One of people's biggest concerns is what to do to immigrate smoothly and safely when it comes to tax issues. That's why today we're going to interview Luiz Guilherme from BT7 Partners. 

This is a subject that people are very concerned about. Especially for entrepreneurs who want to better understand whether it is worth seeking citizenship or even obtaining Green Card.

BT7 Partners is a tax and accounting consultancy firm.

They master tax issues and solve all my clients' problems at Selecta. So there's nothing better than bringing him here to answer a few questions.

How does taxation work in the United States?

‍Bruna: Thank you, Luiz, for being here. Tell us a bit about your CV - I know you have a degree in Brazil and understand a lot about the market and the laws in Brazil and the United States too.

Luiz: It's my pleasure, Bruna. That's right, I'm a lawyer who graduated in Brazil, did a master's in tax in Brazil and then came to the United States to do a master's in American tax. Today, I'm licensed by the US Internal Revenue Service to advise and represent taxpayers here before the federal and state tax authorities.

‍

‍

I got the Green Card. What should I do?

‍Bruna: So, my first question is: I got my Green Card and I'm going to live in the United States permanently, what do I need to do? 

How can people plan? Is there a definitive way out of Brazil or not? If I have a business in Brazil, do I need to keep it? How does all this work?

‍Luiz: Well, let's break it down. A person with Green Card is automatically treated as a tax resident in the United States.

‍Bruna: Even if the person who received the Green Card is already a tax resident in Brazil?

‍Luiz: No. You have the option of applying for Green Card while physically outside the United States or while physically in the United States. So, when you apply outside the United States, the residency system is different. How does it happen? 

When you go for the interview at the consulate, they will stamp the visa in your passport, which will later become Green Card when you get here.

This visa will have a maximum period of entry into the country. This maximum period is usually six months from the day the person took the medical examination.

The person has this deadline and, the day they set foot in the US, they will be considered a tax resident. 

In this case, the date of admission to the country as a permanent resident will appear at the bottom of Green Card. From that date onwards, you are automatically a tax resident. 

This date is usually not exactly January 1st. And what happens: any date other than January 1st, the person will have the first fiscal year as a partial fiscal year in the United States.

So, part of the exercise will be as a non-resident and part as a resident. The non-resident part will pay US income tax. The resident part will pay global income tax. 

This happens when a person applies for Green Card without physically being in the United States.

When the person applies while physically here, this system changes. Generally, once they are here, they ask to have their immigration status adjusted. 

Then she'll ask for what people call a combo card, which is a work permit and a travel permit. 

At that point, if she came, for example, on a student visa and applied for adjustment of status, she is subject to a substantial physical presence test, which is a residence test.

Although she has not yet obtained Green Card, she can become a resident on the basis of the physical presence of the days she spent here each calendar year.

When you come on a tourist visa, for example, it's different from a student visa. This tourist visa does not grant any blocker assignments. 

So, you came here on a tourist visa, a business visa, and applied for adjustment of immigration status - from the day you arrived here on a tourist visa, the days of physical presence are already counting down.

In this case, you have a greater chance of becoming a resident early compared to the F visa. 

‍Bruna: Wow, a lot of information! And tell me this - when the person who applied for the visa and obtained it is in Brazil, how does tax planning begin? What's the first step in getting organized to come here? 

‍Luiz: On the tax side, we recommend that clients, before actually coming here or even if possible, before starting this plan to have Green Card, do a detailed tax analysis in pre-migration tax planning to determine what they have to do before becoming a tax resident.

Because ideally you should have this time off to plan and implement your strategies. 

When you fail to do this in advance, you miss out on an opportunity.

So you fail to implement strategies that will generate greater savings.

It depends a lot on the type of income and assets the person has, but the more they anticipate, the better, because they will have more time to implement strategies and, from the moment they become resident, be tax efficient.

‍Bruna: Luiz, give me an example of a situation, of a client who, if they miss this window of opportunity, what happens tax-wise? 

‍Luiz: One of the cases where this loss of opportunity becomes more latent is the question of losing the chance to bring your assets (your patrimony) to market value for American tax purposes. 

The person who stops implementing a strategy will basically have their assets accumulated over time and these assets will have a historical cost that they used to acquire them in Brazil. 

If it doesn't implement the strategy, it will use the same acquisition cost of these assets for American purposes. 

If she plans ahead, it's possible to do the following: before she comes here, she'll have an asset valuation for American purposes only.

So, when she sells this asset in the future, for American purposes, she will make a small gain or even no gain at all, because it was at market value.

