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Is it Safe to Use a S.A.F.E.?

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Is it Safe to Use a S.A.F.E.?

In 2013 a new investment scheme was introduced to the world. A Simple Agreement for Future Equity (“S.A.F.E.”) allows a company to receive funds in exchange for an obligation to issue shares in the future at favorable conversion rates for an investor at the happening of a fundraising round, a liquidity event, or an I.P.O. The S.A.F.E. is popular among start-up tech companies because of its simplicity. However, it does not properly fit into any of the usual categories of investment vehicles, such as debt or equity, and there is much ambiguity as to the proper characterization of a S.A.F.E. for U.S. tax purposes. Stanley C. Ruchelman and Daniela Shani take a deep dive into the tax issues that surround the character of a S.A.F.E. Should it be treated as debt, equity, a warrant, a prepaid variable forward contract? None of the above? While the I.R.S. was asked by the A.I.C.P.A. to provide guidance on the character of a S.A.F.E. arrangement, the I.R.S. declined to include the matter in its 2023-2024 list of regulatory priorities.

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I.R.S. Issues Proposed Regulations on Information Reporting for Digital Assets

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I.R.S. Issues Proposed Regulations on Information Reporting for Digital Assets

Digital assets are considered to be a form of intangible property and exchanges of digital assets or transfers for cash are taxable events under U.S. tax law. Compliance with income tax rules on income recognition from the disposal of digital assets is viewed to be low. As part of the move to enforce compliance, the I.R.S. recently issued the first of several sets of proposed regulations intended to provide greater clarity on information reporting rules that are designed to enhance compliance. The list of transactions that must be reported by brokers has been expanded to include dispositions of digital assets in exchange for cash, other digital assets, stored-value cards, broker services, or other property subject to reporting under Code §6045. In his article, Wooyoung Lee explains (i) the proposed definition of a digital asset for reporting purposes, (ii) persons considered to be brokers covered by the reporting obligations, (iii) the definition of a sale in a digital asset transaction, and (iv) the scope of information that must be reported.

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Too Bad To Be True – Code §§267A and 894(c) Signal the End for Cross Border Hybrids

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Too Bad To Be True – Code §§267A and 894(c) Signal the End for Cross Border Hybrids

If you are a tax professional, you know your client is in a pickle if a provision under U.S. tax law disallows a deduction for the payor of an expense and another provision subjects the corresponding income of a foreign counterparty to U.S. tax, notwithstanding its residence in a treaty partner jurisdiction. That is the predicament that is faced when Code §§267A and 894(c) apply to outbound payments of deductible items to hybrid entities. In their article, Stanley C. Ruchelman and Neha Rastogi explain the death knell of what had been a common planning technique for U.S. tax advisers. They point out that, in certain circumstances involving payments to a reverse hybrid entity, relief might be provided by resort to competent authority proceedings.

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Code §367 and Unassuming Outbound Transfers

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Code §367 and Unassuming Outbound Transfers

U.S. tax law provides for the deferral of taxation for a person transferring assets in connection with certain tax-free corporate reorganizations or transactions. However, the same may not be true when the reorganization or transaction involves a U.S. person who transfers shares to a foreign corporation. In these situations, the Code causes gain to be triggered for the U.S. person unless the transferred assets consist solely of shares of stock of a target corporation and certain arrangements are made by the U.S. transferor to grant the I.R.S. the right to collect deferred tax on a retroactive basis in the event of a future (i) retransfer of those shares by the foreign corporation or (ii) a transfer by the target corporation of its underlying assets. These rules appear in Code §367(a) – which imposes tax – and I.R.S. regulations related to a gain recognition agreement (“G.R.A.”) – which allows tax deferral for the original transfer. Not all transfers that are subject to the rules of Code §367(a) are obvious. To illustrate, a U.S. person that is a passive investor in a foreign partnership may face U.S. tax immediately by reason of Code §367(a) when that partnership transfers shares of stock to a foreign corporation in return for shares of that corporation in a transaction that ordinarily is tax-free under Code §351 or 368(a)(1)(B). While the transaction is effected between two foreign entities, the transferor foreign partnership is tax transparent in the U.S., meaning that the partner is deemed to have made an indirect transfer of assets. In his article, Michael Bennett describes the tax issue and explains how a G.R.A. is a simple way to obtain the benefit of deferral.

