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Extension of German Taxation on Foreign Companies Holding German Real Estate

Extension of German Taxation on Foreign Companies Holding German Real Estate

In August, the German Federal government proposed draft legislation that will expand the scope of German taxation to cover the sale of shares in “real estate rich companies” by nonresident taxpayers. The draft legislation proposes that capital gains from shares in non-German companies will be subject to German taxation if more than 50% of the share value is attributable to German real estate. The legislative proposal has wide application, reaching a shareholding that exceeds a 1% threshold at any time in the five years preceding the sale. Dr. Petra Eckl, a partner at GSK Stockmann + Kollegen in Frankfurt, explains the proposal and the practical exposure that arises from its overly broad language.

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Implementing the Border Adjustment Tax: Winners & Losers

Implementing the Border Adjustment Tax: Winners & Losers

The border adjustment tax will harm certain companies and aid others.  To be expected, exporters like the proposal and importers hate it.  Philip R. Hirschfeld and Kenneth Lobo look at the industries that will be winners and those that will be losers if the border adjustment tax is adopted.  Strangely, each side argues that employment will be increased if its position is adopted, an example of how voodoo economics support a politicized tax proposal.

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Indian Investors Purchasing U.S. Real Estate – From a U.S. Point of View

Published in International Taxation, Volume 13, Issue 3: September 2015.

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New Centralized Approach to International Audits

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Federal budget cuts have resulted in a new risk-based approach to international audits by the Large Business & International (“L.B.&I.”) division of the I.R.S.

On February 27, Sharon Porter, acting director of International Business Compliance within the L.B.&I., announced that the I.R.S. will “re-engineer” its approach to international audits and begin implementing a pilot program utilizing an experimental centralized method of risk assessment.

Inbound Investment in German Real Estate

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INTRODUCTION

Investments in German real estate are attractive to international investors. Low interest rates and positive economic conditions exist in Germany. The demand for commercial and residential rental properties has increased in urban centers such as Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, and Stuttgart. In these circumstances, it is expected that Germany will remain an attractive market for real estate investments.

Germany provides reliable political conditions, which are advantageous for a successful investment. However, there is an increasing complexity to the general legal conditions, and the success of a real estate investment strongly depends on proper structuring of the investment in a tax-efficient way.

This article provides an overview of the tax consequences of inbound investments in German real estate.

Different investment structures are compared:

  • Holding the property directly,
  • Holding shares in a property company, and
  • Holding interests in a property partnership.

In addition to income tax, German real estate transfer tax aspects are discussed, and planning opportunities to reduce or eliminate German trade tax are explored.

Insights Vol. 1 No. 6: Updates & Other Tidbits

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THINK TWICE BEFORE EVADING TAXES (PART II) FOLLOW UP TO CREDIT SUISSE GUILTY PLEA

As we noted last month, Credit Suisse AG pleaded guilty to conspiracy to aid and assist U.S. taxpayers with filing false income tax returns and other documents with the I.R.S. Following Credit Suisse’s guilty plea to helping American clients evade taxes, New York State’s financial regulator is said to have picked Mr. Neil Barofsky as the corporate monitor for Credit Suisse Group AG. Monitors are chosen to act as the government’s post-settlement proxy, shining a light on the inner workings of corporations and suggesting steps to bolster compliance procedures.

Credit Suisse agreed to two years of oversight by New York’s financial regulator as part of its $2.6 billion resolution with the U.S. Credit Suisse’s settlement is the first guilty plea by a global bank in more than a decade, and the penalty agreed to is the largest penalty in an offshore tax case.

Tax 101: Outbound Acquisitions - Holding Company Structures

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When a U.S. company acquires foreign targets, the use of a holding company structure abroad may provide certain global tax benefits. The emphasis is on “global” because standard U.S. benefits such as deferral of income while funds remain offshore may not be available without further planning once a holding company derives dividends and capital gains. This article will discuss issues that should be considered when setting up a company overseas, particularly a foreign holding company, in order to maximize foreign tax credits despite the limitations under the U.S. tax rules, and to reduce the overall U.S. taxes paid. These issues include challenges to the substance of a holding company, recent trends in inversion transactions, the net investment income tax on investment income of U.S. individuals, and the significance of the O.E.C.D. Base Erosion and Profit Shifting report on tax planning structures.

