How To Open An Investment Fund In USA As A Foreigner
FAS CPA & Consultants
Do foreigners who open an investment fund in the U.S. have to pay taxes?
Yes, they pay taxes for the profits that they get from the trading that they do in the US. It’s the same as buying a property in the US and you sell it and there is a profit in that sale you have to pay taxes, you have to file a tax return same thing applies to stocks or funds. Usually, a fund when is opened according to the strategy they can invest in real estate, stock market, forex, bitcoin, art and ongoing business, that depends on the investors, but we have to treat every single asset that the funds is going to invest in as an asset that is going to be taxable if the asset when sold produces profits, if there are profits there are taxes. Now in the case of foreigner, whenever there is foreigner and the funds is formed as an LLC the IRS requires that all foreign investments and foreign partner in that investment fund needs to report taxes every single quarter this requirement started 3 or 4 years ago, the IRS require that LLCs with foreign partners are obligated to withhold 30% of the profits of the foreign partners and submit that to the IRS. So, it’s not only that they pay taxes but they pay taxes for the investment activity for the profits in addition to that they have to pay taxes in advance meaning that every quarter from that foreign partner 30% whatever the income is allocated to that is withheld and given to the IRS in that particular quarter if that is not provided the IRS can impose penalties because it is a requirement that is not being fulfilled. It is important that if you’re forming an investment foreign fund in the US you get all this information and when you apply your strategy for investment your foreign investor knows that they are going to be taxed many times and at the end of the year file a tax return to claim money withheld in excess from the IRS.
How can I structure the investment fund to get the most benefit at the tax level?
Whenever you are dealing with foreign partners, and you want to avoid taxation to the foreign partners, and this is only for the foreign partners because for US citizens they have to pay taxes there is no way to avoid taxation you can only defer it. But for foreigners they are going to be taxable with 30% every quarter from the profits, now to avoid or shield the foreign investor from that withholding you need to go offshore. Open an investment fund in Bermuda for example or Cayman Islands which is very famous and prestigious for this kind of structure, and it is the Cayman Island the entity who is going to do the investment in your investment fund in the US you are not going to bring the foreign partners in the US because that causes taxes. It’s better to place all your foreign investors in the Cayman Islands and then the entity formed also as a fund in the Cayman Island is the one that will receive the funds from the foreign investors and that entity in Cayman Island is the one that is going to invest in the investment fund in the US. Because of that arrangement your foreign investors are going to be shielded from tax liability in the US. That’s how you minimize your tax liability for foreign investors, this doesn’t work for US citizens.
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What requirements must a person have to open an investment fund in the U.S.?
The first thing is to have an LLC, if you have only US citizens as investors, they need to provide for a percentage of participation according to the amount agreed and invested so that is the basic requirement for an LLC. Now once you have that you have to create the operating agreement and the strategy to invest in, and all of these documents need to be in agreement for every single partner or owner of the LLC, once you have that clear you can go and invest. Now, whenever you are receiving money from third parties the LLC needs to be accountable, if you invest in real estate you can handle it having the investment fund and then you also need to open in addition to that a second company that is going to execute the purchase, so do not mingle the assets in one single entity because its going to increase your risk and you will need to take more liability insurance. Ideally is assets are purchased and placed in one particular LLC, that will create a separation from the fund and the company that are going to own the asset. This arrangement works when dealing with Real Estate, there are other cases where there are few owners and separate the Investment from the fund and then the fund is the one that receives the money and also holds the properties. Whenever you are investing in the stock market you must have two more companies one LLC that will be the management investment, you need to open a second company that is going to give advice to the fund on what to invest and the investor advisor needs to be registered with the Security Exchange Commission because now you are going to the sick market and anyone doing management and advising for a group of people needs to have registration and the person who is doing the investment also needs to open its own LLC for liability protection. So, you have one company that is the fund, one company that is the investment manager and another company that is the investment advisor that the structure you need to have in place with the objective of limiting the liability in case the investments in the stock market go sour everyone will be protected because of the market fluctuates and that is something that the investment manager can control. Usually the company in the Cayman Islands is called an exempt company meaning that is not taxable because it will be formed only for people who are not Cayman Island citizens nor US Citizens, second if you plan to invest even if you have foreign investors make sure you have an investment management company that is the one executing the strategy from the fund and within that you have an investment manager but this needs to be also an LLC for limited liability protection.
Once the investment fund is established can we carry out forex related operations?
Yes, you can the problem is that the forex platform will not open an account for US citizens. Forex in Europe or continents will not deal with US citizens you cannot go offshore to do forex you have to do it in the US. Yes, you can invest in forex, bitcoin, cryptocurrencies, real estate whenever you are in agreement with your investors and that has to be in written so if anything happens you have the contract, and all single partners know.
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What is the correct structure to establish an investment fund in the U.S. that sends money abroad and can receive local capital?
It will be the one in Cayman Islands, you open an investment fund in the US an LLC and then open an investment management company is the one that is going to manage the investment and you also need to open an investment manager company that is going to execute and manage the investment from the funds. Once you have that structure and you also have foreign investors you also need an exempt company in Cayman Islands. So it will be a master fund in the US, a master fund in the Cayman Islands that sends the money to the investment in the US, then you create the investment fund that receives the money from the master funds in US and Cayman Islands, and this fund is the one that is going to invest and will need a fund management company and fund manager or advisor that are also LLC and registered with the Security and Exchange Commission, that is the structure that will be able to receive money from US citizens, foreigners and will have no problem in sending money outside of the US.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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