# Need advice on how to setup a new corporation - 3 countries involved



## cescolar

I was born in Spain, became a US citizen and now I am a Brazilian resident.

I inherited 49% of the family "holding" company in Spain. To simplify my life, I plan on splitting it, one company with the 51% that my brother owns, another one for me, with my 49% (let's call it Laycar SL). I will own 100% of it, so I guess it will be considered a CFC. The new company will just have one asset: part ownership of another company (let's call it Lico SL) that owns a building. When the building gets rented, it will generate dividends. When the dividends go from Lico to Laycar, it won't have to pay taxes in Spain. Will I have to pay them in the US?

Then, if the building ever gets sold, I guess Laycar will have to pay capital gains taxes in Spain. Will I have to pay them in the US?

Can you give me any advice as what would be my best strategy: classifying Laycar as a "disregarded entity" using form 8832 or not?


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## Bevdeforges

I'm no expert in corporate tax matters, but I would suggest that it may all depend on the type of corporation you set up. I know you've gone around with those forms for declaring a "US interest" in "certain corporations" - but to my knowledge, those are disclosure forms, not tax forms. If your corporation (or other business structure) is not a pass-through type of entity, I believe it would only pay taxes in the country in which it is incorporated and doing business.

You, as a US citizen, would declare income (and potentially pay taxes) on income accruing to you from the corporation - whether in the form of salary, dividends or whatever other arrangements you establish.
Cheers,
Bev


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## cescolar

I guess I would setup a "sociedad limitada" in Spain. Then I would file an 8832 if I did not want the US to give it the default treatment.

So my questions are:

what is the default
what do I have to select in order to be able to shelter its income i.e. only pay taxes when it pays me, not when it receives income

I believe Spain and the US have a tax treaty. How does that enter into the equation?


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## Bevdeforges

Again, this is more from an accounting point of view, but if a "sociedad limitada" in Spain is considered a tax entity in Spain (usually means that the company pays its own taxes), then you (as an individual) would only report and pay taxes on income paid out of the company to you (normally in the form of "salary," interest or dividends). 

I wouldn't be too quick to file anything with the IRS on a Spanish corporation. Certainly not until reading through their publication 542 on Corporations. First of all, you need to determine if your company falls under IRS jurisdiction (which it may, given your position and ownership interest in the corporation). But if the company is doing business exclusively in Spain and is paying taxes as a "corporate person" in Spain, then it isn't subject to US income taxes. You may have to disclose your ownership interest, but you would only have a US tax obligation with regard to income that you receive from the company.
Cheers,
Bev


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## BBCWatcher

There are also potential PFIC complications.


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## cescolar

BBCWatcher said:


> There are also potential PFIC complications.


Can you please elaborate?


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## cescolar

Bevdeforges said:


> Again, this is more from an accounting point of view, but if a "sociedad limitada" in Spain is considered a tax entity in Spain (usually means that the company pays its own taxes), then you (as an individual) would only report and pay taxes on income paid out of the company to you (normally in the form of "salary," interest or dividends).


I think so. I read that it might be better to get "qualified dividends" because they get a lower tax rate. Will I need to fill form 8832 and elect not to be treated as a corporation in order to get them?



> I wouldn't be too quick to file anything with the IRS on a Spanish corporation. Certainly not until reading through their publication 542 on Corporations. First of all, you need to determine if your company falls under IRS jurisdiction (which it may, given your position and ownership interest in the corporation). But if the company is doing business exclusively in Spain and is paying taxes as a "corporate person" in Spain, then it isn't subject to US income taxes. You may have to disclose your ownership interest, but you would only have a US tax obligation with regard to income that you receive from the company.


Right. The company only will do business in Spain and get "passive" income (rental). I will read publication 542.
Thanks!


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## Bevdeforges

A PFIC is a Passive Foreign Investment Company - one where the company makes its money through passive investments. That gets you into another set of forms: Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Rule of thumb they taught us in business school is that you should never do anything just for tax reasons. What you save in taxes will most likely get gobbled up by the accountants and lawyers needed to maintain the structure.
Cheers,
Bev


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## BBCWatcher

In other words, the U.S. Congress is way ahead of you. Lots of mostly wealthy individuals used foreign corporations to shield their incomes from U.S. tax. Congress introduced PFIC rules many years ago to battle that tendency.

If you run afoul of the PFIC rules it's expensive. 

