EXPOSURE TO FEDERAL ESTATE TAX IN THE UNITED STATES
WHEN INVESTING FROM CHILE IN AMERICAN ASSETS
Below we present a brief article about the application of estate tax in the United States of America regarding investments in that country and one of the many possible structures to eliminate such tax contingency when investing from Chile.
I. THE INHERITANCE TAX IN THE US
The Federal Estate and Gift Tax levies the transfer of property originated by the death of an individual to his beneficiaries. Together with it, there are other state inheritance taxes with different regulations, depending on the legislation of each state.
Non-citizens who are not permanently based in the US are subject to the tax in question if properties and / or businesses in that country are under their property at the time of death.
Although the federal estate and gift tax has a maximum rate of 40%, its effective rate depends on different variables, including the value of inherited assets. Likewise, the tax only applies if the taxable equity exceeds a certain amount.
Therefore, if a not resident in the US and holder of investments in said country dies, the payment of the aforementioned tax would be accrued.
II. MITIGATION OF THE INCOME WHEN INVESTING FROM CHILE TO THE U.S.
In order to ensure a more efficient Estate Tax structure and particularly avoid the accrual of inheritance taxes outside Chile (as would be the case with the federal estate and gift tax), one alternative would be to replace the role of the individual investor with a Chilean corporation who could act as the owner of the investment in the US. The foregoing would allow, in the event of the death of the original investor, avoiding the taxable event contemplated in the federal estate and gift tax, but a change in the shareholders of a Chilean company that owns shares in the US.
In this same way, it is important that the transfer of the assets from the individual to the new vehicle is carried out in such a way that it does not generate tax effects, because otherwise, any capital gain obtained in the sale of the assets would be subject to taxation in Chile and harm the current investment.
For the purposes of achieving the above and always bearing in mind that each case must be evaluated based on the particular background associated with it, a solution would consists in the reorganization of the investor's equity by assigning the investment in question to the figure (recognized in the Chilean regulation ) of the Individual Entrepreneur (“EI” due to its acronym in Spanish) and then contribute it at its tax cost in a corporation specially incorporated in Chile in the context of a corporate reorganization.
By doing these, the investment in the US would be allocated in a Chilean corporation without anticipating the taxation associated with the capital gain that said values could have generated since their purchase and, additionally, eliminate their exposure to the payment of federal estate and gift tax.
DISCLAIMER
This article does not constitute advice or recommendation, having exclusively informative and illustrative purposes.
