Tax treatment of real estate income from USA

Introduction

It is well known that the Greek community in the US became larger during the deep recession in Greece. Many people moved to the US to make their living and make wealth. Nowadays, the better financial conditions and the tax incentive schemes, introduced by Greek government under articles 5A-5C of Income Tax Code, attract foreign HNWI and are driving brain gain, repatriation of Greek workforce and pensioners.

Actually, people who decide for a relocation to Greece may own properties and other assets in the US. In particular, a tax resident of Greece may receive rental income directly from a US property or via a US property holding corporation (either C or S corp.) Thus, the scope of this article is to analyze the taxation of income derived from real estate activities in the U.S. in accordance with the Double Tax treaty (DTT) in force.

Taxation for rental income

There are several cases of taxpayers who filed mandatory administrative recourses and claimed that real estate income from U.S. sources should be exclusively taxed in the source country. On the other hand, the Greek Tax Authority has released several decisions interpreting that that such exclusive tax rights are not provided by the Double Tax Treaty (DTT) between Greece and the US, considering that the rental income shall also be subject to tax in Greece.

In more detail and according to Article 8 of the DTT, tax residents of Greece have the option to choose the country in which their real estate income will be taxed. For instance, if a Greek resident earns rental income from properties located in the U.S., this income can be taxed under the U.S. law. However, the US Tax Authority (IRS) does not have the exclusive tax right over this income. This means that the rental income is also subject to tax in Greece applying the tax credit scheme. Thus, the US federal tax can be credited against Greek income tax on the basis of supporting documents that prove this tax payment (apostille copy of income tax return etc.).

Taxation for property holding entities

There are also tax residents of Greece who operate a US property holding corporation allowing them to deduct expenses related to real estate activities. A usual form of this company is LLC that may fall under under C-corp or S-corp status. In particular:

• A C Corporation is a legal structure for a corporation which provides for the owners or shareholders to be taxed separately from the entity. Thus, C corporations pay corporate tax on earnings (at a rate of 21%) and may distribute after-tax profits to their shareholders in the form of dividends. In this case, the shareholder’s profit is taxed as a dividend at a flat rate of 5%.

• A S corporation could be considered as a pass-through entity, i.e. the business profit/loss is passed through to the shareholders and shall be declared on their personal tax returns. The Greek Income Tax Code does not provide for the taxation of income received via pass-through entities. Therefore, it is not clear if such income should be declared as dividend or as self-employment income.

Conclusion

The Greek economy is becoming robust and outward-looking. The enactment of Articles 5A, 5B, and 5C of the Income Tax Code outline an initiatives spectrum to attract highly skilled professionals (brain gain), high-net-worth individuals (HNWIs), and strategic investors. Undoubtedly, DTTs improve and ensure transnational trade and mobility. However, several DTTs (or some articles of them) are outdated and create challenges within the field of tax compliance. Ensuring clarity in tax rules and effective implementation of DTTs will be a key to avoiding double taxation issues.