President Trump's proposals for US tax overhaul have now been outlined, which includes a reduction in the US corporate income tax rate from its current 35% to 15%. This tax overhaul as envisioned would favorably affect Saudis who invest in US real estate since most of these investors hold their US property through corporations, even though the investors themselves may not always be corporate entities. Rental income and capital gain received by holding corporations are currently subject to a US federal corporate tax rate of 35%. Any decrease in US corporate tax rates is expected to be of great interest to prospective foreign investors and holders of US real estate at all levels of the spectrum, including individuals, family offices, real estate investment funds managed from the Kingdom and governmental institutions. Thus, what appears to be a purely US tax issue may in fact substantially and favorably impact Gulf-region finance and investment trends towards the US market. Notably, any reduction in the US corporate tax rate affects Saudi families and family offices holding investment property in the US, as well as Saudi advisory firms sponsoring investments in US real estate and sovereign wealth funds and other governmental institutions holding US real estate. Gulf-region investors are in a somewhat unique category with their investments in US real property made through corporations, which for several technical tax reasons is not expected to change. Also, it is not expected that the US tax overhaul debate will focus on the impact on this niche market of foreign investment in US real estate as the debate will likely center on and be subsumed by its main impact on US operating businesses and US multinational employers. Any increase in Gulf-region finance and investment trends towards the US market may accentuate the recent trend towards local family offices, investment managers and governmental institutions building up their in-house staff and capability to handle their US real estate. In the digital age, investors in US real estate are increasingly able to source new investments and manage their US investments from the Kingdom with less reliance on US property managers. Thus, while capital may flow into US real estate, employment of professional staff may increase locally to handle this new investment activity. Historically, Saudi investors in US real estate would typically provide corporate authority to their US counsel and agents with very limited day-to-day tax and financial related communications between the investor and their US representatives. Now, the recent trend in the Kingdom is a quest for knowledge relating to the intricacies of US tax law, which is an expertise brought in-house in local companies. It would be expected that US tax overhaul will be closely studied by those growing real estate and financial departments in the Kingdom. — John Dworkin is an expert on a wide range of tax and corporate law matters, with particular emphasis on structuring foreign institutional, individual and family investment in U. Real Estate (FIRPTA) as well as Foreign Investment in US based real estate funds, private equity, joint ventures and direct US portfolio investments.
