Inbound Investment: The Tax Questions That Shape Structure

US tax treats a foreign investor differently depending on the character of the income and on whether the investor is treated as conducting a US trade or business.

Passive income — dividends, certain interest, royalties — is generally subject to withholding at source, reduced by treaty where one applies and where the investor satisfies the treaty's limitation on benefits provisions.

Effectively connected income — income from a US trade or business — is taxed on a net basis with a US filing obligation, and for corporate investors may attract an additional branch-level tax. Most foreign investors structure specifically to avoid being treated as conducting a US trade or business.

Real property has its own regime. Gain on the disposition of US real property interests, including interests in certain US corporations holding real property, is taxed as effectively connected income with withholding on the gross proceeds at disposition.

Blockers. A US or non-US corporation interposed between the investor and an operating investment converts what would be effectively connected income into dividend income, at the cost of corporate-level tax. Whether this is worth it is an arithmetic question specific to the holding period and the exit.

Treaty jurisdiction. Where an intermediate holding company sits determines the withholding position, and limitation on benefits provisions mean the entity must have genuine substance and a qualifying ownership profile. Structures without substance are challenged.

Debt versus equity. Interest deductions reduce US taxable income, but earnings stripping rules, interest limitation provisions, and the base erosion rules constrain how far related-party debt achieves this.

Exempt and sovereign investors. Pension funds and sovereign wealth investors have specific exemptions available, and structures are frequently built around qualifying for them. The conditions are precise.

• Settle the structure before committing capital; restructuring after acquisition is expensive and sometimes taxable
• Test treaty eligibility against limitation on benefits, not just against the treaty's existence
• Establish real substance in any holding jurisdiction relied on
• Model the exit, including withholding at disposition, rather than only the holding period
• Coordinate with home-country treatment; a structure that is efficient in the US and inefficient at home has solved half the problem

This is a summary of the structural questions, not tax advice; each of these points turns on specific facts and requires US tax counsel on the particular investment.