There are individuals who do a great job avoiding taxes -- Mitt Romney's sub-10% effective tax rate is darn impressive to pick an example -- but they tend to have very high priced legal and accounting help, as Bev mentions.


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## cescolar

Bevdeforges said:


> A PFIC is a Passive Foreign Investment Company - one where the company makes its money through passive investments. That gets you into another set of forms: Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund


I tried to get form 8621 and its instructions and got an error: 

_Forbidden
You don't have permission to access /pub/irs-pdf/f8621.pdf on this server._

Boy, I wish they would get their act together!



> Rule of thumb they taught us in business school is that you should never do anything just for tax reasons. What you save in taxes will most likely get gobbled up by the accountants and lawyers needed to maintain the structure.


Sometimes it is a necessity: I believe I need to form a corporation because otherwise I would have a huge capital gain (between the value that that the asset had when I inherited it and the current valuation). Since the asset is not liquid (a building owned with many other people - the majority would need to agree to sell it - and then we would need to find a buyer!), I would not have the money to pay the due taxes...

So it is not like I am trying not pay my fair share...just trying to survive!


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## BBCWatcher

cescolar said:


> I believe I need to form a corporation because otherwise I would have a huge capital gain (between the value that that the asset had when I inherited it and the current valuation).


Why do you think that? (Ignore the capital gains for a moment.)

The current estate tax exemption to U.S. citizen heirs is $5,250,000 (total). Are you saying that the total value of the estate (in excess of that left to a U.S. citizen spouse) was greater than that amount? (When did the individual die?)

Back to capital gains. There are no capital gains unless and until the property is sold or transferred.

I'm very confused.


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## cescolar

Three years ago I inherited 49% of the business holding SL. Let's call it COBRO. My brother, who got the other 51%. He had setup the whole thing, and only he understands it all! 

Since he can take all the decisions and run it all to the ground, we agreed that it would be more prudent to split the holding SL. Since I am a retired Bell Labs engineer with little business and tax knowledge, we think that the company that is created for me after the split should just own shares of a company that only has one asset: a building. Let's call it COBUILD.

My choices would be to either form a new company (NEWCO), or just be the owner outright of some shares of COBUILD. I need to make that decision, so I am trying to get educated on all the tax issues. (And this forum has been a lifesaver for me! )

The new company would be a CFC and a PFIC. Is that terrible? 
The accounting would be really simple: it will get dividends and it will pay them to me.
I would fill the needed forms and pay the needed taxes. Simple?

COBRO owns 25% of COBUILD and I now own 49% of COBRO. Let's say that in the split I would just end up with the 25% of COBUILD and my brother with the rest of the assets of COBRO. Then, if is a corporation split, no capital gains.

But if I get the shares of COBUILD directly, not as a corporation, then COBRO is selling me the 51% of the shares of COBUILD that I did not own and that would be a taxable event. I would have to pay capital gains, but I would not have any cash to pay it with!


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## BBCWatcher

cescolar said:


> Three years ago I inherited 49% of the business holding SL.


2010 was a very good year to die.



> The new company would be a CFC and a PFIC. Is that terrible?


Probably. Though that bridge may have been crossed already depending on COBRO's activities.

May I suggest a simpler approach? Your brother buys out your entire 49% interest in COBRO. He mortgages the building to pay you. Assuming the estate taxes are settled by now, you pay tax only on the capital gains between 2010 and 2013. Which, if the business is like most in Spain over the same period, is less than zero.

Alternatively, and assuming it's tax compliant (consult an expert), your brother buys out your 49% and agrees to pay you in installments at a market rate of interest (which is low) per a formal promisory note secured by a formal lien against the building. You become a secured creditor but cease being a corporate owner. Again, unless COBRO is a very strange Spanish company, your capital gains tax is zero. (Though in this second case you may pay a bit of tax each year on the interest you receive from your brother.) In other words, you exchange your shares for bonds, legally and cleanly.

Why all this complexity? If you don't want to run the business (and your brother does) then get out.


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## BBCWatcher

By the way, take a look at IRS publications 551 and 4895 to determine the basis of your inheritance of 49% of COBRO. In general that's the fair market value when your decedent died, but it's a bit complicated, especially if the decedent died in 2010.


