via the FIRPTA withholding and the tax paid if a tax
return is filed.
U.S. FEDERAL INCOME TAX ON OPERATING INCOME
Based on the rules discussed above, if the operating
income is ECI, tax is imposed on the Chinese investor
at regular U.S. rates. The tax base is the gross income
net of allocable deductions, including operating costs,
management fees and interest expense. Passive
income such as dividend and interest income, not
considered as ECI, are generally taxed at 10 percent
of the gross amount under the US/China income tax
treaty.
Foreign corporations investing directly to the United
States are normally subject to a U.S. branch profits tax,
which is intended to replicate the second level U.S.
withholding tax that would apply when a dividend
is paid by a U.S. corporation to its foreign corporate
parent. The situation is different for Chinese corporate
investors, however, as the U.S./China treaty is provided
with a complete exemption from the branch profits
tax.
ESTATE AND GIFT TAXES
With certain exemption and exceptions, high net
worth Chinese individual investors are generally
subject to estate and gift taxes on property located in
the United States including real property and tangible
personal property located. The transfer by a Chinese
investor of an intangible asset, such as stock in a
U.S. or foreign corporation, is not subject to U.S. gift
tax. However, a transfer of stock in a U.S. corporation
triggers U.S. estate tax.
COMMONLY USED INVESTMENT STRUCTURES:
DIRECT INVESTMENT STRUCTURE
Without any specific tax planning, a Chinese investor
may choose to invest in U.S. real estate directly
or through the use a single member U.S. limited
liability company. Under this structure, since a U.S.
LLC is transparent for U.S. tax purposes, the Chinese
investor must file U.S. income tax returns. Upon a tax
audit, U.S. tax authorities may examine the investor’s
worldwide transactions, for example to prove legal
and accounting expenses billed to the U.S. real
properties. In addition, direct ownership of U.S. real
property is subject to both U.S. estate and gift tax, if
the investor is a Chinese national.
U.S. CORPORATE STRUCTURE
An investment can also be made through a U.S.
corporation. When there are multiple purchases, the
real estate can be directly purchased by a U.S. LLC. In
such cases, U.S. Blocker then invests in that U.S. LLC.
The benefits under this structure are that the Chinese
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