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Unravelling of the Matryoshka Doll – Impact of the C.T.A. on entities having nexus to the U.S.

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Unravelling of the Matryoshka Doll – Impact of the C.T.A. on entities having nexus to the U.S.

Aimed at curbing money laundering, terrorism financing, and other nefarious activity, Congress enacted the Corporate Transparency Act (“C.T.A.”) on January 1, 2021. However, the C.T.A. became fully effective from January 1, 2024. It now requires certain domestic and foreign entities to disclose to the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Treasury Department, the identity of their beneficial owners and control persons. A failure to do so can attract heavy penalties. The targets of the C.T.A. are much like Matryoshka dolls, having many layers between what appears on the surface and what exists at the heart. Neha Rastogi and Stanley C. Ruchelman guide the reader through the in’s and out’s of what is likely the most invasive legislation enacted by Congress.

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Receipt of a Profits Interest in a Partnership by a Service Provider – Not Taxable

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Receipt of a Profits Interest in a Partnership by a Service Provider – Not Taxable

In E.S. N.P.A. Holding L.L.C. v. Commr., the U.S. Tax Court decided that the indirect receipt of a profits interest in a partnership in exchange for services was not a taxable event for the recipient. The decision was largely an application of Revenue Procedure 93-27, in which the I.R.S. provided guidance on the tax treatment of an individual who directly provides services to a partnership in exchange for the receipt of a profits interest. However, it is not a run-of-the-mill fact pattern that involves the grant of a profits interest to an individual in the financial services sector. Rather, it is about how an individual running a business through a taxable C-corporation was able to (i) arrange a sale of 70% of the C-corporation’s business to new investors bringing in fresh capital and (ii) by choosing a proper structure open a pathway to receive future profits without channeling income through the C-corporation. Wooyoung Lee, Nina Krauthamer, and Stanley C. Ruchelman explain the applicable I.R.S. regulations defining a “profits interest,” an important 8th Cir. Case reversing a decision of the U.S. Tax Court, the Revenue Procedure, and finally E.S. N.P.A. Holding v. Commr.

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Notice 2023-80: U.S. Foreign Tax Guidance for Pillar 2

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Notice 2023-80: U.S. Foreign Tax Guidance for Pillar 2

On December 11, 2023, the I.R.S. issued Notice 2023-55 (the “Notice”), announcing the intention to issue proposed regulations addressing the interaction between the Pillar 2 GloBE Rules and specific U.S. tax provisions, including the foreign tax credit rules and dual consolidated loss rules. The issuance of this guidance is timely, as the I.I.R.’s of most countries took effect at the start of this year. The U.T.P.R.’s are scheduled to come online in 2025. In his article, Michael Bennett tracks the way Notice 2023-80 addresses GloBE model rules and the foreign tax credit. Topics include the application of the foreign tax credit rules in the U.S. to final Top-Up Tax, the Q.M.D.T.T. in general, how the application of the separate levy rules will apply to a foreign country’s I.I.R., U.T.P.R., and Q.D.M.T.T, and the interplay of the GloBE rules of B.E.P.S. 2 and the dual consolidated loss rules of U.S. tax law.

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Mauritius – Gateway To Africa

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Mauritius – Gateway To Africa

Rightly called “the Pearl of the Indian Ocean,” Mauritius is much more than a popular tourist destination. Recent World Bank statistics identify Mauritius as the country with the second highest per capita G.D.P. in Africa. Mauritius maintains relationships with key African and international bodies, such as the Southern African Development Community (“S.A.D.C.”), the Common Market for Eastern and Southern Africa (“C.O.M.E.S.A.”), the World Trade Organization, and the Commonwealth of Nations. It has a low income tax rate and offers a range of incentives to boost its competitiveness. Sattar Abdoula, the C.E.O. of Grant Thornton Mauritius, and Mariam Rajabally, a partner in the international financial services and tax at Grant Thornton Mauritius, take a deep dive into the tax, financial, and commercial benefits that are available in Mauritius, and why it remains an important gateway into Africa.

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Square Pegs in Round Holes – You Like "To-May-To" and I Like "To-Mah-To"

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Square Pegs in Round Holes – You Like "To-May-To" and I Like "To-Mah-To"

In a post-COVID-19 world, anecdotal evidence suggests that individuals and families are relocating to new jurisdictions of residence. Equally, individuals have evidenced renewed vigor in acquiring and structuring assets across a range of jurisdictions. When the individual is a U.S. citizen and the place to relocate or acquire assets is the U.K., care must be taken to avoid common – and not so common – traps and pitfalls regarding taxation. In their article, Ed Powles, a Partner of Maurice Turnor Gardner, London and Emma-Jane Weider, the Managing Partner of Maurice Turnor Gardner, London, identify areas for which tax planning is crucially important prior to a move. Included are (i) tax residence and domicile rules for individuals, (ii) residence tests for trusts, companies, and charities, (iii) identifying areas for which income tax treaties do not necessarily provide relief against double taxation, and (iv) ways in which gift and estate planning, dissolution of marriages, forced heirship, and structures to own personal use residential real property are affected by the move.

