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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

The Tax Cuts and Jobs Act (“T.C.J.A.”) was enacted in 2017, bringing substantial alterations to the tax landscape for individuals and corporations. Many of these alterations are set to expire at the end of 2025. Understanding these changes, including their implications and timelines, is crucial for individuals and corporations. Michael Bennett addresses some of the more problematic provisions that are scheduled to reappear in the tax law. Among other things, individual tax rates will increase, the standard deduction will decrease, S.A.L.T. deductions will be allowed, corporate tax rates will increase, the Q.B.I. deduction will expire, the corporate tax on G.I.L.T.I. will increase, and the tax benefit for F.D.I.I. will decrease.

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Did You Just Manifest the Opposite of What You Wanted - (IN)Ability to Use G.I.L.T.I. Losses to Offset Gain

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Forward-looking tax planning for U.S. taxpayers and their foreign subsidiaries was never an easy task. Since the adoption of the G.I.L.T.I. regime, domestic tax plans must be adjusted when applied to a cross border scenario. In their article, Stanley C. Ruchelman and Neha Rastogi examine a straightforward merger of related corporations, each operating at a loss, followed by a significant gain from the sale of an operating asset. What is a statutory merger when two companies are based outside the U.S.? What information must be reported on a U.S. Shareholder’s U.S. income tax return? What forms are used to report the information? Do the G.I.L.T.I. rules make operating losses of a C.F.C. useless to a U.S. Shareholder when a C.F.C. sells operating assets at a sizable gain? These and other issues are explored by the authors.

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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

At a certain point in the life of a corporation that operates more than one business, management may wish to separate the different businesses into two or more separate corporate entities. In most cases, demergers are structured based on the requirements of the corporate law in the place of domicile of the corporation. Typically, a demerger of a foreign corporation that follows the corporate law provisions of applicable foreign law would also be exempt from tax in the relevant country. However, when one of the shareholders is a U.S. individual or corporation, U.S. Federal tax considerations should be taken into account to prevent unexpected U.S. tax for a U.S. investor. Demergers are given tax-free treatment under U.S. tax law only if the requirements of Code §355 are met. If not met, both the corporation that undergoes the demerger and its shareholders recognize gain in connection with an actual or deemed distribution of appreciated property. While the foreign corporation may have no U.S. tax to pay, the U.S. investor may find that tax would be due in the U.S. if the foreign corporation undergoing the demerger is a C.F.C. Stanley C. Ruchelman and Daniela Shani explain the various categories of tax free demergers under U.S. tax concepts and the consequences of failing to meet the requirements in the context of a corporation formed outside the U.S.

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Tax Considerations for a U.S. Holder Of Bare Legal Title in a Usufruct Arrangement

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Tax Considerations for a U.S. Holder Of Bare Legal Title in a Usufruct Arrangement

When European parents engage in inheritance planning by transferring bare legal title in shares of a privately held company to children resident in the U.S., the gift may bring with it a pandora’s box of tax issues. If the value of the bare legal title exceeds 50% of the value of the property when computed in accordance with U.S. tax rules for valuing split interests in property, the foreign company may become a C.F.C. That can trigger certain reporting requirements in the U.S. related to Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) even though the children have no right to income from the company. Separate and apart from C.F.C. status, the basis which the children have in the shares is a carryover basis that will not be stepped up then the usufruct interest and the bare legal title are merged. Separate and apart from the foregoing issues is a potential F.B.A.R. filing requirement on FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) with immediate effect. In their article, Nina Krauthamer, Wooyoung Lee, and Stanley C. Ruchelman explain these issues, why they pop up, and potential ways to mitigate some if not all of the problems.

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

When a U.S. corporation expands its operations to India and forms an Indian subsidiary, tax issues need to be addressed in both countries at various points in time – when the investment is first made, as profits are generated, as funds are repatriated, and when the investment is sold. In their comprehensive article, Sanjay Sanghvi, a partner of Khaitan & Co., Mumbai, Raghav Jumar Baja, a principal associate of Khaitan & Co., Mumbai, Stanley C. Ruchelman and Neha Rastogi explain all facets of tax planning in both countries at each stage of the investment and do so in an integrated way.