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## cescolar

BBCWatcher said:


> 2010 was a very good year to die.
> Alternatively, and assuming it's tax compliant (consult an expert), your brother buys out your 49% and agrees to pay you in installments at a market rate of interest (which is low) per a formal promisory note secured by a formal lien against the building. You become a secured creditor but cease being a corporate owner. Again, unless COBRO is a very strange Spanish company, your capital gains tax is zero. (Though in this second case you may pay a bit of tax each year on the interest you receive from your brother.) In other words, you exchange your shares for bonds, legally and cleanly.


That sounds like a great idea! Thanks a million!

Now I have to run it by my brother and see what he thinks...

But then I won't need to keep on reading this forum and I would miss you guys!


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## cescolar

BBCWatcher said:


> By the way, take a look at IRS publications 551 and 4895 to determine the basis of your inheritance of 49% of COBRO. In general that's the fair market value when your decedent died, but it's a bit complicated, especially if the decedent died in 2010.


He died in Spain and all his estate was in Spain, so only the Spanish laws apply here, right?


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## BBCWatcher

cescolar said:


> He died in Spain and all his estate was in Spain, so only the Spanish laws apply here, right?


Only if the tax treaty says so, and even then it's still probably complicated.


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## BBCWatcher

I'll emphasize the "consult an expert" part again. You and your brother have got many potential issues: the inheritance and potential estate taxes, the behavior of the corporate share you inherited for tax years 2010 to 2013 inclusive (e.g. potential CFC and/or PFIC complications), and the possible disposition of your share.

With respect to PFIC complications, don't panic (probably never a good idea), but yes, they can be really, really nasty. Perhaps the nastiest part of the U.S. tax code -- Congress came down really hard on what they felt (with justification) was a prime vehicle for tax avoidance. It didn't hurt that they could also protect U.S. investment firms' interests.


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## cescolar

BBCWatcher said:


> By the way, take a look at IRS publications 551 and 4895 to determine the basis of your inheritance of 49% of COBRO. In general that's the fair market value when your decedent died, but it's a bit complicated, especially if the decedent died in 2010.


I was wrong, he died in 2009, not 2010. I looked at those publications quickly.
They seem to apply to probates executed in the USA, right? He was Spanish and his probate happened in Spain.
I am a tax (and accounting!) newbie, but to me it seems obvious that when you get an asset in an inheritance the item is assigned a value, and that should be your cost basis to use when you sell it. That is the value that was used to pay the estate taxes.
Can you elaborate how it could be otherwise?


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## cescolar

BBCWatcher said:


> You and your brother have got many potential issues: the inheritance and potential estate taxes,


I checked: when there is a foreign inheritance, the IRS does not collect any taxes. Only the country where the probate takes place collects. But there is one requirement: you must file form 3250 just to inform the IRS. If you don't there could be a 5% penalty on the value of the Estate! My question: does the 3 year statute of limitations also apply to all the forms that need to be filed just for information purposes, like 3250, 5471 etc?



> the behavior of the corporate share you inherited for tax years 2010 to 2013 inclusive (e.g. potential CFC and/or PFIC complications), and the possible disposition of your share.


Yeah, even it could be a Foreign Personal Holding Company (FPHC). But I think that would "only" require filling 5471s...

The problem with consulting (and paying?) an "expert" is that they could whip up my fears just to get my business! Besides, where do I find one I can trust? Do you know any?

PS I am getting rid of my shares of COBRO as fast as I can...I just need to convince my brother about you bond idea...that was brilliant, BBCWatcher!


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## BBCWatcher

The decedent was neither a U.S. citizen nor a U.S. permanent resident, correct?

If the decedent was a foreign person, actually it looks like the penalty could be as high as 25%. I'd check to see if the IRS's streamlined compliance offer covers late filing of Form 3250 (which would have been due June 15, 2010, I assume).

Yes, I've recently discovered that foreign bonds are a lot simpler than foreign shares. To expand on the previous advice a bit, the IRS would likely want some reasonable documentation (if they ask) that your sale of 49% of COBRO was properly, fairly valued and that the compensation (the bond you receive and performance on it) matches. This maneuver is the sort of thing some people could use to dodge taxes in either direction, so it's best to keep it very clean, simple, and well documented. For example, I wouldn't make the bond terms too complicated. You'll still have the COBRO complications from 2009 to 2013 -- that'll probably be a bit of a mess -- but at least you should be able to simplify things going forward and let your brother focus more on his business.

Good luck.


