April 2018
Private Client Cross Border News

The following are some articles on international private client matters which we thought would be of interest to you.  
New Withholding Tax for Foreign Partners on the Horizon

The IRS continues to ramp up its efforts to collect U.S. tax owed from overseas individuals. Now, it's adding a new weapon to its arsenal: the ability to impose withholding tax on foreign taxpayers who sell their partnership interests for gain.

Amid an influx in the number of partnerships engaging in more and larger foreign transactions, the agency has been looking at ways to prevent partnerships from skirting taxes on appreciated assets held overseas. According to the most recent IRS data , the number of partnerships engaged in foreign transactions increased by 10% between 2012 and 2014.

The forthcoming regulations stem from the newly enacted Tax Cuts and Jobs Act . The Act requires that a transferee withhold 10% of the amount realized on the sale of a partnership interest by a nonresident alien individual or a foreign corporation when any portion of that gain is effectively connected to U.S. trade or business. This applies to dispositions after December 31, 2017.

Of concern is that the agency will use a broad stroke approach when considering who qualifies as a foreign individual and is subject to the withholding tax. It will be up to taxpayers to file the appropriate paperwork to verify that they are a U.S. individual.

To help with the implementation of the new rules, the IRS issued guidance on how foreign partners can qualify for an exemption or reduce the amount of withholding tax owed. The guidance also details exceptions to the rules - scenarios in which a disposition won't be subject to any withholding tax. This occurs when the disposition doesn't result in a gain, or if the assets sold generate a nominal amount of income effectively connected to the U.S., and the partnership has met certain requirements and provides the IRS with proper certification.

The notice also provides interim guidance for taxpayers looking to sell interests prior to the release of the final regulations, and states that the IRS plans to issue regulations that will allow penalty and interest relief for individuals who submit the appropriate forms in connection with the new withholding tax requirement before May 31, 2018.

If you are involved with a foreign partnership - or even a U.S. partnership - it's recommended that you consult your tax advisor to see how these new regulations may impact you and whether you can qualify for exemption or a reduction in the amount of withholding tax owed.
CFC owners lose preferential tax benefits under new tax bill, hit with transition tax  

U.S. citizens who own a reportable interest - 10% or more - in a controlled foreign corporation (CFC) may be surprised to find they are subject to a new repatriation tax, which was intended for large multinationals. More bad news: The tax owing is due with their 2017 filing, the deadline for which has passed.

As part of Congress's broad tax overhaul, the government imposed a one-time repatriation tax on offshore assets of multinationals, with the assets deemed repatriated to the U.S. before Jan. 1, 2018. While the tax was aimed at large multinationals, due to how the new laws are worded, CFCs are also on the hook.

The issue? The deadline to report these earnings was April 15. Many CFC owners may have been unaware of their reporting requirement-or would have had insufficient time to report by the deadline even if they were aware. According to American Citizens Abroad, there are upwards of 10,000 CFCs owned by U.S. citizens overseas, and the tight deadline was more than likely a compliance challenge for many.

The tax, which carries a 15.5% rate for cash and cash equivalents and an 8% rate of illiquid assets, is imposed on post-1986 earnings of deferred foreign income corporations (DFIC) or those CFCs that have at least one 10% shareholder that is a U.S. corporation.

Despite calls from groups like American Citizens Abroad to extend the April 15 deadline, and to put in place a de minimis rule that would exempt smaller companies from the tax requirement, the requirements and the current deadline still stand under current law.

If a CFC has already filed without reporting this amount, it may need to file an amended return with the appropriate elections and include an IRC 965 Transition Tax Statement in its amended return.

As for repaying the tax, over the first five years, 8% of the tax must be paid annually. The remaining balance can be paid in annual installments of 15%, 20% and 25% in years six, seven, and eight, respectively.

For those individuals who report income under the new tax code requirement (§965), there are other potential implications for other foreign tax credits that they may be receiving. It is recommended that if you hold ownership in a CFC, you should consult your tax advisor to see how this new transition tax applies to you, whether you're currently in compliance with reporting requirements, and how reporting this income may impact other areas of your tax situation.

We thank you for taking the time to read our newsletter.  If we can be of service please do get in touch by e-mail or telephone.  


Jack Brister and Alicea Castellanos
Co-Founding Partners
International Wealth Tax Advisors


This e-newsletter is published by International Wealth Tax Advisors, LLC (IWTAs) and is not intended to be, nor should it be used as a substitue fo specific tax advice on any matter or set of circumstances.  It does not purport to be comprehensive or to render tax advice and is solely intended to provide general information for the clients and professional contacts.