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Anti-Abuse Developments: A New Normal in the Netherlands

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Anti-Abuse Developments: A New Normal in the Netherlands

“Doe normaal” is practical advice in the Netherlands encouraging one to act normal.  In the past, that phrase would describe commonly used plans to reduce tax. Today, if the old normal is followed by a multinational group effecting an acquisition, the group could end up facing unintended tax consequences. Legislators and tax authorities are increasingly examining traditionally “normal” acquisition structures and financing arrangements in a quest to combat deemed abusive tax arrangements.  Like its fellow E.U. Member States, the Netherlands has shifted its tax policy agenda in recent years in line with international and E.U. initiatives to target perceived abuse. In a similar way, the U.S. has targeted abusive arrangements for several decades via common law doctrines and codified anti-abuse rules, including the economic substance doctrine and conduit financing regulations.  Michael Bennett, a U.S. attorney, recounts recent developments in the Netherlands based on a two-year assignment as a U.S. tax adviser in the Amsterdam Office of a major international law firm. He also addresses “economic substance” rules followed for close to a century in the U.S. This is Mr. Bennett’s first article for Insights as an associate of Ruchelman P.L.L.C.

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

A common error among tax advisers is the expectation that tax law in a foreign country is applied in a straightforward way. For example, if a tax treaty provides that a foreign country will provide a foreign tax credit for taxes imposed by the other country, it seems clear that foreign tax will be reduced by that credit. Regrettably, this is not always the case. Francesco Capitta, who is Of Counsel to Facchini Rossi Michelutti, Studio Legale in Milan, and Andrea D’Ettorre, who is an associate at the same firm, explain that, in Italy, a decision of the Supreme Court was required in order to allow an Italian resident individual to reduce Italian tax by a foreign tax credit for U.S. income taxes withheld on U.S. source dividend income. Remarkably, there was a logical reason for the denial, but it was invalidated in the case.

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Do You Have to Withhold 30% on Payments to a Non-U.S. Independent Contractor?

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Do You Have to Withhold 30% on Payments to a Non-U.S. Independent Contractor?

A common theme when a business engages the services of an individual is whether the individual is an independent contractor or an employee. The stakes become higher when the individual and the business are not resident in the same country. Galia Antebi address the applicable rules and special I.R.S. procedures for businesses located in the U.S. engaging service providers based in other countries to work in whole or in part in the U.S. Even when a tax treaty exempts the payment from income tax, businesses should be prepared to collect potentially refundable 30% withholding tax in the absence of an advance notice to the I.R.S.

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Proposed Amendments to F.A.T.C.A. Suggest Reducing or Deferring Withholding

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Proposed Amendments to F.A.T.C.A. Suggest Reducing or Deferring Withholding

In mid-December 2018, revised F.A.T.C.A. regulations were proposed by the I.R.S. Highlights included (i) the elimination of withholding on payments of gross proceeds, (ii) deferral, but not elimination, of withholding on foreign passthru payments, (iii) clarification of the definition of an investment entity, and (iv) changes to the consequence of hold-mail instructions on presumptions of residence. Galia Antebi explains all.

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Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

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Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

Across the globe, the landscape for international tax is in a constant state of change. Nowhere is this more evident than in the Netherlands. On the third Tuesday of September, a repeal of the dividend withholding tax was announced. Within a month, it was withdrawn. Paul Kraan, a partner of Van Campen Liem in Amsterdam, discusses the remaining tax proposals presented by the Dutch government on the eve of the third Tuesday of September. These include provisions related to A.T.A.D. 1, such as G.A.A.R., an exit tax for corporations, a C.F.C. anti-abuse rule, and a cap on the deductibility of net interest expense.  Also discussed is an existing unilateral exemption from withholding tax on cross-border dividend payments in (i) the context of an income tax treaty and (ii) the presence of economic substance for the direct or indirect shareholder. This exemption is likely to remain in the law.

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Foreign Investor in a U.S. L.L.C. – How to Minimize Withholding Tax on Sale of L.L.C. Interest

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Foreign Investor in a U.S. L.L.C. – How to Minimize Withholding Tax on Sale of L.L.C. Interest

U.S. tax law was revised in last year’s tax reform legislation to impose tax on non-U.S. persons recognizing a gain from the sale of a partnership that engages in a U.S. business.  Worse, purchasers must collect and pay over to the I.R.S. a withholding tax equal to 10% of the amount realized by the seller.  Because of the way U.S. tax law treats partners of partnerships financed with debt, the withholding tax can be greater than the cash that is set to be paid to the foreign seller.  In April, the I.R.S. issued guidance on the problem, leading some to recommend a two-step plan to align the withholding tax with the ultimate income tax that will be due.  Fanny Karaman and Stanley C. Ruchelman explain the I.R.S. guidance and the two-step plan.

