After the passage of Public Law No. 115-97, formerly known as the Tax Cuts and Jobs Act (the “Tax Reform Act”), U.S. individual shareholders of controlled foreign corporations (“CFCs”) were faced with a difficult decision. As a general rule, when it comes to CFCs, the Tax Reform Act treats U.S. corporate taxpayers more favorably than U.S. individual shareholders, sometimes drastically so. Individual U.S. shareholders thus had to consider, beginning in tax year 2018, whether to contribute their CFC interests to a U.S. C corporation (or a U.S. LLC that is treated as a corporation for U.S. federal income tax purposes), or instead to continue to hold their CFC interests directly. In the case of continuing direct ownership of CFC shares, many U.S. individual shareholders planned to utilize elections under Section 962, which cause such individual shareholders to be taxed like corporations for certain limited purposes of U.S. outbound taxation. Continue Reading
Trusts are a classic planning tool for the transfer of a family’s wealth down to future generations. Cross-border families will often consider establishing a trust governed by local law or outside of the United States if the matriarch or patriarch is not a U.S. resident (i.e., is not a U.S. taxpayer). However, if any of the current or future beneficiaries are, or will become, a U.S. taxpayer (“U.S. beneficiary”), a foreign trust will create additional tax complexity for such beneficiary at some point. In the past few years, there also has been a push to consider the United States as a place to govern trusts where no beneficiary is expected to be a U.S. beneficiary. This is largely driven by the OECD’s implementation of the Common Reporting Standard (“CRS”), under which jurisdictions agree to exchange financial account information with each other in an effort to combat offshore tax evasion. Almost 100 jurisdictions have agreed to participate in CRS but, as of the date of this article, the United States continues to be a non-participating jurisdiction, resulting in a number of trusts either being established in or transitioned to the United States. In this article, I will discuss some of the tax, planning, and practical issues involved in considering the domestication of foreign trust structures.
Please click here to read the full article on Bloomberg Law‘s website.
Join us April 26th for the next edition of Bilzin Sumberg’s International Tax Breakfast Series. Tax and Private Wealth Services attorneys Hal J. Webb and Jennifer J. Wioncek will explore the Tax Cuts and Jobs Act legislation and its impact on inbound and outbound U.S. income tax planning for international private clients.
Topics of discussion include:
- Changes impacting individual and family planning matters
- Planning for basic foreign “blocker” structures
- Misconceptions and traps to the change of attribution rules
- Planning possibilities for S corporations with non-U.S. clients
Attendees include financial advisors, accountants, family offices, foreign attorneys, tax directors and trust advisors who are working with multinational companies, closely-held businesses, and high net worth individuals engaged in cross-border business or investments. Continue Reading
by Andrew Velarde, Tax Notes International Magazine
The Tax Cuts and Jobs Act (P.L. 115-97) has brought newfound attention to an election by individuals to treat themselves as corporations, as well as important questions about uncertainties surrounding its interplay with newly enacted international provisions.
Section 962 was drafted in 1962 and until recently was largely unknown to many practitioners (2018 TNI 8-46). Under that section, U.S. individual shareholders may annually elect to be taxed at the corporate tax rate for their section 951(a) subpart F inclusions. The taxpayer may also claim the deemed-paid foreign tax credit under section 960. The election has its limits,
however, as under section 962(d), when an actual distribution is made, the earnings and profits from a controlled foreign corporation that exceed the tax applicable under the section 962 election are also treated as income.
The TCJA committee report, in a terse footnote about section 965, cites to the section 962 election as a way for individuals and investors in U.S. passthrough entities to receive corporate rates for the transition tax inclusion, without further explanation. Guidance from the IRS and Treasury may be needed to clarify its operation in conjunction with section 965 or the tax on global intangible low-taxed income (GILTI). Continue Reading
Most of the attention surrounding the international aspects of Public Law No. 115-97, formerly known as the Tax Cuts and Jobs Act (the “Tax Reform Act”), has understandably focused on outbound provisions, including Section 951A (GILTI), Section 250 (FDII), Section 965 (deemed repatriation tax), and Section 245A (dividends received deduction). The scope of the implications of inbound changes under the Tax Reform Act, however, particularly in the context of inbound financing structures, will catch many international practitioners by surprise.
