Author: Ari Good, JD LLM

Bitcoins

Where to go to ICO – Two ideas

The world is your oyster, as they say, when it comes to choosing where to incorporate your business(es) for an ICO.  That said, cryptocurrency regulation is new to many jurisdictions, who are looking for ways to define and manage what cryptocurrencies are.

What makes a “good” jurisdiction in which to conduct a cryptocurrency business or issue tokens?

There are several characteristics that separate “good” from “bad” jurisdictions in which to conduct an ICO or run a cryptocurrency business.  First, there is, as of today, there are still no truly “mature” regulatory environments in which to run your business. Without exception, the governments in the following jurisdictions are still in the process of evaluating crypto-currencies on multiple levels. The attention that is currently being paid to these businesses means that the days of zero-regulation, self-governed ICOs that escape regulatory attention entirely are, if not over, certainly limited. This has advantages and disadvantages. The advantage being that a more certain regulatory environment means less future risk of a jurisdiction creating and/or enforcing a law retroactively that could undo what you have done in terms of raising capital, forming your business, and issuing your tokens. The disadvantage is that as a practical matter, “legitimizing” cryptocurrencies means, in most cases, more paperwork, more expense, and more restrictions. That is the essence of regulation, however “light” it may be relative to traditional, heavy-handed regulations in the areas of securities laws, banking laws and tax laws.

Second, there are a few themes or values that came up consistently, and are likely to be the “must haves” in your ICO / cryptocurrency enterprise. The values that crop up consistently include anti-money laundering, anti terrorist-financing and investor protection (in that order, in my opinion). The first theme falls with the Bank Secrecy Act, among other legislation, that sets forth the framework for Know Your Customer / Anti-Money Laundering procedures. The second invokes the respective securities laws of each country in which you do business. Sure, this adds “drag” in the form of having to verify the identity of your investors (unlike prior ICOs in which an Ethereum address was enough), but that is the price to pay for keeping the good guys and chasing away the bad ones.

Third, there are several characteristics of the country you want to look for. First and foremost is to ask what history the jurisdiction has with cryptocurrency, and what is their level of sophistication? The regulatory culture is critical. Does the country fundamentally have a positive or a negative view of cryptocurrencies and blockchain-oriented businesses? Obviously it is only worth considering jurisdictions that have a sophisticated understanding of these products, enough to know when and how to lay off businesses without compromising the “core” values described above. Other important characteristics include those that do not deal directly with cryptocurrency but that relate to the business environment as a whole such as: what is the business language of the country? What type of legal system does it have? How easily can you avail yourself of the legal system (either offensively or defensively)? What is your access to banking relationships and how strong is the banking sector? What are the jurisdiction’s tax laws and policies?

Shades of Regulation

You should view regulation of cryptocurrency companies on a spectrum. On one end your company is fully regulated, mostly under existing securities and banking law, in whichever country you intend to do business. At this extreme, not surprisingly, are the greatest regulatory costs and burdens, including the need for extensive pre and post-ICO disclosures, “lock up” periods for the tokens and the like. At the other extreme one operates in a “permissionless” environment, that is, you conduct your offering however you like, including very limited public disclosures, no KYC/AML procedures and so forth. ICOs that took place prior to and during 2017 largely followed this second model, accepting anonymous investors and providing little public information other than the team’s wish list. As 2017 went on, however, more and more ICOs have begun to adopt elements of the first model. This appears that this is the current trend.

One popular, though commonly misunderstood, manner in which to operate your blockchain company is through regulatory “sandboxes”. Countries such as the United Kingdom, Singapore and Canada have established programs within which some blockchain companies are allowed to operate without having to fully comply with the full battery of (mostly securities) regulations.  A “sandbox” does not refer to an all-play, no regulation environment.  Rather, it requires compliance with a streamlined set of rules, and in some cases comes with restrictions on what the company can and cannot do.

