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Another Taxpayer Allowed Treaty-Based Foreign Tax Credit Against N.I.I.T.

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Another Taxpayer Allowed Treaty-Based Foreign Tax Credit Against N.I.I.T.

The application of the foreign tax credit to the net investment income tax (“N.I.I.T.”) has been a recurring battle in courtrooms in recent years. In the most recent installment, the taxpayer in Bruyea v. U.S. prevailed in claiming a foreign tax credit under the Canada-U.S. income tax treaty. The N.I.I.T. is a 3.8% tax on certain items of passive income that is levied on U.S. individuals whose gross income is above certain thresholds. The position of the I.R.S. is that the foreign tax credit cannot be claimed to reduce the amount of N.I.I.T. that is due. In the facts of the case, the Canada-U.S. Income Tax Treaty clearly provided that the foreign tax credit applies to all U.S. taxes based on income whether in existence at the time the treaty came into force and effect or afterwards. Wooyoung Lee explains all.

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Insights Volume 12 Number 1: Updates & Other Tidbits

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Insights Volume 12 Number 1: Updates & Other Tidbits

This month, Tidbits returns to Insights. One tidbit addresses the on-again / off-again status of the Corporate Transparency Act. A second tidbit addresses a rare win for an individual who challenged taxation at the state level.

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Corporate Matters: Ending a Business Relationship – A Time Consuming and Drawn-Out Process

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Corporate Matters: Ending a Business Relationship – A Time Consuming and Drawn-Out Process

Often the realities of a business arrangement can be quite different than a plan conceived between optimistic partners. Market conditions can change, and commitments made can become difficult to deliver, sometimes through no lack of trying. As business attorneys, we have seen situations where one partner brings technical and production know-how, and another brings the promise of market introductions and sales contacts. In an article based on many years of practice, Simon Prisk advises that breaking up a business partnership can be difficult and emotional. If the organizational documents are simply taken from a form book, the partners will face a time of uncertainty as off-the-shelf documents rarely provide helpful solutions.

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Reading Tea Leaves – What May Be In Store For Tax Legislation

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Reading Tea Leaves – What May Be In Store For Tax Legislation

President Trump made several tax proposals in the course of his winning campaign for the White House. In her article, Nina Krauthamer lists proposals made by the President and the likely responses of Democrats in Congress followed by a general analysis of various positions. What becomes clear is that when political parties are in power, proposals to spend money are plentiful. Yet, when they are voted out of office, the same parties object to every tax cut as ultimately being profligate. 

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Hooray for New Math: Is It Really a Simplified Transfer Pricing Approach for 2025?

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Hooray for New Math: Is It Really a Simplified Transfer Pricing Approach for 2025?

As promised before the end of 2024, the I.R.S. has outlined its approach to the codification of Amount B, a component of the O.E.C.D. Pillar One approach to controlled distribution transactions of tangible property. Notice 2025-04 allows taxpayers to elect to use the streamlined, simplified approach (“S.S.A.”) for corporate tax years beginning on or after January 1, 2025.  If a valid election is made, the I.R.S. will consider the S.S.A. to be the best method under the Treas. Reg. §1.482-1(c). While touted as a method that brings simplicity to transfer pricing, in practice simplicity is achieved at the price of certain important concepts fundamental to the arm’s length standard codified in tax law. Michael Peggs does yeoman’s work in taking the reader through the steps to be followed, the conditions to be applied, and the variable values that pop out of the S.S.A. machine. To readers who have given transfer pricing advice over the years, Amount B may seems to be based on concepts of the command economy of bygone days rather than market transactions.

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Dynasty in the Details – U.S. Estate Planning Considerations for Global Families

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Dynasty in the Details – U.S. Estate Planning Considerations for Global Families

In the United States, creating “dynasty trusts” has become common planning tool for many estate planners. A dynasty trust is a trust that may continue for generations. If done well, it provides a myriad of benefits for strategic income, estate and gift tax planning, creditor protection and ensuring family inheritance. Nonetheless, life choices have a way of interfering with preset plans. A beneficiary moves to a different country. A trustee who is a U.S. resident, but not a citizen decides to move home. A foreign parent of a U.S. spouse wishes to make a gift to the next generation of beneficiaries. These seemingly trivial details could unintentionally cause severe tax and other planning consequences in the U.S. and abroad. Based on her experience, Allison Dolzani leads the reader through a cycle of cross border issues that must be addressed as life progresses.

