Wisconsin is a good place for a foreign individual or entity to invest. While there are currently travel restrictions in and out of the United States due to the COVID-19 pandemic, now is a good time for foreign investors to take advantage of cheaper prices, and start planning potential investments for when the borders open up.
Wisconsin has a low sales tax, and good corporate and property tax rates compared to other states. Wisconsin is most famous for its dairy and agricultural industries, but the state also houses strong leaders in health care services, information technology, financial services, insurance, manufacturing, and food production, which many foreign investors will find attractive. Depending on the size of the foreign investment, the investor may also qualify for a tax credit with the State of Wisconsin. Find out more on the Wisconsin Economic Development Corporation website.
For any foreign individual or entity investing in a business in Wisconsin, there are special considerations that differ from those that a domestic business owner might encounter. This article is a quick guide to foreign direct investment in Wisconsin, but it is not intended to be complete.
Bethany Wilson, U.W. 2017, is s a business law associate at Palmersheim Dettmann in Middleton. Her practice includes international trademarks, partnership agreements, international investment contracts, and noncompetition agreements.
A foreign individual or entity interested in investing in Wisconsin should, in addition to working with an experienced attorney, locate an accountant familiar with international tax matters to assist them through the process.
United States Trade and Foreign Investment Rules
If the foreign investor is considering investing in a company that imports products into the United States, there are federal restrictions on what type of goods can be imported from certain countries.
For example, importing firearms, certain weapons, ammunition, or similar devices is not allowed without written authorization from the Bureau of Alcohol, Tobacco, Firearms, and Explosives. Plants and food products are also highly regulated by the U.S. Department of Agriculture. The foreign investor will also need to determine what the tariff on those goods will be by searching the U.S. International Trade Commission’s Harmonized Tariff Schedule and working with an experienced trade broker or attorney.
Be careful to make sure that the industry of investment is not subject to limitations of foreign direct investment, such as investment in companies owning ships, grazing livestock on certain lands, or mining certain types of minerals.
For a fairly complete summary of restrictions on foreign ownership in the U.S., see Congressional Research Service’s article on major federal statutory restrictions.
If the foreign investment is in real estate, Wisconsin law does not allow foreigner individuals or U.S. entities with more than 20% foreign ownership to purchase more than 640 acres of land, except for some limited exceptions (Wis. Stat. section 710.02). There are other specific federal restrictions on foreigners purchasing land, so this issue will need to be carefully considered before making an investment in real estate.
Any foreign national who intends to invest in the United States will need to carefully consider what the investor is or is not allowed to do while in the U.S. on their particular U.S. visa status.
An investor may be able to engage in many of the steps required to set up a business while in the U.S. on a tourist visa, but generally, the investor is not able to actively run the business unless they have a specific nonimmigrant or immigrant visa status that allows them to engage in active employment while in the U.S.
Therefore, foreign investors often need to hire someone authorized to work in the U.S. to manage their investments, until such time that they may be able to secure their own authorization to work in the U.S.
Foreign nationals who wish to transfer any employees from a business they operate outside of the U.S., or to hire non-U.S. workers to work for their new investment, will also have to consider what steps must be taken in order to secure the ability to have such foreign individuals work for their U.S. business investment .
A foreign investor will therefore want to work with an immigration attorney to determine how the immigration restrictions will impact their investment activities. Depending on the current U.S. administration and the investor’s country of origin, a foreign investor may encounter more or fewer difficulties.
A foreign company or individual investing in Wisconsin can choose from a variety of methods, such as establishing a wholly foreign owned entity (WFOE), creating a joint venture with an existing Wisconsin business, or purchasing equity in an existing Wisconsin business. The decision will depend on the investor’s needs and purpose.
WFOE: If the foreign investor is interested in setting up a wholly foreign owned entity in Wisconsin, all of the entity options available to domestic owners are also available to them.
A limited liability company (LLC) is a popular choice for domestic owners, because it has fewer requirements than a corporation and has default pass-through taxation. An LLC, however, may not be the best option for a foreign investor individual who resides outside of the U.S. and does not want to file a U.S. personal tax return. The decision about the right type of entity for a WFOE will largely depend on the specifics of the investment and advice from an accountant.
Once the foreign investor selects the entity type for a WFOE, they will need to select a name. No foreign alphabets are allowed in company filings with the Wisconsin Department of Financial Institutions.