With this framework in mind I turn to an analysis of the top two jurisdictions which, in my opinion, merit your further consideration as a place in which to incorporate and/or issue tokens:

Switzerland flagSwitzerland and ICOs

Switzerland needs no introduction as a world financial capital. It has some of the most developed educational, financial and technological systems in the world, and has through public statements adopted a very welcoming attitude towards cryptocurrency related business. The town of Zug is affectionately referred to as “Crypto Valley” for its concentration of innovative Fintech companies that have set up operations there. The Crypto Valley Association (CVA) was formed on January 17, 2018, for the express purpose of attracting blockchain companies to Switzerland.

For the reasons discussed below Switzerland is the second most popular jurisdiction for conducting ICOs (nine, as of February 1, 2018, including Ethereum). Switzerland began discussing ICOs, blockchain and innovative financial companies years ago, before many countries even had a firm understanding of the basics of the industry. A February 11, 2016 publication by the Federal Department of Finance (FDF), for example, set forth a “three pillar” approach to regulation of FinTech companies. Tier 1 addresses “crowdfunding” style campaigns, not unlike the JOBS Act crowdfunding regime in the United States. The second pillar is referred to as the “Innovation Area”, which features a regulatory sandbox approach. The third pillar contemplates a full Fintech license, though with lower regulatory requirements than conventional banks.

The Swiss followed up on this initial guidance with FINMA Guidance 04/2017 (actually dated 29 September 2017)(the “Guidance”) that specifically addressed the parts of Swiss law that could potentially apply to ICOs, or “Token Generating Events”. The tone of the publication is positive and supportive of developing and implementing blockchain solutions in the Swiss financial center.  The Guidance does not describe what is a “payment instrument”, the types of obligations that an ICO operator would have, or what constitutes “external management” of ICO assets. It does not define what is a “security” either, although the definition of “securities” has been better explored in multiple jurisdictions. The point to take away from this initial guidance is that it is likely that at least one of the existing legal regimes applies to any given Token Generating Event / ICO.

The Swiss continued their leadership with their “Guidelines for Enquiries Regarding the Regulatory Framework For Initial Coin Offerings (ICOs)” of February 16, 2018 (the “Guidelines”). These Guidelines refined the above-referenced Guidance by categorizing different types of tokens and by further explaining what regulatory regimes apply to which types of tokens. Included in the Guidelines is the questionnaire that FINMA requires of “market participants” who are interested in doing business in Switzerland. The Guidelines do not apply to existing ICOs (which are considered only retrospectively by enforcement bodies), or for those simply requesting information.

The heart of the Guidelines is in Section 3, Principles applied when assessing specific enquiries. Section 3.1 provides that tokens will be viewed according to an “underlying economic function” test, that is, what is the substance of the economic relationships that the token creates, and how does that token fit existing Swiss law. These are the three primary types of tokens and their fundamental characteristics:

  • Payment Tokens – Tokens intended to be used, now or in the future, as (1) a “means of payment” for acquiring goods or services, or (2) as a means of money or value transfer (compare Bitcoin)
  • Utility Tokens – Those which are intended to provide access digitally to an existing application or service by means of a blockchain-based interface (Compare STEEM).
  • Asset Tokens – Tokens that “represent assets such as a debt or equity claim on the issuer”, such as a share in future earnings or capital flows. Asset tokens are “analogous to equities, bonds or derivatives”, and include tokens that enable physical assets to be traded on the blockchain.

The Guidance points out that the categories are not mutually exclusive, and that “hybrid” tokens display more than one set of the above characteristics. In these cases the regulatory requirements for the hybrid tokens are cumulative.

The timing of the ICO versus the development of the network is crucial in how the token is characterized. Tokens that relate to blockchains or networks that are already fully developed at the point of fund-raising are generally categorized according to the categories set forth above, depending on their underlying economic function. Claims (such as SAFTs) and tokens that relate to networks to be developed in the future – known in the Guidance as a “Pre-Financing”- may be treated differently than what the underlying economic function may eventually be. Claims to future tokens in the form of SAFT, for example, are treated as “securities” even if the eventual underlying economic function of the token to be released later is utility.  In summary, forming an ICO company in Switzerland offers a level of predictability as to how you might expect your token to be treated that is not found in other jurisdictions.

