Under the Foreign Account Tax Compliance Act (“FATCA”), effective 1/1/14, Foreign Financial Institutions (“FFI”) must withhold 30% tax on U.S. source “withholdable payments” (and “pass-through payments’) including:
1. U.S. Source FDAP Income: including portfolio interest;
2. Gross proceeds from U.S. securities. To avoid the withholding tax the foreign financial institution either has an agreement with the IRS or if no agreement, certify no substantial U.S. owners, or disclose all substantial U.S. owners.
Under FFI agreements, foreign banks must:
1. Determine which accounts are U.S. taxpayers;
2. Report to IRS regarding U.S. accounts;
3. Deduct 30% of withholdable payments to recalcitrant account holders.
Pre-Immigration Planning (Tax Strategies)
1. Accelerate income prior to entry into U.S.;
2. Defer income until resume non-residency (for investment portfolios by use of international life insurance and deferred annuities);
3. For investment portfolio earnings (e.g. “short-term” capital gains, “ordinary income” interest), defer or entirely eliminate tax by international life insurance. See my article, “U.S. Tax Planning for Passive Investments”.
4. Prior to U.S. entry, “Step-up” basis transactions if tax basis substantially less than FMV. For publicly traded property can sell and repurchase, transfer to corporation in “taxable transaction” and still maintain ownership (through corporation).
5. To avoid anti-deferral regimes, sell stock of foreign mutual fund (PFIC) and purchase interest in U.S. fund.