U.S. Blocker Corporations

For Kuwaiti sovereign wealth and high-net-worth individuals, directly owning a U.S. business or real estate asset that generates active income is highly inefficient. It subjects the foreign investor to U.S. tax on 'Effectively Connected Income' (ECI) and requires the filing of U.S. tax returns. The solution is the 'Blocker Corporation.'

Mechanics of a Blocker

A Blocker Corporation is typically a U.S. domestic C-Corporation placed between the foreign investor and the underlying U.S. operating business or real estate asset.

• The U.S. asset generates income, which is paid to the Blocker.
• The Blocker pays U.S. corporate income tax (currently a flat 21% federal rate) on its net income.
• Because the Blocker is a U.S. entity, the foreign investor is shielded from ECI and does not have to file a U.S. tax return.

The Repatriation Challenge (Dividend Withholding)

While a Blocker solves the ECI and filing problems, it creates a new challenge: repatriating cash. When a U.S. C-Corp pays a dividend to a foreign shareholder, the IRS mandates a 30% withholding tax on that dividend, unless reduced by a tax treaty.

The Leveraged Blocker Strategy: To minimize the 30% dividend withholding tax, the structure is often capitalized with a mix of equity and debt (shareholder loans). The Blocker pays interest to the foreign shareholder instead of dividends. Interest payments are often deductible to the Blocker (reducing its 21% corporate tax burden) and, under the 'Portfolio Interest Exemption', can often be paid to the foreign lender completely free of U.S. withholding tax.