Gibraltar flag
Gibraltar

Gibraltar and ICOs

Gibraltar is a British Overseas Territory and headland on Spain’s south coast. First settled by the Moors in the Middle Ages and later ruled by Spain, the outpost was later ceded to the British in 1713. It is currently considered a British Overseas Territory, rather than an independent nation, but is nevertheless a member of the EU. While only 2.6 square miles in area it is home to close to 30,000 people. Under its 2006 Constitution Gibraltar governs its own affairs, though some powers, such as defense and foreign relations, remain the responsibility of the British government. Today, Gibraltar’s economy is dominated by four main sectors: financial services, online gambling, shipping, and tourism. Its official languages include English and Spanish. It’s corporate tax rate is a favorable 10%.

In 1967, Gibraltar enacted the Companies (Taxation and Concessions) Ordinance (now an Act), which provided for special tax treatment for international business. This was one of the factors leading to the growth of professional services such as private banking and captive insurance management. Gibraltar has several attractive attributes as a financial center, including a common law legal system and access to the EU single market in financial services, although following Brexit there is some uncertainty as to whether this access will continue. The Financial Services Commission (FSC) which was established by an ordinance in 1989 (now an Act) that took effect in 1991, regulates the finance sector.

The Gibraltar DLT License

True to its history in attracting innovating finance companies, Gibraltar has issued partial regulations governing blockchain companies, or “distributed ledger technology” (DLT) companies. The Gibraltar Financial Services Commission has issued numerous statements and conducted interviews in which it has described its approach to DLT, and ICO, regulation. This it to be done in two phases, the first of which is complete in the form of the Financial Services (Distributed Ledger Technology) Regulation LN.2017/204. The second part of the legislation will address ICOs specifically.

“One of the key aspects of the token regulations is that we will be introducing the concept of regulating authorized sponsors who will be responsible for assuring compliance with disclosure and financial crime rules,” said Sian Jones, a senior advisor to the GFSC, according to Reuters. It is not entirely clear who such “authorized sponsors” would be, but in general the Commission’s public statements have reflected a flexible, market-oriented approach.

Gibraltar has since come out with proposals for how DLT and, specifically, token issuers will be regulated. The document, “Token Regulation”, dated March 9, 2018 describes the present regulatory environment, how the Government of Gibraltar views tokens in general, and what new activities will constitute “controlled activities” subject to formal regulations yet to be released. This White Paper advances Gibraltar considerably along the spectrum of regulatory maturity discussed above.

The White Paper begins by characterizing tokens and token issuers in terms somewhat different than other jurisdictions. It points out that at present “raising finance by means of an ICO is unregulated in Gibraltar”. Notably this isn’t cast as a negative thing, rather, the White Paper notes that, according to HM Government of Gibraltar (HMGog) and the Gibraltar Financial Services Commission (GFSC), Gibraltar is expected to “remain … an attractive jurisdiction from which to conduct ICOs”. This is an interesting and critical point in that the government appears to, at least on the surface, approve of ICOs that already occurred from Gibraltar and that will occur even with regulation coming down the pike. This is important because it reduces the risk of retroactive application of punitive provisions (for example, in the case of  Switzerland’s look-back approach), and suggests that companies wishing to do ICOs while the new legislation is pending will not necessarily be violating any laws.

The White Paper nevertheless cites prior guidance in setting forth general principles which are likely to apply going forward. This prior guidance sets forth general warnings about the speculative and risky nature of most blockchain projects. The White Paper also cites the provision in the prior guidance that distinguishes between security tokens (“with an equity interest or right to distributions of … profits or in the event of winding up”) and utility tokens that serve an unregulated functional use, “such as prepayment for access to a product of service that is to be developed using funds raised in the ICO”. The White Paper lists lack of regulation and the difficulties in defining exactly what are securities as “defining the problem”.

Gibraltar has a unique take on tokens as securities that is narrower than in other jurisdictions. In fact, the White Paper notes that “most often, tokens do not qualify as securities under Gibraltar or EU legislation”. Rather, tokens constitute “the advance sale of products that entitle holders to access future networks or consume future services”. As such, rather than conferring fixed rights to income or assets (which would most often be securities), the White Paper states that most tokens are “commercial products … not caught by existing securities regulation in Gibraltar.” The White Paper likens tokens to commodities.

