Breakfast With Berdon: U.S. Investors Should Seek Accounting Advice Before Pursuing Foreign Investment

New York building owners bringing foreign money into the U.S. should seriously consider employing accounting help in structuring the transaction.

“If you’re looking for foreign investors in your real estate purchase in New York, you want to make sure they invest in the most tax-efficient way possible,” said Lisa S. Goldman, tax partner, executive committee member and head of the international practice at Berdon Accountants and Advisors LLP, in the latest installment of the company’s “Breakfast with Berdon” video series. “They’re concerned with more than just the U.S. tax. They’re concerned with their worldwide tax effect on the transaction. We have to be mindful of how anything that happens in the U.S. may affect them at home, whatever country they’re from.”

Speaking with Meyer Mintz, tax partner and co-chair of the real estate group at Berdon, for the fifth installment of the series produced with Commercial Observer, the pair used the example of a hypothetical Israeli investor to illustrate further.

“A typical U.S. real estate investor sets up an LLC, then purchases the property and brings in investors through that LLC. That’s tax-efficient from a U.S. perspective, because all the income will flow through to the investor’s return,” Goldman said. “From Israel’s perspective, that LLC is opaque. They will treat it like a corporate entity, and may tax it at two levels. You have to be mindful of how the government of the country your investors are from will view the transaction.”

They noted that, in order to establish the transaction for optimal client benefit, accountants should be involved as early as possible.

“We want to be involved as soon as the U.S. investor starts looking for outside investors,” said Goldman. “We want to make sure that all investors are on the same footing, and that the foreign investor can get the same economic achievements that the U.S. investor wants out of the investment.”

Goldman noted that if non-U.S. entities make a profit here, they must pay a withholding tax when the profits are made even if they’re not distributed.

“Your foreign investor may have to take a distribution equal to those tax payments, while your U.S. investors may get just a straight distribution out,” Goldman said.

She mentioned that withholding rules differ depending on the type of income, noting that for interest or dividends, there’s normally a flat 30 percent rate (baring any tax treaties declaring otherwise), while real estate-type income might require a 37 percent tax depending on the nature of the investment, including whether the foreign entity is an individual or a corporation.

All of this emphasizes that people in the U.S. seeking foreign investment have much to consider before looking abroad for funding.

“First, find your adviser,” Goldman said. “If you’re trying to attract both foreign and U.S. investors, maybe set up dual structures — one that will benefit the U.S. investor, and another to benefit the foreign investors, no matter where they’re from. That way, there can be like returns on their investments regardless of where the investments are coming from.”