When i was young, I was prone to digging holes in the backyard with the assistance of the family dog, Fritz, who was quite the digger. For the record, I was not eighteen at the time but still do a pretty good job of digging myself into holes! The story was that if you dug deep enough, you would end up in China. Well, I still have not made it yet either by digging deeply enough or by foreign travel.
I am seeing with increasing frequency Chinese investment in any number of U.S. hard asset investments – real estate, oil and gas etc. Frankly, if I were Chinese, I would want my serious money outside of the country with a visa in hand for permanent residency in the U.S., Canada or Australia, just in case, the Chinese government decides to change its mind on how it feels about you and your business, you want to have plans in place.
A big part of that planning is how much you have and how much you get to keep after high American taxes. One strategy for structuring that is not well known by Chinese investors and their advisors is the use of private placement variable deferred annuities (PPVA). PPVA is an excellent structuring vehicle for investment in U.S. real estate, private equity and venture capital that might generate effectively connected income (ECI) to a U.s. trade or business as well as FIRPTA, the real estate withholding tax provision. the withholding rate for ECI is the top marginal tax bracket. I have written extensively on this.
Virtually all of the double tax treaties with the U.S. treat “annuity” income as tax-exempt income that is not subject to withholding taxation. As a result, a real estate or private equity insurance dedicated fund within a PPVA contract can convert taxable income into tax-exempt income. You read it correctly!
The cost of the structure is under 100 basis points compared to a 34-45 percent tax rate. The assets within the policy are bankruptcy remote. When the policy issued by an offshore insurer that has made the so-called 953(d) election none of the investment income is subject to withholding taxation and the policy is not considered a U.S. sitused asset for federal estate tax purposes. What other structure does this for this type of investments? No K-1s1 No federal or state level tax returns.
Why aren’t more Chinese investors and their advisors looking at PPVA. Maybe I need to keep digging until I end up in China to deliver the news myself.