Investor Risks of Direct Foreign Investment in the U.S.

By of MillarLaw A Professional Corporation On Sunday, January 28, 2018

The Tax Cuts and Jobs ACT of 2017 (TCJA) may have made direct foreign investment in the U.S. more attractive for foreign investment. The reduction of the corporate tax rate, favorable tax treatment of pass-through entities and a positive investment climate together with a strong “Rule of Law” structure gives the foreign investor reason to prefer the U.S. to other options. The one caution, however, is that the U.S. has numerous “information exchange agreements” and Mutual Legal Assistance Agreements in force. The result is that foreign investors could find themselves the subject of U.S. enforcement of foreign criminal laws such as currency controls.

Example: Assume an investor is from Country A which has an annual limit on exportable currency. Further assume that the investor violates those currency controls, thereby, committing a criminal offense in his/her country. If country A has an “information exchange agreement” with the U.S. then the investors disclosable financial information such as that required under the Foreign Account Tax Compliance Act, (FATCA) may be disclosed to his/her country. The risk of discovery of the currency control violation by country A is, therefore, more than theoretical. If discovered country A may invoke the provisions of the Mutual Legal Assistance Agreement it has with the U.S. and request cooperation in arresting and extraditing the investor. This is a complex process, but one that should cause investors who are considering a direct investment in the U.S. to carefully consider the effects of disclosure of their investment .

It is also important for the company that is going to receive the foreign investment to know their investor. The company should carefully document the source of funds in order to avoid Money Laundering charges in cases where the source of funds is dubious.

Structuring direct foreign investment is not just a tax challenge, but one that requires knowledge of international disclosure and enforcement agreements. This is a complex area involving U.S. law and experience in dealing with foreign jurisdictions. We are available to help.