The White Paper’s fundamental purpose is to propose regulation in these, previously unregulated areas with the goal of protecting consumers, Gibraltar’s reputation and the safe use of tokens as a means of crowd financing. The White Paper calls for regulation as to:

  • The promotion, sale and distribution of tokens;
  • Operating secondary market platforms trading in tokens; and
  • Providing investment and ancillary services relating to tokens.

It proposes that the GFSC will regulate:

  • Authorized sponsors of public token offerings;
  • Secondary token market operators; and
  • Token investment and ancillary service providers.

Notable is what the White Paper states the government should not regulate:

  • Technology;
  • Tokens, smart contracts or their functioning;
  • Individual public token offerings; or
  • Persons involved in the promotion, sale and distribution of tokens.

Consistent with other jurisdictions, the White Paper also proposes to make the proceeds received from token offerings subject to Gibraltar’s anti-money laundering (AML) and countering financing of terrorism (CFT) legislation, and to designate GFSC as their relevant supervisory authority for AML/CFT purposes. As in other jurisdictions the white paper provides that regulation is cumulative, and that the regulated activities described above may also apply to firms or individuals covered by the DLT Regulation.

The White Paper breaks down the expected legislation into “limbs”. The first “limb” is “intended to regulate [the] primary market promotion, sale and distribution of tokens” that are neither securities (which are regulated under existing securities laws) nor “outright gifts or donations”, conducted in or from Gibraltar. Notably, this first limb specifically excludes virtual currencies. The government makes this distinction based on the “underlying economic function” of the token. The White Paper also applies a type of “situs”, or location test, providing that the first limb of the regulations apply to activities that are conducted from Gibraltar, intended to come to the attention or be accessed by any person in Gibraltar, conduced by overseas subsidiaries of Gibraltar-registered legal persons, or conducted by overseas agents or proxies acting on behalf of Gibraltar-registered legal persons, or on behalf of natural persons ordinarily resident in Gibraltar.

While short on specifics, the White Paper calls for robust disclosure of information on the part of ICO organizers. The proposed regulations, it provides, should provide “adequate, accurate and balanced disclosure of information [that is designed to] enable anyone considering purchasing tokens in the primary market to make an informed decision”. What is specific is the provision that brings the proceeds of ICOs (the currencies collected in exchange for tokens) within Gibraltar’s AML regime, specifically the AML and CFT (counter terrorism financing) provisions of the Proceeds of Crimes Act 2015 (POCA). The White Paper directs that these changes be made by separate regulation under the POCA legislation.

An interesting characteristic of the Gibraltar White Paper and the regulations it calls for is its “Authorized Sponsor” (AS) provisions. In short, an Authorized Sponsor is a person who is in essence the official representative of the ICO. This person will be responsible for the organizer’s compliance with the regulations, and must be “appointed in repsect of every public token offering promoted, sold or distributed in or from Gibraltar. The organizer is the one to appoint the AS. The Authorized Sponsor must have “mind and management” (likely, some sort of permanent office) in Gibraltar, and is permitted to provide additional services to the offering other than serving as the representative, such as serving as a custodian of the proceeds or authorizing their release according to the sale conditions.

Each AS must have “Codes of Practice” as to each offering they supervise. These Codes of Practice are intended to assure the organizer’s compliance with the forthcoming regulations, and to establish “best practices” as to an ICO. The White Paper is short on details as to precisely what these Codes of Practice should contain, but is explicit that the GFSC will be flexible as to the format of these Codes provided they reflect “appropriate, relevant knowledge and experience” as to the letter and spirit of the White Paper, and later, the proposed regulations. Notably, Sponsors are free to apply different Codes to different types of tokens and offerings, and may set out such matters as the method for applying and distributing sales proceeds.