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U.S. Income Tax Treaty Update

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U.S. Income Tax Treaty Update

The past 12 months or so have seen an uptick in matters related to the network of U.S. income tax treaties. Perhaps most interesting is a legislative proposal to amend the Internal Revenue Code so that it adopts rules applicable to qualified residents of Taiwan that mirror income tax treaty benefits. The rules would go into effect when the Administration reports to Congress that Taiwan has adopted equivalent rules applicable to U.S. persons investing or working in Taiwan. Other recent events related to U.S. income tax treaties include (i) Senate approval of an income tax treaty with Chile, subject to certain reservations regarding the taxation of direct investment dividends and the imposition of the B.E.A.T. provisions of Code §59A, (ii) the signing of an income tax treaty with Croatia that will require the addition of similar language to the reservation in the treaty with Chile, (iii) announcements that signed income tax treaties with Poland and Vietnam that await Senate action will need to be revised related to double tax relief and B.E.A.T., (iv) the termination of the income tax treaty with Hungary, (v) the start of negotiations of a new income tax treaty with Israel, and (vi) and the completion of treaty negotiations with Romania and Norway, also subject to reservations regarding double tax relief for direct investment dividends and the B.E.A.T. provisions. Nina Krauthamer and Wooyoung Lee tell all.

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Regulating the Issuance of A.P.A.’s in Greece

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Regulating the Issuance of A.P.A.’s in Greece

Advance Pricing Agreements (“A.P.A.’s”) regarding intercompany transactions have been issued in Greece for several years. In late July, the Independent Authority for Public Revenue introduced new procedural and timeline-related modifications, aligning the A.P.A. procedure in Greece with global standards. In her article, Natalia Skoulidou, a partner of the Iason Skouzos Law Firm, Athens, addresses new rules for (i) pre-submission consultations, (ii) procedures to be followed when applying for an A.P.A., (iii) the content of the information that must be submitted, (iv) the taxpayer’s A.P.A. history in other countries, (iv) the disclosure of key assumptions on which the proposed pricing method is based, (v) the ability to roll back the methodology to open years, and (vi) revisions, revocation, or cancellation of the A.P.A. 

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British Virgin Islands Economic Substance Requirements

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British Virgin Islands Economic Substance Requirements

Just as water flows downhill, action to prevent aggressive tax planning flows from (i) the O.E.C.D. in its B.E.P.S. Action Plan, especially Action 5 applicable to no or nominal tax jurisdictions (“N.T.J.’s”) to (ii) the E.U. Code of Conduct Group (“C.O.C.G.”), in its scoping paper identifying nine relevant activities and economic substance criteria for N.T.J.’s to avoid the E.U. blacklist, to (iii) the N.T.J.’s, themselves, in steps taken to police economic substance requirements of local law. The B.V.I. heard the message and has implemented a robust information reporting system for relevant entities. In their article, Joshua Mangeot, a partner in the B.V.I. office of Harneys and Kiril Pehlivanov, a member of the investment funds and regulatory team in the B.V.I office of Harneys, explain the effect of the B.V.I. economic substance regime on companies and limited partnerships registered in the B.V.I. and provide practical guidance for compliance and reporting.

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Singapore: Tax on Disposal of Foreign Assets

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Singapore: Tax on Disposal of Foreign Assets

During the summer, the Singapore Ministry of Finance released a proposal calling for the imposition of tax on the receipt in Singapore of proceeds of gains arising from the sale or disposal of foreign assets. When effective in 2024, the proposal will align Singapore law to guidance on economic substance prepared by the E.U. C.O.C.G. Unless prescribed or excepted, the proposal applies to all companies and limited liability partnerships resident in Singapore. In his article, Sanjay Iyer, the founder of Silicon Advisers, based in Singapore, explains the workings of the tax, including (i) entities that are within scope, (ii) entities that are not within scope, (iii) the definition of foreign assets, (iv) the circumstances in which proceeds are considered to be received in Singapore, and (vi) the ability to use losses from the sale of foreign assets to reduce the amount of foreign gain that is taxed on remittance to Singapore.

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Farhy v. Commr. – The Penalty for Failing to Timely File Form 5471 May Not Be Assessed Administratively

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Farhy v. Commr. – The Penalty for Failing to Timely File Form 5471 May Not Be Assessed Administratively

Sometimes, good things happen to the undeserving. In the play “Pygmalion,” Alfred Doolittle – the undeserving father of Eliza Doolittle – receives a bequest from a faraway benefactor. In Farhy v. Commr., a scofflaw who refused to file Form 5471 for several Belize companies and received penalty notices regarding the seizure of his property convinced the Tax Court that the penalty was not self-enforcing. Rather, the Department of Justice would be required to initiate enforcement proceedings in District Court to collect the assessed penalties. Stanley C. Ruchelman and Wooyoung Lee explain the reasoning of the decision and then ask which other penalties have similar requirements. In answer, they survey client alerts published on the internet by various firms. Surprisingly, the answers are not consistent.