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Andorra: A Comprehensive Tax And Legal Analysis

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Andorra: A Comprehensive Tax And Legal Analysis

Andorra is a tiny landlocked principality nestled in the Pyrenees mountains between France and Spain. While it offers many quality-of-life benefits, the country’s biggest attraction has been its favorable taxation system. In recent years, Andorra has worked diligently to enhance transparency and to promote international cooperation in an attempt to rid itself of a tax haven reputation. Today, Andorra is widely considered to have a modern tax system, making it an approved jurisdiction by the E.U. It is a party to 10 double tax agreements, participates in C.R.S., is not on the O.E.C.D. list of noncooperative tax jurisdictions, and has ongoing discussions of association with the E.U. All the while, Andorra maintains attractive tax rates for individuals and corporations. Albert Folguera Ventura, C.E.O., Partner, and Head of Tax at Addwill Partners, Barcelona, explains the ins-and-outs of the Andorran tax system applicable to corporations and individuals resident in the country.

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Insights Volume 10 Number 6: Updates & Other Tidbits

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Insights Volume 10 Number 6: Updates & Other Tidbits

This month, Wooyoung Lee looks at several interesting items, including (i) Aroeste v. U.S, an F.B.A.R. case that will bring joy to many expat green card holders living abroad and claiming U.S. tax benefits as a resident of a treaty partner country, (ii) continued movement towards passage of the Taiwan tax-treaty bill, reflecting bipartisan support in the Senate and House of Representatives, and (iii) the issuance by FinCEN of final regulations allowing a 90-day period for filing beneficial owner statements for companies formed in 2024. 

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Christensen v. U.S. – Reducing the N.I.I.T. by Claiming an F.T.C.

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Christensen v. U.S. – Reducing the N.I.I.T. by Claiming an F.T.C.

In Christensen, the Federal Claims Court allowed U.S. citizen/French tax resident taxpayers to claim the foreign tax credit to reduce the net investment income tax (“N.I.I.T.”) using Article 24(2)(b) of the France-U.S. Income Tax Treaty. This approach countered the Code’s explicit disallowance of the foreign tax credit as a way to reduce the N.I.I.T. The Federal Claims Court decision built upon the Tax Court’s previous decision in Toulouse, where the Tax Court denied the foreign tax credit claimed against the N.I.I.T. by a U.S. citizen/French resident taxpayer. Michael Bennett explains that the disparity in outcomes did not stem from a conflict in reasoning. Rather, it resulted from the application of different provisions of the treaty.

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Moore v. U.S. – A Case for the Ages to be Decided by Supreme Court

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Moore v. U.S. – A Case for the Ages to be Decided by Supreme Court

Moore v. U.S. is a case that asks the following question: does the U.S. Constitution impose any limitations on Congress to impose tax where no Subpart F income is realized during the year by a C.F.C. and no dividends have been paid to shareholders? It does so in the context of the change in U.S. tax law provisions designed to avoid double taxation of income in a cross border context. Prior to 2018, U.S. law eliminated double taxation on direct investment income of a U.S. corporation by allowing an indirect foreign tax credit for income taxes paid by a ≥10%-owned foreign corporation. In 2018, the U.S. scrapped that method and adopted a D.R.D. for dividends paid to a U.S. corporation by a ≥10%-owned foreign corporation. To ensure that accumulated profits in the foreign corporation at the time of transition would be taxed under the old system, the transition tax required a one-time increase in Subpart F income attributable to the deferred foreign earnings of certain U.S. shareholders. However, the tax was imposed in certain circumstances on individuals who never were entitled to claim an indirect foreign tax credit under the old law and were not eligible to claim the benefit of the D.R.D. Mr. and Mrs. Moore were two such individuals. They paid the transition tax, filed a claim for refund, and brought suit in the U.S. Federal District Court to recover the tax paid. They lost in the district court and again on appeal. A writ of certiorari was filed with the U.S. Supreme Court and the case was accepted for consideration. Most pundits believe the Moores have no chance of winning. Stanley C. Ruchelman and Wooyoung Lee evaluate their chances, pointing out that the last chapter of the saga has not yet been written. 

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Did You Just Manifest the Opposite of What You Wanted - (IN)Ability to Use G.I.L.T.I. Losses to Offset Gain

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Forward-looking tax planning for U.S. taxpayers and their foreign subsidiaries was never an easy task. Since the adoption of the G.I.L.T.I. regime, domestic tax plans must be adjusted when applied to a cross border scenario. In their article, Stanley C. Ruchelman and Neha Rastogi examine a straightforward merger of related corporations, each operating at a loss, followed by a significant gain from the sale of an operating asset. What is a statutory merger when two companies are based outside the U.S.? What information must be reported on a U.S. Shareholder’s U.S. income tax return? What forms are used to report the information? Do the G.I.L.T.I. rules make operating losses of a C.F.C. useless to a U.S. Shareholder when a C.F.C. sells operating assets at a sizable gain? These and other issues are explored by the authors.

