Enacted as part of the Tax Cuts and Jobs Act, Code§864(c)(8) codifies the holding in Rev. Rul. 91-32 and overturns the result ofthe Grecian Magnesite case. In late December 2018, the I.R.S. released pro- posed regulations containing guidance under new Code §864(c)(8). Among the points addressed in the proposed regulations are (i) rules to compute the amount of E.C.I. gain or loss, (ii) coordination with F.I.R.P.T.A. tax and withholding, (iii) interaction with income tax treaties, and (iv) anti-abuse rules. Fanny Karaman and Nina Krauthamer discuss these and other aspects of the proposed regulations.

Code §962 allows an Individual U.S. Shareholder to apply corporate tax rates and offers relief from double taxation in certain situations, but where new provisions of the Tax Cuts & Jobs Act (“T.C.J.A.”) are involved, the application is murky. The T.C.J.A. introduced two provisions designed to limit the scope of deferral for the earnings of foreign subsidiaries operating abroad. One provision is the one-time deemed repatriation tax regime of Code §965, which looks backward to tax what had been permanently deferred earnings. The other provision is the global intangible low taxed income (“G.I.L.T.I.”) regime, which eliminates most deferral on a go-forward basis. Each provision limits deferral but, at the same time, imposes relatively benign tax on U.S.-based multinationals. Interestingly, it seems that it was only in the last days of the legislative process that Congress became aware that owner-managed businesses also operate abroad. While the provisions clearly apply to corporations, Congress may or may not have provided a benefit for the U.S. individuals who own of these companies. Sound cryptic? Fanny Karaman and Nina Krauthamer explain all.

In August, the I.R.S. issued much-awaited proposed regulations under the new Code §199A covering Qualified Business Income (“Q.B.I”). This provision of recently enacted U.S. tax law allows entrepreneurial individuals to claim a 20% deduction on taxable business profits of a sole proprietorship, partnership, L.L.C. or S-corporation. Galia Antebi, Nina Krauthamer, and Fanny Karaman ask and answer the pertinent questions: Who may benefit? How do the rules addressing R.E.I.T.’s and publicly traded partnerships (“P.T.P.’s”) affect Q.B.I when a net negative result is reported by the R.E.I.T. and the P.T.P.? When is an individual’s income effectively connected to a trade or business and when is the. income a form of disguised salary for which no deduction is allowed? What is a specified trade or business (“S.S.T.B.”)  for which the resulting income cannot benefit from the Q.B.I. deduction? How does the de minimis rule work under which a limited Q.B.I. deduction is allowed S.S.T.B. income does not exceed a specified ceiling? How does the ceiling based on W-2 wages work when calculating the Q.B.I. deduction? 

When U.S. tax planners attend foreign conferences, it is not uncommon to hear pointed barbs that the U.S. is an outlier when it comes to rules enforcing “best practices” on global business transactions. However, when it comes to reverse hybrids and hybrid mismatches, the rules are not all that different on both sides of the Atlantic. Fanny Karaman and Beate Erwin compare approaches taken by ATAD 2 with U.S. tax law after the Tax Cuts and Jobs Act.

Blockchain has been in the spotlight since early 2017, mostly due to the 2017 surge in cryptocurrency values and the rise of initial coin offerings (“I.C.O.’s”). Many legal advisors have clients who use or wish to use blockchain in their businesses, and yet, the actual technology is often not discussed in the legal field. In a series of Q&A’s, Fanny Karaman and Galia Antebi explain the rationale behind blockchain technology and reasons for its reliability. Because blockchain is a decentralized system with inherent proof of work built into the program, it can eliminate the need for intermediaries, such as banks, lawyers, and brokers. Advisers should be aware of the benefits of the technology, as well as its potential for disrupting the legal landscape.

U.S. tax law was revised in last year’s tax reform legislation to impose tax on non-U.S. persons recognizing a gain from the sale of a partnership that engages in a U.S. business.  Worse, purchasers must collect and pay over to the I.R.S. a withholding tax equal to 10% of the amount realized by the seller.  Because of the way U.S. tax law treats partners of partnerships financed with debt, the withholding tax can be greater than the cash that is set to be paid to the foreign seller.  In April, the I.R.S. issued guidance on the problem, leading some to recommend a two-step plan to align the withholding tax with the ultimate income tax that will be due.  Fanny Karaman and Stanley C. Ruchelman explain the I.R.S. guidance and the two-step plan.