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New Partnership International Information Return Schedules

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New Partnership International Information Return Schedules

· The I.R.S. recently released drafts of two new partnership return schedules and accompanying instructions to address the reporting of income from international transactions. The new forms are required because of tax law changes enacted as part of the Tax Cuts & Jobs Act in 2017 and recent changes in I.R.S. policy regarding partnerships as aggregates rather than entities. Schedule K-2 and Schedule K-3 each contain nine parts, generally covering the information required with respect to the most common international tax provisions of U.S. tax law. Schedule K-3 contains a tenth part applicable only to the distributive share of a partner in relation to a sale of a partnership interest. Galia Antebi and Nina Krauthamer explain all.

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Final G.I.L.T.I. High-Tax Regulations and the Tested Unit: Would a Rose by Any Other Name Smell as Sweet?

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Final G.I.L.T.I. High-Tax Regulations and the Tested Unit: Would a Rose by Any Other Name Smell as Sweet?

A precursor to a global minimum tax for multinational enterprises, the G.I.L.T.I. rules under Subpart F ensure that tax is imposed on cross-border income. The tax rate on G.I.L.T.I. reported by U.S. corporations is relatively low, currently 10.5% and a foreign tax credit is allowed for 80% of the foreign taxes imposed on tested income taxed under the G.I.L.T.I. provisions. In the summer, the I.R.S. issued proposed and final regulations allowing taxpayers to avoid the tax by claiming an exclusion for highly taxed income of tested units. Are the regulations a true benefit or is the benefit illusory? Andreas Apostolides and Neha Rastogi explain all.

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When an Exchange of Vows is Followed by Separate Ownership of Shares Should Either Spouse Feel G.I.L.T.I.?

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When an Exchange of Vows is Followed by Separate Ownership of Shares Should Either Spouse Feel G.I.L.T.I.?

Cross border tax planners are expected to know all there is about various provisions of Subchapter N of the Internal Revenue Code. An example might be the G.I.L.T.I. provisions adopted in the Tax Cuts & Jobs Act of 2017. They are not expected to know more mundane provisions of tax law such as rules that apply to married persons filing a joint tax return. In their article, Andreas Apostolides and Stanley C. Ruchelman examine a recent hiccup in G.I.L.T.I. provisions that focus computations in a top-down way. What happens when the marital property regime adopted by the married couple is that of separate property (or they are domiciled in a common law jurisdictions), one spouse separately owns C.F.C.’s with losses, the other spouse separately owns C.F.C.’s with positive earnings, and none of the C.F.C.’s generates Subpart F income? Is the married couple treated as one unit or simply an aggregate of two separate taxpayers? The answer may be troubling.

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Domestic Partnerships Treated as Entities and Aggregates: New Approach for G.I.L.T.I. and Subpart F

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Domestic Partnerships Treated as Entities and Aggregates: New Approach for G.I.L.T.I. and Subpart F

The effects of the 2017 U.S. tax reform continue to be encountered in unexpected ways. Two prime examples are the final and proposed G.I.L.T.I. regulations issued by the I.R.S. earlier this year. These 2019 regulations attempt to bring order out of the chaos created by proposed G.I.L.T.I. regulations released in September 2018. In their article, Neha Rastogi and Stanley C. Ruchelman look at how the rules treat a domestic partnership and its partners when determining who is – and who is not – a U.S. shareholder of a controlled foreign corporation. The answer affects the application of the G.I.L.T.I., Subpart F, and P.F.I.C. rules. For those who follow the debate over whether a partnership is an aggregate of the partners or an entity that is separate from the partners, chalk up a victory for the proponents of the aggregate approach.

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Remember when Code §1248 was intended to right an economic wrong by converting low-taxed capital gain to highly-taxed dividend income? (If you do, you probably remember the maximum tax on earned income (50% rather than 70%) and income averaging over three years designed to eliminate the effect of spiked income in a particular year.) Tax law has changed, and dividend income no longer is taxed at high rates. Indeed, for C-corporations receiving foreign-source dividends from certain 10%-owned corporations, there is no tax whatsoever. This is a much better tax result than that extended to capital gains, which are taxed at 21% for corporations. Neha Rastogi and Stanley C. Ruchelman evaluate whether the conversion of capital gains into dividend income produces a meaningful benefit in many instances, given the likelihood of prior taxation under Subpart F or G.I.L.T.I. rules for the U.S. parent of a multinational group. Hence the question, is the conversion of taxable capital gains into dividend income under Code §1248 a real benefit, or is it simply a glistening

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New Jersey Provides G.I.L.T.I Guidance

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New Jersey Provides G.I.L.T.I Guidance

Federal tax law has introduced a new type of gross income: Global Intangible Low Tax Income (“G.I.L.T.I.”).  The provisions are designed to stop U.S. companies from shifting their profits to offshore jurisdictions, and states are given a choice to incorporate parts of Federal law in one of three ways.  New Jersey has chosen “selective conformity.”  Nina Krauthamer and Rusudan Shervashidze explain what this means for the state and for taxpayers.