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All Eyes on the I.C.-D.I.S.C. Part Two: I.R.S. Examinations

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All Eyes on the I.C.-D.I.S.C. Part Two: I.R.S. Examinations

The Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) is an undervalued tax planning tool for exporters that can provide substantial tax advantages to U.S. export companies and their shareholders. In the March edition of Insights, Michael Bennet addressed the technical aspects, and tax benefits of the I.C.-D.I.S.C. In this month’s edition, he addresses Part Two reviewing the I.R.S. examination procedure and key aspects taxpayers should keep in mind. Based on the I.C.-D.I.S.C. audit guide published by the I.R.S., the article explains the steps that should be followed to stand up to the questions that will be asked by the examiner. Those who read Part One are strongly urged to read Part Two to understand the internal steps to be taken to ensure the I.C.-D.I.S.C. benefit is real after an I.R.S. examination is completed.

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New Tax Relief on Repatriation of Intangible Property

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New Tax Relief on Repatriation of Intangible Property

Code §367(d) provides rules for intercompany transfers of intangible property to related parties abroad. Not only are they taxable when first made, but they may continue to give rise to taxable income for the transferor for extended periods of time, notwithstanding a fixed price that is arm’s length at the time of the original transfer. Recently, U.S. companies have considered repatriating intangible property previously transferred abroad, in light of favorable provisions under the F.D.D.I. regime, the inability to defer tax under the C.F.C. rules, both Subpart F and G.I.L.T.I., and the prospect of Pillar 2’s adoption. However, the rules that applied to repatriation of intangible property left issues unanswered. In early May, the I.R.S. published proposed regulations affecting transactions in which U.S. corporations bring intangible property back to the U.S. In their article, Stanley C. Ruchelman and Daniela Shani review the legislative background of the proposed regulations and address the key principles involved before the toll charges of Code §367(d) are turned off. If the repatriation transaction can be effected tax free under U.S. domestic law to the prior transferor or a qualified successor, no gain is recognized.

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International Marriages – Special U.S. Tax Concepts

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International Marriages – Special U.S. Tax Concepts

Continuing with the theme of cross-border mobility and resulting tax consequences, U.S. tax law contains provisions that affect married couples coming to live in the U.S. from a country that has a community property regimes in force and effect. They may find that income tax consequences are not necessarily controlled by the marital laws of the former home country. The Internal Revenue Code contains provisions that apply to earned income that override community property regimes when one or both spouses are not U.S. residents or citizens. Nina Krauthamer and Galia Antebi address the circumstances controlled by Code §879. They also address rules for filing joint income tax returns when one spouse is not a U.S. citizen or resident, available elections under Code §6013(g) and (h) to allow for the filing of joint tax returns, elections for arriving persons to be treated as residents with an accelerated residency starting date, and tricky trust and estate rules that apply to a donor spouse when the donee spouse is not a citizen. A must read for arriving individuals.

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The Pour-Over Clause In A Cross-Border Context

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The Pour-Over Clause In A Cross-Border Context

With all the career and job opportunities available, many Canadians and Americans choose to cross the border to pursue new goals. Providing trust and estate planning advice to Canadians living in the United States and Americans living in Canada is no longer a rare situation. Where an individual has spent part of his life in one country and part in the other, his will and power of attorney may have been executed in one country but not amended following the arrival in the other country. This can pose problems when an estate plan crafted to meet U.S. rules is applied to a U.S. citizen that relocated to Canada and remained in Canada for the balance of his life. Caroline Rheaume, a member of the Quebec Bar, focuses on pour-over provisions in trusts, frequently used by U.S. estate planners, but which encounter enforceability problems in several Canadian provinces. The takeaway is simple. When in Canada do as the Canadians do, or your legatees may find that you died intestate.

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Effect of Ruling No. 288/2023 – Italian Anti-Hybrid Rules Attack the 2020 Swiss Corporate Tax Reform

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Effect of Ruling No. 288/2023 – Italian Anti-Hybrid Rules Attack the 2020 Swiss Corporate Tax Reform

