How Offshore Companies Are Used to Own Property in the U.S. and EU

Managing foreign-owned property is both attractive (a means to diversify, to invest, to acquire a second home) and daunting. The myriad taxation laws and local regulations, along with the need to maintain the organization and confidentiality of ownership abroad, can be very difficult. 

Many international investors consider establishing an offshore company as a viable method to manage their properties. This will protect them legally, allow for flexibility in ownership, establish a degree of anonymity, and ensure compliance with applicable laws. Properly established offshore companies can help distinguish the investor’s identity from their asset base and streamline long-term ownership management and planning.

Key Takeaways

• The use of foreign or “offshore” companies to retain and/or purchase property in the United States (U.S.) and the European Union (EU) is increasingly common.
• An advantage of using an “offshore” company, such as a Nevis LLC or a British Virgin Islands (BVI) entity, is that it provides a clear legal distinction between the individual(s) who own the entity and the real estate owned by the entity; this can be helpful from both an organizational standpoint for managing assets and for providing privacy.
• Further, pairing an “offshore” company with a trust can provide even greater asset protection benefits and also facilitate easier succession planning.
• It should be noted that there are no exceptions to the application of these international requirements. All structures must comply with anti-money laundering (AML), know your customer (KYC), and automatic exchange of information (CRS).
• When considering creating either type of structure, the prospective owner/creator should be aware of other considerations such as the cost associated with incorporating the entity, the ongoing annual fee charged for maintaining the entity, whether or how financing will be available for the acquisition of a home, and what applicable laws govern the creation, maintenance, and sale of real estate.
• There are significant risks when acquiring property through an “offshore” company, including, but not limited to, filing tax returns on income derived from renting out the property and complying with all applicable laws governing property ownership.

What Is an Offshore Company?

An offshore company is simply a legal entity set up in a country other than your own. They allow you to own, buy, sell, and rent property globally, as well as enter into contracts. Most offshore jurisdictions feature more flexible corporate law, better protections for your rights, and more privacy than domestic corporations.

It is true that owning real property using an offshore company does not relieve you of your obligations. You will need to comply with the same tax regulations, reporting requirements, and laws applicable in your home jurisdiction, i.e., the U.S. or the E.U. However, using an offshore company will simplify managing multiple properties domestically and internationally and help separate your personal financial interests from your business interests.

Are Offshore Property Structures Legal?

Yes, when structured and in compliance with all applicable laws (tax, reporting, and anti-money laundering (AML) in both jurisdictions where the property is located, as well as that of the entity itself), an offshore company may lawfully hold title to a property located in the United States or the European Union. In no event will owning an offshore company result in eliminating your tax liability or obligation to report on your foreign-owned assets. The primary reasons individuals use such a structure include protecting their assets from personal liability, enabling efficient management of multiple properties by allowing them to be owned through a single vehicle, establishing a plan for future succession, and providing greater flexibility in the operation of their business. 

Why Use an Offshore Company to Own Property?

Here are some reasons why individuals and businesses purchase real property utilizing offshore companies.

1. Asset Protection

Another reason many investors use offshore companies to protect their assets is the added layer of liability protection they provide. While owning property utilizing an offshore company does not shield your assets from all potential liabilities, it certainly adds another hurdle for a creditor to overcome before pursuing a claim against you. Furthermore, the complexity of litigation increases substantially once there are two layers of barriers between the plaintiff and defendant.

Why it matters:

• Utilizing an offshore entity provides yet another layer of protection against creditors.
• Separating the interest in a property from your identity can discourage opportunistic claims.
• Utilizing a trust in addition to the company will increase protection and may provide additional security.

2. Privacy and Ownership Separation

When individuals discuss protecting their privacy associated with offshore property purchases, most people incorrectly assume it is due to a desire for secrecy. Rather, individuals seek to maintain control over access to information regarding their ownership. In several offshore jurisdictions, records related to a corporation cannot be accessed by the general public, nor can such records generally be accessed by others except in limited circumstances. As a result, investors with large property portfolios find this a very useful tool.

Benefits:

• Ownership details are not readily available to the general public; therefore, such details are not visible to everyone.
• Corporations and trusts can be used to separate an individual’s name from the record title of property, thereby providing greater clarity between an individual’s identity and his/her assets.
• While records may exist for regulatory/compliance purposes, they are typically not viewable in a public database.

3. Flexibility for International Operations

In my opinion, one of the greatest benefits of using an offshore company is its ability to facilitate the management of properties across various jurisdictions. As soon as the scope of a person’s activities begins to span multiple countries/territories/jurisdictions, having all aspects of their operations managed by a single entity can greatly reduce confusion and save a great deal of time.

Example:

• If an investor is based in Europe and owns property in the United States, he/she can manage all aspects of property management through a single entity (i.e., an offshore company) rather than operating multiple entities separately in each country.
• Managing rental or commercial activities involving multiple jurisdictions can be simplified by handling all aspects from a central location, thus facilitating day-to-day operations.
• Additionally, succession planning, etc. It is greatly simplified since assets held in an entity or trust are generally easier to administer upon death, etc. Then, if assets were held personally.

4. Tax Neutrality (With Compliance)

Many offshore jurisdictions do not impose income taxes on income earned outside their respective territories. This is why offshore jurisdictions are commonly referred to as “tax neutral.” In reality, however, this concept has made structuring easier, particularly for an investor managing assets across multiple jurisdictions.
Again, however, this does not mean taxes cease to exist entirely. Investors will be required to fulfill their tax obligations both in relation to the jurisdiction(s) in which the property is situated and in their jurisdiction(s) of residency. The purpose of establishing an offshore structure is to simplify the operational and managerial processes involved in managing international property, not to circumvent existing tax regulations.