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

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

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.

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A Deep Dive into G.I.L.T.I. Guidance

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A Deep Dive into G.I.L.T.I. Guidance

The I.R.S. has published proposed regulations on the global intangible low-taxed income ("G.I.L.T.I.") regime, which is applicable to those controlled foreign corporations that manage to operate globally without generating effectively connected income taxable to the foreign corporation or Subpart F Income taxable to its U.S. Shareholders. In a detailed article, Rusudan Shervashidze, Elizabeth V. Zanet, and Stanley C. Ruchelman examine the proposed regulations and all their complexity.

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Tax Considerations of I.P. When Expanding a Business Offshore

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Tax Considerations of I.P. When Expanding a Business Offshore

If a client asks a U.S. tax adviser about the U.S. tax cost of contributing intangible property (“I.P.”) to a foreign corporation for use in an active business, the response can be a dizzying array of bad tax consequences beginning with a deemed sale in a transaction that results in an ongoing income stream. While that is a correct answer, it need not be the only answer. Elizabeth V. Zanet and Stanley C. Ruchelman explore alternatives to a capital contribution of I.P. to a foreign corporation, including (i) the use of a foreign hybrid entity and (ii) licensing the I.P. to a foreign entity in order to benefit from the F.D.I.I. tax deduction. Each alternative may provide interesting tax results, but attention to detail will be required.

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A New Tax Regime for CFCs: Who Is GILTI?→

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Published by the Civil Research Institute in the Journal of Taxation and Regulation of Financial Institutions, vol. 31, no. 03 (Spring 2018): pp. 17-28.

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Coming to the U.S. After Tax Reform

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Coming to the U.S. After Tax Reform

Now, more than six months after enactment of the Tax Cuts & Jobs Act, many tax advisers have achieved a level of comfort with the brave new world of Transition Tax, F.D.I.I., G.I.L.T.I., B.E.A.T., and incredibly low corporate tax rates. However, sleeper provisions in the new law can have drastic adverse tax consequences in the realm of cross-border transactions and investments: (i) the threshold for becoming a C.F.C. has been reduced significantly by several changes in U.S. tax law and (ii) the 10.5% tax rate for G.I.L.T.I. is limited to corporations so that individuals face ordinary income treatment for G.I.L.T.I. inclusions from foreign corporations that were not C.F.C’s. prior to the new law. Jeanne Goulet of Byrum River Consulting L.L.C., New York, addresses these problems and suggests several planning opportunities.

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Code §962 Election Offers Benefits Under U.S. Tax Reform

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Code §962 Election Offers Benefits Under U.S. Tax Reform

Two provisions in the recent tax reform legislation – Code §§965 (transition tax) and 250 (50% deduction for G.I.L.T.I.) – focus on C.F.C.’s and their U.S. Shareholders.  In each case, corporate U.S. Shareholders are entitled to a deduction that is not granted to an individual with regard to income that is taxed under Subpart F.  However, Code §962 may allow an individual who is a U.S. Shareholder of a C.F.C. to elect to be taxed on the Subpart F Income as if a corporation.  This allows for tax at a lower rate and a foreign tax credit for corporate income taxes paid by the C.F.C.  Elizabeth V. Zanet and Galia Antebi explain the workings of Code §962 and focus on the position of naysayers who caution that it may not provide the relief it appears to provide.

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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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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

The T.C.J.A. introduces a new minimum tax regime applicable to controlled foreign corporations (“C.F.C.’s”).  It also provides tax benefits for incomefrom “intangibles” used to exploit foreign markets.  The former is known as G.I.L.T.I. and the latter is known as F.D.I.I.  Together, G.I.L.T.I. and F.D.I.I. change the dynamics of cross-border taxation and can be seen as an incentive to supply foreign markets with goods and services produced in the U.S.  Both provisions reflect a view that only two value drivers exist in business: (i) hard assets (such as property, plant, and equipment) and (ii) intangible property.  In a detailed set of Q&A’s, Elizabeth V. Zanet and Stanley C. Ruchelman look at the ins and outs of the new provisions.

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