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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

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Investing in U.S. Real Estate on a (Possibly) Tax-Free Basis

A Real Estate Investment Trust, or R.E.I.T., is a popular type of investment vehicle.  A R.E.I.T. is an entity that generally owns and typically operates a pool of income-producing real estate properties, including mortgages.  Its investors generally look to a return on investment in two forms: (i) distributions from the R.E.I.T. and (ii) dispositions of the R.E.I.T. stock.  If certain facts exist, U.S. tax law offers foreign investors a completely tax-free avenue to invest in a R.E.I.T.  Galia Antebi and Neha Rastogi explain the ins and outs of tax-free treatment for the foreign investor.

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

T.C.J.A. changes to the Subpart F rules have the effect of deconstructing cross-border arrangements structured to prevent the creation of a C.F.C.  A change to constructive ownership rules may cause all foreign members of a foreign-based group to be treated as C.F.C.’s for certain reporting purposes merely because the group includes a member in the U.S.  A change to the definition of a U.S. Shareholder of a C.F.C. makes the value of shares owned as important as voting power in determining whether a U.S. person is a U.S. Shareholder and a foreign corporation is a C.F.C.  The 30-day requirement for a C.F.C. to be owned by a U.S. Shareholder before Subpart F applies has been eliminated.  In some instances, the changes are retroactive to the 2017 tax year.  Neha Rastogi, Sheryl Shah, Beate Erwin, and Elizabeth V. Zanet explain and provide a case study that ties everything together

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India Budget 2018-19

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India Budget 2018-19

The Indian government announced its plans for the 2018–2019 budget year.  It is the last full budget before the 2019 Parliamentary elections and the first budget following the implementation of the landmark national G.S.T. regime.  Tax is reduced to 25% for domestic companies generating income of approximately $40 million or less.  The definition of the term “business connection,” the equivalent of a P.E. under domestic law, is broadened to cover agents having and habitually concluding contracts and circumstances where a nonresident has a significant economic presence.  A 10% tax is imposed on certain stock market gains.  Incentives are given to international financial services companies in the form tax exemptions for certain gains.  These and other provisions are explored by Jairaj Purandare of JPM Advisors Pvt Ltd, Mumbai, India.

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

Italian domestic tax law has adopted the permanent establishment (“P.E.”) concept when determining whether business profits of a nonresident are taxable in the absence of an applicable income tax treaty.  Earlier this year, changes to the definition of the term broadened the scope of activity constituting a P.E.  Effective January 1, 2018, (i) a digital P.E. is treated as a fixed place P.E., (ii) the scope of the specific activity exemption has been scaled back, (iii) an anti-fragmentation rule has been adopted applicable to groups of companies, and (iv) the scope of an agency P.E. has been broadened. Stefano Loconte and Linda Favi of Loconte & Partners, Milan, explain the new rules.

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US Tax Reforms - Anti-Abuse Regime for CFCs→

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Published on Out-law.com (March 2018).

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Qualified Business Income - Are You Eligible for a 20% Deduction?

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Qualified Business Income - Are You Eligible for a 20% Deduction?

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.

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Doing Business Post-Brexit: What to Expect in the United Kingdom

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Doing Business Post-Brexit: What to Expect in the United Kingdom

The U.K. is firmly on course to leave the E.U., with a target date of March 29, 2019.  After a difficult period of 18 months, agreements to address two important “divorce” issues – the exit payment and the status of Brits in the E.U. and Europeans in the U.K. on Brexit Day – have been reached, while a decision has been made to defer discussions regarding the border with Northern Ireland.  Graham Busch of Gerald Edelman, Chartered Accountants, London, addresses these and other settled issues as well as those for which a decision has been kicked down the road.

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Insights Vol. 5 No. 2: Updates & Other Tidbits

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Insights Vol. 5 No. 2: Updates & Other Tidbits

This month, Tomi Oguntunde, Sheryl Shah, and Nina Krauthamer look briefly at four recent developments in international tax: (i) an I.R.S. directive temporarily halting new examinations involving cost sharing agreements that do not include stock-based compensation costs, (ii) an I.R.S. appeal of a Texas District Court case in which certain anti-inversion rules were invalidated for nonconformance with the Administrative Procedures Act, (iii) Dutch measures to eliminate intragroup dividend withholding tax and address abusive tax planning channeled through the Netherlands, and (iv) a revised timeline for implementation of withholding tax on transfers involving effectively connected gain under Code §1446(f).

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Corporate Matters: Partner Representative and the New Partnership Audit Regime

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Corporate Matters: Partner Representative and the New Partnership Audit Regime

Commencing in January 2018, the I.R.S. began a new centralized audit regime with respect to partnerships.  It replaces the concept of a “Tax Matters Partner” with a “Partnership Representative.”  This is more than a change in name.  Unless the partnership is able to elect out of the new rules and actually does so, the I.R.S. will only deal with the Partnership Representative, and the individual partners have no right to separately appeal any tax assessment.  Additionally, the I.R.S. may now collect tax at the partnership level as a result of a tax audit.  Simon Prisk examines these and other changes – including the opt-out provisions – that will affect partnerships, partners in the current taxable year, and partners at the time that year is examined by the I.R.S.

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

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A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

U.S. tax law allows a domestic corporation to elect pass-thru tax treatment of income by making an S-corporation election.  Several conditions must be satisfied before the election can be made, including a prohibition of any foreign ownership.  In an almost invisible provision of the T.C.J.A., U.S. tax law has been revised to allow an individual who is neither a citizen nor a U.S. resident to hold an indirect current interest in an S-corporation without causing an automatic termination of pass-thru treatment for the corporation.  The key is for the current interest to be held through an Electing Small Business Trust that qualifies as a domestic trust for U.S. tax purposes.  This may be a boon for Canadian-resident individuals who face mind and management issues when a U.S. L.L.C. is established to invest in a U.S. opportunity.  Rusudan Shervashidze and Stanley C. Ruchelman explain all.

