, it is not without significance that most of decedent’s assets, valued at $556,351.76, were located in Canada. He met with Mr. Larouche and Mr. Bourgeois regularly in Canada concerning his investments. In order to keep his assets liquid, decedent’s portfolio was divided between deposits in Canadian banks and stocks and bonds of Canadian corporations. Decedent returned yearly to actively manage his investments. Decedent met at least twice a year with Mr. Larouche at which time he personally made the decisions of when and where to invest his money. In fact, Mr. Larouche was prohibited from making changes in decedent’s portfolio unless he received personal authorization.

* * *

After careful evaluation of all the evidence, including testimony by those who were well acquainted with decedent, we find that decedent never had any intention to establish a United States domicile.

Decedent maintained many contacts with his native country, and followed a 25-year old practice of spending winters in Florida. We find that decedent never intended to remain in the United States

indefinitely.” (at p. 1404).

D. In Estate of Barkat A. Khan, T.C. Memo 1998-22:

The decedent, a Pakistani citizen, had obtained an immigration long-term permanent resident alien green card and a social security number in part to help preserve certain U.S. subsidies, but the decedent died in Pakistan in 1991 and although the 1986 through 1990 U.S. Individual Income Tax Returns for the decedent had incorrectly been filed as nonresident Forms 1040NR, amended Forms 1040 were filed subsequent to decedent’s death. Decedent’s estate was desirous of resident alien domiciliary status (e.g., it wanted to use the larger unified exemption available to an estate of a U.S. citizen or resident alien domiciliary, but not to an estate of a nonresident alien domiciliary) and based its argument largely on decedent’s possession of a green card. However, the Service’s position was that decedent and his wife were not resident alien domiciliaries of the U.S. at the time of his death and that decedent’s estate was not entitled to the full unified credit or the marital deduction. In a decision which, in the authors’ opinion, had numerous factors both for and against resident alien domiciliary status, the court, in finding resident alien domiciliary status, placed significant weight in the decedent’s obtaining a permanent resident alien “green card” plus a re-entry permit when he left the U.S. to return to Pakistan. The case further substantiates that possession of a green card is not conclusive in determining resident alien domiciliary status, although when taking into account all of the facts and circumstances, it can be an adverse factor.

E . In Estate of Jack, 54 Fed. Cl. 590 (2002):

The parties filed cross-motions for summary judgment to determine whether a Canadian citizen employed in the U.S. on the date of his death, having been admitted to the U.S. under a non-immigration, temporary professional classification, was legally capable of forming an intent to be domiciled in the U.S. for Federal estate tax purposes. The decedent’s estate argued that the intent to establish domicile by the holder of a temporary professional visa would be in direct violation of the terms of the visa, so that such an intent would be precluded. The Court granted summary judgment to the Service holding that for Federal estate tax purposes, a Canadian citizen employed in the U.S. on the date of his death, who was admitted to the U.S. under non-immigrant, temporary professional classifications, was legally capable of forming an intent to be domiciled in the United States.

  1. Immigration Status--Illegal Aliens.

With respect to the impact of immigration status upon residence status for purposes of estate and gift taxation, so long as the individual in fact resides in the U.S. with no definite present intention of leaving [regardless of what “legal ability” or “disability” the immigration law places him under (compare Rev. Rul. 80-363, 1980-2 C.B. 249 with Rev. Rul. 74-364, 1974-2 C.B. 321 revoked by Rev. Rul. 80-363, 1980-2 C.B. 249, which it revoked, and which are discussed below)], he has formed the necessary intent to become a U.S. domiciliary.

In Elkins v. Moreno, 435 U.S. 647 (1978), the U.S. Supreme Court held in a non-tax related decision that under Federal law, a non-immigrant alien holding a G-4 visa has the legal capacity to establish domicile in the U.S. when the Federal law which governs the granting of the visa does not impose restrictions on intent or duration of stay. The Supreme Court continued to note that even though permanent immigration would normally occur through immigration channels, nonrestricted non-immigrant aliens could adopt the U.S. as their domicile under certain circumstances. Following the Elkins decision, the Service issued Rev. Rul. 80-363, above, in which it concluded that the decedent therein formed the intent and did in fact reside in the U.S. with no definite present intention of leaving, and was therefore a resident decedent (i.e., domiciled in the U.S.): “The Supreme Court of the United States, in Elkins v. Moreno, 435 U.S. 647 (1978), held that, under federal law, a nonimmigrant alien holding a ‘G-4’ visa has the legal capacity to establish domicile within the United States. The Court concluded that when federal law, such as the statute that governs the granting of ‘G-4’ visas, did not impose restrictions on intent or duration of stay, Congress intended that, while permanent immigration would normally occur through immigrant channels, nonrestricted nonimmigrant aliens could adopt the United States as their domicile under certain circumstances.

