The Florida Department of Revenue recently issued a Tax Information Publication (TIP No. 17A01-08) offering guidance on the new sales and use tax exemption for animal and aquaculture health products that came into effect on July 1, 2017. Under the new exemption, animal health products administered to, applied to, or consumed by livestock or poultry to alleviate pain or cure or prevent sickness, disease, or suffering are exempt from sales tax. In addition, aquaculture health products that are used by aquaculture producers to prevent fungi, bacteria, and parasitic diseases in the production of aquaculture products are also exempt from sales tax. To be eligible for these exemptions, the purchaser must furnish the seller with an exemption certificate stating that the purchased item is exclusively for an exempted use. The TIP provides details on the contents of the exemption certificate.
Earlier this month, the Tax Court rejected an argument by the IRS that in order to establish good faith reliance on a tax advisor, for purposes of avoiding penalties, the taxpayer, a foreign corporation, needed to have (1) conducted an independent investigation into the tax advisor’s background and experience instead of merely relying upon the recommendation of the tax adviser by the taxpayer’s US legal counsel, and (2) hired a tax expert that specialized in international tax law or an attorney with an LL.M. degree. The Tax Court found that the IRS attempted to impose greater conditions on the taxpayer than what is required under existing law. The Tax Court ruled that the taxpayer reasonably relied upon the recommendation of its legal counsel in hiring the tax advisor. Furthermore, the standard is not whether the tax advisor was an expert in international tax law or an attorney with an LL.M. degree, but instead whether the tax advisor was “a competent professional who had sufficient expertise to justify reliance.”
The opinion in the case, Grecian Magnesite, Industrial & Shipping Co., S.A. v. Commissioner, 149 T.C. 3 (2017), can be found here.
We previously blogged that the Florida Legislature enacted a reduction to the state sales tax rate on commercial real property leases from 6% to 5.8% effective January 1, 2018. The language of the new statute is unclear as to whether the rate decrease would apply to current leases. However, we have confirmed with a representative of the Florida Department of Revenue that they interpret the rate reduction as applying to current leases for periods after December 31, 2017.
Governor Rick Scott signed House Bill 7109 on May 25, 2017, which reduces the state sales tax rate on commercial real property leases from 6% to 5.8% effective January 1, 2018. However, this rate decrease will not apply to current leases, because the bill provides that the tax rate in effect at the time the tenant occupies or uses the property is applicable, regardless of when a rent payment is due or paid. The bill does not change the local option sales tax, which is imposed in 0.5% increments. So, for example, the applicable rate in Sarasota County for leases commencing on or after January 1, 2018, would be 6.8% (instead of the current 7%). Florida is the only state that charges sales tax on the lease of commercial real property.
Tax inversions have been in the news for several years now, but almost always in the context of a public US company reincorporating in a foreign country to achieve lower tax rates on non-US source income. However, there is another type of inversion, the S corporation inversion, that does not involve any foreign countries but can be an elegant solution to a problem faced my many small and medium-sized businesses operated as S corporations.
Many businesses start as S corporations for good tax reasons, but later in their lifecycle want to convert to a tax partnership (such as an LLC taxed as a partnership) for a variety of business and tax reasons. For example, perhaps a private equity fund or foreign investor (which are both impermissible S corporation shareholders) want to invest in the business and become owners. Another example is where an S corporation wants to grant an equity interest to a key employee in exchange for their past and future services. Oftentimes, the best approach in this case is to grant the employee a “profits interest” in the business, but S corporations cannot grant such interests, while tax partnerships can. Simply converting or merging the S corporation into an LLC taxed as a partnership is not satisfactory, because that transaction would trigger the taxable liquidation of the S corporation.
One method to convert to a tax partnership tax-free, without undergoing an inversion, is the “LLC drop-down,” which entails the S corporation forming a wholly-owned LLC, that is initially a disregarded entity for tax purposes, and transferring all of the S corporation’s assets and business to the new LLC. Once this is accomplished, the new investors can invest in the business by investing into the new LLC, which will become a tax partnership. However, this restructuring is deceptively simple, because migrating the S corporation’s business to the new LLC can create many issues, including (1) migrating employees, payroll, and benefit plans to the new LLC; (2) opening new operating and payroll bank accounts for the new LLC; (3) consulting with insurance agents to obtain coverage for the new LLC; (4) assigning customer, lease, vendor, and other key agreements to the new LLC, which oftentimes requires the counterparty’s consent; (5) transferring or obtaining new licenses and permits for the new LLC to operate the business; and (6) obtaining lender consent.
These headaches can oftentimes be avoided by utilizing an S corporation inversion. The S corporation inversion is accomplished by having the shareholders of the S corporation (“Old S”) transfer their stock to a newly formed S corporation (“New S”) in exchange for all the stock of New S. Old S immediately makes an election to be a qualified subchapter S subsidiary, and so Old S will be disregarded for tax purposes. New S then forms a wholly-owned LLC, which is initially disregarded for tax purposes, and then merges Old S into the new LLC, with new LLC as the survivor of the merger. The merger is without tax consequences, because it’s a merger of two entities, Old S and LLC, that are disregarded for tax purposes. Furthermore, by operation of the Florida merger statute, all of the assets, liabilities, contracts, and legal relationships of Old S transfer to LLC and in most circumstances no third party consents are required. Now the old business is in a new LLC that can take on new investors in a tax partnership format and without many of the headaches of migrating a business to a new legal entity. For guidance on this structure, see Treasury Regulation Section 1.1361-5(b)(c), Example 2.
