Reduction in U.S. Corporate Tax Rates Will Significantly Impact Outbound Tax Planning by U.S. Individuals

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

International Tax & Wealth Planning Conference

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.

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The Malta Pension Plan – A Supercharged, Cross-Border Roth IRA

Relevant US Tax Principles

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

Inbound and Outbound U.S. Tax Planning – What’s Left After the MLI?

The Multilateral Instrument

0613_GlobalImageOn 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.[1]

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

International Tax Breakfast Series: The Do’s and Don’ts of Domesticating Trusts to the U.S.

InternationalTaxBreakfastSeriesJoin 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

Creating Non-Taxed “Previously Taxed Income”: The Ultimate Pre-Immigration Strategy

Tax Blog PictureAccording to recent statistics, immigrants and their U.S.-born children now number approximately 84.3 million people, or 27% of the overall U.S. population.   The countries from which the largest numbers of these individuals originate include India, China, Mexico, and Canada.  Many of those moving to the United States are wealthy business owners who will continue to own interests in, and receive distributions from, non-U.S. businesses after they become U.S. taxpayers.

Many times U.S. tax advisors that engage in pre-immigration planning for such individuals and their respective companies recommend strategies such as “check-the-box” planning to obtain a basis “step-up” in the shares or assets of the underlying non-U.S. companies, acceleration of income recognition, and deferral of loss recognition prior to U.S. residency beginning.  One potential strategy that may provide substantial tax benefits is the use of a U.S. partnership to create a “previously taxed income” account prior to the time that a non-U.S. owner of a foreign business becomes a U.S. tax resident. Continue Reading

International Tax Breakfast Series: How the Recent Colombian Tax Changes Impact U.S. – Colombia Tax Planning

0201_InternationalTaxBreakfast_ColombiaJoin us on February 7th for a new installment of Bilzin Sumberg’s International Tax Breakfast Series. The discussion will cover the recent Colombian tax changes and how they affect U.S.-Colombia Tax Planning.

Colombian tax lawyer Camilo Cortes will provide an overview of the changes, which include Controlled Foreign Corporation (CFC) legislation and the introduction of withholding tax on dividends. Bilzin Sumberg attorneys Jeffrey L. Rubinger and Jennifer J. Wioncek will further discuss how these changes could impact U.S. inbound and outbound planning strategies.

Jeff has extensive experience in advising domestic and international clients on how to maximize tax and estate planning, and Jennifer advises high net worth individuals and family offices in domestic and international trust and estate planning matters.

The breakfast event will be held at the Bilzin Sumberg offices on Tuesday, February 7th, from 8:30 a.m. to 10 a.m.

Please click here to register and reserve your spot.

Minimizing Tax on Gain from the Sale of Stock of Latin American CFCs

South AmericaThe United States currently has only two income tax treaties in effect with Latin American jurisdictions: Mexico and Venezuela. As a result, most individual taxpayers who recognize gain from the sale of stock of a controlled foreign corporation (CFC)1 located in Latin America (other than in Mexico or Venezuela) assume that such gain will be subject to U.S. federal tax at the “non-qualified dividend” rate of 43.4 percent. Because the corporate income tax rates are so high in most Latin American countries, however, this typically will not be the case. An important limitation is provided on the amount of tax that an individual U.S. shareholder will pay when it sells stock of a CFC. This limitation is based on the amount of corporate income tax that the CFC pays in its home country, as well as a hypothetical corporate income tax that would apply if the CFC were a domestic corporation. As illustrated below, with careful analysis, this limitation can provide an individual U.S. shareholder with significant tax savings if the shareholder recognizes gain on the sale of stock of a CFC located in a high-tax jurisdiction. Continue Reading

International Tax Breakfast Series: Recharacterizing Debt as Equity

Conference_ shutterstock_169062704The next installment of our International Tax Breakfast Series looks at an area of tax law where the exact application of a proposed rule remains uncertain. Please join us for “Recharacterizing Debt as Equity: How the Proposed Section 385 Regulations Will Impact Traditional Cross-Border Income and Estate Tax Planning.” The breakfast event will be held at the Bilzin Sumberg offices on Wednesday, November 9, from 8:30 a.m. to 10 a.m.

Bilzin Sumberg Tax Partners Summer Ayers LePree, Jeffrey L. Rubinger, Hal J. Webb, and Jennifer J. Wioncek will discuss the controversial proposal, which has been criticized for being overbroad with a potential harmful effect on ordinary domestic and international business transactions. Under the new Section 385, the IRS would be able to recharacterize certain debt instruments as equity for federal tax purposes.

Summer and Jeff have extensive experience at advising domestic and international clients on how to maximize tax-planning opportunities. Hal’s practice focuses on advising high net worth private clients in international tax and estate planning. Jennifer advises high net worth individuals and family offices in domestic and international trust and estate planning matters.

Please click here to RSVP and reserve your spot.

Cancellation of CFC Loans to US Shareholders – Should the Service Get a Second Bite at the Apple?

4599538The Service generally has three years after a return is filed to assess any tax due for that year.1 There are a number of exceptions to this general rule, such as where a taxpayer files a false return or omits more than 25 percent of its gross income from the return. There are no exceptions, however, that would allow the Service to keep the statute of limitations open indefinitely with respect to an amount actually received in the current year, but constructively received in a prior year with respect to which the statute of limitations is now expired. Notwithstanding the lack of any statutory support, the Service has attempted within the cross-border setting to take two proverbial bites of the apple in such cases.

Section 956 and Constructive Dividends, in General

In general, U.S. shareholders of foreign corporations, like U.S. shareholders of domestic corporations, are taxable on the earnings and profits (E&P) of such corporations only when that E&P is distributed in the form of a dividend. If the corporation is classified as a “controlled foreign corporation” or “CFC,” however, any U.S. shareholders owning 10 percent or more of the voting power of the CFC (“U.S. Shareholders”) are taxable annually on their pro rata shares of (1) the CFC’s “Subpart F income” and (2) the CFC’s earnings invested in U.S. property (“Section 956 inclusions”). Continue Reading