The question of domicile depends on whether the decedent had formed the intent to remain in the United States indefinitely. In the present situation, decedent was a resident decedent since, at the time of death, domicile had been established in the United States, and decedent had formed the intent and did, in fact, reside in the United States with no definite, present intention of leaving. This is true notwithstanding that decedent had entered and remained in the United States with a ‘G-4’ visa.” (at 1980-2 C.B. 250). See also, TAM 8137027 (a National Office Technical Advice Memorandum which further discussed the relevant issues). In connection with illegal aliens, in Rev. Rul. 80-209, 1980-2 C.B. 248, the Service concluded that an illegal alien who lived in the U.S. for 19 years with his family, had purchased a U.S. residence and had established strong community ties, was domiciled in the U.S. at the time of his death: “The requirements for acquiring a domicile are (1) legal capacity to do so; (2) physical presence; and (3) a current intention to make a home in the place. . .

* * *

. . . Some of the factors used in determining such requisite intention are home ownership, local community ties and living with one’s family in the claimed domicile. See Farmer’s Loan & Trust Co. v. United States, 60 F.2d 618 (S.D.N.Y. 1932). In the present case, the fact that the decedent lived in the United States for a long time with the decedent’s family and that the decedent established strong community ties indicates an absence of any fixed intention of returning to the native country.

* * *

. . . The facts in the present case thus indicate that the decedent intended to remain in the United States indefinitely.” (at 1980-2 C.B. 249).

  1. Factors Indicative of Domicile.

As indicated by the illustrative cases above, the factors which are considered in making the determination of whether an alien is a resident for U.S. estate and gift taxation must demonstrate a certain degree of permanence in the U.S. on the part of the alien before he is classified as having a U.S. domicile. As expressed by the Court in Safe Deposit & Trust Co. of Baltimore, 42 B.T.A. 145 (1940), rev’d on other grounds, 316 U.S. 56 (1942):

“. . . the acquisition of a domicile of choice involves actual physical presence at a dwelling place in another state, coupled with the concurrent intent to make it a home. Intention involves the idea of fixity, of some degree of permanence in the new abode, and must be more than the mere intention to acquire a new domicile.” (citing Restatement of Conflicts §§15, 16, 18, and 19 at pp. 162 and 163).

In connection with the determination of domicile, some of the most common factors analyzed in the estate and gift tax context are:

  1. The amount of time spent by the decedent in the U.S., in other countries, and the frequency of travel both between the U.S. and other countries and between places abroad. However, a period of extended physical presence in the U.S. alone will not suffice to establish U.S. domicile.
  2. The size, cost and nature of houses or other dwellings, and whether those places were owned or rented by the decedent. In Estate of Fokker, 10 T.C. 1225 (1948), the decedent maintained a large home in New York and a smaller home in Switzerland. The Tax Court found the decedent to be a U.S. domiciliary. The Court compared the size of the houses and their localities, and stressed that the location of the Swiss home (in St. Moritz) constituted a resort, pleasure oriented community with international appeal.
  3. The area or locality in which the houses and dwelling places are located. See, Estate of Fokker, above.
  4. The location of expensive and cherished personal possessions of the decedent. See, Farmers’ Loan & Trust Co. v. U.S., 60 F.2d 618 (S.D.N.Y. 1932).
  5. The location of the decedent’s family and close friends. See, Estate of Nienhuys, 17 T.C. 1149 (1952).
  6. The places where the decedent has maintained and participated in civic leagues, churches, clubs, etc. See, Farmers’ Loan & Trust Co., above, and Estate of Nienhuys, above.
  7. The location of the decedent’s business interests. See, Estate of Fokker, above.
  8. The location of the bulk of the decedent’s assets, and the location of his professional advisors. See, Estate of Paquette, above.
  9. Where did the decedent file tax returns up until his death. See, Estate of Paquette, above.
  10. Declarations of residence or intent made in visa applications for reentry permits, wills, deeds of gift, trust instruments, letters, and oral statements made by the decedent. For example, in Bank of New York & Trust Co., 21 B.T.A. 197 (1930), the decedent, a U.S. citizen, spent the last 5 years of her life traveling in France, Italy and other countries in Europe. The Court found that she was a U.S. resident, and that she did not have the intention to abandon her U.S. residence while in Europe since her purposes for being there were pleasure and health. The decedent’s declarations and actions indicated that her home was in the U.S. (e.g., when applying for passport renewals she stated that she was abroad only temporarily, and in two trust instruments and a Will executed by her she described herself as a resident of Washington, D.C.). See also, Estate of Fokker, above, Frederick Rodiek, 33 B.T.A. 1020 (1936), aff’d, 37-1 USTC ¶9032 (2d Cir.), Estate of Bloch-Sulzberger, above.
  11. Whether the decedent used traveler’s checks and international credit cards while in the U.S. rather than U.S. issued credit cards and local accounts.
  12. Whether the decedent obtained and used a U.S. driver’s license as opposed to an international one.
  13. Whether the decedent acquired in his own name (as opposed to renting) an automobile in the U.S.
  14. Whether the decedent spent holiday periods with his family, and if so, where.
  15. Whether the decedent brought his family to the U.S.
  16. Whether the decedent was engaged in political activity such as voting, public, or military service, abroad.
  17. Reasons or motivation for presence of the decedent in the U.S., e.g. health, pleasure, business, war or terrorism in home country or avoidance of political repression or instability in home country.
||. RULES APPLICABLE TO NRAT/D.
A. Gift Tax Rules.
  1. Only subject to gift tax on transfer of property situated in the U.S. (“U.S. situs property”) and excluding the transfer of intangible property. Examples: U.S. real estate, tangible personal property, currency, deposits bank accounts? LLCs?
  2. No unified credit
  3. Marital deduction. Depends on citizenship of spouse. If spouse is U.S. citizen, the deduction is unlimited. If spouse is not U.S. citizen, the deduction is not unlimited §2523(i). However limited inflation adjusted $100,000 per year exclusion ($149,000 for 2017) if the gift otherwise qualifies for marital deduction. Examples: NRAT to U.S. citizen. U.S. citizen to Non-U.S. citizen. NRAT to non-U.S.citizen.
  4. Annual inflation adjusted $10,000 ($14,000 for 2017) and certain transfers for educational or medical expenses are also available. §§2503(b) and 2503(e). May use irrevocable trust with Crummey powers and discounts. E.g., planning for U.S. real estate.
  5. Gift splitting is not allowed unless both spouses are U.S. citizens or RATs. Gift splitting is allowed even for RAT spouses even though one could not gift to another gift tax free except as explained in II.A.3. above.
  6. Charitable deductions limited to domestic corporations and/or domestic use.
  7. Treaties may change domicile, unified credit, marital deduction and other deductions.
  8. Consider change of domicile. Consider making complete gifts of foreign real and foreign tangible personal property, and intangible property wherever situated, before you attain RAT status.
B. Estate Tax Rules.
  1. Gross estate only includes property situated within the U.S. (so-called “U.S. situs” property). §§2103 and 2106. Consider §2104(b) incorporating §§2035 to 2038 to transfers of U.S. situs if property was U.S. situs when transferred or upon death, e.g., real estate transferred to foreign revocable trust, trust sells real estate and buys real estate in Brazil? How about transfers to foreign corporations?
  1. Credits.

