U.S. Tax Reform (Part 8) Mandatory deemed repatriation tax: highlights, scope and impact on U.S. residents owning a foreign business

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On December 22, 2017, President Trump signed into law the U.S. tax reform legislation, also known as the Tax Cuts and Jobs Act. This new legislation includes major changes to the previously existing tax system and will affect both businesses as well as individuals. 


Generally, the new legislation applies for tax years beginning after December 31, 2017. The IRS is working to develop guidance regarding the implementation of the U.S. tax reform legislation and publishes statements as it becomes available. Below are the highlights of the new corporate tax provisions which may have an impact on your business.
                                     

Mandatory deemed repatriation tax: highlights, scope and impact on U.S. residents owning a foreign business

Historically, the United States has operated under a worldwide system of taxation, and all income of U.S. persons, domestic or foreign sourced, was subject to the applicable U.S. tax rate.  Practically speaking, for corporations with foreign derived income, the tax was collected once the funds were repatriated, creating an incentive for multinationals to hold vast amounts of capital offshore.

A big objective of the U.S. tax reform was to repatriate and inject foreign held capital of U.S. corporations into the U.S economy.

One of the measures in the 2017 U.S. tax reform act is a mandatory deemed repatriation tax on the historical earnings & profits of certain U.S.-owned foreign corporations. For the last taxable year before January 1, 2018, the U.S. shareholder of a specified foreign corporation should include the pro rata share of undistributed and untaxed post-1986 foreign income as subpart F income determined as of November 2, 2017 or December 31, 2017 (whichever amount is greater). Based on Notice 2018-07, this measure is effective for the last taxable year of the foreign corporation beginning before January 1, 2018 and, for U.S. shareholders, for the taxable year in which or with which such taxable year of the foreign corporation ends.

The deemed repatriation tax is a one-time tax of 15.5% for cash and cash equivalents and 8% for all other non-liquid assets. Taxpayers may elect to pay the deemed repatriation tax in installments over 8 years.

Once this repatriation tax has been collected, the reform exempts future dividends paid to the U.S. corporate shareholder and moves in this way towards a territorial system of taxation. However, the dividend exemption is not available for U.S. individuals.

Deemed repatriation tax may also apply to U.S. citizens and green card holders residing abroad

The above provisions affect U.S. shareholders of specified foreign corporations. “U.S. shareholder” is any U.S. person (corporation, partnership, trust, estate but also U.S citizens and residents) owning 10% or more of the total combined voting power or 10% or more of the total stock value of a foreign corporation. This means that the deemed repatriation tax may also apply to green card holders or U.S. citizens residing outside of the U.S.

A “specified foreign corporation” is (1) any foreign corporation with a U.S. corporate shareholder, and (2) any controlled foreign corporation. A foreign corporation is a “controlled foreign corporation” when U.S. shareholders own more than 50% of the total combined voting power or more than 50% of the total stock value.

The new U.S. tax reform legislation is complex and it is currently unclear whether the IRS will provide further guidance regarding the deemed repatriation tax, amongst others concerning the impact on individuals. A U.S. shareholder with more than 10% ownership of a foreign company should however take the above into consideration for their 2017 U.S. income tax return and seek appropriate advice.

 

Authors: Antoine Guillaud, Ben Troch, Pierre Arrouy

Chicago January 31st 2018

 

This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.