‍Bruna: Very interesting. How many days in advance does someone need to contact you to start planning? To have the peace of mind to look into all these issues?

‍Luiz: For the specific issue of asset valuation, the ideal is a horizon of at least six months. Because it will involve contact with us, with the lawyers, with the accountant in Brazil that the person has. 

But also banks in the United States and other agents here so that these strategies are implemented before the person steps foot here with Green Card.

‍Bruna: That's very important, because people get very excited when they get their visa. When you have a Green Card, which is why many people decide not to become permanent residents, it means that you have to declare everything you do in the world.

‍Luiz: That's right, in the United States, you tax income globally. So it doesn't matter where the income comes from, the US will want to tax the income of its residents. In Brazil, there's the aggravating factor that there's no double taxation treaty. 

But the benefit that the United States offers is that you can use an income tax that you pay in Brazil as a credit.

So part of precatory tax planning, especially for those who have companies and have decided to come here, is analyzing the strategies you can implement.

This is because dividends that you don't tax in Brazil will be taxed in the United States and the strategies will allow you to be taxed more efficiently.

‍

‍

How does the definitive tax exit from Brazil work?

‍Bruna: For families and entrepreneurs who receive Green Card and come here and want to leave Brazil permanently. Can they do this even if they still have a company in Brazil? 

‍Luiz: As there is no treaty between Brazil and the United States, you can even maintain a dual tax residence between Brazil and the US. 

So, when a person goes to Green Card and decides that they no longer want to have to pay income tax in Brazil and no longer want to tax income from other countries in Brazil, that suggests a definitive tax exit. 

‍Bruna: Even if the person has a company in Brazil, can they make a tax exit in Brazil?

‍Luiz: Yes, he can make a tax exit. In this case, the precaution will be, for example, if he leaves a company in Brazil that is in Simples Nacional - if he gives the tax exit, he loses Simples Nacional. 

Depending on the type of tax regime the company in Brazil has, it is interesting to do this analysis to see what the additional impacts will be with the tax exit. 

This also applies to people with financial assets in Brazil. Will there be any changes to the tax exit? Will the person have to migrate to a non-resident account whose fees are more expensive and implies a more restricted portfolio?

All of this is analyzed to understand whether it really makes sense to formalize the tax exit or whether it's better to maintain a dual residence and still have tax optimization.

‍Bruna: When you meet the client, you analyze the whole history, the whole company and family structure to understand what the best way is. There's no 'copy and paste' that works for everyone, right? 

‍Luiz: That's true. There's no recipe for a cake. Each case is different. 

There are clients who have simpler operations and assets than others. Because there really are some cases where you have to analyze not only Brazil vs. the United States, but also the positions the client has in Canada, Europe and Asia.

This already involves questions of applying the United States' treaty with these countries to see to what extent it is possible to optimize.

Also, clients with more complex succession structures. In other words, clients who have already formed foundations abroad and are going to become tax residents in the United States.

So, whenever we analyze a client, if they have companies or assets abroad, their report for American purposes is always more complex.

We have to be very careful to report in the right way, because otherwise the fines are very heavy.

How do you become a US tax resident?

‍Bruna: Can you explain how a person becomes a tax resident in the United States? If you've been here for a long time and become a tax resident, do you have to file a tax return according to how long you've been here?

‍Luiz: Here in the United States, you basically become a resident in four scenarios:

1 - American citizen

When you are an American citizen, residency is automatic.

‍2- People with Green Card

When the person receives the Green Card, residence is automatic.

‍3- Person married to the person who owns the Green Card

If you are married to the person who has Green Card but you don't live here and you choose to file a joint tax return with your spouse, this is also a way of becoming a tax resident in the United States.

In these cases, the person makes a tax election reporting that they have not met the requirements but would like to be treated as a tax resident to hand over with my spouse.

4 - Person with a substantial physical presence in the country

The last hypothesis is when the person has a substantial physical presence in the country. In this respect, the type of visa the person used to enter the United States will weigh heavily. 

For example, on a study or exchange visa, you have what's called a blocker, which means that the time you spend there is disregarded for the purposes of tax residence in the country.

Of course, this possibility that the legislation gives is for a limited time. So you would have five calendar years to take advantage of this exemption.

If you overstay your visa, you'll have to anticipate any audit by the US Internal Revenue Service to inform them that you've overstayed your visa.

But even so, let's say you want to return to your country of origin and you have no ties to the United States and are only here to study.

It's up to the IRS to accept your argument or not. In most cases, it is not accepted. 

Other visas, such as tourist visas, executive visas, work visas, are all subject to a substantial physical presence test.