In Europe, an individual’s right to the protection of personal data is a fundamental right.   The E.U. General Data Protection Regulation (“G.D.P.R.”) takes effect on May 25, 2018, to protect that right.  The G.D.P.R. is notable because it applies to all companies processing personal data of persons residing in the European Economic Area regardless of the company's location and irrespective of whether the company has a physical presence in these countries.  Severe penalties are provided for violators. Fanny Karaman and Beate Erwin provide a layman’s guide to the G.D.P.R.

The term “intentionally defective” sounds problematic, but in reality, is quite favorable when it comes to estate planning.  Intentionally defective grantor trusts are an especially useful tool when combined with pre-immigration planning for a family where only one spouse is a U.S. citizen because these trusts are disregarded for income tax purposes but respected for estate tax purposes.  If set up and funded by a non-citizen spouse before arrival in the U.S., gift and estate tax planning can be achieved in a low tax environment.  In these trusts, the settlor continues to pay tax on the income even though not a beneficiary.  As a result, the beneficiary does not pay income tax on trust distributions and the tax payment by the grantor is not considered to be gift to the beneficiary.  Hence, no gift tax.  Fanny Karaman and Nina Krauthamer explain all.

Have you ever been asked to define the undefinable?  At first glance, the new 20% Q.B.I. deduction – a reduced tax rate for the self-employed and partnerships introduced by the Tax Cuts and Jobs Act (“T.C.J.A.”) – seems to be just that: a maze in which the general rule is modified in hidden ways through subdivisions of subsections and in definitions that have substantive effect.  In their article, Stanley C. Ruchelman and Fanny Karaman logically guide the reader in detail and with illustrations.

The end of each year in France is marked by a fiscal legislative process to amend the current year’s finance law and to draft the law for the upcoming year.  The year 2017 was no exception.  Changes will be made to wealth tax, tax brackets, tax on investment income, corporate tax rates, and the 3% additional tax on dividend distributions (retroactively).  Fanny Karaman and Nina Krauthamer explain the tax changes.

With the recent launch of Bitcoin futures trading, this once obscure asset class may soon become a mainstream investment.  Alev Fanny Karaman delves into the details of virtual currency in the U.S. context.  She explains the blockchain computations that make Bitcoin and other cryptocurrencies attractive to investors and the U.S. tax treatment and reporting obligations of virtual currency holders.

 When a company expands across a border, it faces a complex web of employment-related taxes.  Penalties for failure to properly comply with these rules can be severe.  Fanny Karaman looks at the U.S. rules that are applicable to the payment of wages and bonuses, the penalties that can be imposed on compliance failures, and the procedures that are available to cure errors.  The rules are not straightforward, guidance is often minimal, and an experienced advisor is extremely valuable.

The sharing economy uses digital platforms to connect suppliers willing to provide services or use of assets with consumers.  Think of Uber and Airbnb.  These multinationals are structured to channel profits to low-tax jurisdictions.  As with Google and Microsoft, tax authorities have begun to challenge these business models.  In part two of this series, Fanny Karaman and Beate Erwin explain how these business models are being challenged.

The current international tax system was established on principles dating back to the first half of the 19th century, when a nation’s retail economy consisted mostly of brick-and-mortar stores.  As the purchase of services and goods was gradually dematerialized and internet giants such as Google or Microsoft appeared, governments struggled adapt tax rules to keep up with new business models.  Now, governments around the world have shifted their focus to a relatively new part of the digital economy called the “sharing economy.”  Fanny Karaman and Beate Erwin look at recent tax developments in the world of Airbnb and Uber.

While the O.E.C.D. and the European Commission have only recently discovered the “principal purpose” test as a tool to combat aggressive tax planning, U.S. case law has enforced an economic substance rule for over 85 years and that rule was codified in 2010.  Fanny Karaman, Neha Rastogi, and Stanley C. Ruchelman explain the hurdles that must be achieved in order for a plan to have economic substance.

In June, the European Commission proposed a set of rules calling on tax advisers to report aggressive tax plans submitted to clients.  The proposal identifies the hallmarks of aggressive plans and provides rules for the timing of reports and the exchange of information within Europe.  Fanny Karaman and Stanley C. Ruchelman explain.

