Question from a US-based IM Member:
Q: “Is it possible to minimize and/or defer rental income in an Argentinian property if the funds are retained in a bank or an overseas brokerage account?”
A (by Ryan Losi): No, it's not possible. All they have is an account that happens to be sitting in a foreign bank. There's no mechanism in the US that allows you to defer income off that account.
The only way to receive deferral from foreign earnings is to utilize the Controlled Foreign Corporation (CFC) regime under Section 951 of the code – through a foreign corporation. Even with that, there are a lot of rules that limit how you maintain deferral status on those foreign earnings.
This is a complicated subject that requires professional assistance, but here's a simplistic way to look at it.
In general, passive income is not deferred, only active income. If you have an active trade or business that operates through a foreign corporation, then you can utilize the CFC regime. In this case, active means you are actually “doing stuff” – a manufacturing company, a sales company or what have you.
If a CFC owns assets that primarily or in-majority generate passive income like dividends, interest, rents and things like that, a deferral will likely not be permitted. Rather, that income is going to fall under a special rule called Subpart F, which falls under the CFC regime. It basically states that even though you have a CFC and ordinarily you would have deferral of your foreign earnings, because in this case, your foreign earnings are passive, it will be categorized as includable in your current US tax return.
In most cases, the US wants you to be able to compete in active trade or businesses abroad, which is the point of the CFC regime in the first place. It is not designed for wealthy people to set their portfolios in foreign corporations just so they can escape US taxation.
Ryan Losi is an international tax specialist based in Virginia who helps American expats manage their financial and reporting requirements back home. He also works the other way too – helping “inpats” entering into the US structure themselves and navigate the bureaucracy and regulations of the US market. After starting his career in the 90's at KPMG, Ryan is now partner at Piascik & Associates, a boutique practice serving some 700 clients in 22+ countries. Ryan has been featured in Fortune Small Business, Forbes.com, CFO Magazine, and is also adjunct professor of the Executive MBA program at Virginia Commonwealth University.
Caveat – these are complicated legal issues, which have a variety of potentially serious legal implications. Decisions shouldn’t be made without consulting capable and internationally experienced counsel. These are just practical replies.
PLEASE NOTE: The information contained within this article is based on the best research we could find as of the date of publication. However, the world changes fast and information can become out of date relatively quickly. So, two points… First, before undertaking any action described in this material, please conduct your own due diligence and verify all facts. Second, if you happen to spot an out of date fact or figure (or even suspect something is out of date or false), simply get in touch with us and we'll look into it. International Man is a network made up of some very smart people – tax specialists, accountants, lawyers, analysts and many other talented individuals. As a group, we can create and maintain a very accurate and highly actionable resource for internationalization.