The Code of Practice must be incorporated into some sort of agreement between each AS and their sponsorship clients. The Code is part of the organizer’s license application. The GFSC will be maintaining a public register of Authorized Sponsors and their respective past and present codes of practice. As such, the following will be public information as to each ICO:

  • The client(s) for whom they act;
  • The token(s) included in the offering;
  • The code of practice applicable to the offering; and
  • Any interest they, and connected persons, have in the tokens offered

As such, Gibraltar law has a public disclosure element that is missing from other jurisdictions, although it is not yet clear to what extent disclosing information about the Authorized Sponsor will require material information about the ICO organizer’s business model or plans.

Importantly, and contrary to other language in the White Paper concerning unregulated ICOs, the White Paper calls for the regulations to create a “new controlled activity and offence”, the controlled activity being the Authorized Sponsor requirement, the offense being the “promoting, selling or distributing tokens” without complying with:

1. The requirement for an authorized sponsor;
2. The requirement for a current entry on the public register;
3. Specified disclosure obligations;
4. Relevant provisions of POCA, where applicable.

This is potentially problematic in that the White Paper puts all ICO organizers on notice that they require a representative whose duties are not fully specified, public disclosure of Codes of Practice yet to be defined, and “disclosures” of information in an unspecified format, the content of which has yet to be determined. Only the anti money-laundering provision (the reference to compliance with POCA) is somewhat easier to comply with in the present, as Know Your Customer and related legislation has been in existence for some time, the compliance regimes for which are available as examples. Unlike, for example, the Code of Conduct provision, which specifies that Authorized Sponsors may exercise discretion in how they propose to comply with the regulations, this latter provision specifies that “promoting, selling or distributing” tokens without these pieces in place is an offense, potentially subjecting the organizer to civil or perhaps even criminal penalties. It is hard to imagine this not having some chilling effect on those looking to issue tokens in the near term, before the regulations are in place.

On the other hand, Gibraltar should not be too quickly written off as too risky simply because there is some delay in getting final regulations. Notwithstanding the single reference to the offense of conducting an unregulated ICO, the fact that Gibraltar is moving at all towards providing clear regulatory guidance itself differentiates it from many other countries that having nothing on the table except enforcement actions, most notably the United States. The overall tone towards DLT and ICOs is, too, unmistakably positive in tone. Further, you may have many parts of the business that are still maturing, and, as such, you may have flexibility in your timetable within which to issue your tokens. Put simply, Gibraltar may be worth the wait.

While uncertainty reigns, at least the White Paper establishes a time table within which (supposedly) the regulations are to be forthcoming. Draft regulations for the promotion, distribution and sale of tokens is supposed to occur in May of 2018, which is not far off from the date this memorandum was written. The limited regulation amending POCA is expected in March, 2018.

– (c) 2018 Ari Good, Good Attorneys At Law

Tax penalties and health care coverage

Obamacare (Affordable Care Act) Taxes and Penalties

Penalties Increase for Individuals and for Employers under Obamacare (Affordable Care Act)

Tax penalties and health care coverage
Play or pay

As promised, Obamacare taxes and penalties for not having health insurance are on the rise.  The following is a summary of  what to know:

 

Individual Health Care Penalties

The penalty for not having minimum essential coverage [MEC, ACA defined] in 2016 will increase to the following:

· The greater of (a) 2.5% of taxpayer’s household income over the filing threshold or (b) $695 per person ($347.50 per child under age 18) ($2,085 per family whichever is higher) OR the cost of the national average premium for a Bronze level health plan.
· Remember to save your 1095-A if you are a part of the Exchange. You should receive in January 2016 and will need it for your tax return.

Note : Open enrollment for 2016 coverage begins on November 1, 2015.

Employer Health Care Penalties

The Trade Preferences Extension Act of 2015 significantly increases penalties for companies failing to file correct information, returns, or provide correct payee statements. Penalties increased from $100 to $250 per return or statement with a cap increase up to $3 million.
Beginning in 2016, all companies with 50 or more Full Time Equivalent employees [FTE, defined by ACA] are required to report to the IRS whether they offer their FTE and their qualified dependents the opportunity to enroll in MEC under an employer-sponsored plan. Companies are required to file a transmittal report (Form 1094-C) which summarizes the Forms 1095-C which must be provided for each FTE employee who was employed for one or more months during 2015.

