January 28, 2019

Code §962 Election: One or Two Levels of Taxation?

January 28, 2019/ Ruchelman P.L.L.C.

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.

October 31, 2018

Transition Tax – Proposed Regulations Are Here

October 31, 2018/ Ruchelman P.L.L.C.

The I.R.S. has published proposed regulations on Code §965, which requires a U.S. Shareholder to pay income tax on a pro rata share of previously untaxed foreign earnings held in a C.F.C. and certain other foreign corporations. The tax is commonly referred to as the transition tax. It is designed to tax deferred foreign income prior to the transition to a participation exemption system for intercompany dividends from certain foreign corporations. A multi-step computation is required to (i) measure post-1986 E&P, (ii) allocate E&P deficits among affiliated foreign corporations, (iii) calculate the aggregate foreign cash position, (iv) compute allowed deductions, and (v) determine foreign tax credits. Elizabeth V. Zanet, Rusudan Shervashidze, and Beate Erwin detail the required steps as well as special rules applicable to individuals.

April 01, 2018

I.R.S. Offers Additional Guidance on Code §965 Transition Tax

April 01, 2018/ Ruchelman P.L.L.C.

On the way toward a dividends received deduction for certain dividends paid by foreign subsidiaries, Congress enacted a one-shot income inclusion of all post-1986 earnings from C.F.C.’s and foreign corporations having 10% U.S. Shareholders that are corporations. In March, the I.R.S. issued an F.A.Q. providing additional guidance on open issues for 2017 tax returns. Rusudan Shervashidze and Stanley C. Ruchelman explain the mechanics of the income inclusion and an election to defer payments for eight years, sometimes more.

January 26, 2018

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

January 26, 2018/ Ruchelman P.L.L.C.

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.

April 15, 2015

Repatriation of Foreign Earnings v. Related Party Indebtedness

April 15, 2015/ Web Developer

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On March 13, 2015, the United States Court of Appeals for the Fifth Circuit (the “Appeals Court”) reversed a decision of the United States Tax Court regarding the rules relating to the repatriation of earnings under Code §965.

Code §965 was a temporary statute permitting an 85% dividends received deduction in connection with the repatriation of earnings from a foreign subsidiary as long as the proper tests were satisfied. One test related to intercompany loans to foreign subsidiaries allowing them to pay the low-tax dividends. Even though the statute is not currently in effect, the reasoning of the Appeals Court suggests that substance will at times prevail, even if it works against the I.R.S.

BMC Software, Inc. (“BMC”) was a software developer that generated income from licensing operations. It had in effect a qualified joint cost-sharing agreement with a subsidiary. In 2002, the agreement was terminated and BMC began to pay royalties to the subsidiary in return for the transfer of rights back to BMC. In an I.R.S. examination, the arm’s length nature of the royalty amount was challenged and ultimately was resolved through two closing agreements entered into in 2007. The first determined that the amount of an arm’s length royalty was less than the amount paid. The second permitted BMC to treat the excess payment as a loan to the foreign subsidiary. This treatment, which has a long history in practice, was permitted under Rev. Proc. 99-32. As a result, the cash flow between BMC and its subsidiary was not changed but made to conform to the agreed amount of an arm’s length royalty, and the return of the cash would be tax-free but for some deemed interest.