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U.S. Tax Planning for Israeli Investment in U.S. Real Estate: A Tale of Scylla and Charybdis

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U.S. Tax Planning for Israeli Investment in U.S. Real Estate: A Tale of Scylla and Charybdis

U.S. real estate remains a favored asset class for foreign investment by Israeli residents. With the Israeli shekel currently being relatively strong against the U.S. dollar, investments in the U.S. have become even more attractive. And while personal use property in cities like Miami and New York City remain a privilege of high net worth individuals, fractional investments in multifamily residential and commercial property have become available to many investors. Whether investing in high end property or in development projects, hidden traps exist. Knowing where they pop up, the ways to best resolve issues in one country without creating problems in the other, and how to manage client expectations while maneuvering between the “Scylla” and “Charybdis” of the laws of each country requires the experience of an Odysseus. Galia Antebi takes a deep dive into the planning alternatives that are available, identifying the pluses and minuses of each alternative.

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B.V.I.: Beneficial Ownership Reporting and Consultation on Access to Beneficial Ownership Information

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B.V.I.: Beneficial Ownership Reporting and Consultation on Access to Beneficial Ownership Information

As of January 2, 2025, a new beneficial ownership reporting regime has come into effect. This regime replaces the previous beneficial ownership reporting framework. New entities must identify and file adequate, accurate, and up-to-date beneficial ownership reports within 30 days of registration Existing Entities have until Julyl 2, 2025, to comply. On January 17, 2025, the B.V.I. Government launched a consultation on a draft policy regarding rights of access to the Register. In line with its commitments, access to information will be granted to persons demonstrating “legitimate interest” to information. The period for responses to the Consultation closes on February 28, 2025. Joshua Mangeot, a partner in the B.V.I. office of Harneys, explains how the new system addresses major issues, including the definition of a “legitimate interest” and circumstances in which disclosure will be viewed as posing a disproportionate serious risk for affected U.B.O.’s.

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The B.V.I., Cayman Islands, and Bermuda – Current Practice, Enforcement, and Emerging Trends

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The B.V.I., Cayman Islands, and Bermuda – Current Practice, Enforcement, and Emerging Trends

These three leading Caribbean international financial centers are members of the Caribbean Financial Action Task Force and have consistently implemented O.E.C.D. initiatives and E.U. requirements. They pride themselves in following international best practices. None of the regimes discussed below is a taxing regime. Consequently, their compliance focus is on information exchange, increased transparency and economic substance. Joshua Mangeot, a partner of the B.V.I. office of Harneys Celeste Aubee, an associate in the B.V.I. office of Harneys, explain the hurdles that have been overcome to remain in good standing with Europe and the U.S.

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Recent Developments to Combat Tax Avoidance in Germany

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Recent Developments to Combat Tax Avoidance in Germany

“Paper is patient.” This is a common German saying, typically used to highlight the sluggishness of processes and plans of all kinds. However, paper can also catch up with you or even take you by surprise in a way that may be embarrassing or worse when your name pops up in leaked information relating to offshore accounts. Jurisdictions with preferential tax regimes are under the scrutiny of tax and investigative authorities in Germany. This affects multinational corporations, family offices, entrepreneurial families, and wealthy private individuals who invest their assets internationally in a diversified and international manner. Dr. Marco Ottenwälder, a partner in the Frankfurt Office of Andersen Tax, and his colleague, Andreas Gesel, a senior associate of the firm, explain recent measures taken in Germany to combat tax avoidance and follow up with recent practical experience. The tax authorities are aggressive, exit tax has a wider scope than might be commonly expected, and unhappy events occur for individuals and associated companies stemming from arrival in Germany and also departure. Not a pretty sight.