Employers who have fewer than 50 FTE but who sponsor a self-insured group plan must also file reports 1094-B for transmittal and a 1095-B to each employee.

Information that must reported to the IRS includes:
· The name, address, and employer identification number of the provider.
· The statement recipient’s name, address, and taxpayer identification number, or date of birth if a TIN is not available. If the statement recipient is not enrolled in the coverage, providers may, but are not required to, report the TIN.
· The name and TIN, or date of birth if a TIN is not available, of each individual covered under the policy or program and the months for which the individual was enrolled in coverage and entitled to receive benefits.

Employers should have steps and infrastructure in place to gather information reflecting coverage offered in plan year 2015, which can include monthly tracking.

Information you need to track:
· Date coverage is offered
· Proof of offering
· Employee Share of the Lowest Cost Monthly Premium for Self-only Coverage

Important Dates to Note:
· February 1, 2016 – Employee Statements are due
· February 29, 2016 – IRS Statements due if filing by paper
· March 31, 2016 – IRS Statements due if filing electronically (must file electronically if filing 250 or more forms)

Note: Employers who have fewer than 50 FTE and are not offering a self-insured group plan have no filing requirements.

Foreign earned income exclusion

The Foreign Earned Income Exclusion

What is the foreign earned income exclusion?

Foreign earned income exclusion
Beating the double dip

If you are a U.S. citizen (or U.S. resident alien) who living in or planning to relocate to a foreign country you may qualify for what is known as the “Foreign Earned Income Exclusion”. The foreign earned income exclusion is an exception to the general rule that US citizens and resident aliens are taxed on their worldwide gross income, that is, you must pay US taxes on all of your income from everywhere, even if you live outside the US or have never been here. While the foreign earned income exclusion doesn’t help you when it comes to being taxed in the foreign country, it does mean that, if you qualify, you can exclude some of that income from what is taxed by Uncle Sam.

Are you a “qualified individual” for purposes of the foreign earned income exclusion?

There are a couple of tests you must pass in order to qualify for the Foreign Earned Income Exclusion.

Tax home

(1)  You must have a “tax home” in a foreign country. An individual’s tax home is considered to be his regular or principal (if there is more than one regular) place of business. If the individual has no regular or principal place of business because of the nature of the business, or because he is not engaged in carrying on a trade or business, his tax home is his regular place of abode. In other words, you must either be conducting business abroad or have your home there. Additional rules apply to resident aliens claiming to have a tax home in their country of origin.

Bona fide resident and physical presence tests

(2)  You must either be (i) a “bona fide foreign resident” of that country (only US citizens and US resident aliens who come from countries with which the US has a tax treaty can use this test) for an uninterrupted period that includes an entire “tax year”; or (ii) physically present in the foreign country for 330 full days during any consecutive 12 month period (in which case you are a “qualified individual”). Both US citizens and resident aliens can use this test.

Whether you are a “bona fide resident” of a foreign country depends on the facts and circumstances of why you are there. Part (though not all) of the analysis depends on where you are “domiciled”. Selling your home in Des Moines, for example, and purchasing a scenic villa in Punta Del Este, Uruguay, where you stay all year round and join the community, suggest that you could be a bona fide resident of Uruguay for purposes of the Foreign Earned Income Exclusion. The duration of your stay is also relevant. If it is clear that you have moved for an indefinite period of time and made yourself part of the community in the foreign country, you move closer to being a bona fide resident.

If, however, you are abroad for a limited purpose, say, if you are a contractor in country solely for a particular assignment, with the expectation that you will return to the US when it is done, this would weigh against your being a bona fide resident. The physical presence test is more straightforward than the residence test, but more rigid. It doesn’t matter why you are in the foreign country (or countries – so long as they’re not the US) so long as you are physically abroad for the 330 twenty-four hour periods. So, unlike the residence test you don’t have to worry about why you’re there, but you can’t come and go for more than 35 days (with no more than 30 being in any single month).