Sometimes, anti-abuse provisions are applied by tax authorities because of what happened in the past, not the present, much like a classic vendetta. This is what happened to an Italian subsidiary of a Swiss company that benefitted from the principal company regime in Switzerland. That regime presumed the existence of a deemed P.E. outside of Switzerland and the allocation of profit to the deemed P.E. The regime was repealed with effect as of January 1, 2020, and replaced by a relatively normal tax regime, with one specific transition rule. The Swiss parent was entitled to a tax-free step-up in the goodwill of the deemed P.E. which could be amortized over 10 years, allowing a tax benefit for the Swiss company. In April of this year, the Italian tax authorities issued tax ruling no. 288/2023 to an Italian subsidiary of a Swiss company that previously benefitted from the principal company regime. It now was taxed under Swiss law in a straightforward way, but with the amortization benefit. In the ruling, the Italian tax authorities determined that the amortization deduction constituted a hybrid mismatch because the goodwill was not purchased. The result is that the Italian subsidiary cannot reduce sales by the related cost of inventory purchased from its Swiss parent. Federico Di Cesare, a Partner of Macchi di Cellere Gangemi, and Dimitra Michalopoulos, an Associate in the tax practice of Macchi di Cellere Gangemi explain the basis of the ruling and strongly suggest that it is not grounded on the existing provisions of the Italian anti-hybrid rules. Sounds like classical vendetta in the context of the A.T.A.D.

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Economic Substance: Views From the U.S., Europe, and the B.V.I., Cayman, and Nevis

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Economic Substance: Views From the U.S., Europe, and the B.V.I., Cayman, and Nevis

Like concepts of beauty, the presence or absence of economic substance in the tax context often is in the eye of the beholder. More importantly, economic substance means different things to tax authorities in different jurisdictions and the approaches in taxpayer obligations varies widely. This article looks at the concept of economic substance in three separate localities. Stanley C. Ruchelman and Wooyoung Lee look at the U.S., addressing case law establishing the requirement and the 2010 codification of the concept into the tax code. Werner Heyvaert, a partner in the Brussels Office of AKD Benelux Lawyers, and Vicky Sheik Mohammad, an associate in the Brussels Office of AKD Benelux Lawyers, look at the Danish Cases that establish an abuse of rights view for aggressive tax planning – the taxpayer abused rights granted to it by E.U. law – and the Unshell Directive designed to remove certain tax benefits from shell companies. David Payne, Global Head of Governance for Bolder Group, looks at the self-certification rules that have been adopted in the B.V.I., Cayman, and Nevis.

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Insights Volume 10 Number 2: Updates & Other Tidbits

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Insights Volume 10 Number 2: Updates & Other Tidbits

This month, Michael Bennett and Wooyoung Lee look briefly at four items. The first is Bittner v. U.S., a Supreme Court case holding that the non-willful penalty for failing to file a complete and accurate F.B.A.R. form is $10,000 for the annual form and not $10,000 for each account. The second is Aroeste v. U.S., a U.S. District Court case holding that a dual resident individual whose residence is allocated to a treaty partner jurisdiction is not a U.S. person for purposes of filing F.B.A.R. reports. The third is a concession by the I.R.S. that a person had reasonable cause for the failure to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) when following bad advice from his tax adviser. Finally, the BE-12 Benchmark Survey of Foreign Direct Investment in the U.S., conducted every five years by the Department of Commerce’s Bureau of Economic Analysis, is due this year. The final due date for filing is (i) May 31 for those filing by mail or fax or (ii) June 30 for those filing electronically.

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All Eyes on the I.C.-D.I.S.C. Part I: the Export Gift That Keeps on Giving.

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All Eyes on the I.C.-D.I.S.C. Part I: the Export Gift That Keeps on Giving.

Regardless of their political affiliations, presidential administrations and members of Congress share the goal of maintaining U.S. competitiveness on the global market. We often hear statements directed toward strengthening the U.S. manufacturing sector and bringing production activity back to the U.S. These words would be futile without implementing initiatives favoring U.S. business interests. An often-overlooked incentive is the Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) regime. For an export business operated in the form of an L.L.C. owned by individuals, an I.C.-D.I.S.C. can produce tax savings for export profits of about 40% for the owners, when operated properly. More importantly, it can be run on automatic pilot once set up. In Part I of a two-part series, Michael Bennett explains the basics of setting up and operating an I.C.-D.I.S.C. In Part II, he will discuss issues that have been raised in years past when the goal of a D.I.S.C. was to promote exports by permanently deferring the export profits rather than recognize taxable income immediately, but at lower rates.

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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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Bittersweet Christmas in Spain – Beckham Regime 2.0 and Solidarity Tax

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Bittersweet Christmas in Spain – Beckham Regime 2.0 and Solidarity Tax

Last year, Christmas in Spain brought with it good news for some individuals and bad news for others. Regarding the good news, the Beckham Regime was improved as was the start-up ecosystem regime for entrepreneurs. Regarding the bad news, Spain adopted a second wealth tax to soak up wealth tax that appropriately went unpaid where certain regions provided relief for assets situated in the local region. Spanish residents that previously paid no Wealth tax will be subject to the Solidarity tax. Luis J. Durá Garcia, the Managing Partner of Durá Tax & Legal, Madrid and Valencia, tells all.

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