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Focus on H.N.W.I.’S and Offshore Structures – an Indian Perspective

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Focus on H.N.W.I.’S and Offshore Structures – an Indian Perspective

The topic of offshore assets held by H.N.W.I.’s based in India is a topic of substantial interest for various governmental authorities in India. It is not just the Indian Tax Authority that is interested in offshore accounts. Substantial exchange control regulations are in place in India and other regulatory authorities keep a close track of the offshore interests of Indian residents. Over the years, Indian names appeared in data leaks of offshore structures and bank accounts, triggering significant administrative focus and amendments to the law. In 2015, the Black Money Act was introduced in India, with the stated intent of enacting provisions to deal with the problem of undisclosed foreign income and assets and to impose tax on undisclosed foreign income and assets. Ashish Mehta, a partner in the Direct Tax Practice in the Mumbai office of Khaitan & Co., and his colleague, Ujjval Gangwal, a principal associate of the firm, explain in infinite detail the risks that apply to residents hiding funds abroad, the aggressive steps taken by Indian tax authorities in seeking information, the traps for returning Indian nationals stemming from the ownership foreign assets, and the steps to ensure compliance.

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Trusts In Italy: The View of Italian Tax Authorities & Recent Developments

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Trusts In Italy: The View of Italian Tax Authorities & Recent Developments

The legal construct of a trust is a common law arrangement having features that make it suitable for a wide range of uses. Italy lacks a specific legal framework for trusts, which limits its use in a purely Italian set of circumstances. Nevertheless, Italy ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition (1985) and in so doing, introduced a degree of recognition of trusts governed by foreign law. The absence of a specific civil law framework for trusts, combined with Italy’s fragmented and evolving tax law regarding the treatment of trust structures has led to significant interpretative uncertainty both as to income tax matters for the settlor and the beneficiaries and inheritance and estate tax matters. Fabio Chiarenza, a partner in the Rome office of Gianni & Origoni, Francesca Staffieri, also a partner of Gianni & Origoni, and Alessandro Minniti, a managing associate of that firm explain all, including opaque trusts, transparent trusts, timing of the imposition of inheritance and gift tax, and the concept of fictitious interposition of trust as applied by the Italian tax authorities. Good read.

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The Evolution of Tax Enforcement in Switzerland

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The Evolution of Tax Enforcement in Switzerland

As in the rest of Europe, Swiss tax authorities have ramped up examinations of cross border transactions of Swiss residents and cooperation with tax authorities in other countries. Examinations of Swiss residents focus on the abuse of offshore structures and increases in the number of tax examinations and aggressiveness of tax authorities. Regarding Swiss holding companies owned by nonresidents, Switzerland now has an active exchange of information program that provides administrative assistance within the framework of the more than 100 double tax treaties. Thierry Boitelle, the Founding Member of Boitelle Tax Sàrl, in Geneva, and his colleagues Sarah Meriguet and Marine Antunes, Senior Associates at the firm, explain all.

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International Tax Investigations in the U.K.

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International Tax Investigations in the U.K.

It is no secret that the U.K. government is anxious to raise revenue as the public sector debt is estimated to be equivalent to 98.5% of G.D.P. (approximately £2.7665 trillion). The Labour government is dead set on raising income. Non-dom taxation is gone, tax rates are on the rise, and what was capital gains for certain carried interests is ordinary income. Part of the labor program is an attack on tax evasion and avoidance. There are plans for the Labour government to invest £855m over five years in resources for H.M.R.C. to raise £2.7 billion per annum from this investment. In those circumstances, it is not unexpected that assertions of tax fraud and evasion will be raised against those caught up by the compliance initiative. Gary Ashford, a partner of Harbottle & Lewis in London, explains H.M.R.C.’s definition of tax fraud and goes on to discuss the steps that are available for those wishing to make a voluntary disclosure. It is not a pretty picture, especially for those having used offshore vehicles.

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Examining High Net Worth Taxpayers in the U.S.

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Examining High Net Worth Taxpayers in the U.S.

Beginning in 2023, I.R.S. D.O.J. took up the call with programs of enhanced (i) I.R.S. examinations of high-net-worth individuals, large partnerships, and large corporations and (ii) D.O.J. prosecutions of persons accused of criminal tax offenses. The first initiative focused on taxpayers with income of more than $1 million and tax debt in excess of $250,000. The second initiative expanded the focus to large partnerships, which traditionally have more than $10 million in assets. Included were hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms. At the same time, D.O.J. began prosecuting a slew of recalcitrant taxpayers with significant means, whose tax schemes resulted in millions of dollars in lost tax revenue. Philip Colasanto, a senior associate in the New York Office of Withers Bergman L.L.P. (WithersWorldwide) takes a deep dive into the initiatives and the prosecutions. He goes on to explain various ways that are available to taxpayers wishing to come into compliance regarding past reporting failures.