Ever heard of qualified small business stock (“Q.S.B.S.”) as a means of investing in start-up companies?  Although it is not typically thought of as a tax planning tool for foreign investors, when the foreign person is an applicant for an EB-5 visa, the tax results can be surprisingly good.  Fanny Karaman and Beate Erwin explain.

In April, the Large Business & International Division (“LB&I”) of the I.R.S. published an International Practice Unit directed to the foreign tax credit claimed by individuals.  Tax advisers to Americans living abroad or having global investment portfolios may find that the Practice Unit indicates topics of interest for the I.R.S.  Fanny Karaman and Galia Antebi explain the concepts covered, including persons eligible to claim the credit, foreign taxes that qualify for credit, whether to deduct or credit a foreign income taxes, foreign tax credit limitations, and means of ameliorating the effect of unused credits in a particular year.

Although the U.S. is the world’s largest economy, it is the only world economy that does not have a national value-added tax (“V.A.T.”).  Until the border adjustment tax (“B.A.T.”) proposals were floated, most cross-border tax advisers in the U.S. only had vague concepts of the workings of a national V.A.T.   Fanny Karaman and Stanley C. Ruchelman explain the mechanics of the V.A.T. as enacted in the E.U., cautioning that the B.A.T. is not a V.A.T.

When foreign tax counsel advises a client on a personal investment in the U.S., it is common for a U.S. tax adviser to comment on the scope of U.S. income, gift, and estate taxes.  Sometimes the investment is made through a trust and other times it is made directly.  In their article, Kenneth Lobo and Fanny Karaman answer questions raised in the context of fact patterns often used.

Concepts of usufruct and bare legal ownership are widely used estate planning tools by parents resident in civil law jurisdictions in Europe.  However, when the next generation is resident in a common law jurisdiction such as the U.S., the results are not always pretty.  Fanny Karaman and Beate Erwin examine the tax consequences for the U.S. children and the steps available to the European parents that may limit adverse tax consequences in the U.S.

The tax world has seen an important shift in global policies, with an emphasis on tax transparency and exchange of information.  The transparency measures are contained in tax-driven and non-tax-driven legislation, and while the goals of the legislation may be lofty, the policies may violate fundamental individual rights, including data protection.  Fanny Karaman and Astrid Champion examine the E.U.’s non-fiscally-driven approach to tax transparency and, more precisely, the legal limits of such transparency as evidenced in recent cases.

Even absent a distribution, shareholders of U.S. corporations may, under certain circumstances, be subject to a second layer of tax: the accumulated earnings tax (“A.E.T.”).  The tax is imposed on the accumulation of earnings beyond the reasonable needs of the business.  Although rarely imposed on well-advised taxpayers, the A.E.T. could become increasingly important if the tax rate disparity between the corporate and individual income taxes increases under proposals put forth by the current administration.  Fanny Karaman and Beate Erwin look at a recent Chief Counsel Advice Memorandum where the absence of liquidity within the corporation was found to be an irrelevant factor in determining that earnings were unreasonably accumulated by the corporate taxpayer.

In France, the enactment of new tax law provisions requires a multi-faceted procedure involving many steps carried out by the government, two houses of parliament, specialized committees, a conference of both houses of parliament, and a review by the French Constitutional Court.  Once the full procedure is completed, the new law may be effective retroactively.  Many changes in tax law were made in 2016, including the adoption of employee withholding tax, changes to the free share regime, a reduction to the corporate tax rate, extension of exemptions to the corporate tax on the payment of dividends, and the parent-subsidiary regime.  Fanny Karaman and Astrid Champion discuss these and other changes.

This month, we reminisce on the best of 2016, with articles on the brewing transatlantic trade war disguised as European Commission attacks on illegal State Aid given to U.S.-based groups.

Share-based compensation incentives are commonly used by corporations worldwide.  Employees defer income or realize income immediately at a low value, and the employer accepts a deferred or reduced deduction for compensation expense.  Three or four key moments in the life of a stock-based compensation plan can be identified as taxable events: (i) the grant of share-based compensation, (ii) the exercise of an option, (iii) the “vesting” of the underlying shares, and (iv) their subsequent sale.  Fanny Karaman and Stanley C. Ruchelman explore tax treatment in France and the U.S. in the context of a French employee who participates in a French plan and is then assigned to the U.S.