Tax Exempt Investing for Foreign Nationals: Easy as P.I.E.
Foreign Investors stray away from US investments because of the federal tax burden.
Income earned from investment in the US is typically subject to a 30% withholding for US taxes. The non-US investor is required to file a tax return, as they earn income in the US. On top of that, the non-US investor may be required to pay taxes on this income in their home country, depending on the country’s tax treaty with the US.
Portfolio Interest Exemption (PIE) allows non-US investors to invest in the US by lending money to US borrowers and earn the interest income without being subject to any US tax withholdings. That being said you must qualify for the Portfolio Interest Exemption. To qualify for the Portfolio Interest Exemption, the investment and parties involved must meet specific qualifications.
Investment Must Be Debt. Portfolio Interest Exemption only applies to interest income, therefore the investment must be a loan.
Interest Must NOT be “Contingent Interest”. If the interest rate of the loan payable to the non-US lender is determined by reference, or conditioned upon another event, such as flow, income fluctuations, property value fluctuations, or anything similar, then that interest income will NOT be eligible for the Portfolio Interest Exemption.
Loan Must be in “Registered Form”. “Registered Form” is a book entry maintained by the borrower, or surrendered and reissued. This is required because the loan or debt instrument may not be freely transferable unless the transfer is organized and managed in a very specific “Registered Form”.
Non-US Lenders must have NO RELATIONS to the US Borrower. No familial or entity affiliation with the US Borrower. This also includes that the non-US lender must not be a bank, financial institution, or controlled by a US entity.
Portfolio Interest Exemption creates an attractive opportunity for non-US investors. By lending through short-term Mortgages like those offered by JCAP Private Lending, Foreigners can invest in conservative debt that pays a monthly return (6-10% APY) that can be exempt from Federal Taxes (consult your CPA).
Information contributed by Kevin Kim, attorney at Geraci Law Firm. Kevin is an experienced corporate and securities attorney with Geraci Law Firm, dedicated to providing reliable and innovative legal solutions. Kim’s main focus is real estate matters, and other alternative investments for private lenders, real estate developers, and other real estate entrepreneurs. As an experienced attorney, Kim understands the importance of traversing complex transactions and strives to develop innovative and strategic solutions while promoting his clients objectives.