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Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

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Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

Except for the U.S., transfer pricing law frequently includes a provision that references the O.E.C.D. T.P. Guidelines as the guidance that must be used to interpret other provisions of relevant law. Nonetheless, national tax administrations publish their own interpretive guides to the O.E.C.D. T.P. Guidelines, thereby adding to a body of administrative guidance that can vary from country to country. The European Commission has recently proposed a Council Directive on transfer pricing released as part of the Business in Europe: Framework for Income Taxation (“B.E.F.I.T.”). The Directive proposes to codify the arm’s length principle and elements of its interpretation from the O.E.C.D. T.P. Guidelines. This elevates the O.E.C.D. T.P. Guidelines into E.U. law, thereby making them more than an arm’s length principle interpretive standard. It does so with several subtle and not-so-subtle variations. Michael Peggs and Michael Bennett caution that making soft law into hard law impairs the ability of tax administrations to compromise on points of controversy.

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News From Italy – Recent Updates to Inbound Workers Regime and Register of Beneficial Owners

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News From Italy – Recent Updates to Inbound Workers Regime and Register of Beneficial Owners

This month, the good news regarding special tax regimes in Italy relates to the flat tax. No changes are expected to the regime as Italy finishes its legislative session. The €100,000 flat tax remains intact. Good news also exists for the lesser known Pensioners Regime that imposes a 7% substitute tax on all pension payments paid on non-Italian source pension income if certain conditions are met. However, cutbacks in benefits and more stringent standards for qualification have been announced regarding the Inbound Workers Regime. In addition, the Register of Beneficial Owners of enterprises with legal personality, private legal entities, trusts, and similar legal arrangements has become operational at local Italian Chamber of Commerce offices. Andrea Tavecchio, the Founder and Senior Partner of Tavecchio & Associati, Tax Advisers, Milan, and Alessandro Carovigno, a chartered accountant at Tavecchio & Associati, Tax Advisers, Milan, explain the revisions to the Inbound Workers Regime and the information that must be filed with the Beneficial Owner Register. They also address the persons obligated to file with the Register and the persons who have access to the information filed with the Register.

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Invoking M.F.N. Clause Under Indian Tax Treaties Requires Notification

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Invoking M.F.N. Clause Under Indian Tax Treaties Requires Notification

India’s tax treaties with various countries mitigate double taxation and reduce the scope of taxable income or provide lower rates of withholding tax in certain cases. Some agreements include a most favoured nation (“M.F.N.”) clause. The clause allows the treaty partner country to import benefits from a subsequently signed Indian income tax treaty when certain conditions are met, most notably that the treaty partner country in the treaty subsequently signed is a member of the O.E.C.D. Opinions differed as to whether the M.F.N. clause is self-executing when a treaty partner country was not a member of the O.E.C.D. at the time its treaty with India is negotiated but subsequently becomes a member. Does the M.F.N. clause apply automatically or are there procedures to follow? Recently, the Supreme Court of India upheld the position of Indian tax authorities that an M.F.N. clause is not self-executing and that an M.F.N. clause properly looks only to the list of O.E.C.D. member states at the time the earlier treaty was signed. Sakate Khaitan, the Senior Partner of Khaitan Legal Associates, Mumbai, Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, and Weindrila Sen, an associate of Khaitan Legal Associates, Mumbai explain all. Indian subsidiaries now face the risk of taxation, interest, and penalties for the past 10 years.

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Changes Announced to Dutch Entity Classification Rules and Tax Regimes for Funds

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Changes Announced to Dutch Entity Classification Rules and Tax Regimes for Funds

 In the Netherlands, the third Tuesday in September, known as Princes’ Day, marks the opening of the new parliamentary year. The budget for the coming year is announced, including an accompanying Tax Plan. The 2024 Tax Plan was presented by the sitting Dutch government, which is merely a caretaker until a new coalition is formed in November. This year, the Tax Plan contains provisions that will have a significant impact on businesses and financial institutions, particularly in relation to Dutch investment institutions. One major goal is to simplify the tax characterization of various entities to eliminate the opportunity of planning through hybrid entities. The distinction between open and closed C.V.’s is eliminated. The possibility of planning for an F.G.R. to be opaque or transparent is mostly eliminated, but for those F.G.R.’s that adopt the redemption method as the exclusive means of disinvesting in a fund. Where transparent, an F.G.R. will not be eligible to benefit from the V.B.I. regime for collective investment vehicles and its 0% rate of tax. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam, explains all, and advises that the general consensus in the Netherlands is that the legislative process should continue, having been subject to public consultation previously.

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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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