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## cescolar

BBCWatcher said:


> The decedent was neither a U.S. citizen nor a U.S. permanent resident, correct?


Correct.



> If the decedent was a foreign person, actually it looks like the penalty could be as high as 25%. I'd check to see if the IRS's streamlined compliance offer covers late filing of Form 3250 (which would have been due June 15, 2010, I assume).


Does the 3 year statute of limitations also applies to filing forms?

I have gotten in touch with some experts at Home - Greenback Expat Tax Services. I am waiting to hear back from them.
Have you heard of them. How about Expat Taxes - Expat Tax Advice, Laws & Tips - H&R Block®

I have prepared a letter to file with the late 3250, explaing that my accountant did not advise me the need to file, but also that I did file the FBAR that year, which shows that I was not trying to hide anything, and I repatriated all the money I could...If they assess me a fine I think I have a good malpractice suit!



BBCWatcher said:


> Yes, I've recently discovered that foreign bonds are a lot simpler than foreign shares. To expand on the previous advice a bit, the IRS would likely want some reasonable documentation (if they ask) that your sale of 49% of COBRO was properly, fairly valued and that the compensation (the bond you receive and performance on it) matches. This maneuver is the sort of thing some people could use to dodge taxes in either direction, so it's best to keep it very clean, simple, and well documented. For example, I wouldn't make the bond terms too complicated. You'll still have the COBRO complications from 2009 to 2013 -- that'll probably be a bit of a mess -- but at least you should be able to simplify things going forward and let your brother focus more on his business.


I think it might be best for me to file a PLR to request that I be allowed to file late forms 3520s for both to be considered disregarded corporations and then amend my personal returns for the past 3 years and claim all their loses. What do you think? Making lemonade when life gives you lemons?

We are thinking of making it an interest paying loan, since issuing a real bond is really complicated and costly.

I plan on keeping it really clean! I think showing how much COBRO was evaluated in the will and how much it is evaluated in the current "declaracion de la renta" should do it. I would like to claim the (real) loss I am suffering. The worse that the IRS could do would be not to accept that I had a loss. But could they claim I had a gain?

I am afraid that claiming the loss next year my trigger an internacional audit 
Do you know how that works? If I show them all the papers in spanish, do they understand them, or do I have to find an official translator? They also have to understand the spanish accounting terms and laws! I sincerely don't know how they can do it!



> Good luck.


Thanks, I need it!


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## cescolar

BBCWatcher said:


> If the decedent was a foreign person, actually it looks like the penalty could be as high as 25%.


Where did you get that information? In the instructions for form 3250 it says:

_
A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or:
35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or
35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or
5% of the gross value of the portion of the trust's assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.
_
I don't see any mention of 25%...As a matter of fact, I don't see any penalty for failure to report a distribution from a foreign estate either...

Under "Who Must File", the section about inheritances says:

_a. More than $100,000 from a nonresident alien
individual or a foreign estate (including foreign persons
related to that nonresident alien individual or foreign estate)
that you treated as gifts or bequests;_

So if they are talking about a foreign estate there, should there not be a corresponding section under penalties?

Are all the instructions of the IRS forms just a "tax for dummies" and to get the real answer you need to dig and find the law that governs that form?


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## BBCWatcher

....Or zero according to this information.

Look just below the text you quoted for the paragraph that begins with "Section 6039F." That's where the up to 25% part appears. Whether your inheritance was IRC Section 6677 or Section 6039F, I don't know, but there you go.

However, you're well covered if you simply follow the instructions at that first link (and with the possible 3 year limit which might be timing out on June 17, 2013 for a foreign inheritance completely received in 2009).


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## cescolar

BBCWatcher said:


> ....Or zero according to this information.


Wow! 

I owe five 5471s, (that would have been a $50.000 fine!) but no taxes, so it is a HUGE relief to know that the IRS will not assess penalties in those cases!

Thanks a million for that link!


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## cescolar

BBCWatcher said:


> I'll emphasize the "consult an expert" part again. You and your brother have got many potential issues: the inheritance and potential estate taxes, the behavior of the corporate share you inherited for tax years 2010 to 2013 inclusive (e.g. potential CFC and/or PFIC complications), and the possible disposition of your share.


I finally found an expert and he found out that since my brother is not a US person, then the companies are not CFCs nor PFICs. The shares of a non-us person cannot be attributed to a us person. See IRC section 958(a)&(b) and section 318(a).


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