Under prior law, a U.S. shareholder of a foreign corporation generally was not subject to U.S. tax on that corporation's income until it was distributed to the shareholder as a dividend. The new Act eliminates the deferral of a foreign subsidiary's previously untaxed income by requiring a deemed repatriation of those earnings.
Under the new Act, U.S. shareholders of a Controlled Foreign Corporation and certain other U.S. persons holding at least 10% of a foreign corporation must report as taxable income their pro-rata share of the previously untaxed net post-1986 earnings and profits (E&P) of the foreign corporation. For purposes of these provisions, a U.S. shareholder includes an individual, trust, estate, partnership, and domestic corporation.
The foreign subsidiary's E&P may be taxed at two different rates. The portion of E&P attributable to cash or cash equivalents is taxed at a rate of 15.5%. The remaining E&P attributable to all other assets is taxed at a rate of 8%. It may be possible to use foreign taxes paid at the entity level as an offset to this tax. Owners of a foreign corporation with a fiscal year end are subject to additional special rules.
A Subchapter S corporation may elect to continue deferral of the foreign corporation's earnings until it changes its U.S. tax status, sells substantially all its assets, or ceases to conduct a trade or business. The deferral may also terminate when an electing shareholder transfers his or her stock in the S corporation.
At least 90% of the repatriation tax must be paid before April 17, 2018 with the remainder paid on a prospective basis. However, a U.S. shareholder can elect to pay the tax liability in installments over 8 tax years. If this election is made, the shareholder will pay installments of 8% of the net tax liability in each of the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the eighth and final year.
Based on the guidance available at this time, the election to pay the repatriation in installments must be made by the unextended original due date for the shareholder's 2017 U.S. income tax return. All installment payments must be made each year by the unextended original due date for the shareholder's U.S. income tax return for that year.
Since the determination of the deemed repatriation tax liability is both complex and time sensitive, we recommend that you coordinate with your Whitley Penn LLP tax advisor to manage the process of determining how the new law will apply to you. Note that some information necessary to determine the tax may not be readily available in tax filings, so it is important to begin the analysis as soon as possible. Whitley Penn LLP currently is contacting applicable clients to begin making the analysis and calculations necessary to determine the repatriation tax before the election and installment due dates.
If you have any questions or require any additional information, please contact your Whitley Penn LLP tax advisor or our Partner in Charge of International Tax Services, Brian Mitchell, at 214-393-9414.