International Tax

Tax Planning for Portfolio Investment into the United States by Foreign Individuals (Portfolio 6420)

  • This portfolio discusses the U.S. federal income tax effects of the principal kinds of portfolio investments that are made into the United States by foreign individuals, i.e., by individuals who are classified as “nonresident aliens” for federal income tax purposes and as “nonresidents not citizens of the United States” for federal transfer tax (estate, gift,…


The Portfolio examines how non-U.S. citizens may lawfully minimize or eliminate U.S. federal transfer taxes on their U.S. portfolio investments and U.S.-situs personal assets by holding them through a non-U.S. structure such as a holding company, a trust, or a partnership. Although avoidance of U.S. transfer taxes is usually the alien investor’s principal concern in utilizing a non-U.S. holding structure, there may be a number of U.S. federal income tax consequences to the manner in which the alien makes the investment, particularly if the alien becomes a U.S. resident for income tax purposes or if the alien has U.S. heirs. The existence of U.S. heirs may also encourage the alien to utilize a “dynasty trust” so as to avoid U.S. transfer tax on the U.S. heirs in later generations.

Chapter I explains fundamental concepts and terms. Chapter II discusses the federal income taxes and federal transfer taxes that can apply to portfolio and personal U.S. assets in the absence of restructuring by the non-U.S. individual who owns them. Chapter III discusses the use of a foreign holding company, while chapter IV discusses the inheritance of a foreign holding company structure by a U.S. person. Chapters V and VI discuss the use of a foreign trust, and alternatively the use of a foreign holding company that in turn is owned by a foreign trust. Chapter VII discusses the use of a dynasty trust if there are U.S. heirs in order to avoid U.S. transfer tax on the U.S. heirs in later generations. Chapters VIII and IX discuss various U.S. federal tax problems that can arise if a foreign individual who has formed a foreign holding structure moves to the United States either temporarily or permanently. Chapters X and XI discuss two particular kinds of U.S. investments — investment in U.S. real estate and investment in various kinds of insurance products. Finally, Chapter XII provides an overview of how the “FATCA” rules apply to the various structures discussed in the previous chapters.

This Portfolio may be cited as Bissell, 6420 T.M., Tax Planning for Portfolio Investment into the United States by Foreign Individuals.

Table of Contents

I. Introduction
II. Federal Taxes on U.S. Investments Without Restructuring
III. Use of a Foreign Holding Company by a Non-Domiciled Alien to Avoid Estate Tax
IV. Inheritance of Foreign Holding Company Stock by a U.S. Person
V. Taxation of Foreign Trusts Where There Is No Foreign Holding Company
VI. Taxation of Foreign Trusts Where There Is a Foreign Holding Company
VII. Use of “Dynasty Trusts” for U.S. Transfer Tax Planning Purposes
VIII. Planning by Aliens Moving Temporarily to the United States
IX. Planning by Aliens Moving Permanently to the United States
X. Investment in U.S. Real Property
XI. Investment in Insurance Products
XII. Applicability of the FATCA Rules

Thomas Bissell
PricewaterhouseCoopers LLP
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