To block or not to block – when should you use a blocker company?
To Block Or Not To Block
Should you use a blocker company when investing overseas? That is the question Clint Harding and Alexander Rasmussen of Arnold Bloch Leibler in Sydney will discuss with you in this episode.
Here is what we learned but please listen in as Clint Harding and Alexander Rasmussen explain all this much better than we ever could.
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To Block or Not to Block
Let’s assume you have an interest in a US based Limited Liability Company (LLC). Should you put a blocker between your Australian holding and the LLC?
A blocker changes your tax position in three ways:
1 – No Filing Obligation in the US
Without a blocker the Australian holding would have a filing obligation in the US for its US sourced income. But if you use a blocker, that blocker will shield the Australian holding from that obligation. So instead of the Australian holding, the blocker now has to file.
2 – No FITO for US Corporate Tax
Without a blocker the Australian holding would receive a Foreign Income Tax Offset (FITO) for the US tax the Australian holding paid. But with a blocker the holding doesn’t, since it is no longer the one paying the US tax. The blocker does.
However, this is only a benefit while the profits stay within the Australian holding. As soon as you distribute these profits, you lose the FITO and the dividends come out unfranked, requiring full top-up-tax.
3 – Possible CFC
Without a blocker, there is no company, but just a partnership interest in the LLC. With a blocker you have a company and possibly a CFC. However, it is unlikely that the interest in an actively trading LLC would trigger the CFC rules.
Where To Block
The next question is where to block. Within the US or outside?
If you use a US based blocker, you will need to disclose some information about the shareholding of that blocker, meaning the IRS will learn the identity of the Australian holding.
If that is an issue, then you use a blocker company outside of the US, for example in the Cayman Islands. A blocker outside the US will need to disclose less information to the IRS about its shareholders.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 12 October 2021