Many purchasers from outside the United States require offshore companies (i.e. companies formed in jurisdictions outside the United States ) to insulate them and their families from exposure to various United States taxes. The United States taxation of foreign purchasers (technically, "non-resident alien purchasers") of real estate is quite different from that of domestic purchasers. Indeed, the impact of the United States estate tax where a foreigner dies owning United States based real estate can be punitive.

The reason for the concern regarding United States estate taxes and its relationship to foreign purchasers is that the tax is imposed at progressive rates on the fair market value of the United States property owned by the foreigner at his death. After allowing for an initial $60,000 exemption (as contrasted with US$2,000,000 in 2007 increasing gradually to $3,500,000 in 2009 for United States residents or United States citizens) these rates start at 18% for estates with a value of $10,000 and reach 45% for values in excess of $2,500,000. Moreover, a marital deduction is available only if the surviving spouse is a United States citizen or if the property is transferred to a qualified domestic trust.

For example, if a nonresident alien dies owning property in his sole name which has a fair market value of $810,000 at the time of his death, there will be a federal estate tax of at least $248,300 imposed upon the estate of the nonresident alien.

Because shares of an offshore corporation are not subject to United States estate taxes when held by a nonresident alien at the time of his death, the estate tax can be entirely avoided if the property is owned by the foreign corporation rather than directly in the name of the foreign purchaser.

Other advantages which arise from the use of an offshore corporation to hold United States real estate include:

• Avoidance of probate proceedings in order to convey proper title from the estate.
• Avoidance of United States gift tax.
• Increased confidentiality, as only the name of the offshore company and not the name of the ultimate beneficial owners of the company is filed in the public records.

We have advised our clients that they must follow formal procedures with regard to the conduct of their offshore corporations and not merely ignore the existence of the corporation other than to pay for its annual maintenance. Under principles of United States tax law, the existence of a corporation can be "pierced" if the practice of the client has been to ignore the corporation or otherwise treat it as his alter ego. While there is case law dealing with domestic taxpayers, to the best of our knowledge there are no cases or Internal Revenue Service rulings directly addressing the use of offshore corporations to hold title to United States real property by nonresident aliens. We also believe that the Internal Revenue Service has not yet succeeded in setting aside the existence of a properly structured and maintained offshore corporation. Nevertheless, there exists the possibility that in the future the Internal Revenue Service may contend that the offshore corporation be required to report rental income, although possibly for only the days the property is actually being used by the nonresident shareholder or principal-in-interest. In this instance, a pro-rata share of deductions would be allowed, but only if a tax return was timely filed by the offshore corporation. Penalties could presumably be assessed; and, if the issue were raised after the death of the nonresident alien shareholder, a United States estate tax would presumably be due.

We have determined that certain actions should be considered in connection with the foregoing issues. Specifically, we are recommending that our clients consider the preparation and execution of lease agreements combined with rental payments from the individual to the offshore corporation, which in turn would require the filing of all appropriate federal, state, and foreign (if required) tax returns. As an added measure, we have made it a policy to see that annual corporate minutes are prepared for all of our offshore corporations. For new nonresident alien purchasers, we recommend consideration of owning the real property through a domestic ( Florida ) subsidiary corporation to be formed and owned by the offshore corporation. This domestic subsidiary would then enter into a lease with the individual and would file all required income tax returns.