Calculating the foreign earned income exclusion on your taxes

Assuming you qualify under the tests described above, calculating your foreign earned income tax exclusion is unfortunately not as simple as hacking the yearly exemption amount ($100,800.00 for 2015) off the top of your gross income. Rather, you must first determine for how many days of the year in which you earned the foreign income you were a “qualified individual” (as described by the tests above). Second you then take that fraction and apply it to the maximum exclusion amount.

For example, assume that U.S. citizen Sarah’s tax home is in France where she meets the bona fide residence test for 2015. Sarah is a qualified individual for 181 days and receives $100,000 that is attributable to services she performs in France. Sarah can exclude $49,986 of foreign earned income, the lesser of $100,000 or $49,986 ($100,800 x 181/ 365). Sarah would then factor that excluded amount into her other income to come up with the amount of tax she owes.

A couple caveats about the foreign earned income exclusion. First, the calculations for determining the amount of tax due at the end of the day are very complex. Second, the character of the income (i.e. wage income versus capital gains) is relevant in some cases. Third, there are different rules that may apply if you are running a business abroad and have what would otherwise be deductible business expenses, versus serving abroad as an employee.  It is very important to consult an international tax professional to understand how any foreign tax credit and/or the foreign housing cost exclusion (covered later) would apply and how you might benefit from this important way around being taxed twice by two different countries.

Contact an international tax lawyer now

Ari Good, Esq.

(786) 235-8371

Flags of the world

Tax Considerations For Inbound Investors in US Property

Flags of the world
Come one come all

Tax Considerations for Inbound Investors in US Property

Foreign Investments In US Real Estate

The United States has enjoyed a resurgence in foreign money coming to our shores to invest in stocks, businesses and, perhaps most of all, real estate.  Whether this is to scoop up real estate deals or simply find a safe place your money a key first step is proper tax planning.  The tax code provisions dealing with such “inbound” investments are very complicated and there’s always a lot of variables at play.  Key considerations include the type of property you want, for how long you want to hold it, and what type of income you expect it to produce.  While there is no substitute for professional advice here are some key concepts to keep in mind.

Regulations for Regulations

Be prepared to answer a number of questions dealing with who you are, where you’re from and where you got your money, especially if you are borrowing from any “financial institution” as part of the deal.  The United States government, particularly the IRS, has for years tightening the noose on international banking and trade.  Opening bank accounts or forming companies in many cases require you to complete “know your customer” style questionnaires asking about all manner of things including who will be the beneficial owners of your investments.  Unfair as it may be this is even more difficult if you come from a country that shows up on certain lists, such as the OECD “gray list” of countries deemed uncooperative in sharing bank account and tax information, or the Financial Action Task Force (FATF) “black list”, a list of countries deemed not to be doing enough to combat money laundering.  In the end, however, you can still achieve a measure of asset protection and anonymity by selecting the right entity and tax structure that will protect you while still keeping you in compliance with the thicket of regulations.

Euros
Moving your money

Withholding Your Money

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was designed to prevent foreign investors in US real property from selling and taking their proceeds abroad without paying tax.  At the time there was no way at the time for the IRS to collect tax from people who did not have a presence in the US other than the property they sold.  FIRPTA changed this by putting the burden on the buyer (or other transferee) to withhold part of the proceeds of the sale (10% as to individuals) to put against any tax liability the foreign buyer may have.  Typically it is the settlement officer / escrow agent who would bear this burden.  The burden is even higher (35%) for a foreign corporation that sells a US property and then sends the proceeds to the corporation’s shareholders.  Again, though, fortunately, going about both the buying and the selling the right way can reduce or even eliminate FIRPTA obligations.

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Your silent partner

Your United States Tax Return

I would be hard pressed to think of one of my foreign investor clients who wants to get into the messy business of filing a US tax return.  There are options, however.  Even if you have to file a US tax return that doesn’t mean that you have to do so individually, rather, there are corporate structures that allow you to limit what “you” have to report to the business of that entity.  Second, in real estate it sometimes makes sense to consider yourself to be “effectively connected” to the United States and file a US return.  These are just words that mean that in the eyes of the law you are, in summary, doing business here and agree to file a US tax return.  The upside of this is that you are then able to fully deduct your expenses like property maintenance, interest expense, taxes and fees from your gross rents or spec properties.

