A nonresident, nondomiciliary alien of the United States (NRNDA) may interpose a foreign corporate-related structure in connection with the acquisition of residential real property located in the United States. (1) Afterward, the shareholder or members of the shareholder's family may personally utilize the underlying premises. From the United States income tax perspective, their doing so presents considerations relating to the payment of arm's length rent, structuring alternatives, and compliance requirements.
At least two basic corporate-related structures may be presented. The first is that in which the NRNDA is the shareholder of a foreign corporation that is itself the parent of an underlying domestic subsidiary. The subsidiary is in turn the direct owner of the realty. Alternatively, the foreign corporation may take title to the realty directly without regard to a domestic subsidiary. Potential U.S. income tax implications vary depending on the specific structure at issue.
The Tax Court decision in G.D. Parker, Inc. v. C.I.R., T.C. Memo. 2012327 (2012), is illustrative. It addresses the resulting U.S. tax consequences in the foreign corporate parent-domestic corporate subsidiary context. There, two separate houses, one in Key Biscayne (Florida realty), and the other in Valdemossa, Spain (Spanish realty), were directly owned by the same Florida corporation. The ultimate parent of the collective corporate structure was a Panamanian corporation, which was itself wholly owned by Genero Delgado Parker, a citizen and resident of Peru. Parker and his family from time to time personally used both houses during each of the taxable years at issue. (2) The Tax Court found that no rent had been paid to compensate the Florida corporation for its personal use of the respective premises. (3) Deductions claimed by the Florida corporation, e.g., for repair, maintenance, and depreciation, were essentially disallowed by the court (4) with the corresponding imposition of accuracy-related penalties. (5)
Based on these facts, the Tax Court concluded that the rent-free use of the houses was in substance a constructive dividend that was deemed to have been paid by the Florida corporation up through the corporate chain to Parker individually. As the dividend at inception was treated as having been paid by a domestic corporation and was considered correspondingly as having been received by a foreign person, the deemed payment was classified as U.S. source fixed or determinable, annual or periodic income. Accordingly, the Florida corporation was held to have been a withholding agent and, as such, was required to have withheld on the deemed dividend at the flat Code rate of 30 percent. (6) The collective amount of the dividend...