Browse Articles:   By Category   /   By Author
HIDE

Other Publications

Insights

Publications

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

/
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.

Read More

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

/
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.

Read More

Code §245A – Sometimes Things Are More Than They Appear

/
Code §245A – Sometimes Things Are More Than They Appear

Code §245A of effectively exempts U.S. corporation from U.S. Federal income tax on dividends received from certain foreign subsidiaries. It allows a deduction equal to the amount of the dividend received. Code §245A applies only with respect to dividends received “by a domestic corporation which is a United States shareholder.” Nevertheless, Code §245A can also apply to dividends received by a controlled foreign corporation from a qualifying participation in a lower-tier foreign corporation. The question presented in that fact pattern relates to how Code §245A will be applied. Is the controlled foreign corporation entitled to claim the deduction as dividends are received? Or is a U.S. corporation that is a U.S. Shareholder with regard to the foreign corporation entitled to claim the deduction at the time Subpart F income is reported in its U.S. tax return? Significantly different results may apply depending on the answer. Interestingly, the differences affect U.S. taxpayers other than the corporation that is a U.S. Shareholder. Stanley C. Ruchelman and Daniela Shani explain the different results that may apply.

Read More

New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

/
New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.

Read More

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

/
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.

Read More

Watch Out Whirlpool: The I.R.S. Has Put 50 Million Wrinkles in Your Permanent Press Cycle

/
Watch Out Whirlpool: The I.R.S. Has Put 50 Million Wrinkles in Your Permanent Press Cycle

As 2020 comes to a close, Subpart F is approaching its 59th anniversary as part of the Internal Revenue Code. During that period of time, various portions have been revised, but by and large, the branch rule has remained untouched. Under that rule, a C.F.C. based in a country that exempts income of a permanent establishment can be treated as two companies where manufacturing takes place in one country and selling activity takes place in a different country. From a U.S. viewpoint, the same abusive tax planning can be undertaken between the head office and the branch as can be undertaken between brother-sister or parent-subsidiary C.F.C.’s. Nonetheless, no taxpayer ever lost a case brought by the I.R.S. until this year. In Whirlpool Financial Corp. v. Commr., Whirlpool Corporation determined that the branch rule regulations were invalid when manufacturing operations were conducted by the branch and selling activities were conducted by the head office. Arguing that the law permitted the loophole because a single corporation conducted the manufacturing operations, Whirlpool became the first U.S. Shareholder to lose a case in which the I.R.S. asserted the application of the branch rule to a manufacturing branch. Gianluca Mazzoni, S.J.D. 2020 and L.L.M.2016 International Tax, University of Michigan Law School, explains the plan that was adopted, the argument presented by the taxpayer, the decision of the court, and the likely issues that will be addressed on appeal.

Read More

New Partnership International Information Return Schedules

/
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.

Read More

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

/
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.

Read More

Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

/
Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

When Congress expanded the definition of a “U.S. Shareholder” in the T.C.J.A. by requiring the measurement of value as an alternative to voting power, it opened a Pandora’s box of issues.  First, more U.S. Persons became U.S. Shareholders.  Second, it imposed a difficult task for shareholders and corporations to measure relative value of all classes of shares and all holdings of shareholders.  Finally, many plans based on the existence of direct or direct or indirect dividend rights of foreign shareholders were shut down. Proposed regulations will modify the way Subpart F Income is allocated to various classes of shares having discretionary dividend rights. Neha Rastogi and Stanley C. Ruchelman explain the broadened scope of income inclusions under Subpart F.

Read More

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

/
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.

Read More

New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

/
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. 

Read More

Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

/
Impact of the Tax Cuts and Jobs Act on U.S. Investors in Foreign Corporations

International tax planning in the U.S. has been turned on its head by the Tax Cuts and Jobs Act (“T.C.J.A.”).  This article looks at (i) the new dividends received deduction that eliminates U.S. tax on the receipt of direct investment dividends paid by a 10%-owned foreign corporation to a U.S. corporation, (ii) the repatriation of post-1986 net accumulated earnings of 10%-owned foreign corporations by U.S. persons and the accompanying deferred tax rules, (iii) changes to Code §367(a) that eliminate an exemption from tax on outbound transfers of assets that will be used in the active conduct of a foreign trade or business, and (iv) a broadening of the scope of Subpart F income by reason of a change to certain definitions.  Rusudan Shervashidze and Stanley C. Ruchelman address and comment on these revisions.