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Non-Corporate Taxation: Individuals & Partnerships Face Highs & Lows Under the T.C.J.A.

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Non-Corporate Taxation: Individuals & Partnerships Face Highs & Lows Under the T.C.J.A.

Most cross-border tax advisers with clients that are impacted by the T.C.J.A. focus on the principal items, such as B.E.A.T., G.I.L.T.I., and the like.  However, the act contains many additional provisions that can affect the non-corporate cross-border investor.  Taxes have been reduced, a holding period for capital gains treatment now applies to carried interests, the scope of like-kind exchanges has been limited, and the tax treatment of alimony payments has been changed.  These are just a few of the items addressed by Sheryl Shah.

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B.E.A.T.-ing Base Erosion: U.S. Subjects Large Corporations to Anti-Abuse Tax

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B.E.A.T.-ing Base Erosion: U.S. Subjects Large Corporations to Anti-Abuse Tax

Cross-border payments to related parties have been an arrow in the quiver of cross-border tax planners since the time that income tax and global trade first intersected.  The new Code §59A introduces the Base Erosion and Anti-Abuse Tax (“B.E.A.T.”) on large corporations that significantly reduce their U.S. tax liability through the use of cross-border payments to related persons.  It is structured as another form of the now-repealed corporate Alternative Minimum Tax rather than a disallowance of a deduction in computing regular taxable income.  Banks that have significant interest payments and U.S. companies that pay significant royalties for trademarks, copyrights, and know-how are the targets of the tax to the extent full 30% withholding tax is not imposed.  Galia Antebi and Sheryl Shah explain how the tax is computed.  Is this another step towards a global trade war?

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Reform of the U.S. Tax Regime – The Swiss Perspective→

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Published by Prager Dreifuss, Tax Newsletter (February 2018).

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Insights Vol. 5 No. 1: Updates & Tidbits

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Insights Vol. 5 No. 1: Updates & Tidbits

This month, Neha Rastogi and Nina Krauthamer look briefly at three recent developments in international tax: (i) expired I.T.I.N.’s and how tax returns that use an expired I.T.I.N. will be treated by the I.R.S., (ii) the E.U. blacklist of uncooperative jurisdictions, which includes American Samoa and Guam, and (iii) and unanticipated tax demands on contributions to the Brexit campaign.

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

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Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

The Large Business and International Division of the I.R.S. (“LB&I”) periodically develops international practice units (“I.P.U.’s”) that serve as training material for international examiners.  In November 2017, an I.P.U. entitled “Common Ownership or Control Under IRC 482 – Inbound” was published.  On the same date, the I.R.S. issued a sister I.P.U. for outbound transactions, “Common Ownership or Control Under IRC 482 – Outbound.”  Together, they serve as a primer for determining whether sufficient control exists between two parties to bring the arm’s length transfer pricing rules of Code §482 into play.  Stanley C. Ruchelman explains how the I.R.S. trains its examiners when determining whether a transfer pricing adjustment is appropriate. 

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Individual, Corporate, and Trust News from France

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Individual, Corporate, and Trust News from France

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.

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Circular Letter No. 25/E Clarifies Italy’s New Carried Interest Regime

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Circular Letter No. 25/E Clarifies Italy’s New Carried Interest Regime

Early last year, the Italian government announced new rules regarding favorable taxation of carried interests.  Graduated tax rates and social charges would be replaced by a flat 26% tax on investment income.  Towards the end of the year, guidelines were published by the Italian tax authorities providing significant clarifications on the scope, requirements, and conditions under the new tax regime.  Andrea Tavecchio and Riccardo Barone of Tavecchio Caldara & Associati, Milan, examine how the new regime will work in practice.

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities.  In some instances, the new provisions closely follow their foreign counterparts.  In others, the provisions that are specific to U.S. tax law.  Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner.  Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context. 

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Modifications to the Foreign Tax Credit System Under the Tax Cuts and Jobs Act

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Modifications to the Foreign Tax Credit System Under the Tax Cuts and Jobs Act

The T.C.J.A. introduces new concepts in foreign tax credit planning and eliminates others.  Gone are the pool of post-1986 earnings & profits and deemed-paid foreign tax credits for intercompany dividends.  In their place is a dividends received deduction.  Allocations of interest expense between foreign-source income and domestic income now must be based on tax book value.  Entities that manufacture in one jurisdiction and sell in another will find that the source of income is controlled only by production activities.  Neha Rastogi and Stanley C. Ruchelman explain.

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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

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Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

International tax planning in the U.S. has been turned on its head by the Tax Cuts and Jobs Act (“T.C.J.A.”).  This article looks at (i) the new dividends received deduction that eliminates U.S. tax on the receipt of direct investment dividends paid by a 10%-owned foreign corporation to a U.S. corporation, (ii) the repatriation of post-1986 net accumulated earnings of 10%-owned foreign corporations by U.S. persons and the accompanying deferred tax rules, (iii) changes to Code §367(a) that eliminate an exemption from tax on outbound transfers of assets that will be used in the active conduct of a foreign trade or business, and (iv) a broadening of the scope of Subpart F income by reason of a change to certain definitions.  Rusudan Shervashidze and Stanley C. Ruchelman address and comment on these revisions.

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