(a) Unified - $13,000. Special rules may apply for NRADs from U.S. possessions or certain treaty countries. §2102(c).

(b) State death taxes. §§2102(a) and 2011.

(c) For certain pre-1977 gifts made within 3 years of death (is a full credit). §§2102(a) and 2012.

(d) Tax on prior transfers. §2013. If a U.S. citizen decedent or RAD has a non-U.S. citizen spouse, the marital deduction is not allowed in the absence of a qualified domestic trust (“QDT”) or a treaty. If the non-U.S. citizen spouse is ultimately subject to U.S. estate tax on this “same” property, a full §2013 credit will be available regardless of when the first decedent spouse died.

  1. Marital deduction. Depends on citizenship of surviving spouse and not on status of decedent. If spouse is a U.S. citizen, the deduction is unlimited. If spouse is not a U.S. citizen, there is no deduction unless through a QDT or under a treaty. A QDT requires U.S. citizen or domestic corporation Trustee with right to withhold estate tax on distribution of principal. §2056A. There are other requirements including an election. The surviving spouse can create a QDT or it can be created by decedent’s documents and decedent’s documents can also be reformed. Big drawback is that the QDT tax is imposed as if the property was part of the estate of the first to die so no benefit from surviving spouse tax brackets, credits, etc.
  1. Limited deductions. Deductions are allowed in relation to the value of the U.S. gross estate versus the worldwide gross estate.
  1. Joint tenancies. §2040(b) 50% inclusion rule does not apply if surviving spouse is not U.S. citizen and instead the contribution rule applies. Be careful with joint tenancies and consider community property issues.
  1. Other benefits not available. Foreign death tax credit; special use valuation for farms and closely held business realty; the family-owned business exclusion.; extensions to pay estate tax.
  1. Always consider treaties. May override certain provisions.
  1. Expatriates. Certain expatriates - special rules apply. §§2107 and 6039G. Also, expatriates include not only former U.S. citizens but also certain specifically defined former long-term permanent resident aliens as defined in § 877(e). See also §2801 for expatriates who expatriate after June 16, 2008.
Part IV - Substantial presence and exceptions

There are certain exceptions to the Substantial Presence Test:

(a) the closer connection/tax home exception; and

(b) the exception for exempt individuals or for certain medical conditions.

The closer connection/tax home exception provides that if an alien:

(i) is present in the United States for fewer than one hundred eighty-three (183) days during the current year; and

(ii) establishes that he has a “closer connection” with a foreign country and a “tax home” in that country, then he will not be treated as a RA under the Substantial Presence Test for the current year [Section 7701(b)(3)(B)]. The commentary to Section 451 of H.R. 4170 by the House Ways and Means Committee (the “House Commentary”) clarifies somewhat the interpretation to be given to the “closer connection/tax home” exception by providing that the “maintenance of a United States abode will not automatically prevent an individual from establishing a tax home in a foreign country.”

