We are a Chinese company. Our U.S portfolio includes mixed-use, senior living and office spaces on the West Coast and in New York. We’ll be opening a U.S. office, our first, in Los Angeles. We’re considering forming a U.S. corporation instead of a foreign subsidiary. What would be the pros and cons of doing that?
Answers
The following should not be considered legal or tax advice and you should not rely on it or any other response to general questions such as yours by anyone other than someone who has been properly retained to provide such advice and has had the opportunity to understand the entire factual and legal context. The following assumes an existing Chinese entity treated as a corporation for U.S. tax purposes forms a U.S. corporate subsidiary whose assets will consist of more than fifty percent interests in U.S. real estate (whether held directly or indirectly). The response lists pros and cons of forming a US real estate holding corporation. The investors in the Chinese company are referred to as "foreign investors," below.
Pros: no obligation of foreign investors to file a tax return; foreign investors should not be subject to U.S. gift or estate tax; potential to exit investment with only a single level of tax on gains if U.S. corporation sells all of its assets and liquidates.
Cons: cost of maintaining two corporations; withholding tax applies to operating distributions to shareholders. This tax would not apply to an operating distribution from a U.S. branch to a mainland Chinese corporation (however, the functional equivalent of such tax would apply to an operating distribution of a U.S. branch to a Hong Kong corporation).