In this case, if a person spends more than 182 days over a three-year period, they become a resident for the year in which the deadline is exceeded. 

But each year has a different weight in the calculation. So in the current year you will always consider 100% of the weight.

The previous year will be a third and the year before that will be a sixth.

So, when all is said and done, if you exceed these 182, you will become a tax resident for the year in which you exceeded them.

Tax residency will be backdated to the first year of physical presence.

Can you have tax residence in two countries?

‍Bruna: Can a person have tax residence in two countries?

Luiz: Yes, when the two countries don't have a treaty, they can maintain dual residence.

Now, for countries that have a treaty, there is a rule that says we will have a tie-breaker. 

They will analyze which country will meet the tie-breaking criteria and, when it does, you will only be a tax resident of that country.

These treaties are agreements that countries sign - the US has treaties with most European and Eastern countries. In South America, there are no treaties in force yet. Negotiations began with Brazil, but then stopped.

These treaties will basically regulate what each country can tax its residents on, to avoid them having to pay tax in both countries on the same income. 

Bruna: What else is part of this tax planning before the person immigrates?

Luiz: The accounting, financial and tax side. We analyze the company, financial investments, receivables that the person will have when they become a resident.

For example, it is very common for a person to sell a company in Brazil and come to live here, but be left with installments to receive from the sale of the company. 

So there are strategies to implement so that the installments don't get taxed here even after you get the Green Card.

We also analyze the suitability of the financial statements in terms of the Brazilian format and the American reporting format. We have to analyze all of this to see where the client needs to make adjustments before becoming a tax resident so that reporting in the United States is simplified.

Bruna: When the person immigrates and the tax planning is done in advance, do you do their tax in Brazil or not? Is this left to an accountant in Brazil? 

Luiz: There are two possibilities. There are clients who, from the moment they become residents, say that they would like us to do everything - the United States and Brazil. And there are clients who prefer to work with their trusted accountant in Brazil and work with us on the American side.

It really depends on each client. 

People usually like to have an investment account in the United States to invest in American shares or funds. 

So, usually, to avoid problems with US inheritance tax, where an intermediary vehicle is normally used - or a country with low or zero taxation, such as the Bahamas. 

This vehicle will be the gateway to the American account, it will be the holder of the American investment account.

Bruna: Are the banks open?

Luiz: Everything will depend on the banks' own policies. Some banks open Starting at a certain investment limit.

Bruna: And today, more and more, I see that banks want the person to be there physically to open a bank account. 

Luiz: That, and there are banks that say they don't open bank accounts for offshore companies. It depends on the bank you're going to and the client's relationship with the bank, such as their history.

Bruna: So, from there, this client opens the company, opens the bank account and they are able to start operating, making investments, without any problems? 

Luiz: Exactly. They will use the banker to put together the investment portfolio and, in this case, the banker ends up putting together a portfolio that will have tax optimization on the American side.

So either it won't generate tax in the US or it will generate a lower tax. You, Bruna, as a US tax resident, no longer have that much flexibility - you will always pay income tax.

Bruna: If a foreigner wanted to create this structure, do they have more advantages when it comes to paying taxes?

Luiz: Yes. On the American side, yes.

Bruna: Now, if they repatriate the money in Brazil, that's another matter, right?

Luiz: Even this use of an intermediary company is precisely to prevent the individual in Brazil from having to pay tax every month.

Bruna: So you go straight to the intermediary company?

Luiz: Yes. In this case, the profits are held back until the company distributes them to its partner.

‍

‍

Succession rate and FIRPTA

‍Bruna: On the real estate side, we're talking that it would be the same way out to avoid succession, right?

‍Luiz: Exactly. With the difference that here you have the FIRPTA rule, which is not exempt and which will have an impact on the sale of real estate.

So, when a foreigner sells a property, the buyer is obliged to withhold tax and, currently, this tax withholding requires filing a declaration to prove how much they actually earned, requesting a refund, but it's taking at least two years to get the money back. 

When the sale, for example, was via off-shore, it takes two years.

When you're an individual, it's a bit quicker.  

‍Bruna: Let's go back to the question of succession. We know that here, when a foreigner buys a property and the owner of the property dies, there is a high tax to pass on to the heirs. This tax is around 40%, because this amount is progressive.

‍Luiz: That's right, it goes from 18% to 40%. 

‍Bruna: To avoid that rate of succession, you have a structure.

‍Luiz: When a person goes to buy a property here, they usually set up an intermediary company that owns an American company. The purpose of this structure is both to cover inheritance tax and to avoid FIRPTA.

