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

06 Mar
Cisne Branco of Brazil - Tax Planning

Cisne Branco of Brazil

I have mentioned in prior articles that I was a Spanish and Portuguese major as an undergraduate. During the time that I was attending law school at the University of Miami, the early 1990’s, the Brazilians had yet to arrive in South Florida in a significant manner. The Brazilian community in Broward County (Pompano Beach) was already in motion, but the large amount of inbound Brazilian investment was just beginning. Fast forward twenty years and it is a totally different story. These days if you go anywhere in Broward or Dade counties in South Florida, and you are bound to hear Brazilian Portuguese. The Brazilians have also turned up in places where there was a large Portuguese community – Massachusetts, New York-Newark, and Danbury, Connecticut.

Brazil as the largest economy in South America, and the “B” in the BRIC nations, has had a good run. A lot of the same problems that brought Spanish-speaking Latin Americans to South Florida over the last forty-fifty years, are the same problems bringing Brazilians to South Florida, namely safety and security. If you speak to many Brazilians living in the U.S., they will tell you that from their perspective that the violence is out of control in Brazil and if you can afford your own armed compound, then it might not be a bad investment. At the same time, Brazil is poised for another election. Elections are always an unknown factor in Latin America.

A Brazilian friend shared a story about her average timeshare in Orlando when she noticed the Brazilian version of Warren Buffet living next door, living well below his means. The point to be made here, is that a Brazilian or any foreigner can enjoy being another face in the crowd without the fear of kidnap and violence in the U.S. That’s a good thing! Just as “gringoes” were beginning to learn Spanish, the Brazilians tripped everyone up by throwing Portuguese into the mix of things!

This article is the first 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 with children possibly attending college or prep school in the United States.

Are You Sure You Want to Be “Americano”?

Cisne Branco of Brazil - Tax PlanningThe EB 5 immigration program has received a lot of attention from the immigration bar for its fast track towards permanent residency in the United States. Under the physics of tax law, what goes up, must come down, i.e. the tax tradeoff for permanent residency is taxation on worldwide income for any non-citizen that has a Green Card; meets the substantial presence test; or makes an election under IRC Sec 7701(b)(1)(A) to be treated as a permanent resident in the first year of residency. Depending upon a number of personal and financial considerations, this decision may be a “deal killer” for the inbound Brazilian.

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.

Cisne Branco of Brazil - Tax PlanningThe 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 calculation uses a formula that weighs the current year more heavily than days in prior years. The Substantial Presence Test does not apply at all if the taxpayer is not in the U.S. at least 31 days in the current tax year. Furthermore, the taxpayer does not have to prove a “closer connection” to Brazil than the U.S.

An example is helpful in order to understand how the formula works. Assume Chico Da Silva spends 120 days in the U.S. in 2014 as well as 2013 and 2012.

U.S Tax Planning – Year Formula

  • 2014 120 days present x1 = 120 days
  • 2013 120 days x 1/3 = 40 days
  • 2012 120 days x 1/6 = 20 days
  • Weighted Average Total = 180 days

An important exception to the Substantial Presence Test provides that if the non-resident alien is able to demonstrate to the IRS on Form 8840 that the taxpayer has a tax home in Brazil and a closer connection to Brazil than the United States, regardless of the Substantial Presence Test, than the individual will not be treated as a U.S. taxpayer.

Rear view of the tall ship of the Brazilian Navy Cisne Branco leaving the port of Bremerhaven in Germany - Tax Planning

Rear view of the tall ship of the Brazilian Navy Cisne Branco leaving the port of Bremerhaven in Germany

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.

The First Year Election allows the taxpayer to make an affirmative election to be treated as a U.S. taxpayer providing the taxpayer is present in the U.S. at least 31 consecutive days in the current tax year; (2) 75 percent or more of the days in the testing period. The testing period is starts on the first day of the consecutive 31- day period and December 31st in the year of election. (3) The taxpayer meets the substantial presence test in the next tax year.

Summary

The decision to become a U.S. resident for income tax purposes is a complex decision based upon both personal and financial considerations. In the current state of affairs, the Brazilian’s status as a U.S. taxpayer carries with it many ramifications. Not that the fiscal authorities are ominous anywhere in the World, but the IRS’ reputation for efficient enforcement is world renown.

The next installment will focus on the taxation of various forms of income in the U.S. Once an outline of the basic tax rules is in place, the articles will focus on planning structures and alternatives in order to minimize U.S. taxation.

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