Corporate Structures For Overseas Real Estate: Part 1

Which Corporate Structure Do You Need For Your Overseas Property?—Part I (Hint: The Answer May Be None)

pile of tax papers with a pen, mouse, coffee mug and laptop on top of them

When determining the most beneficial legal structure to use for buying and holding overseas property, you should consider several factors. In fact, the first question is whether you need a structure at all.

Generally, I am in favor of creating legal structures for overseas property for the many reasons I will explain here (and in next week’s edition). However, let me start by outlining scenarios where you may not want or need a corporate legal structure.

Situations Where A Structure Is Not Appropriate

The first issue to consider is foreign residency. Many of my clients purchase foreign real estate with the goal of obtaining foreign residency or even foreign citizenship. In those cases, it’s imperative that the real estate is purchased in the person’s own name in order to qualify for any residency or citizenship benefits.

If the property is purchased in a structure’s name, frequently the person will not qualify for residency. Some exceptions exist, such as the case of Panama, where you can buy real estate in a corporate name and still qualify for a Friendly Nations’ Visa. In virtually all other countries, though (including Colombia, Portugal, Cyprus, and St. Kitts and Nevis, just to name a few), the real estate must be titled in the individual’s name to qualify for the various residency and 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, unless you plan to immediately sell the property. The type of structure to use will depend on your goals and objectives as I outline in the following sections…

Besides second residency and citizenship, there are other reasons to own property in your own name. One compelling reason is if you are purchasing inexpensive property. For example, if you buy a US$25,000 golf course lot in Nicaragua or a US$10,000 casita in Ecuador, you might not want to spend the money to establish a legal or corporate entity.

The costs of these structures for both the set up and the ongoing fees may be disproportionate to the cost of the property. In these cases, it may be better to simply accept the possible legal exposure and risk factors that come from owning property in your own name.

In some jurisdictions, certain taxes (including transfer taxes, personal property taxes, capital gain taxes, and estate taxes) may be lower for individuals than for 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.

If the acquisition, holding, and property disposition taxes are higher for structures, which is the case in Canada, for example, then keeping the property in your own name but leveraging out the equity in the form of a large mortgage or line of credit may be a better solution.

In the majority of cases, however, owning property inside corporate and legal structures is beneficial. These entities can impact taxes, asset protection, and estate planning in a positive manner.

I’ll start with a look at corporate ownership structures today, and I’ll dig into other structural options including LLCs, two-tiered companies, foundations, trusts, and common law asset protection next week. Through this analysis you’ll understand why each structure has its own use in today’s real estate ownership.

Corporate Company Structures

Foreign corporate structures include:

  • IBCs—International Business Companies;
  • SAs—Public limited companies used in many Spanish-speaking countries;
  • GmbHs—German limited liability companies;
  • and other, less frequently used options.

Here’s a quick summary of the pros and cons of creating a corporation to own foreign real estate:

Advantages

A classic corporation makes sense:

  • Where you have a more complex ownership structure,
  • Where you utilize leverage (debt) in owning real estate, or
  • When you simply require a high level of asset protection.

These types of corporate vehicles maintain everything at the corporate level including taxation, income, liability, etc., so in many ways it is the exact opposite of the pass-through nature of a limited liability company (LLC).

Corporations can 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.

Similarly, Mexico limits foreign ownership of certain coastal and border area properties. Banker trusts or Mexican companies can allow foreigners to buy the ocean-side property of their dreams.

Disadvantages

One of the major disadvantages of a classic corporate company is the fact that the company is subject to taxation, and then the distributions, or 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.

In a zero-tax jurisdiction, 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 where the shareholders come from different jurisdictions.

Let’s imagine a situation where German and Japanese partners decide to work on a real estate project together. If they set up a zero-tax IBC in Belize and earn a profit on their venture, they would pay zero tax at the corporate level in Belize.

Of course, the German shareholder would pay German tax rates on his dividends in Germany and the Japanese shareholder would pay Japanese tax rates on his dividends in Japan. That structure provides maximum tax efficiency to both the company as well as the individual shareholders.

Stay Tuned…

I have just scratched the surface of corporate structure possibilities in this week’s edition. Because you have many other options to choose from, be sure to look for next week’s Overseas Property Alert in your inbox to learn about other alternatives, to make sure you fully understand which structure works best for you.

See you next week,

Joel M. Nagel