‍Bruna: That's very interesting, because I've heard many brokers and accounting professionals say that if you open a company here in the United States, you avoid this succession tax. And you taught me, a long time ago, that in fact you don't. The fee is minimized, but not. The fee is minimized, but not avoided. To avoid it, you need to have the intermediary company (owner of the American company), correct?

‍Luiz: That's right, the succession has to occur above the level of the American asset. Because I cut from an LLC, from shares in a corporation, which are American assets.

Because they have real estate underneath them, which is property located here on American soil. 

They are treated as American assets.

So, even if you set up an American company and the partner dies, he has left you an American asset.

In this case, he is subject to tax of between 18% and 40% on the value of the current company's net assets, proportional to the quotas or shares he holds.

‍Bruna: We also have the other side, which is FIRPTA. When a foreigner sells a property that is in the name of a foreign individual, the government withholds 15% of the value of the property. There's also a way for you to avoid this, which is also this structure.

‍Luiz: When the sale is made by an American company that is taxed as a partnership or as a Corporation, you can avoid FIRPTA. So the buyer is purchasing a property from an American person.

In this way, it avoids FIRPTA in this transaction. In this case, the seller receives the full price, calculates what they owe in tax and pays it to the government.

In the other model, if it was a direct sale from offshore, the buyer would retain 15% of the sale price. At that point, the actual capital gain would not be taken into account. In this case, you would have to pay the 15% and say what your gain was in order to request a tax refund.

That would be one way to ask for restitution.

Another way is for the seller to anticipate and say the following: I'm asking the US Internal Revenue Service for a withholding exemption or reduction certificate.

Basically, you'll gather the documents from the sale, the documents from when you bought the property to demonstrate your actual gain on that transaction.

The US Internal Revenue Service will analyze and give you an answer based on what you've said and presented. They may exempt you from withholding or say that you do need to withhold the 15% of the sale price. 

On the day of closing, he will receive the amount of the sale price, minus this discount.

‍Bruna: I always try to explain this subject in the best way so that they can understand. When some people find out they have to pay FIRPTA, they get desperate.

‍Luiz: This situation is even worse when the property is financed. Because the person has to pay off the outstanding balance of the mortgage, and there's also the 15% retention of the sale price.

Does income from property in the USA need to be declared in Brazil?

‍Bruna: When a client buys a property that is earning income, I know that he needs to do the income tax here, because he is generating income in the country and he needs to do income tax. It's an advantage if the property is in the name of a legal entity, because you can minimize the amount of tax a little, depending on the value, because you can put in more expenses - all of that. 

But my question is: does this foreign person, who has a property in the name of a legal entity, make 10,000 dollars in the year, do they need to declare it in Brazil?

‍Luiz: Yes, if she is a tax resident in Brazil.

Here, depending on the type of company they open, they will have a different tax treatment for the United States and a different treatment for Brazil. For example, here people often open an LLC taxed as a partnership. In which the company pays no tax and the partners pay the taxes. 

In this model, even though the money stays in the company, it is the partners who have to pay tax on the year's profits.

Brazil will see this model as if it were the equivalent of a corporation. So the company is a separate taxpayer from the partner.

In this case, Brazil will want to tax when the company has actually distributed to the partner.

‍Bruna: That is, when he withdraws the money and takes it back to Brazil.

‍Luiz: To Brazil or to his American account. When you move it from the LLC account to his account, Brazil recognizes it as a transfer and will want to tax it.

The Brazilian model will be one of effective distribution. Not in the United States. This will happen regardless of distribution.

Whether or not the money is in the company's till is irrelevant in the US. 

When a person is a tax resident in Brazil and has this type of structure here, it is interesting to make the report, the tax collection in such a way that he can use the tax credit he is paying here in Brazil.

‍Bruna: So it's not just a declaration in which he informs you that he has received an amount. He also has to pay the tax.

‍Luiz: Yes, which was the result of that year that he had from renting the property. Then, for you to be able to use it as a credit in Brazil, the country asks you to prove that the tax was paid in the year you received the income.

So he pays the tax and informs Brazil that he has earned a sum in the United States, should pay the tax, but ask for a discount on what he has already paid to the United States. Here, Brazil will grant the credit and tax the difference.

What happens if you don't declare your American income?

‍Bruna: People who don't do all this, sometimes even for lack of knowledge, what happens? What can happen? 

‍Luiz: It will depend on how the person operated the company. 

For example, if the company made a profit and didn't distribute it, Brazil wouldn't tax it. So there was no need to report it to Brazil.