Significantly, the “closer connection/tax home” exception will not apply with respect to an alien who has at any time during the current year, an application pending to change his status to permanent resident or who has taken other affirmative steps to apply for status as a lawful permanent U.S. resident.

The exception for exempt individuals provides that under certain circumstances, “foreign government-related individuals”, students and teachers or trainees are defined as exempt individuals and may avoid application of the Substantial Presence Test. However, the application of this exception in the case of students and teachers or trainees is limited to a certain number of years.

In addition, an alien individual who is unable to leave the United States because of a medical condition which arose while the individual was present in the United States is not treated as being present in the United States for purposes of the Substantial Presence Test on any day that such individual was unable to leave the United States because of the medical condition. It should be noted that this is a narrow exception limited to persons who require medical attention after arriving in the United States and are “unable” to leave the United States.

Finally, the Joint Statement notes that the residence definition contained is not intended to override treaty obligations of the United States. Therefore, in the event of a conflict, the treaty definition of residence will prevail. However, the Joint Statement also stated that: “...notwithstanding the treatment of the alien as a resident of the other country for treaty purposes, the Conference Agreement will treat the alien as a U.S. resident for purposes of the internal tax laws of the United States. For example, if the alien owns more than fifty percent (50%) of the voting power of a foreign corporation, the foreign corporation will be a controlled foreign corporation.”

Part V - First year elections

Section 7701(b)(2) contains special rules that relate to an alien’s “first year of residency” and “last year of residency” and delineate during what portion of such years the alien will be considered a RA or a NRA. Thus, these rules clarify that in the case of an alien who was a NRA during the entire preceding calendar year, but who is a RA for the current year (the “first year of residency”), the alien will be considered a RA beginning on the “residency starting date”, which may not necessarily be the beginning of the current year. In the case of an alien who is considered a RA under the Green Card Test, the “residency starting date” is the first day in the calendar year on which the alien is present in the United States while a permanent lawful resident of the United States (subject, however, to the third transitional rule discussed in § II.A. above); and, in the case of an alien who is considered a RA under the Substantial Presence Test, the “residency starting date” is the first day on which the alien is present in the United States during the calendar year in which the alien meets such test.

In addition, for purposes of determining an alien individual’s “residency starting date” in the “first year of residency” and the alien’s “last year of residency”, an exception to the Substantial Presence Test is also provided for certain nominal presence in the United States during the year. Thus, for purposes of an alien individual’s “residency starting date” or “last year of residency”, the individual will not be treated as present in the United States during any period not exceeding ten (10) days for which period the individual establishes that he has both a tax home in a foreign country, and a closer connection to that foreign country than to the United States. In this connection, the Joint Statement states that: “[d]e minimis presence before start or after termination of substantial presence will generally be disregarded under the substantial presence test.” Thus, the Joint Statement appears to confirm that this provision was not intended to allow multiple periods of nominal presence in the United States without triggering residence status, but intended to permit, without triggering residence status, brief presence in the United States (for example, for business or to find a house) before the alien moves to the United States.

Similarly, these special rules define, in the case of an alien who is a RA during the current year, but who is NRA for the following year, the alien’s residence status in the “last year of residency.”

With respect to the first year of residency, last year of residency and related rules, the House Commentary states that “aliens should not be able to switch back and forth between resident and nonresident status for short periods, and that there should be no gap in resident status when an alien is a resident for part of two consecutive years.”

Part VI – Considerations for International Estate Planning

A. Gift Tax Rules for Non Resident Alien Transferor / Domiciliary (NRAT)

  1. Only subject to gift tax on transfer of property situated in the U.S. (“U.S. situs property”) and excluding the transfer of intangible property. Examples: U.S. real estate, tangible personal property, currency, deposits bank accounts? LLCs?
  2. No unified credit
  3. Marital deduction. Depends on citizenship of spouse. If spouse is U.S. citizen, the deduction is unlimited. If spouse is not U.S. citizen, the deduction is not unlimited §2523(i). However limited inflation adjusted $100,000 per year exclusion ($149,000 for 2017) if the gift otherwise qualifies for marital deduction. Examples: NRAT to U.S. citizen. U.S. citizen to Non-U.S. citizen. NRAT to non-U.S.citizen.
  4. Annual inflation adjusted $10,000 ($14,000 for 2017) and certain transfers for educational or medical expenses are also available. §§2503(b) and 2503(e). May use irrevocable trust with Crummey powers and discounts. E.g., planning for U.S. real estate.
  5. Gift splitting is not allowed unless both spouses are U.S. citizens or RATs.
  6. Charitable deductions limited to domestic corporations and/or domestic use.
  7. Treaties may change domicile, unified credit, marital deduction and other deductions.
  8. Consider change of domicile. Consider making complete gifts of foreign real and foreign tangible personal property, and intangible property wherever situated, before you attain RAT status.

B. Estate Tax Rules.

  1. Gross estate only includes property situated within the U.S. (so-called “U.S. situs” property). §§2103 and 2106. Consider §2104(b) incorporating §§2035 to 2038 to transfers of U.S. situs if property was U.S. situs when transferred or upon death, e.g., real estate transferred to foreign revocable trust, trust sells real estate and buys real estate in Brazil? How about transfers to foreign corporations?
  2. Credits.

