International Tax aspect of Gifting U.S. Property
International Tax aspect of gifting U. S .property
Pursuant to your request, we have analyzed the U.S. tax consequences and compliance requirements of ‘GP’ gifting or transferring his note payable from International Business. (“IB”) to his mother (“Mom”) and the subsequent payment of interest on the note by IB.
Our Understanding of the Facts
GP holds a note payable from IB for $1,000,000 USD. The current IB trial balance reflects an issue date for the note of April 11, 2007. Any accrued interest through December 31, 2011 was forgiven and there is no accrued interest for the note reflected on the books of IB, subsequent to December 31, 2011. GP is considering gifting or transferring the note payable to his mother. After the transfer IB will begin to make interest payments on the note. Mom is a Mexican national and is considered a nonresident alien for U.S. income tax purposes. She also has an ownership interest in IB’s 49% shareholder, “Wineu”, CV, a Netherlands limited partnership.
Summary Conclusions and Recommendations
If utilizing the lifetime estate and gift exclusion is a concern, consideration should be given to selling the note payable to Mom. The consideration for the sale could be in the form of a note payable from Mom to GP. This note could be structured as a “balloon” note with no interest payable to GP for an extended period. The note may even be forgiven or cancelled at the death of Mom, under the terms of her will. The sale of the note would be reported on GP’s income tax return for the year of sale. The sales price may be substantially the same as cost basis, resulting in little or no gain or loss.
If GP gifts the note payable from IB to his mother, the gift would be reported on Form 709 and are due by April 15th of the year following the gift. This due date may be extended until the following October 15th.
Recommendation: Consider holding the note in a foreign entity that has perpetual life and, therefore, would not be subject to the U.S. estate tax. If Mom holds an ownership interest in Wineu, the note could be gifted to (or sold to) and held by Wineu. The assets of Wineu (including the note) should not be subject to U.S. estate tax, as long as, Wineu would not terminate upon Mom’s death. Since Wineu is a partnership, the interest payments may be paid to Wineu, then specially allocated and distributed to Mom. Tax counsel familiar with Netherlands domestic taxation should be consulted before this strategy is implemented.
When IB makes an interest payment to Mom, the 15% or 30% withholding tax must be deposited with the IRS on a current basis. Annual reporting of the withholding to the IRS is required on Forms 1042 and 1042-S. A copy of Form 1042-S would also have to be provided to Mom. If the interest income from the note is her only U.S. source income, she would not be required to file a U.S. income tax return (Form 1040-NR). However, if other sources of U.S. income require her to file a U.S. return, the interest income and withholding reflected on Form 1042-S would have to be included in her U.S. return.
After your review of this letter, please feel free to contact me with any questions you may have at (210) 694-5945.
Mark H. Nelson