Now, if there has been a distribution and you haven't reported it, Brazil will send you the tax bill plus a fine and interest.

‍Bruna: And how will Brazil know?

‍Luiz: In that case, it's really through the exchange of information, which is currently not being used that often by either country.

The exchange is a little more focused on high-value issues with criminal repercussions.

Now, for day-to-day use, there is not yet such effective interaction between the two.

‍Bruna: When you buy a property and you don't generate any income from it, you have to declare that you own the property. In this case, you don't have to pay anything - it would just be a matter of declaring that you own the property in your annual income tax.

‍Luiz: Correct. If a person buys a property directly as an individual, they must state that they bought a property abroad.

If it buys through a company, whether it's a foreign off-shore company or an American one, it will report the quotas, the shares of the company it owns. 

There will be a report every year saying how much was put into each investment on December 31st.

‍Bruna: That's important, because the person who wants to repatriate the money, everything is clear, easy and declared. 

‍Luiz: That's because the bank, when it's going to close the exchange on the Brazilian side, will ask for proof of the origin of that resource. And when you manage to declare it, everything is already reported and described every year.

‍Bruna: And if the client doesn't have that tax return from Brazil, how does he take the money?

‍Luiz: In this case the bank may want to create a problem to close the exchange there.

If it's just a question of not having reported the asset, then the penalty is a little more lenient. But everything is more focused on the issue of reporting income. 

Now, on the question of assets, you can say that it didn't appear on your tax return, but you can prove that it was a legal resource that I used to buy, that the exchange was closed to send, but it just wasn't entered on your tax return.

‍

‍

Fees paid to Brazil when taxing real estate in the United States

‍Bruna: When you make this declaration, everything correctly, and send the money back to Brazil, what do you have to pay?

‍Luiz: In Brazil, for example, if he sent the resource back there in reais for dollars, then the acquisition cost for him in Brazil is going to be in reais.

Then, down the road, let's say the person sold the property and repatriated the funds to Brazil. In this case, it is necessary to inform how much the cost was in reais when the purchase was made, versus what was sold now in dollars converted to reais. At the current exchange rate.

In this case, you will not only have the exchange rate of the value of the property itself, but also the exchange rate variation.

‍Bruna: Do you have to pay at source or on your next tax return?

‍Luiz: In this case of capital gain, you need to fill in the GCAP on the Brazilian side to inform what the gain was and request a DARF to pay the tax over the course of the year.

If I'm not mistaken, in Brazil it's 30 days in the month following the month in which you received it. There is a deadline for you to say that you sold your property, for example, in February, and you will pay your DARF for this gain in March. 

‍Bruna: Are there any cases in which it is more worthwhile to keep Green Card and choose not to become an American citizen?

‍Luiz: It all depends on how long the person is going to hold the Green Card. What happens is that when a person is an American citizen, they are subject to an exit tax from the United States. 

So if she returns her American passport, she is subject to exit tax, except in a few very specific cases.

‍Bruna: So if a person has a Green Card and wants to return it, is there a fine?

‍Luiz: She may be subject to exit tax, as long as she has stayed with Green Card for at least 8 years.

Up to 7 years, if you return Green Card, you don't have to worry about exit tax.

Exit tax is actually normal income tax.

But practically, it's like saying that the day you return the Green Card or the American passport, everything you have in assets will be brought to market value and then it will be as if you had sold everything before returning the passport or the Green Card.

If you make a gain on this market valuation, you will have to pay income tax on that gain.

Bruna: Why do they do that?

‍Luiz: To encourage people to stay in the country, with the money in it, turning the economy around.

Tax precautions for sending money to students in the USA

‍Bruna: Now, Luiz, going back a bit to the student visa, which you mentioned as an exception to the tax residency issues. When you send money to someone on an F-1 visa all the time, how careful do you have to be on the tax side?

‍Luiz: You just have to document that this amount is not being received as consideration for some service rendered by him.

If the parents are keeping the child, you will need to gather documentation to show that the parents are transferring funds to pay the bills.

The student will not need to report this to the US Internal Revenue Service, since they are still a non-resident.

Now, if the student has passed the 5-year deadline and continues to hold the same visa, and continues to receive the amounts, depending on the amounts you receive, you are obliged to report that you are receiving them.

You won't necessarily have to pay tax, but you will have to report it.

‍Bruna: I hope this interview with Luiz Guilherme has helped you clear up your doubts. If you would like tax advice or to talk more about real estate investment, please contact us by clicking here.

‍

I invite you to watch my video "TAXATION IN THE UNITED STATES - Everything you need to know about taxes in the USA".

‍