    (a) Unified - $13,000. Special rules may apply for NRADs from U.S. possessions or certain treaty countries. §2102(c).

    (b) State death taxes. §§2102(a) and 2011.

    (c) For certain pre-1977 gifts made within 3 years of death (is a full credit). §§2102(a) and 2012.

    (d) Tax on prior transfers. §2013. If a U.S. citizen decedent or RAD has a non-U.S. citizen spouse, the marital deduction is not allowed in the absence of a qualified domestic trust (“QDT”) or a treaty. If the non-U.S. citizen spouse is ultimately subject to U.S. estate tax on this “same” property, a full §2013 credit will be available regardless of when the first decedent spouse died.

  1. Marital deduction. Depends on citizenship of surviving spouse and not on status of decedent. If spouse is a U.S. citizen, the deduction is unlimited. If spouse is not a U.S. citizen, there is no deduction unless through a QDT or under a treaty. A QDT requires U.S. citizen or domestic corporation Trustee with right to withhold estate tax on distribution of principal. §2056A. There are other requirements including an election. The surviving spouse can create a QDT or it can be created by decedent’s documents and decedent’s documents can also be reformed. Big drawback is that the QDT tax is imposed as if the property was part of the estate of the first to die so no benefit from surviving spouse tax brackets, credits, etc.
  2. Limited deductions. Deductions are allowed in relation to the value of the U.S. gross estate versus the worldwide gross estate.
  3. Joint tenancies. §2040(b) 50% inclusion rule does not apply if surviving spouse is not U.S. citizen and instead the contribution rule applies. Be careful with joint tenancies and consider community property issues.
  4. Other benefits not available. Foreign death tax credit; special use valuation for farms and closely held business realty; the family-owned business exclusion.; extensions to pay estate tax.
  5. Always consider treaties. May override certain provisions.
  6. Expatriates. Certain expatriates - special rules apply. §§2107 and 6039G. Also, expatriates include not only former U.S. citizens but also certain specifically defined former long-term permanent resident aliens as defined in § 877(e). See also §2801 for expatriates who expatriate after June 16, 2008.

Streamlined Compliance Procedure

There are so many myths to dispel -

  • If you are US exposed (citizen, green card or substantial presence), you are usually taxed on your worldwide income;
  • These tax obligations do not stop because you reside outside of the US;
  • Even if your earnings are under the threshold of the foreign earned income exclusion, and you reside outside of the US, you may still have to file US tax returns;
  • Since the early 1970s, US persons have been obligated to report any foreign financial assets once the maximum aggregate balance exceeds a certain threshold.

FATCA and CRS have, among other things made these requirements more widely known.  If any of the above is news to you?  Then you may have to do some catchup filings.  Pleading ignorance is no longer a credible excuse.

Most professionals agree on three things -

  1. It is critical to contact the IRS before they contact you.
  2. The idea of a "quiet disclosure" involves quietly filing prior year returns outside of any amnesty program. This is not advisable.
  3. Technology means that it is both possible and probable that any "quiet disclosure" will not go unnoticed.

Nanette Davis, a Department of Justice (DOJ), Tax senior litigation counsel, is on record cautioning taxpayers about quiet disclosures, with the threat that additional enforcement action may follow because

(i) the DOJ program is helping identify quiet disclosures and
(ii) "the patterns of late returns and FBARs are clear in the data."

The 'data' referenced in that quote is apparently the data in the IRS records when entering the filing of delinquent or amended income tax returns and delinquent FBARs 

Whether or not the streamlined procedures are right for your case depends on a number of factors.  One of these factors is willfulness.  Read more here - http://www.mooresrowland.tax/2015/11/willfulness.html

First, we would like to thank you for taking the time to get to know us. We are Hayden T Joseph & Co (http://www.htj.tax) and we are an independent member firm of the Moores Rowland Asia Pacific Network (http://mooresrowland-asiapac.com). The group has over 30 offices in 11 countries.

We work on International Tax in general, and United States International Tax in particular.

  • We can help your family or your firm with international tax planning as well as international tax compliance. Especially within -
    • The UK
    • The USA
    • Parts of the Caribbean and
    • Asia.

Here's more on the streamlined procedures - http://www.mooresrowland.tax/2015/02/streamlined-foreign-offshore-procedures.html

  1. We would need to prepare 3 years Federal returns. The most recent 3 years for which the due date has already passed.
  2. We would need to prepare 6 years of FBARs http://www.mooresrowland.tax/2014/11/fbars-and-form-8938.html
  3. If you have more than 10% in any non-US entities, we would need to prepare an information return such as Form 5471 declaring your interest -http://www.mooresrowland.tax/2014/03/the-scariest-us-tax-form-ever.html
  4. A cover letter is also required.  95% of our clients write it themselves but if you require an attorney to assist, we can recommend accordingly.

