JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

Panama S.A. Owning Real Estate

QUESTION: As far as I understand, a Panama S.A. corporation can not file 8832 to be a disregarded entity and is hence subject to ordinary income taxes on generated income. However, I can't seem to find tax information regarding passive real estate holdings in an S.A. If an S.A. only owns one property and that particular property is sold by means of selling all shares of the S.A. to a third party, what are the tax consequences?

REPLY: The short-short answer is that gain on the sale of stock of a controlled foreign corporation is generally treated as ordinary income to the extent of any acccumulated and tax deferred earnings and profits of the corporation.

But, rental income from passive real estate is subject to current taxation by certain U.S. shareholders of the S.A. corporation and the income on which taxes are paid is added to the cost (basis) to compute the gain or loss on the sale of the stock of the corporation. If the gain exceeds the adjusted tax cost (basis), and meets the holding  period requirements for long term capital gains, the gain should be eligible for the reduced tax rate on long term gains.

This assumes that the S.A. corporation is a controlled foreign corporation and that all of the income of the S.A. corporation is subject to tax by the shareholders under the rules for subpart F income in tax code sections 951 through 965.