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Developments In Cross-Border Tax Investigations Target High Net Worth Individuals

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Developments In Cross-Border Tax Investigations Target High Net Worth Individuals

Tax collection and tax policy remain high priorities for the F.A.T.F. and the O.E.C.D. These organizations are responsible for developing and monitoring implementation of standards aimed at enhancing transparency, combatting financial crime, and ensuring effective regulation. The past decade saw adoption of accelerated reforms and ambitious deadlines. Differences between implementation and interpretation of international standards and unilateral or bilateral initiatives increase complexity and uncertainty for H.N.W.I.’s. In an introductory chapter to this edition of Insights, Joshua Mangeot, a partner of the B.V.I. office of Harneys, sets the table for the articles that follow.

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Democrats vs. Republicans: OPPOSITE VIEWS on Taxes

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Democrats vs. Republicans: OPPOSITE VIEWS on Taxes

One political party promotes higher taxes to fund a better life for voters in underserved places. The other political party promotes freedom to succeed financially from succeeding in business. Which political party will attract the most voters? It is anybody’s guess. Nina Krauthamer and Wooyoung Lee review the stated tax policies of the two parties. What is clear is that the supporters of the party that does not succeed will be very unhappy with the tax policy of the victor.

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The Aftermath of YA Global: Who is a Partner?

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The Aftermath of YA Global: Who is a Partner?

The YA Global case has drawn widespread attention due to the U.S. tax implications for foreign investment partnerships investing in U.S. securities or making use of a U.S. investment manager. The I.R.S. prevailed in the U.S. Tax Court, and the foreign investment partnership was found to have been engaged in the conduct of a U.S. trade or business in the facts presented. The Tax Court has now released a follow-up memorandum opinion that addresses the following question: what standard should be applied when determining whether a foreign recipient of an income payment from a partnership should be recognized as a partner for income tax purposes and subject to Section 1446 withholding tax? At stake is the U.S. withholding tax imposed on partnerships with foreign partners and U.S. effectively connected income. Wooyoung Lee and Stanley C. Ruchelman address the issue. Sometimes, financial engineers develop a plan that works well when stress tested in the office, but is far too complicated for the I.R.S. and Tax Court judges.

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French Life Insurance “101” – For U.S. Persons, Run Away

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French Life Insurance “101” – For U.S. Persons, Run Away

An individual takes out life insurance in order to provide for his heirs and to obtain peace of mind. Tax treatment for the individual during life and the heirs is straightforward when everyone resides in one country. But when a life insurance policy is written in France and the insured or the heirs are U.S. citizens or residents, what the policy holder, his estate, or the beneficiaries may encounter is anything but peace of mind. To their chagrin, each may find that he or she is in the crosshairs of contrary laws in two countries resulting in sub-optimal tax results. In their article, Sophie Borenstein, of attorneys Klein Wenner in Paris, Neha Rastogi, and Stanley C. Ruchelman discusses the French and U.S. tax rules applicable to a French life insurance policy. Grown men have cried over less complicated matters.

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Blunders in International Estate Planning

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Blunders in International Estate Planning

Trust & estate lawyers who dabble infrequently in cross border matters, take notice! It is relatively easy to lose your way when advising a non-U.S. person with assets in the U.S. Shortcuts that work when clients and properties are located in the same jurisdiction may lead to horrific problems when clients are domiciled in one jurisdiction and property is located in another. Examples are (A) drafting two wills where each revokes the other, (B) allowing an individual having a foreign domicile to directly own financial assets in the U.S., such as shares of publicly traded stock or mutual funds, can result in unanticipated estate tax and long delays before heirs have access to the assets, (C) not knowing which I.R.S. information reporting forms must be filed when a new client is a recent arrival from abroad can yield significant penalties for the client, (D) allowing a resident, non-citizen individual to return to the home country is an invitation to unnecessary U.S. estate tax if the client retains investment assets and real property in the U.S., and (E) not noticing inconsistencies in residuary clauses in a principal will drafted in the home country and a U.S. property only will drafted in the U.S. begs for a will fight. Diane K. Roskies, a principal in the New York office of the Offit Kurman law firm, and Zachary Weitz, an attorney in the Los Angeles office of the same firm, explain the severe problems that may be encountered, but do so in a light hearted manner.

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