U.S. TAXATION OF INTERCOMPANY DIVIDENDS AMONG FOREIGN SUBS

If we assume the income of each foreign target consists of manufacturing and sales activities that take place in a single foreign country, no U.S. tax will be imposed until the profits of the target are distributed in the form of a dividend or the shares of the target are sold. This is known as “deferral” of tax. Once dividends are distributed, U.S. tax may be due whether the profits are distributed directly to the U.S. parent company or to a holding company located in another foreign jurisdiction. Without advance planning to take advantage of the entity characterization rules known as “check-the-box,” the dividends paid by the manufacturing company will be taxable in the U.S. whether paid directly to the parent or paid to a holding company located in a third country. In the latter case, and assuming the holding company is a controlled foreign corporation (“C.F.C.”) for U.S. income tax purposes, the dividend income in the hands of the holding company will be viewed to be an item of Foreign Personal Holding Company Income, which generally will be taxed to the U.S. parent company, or any other person that is treated as a “U.S. Shareholder” under Subpart F of the Internal Revenue Code.

Using the U.K. as a Holding Company Jurisdiction: Opportunities and Challenges

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INTRODUCTION: AN IDEAL HOLDING JURISDICTION?

At a time when a quintet of septuagenarian comics attempt to revive former glories with a final run of a live show of Monty Python in London, it is worth reflecting on the Holy Grail of the international tax practitioner: to find the perfect international holding company jurisdiction.

In this, the holding company jurisdiction needs certain characteristics:

  • The possibility of returning profits to shareholders with minimal tax leakage;
  • The ability to receive profits from underlying subsidiaries without taxation at home;
  • The ability to dispose of investments in the underlying subsidiaries without triggering a tax charge on any profit or gain;
  • A good treaty network to ensure that profits can be repatriated to the holding company from underlying subsidiaries, whilst minimizing local withholding taxes; and
  • Low risk from anti-avoidance measures that profits of subsidiaries will otherwise be taxed in the holding company jurisdiction.

The U.K. has emerged over the last decade as an increasingly viable holding company jurisdiction, particularly for investments in countries within the European Union.

F.B.A.R. Penalty: Recent Cases

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U.S. v. ZWERNER: WILLFUL NON-FILINGS RESULT IN MONSTROUS CIVIL PENALTIES

United States v. Zwerner illustrates the potential for monstrous civil penalties resulting from willful failure to file F.B.A.R.’s. It further confirms the point that, if evidence of willfulness exists even in a sympathetic case, the I.R.S. may assert willful penalties in the case of “silent” or “quiet” disclosures, which the I.R.S. and its officials have consistently warned in official and non-official statements.

The facts of the case in brief are as follows:

From 2004 through 2007, Carl Zwerner, currently an 87-year-old Florida resident, was the beneficial owner of an unreported financial interest in a Swiss bank account that he owned indirectly through two successive entities. He did not report the income on the accounts for the period of 2004 through 2007, according to the complaint filed by the United States, but in his answer to the complaint, Zwerner, while admitting that he filed a delinquent F.B.A.R. for 2007, denied filing an amended return for that year, stating that his financial interest in the foreign account was reported on his timely-filed 1040 for that year. The complaint also alleged that, for 2006 and 2007, he represented to his accountant that he had no interest or signature authority over a financial account in a foreign country. Zwerner denied those allegations.

Tax 101: Transactions in FX - A Primer for Individuals

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In our last issue, we discussed the recent I.R.S. guidance on bitcoins which, in general, stated that transactions in bitcoins should be treated as transactions in property under the general rules of the Internal Revenue Code (the “Code”) rather than the special rules applicable to foreign currency. We therefore thought it would be useful to provide a primer on common transactions involving foreign currency (sometimes hereinafter referred to as “FX”) with respect to U.S. individuals.

IN GENERAL

The first thing to note about engaging in transactions involving foreign currency is that foreign currency is treated as any other asset. Think stocks, bonds, or real estate. When an individual buys foreign currency, that individual has a basis in the FX (e.g., Euro) similar to any other investment. When the individual sells that foreign currency, that individual will have a realization event, in which case gain or loss may have to be recognized. Whether the character of that gain or loss is ordinary will depend on the specific transaction and the applicability of Code §988, as will be discussed in more detail below.

Example 1

Mr. FX Guy, a U.S. citizen individual, buys real property located in the U.K. for 100,000 British pounds (£) on January 1, 2014. In order to effectuate the purchase, Mr. FX Guy uses £100,000 that he purchased for $150,000 on January 1, 2012 when the exchange rate was $1.5 to £1. Assume on January 1, 2014, the exchange rate was $2: £1 as the British pound appreciated against the U.S. dollar. The £100,000 has a basis of $150,000. It was acquired on January 1, 2012 and disposed of on January 1, 2014. The disposition is a sale of an asset (in this case, the FX). The amount realized is the fair market value of the consideration received, or $200,000. Accordingly, the taxpayer has a gain of $50,000 attributable to the foreign currency that must be recognized. The character of the gain, and the applicability of §988, will depend on whether the transaction was a “personal transaction.”