Joint Venture: Another option for a foreigner investing in Wisconsin is to create a joint venture with one or more domestic individuals or companies. The advantage of this type of arrangement is that the domestic person or entity will be more familiar with doing business in Wisconsin and how to navigate governmental requirements. Forming a joint venture requires a great deal of trust between the partners, but the advantages can make it worthwhile.
There are numerous ways to structure the deal. For example, the domestic partner may do 100 percent of the management, while the foreign partner serves as a passive investor. Alternatively, the domestic partner may only manage certain tasks, while the foreign partner handles other tasks.
A well-drafted contract is essential, especially the sections on compensation and profit-splitting. For dispute resolution, the investor may want to consider an international commercial arbitration clause rather than litigating the dispute in the Wisconsin courts.
Equity Ownership: If the foreign investor is investing in equity ownership in an existing Wisconsin corporation, LLC, or partnership, the parties should make sure that they are compliant with state and federal securities laws.
A well-drafted partnership, operating, or shareholders agreement will be essential. The parties should make sure that they understand important issues from the beginning, such as options for partner withdrawal, valuation, and each party’s respective responsibilities.
When partners have different cultural and legal backgrounds, it is very important to ensure everyone is on the same page in the initial stages of the investment, in order to prevent disputes down the line.
Establishing an Office
If the foreign investor is establishing a WFOE, the new business will need a registered agent in Wisconsin. Most law firms provide this service to their clients, but there are also independent companies that offer the service for a minimal fee.
The foreign business may want to consider renting an office space in Wisconsin. The company is not required to have an office (other than a registered agent office) to organize, but they will need one for the Employer Identification Number (EIN) application with the IRS. The IRS specifically instructs that a registered agent address cannot be used for the business’ physical address for an EIN filing.
Finding a Bank
Locating a bank that allows a foreign individual or company to open an account can be difficult. One would think that a national bank would be easier to work with on this issue, but in my experience, they are not necessarily more accommodating than local banks. The foreign investor may need to call around to several places to find a bank that will open a business account for them.
Obtaining Employer Identification and Wisconsin Business Tax Registration Numbers
Most banks require that a business have an EIN before it will open a business bank account. The foreign investor will also need an EIN if they plan to have any employees in the United States.
In order to register for an EIN, a foreign individual will need to provide either a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN). This can be challenging if the foreigner opening the account has never filed an individual tax return in the U.S.
In most cases, they must be a citizen, permanent resident, or have work authorization in the U.S. to obtain a SSN, and generally they can only apply for an ITIN at the time they file a tax return. It is not unusual for foreign investors to have a domestic representative provide their SSN or ITIN for the EIN application. They may also be able to find a bank that will not require an EIN, or delay requiring one until the foreign investor has filed a U.S. tax return.
If a foreign company applies for the EIN to establish a WFOE instead of an individual investor, then the IRS will require the foreign entity to provide its EIN before it can file for one for the new Wisconsin company. A foreign entity will encounter the same issues as a foreign individual. If the foreign entity has never filed a U.S. tax return, it may not yet have an EIN. To get an EIN for the foreign company, one of its owners must provide an SSN or ITIN. It is possible that none of its owners has ever filed a U.S. tax return, so the foreign entity owner will run into the same issues as the foreign individual.
Once the new company has an EIN, it can then file for a Wisconsin business tax registration number, if required. Companies that sell physical goods in Wisconsin or have employees in Wisconsin will need to apply for one, but companies that only offer services with no employees may not need a Wisconsin business tax registration number. The rules on which companies need a Wisconsin business tax registration can be complicated, and will take special consideration.
No S Corporations
An entity with a foreign individual investor cannot be taxed as an S corporation. Owners of an LLC or C corporation sometimes choose to tax their entities as an S corporation because of the tax advantages. This option is simply not available for a company with foreigner shareholders. However, the rules on this issue have loosened a bit for indirect foreign ownership in an S corporation, such as through a trust.
U.S. Department of Commerce Reporting Requirements
In any business where the foreign ownership in an entity in the U.S. is greater than 10 percent, the business is obligated to record this fact with the federal government through a BE-13 form.
There are several different versions of this form depending on the situation, but the investor can file a BE-13 Claim for Exemption if the foreign investment is less than $3 million. This information will remain anonymous and will only be used for internal government purposes. There are hefty fines if foreign investors fail to record this information. ($4,000-$40,000).
Conclusion: Wisconsin Is a Good Place for Investment
Overall, Wisconsin is a good place for foreign investment, but the above information highlights the special issues that a foreigner investor will encounter.
This article was originally published on the State Bar of Wisconsin’s International Practice Section Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.