Contact Us For Help

No matter what path you follow it is essential that you do it right the first time.  This requires careful attention to all of the filing and election requirements.  Failing to do this correctly could cost you some or all of your profits on the deal.  I am here to help.

Ari Good, Esq.

(786) 235-8371

band performing

Recording Industry Contracts – What To Look For

band performing
Negotiate your recording industry contract

The Ins and Outs of Recording Industry Contracts

One of the most exciting moments in an artist’s career is when he or she receives his first recording contract.  This can represent your  “big break” and an opportunity to market your music and gain more fans, followers and ultimately sales. The smart artist carefully reviews his contract before committing to any music marketing company, recording industry contract, or other agreement.  This is extremely important.  Committing yourself to the wrong contract can limit your artistic freedom, obligate you to produce a nearly impossible amount of music in a short period of time, and restrict you from working with your favorite musicians or producers. Here is a list for some common things to look out for:

Your minimum recording commitment

In summary, your minimum recording commitment (or “MRC”) spells out how much music you have to produce for the marketing company or record label in exchange for their services.  The MRC can be phrased in terms of the number of singles or number of albums, or sometimes both.  Have a good idea based on your experience of how long it takes you to produce a song or album.  You  will need to have enough time to create a quality product without sacrificing your artistic integrity, which is what brought you the contract in the first place.  The timeframe for meeting your MRC can often be pretty tight, which brings us to our next point:

The Recording Industry Contract Term

Rather than being for a year or for a certain number of albums, many recording industry contracts create several back-to-back terms that obligate you to meet your MRC within each term.  These can be as short as six months.  The contract typically gives the label or marketing company the option, but not the obligation, to cancel or renew the contract at the end of the each term while keeping the work you have produced thus far.  This often a pretty one-sided deal.  You may not have the same right to cancel if you’re unhappy with the relationship.  Ideally you would want either one of you to have the option to cancel the relationship after each successive term or extend the whole term in the recording industry contract so there is more of a mutual commitment.

Getting a Win-Win Deal

You scratch my back I’ll scratch yours as they say.  Many recording industry contracts are pretty thin on detail when it comes to what exactly the record label or marketing company will do for you.  You should have a very clear idea of what you want out of the deal and how the company plans to give it to you.  Are you looking for social media promotion?  Bookings?  Paying for your production and CD costs?  Perfecting your listings on iTunes, submitting your material to Spotify and Pandora and registering you with the performing rights organizations?  These are all critical parts of marketing your music.  Keep in mind too that most of the money in the music industry is made in live performances and merchandising rather than unit sales.  Be aware of  smaller companies that claim to have hot “industry contacts”.  Such companies often claim that they’ve worked with big artists and launched their careers.  Obviously these claims may be true, and this might be a great relationship for you, just be aware of claims that are very hard to prove.  Do your homework. What does their website look like?  How long have they been in business?  Exactly which artists having worked with and is their name on those artists websites or CDs, etc.

Music Industry Relationships and Leverage

Always know who has more bargaining power in any relationship.  If you’re looking at a contract from Virgin Music or Sony, suffice it to say that there’s probably not a whole lot you can do in terms of negotiating terms, and you are probably lucky to have such an opportunity.  If you’re dealing with a smaller company though, know that they might be hungry just as you are, and you may have more power negotiating terms if you already have an established fan base, merchandising relationships, and other things going for you that make you easier to market.  It’s sort of like the joke about getting a loan – the only people who get them are those who don’t need them.  The best contracts go to artists that have already done a lot for themselves and already have a following.

Getting the right advice in advance can make the difference between hitting it big and ending up with an impossible situation.  Call me for consultation and contract review.  A little good advice and perspective at the beginning can save you a lot of headaches down the road and open you up to  win-win deals that will deliver what you’re really looking for.

Ari Good, Esq.

(786) 235-8371