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How Offshore Property Ownership Works

Most of the time, when people purchase offshore property, they establish an entity to hold it. Usually, this will be a company and sometimes a trust above the company. Establishing an additional level of entities to hold your offshore properties creates separation for the purpose of creating liability protection; it also facilitates the ability for others to manage the property you have purchased by providing them with authority to act on your behalf, and can provide an additional level of security regarding your assets.

Common setup:

• Offshore trust (optional): Can sit at the top level of the structure as the legal owner of the company, providing an additional layer of separation.
• Offshore company: Owns the property and manages daily functions related to the property, i.e., contracts, leases, etc.
• Real estate/asset: This is where all of your money is going into; it can be residential, commercial, investment real estate, etc.

Example Table:

Scenario: A consultant has properties in Spain, France, and the United States. To protect their assets from being attached in litigation, rather than owning each property directly, they establish a trust in Nevis that holds title to the properties. By doing so, they have created separation between their identity and their assets, simplified contracting, and created a new legal barrier protecting their assets.

Costs and Practical Considerations

Owning property through an offshore entity will entail costs and expenses associated with setting up the entity and maintaining it going forward. However, owning property through an offshore entity can provide several benefits, such as legal protections, privacy, and flexibility. 

Typical Costs:

Practical Tips:

• Ensure that your compliance strategy addresses both the offshore jurisdiction and the country of location of the property.
• Educate yourself about local real estate law in each country. Many EU member states (for example, Spain) have specific restrictions on non-EU citizens purchasing and owning property within their borders.
• Document all aspects of the purchase process, and keep complete, detailed records to help ensure a smooth audit experience, should one occur.

Financing and Mortgages

One of the biggest concerns many investors have about using an offshore entity to purchase investment real estate is whether they can obtain bank financing. 

In most cases, obtaining bank financing through an offshore entity is possible; however, there may be additional complications:

• Not all lenders will lend money to an offshore company.
• Some banks require personal guarantees from the Ultimate Beneficial Owner (UBO) of the offshore entity.

The rental income generated by the property and/or the property’s value may limit lending options based on these factors; therefore, it is imperative to provide as much documentation as possible regarding these two areas prior to applying for a mortgage loan.

There are specific restrictions in some European Union countries that prohibit lending to foreign-owned companies.

Risks and Common Mistakes

The use of offshore structures may have numerous advantages; however, the improper establishment and administration of these structures could result in financial expense or other unnecessary complications. Many of the most commonly encountered obstacles with offshore property structures include:

• The failure to comply with reporting requirements for both you (as an individual) and your offshore company to your home country’s tax authority. This can lead to monetary penalties and/or criminal prosecution. It is crucial that you remain aware of and compliant with the reporting requirements applicable to your situation.
• Adding unnecessary complexity to the corporate structure by including excess levels, such as additional corporations and trusts. In addition to increasing costs associated with maintaining and administering the corporate structure, adding unnecessary layers can also cause administrative burdens. Simplicity within the corporate structure can be more beneficial than excessive complexity.
• Failure to understand and/or comply with the jurisdictional laws related to property ownership, taxation, and reporting within each respective country. Although your offshore corporation may be lawful within another jurisdiction, non-compliance with the local laws within a particular country will result in potential difficulties regardless.
• Offshore corporations provide controlled privacy and not total anonymity. Therefore, it is possible that when there is a legitimate need for authorities to access this information, they will be able to do so based upon existing law.
• Potential currency and banking challenges. International wire transfers can be subject to exchange rate volatility, banking restrictions, and processing delays.

Succession Planning

Long-term planning, specifically regarding the transfer of assets (or wealth) from one generation to another, can include offshore structures. Assets held by a corporation or trust typically have more clearly defined ownership than those individually owned, which may result in an easier, less complicated inheritance process. In addition, there are generally fewer legal hurdles to overcome regarding the international transfer of funds. As well, corporations and trusts can be structured to protect the rights of their beneficiaries while allowing considerable latitude in managing the assets themselves.

Comparison with Direct Ownership

Offshore ownership adds layers of protection and flexibility but comes with additional costs and complexity compared to holding property directly.

Common Jurisdictions for Property Ownership

Some offshore jurisdictions are more commonly used for holding U.S. and EU property:

Legal and Compliance Considerations

It’s easy to assume that, when purchasing an overseas property, since it has been purchased through an offshore company/structure, there will be some method of avoiding the normal rules & regulations in place for all domestic property. While offshore entities do offer a degree of anonymity & protection, they are subject to their own set of international regulations, which include:

• AML (Anti-Money Laundering) – The origin of the money used to purchase the property.
• KYC (Know Your Customer) – Identifying those who ultimately benefit financially from the property.
• CRS (Common Reporting Standard) – Providing tax authorities with data about income generated from your rental properties.

Offshore entities also require you to comply with the laws governing taxation, reporting, and use of foreign real estate. Offshore companies can provide you with private asset protection, but only if structured properly, not as an excuse for avoiding your obligations.

Summary

Managing property internationally using an offshore company can add an additional layer of organization, some extra privacy, and help to bring all your international property holdings into one centralized location.

It may have its advantages over a domestic setup; however, it also has its disadvantages. There will still be costs involved; there will still be rules and responsibilities to follow. However, for those who have more complex setups, an offshore company can be a useful tool for managing your property and planning for the future with greater clarity and control.

Frequently Asked Questions