Dear Ambassador Nagel,
I am considering buying property in both Europe and Central America. I have heard and read a lot of information about the types of legal structures I should use to hold the property that I purchase, but now I am confused as to how I should structure these purchases. Can you help me?
Thanks for your letter and your very good question.
There are many factors that go into determining the right type of structure you might need (if any) to hold your overseas property. Generally, I am in favor of legal structures for owning property for the reasons I will go into below, but let me start by outlining scenarios where you really DON’T want to create a corporate legal structure.
First, there is the issue of “foreign residency.” Our firm assists many of our clients in purchasing foreign real estate with a view towards obtaining foreign residency or even foreign citizenship. In those cases, it is imperative that the real estate purchase be made in the person’s own name, in order to qualify. If the property is purchased in a structure’s name, frequently the person will not qualify for residency. There are some exceptions, as in the case of Panama, where you can, for example, buy real estate in a corporate name and still qualify for a Friendly Nations Visa. But, in virtually all other countries including Colombia, Portugal, Cyprus, and Nevis / St. Kitts, the real estate must be in the individual’s name to qualify for the various residency / citizenship incentives.
In these scenarios, it makes sense to buy the property in your own name and then transfer it to a structure after you have achieved your goal of residency or citizenship. The type of structure will depend on your goals and objectives, as I have outlined in the following sections.
Besides obtaining second residency and citizenship, there are other reasons to own property in your own name. These reasons include owning very inexpensive property. If, for example, you were to buy a $25,000 golf course lot in Nicaragua or a $10,000 casita in Ecuador, you might not want to spend any money on a legal or corporate entity, as the costs of these structures in both setup costs and ongoing fees may be disproportionate to the costs of the property.
Also, in some jurisdictions, various taxes including transfer taxes, personal property taxes, capital gain taxes, and estate taxes may be lower in some places on individuals than on legal and corporate structures. A local lawyer or accountant should be able to easily outline the difference in tax treatments between individuals and structures, in the country where you are considering buying real estate. In the majority of cases, however, there are benefits to owning property inside corporate and legal structures, which impact taxes, asset protection, and estate planning in a very positive manner. So, let’s look at those structures and see why each has its own use in today’s real estate ownership.
The Limited Liability Company, or LLC, is one of the simplest, easiest, and cheapest legal structures to create to hold foreign real estate. It can be structured as either a local or international (offshore) LLC. The tax aspects of an LLC do not stay at the corporate level, but rather “pass through” to the individual owner or owners, referred to as the “members” (rather than as the shareholders, as in the case of most other companies). This type of “pass-through” vehicle eliminates double taxation, assuring that tax is only payable once on things like rental income or capital gains.
An LLC is frequently used as a vehicle for IRA investment into real estate. The property is properly vested in a company for asset protection purposes, while at the same time the income flows back to the IRA custodian and into the IRA account on a tax-deferred basis. The member interests can be owned by the IRA to maximize tax deferral and efficiency of rental property income as well as capital gains. The member interests themselves can also be distributed back fractionally to the IRA account owner as needed for part of any mandated distribution. So, if investing in foreign real estate is something you want to do with your retirement funds, the IRA / LLC structure is by far the best way to do it.
COMPANIES (IBCs, SAs, GmbHs, etc.)
The classic corporation makes sense where you have a more complex ownership structure, when you utilize leverage (debt) in owning real estate, or simply when you require a high level of asset protection. These types of corporate vehicles maintain everything at the corporate level, such as taxation, income, liability, etc. – in many ways, exactly opposite to the pass-through nature of an LLC.
One of the major disadvantages of a classic company is the fact that the company is subject to taxation and then the distributions (dividends) are taxed at the shareholder level, creating double taxation. This type of punitive double taxation can be overcome by establishing the company in a zero tax haven such as Belize. The company pays no tax and then the shareholders are each subject to taxation on the dividends in their home country. This works well in scenarios whereby the shareholders come from different jurisdictions. Let’s imagine a scenario whereby German and Japanese partners decide to work on a real estate project together. If they set up a zero tax IBC (International Business Company) in Belize and earn a profit on their venture, then they would pay zero tax at the corporate level in Belize; the German shareholder would pay German tax rates on his dividends and the Japanese shareholder would pay Japanese tax rates on the same dividends in Japan. That structure provides maximum tax efficiency to both the company as well as the individual shareholders.
Corporations can also be used in jurisdictions that limit or even ban foreign ownership of domestic real estate. Many European countries, for example, do not permit U.S. or Canadian nationals to buy European properties. By establishing a company in a European jurisdiction, those limitations can often be circumvented. Mexico is another example of a country which limits foreign ownership of certain coastal and border area properties. “Banker Trusts” or Mexican companies can allow the same type of property sale to take place.
