LLC vs IBC for passive real estate holding

[Onassis]

Hello everyone,

My home country allows real estate to be owned by individuals and legal entities based in Saint Kitts and Nevis. (There are agreements with other countries as well but Nevis is the simplest one to set up a company in, apart from maybe US LLCs which I would like to avoid.)

One of my parents owns some real estate that we would like to transfer to a company there in case of his/her death. This will of course be done using a will.

Since Nevis has both IBCs and LLCs, I'm wondering which company type would be ideal in this case, while taking into account that this company will be at one point transferred to an irrevocable discretionary trust or a foundation.

Any suggestions? Thank you.

 

[Sols]

This is a choice that needs to be made with local law taken into consideration. How are LLCs treated? Are they considered partnerships, limited partnerships, limited liability partners, or as companies, or as something else? Is there a difference in how the entities are viewed for tax and ownership purposes? Does the difference matter in your use case?

Comparing just the entity types by themselves, there is probably no meaningful difference for your use case.

 

[mok]

Most countries allow real estate to be owned by foreign corporations, BUT in international tax law, taxing rights on income from real estate are always awarded to the country the real estate property is located in.

This includes all types of income that derive from the real estate including rent and also to any capital gain that you may when selling the property. Here is Article 6 of the OECD Model Tax Treaty that talks about this:

The idea of an International Business Company (IBC) is a company that is registered in Country A, but managed from Country B. Then, Country A agrees to not levy any tax on the profits of the IBC as long as the IBC does not have any staff working from Country A. But, since the IBC is then managed from Country B, Country B will want to tax it.

In international tax law, this called the 'place of effective management' principle and it allows countries to tax foreign corporations as if they were local. This is what will most likely happen to your IBC unless you live in a few select countries that do not live by that principle but most do.

In order to argue that the 'place of effective management' is offshore, people usually place nominee local directors on their company and lease an office in the offshore jurisdiction.

But still you won't be able to get the real estate profit to be taxed offshore even with that.

Usually, people buy property using offshore corporations for anonymity/asset protection reasons. If that's what you're trying to achieve go at it. But if you're trying to save on taxes you're out of luck.

 

[Onassis]

Usually, people buy property using offshore corporations for anonymity/asset protection reasons. If that's what you're trying to achieve go at it.

Indeed, it's not about taxes at all. I'm just looking to avoid inheriting the properties in my own name.

This is a choice that needs to be made with local law taken into consideration. How are LLCs treated? Are they considered partnerships, limited partnerships, limited liability partners, or as companies, or as something else? Is there a difference in how the entities are viewed for tax and ownership purposes? Does the difference matter in your use case?

Comparing just the entity types by themselves, there is probably no meaningful difference for your use case.

Both are fully recognized as legal entities but also tax transparent as there are CFC rules for individuals. Tax however is out of scope in this case.

Seems like there is no difference then? What about in the context of transferring the company to a trust/foundation later on?

 

[Sols]

What about in the context of transferring the company to a trust/foundation later on?

I can't think of any difference, that wouldn't be specific to your local law and best checked with a local attorney.

The main difference in this context is that ownership is transferred either by shares (IBC) or by updating ownership register (LLC). Profits from an IBC can be deferred while LLCs are generally pass-through and any income immediately becomes income for the trust or the foundation. You need to consider the impact of those kinds of details.

 

[Onassis]

Ok. Thank you for your answer.