Let me know if you have more questions  - email HTJ@help.tax


It sounds like a cliche now but there is an ongoing shift towards Asia in general and towards South East Asia in particular. Here we will give 6 reasons for tech entrepreneurs in the West to consider moving East.

  1. Market Size
    • Based on the World Population data prepared by United Nations Population Division, the population of ASEAN will increase from 633 million people in 2015 to 717 million in 2030 and 741 million people in 2035, a rate of 0.85% per annum.
  2. Market Demographics
    • More than half of the people are under 30
  3. Tax Efficiency
    • Depending on your situation, corporate and personal income for US tax hong kong can be half of what it is in the USA
  4. Legal Protection
    • Includes both common and civil law jurisdictions
    • Singapore is probably the gold standard
  5. Education System
    • Great for families
    • Great for sourcing skilled employees
  6. Quality of Life
    • Singapore is a very safe city

Surveys suggest that the top four criteria businesses use in deciding the attractiveness of a location for Regional Headquarters are economic policies, domestic market size, infrastructure and political stability.

It seems like most Asian jurisdictions compete, at least on paper, to encourage companies to set up a regional headquarters within their borders. Which is best? There is no one size fits all and it really depends on your business model. Anyone who says otherwise probably is not being objective.

Traditional wisdom was that Hong Kong is the best bet if your focus is China and especially if you run a manufacturing company. Singapore is best if your focus is South East Asia in general. I used “traditional” deliberately because things are changing.

On one hand, Hong Kong is arguably still Asia’s financial center. But as Hong Kong marches towards 2047, politically, the future remains uncertain. In addition, there’s an ongoing shift in economic activity to Shanghai and Shenzhen and that’s why the US tax specialist/advisory in Hong Kong getting the prominence to balanced such fluctuating situation in all tax disciplines and allow fair settlements.

On the other hand, Singapore offers a slower pace therefore better quality of life and political stability. But it is experiencing an economic slowdown, high living costs, high-cost of doing business and work permit restrictions. So for many, Malaysia is seen as a viable alternative to Singapore.

Most regional headquarter programs involve Hong Kong US tax incentives at the corporate and/or individual level. I’ve found that without a doubt, Singapore is the easiest jurisdiction for English speaking Westerners to do business. Indonesia and the Philippines have a formidable bureaucracy not to mention “negative lists”. Malaysia is not SME friendly as it requires minimum paid up capital of RM500k or US$120k upwards for a 100% foreign owned entity, it has a headline corporate tax rate of 18%-24% and individual tax rates of up to 28%. This compares poorly to Singapore’s 17% corporate tax rate and 17%-20% individual tax rate. So despite the higher operating cost of Singapore businesses, depending on your business model, it is still an attractive jurisdiction especially given the strong talent pool and first world infrastructure. Also noteworthy is that Singapore based regional headquarters with international intellectual property (IP) holding may claim a writing-down allowance (WDA) for the cost of acquisition of the IP.

But before you invest, it is worth while meeting with an experienced US tax advisor Hong Kong professional with both Western and Asian experience to determine the right regional structure. If your company is American, it is even more important to have a team that is both US and Asian qualified.


Headquartered in Singapore, Hayden T Joseph & Co (DBA Advanced American Tax) is a member of the Moores Rowland Asia Pacific network of firms with offices in 11 countries across Asia (www.HTJ.tax).

Among the services that we as an accounting group offers, is outsourcing.

Outsourcing reduces cost, gives you access to qualified and experienced international talent, while enabling you to focus on your core competencies. Functions that can be outsourced, includes accounting, payroll, special back office services, out-patient medical administration and other human resources related outsourcing services such as searching for, engaging and arranging employment of staff on behalf of clients.

  • Accounting Outsourcing
    • Book keeping
    • Management of Account Payable/Receivable
    • Reporting
    • System Review & Staffing
  • Human Resources Outsourcing
    • HR Supports and Staff Employment
    • Employment Agreement Preparation
    • Travel and 'Expenditure Advances' Management
    • Medical Reimbursement Management
  • Payroll Services -
    • Payroll is not only about numbers but is about compliance to payroll related regulations;
    • We offer complete payroll outsourcing packages/services with flexibility to customize the services
  • Outpatient Medical Outsourcing
  • Special Back Office Services (Customized)
  • Recruitment Services

It is always helpful to get professional advice before proceeding with any investment.  Tax advice is especially critical as taxes can make an otherwise attractive investment unattractive. Ways in which an adviser can help –

  • Advising on appropriate structures to avoid or minimise UK income tax, stamp duty land tax, VAT and inheritance tax
  • Introducing appropriate UK advisers including legal advisers and letting management agents
  • Establishing non-resident status with HM Revenue & Customs (HMRC)
  • Arranging for income to be received gross
  • Identifying and maximising tax deductible expenditures and capital allowances
  • Submitting rental income returns to the HMRC and advising taxation payments due