LLC / COMPANY TWO-TIERED STRUCTURE
In some instances, the best structure is a two-tiered structure combining the positive elements of the corporate structure and the LLC. An LLC owning an IBC which uses leverage (debt) in acquiring property inside an IRA is one such scenario. This is referred to as a UBIT blocker because it keeps unrelated business income taxation from being assessed against the IRA.
In other situations, the top level company or “holding” company (as well as trusts and foundations) can transfer property by selling off the lower level company in which the property is actually registered. This type of structure can minimize or avoid future property transfer taxes and convert higher levels of taxation on real estate as assessed in some countries into lower levels of capital gains tax associated with the sale of corporate stock (shares or “member interests”).
This type of structure is frequently used by foreign (non-resident) taxpayers who own U.S. real property. If Venezuelan owners of a Miami condo have a two-tiered corporate structure with the holding company offshore (to both the U.S. and Venezuela) and the subsidiary Florida company in turn owns Florida real estate, then the Venezuelan seller can simply sell his offshore company to a Venezuelan buyer without transferring the shares in the Florida company or the Florida real estate.
The transaction takes place quickly, discreetly, and without any property transfer taxes being paid. The same type of two-tiered structure is used in similar transactions all around the world.
CIVIL LAW PRIVATE INTEREST FOUNDATIONS AND COMMON LAW ASSET PROTECTION AND ESTATE PLANNING TRUSTS
These types of foundation / trust structures are used with more expensive properties that are intended to remain within a family for multiple generations. The separate legal / juridical structure is for the most part impervious to lawsuits, creditors, gift, death, and estate taxes. It’s ideal for providing a “home” for a spouse, child, grandchildren, friend, or other heir without actually giving the property to them outright. This type of structure creates what are sometimes referred to as “life estates,” which are separate and distinct from fee simple title ownership.
The cost of maintaining the property including upkeep, taxes, mortgages, etc., are paid for by the foundation or trust structure allowing the beneficiaries to simply enjoy the property without the headaches of property ownership. But, at the same time, someone such as a trust beneficiary with a “life estate” cannot decide to sell the property. Only the Trustee can sell the property as permitted by the Deed of Trust. If the trust instrument is written in such a way that the Trustee must maintain the property for future generations, then essentially nobody can sell the property. This type of trust might be referred to as a “Dynasty” Trust, exactly because it creates a legal structure designed to go on for multiple generations centered around a family home. Frequently, Dynasty Trusts function alongside Family Offices to hold both property as well as businesses for many, many generations.
In other cases, the trust might be designed to maintain a home for an elderly parent, a handicapped child, a spouse unable to control spending, etc. When this is done for a specific person or reason (rather than for a span of time of many generations, as in the case of a Dynasty Trust), the trust is referred to as a “Special Needs” Trust. Once the “Need” has been fulfilled, then the Trustee is authorized to sell the property and distribute the proceeds to other beneficiaries at some point in the future.
In conclusion, there are literally dozens of legal and corporate structures that can be created to own property. Before deciding which structure is right for you, ask yourself, “What is my goal and objective in buying the property?” Am I buying the property to serve as my foreign residency? Am I trying to buy a property and flip it in six months, or is it something I want my grandchildren to still have sixty years from now? Will it generate income that I would prefer go into a tax-sheltered vehicle like a self-directed IRA or a life insurance wrapper? Am I buying the property myself or with partners, and if I have partners, how do our tax liabilities differ?
Once these questions have been settled in your mind, then you can begin to contemplate the right type of legal structure (if any). But, you certainly need to understand your goals and objectives first. Then we can look into the right type of corporate and legal structure necessary to achieve those goals and objectives. Finally, once we know what type of legal and corporate structure we need, then we can look at the right jurisdictions (frequently called jurisdiction shopping) in which the desired legal or corporate structures exist.
Which jurisdictions will deliver the maximum tax efficiency, asset protection, estate planning, economies of scale, etc.? Certainly legal and corporate structures are not for everyone, or even for every situation. The same property buyer looking to buy and flip a vacant beach lot in Costa Rica will not contemplate using the same type of corporate structure when they buy a French Chateau that they hope to own for many generations. The corporate and legal structure setup changes in every situation based on the jurisdictions involved, the tax situation, and the goals and objectives of the buyer. The proper goal of any legal or real estate advisor should be to help the buyer create structures that best help them meet the client’s goals and objectives in wanting to own foreign real estate.
I hope this brief overview helps you in your decision-making process. Do not hesitate to contact my firm if we can assist you further.
Ambassador Joel Nagel
If you would like to learn more about simple or complex legal structures, international real estate, asset protection, or global investments, consider joining me for my firm’s Annual Presidents’ Week conference in beautiful Ambergris Caye, Belize. This is a special, invitation-only, event for people looking for their own answers to these types of questions. If you would like to join me and my special Keynote Speakers,contact me HERE. I will be happy to send you the dates and price, just put in the subject line: Annual Presidents’ Week.
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