Williams Parker has international reach as the Florida member of Ally law – one of the world’s leading law firm networks. Our companion firm in London, Edwin Coe, represented the winning claimant, Dier Dos Santos, in the high-profile litigation in the U.K. challenging Article 50 and the Brexit vote. The High Court of Justice ruled that based on a 300-year-old law, the U.K. government does not have the constitutional capacity to trigger U.K.’s withdrawal from the European Union without a Parliamentary vote. More information on the ruling and its consequences can be found here.
Williams Parker regularly works with Ally Law attorneys to make sure our clients receive the legal support they need wherever in the world they might operate or have investments. Ally Law includes over 1,300 lawyers in 41 countries. More information on Ally Law can be found on our website.
We invite you to join us for an engaging, informative presentation on doing business in China. Williams Parker is pleased to host Maarten Roos and Robin Tabbers, lead partners of R&P China Lawyers (Shanghai) and authors of articles recently published in Requisite V – The International Edition. Our guests will provide practical guidance on manufacturing and sourcing in China, strategies for managing a Chinese subsidiary, and best practices for selling to the Chinese market. The presentation will take place Monday, September 19, from 5:30 to 7 p.m. at the firm’s office, located at 200 S. Orange Ave. in downtown Sarasota.
Williams Parker and R&P China Lawyers work together as part of the Ally Law network (formerly the International Alliance of Law Firms) to provide solutions to companies doing business internationally. R&P China Lawyers is a boutique PRC law firm that supports international business in China. Its attorneys combine in-depth legal expertise and broad experience of the Chinese business environment with a keen understanding of client needs.
Space is limited. If interested in attending, please email MarketingDesk@williamsparker.com.
Many US companies have entered into licensing agreements, distributorship agreements, or other commercial agreements that set out what they or another party may or may not do in the “European Union.” Historically, countries joined the European Union but they did not depart. Of course, with BREXIT, the constituent countries of the European Union will change when the United Kingdom departs. Consequently, now is a good time for parties to these types of agreements to review them and give some thought as to how they might be construed with the changing composition of the European Union and whether a contract amendment would be appropriate. Furthermore, in light of the closeness of the Scottish Independence Referendum in 2014 and other independence movements within the United Kingdom, it would also be wise to review contracts that set out what a party may or may not do in the “United Kingdom” or “Great Britain.”
Treasury recently finalized regulations clarifying the application of the bankruptcy and insolvency exceptions to cancellation of debt income involving a debtor partnership with one or more partners that are disregarded for income tax purposes. Section 108(a)(1)(A) and (B) exclude cancellation of debt from income if the cancellation or discharge occurred in a bankruptcy case or to the extent the taxpayer is insolvent. Where the debtor is a tax partnership, these exceptions are applied at the partner level instead of at the partnership level. Where a partner is a disregarded entity or grantor trust, the final regulations clarify that the bankruptcy and insolvency exceptions are applied by looking through the disregarded entity or grantor trust to the ultimate owner for income tax purposes. Consequently, the insolvency analysis is applied to the ultimate owner of the disregarded entity or grantor trust, and not to the disregarded entity or grantor trust itself. Similarly, in order for the bankruptcy exception to apply, the ultimate owner of the disregarded entity or grantor trust must be subject to a bankruptcy court’s jurisdiction.
The final regulations can be found here: : https://www.federalregister.gov/articles/2016/06/10/2016-13779/guidance-under-section-108a-concerning-the-exclusion-of-section-61a12-discharge-of-indebtedness
The Canada Revenue Agency (“CRA”) announced at the May 26 meeting of the International Fiscal Association in Montreal that limited liability limited partnerships and limited liability partnerships organized under the laws of Florida or Delaware will be taxable as corporations for Canadian income tax purposes. The CRA has treated US limited liability companies as corporations for many years, but previously treated US LLLPs and LLPs as pass-through entities. The announcement did not specify whether similar entities organized in other US states would be treated the same, but the justification provided by the CRA would appear to apply to such other entities.
The CRA’s announcement raises several issues for US LLLPs and LLPs that have Canadian owners, including such entities that own US real estate. One issue is that income from these entities will now be subject to double income tax. The US will treat these entities as pass-through entities and so only the owners will be subject to US income tax, but Canada will now treat these entities as corporations. Consequently, Canadian dividend tax will apply to distributions received by the Canadian owner, and a Canadian tax credit is not available for the US tax. Previously for such LLLPs and LLPs, but not for LLCs, the Canadian owner could credit the US tax they paid against their Canadian tax. Issues can also arise for US LLLPs or LLPs that do not have Canadian owners, but have business operations or investments in Canada.
The CRA did announce transitional relief so that US LLLPs and LLPs can be treated as pass-through entities for Canadian tax purposes retroactively if certain conditions are satisfied. One of the key conditions is that the LLLP or LLP must convert before 2018 to an entity that is recognized by the CRA as a pass-through entity, such as a general partnership or a limited partnership.