Taxable elements need to be held separately from non-taxable elements.   Typically, a non-UK company holds the property and another (typically, a UK company) to carry out the trading activity/development project.  There is flexibility to superimpose whatever ownership structure is desired above the 'special purpose vehicle' that owns the property.  A UK resident landlord includes the property income on the annual tax return he makes to HMRC. Tax for a tax year (which in the UK runsfrom 6 April to 5 April) is sometimes paid in advance of filing the tax return. Payment is often made in two instalments on 31 January in the year and 31 July following the end of the year with sometimes a final payment on the following 31 January when the tax return is filed. The treatment described above as applying to UK residents will normally be offered to any non-UK resident landlord who applies for it.  However, if this treatment is not applied for (or if HMRC reject the application) a much harsher collection regime is imposed. Any managing agent must deduct and pay to the Revenue tax (at 20%) from rents net of any expenses that he pays on behalf of the landlord; a tenant who pays direct to the landlord must deduct tax at basic rate from all rent payments (unless the rent is less than £100 per week). Where tax deducted at source exceeds the true tax liability for the year it is possible to obtain repayment from the Inland Revenue by filing a tax return. https://www.gov.uk/government/publications/rates-and-allowances-capital-gains-tax/capital-gains-tax-rates-and-annual-tax-free-allowances In principle, capital gains on commercial property made by a non-UK investor are not subject to tax. Therefore a non-UK entity, typically a company, should be used to hold the property. In order to benefit from this exemption, two key conditions need to be satisfied:

  • The investor must not be engaged in 'trading' activity in relation to the property in question. Material redevelopment of the property or an intention at the time of purchase to sell the property within the first few years after acquisition would generally constitute trading.  New rules mean that the profits of any development activity carried on in the UK are subject to tax in the UK.
  • 'Management and control' of the non-UK entity must take place outside the UK. Therefore, while UK agents may take day-to-day decisions in the UK, any more strategic decisions must be taken outside the UK.

In general the UK only taxes individuals who are UK tax resident to capital gains tax.  The main exception is on residential property.  The UK tax loophole which allowed overseas investors and British Expats to avoid Capital Gains Tax (CGT)  on the sale of residential property is now largely closed.The legislation allows three ways in which such gains can be taxed however in most cases tax will be charged based on the proceeds less the value at 5 April 2015 (or if the property was purchased after 5 April 2015 the cost at purchase). Since the new rules came into force in April 2015 as a non-resident, when you sell a UK residential property you must tell the HMRC, even if you have no capital gains tax to declare. This also applies if you are selling, or have sold, your main residence. Failure to correctly make a capital gains tax declaration tothe HMRC within 30 days after conveyancing (transferring ownership of) your property is likely to result in a penalty – even if there is no capital gains tax to pay. Non-resident companies have potentially been liable to UK capital gains tax on the disposal of UK residential property since 1 April 2013 if the property was valued at more than £2 million. That threshold has now dropped to £500,000 and covers most properties in the London area. Disposals of commercial property by non-resident investors remain exempt from UK capital gains tax. A word of caution is needed though: the tax rules summarised above assume that the investment in real estate is a genuine investment, made in order to generate rental income and with a view to long-term capital growth.  If however property is acquired with the sole or main object of realising a profit on disposal, with or without any development of the property, any gain on disposal will normally be treated as income rather than as capital gains. It will therefore be subject to UK taxation as income and the beneficial treatment of capital gains referred to above will not be available. 

Ordinary Income UK income tax is charged on income from letting property situated in the UK regardless of the residence status of the landlord.  This income is computed using ordinary accounting principles.

  • Income and expenses can be taken into account on an accruals or an arising basis.
  • Normal revenue expenses of earning income are tax deductible, including repairs, maintenance, insurance, management fees etc. It is important that detailed records, including invoices, are kept.
  • Interest on a loan taken to acquire the property is in principle tax deductible though relief will be restricted to the basic rate of tax on a transitional basis from 6 April 2017 and phased in over 4 years.
  • If the loan is taken from a connected party then relief will be restricted to the amount of interest that would have been paid in the open market. Even where capital is available it can often be tax efficient to borrow to invest in UK property.
  • Capital expenditure (for example, on improvements to property as distinct from repairs and maintenance) is not deductible from rental income. It will instead be regarded as an additional cost to be taken into account when calculating any gain arising on a disposal of the property provided that it can be said to enhance the value of the property.
  • No tax relief is available for depreciation or amortisation of the property itself. But in the case of commercial property, capital allowances (which are effectively depreciation allowances at a low standardised rate) are available for those elements of the property which meet the description of “plant and machinery”. This can be a valuable relief and the element attracting these allowances is normally negotiated (within statutory limits) at the time of purchase.
  • All lettings carried on by a particular person are amalgamated for tax purposes and treated as a single business; thus if some properties are loss-making and others profitable, the set-off for tax purposes is made automatically.
  • Non-UK-resident owners other than individuals (such as companies or trustees) pay tax on the profits computed at a flat rate of 20%. Individuals are liable at progressive rates rising from 20% to 45%, though many non-resident individuals (broadly, citizens of any state in the European Economic Area and certain Commonwealth countries) are entitled to claim personal allowances which give exemption from tax for the first £11,000 or so of profit.
  • The income may also be subject to tax in the property owner’s home jurisdiction, although if there is a double Taxation Treaty with the UK (which is likely – the UK ‘s Treaties are among the most comprehensive in the world) the treaty will sometimes benefit the owner.