The repeal of Section 958(b)(4), which contained a limitation on the inbound attribution of stock in the context of determining whether a foreign corporation is a controlled foreign corporation (CFC) for U.S. federal income tax purposes, may cause many innocuous inbound financing structures to fail to qualify for the portfolio interest exemption. The introduction of new Section 267A and modifications to Section 163(j) create further complexity and ambiguity, and will prevent deductions of U.S.-source interest payments in some situations where there does not appear to be any abuse. The new “base erosion and anti-abuse tax” (BEAT) tax under Section 59A may have further implications, although for purposes of this blog, we will assume the relevant taxpayers realize gross receipts below the $500 million threshold such that the BEAT provisions should not be applicable. Continue Reading
The Tax Cuts and Jobs Act (“TCJA”) represents the most significant tax reform package enacted since 1986. Included in this reform are a number of crucial changes to existing international tax provisions. While many of these international changes relate directly to U.S. corporations doing business outside the United States, they nevertheless will have a substantial impact on U.S. individuals with the same overseas activities or assets.
One notable change under the new law was the reduction of the maximum U.S. corporate income tax rate from 35% to 21%. Not surprisingly, this change will have a corresponding impact on the ability of U.S. shareholders (both corporations and individuals) of controlled foreign corporations (“CFCs”) to qualify for the Section 954(b)(4) “high-tax exception” from Subpart F income. This is because the effective foreign tax rate imposed on a CFC that is needed to qualify for this purpose must be greater than 90% of the U.S. corporate tax rate. Therefore, this exception now will be available when the effective rate of foreign tax is greater than 18.9% (as opposed to 31.5% under prior law). Continue Reading
Bilzin Sumberg’s International Tax Practice is hosting its Annual International Tax & Wealth Planning Conference November 2nd – 3rd in Miami, Florida.
This conference will highlight the latest developments in the ever changing international tax and wealth planning environment and will cover current topics such as the impact of the new multilateral tax treaty, the use of private trust companies in the U.S. and abroad, and pre-immigration planning from EB-5 investor visas and beyond.
In the cross border setting, two of the principal goals in international tax planning are (i) deferral of income earned offshore and (ii) the tax efficient repatriation of foreign profits at low or zero tax rates in the United States. For U.S. taxpayers investing through foreign corporations, planning around the controlled foreign corporation (CFC) rules typically achieves the first goal of deferral, and utilizing holding companies resident in treaty jurisdictions generally accomplishes the second goal of minimizing U.S. federal income tax on the eventual repatriation of profits (for U.S. corporate taxpayers, the use of foreign tax credits may be used to achieve this latter goal).
In a purely domestic setting, limited opportunities exist to defer paying U.S. federal income tax on income or gain realized through any type of entity, and fewer opportunities, if any, exist for the beneficial owners of such entities to receive tax-free distributions of the accumulated profits earned by these entities. A Roth IRA may be the best vehicle available to achieve these goals. Continue Reading
The Multilateral Instrument
On June 7, 2017, the formal signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument” or “MLI”) took place. Sixty-eight jurisdictions have signed the MLI, with another nine jurisdictions signing a letter indicating their intent to sign the MLI.
The MLI is one of the outcomes of the OECD/G20 Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”). Specifically, Action 15 of the BEPS Project focused on the development of an MLI to enable countries to efficiently modify their bilateral tax treaties to implement certain BEPS measures. What could otherwise take decades to accomplish (i.e., separately renegotiating 3,000 bilateral income tax treaties to accommodate BEPS), the MLI does with a single multilateral instrument.
Although the United States has not signed the MLI, the MLI nevertheless may dramatically impact many inbound structures utilized by foreign investors in the United States, as well as many outbound structures used by U.S.-based multinationals. For example, the possible inclusion of an anti-triangular provision from the MLI in a particular treaty could prevent treaty benefits from being available (and thus result in increased withholding tax) where payments are made to a third-country permanent establishment (PE) and that PE is not subject to a sufficient rate of tax. Many existing structures also could be adversely affected by the inclusion of certain new elimination of double taxation provisions contained in the MLI. Under these provisions, an exemption may be denied in the home country for income that “may be taxed” in the treaty partner country, with a credit being provided instead for the tax paid on such income in the other country (which may often be zero or a de minimis amount). Continue Reading
Join us May 18th for another edition of Bilzin Sumberg’s International Tax Breakfast Series. The event will feature a discussion on domesticating trusts to the U.S. with Tax and Private Wealth Services attorneys Hal J. Webb and Jennifer J. Wioncek.
The U.S. is now preferred as the situs for the administration of many trusts. Hal and Jennifer will review the technical and practical planning issues that may be faced when considering the change of situs of foreign offshore trusts and civil law foundations to the U.S., and how the right approach to domestication of a foreign situs trust or foundation can minimize U.S. tax consequences. Continue Reading