Bye Bye Brazil! – Tax Planning Considerations for Brazilian Investment in the United States: Part II – Additional Income Tax Considerations

07 Mar
Brasão de Armas da Marinha do Brasil - Income Tax

Brasão de Armas da Marinha do Brasil

I have mentioned in prior articles my affiliation with the South Florida law firm Osborne and Osborne, PA in Boca Raton. Back to the beginning! Boca Raton is where I started right out of the Army in 1987. I moved to Miami for law school. Even though I have been living in New England and working heavily in the Big Apple over the last eighteen years, I never lost the “wonder” for all things Spanish and Portuguese. Needless to say, South Florida is the ideal place for the perpetual language major.

South Florida has a lot of Spanish speaking attorneys, but apparently few that can manage Portuguese well. There is a book called “Spanish is not Portuguese”. It’s true! In an effort to “tune up” my Portuguese, I have been attending church in the Brazilian community and attempting to do as many things in Portuguese as I can. In my rides back and forth from the office, I also try to listen to the radio in Spanish. After all, this is in South Florida. May I point out to the uninformed “gringo” that contemporary Latin music in the protestant church is simply amazing?

One of the strong but lasting impressions from attending Brazilian churches and Spanish religious broadcasting that I am left with is that the Republican Party on immigration matters is simply outgunned and outmaneuvered by the Latin American community (Portuguese and Spanish speaking). It struck me sitting in the pew the other day that the millions of prayers from Latin American parishioners delivered to celestial sectors on immigration matters several time per week is a strategic miscalculation that the Republican Party never counted on or miscalculated. I left the church believing that the matter is already decided based upon the doctrine of celestial representation, but the federal government has yet to be informed.

This article is the second installment of a series outlining tax considerations for Brazilians moving to the United States or alternatively considering spending a lot of time in the United States without permanent residency with children possibly attending college or prep school in the United States.

Residency for Income Tax Purposes – a Quick Review

NE Guanabara of Brazil

As a permanent U.S. resident, Brazilians will be taxed on their worldwide income as a U.S. taxpayer. No exceptions!

Under the Green Card Test (Cartao Verde or Permanent Residence Visa), the person holding the Green Card is considered a U.S. resident for income tax purposes. The Green Card holder continues to be treated as U.S. taxpayer unless the taxpayer proactively makes an effort to relinquish or revoke Green Card status.

The Substantial Presence Test of IRC Sec 7701(b)(3) looks at the number of days over a three year period that the individual is physically present in the U.S. An individual is substantially present is present for at least thirty one days during the current year and at least183 for the three year period ending on the last day of the current year (December 31st).

The location of a “tax home” is the taxpayer’s home for determining deductible business travel expenses while away from home. The Closer Connection Test is more subjective and based on intent. The analysis focuses on the amount of time spent in the U.S. versus Brazil, the value and locations of homes and the homes are owned or rented. Additionally, the analysis considers the following factors:

  • Time spent in the U.S. due to health problems or political problems in Brazil
  • The location where the taxpayer’s family and friends are situated
  • Location of valuable personal property
  • Visa status
  • Jurisdiction where the individual is registered to vote
  • Jurisdiction of driver’s license
  • Location of business interests
  • Location of religious and social affiliations
  • Taxation of U.S. Investment Income

NE Guanabara - Income TaxBrazilians that are not permanent U.S. residents are only taxed on U.S. source income. Income that is effectively connected to a U.S. trade or business (ECI) is taxed on a net income basis rather than the flat rate basis for fixed, determinable, annual and periodic income (FDAP) which is subject to a thirty percent flat tax. See IRC Sec 871(b) and IRC Sec 882.

A U.S. Brazilian owning rental real estate in the U.S. would ordinarily attempt to make an election to treat the real estate activities as ECI in order to get the benefit of being taxed on a “net” basis using all allowable deductions. The real estate venture can qualify as ECI if its management (whether or not performed by a U.S. management company) is regular, continuous and systematic. The U.S. and Brazil do not have an income tax treaty between the two countries.

A Brazilian is considered to be engaged in a U.S. trade or business if the activities in the U.S. are “considerable” as well as “continuous and regular. IRC Sec 864 and Treas. Reg. 2.864-2.

FDAP is subject to a flat tax of 30 percent for Brazilians. FDAP consists of dividends paid by a U.S. corporation, interest, rents and royalties that are passive income and not ECI. Capital gain income received by a Brazilian from the U.S. situs property is not subject to U.S. capital gains taxation providing the gains are not attributable to a property that is effectively connected to a U.S. trade or business or gain from the disposition of real property.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) treats gain from the sale of U.S. real property as ECI. A U.S. real property interest includes land and buildings and improvements. It also includes crops and timber and mines for natural deposits. The definition also includes a corporation whose market value in U.S. real property equals or exceeds fifty percent of the value of the corporation. The definition does not generally include debt.

FIRPTA looks-through a partnership or LLC or trust to the underlying U.S. real property interest. The withholding scheme provides for ten percent withholding tax on the amount realized on the disposition of a U.S. real property interest.
Peacemaker - Income Tax

Peacemaker

Two forms of U.S. source investment income are not subject to U.S. taxation – portfolio interest and interest on U.S. bank deposits. The portfolio interest exemption is designed to allow U.S. borrowers to compete for loans for foreign loans from foreign lenders. The foreign lender would be taxed for U.S. purposes without the portfolio interest exemption.

In order to qualify, the loan obligation must be in registered form and the U.S. borrower obtains a statement from the beneficial owner stating that the owner is not a U.S. person. The registration requirement can be met with a “book entry” whereby the foreign issuer maintains a record of ownership of the obligation. The foreign lender cannot own ten percent or more of the U.S. borrower’s stock, capital or voting power. See IRC Sec 871(h)(3)

Summary

This article lays out some of the ground rules for the income taxation of Brazilian inbound investments in the U.S. The next several articles in the series will outline various techniques designed to reduce income tax exposure on U.S. investments.

Bye Bye Brazil! – Tax Planning Considerations for Brazilian Investment in the United States: Part I – Income Tax Considerations

Gerald Nowotny

Law Office of Gerald R. Nowotny
266 Lovely Street
Avon, CT 06001
United States

860-404-9401
TaxManDotCom.com

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