Income derived from the property by a non-UK resident company will be subject to income tax at the basic rate of 20%. This tax is subject to a 'withholding' regime which means that the tenant or other paying entity must deduct the tax due and account for it directly to the tax authority, HM Revenue & Customs ('HMRC'). In most cases, the holding company or other owning entity will register under HMRC's 'non-resident landlord scheme' which will allow it to receive income gross, deduct expenses, calculate taxable profits, and submit a UK tax return in the usual way. Gearing / Borrowing to Invest Currently (subject to the commerciality test) all borrowing costs are deductible to reduce taxable profit, but changes targeted for April 2017 will limit the amount of deductible interest to 30% of the owner's EBITDA (broadly equivalent to income in the context of an SPV owning a single property let on a 'full repairing and insuring' (or in US terms, 'triple net') lease. This restriction is likely to apply equally to UK and non-UK owners and will bring the UK into line with a number of other 'competitor' markets.

 Capital allowances It is not unusual for the seller's 'capital allowances' to be transferred, in whole or part, to the buyer. These are 'writing down' allowances against taxable profits in respect of historic capital investment in plant and machinery. The allowances are at the rate of 18% a year, with an 8% rate applying to 'integral features', and generally have effect on a 'reducing balance' basis. Each year the allowance is applied to the balance of expenditure after deduction of previous years' allowances, for example the 18% allowance is applied to 100% of the qualifying expenditure in the first year but to only 82% of the expenditure in the following year and so on. This means that around 75% of the expenditure is 'written down' over the first seven years. On the sale of a property, the seller may well wish to retain any unused capital allowances. However, where the buyer would be able to benefit from them more than the seller, it may make more commercial sense for the seller to pass them to the buyer, generally for additional consideration. 

Stamp duty land tax ('SDLT') It is payable by the buyer. The purchase price will include any VAT, but fortunately this ‘tax on tax' is rarely levied SDLT will be payable within 30 days after ‘substantial performance' of the transaction, which is usually completion. If a non-UK propco (as opposed to the real estate it owns) is sold, no SDLT or stamp duty will be payable. If a UK propco is sold, stamp duty at 0.5% will be payable. 

Value added tax ('VAT') Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT ispayable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses. However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies. VAT at 20% may be charged on the purchase price of commercial or mixed-use properties. This will be the case with new buildings and those where the seller has ‘opted to tax'. In cases where the sale is subject to VAT, there will be little practical alternative other than to ‘opt to tax'. That will often have the effect of making the sale itself VAT-free (and consequently mitigating the SDLT payable) Where there is no immediate need to opt to tax, you should consider the best strategy for the property as a whole, taking into account future expenditure plans and the likely tenant-mix profile as some tenants will not be able to recover the VAT paid on rent. Many of the costs incurred by investors in UK real estate will be liable to UK VAT at 20%, including legal, architects and survey fees, state agents charges and other professional costs. Since the letting of residential accommodation is (in almost all cases) not a “taxable activity” for VAT purposes, the VAT suffered on those costs is not generally recoverable. Furthermore, VAT remains chargeable on services relating to UK land regardless of the place in which the recipient “belongs” for VAT purposes; the zero-rating available in respect of certain international services is not available where the services relate directly to UK land. Some associated services less directly connected with land (for example, accountancy fees) will usually be zero-rated where supplied to a non-resident. Some commercial property is within the scope of VAT and it is normally possible to elect (on a property-by-property basis) to bring commercial (but not residential) properties within the VAT regime.  We can advise on whether such an election is necessary, possible or desirable and to assist with relevant registrations.  Residential and commercial developments and conversions may be affected by special rules on which we can also advise. 

IHT: inheritance tax Inheritance tax (which is normally payable only by individuals) combines some of the features of a gift tax, death duty and wealth tax. For most non-UK resident individual property investors, who have had no prior connection with the UK, only assets within the UK will be within its scope.  Although, with a 40% rate on death and a 20% rate on lifetime transfers, inheritance tax is at first sight a significant impost. There are many reliefs and exemptions which, properly used, can greatly reduce its impact. In particular:-

  • the first £325,000 of transfers (on a seven-year rolling basis) are free of tax
  • many transfers are “potentially exempt ” and create a charge to tax only if death follows within seven years of the date of the transfer
  • the use of trusts may often effect substantial savings

From 6 April 2017, UK residential property is liable to UK inheritance tax regardless of how it is held. High-value residential properties owned by companies New rules were introduced in 2012 affecting the tax paid in relation to residential properties that are purchased and owned by companies, for properties with a value in excess of £2,000,000. The threshold was reduced to £1 million at 1 April 2015 and £500,000 at 1 April 2016. Where these rules apply, they can create an SDLT rate of up to 15% on purchase; an Annual Tax Charge of up to £218,200; and an uplifted CGT charge on sale.