In Miami, we see waves. But not ocean waves. We see waves of immigrants. Many of the new arrivals at MIA (our airport) come from countries in Latin America facing their own challenges. Chileans began to arrive in larger numbers after October 14, 2019, when the street protests throughout the country started. Argentine have arrived in Miami “en masse” since the reelection of Christina Kirshner as president.
The same way a seasoned traveler will pack their bags a few days before a trip, anyone thinking of moving or spending more time in the United States needs to plan well in advance of their arrival. While every immigrant’s situation is different, there are some general guidelines to keep in mind:
1. Assume that if you spend more than 120 days a year in the United States you will have to pay US taxes on your worldwide income. And if you die, your assets will be subject to the US inheritance tax that quickly reaches 40%.
It doesn’t matter if you are in the US on a tourist or work visa. The US has a “physical presence test” to determine who is subject to US taxes whereby it looks at the number of days an individual has been in the US during the past three years.
2. The US does not have an asset tax. Individuals are not taxed on the value of their assets, they are taxed on the income those assets generate. The goal of pre-immigration planning is not to avoid the US income tax (which can reach 37% for high income earners).
3. The US tax code is quite sophisticated. Please assume that none of those “clever” ideas you might have to avoid US income taxes will work. In fact most of those “clever” ideas will expose you to criminal charges for tax evasion. Also before you start brainstorming, keep in mind that an experienced tax advisor in the US does not want to hear these clever ideas as they might be forced to call the US internal revenue service (IRS) to report you or risk liability themselves.
Even “clever” tax savings schemes proposed by supposed “experts” offer no protection from IRS penalties and jail time unless the tax expert is willing to provide a formal tax opinion under Circular 230 of the tax code. These opinions with the taxpayer’s name on them are available to the IRS.
4. A trust created outside the United States is generally useless for US tax purposes unless the trust was created in close consultation with a US tax expert. The IRS has its own criteria to decide whether it will respect a trust as being its own legal person. 99% of the trusts I have seen that were prepared by non-US lawyers or accountants grant too much discretion to the person who set up the trust or the beneficiaries of the trust, and thus these trust will not be respected in the US perspective.
5. The realistic goal of pre-immigration planning is to minimize the US inheritance tax on an immigrant’s non-US assets. I often say to friends “In the US death and taxes are inevitable. We can sometimes avoid the combination of the two. You should speak to an expert to minimize the US ‘death tax’.”
The other types of waves that arrive on Miami’s shores are the waves of money that flow in from Latin America. For every Chilean or Argentine who has immigrated to the United States in recent months, there are likely dozens who have decided to move some of their cash out of their home country.
Many Latin Americans do not realize that with some proper planning the United States can be a tax-haven almost as efficient as any tax-haven in the world, with much greater legal protections for those assets. Again, while every individual’s situation is unique there are some general guidelines.
1. A Limited Liability Company (LLC) in the United States does not pay corporate income tax. The owners/members of a US LLC pick up the income of the LLC on their individual tax returns. However, if the owners/members of the LLC are not US persons subject to US income tax, often they only have to pay US income tax on the LLC’s US source income—income that is effectively connected with a trade or business in the United States.
So if a US LLC is owned by a non-US person and if the US LLC owns only non-US assets, it is possible that there will be NO US taxes due on the US LLC’s non-US source income. (This is why several years ago the Brazilian tax authorities momentarily put the Delaware LLC on its black-list of “tax privileged regimes”.)
2. The tax efficiency of an LLC is predicated on the US government knowing who owns the LLC. Often a US LLC will be owned by an off-shore entity rather than by individuals. Distributions from an LLC to its owners/members outside of the United States will generally be subject to a 30% withholding unless its owners have filled out a US tax form confirming which individual(s) are the ultimate beneficial owners of the off-shore structure.
3. A US C Corporation (Inc.) pays up to 21% in corporate income taxes. And then when the C-Corp distributes its profits to its owners, those owners have to pay US income on those profits—at a rate as high as 37%. So the effective tax rate of using C-Corp can easily be over 40%, even when the C-Corp does not have US source income.
4. Many well-known Latin American banks (Itaú-Brazil, BCI-Chile, Bco de Bogota) have foreign branches in Miami. These branches are chartered in the United States so that they cannot open up bank accounts for US persons. These branches can only bank non-US citizens. Generally, the only US taxes due on these dollar denominated accounts is income tax due on the interest generated by these accounts.
Similarly, all the major US brokerage houses (Fidelity, Schwab, Vanguard) have special platforms for non-US account holders. Today, these “Big Three” brokers are no longer charging commissions for the purchase and sale of many US stocks. They have moved to a “zero-commission” model”. There are also tech-enabled US start-ups like dvdendo.com that have online platforms to allow non US investors buy US stocks in small increments of $50.
Just as no one should wade into the ocean without a plan as to how they will get back to shore; moving a family or assets to the United States takes some planning. With proper planning and reasonable expectations, the United States can be an efficient and secure place for Latin Americans to grow their businesses and park their financial assets.
This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every individual, every company, every situation is different. There is no “one size fits all” solution. And I am not a tax advisor or tax expert and do not offer tax advice.
For more tax related topics, check out my previous article International Tax Planning: It’s not what you make, it’s what you keep.