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Question:

A foreign corporation (Panamanian) owns a townhouse in Florida. My dad is the owner of the corporation. The corporation needs to be reinstated and my dad wants me (a U.S. citizen) to hold 100% shares and be the beneficiary of the property. Is that possible? Any issues in doing so

Response:

This is outside my area of expertise, so I asked Rita Ryan of Wolf & Company for advice. Here’s what she said:

Rita Ryan

There are a few issues with this –

If the son, a U.S. person, were to take over the foreign corporation, the first issue is the transfer of the shares from father to son. I would assume this would be a gift and that his father is not U.S. citizen. As a result, the son would have a potential Form 3520 reporting to report the receipt of the gift from a foreign/non-U.S. person.

The second is that when the son becomes the sole owner of the foreign corporation that foreign corporation is now a controlled foreign corporation, and son will have a Form 5471 filing obligation each year. He would be subject to ongoing reporting on income earned in that corporation – not sure if there is anything else in the corporation but the property.

If the corporation owns any foreign accounts – Son, now the 100% owner will have a Foreign Bank and Financial Account (FBAR) filing obligation for those accounts, as he would be deemed to have financial interest in the accounts as he would own more than 50% of the foreign corporation.

Not knowing if the townhouse in Florida is rented or not – the foreign corporation itself may have a U.S. filing requirement as the rental income would be U.S. source. Additionally if the property is ever sold there is a Foreign Investment in Real Estate Property Tax Act (FIRPTA) withholding requirement (usually 15%) on the sale price (note: NOT GAIN generated) as it’s a foreign corporation selling the U.S. property. That foreign corporation would absolutely have a filing requirement in the United States upon the sale and typically the rate of tax is 21%. Finally, if the foreign corporation were to then distribute the proceeds to the son there is the branch profits tax which essentially seeks to tax the corporation on the distribution as if it were a dividend.

If the ultimate goal is for the son to benefit from the property, I would consider changing the structure of ownership as having it sit in a foreign corporation really isn’t the best ownership and complicates matters unnecessarily.

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