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A Non-US resident is the sole shareholder of a U.S Corp. The…

A Non-US resident is the...
A Non-US resident is the sole shareholder of a U.S Corp. The U.S Corp is the owner a Real Estate Property in NY City. The shareholder of the U.S Corp is affray that if she passes away, there will be a high estate tax since she is a non-us resident. The question is whether since the property is in the name of the U.S Corporation, there will be a $5 million exemption even though the shareholder is a nonresident. Please provide the IRC code number to support the response.Also, would be beneficial to transfer the shares of the U.S Corp to an offshore? The nonresident would be the sole owner of the offshore. Would that transfer lead to capital gain taxes to U.S Corp that will be transferring the property to the offshore? Please provide the IRC code number to support the response. Does U.S. Code 367 apply? Is there an exemption since the owner of the foreign entity will be the same owner of the U.S Entity?The main goal is avoid paying a high estate tax since the owner of the U.S Corp is a non-US Resident and to defer any capital gain taxes. Thank you.
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Answered in 19 hours by:
12/12/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,357
Experience: Taxes, Immigration, Labor Relations
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Estate taxes are applied to the estate of the decedent - and not on the corporation.

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.

The personal owns shares of the US corporation - so these shares will be included into his estate - and we will need to identify the value of shares.

.

Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.

A nonresident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee.

The issue is that nonresident aliens may not use unified credit ($5,490,000 in 2017, and $5,600,000 in 2018), but may only use $60,000 exclusion.

.

So far - in your situation - the person will be subject to the estate tax (unless they will be eliminated).

Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation.

I might suggest to verify the country where the nonresident alien is a resident.

See code sections here

https://www.law.cornell.edu/uscode/text/26/subtitle-B/chapter-11/subchapter-B

Regarding transfer - based on your information - that will be a revocable transfer - see here

https://www.law.cornell.edu/uscode/text/26/2104

(b) Revocable transfers and transfers within 3 years of death

For purposes of this subchapter, any property of which the decedent has made a transfer, by trust or otherwise, within the meaning of sections 2035 to 2038, inclusive, shall be deemed to be situated in the United States, if so situated either at the time of the transfer or at the time of the decedent’s death.

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Customer reply replied 8 months ago
Hi, thanks for the response. I am ok with the explanation for the estate taxes related to the non-resident. However, it is still not clear if it will be a taxable event if the non-US resident transfers the share of the corporation to a foreign corporation (the non-US resident also owns the shares of the foreign corporation). Also, the non-resident is not deceased. She is just trying to avoid the estate taxes if she passes away while owning the shares of the corporation that owns the property.
So, the main question now is whether there are taxes to be paid if the non US resident transfers the shares of the corporation that owns the property TO a foreign corporation of which the shares are owed by the same non US resident person.
I was reading 26 U.S. Code § 367 - Foreign corporations and it seems that this scenario would be a taxable event. Can you please take a look? I really appreciate the response…..

section 367 you referenced is not directly related to estate taxes (subtitled B) - but to income tax (subtitle A) liability.

https://www.law.cornell.edu/uscode/text/26/367

So - the person who is NOT a US person (nonresident alien) what to transfer shares of US corporation to a foreign corportaion which is not a US person either.

That is NOT a transfer of the property from the US as required by section 367 - because shares of US corporation (subject of such transfer) will remain US suited asset.

.

However - when shares of the US corportaion (or other assets) are transferred to a foreign corportaion solely for the exchange of shares of that foreign corportaion (and there is no sale transaction) - that transfer is NOT subject to US income tax based on section 361

But section 367 limits such exclusion for US persons.

It would be a case when US corportaion transfer the real estate to a foreign corporation - and that is not a case in this situation.

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Customer reply replied 8 months ago
If I understood your response, in this scenario, there will be a taxable event correct? I apologize but I reference the wrong code before. The code that I was reading was 26 U.S. Code § 897 - Disposition of investment in United States real property. It seems that based on your response for a non US person and based on section 897, there will be a taxable event. Do you think I am making the correct assessment? Thanks again.
Customer reply replied 8 months ago
Hi. Did you see my last follow up questions? Thank you!

Sorry for delay... looking now...

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Customer reply replied 8 months ago
Take your time. I did not mean to rush you....thanks!

https://www.law.cornell.edu/uscode/text/26/897

We are talking about Disposition of US real property interest - so whether that planned transfer of US corporation shares is treated as Disposition of US real property?

And again - that is related to income tax liability - not to estate taxes.

Specifically the US real property interest included any shares (interest) in US corporation which owns US real estate - section 897(c)(1)(A)(ii).

Moreover - that foreign corporation will be classified as United States real property holding corporation section 897(c)(2)(B)(ii).

Because of the later - NO gain will realized on that transfer, but because of such classification of that foreign corporation -

See regulations

https://www.law.cornell.edu/cfr/text/26/1.897-2

That foreign corportaion will be under US jurisdiction and all assets still will be included into gross estate as suited in the US.

So that approach will not help to legally avoid possible estate tax liability.

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Customer reply replied 8 months ago
Thanks, ***** ***** helps.
So since the foreign entity will be classified as United States real property holding corporation and it will be under US jurisdiction, will that allow the estate tax credit of $5,490,000 in 2017, and $5,600,000 in 2018 as opposed to only $60,000 exclusion for non US Resident?

the unified estate tax credit of $5,490,000 in 2017 is NOT applied to corporations...

It is applied to the estate of the decedent.

The value of that foreign corportaion will be included into the estate.

So if the decedent will be US resident at the time he/she dies - then yes - that unified credit may be used.
For nonresident aliens - it may be only used based on the tax treaty with the country where the decedent will be a resident and only against the TOTAL estate - not only for the US suited part of the estate.

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Customer reply replied 8 months ago
Right, but will be exclusion of $5,490,000 in 2017 or $60,000 be used against the Total Estate? This should be the last follow up question. Thanks again.

For resident alien's estate - all worldwide assets are included and $5,490,000 unified credit is used

for nonresident alien's estate - only US suited assets are included - and $60,000 deduction will be used.

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Customer reply replied 8 months ago
Thank you!

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.

If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.

Lev
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