Bermudians (and long-term multinational island residents) some say, have always had an almost obsessive affinity for the United States. More so than Canada or the United Kingdom, although thousands of Bermuda guest workers over the years have derived from those countries.

This long-term relationship transcends hundreds of years of mutual assistance, wars between North Atlantic nations, blockades, tax redress, and international commerce. Starting with the American colonies directly impacted by the eventful wreck of the Sea Venture,* and embellished in the last century with the evolution of US Armed Forces presences in Bermuda, Bermuda and the United States have been close “friends.”

The United States, with its unique capitalistic society and welcoming arms, has always appeared to accept any and all investments within its borders, too. So when a flipping houses reality show star came to Bermuda, there was, according to Royal Gazette readers, considerable interest. After all, how easy could it be to pick up a rundown repossessed house for a song, clean it up, sell it and split the profits. What a fabulous way to pay for a vacation!

There are vast differences between a United States citizen businessman/woman residing in the United States with an active US business and a foreign national (Bermuda or elsewhere) breezing into the US on a quick flight, selecting a state, finding an office space (or temporary housing), and setting up shop to flip houses.

Business Operations structure, risk management, and taxes

Bermuda does not have an income tax regime. Our taxes are assessed on customs, consumption, conveyancing, and payroll. There is no dividend, capital gains, corporate or individual income tax, unemployment, or workers’ compensation tax, and related taxes. Therefore, these elements are completely unfamiliar to most Bermudian residents. The United States federal, state, local, and municipal tax regimes generally encompass income tax, estate tax, and gift tax. Each of these taxes are unique and not always mutually exclusive.

On a company level, there are major tax responsibilities in the areas of payroll: social security and Medicare taxes, federal and state unemployment taxes, workers’ compensation insurance, and other related taxes.

Further, the elaborate US system of tax, legal, and regulation enforcement is sophisticated, swift to levy against recalcitrant taxpayers, or to litigate against careless business practices. Ambulance chasers looking for contingency fees market continuously. Non-adherence to federal or state workers’ compensation, insurance and related regulations can cause company financial liability distress, if say, a worker falls through a third floor unfinished chimney and needs major surgery.

Failure to remit payroll-related taxes (considered public trust funds under the US Social Security System), pension benefits and allowances in a monthly and quarterly timely manner (timely penalties are assessed the following quarter) may mean very quick responses from US Internal Revenue Service: frozen business and personal bank accounts, garnishment of wages, and liens and penalty levies assessed against your US property.

Your plans for flipping your property may arrive at a screeching halt. Bermuda businesses have not felt this type of operational risk pain; though, recently the tone at the top for tax collections has become more proactive.

The question then becomes — what form will you operate your US business? A second question — to be answered — in the future is, do you have the right (as a foreign national) to be in the United States running a business. The basic concept of US law is that if a foreign investor owns and later divests himself/herself at a profit of an interest in US real estates, the gain is subject to tax even if the interest is held in US corporate form — in other words, when disposing of the shares of the corporation.**

Business forms:

1. you can become a US sole proprietor.

2. you can be a member of partnership or a limited liability company.

3. you can settle a foreign or domestic trust.

4. you can form a US corporation

5. you can create a foreign corporation doing business in the US sourced.

6. or, you can become far more complex where the foreign corporation owns a domestic corporation, or in reverse, the foreign corporation owns a US subsidiary holding corporation with underlying subsidiaries.

7. other formats.

Note that varying degrees of liability are absorbed by the business structure or by you, depending upon the entity chosen.

As you can see the choices become bewildering, and more complex the higher the number. Any structure that is chosen by you, or on the advice of an experienced professional should be understood clearly by you.

It is imperative that you conduct the business chosen in good order. Each of these structures impacts on the tax exposure of the gain and profits from operational income. It will also affect you, the foreign investor’s exposure to US estate tax on the US real estate investment.

Business governance — i.e. corporate governance — not handled carefully and in compliance, can create the appearance of sham transactions, negating all of your careful costly planning. You can’t use the corporation as your personal piggy bank, or to avoid your good corporate citizen responsibilities.

Last word today. Do your best to plan carefully and avoid conflicts, however unintentional, with other country business, legal, tax and the related regulations. You want your financial and emotional investment to pay profitably, not unpleasantly.

This is part 3 of investing in the United States (or elsewhere) through property acquisition and other investment vehicles.

Parts 1 and 2 were featured earlier this year.

Investing the US Series: Part 4: General overview of choosing your US business structure and working with qualified professional. Part 5: General information on US tax compliance and regulations for foreign nationals doing business in the United States. Part 6: General information on US Income Profits, inadvertent entanglement in FIRPTA and USRPI. Part 7: US estate, income and gift tax differences for foreign nationals.

Sources:

• In the Eye of all Trade: Bermuda, Bermudians, and the Maritime Atlantic World, 1680-1783, by Michael Jarvis. This is a fabulous book — extremely well researched — about the early days of our ancestral Bermudian farmer settlers, and our famous sailors (and ships) who enjoyed a more than 100-year total dominance of the North Atlantic and Caribbean Ocean maritime trade.

• **Rhoades & Langer: US International Tax and Tax Treaties, Copyright 2013, LexisNexis.

Contact martha@pondstraddler.com

Martha Harris Myron JP CPA PFS CFP® JSM. Summa Cum Laude: Masters of Law in International Tax and Financial Services

Pondstraddler Life™ Consultancy provides consulting in cross border financial planning perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre.

This article is for general information purposes only, it is not intended to be used, nor should it be substituted for competent professional legal, financial, or international tax advice.

Readers are advised to consult with experienced professional tax advisers regarding the applicability of this general information to their own personal financial circumstances.