Read More

Contract Manufacturing in a US-Controlled Group→

/

First published by the Canadian Tax Foundation in (2016) 24:7 Canadian Tax Highlights.

Read More

International Practice Unit: I.R.S. Releases Subpart F Sales and Manufacturing Rules

/

Beate Erwin, Kenneth Lobo, and Stanley C. Ruchelman explain how the branch rule works when a C.F.C. operates a manufacturing or selling branch in another country. While the concept is easy to explain, the computations are somewhat confusing. The article explains all.

Read More

International Practice Unit: What the I.R.S. Looks for When Deciding if a U.S. Shareholder Has an Interest in a C.F.C.

/

Rusudan Shervashidze and Stanley C. Ruchelman explain the tests the I.R.S. applies to determine whether a foreign corporation is a C.F.C. and a U.S. person is a “U.S. Shareholder” potentially subject to tax under Subpart F. They explain the tax forms that examiners are encouraged to look for and the telltale signs of direct, indirect, and constructive ownership of shares by U.S. persons.

Read More

Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

/

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

Read More

President's Legislative Proposals

/

In late September, the Obama Administration released the tax revisions that are part of its Fiscal Year 2016 Budget Proposal (the Proposal). These changes are designed to provide deficit reduction measures through additional revenue increases and spending cuts. We explain the new twists to seasoned proposals. If enacted, the changes described in the Proposal could influence global patterns of investment and employment by U.S. multinationals.

Read More

Temporary Regulations Alter C.F.C.'s Active Rents and Royalties Exception to Subpart F

/

Newly issued temporary regulations (T.D. 9733) modify three of the six ways that rental or royalty income can qualify for the active exception to foreign personal holding company income (F.P.H.C.I.) under Subpart F. The new Treas. Reg. §1.954-2T addresses who can perform the required functions when a controlled foreign corporation (C.F.C.) leases or licenses property to an unrelated person, as well as the treatment of cost sharing arrangements.

Read More

Shifting Income and Business Operations

/

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

See all articles in this series →

Anti-Deferral Regimes: U.S. Taxation of Foreign Corporations

/

Read Publication

When a U.S. business expands abroad, it is frequently believed that the income of foreign subsidiary corporations will not be taxed in the U.S. until dividends are distributed to the U.S. shareholder. This is known as tax deferral, which is the general expectation of clients. However, in the U.S., tax deferral may be overridden by provisions accelerating the imposition of U.S. tax on U.S. shareholders of foreign corporations. As a result, income may be taxed before a dividend is distributed. This article describes the anti-deferral provisions of U.S. tax law that may be applicable in certain situations.

ANTI-DEFERRAL REGIMES

The Internal Revenue Code contains two principal anti-deferral regimes that may impose tax on a U.S. taxpayer on a current basis when its foreign subsidiaries generate income. These provisions reflect a policy under which Congress believes the deferral rules are being abused to inappropriately defer U.S. tax, especially if foreign tax is not imposed for one reason or another. The two regimes are the:

  • Controlled Foreign Corporation (“C.F.C.”) regime under Code §§951-964, also known as the “Subpart F” provisions; and
  • Passive Foreign Investment Company (“P.F.I.C.”) regime under Code §§1291-1298.

Controlled Foreign Corporations

Under Code §957(a), a foreign corporation is a C.F.C. if stock representing more than 50% of either the total combined voting power or the total value of shares is owned, directly, indirectly, or by attribution, by “U.S. Shareholders” on any day during the foreign corporation’s taxable year. With respect to a foreign corporation, a U.S. Shareholder is defined as a “U.S. person” that owns, under the foregoing expanded ownership rules, stock representing 10% or more of the total voting power of all classes of the foreign corporation’s stock that is entitled to vote. A “U.S. person” includes a U.S. citizen or resident, a U.S. corporation, a U.S. partnership, a domestic trust, and a domestic estate. Stock ownership includes indirect and constructive ownership under the rules of Code §958. Consequently, ownership can be attributed, inter alia, from foreign corporations to shareholders, from one family member to another, and from trusts and estates to beneficiaries, legatees, and heirs.