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I.R.S. Announces Six Compliance Campaign

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I.R.S. Announces Six Compliance Campaign

The I.R.S. Large Business and International division ("LB&I") recently announced compliance campaigns that are principally directed at compliance in cross-border fact patterns.  Included are campaigns to address (i) non-compliance with respect to Form 3520, (ii) compliance issues related to Form 1042, (iii) nonresident, non-citizen individuals inappropriately claiming tax treaty exemptions, (iv) nonresident, non-citizen individuals inappropriately claiming itemized deductions on tax returns, and (v) inappropriate credits claimed by nonresident, non-citizen individuals. Elizabeth V. Zanet looks into the various campaigns and places into context the effect on individuals.

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention.  Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and provides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues.  Areas covered include whether competent authority agreements can define undefined terms thereby removing the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty. 

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Foreign Charities active in the U.S. – Public? Or Private Foundations?

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Foreign nonprofit organizations have become more active in the U.S. in carrying out their charitable mandates.  Such activities include performances in the U.S. by foreign artistic companies and the use by U.S. charities of technology and know-how developed by foreign charities.  Fees earned by foreign charities could be subject to U.S. income or withholding taxes, but those taxes can be reduced or eliminated if specific procedures are followed. Much will depend on the status of organization as a “public charity” or a “private foundation,” terms that make reference to the organization’s funding sources.  Nina Krauthamer and Galia Antebi explain the U.S. rules that are applicable.

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U.S. Tax Residency Certification and Spanish Withholding Tax: Early Application Recommended

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Global taxpayers live in a process driven world. It is not enough to be correct when claiming a benefit, the paperwork must be completed.  In a detailed article on proper procedure, Beate Erwin and Christine Long explain that U.S. persons claiming treaty tax benefits with regard to payments from Spanish entities face two hurdles. First, they must meet the treaty qualification tests under the limitation on benefits article. Second, they must obtain a U.S. Tax Residency Certification from the I.R.S. before payment is met.

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2016 Model Treaty – Limitation on Benefits Revisions

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On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

Those who thought that the limitation on benefits (“L.O.B.”) provision under the U.S.-Netherlands Income Tax Treaty was complex will find that the level of complexity in the 2016 Model Treaty has been raised several levels. Some taxpayers will be losers and others will be winners. Philip R. Hirschfeld and Galia Antebi explain how the revised provision will work.

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U.S. Treasury Announces New U.S. Model Income Tax Treaty

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On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

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Partnership Tax Traps and Recent Guidance

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At the end of 2015, the I.R.S. issued a notice designed to limit the instances in which contributions of property to foreign partnerships benefit from nonrecognition of gain. In January, the I.R.S. came under pressure to modify its announced position in final regulations that are currently being developed. Philip R. Hirschfeld explains.

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I.R.S. Plan to Reject Foreign Taxpayers' Refunds Criticized by I.R.S. Advisory Committee

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The I.R.S. proposal to deny refunds of excess withholding tax in cases were the withheld tax is stolen by the withholding agent was harshly criticized by the Information Reporting Program Advisory Committee. It seems the I.R.S. does not have the authority to pass the loss onto the party that suffered withholding. Elizabeth V. Zanet and Andrew P. Mitchel discuss the issue in detail.

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Reinsurance Case Invalidates Tax on Foreign-to-Foreign Withholding Transactions

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A “cascading tax” is a tax that is enforced more than once on the income from the same transaction or related transactions. A common example involves a back to back license in which:

  • A non-U.S. individual or corporation (“A Co.”) licenses the rights to use intellectual property (“I.P.”) in the U.S. to another non-U.S. corporation (“B Co.”); and
  • B Co. then sub-licenses the same rights to use the I.P. to a U.S. corporation (“C Co.”).

Legislation to Relax F.I.R.P.T.A. Gets Bipartisan Support

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Tax legislation to encourage foreign investment in U.S. real estate made through real estate investment trusts (“R.E.I.T.’s”) was recently introduced in both the House and the Senate. Representatives Kevin Brady (R-T.X.) and Joe Crowley (D-N.Y.), introduced H.R. 2128, the “Real Estate Investment and Jobs Act of 2015.” The measure, backed by 22 bipartisan members of the U.S. House of Representatives, would make significant changes to the Foreign Investment in Real Property Tax Act (“F.I.R.P.T.A.”). The bill is similar to legislation Representatives Brady and Crowley introduced in the last session of Congress, as well as a companion version introduced in the U.S. Senate this year, co-authored by Senators Mike Enzi (R-W.Y.) and Bob Menendez (D-N.J.), S. 915. The Senate version would adopt additional changes including a proposed increase in F.I.R.P.T.A. withholding tax rates that would complicate investing by those not benefitting from the proposals. Enactment of the significant provisions in H.R. 2128 and S. 915 would signify an important step toward achieving F.I.R.P.T.A. reforms that have been advocated for by a number of real estate organizations for many years.

R.E.I.T. QUALIFICATION

A R.E.I.T. is a creation of the tax law. Any corporation, trust, or unincorporated entity may qualify as a R.E.I.T. if it meets the requirements of Code §856. A benefit of R.E.I.T. status is that it is a conduit for tax purposes, provided distributions are made to shareholders. No tax is imposed on the R.E.I.T. if it distributes all its income to its owners. The R.E.I.T. claims a deduction for dividends that it pays to its shareholders. In addition, a shareholder of the R.E.I.T. may be able to treat a dividend from the R.E.I.T. as taxable at capital gains rates if the underlying income of the R.E.I.T. that generates the dividend arises from the sale of an asset.