Insights Vol. 1 No. 3: Update & Other Tidbits

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CORRECTION TO THE PROPOSED 2013 DIVIDEND EQUIVALENT REGULATIONS

On December 5, 2013, proposed and final Treasury Regulations were published, relating to U.S. source dividend equivalent payments made to nonresident individuals and foreign corporations. On February 24, 2014, a correction to the proposed regulations was published, which tackles errors contained in the 2013 proposed regulations. The corrections mainly clarify the 2013 proposed regulations and prevent any potential misleading caused by their formulation. In addition, on March 4, 2014, the I.R.S. released Notice 2014-14, which states that it will amend forthcoming regulations to provide that specified equity-linked instruments (“E.L.I.’s”) will be limited to those issued on or after 90 days following publication of the final regulations. This will allow additional time for financial markets to implement necessary changes.

UNITED STATES AND HONG KONG SIGN T.I.E.A.

On March 25, 2014, H.K. and U.S. governments signed a Tax Information Exchange Agreement (“T.I.E.A.”) confirming their commitment to enter into an I.G.A., subject to ongoing discussions. The T.I.E.A. will apply to profits tax, salaries tax, and property tax in H.K. and will cover federal taxes on income, estate and gift taxes, and excise taxes in the U.S.

Dividend Equivalents: Past, Present and Future

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Code §871(m) of the Code was enacted as part of the H.I.R.E. Act on March 18, 2010 and treats “dividend equivalents” as U.S. source dividends for withholding tax purposes. On January 23, 2012, Temporary Regulations (the “2012 Temporary Regulations”) and a notice of proposed rulemaking (the “2012 Proposed Regulations”) were published. The 2012 Proposed Regulations and Temporary Regulations provided guidance relating to U.S. source dividend equivalent payments made to nonresident individuals and foreign corporations. They also provided guidance to withholding agents. Correcting amendments to the 2012 Temporary Regulations were published on February 6, 2012, on March 8, 2012 and on August 31, 2012. On December 5, 2013 new proposed regulations (the “2013 Proposed Regulations”) withdrew the 2012 Proposed Regulations. In addition and at the same date, final regulations (“2013 Final Regulations”) were published that essentially adopted the 2012 Temporary Regulations.

BACKGROUND

Code §871(m) defines a dividend equivalent as one of the following:

  • Any substitute dividend made pursuant to a securities lending or a salerepurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States;
  • Any payment made pursuant to a specified notional principal contract (“N.P.C.”) that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States; and
  • Any other payment determined by the Secretary to be substantially similar to a payment described in the two previous categories (a substantially similar dividend).

Walking in the Wilderness: The Experiences of a French Tax Lawyer Practicing in the U.S.

Published in GGi Insider No. 67, September 2013.

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Help - My Exclusively Foreign Trust Now Has a U.S. Beneficiary! What Are the Issues a Trustee Will Now Face?

Published by the American Bar Association in the Real Property Trust & Estate eReport, August 2013.

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Structuring International Operations Following 2010 Legislation

The 60th Tulane Tax Institute: October 26‐28, 2011.

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Understanding Your Neighbour

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As with most international tax planning, the key to cross-border Canada/US tax and estate tax planning is to synchronize the timing of the tax events and the taxpayer in order to minimize, and even eliminate, double taxation. Avoidance of tax in one jurisdiction may not be a satisfactory solution if it is merely a deferral or a shifting of a tax burden to a different taxpayer who or which may be subject ot tax at a lower rate (as well as a later time).

Canadian personal tax overview

Federal income tax is imposed on resident individuals, estates, trusts and companies based upon residency or domicile in Canada. Canada has an extensive array of dual tax treaties, so in many cases tax residency may be overidden by a treaty. If a resident, tax may be imposed on one's worldwide income, which, of course, is determined under specific definitions.

Tax Planning and Compliance for Foreign Businesses with U.S. Activity

Published 2009.

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Practice Exposures for the International Tax Professions in the 21st Century

Published in the Tax Management International Journal, Vol. 37, No. 8: 2008.

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Recent Developments in U.S. Tax Law Affecting International Transactions

American Bar Association – Section of Taxation's Foreign Lawyers Forum: December 2003.

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Inbound Update: Increasing Attention by the I.R.S. to Foreign Taxpayers Doing Business in the U.S. [2002]

New York University Summer Institute, International Taxation: 2002.

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