How do family offices optimize foreign tax credits in the U.S.?

The Clark Family are a U.K. based family office.  They have an established manufacturing business in the U.K. and Asia that has allowed them to accrue substantial amount of capital outside of the family business.  The patriarch was born in Australia and migrated to the U.K. 7 years ago.  The family office is structured through a holding company in the U.K. and a family discretionary trust in Hong Kong and the group is looking to make direct and indirect investments into U.S. private companies and U.S. hedge funds.  The private companies are high growth technology companies and the hedge funds focused on real estate and middle market private equity.

The Clark Family are assessing whether to establish a U.S. based entity through which to make their investments or whether to make their investments directly.  All of the investments are in either U.S. based Limited Liability Companies or U.S. Corporations.

The optimal investment structure for the Clark Family will be dependent upon whether the entities they are investing in have a U.S. trade or business and whether the entity from which they are executing the investment can leverage an income tax treaty.  In this example the Clark’s may be able to leverage group entities in the U.K. or Australia as both those countries have income tax treaties with the U.S. whereas Hong Kong has no treaty with the U.S.

If the entities they are investing in have a U.S. trade or business the focus will be on strategies to optimize the use losses (to the extent the investments generate losses) and the use of foreign tax credits within the wider group, whereas if they are investing into a structure that has no U.S. trade or business the strategy will be focused on not be subject to tax in the U.S. at all.