A Foreign Taxpayer’s Refund or Credit Could Be Limited by Upcoming Regulations

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In Notice 2015-10 (the “Notice”), issued on April 28, 2015, the I.R.S. stated that it was concerned about cases in which persons subject to withholding under Code §§1441-1443 (“Chapter 3”) or Code §§1471 and 1472 (“Chapter 4”) are making or will make claims for refunds or credits in circumstances where a withholding agent failed to deposit the amounts required to be withheld under §6302.

If a withholding agent fails to deposit an amount withheld under Chapters 3 or 4, or reported as withheld on Form 1042-S, and the I.R.S. issues a refund or credit for the amount, the I.R.S. may not be able to recover that amount because the claimant, and in some cases the relevant withholding agent, may be outside the United States. The new regulations aim to reduce the risk that the I.R.S. may issue improper refunds or credits for fictitious withholding or amounts that have not been deposited and are difficult to collect.

As will be seen below, the new regulations would limit a foreign taxpayer’s refund or credit to the amount deposited by the withholding agent. Though collecting undeposited amounts from withholding agents located outside the United States may be difficult for the I.R.S., one wonders about the fairness of limiting a foreign taxpayer’s refund or credit when the I.R.S. could use its greater resources to collect against the withholding agent.

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property – Part III

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INTRODUCTION

This is the final article in a three-part series that explains U.S. taxation under the Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”). This article looks at certain planning options available to taxpayers and the tax consequences of each.

These planning structures aim to mitigate taxation by addressing several different taxable areas of the transaction. They work to avoid gift and estate taxes, and double taxation of cross-border events and corporate earnings, while simultaneously striving for preferential treatment (e.g., long-term capital gains treatment), as well as limiting over-withholding, contact with the U.S. tax system, and liability. Often, such structures are helpful in facilitating inter-family transfers and preserving the confidentiality of the persons involved.

PRE-PLANNING

As with everything else, planning can go a long way when it comes to maximizing U.S. real estate investments. Here are a few questions to ask:

Investor Background

  1. Where is the investor located?
  2. Where is the investment located?
  3. What kind of business is the investor engaged in?

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part II

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This article examines the U.S. income, gift, and estate tax consequences to a foreign owner upon a sale or other disposition of U.S. real property, including a sale of real estate, sale of stock of a U.S. corporation, or a sale of a mortgage secured by U.S. real property.

In addition to (or sometimes in lieu of) rental income, many foreign investors hope to realize gain upon a disposition of U.S. real property. The Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”) dictates how gains are taxed from the disposition of United States Real Property Interests (“U.S.R.P.I.’s”). The law has a fairly extensive definition of U.S. real property for this purpose. Most significantly, the law provides for a withholding mechanism in most cases.

WHAT IS A U.S.R.P.I.?

A U.S.R.P.I. includes the following:

  • Land, buildings, and other improvements;
  • Growing crops and timber, mines, wells, and other natural deposits (but not severed or extracted products of the land);
  • Tangible personal property associated with the use, improvement, and operation of real property such as:
    • Mining equipment used to extract deposits from the ground,
    • Farm machinery and draft animals on a farm,
    • Equipment used in the growing and cutting of timber,
    • Equipment used to prepare land and carry out construction, and
    • Furniture in lodging facilities and offices.

  • Direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property;
  • Ownership interests other than an interest solely as a creditor, including:

    • Fee ownership;
    • Co-ownership;
    • Leasehold interest in real property;
    • Time-sharing interest;
    • Life estate, remainder, or reversionary interest; and
    • Options, contracts, or rights of first refusal.

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part I

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INTRODUCTION

U.S. real estate has been a popular choice for foreign investors, whether the property is held for personal use, rental or sale, or long-term investment. Since the passage of the Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”), the governing tax rules have developed and evolved, but have not succeeded in discouraging foreign investment. F.I.R.P.T.A. can be a potential minefield for those unfamiliar with U.S. income, estate, and gift taxation – all of which come into play. This article is the first of a series on understanding U.S. taxation of foreign investment in real property.

TAXATION OF A FOREIGN PERSON

“A foreign person is subject to U.S. income tax only on income that is characterized as U.S. source income.”

As simple as the concept sounds, there are applicable nuances, caveats, exemptions, and exceptions. Therefore, several questions must first be answered to determine the U.S. income tax consequences for a foreign person engaged in U.S. economic activities, including ownership of real property:

  1. Is the income derived from a U.S. source and therefore potentially taxable?
  2. Is the income taxable or exempt from tax?
  3. Is the income passive or active, subject to a flat withholding tax on gross income or, alternatively, to graduated rates on net income?
  4. Is the income earned by an individual or corporation or other entity, each of which may have different rules and applicable tax rates?