Category Archives: International Tax

A Little Clarity for Non-U.S. Persons Selling Partnership Interests

A Spanish translation of this post appears below. La traducción al español de este artículo aparece a continuación.

The Tax Cuts and Jobs Act provided clarity to a question of how to treat gain or loss from the sale or exchange of a partnership interest held by a foreign person. The IRS, through Revenue Ruling 91-32, previously provided that “the gain realized by a foreign partner upon disposing of its interest in a U.S. partnership should be analyzed asset by asset and, to the extent any such asset would give rise to effectively connected income, the departing partner’s pro rata share of such gain should be treated as effectively connected income.” The Tax Court disagreed with the findings of Revenue Ruling 91-32 in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue and instead held that income, gain, or loss from the sale or exchange of a U.S. partnership interest by a foreign person will only be attributable to a U.S. office, and thus taxed as effectively connected income, if the U.S. office is a material factor in the production of such income, gain, or loss in the ordinary course of business of that U.S. office.

Rather than waiting for courts to come to a consensus as to how to treat gain or loss from a foreign person’s sale of a partnership interest, the Tax Cuts and Jobs Act amended the previous tax law and took the position of Revenue Ruling 91-32. Now if a partnership has a U.S. office and a foreign person sells an interest in such a partnership, then an asset-by-asset analysis will need to be conducted to determine how much of the gain or loss from such a sale will be subject to U.S. taxes.

For more information regarding the Tax Act, please see our recent related blog posts linked below:

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

Un poco de claridad para personas no estadounidenses que ofrecen a la venta su participación en una sociedad americana (también conocida como “U.S. Partnership”)

La ley de recortes fiscales y empleos de 2017, conocida como el “Tax Cuts and Jobs Act,” dió claridad a la cuestión de cómo tratar las ganancias o pérdidas de capital generadas después de la venta o intercambio de capital de una sociedad americana (“U.S. partnership”) en poder de una persona no estadounidense.

El IRS (Servicio de Impuestos Internos), a través de la Resolución de Impuestos 91-32, sostenía que las ganancias generadas por un socio extranjero al vender o transferir su parte en una sociedad americana debían ser analizadas activo por activo y, en la medida en que las ganancias de cualquier activo estuviesen vinculadas a una actividad realizada en los Estados Unidos, las ganancias de dicho socio (medidas en proporción a su participación en la sociedad) debían ser tratadas como ingresos efectivamente vinculados a una actividad realizada en los Estados Unidos.

El tribunal de impuestos no estuvo de acuerdo con la forma en que la Resolución de Impuestos 91-32 fue interpretada en el caso de Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue. El tribunal sostuvo que los ingresos, ganancias, o pérdidas generadas en la venta o intercambio de la participación de una sociedad americana por una persona extranjera debían ser atribuibles solamente a una oficina ubicada en los Estados Unidos y ser tratadas como ingresos efectivamente vinculados, solamente si la oficina ubicada en los Estados Unidos era indispensable para la producción de dichos ingresos, ganancias, o pérdidas en el curso ordinario de los negocios de la oficina ubicada en los Estados Unidos.

En lugar de esperar a que los tribunales llegaran a un consenso en cuanto a cómo tratar las ganancias o pérdidas generadas en la venta de capital de una sociedad en propiedad de una persona extranjera, la reforma fiscal de 2017 modificó la ley tributaria anterior y asumió la regla establecida por la Resolución de Impuestos 91-32. Ahora, si una sociedad tiene una oficina ubicada en los Estados Unidos y una persona extranjera vende su participación en tal sociedad, un análisis de cada activo debe ser conducido para determinar el monto de las ganancias o pérdidas sujetas a impuestos en los Estados Unidos.

Traducción por Juliana Ferro, Abogada

A Guide to the Toll Charge of the Tax Act

Shareholders in foreign businesses could find themselves hit with an immediate tax on offshore earnings under the recently passed “Tax Act,” officially known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”  Before the Tax Act, most foreign income earned by US shareholders through foreign corporations would only be subject to US taxes when the foreign income was paid to those US shareholders as dividends. The Subpart F rules were a way for the United States to capture some of this offshore income in the US tax base, but careful planning meant many US shareholders with foreign companies could keep money offshore and out of the US tax system for years. Some estimates put the amount of this offshore money at nearly $3 trillion, so any change to how the United States treats foreign taxes would look into how best to address these offshore earnings.

The Tax Act will look to capture some of this offshore income through a one-time immediate increase in the Subpart F income of certain US persons investing in foreign corporations.  The amount of income immediately taxed by the United States will increase by the greater of (i) accumulated post-1986 deferred foreign income determined as of November 2, 2017, or (ii) the accumulated post-1986 deferred foreign income determined as of December 31, 2017.  The tax rate on this deferred foreign income will be 8 percent for non-cash E&P and 15.5 percent for cash E&P.  This one-time tax has been referred to as a “Toll Charge” for how it may allow offshore income to flow back into the United States.

The Toll Charge is not a routine E&P calculation for US shareholders of foreign corporations.  Year-by-year ownership percentages, whether E&P is cash or non-cash, and the availability of certain foreign tax credits will all affect the final tax due.  The Tax Act has allowed for the payment of the Toll Charge in installments if sufficient cash to make payments is unavailable.

For more information regarding the Tax Act, please see our recent related blog posts linked below:

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

The U.S.-Japan Income Tax Treaty

Japan has long been one of the United States’ largest trading partners.  Japan is also one of the United States’ longest-standing tax treaty partners.  The first U.S.-Japan income tax treaty was concluded in 1954.  Updated treaties were signed in 1971 and 2003, and a protocol in 2013 further modernized the treaty.  The U.S.-Japan income tax treaty largely follows the model tax convention published by the Organisation for Economic Co-operation and Development (OECD), of which both countries are members.

The U.S.-Japan income tax treaty helps reduce the incidence of double taxation and encourages the cross-border movement of people and goods.  In general, the tax treaty allocates or restricts taxing rights between the two countries so that a resident of either the United States or Japan does not pay tax in both countries with respect to the same income (or pays reduced rates of tax in one of the countries).

For example, dividends paid by a company which is a resident of the United States to a resident of Japan may generally be taxed in both Japan and the U.S., but the rate of tax imposed by the United States with respect to such dividends is limited to either 5% or 10% (or, in some circumstances, such tax may be eliminated).  In the case of interest and royalties paid by a resident of one of the countries, only the country in which the recipient of the interest or royalty payment resides may tax such payments.  Similarly, capital gains derived by a resident of the United States or Japan from the sale of property other than real estate are generally taxable only by the country in which the seller of the property resides.  Gains from the sale of real estate and certain real estate holding companies, however, remain taxable in both countries under the tax treaty.

The tax treaty also provides for tie-breaker rules so that the same person is not considered a resident of both countries and provides a limited safe harbor for wages and salaries paid to residents of one country who perform employment services in the other country.  Other provisions relate to the taxation of diplomats, athletes, and branches or “permanent establishments” of multinational businesses, among other special situations.  Where disputes regarding the taxation of cross-border activities arise, notwithstanding the provisions of the treaty, the treaty provides a dispute resolution mechanism whereby the U.S. and Japanese governments can come to a mutual agreement to reduce or eliminate the additional taxation.

Recent U.S.-Japan income tax treaty documents and Treasury Department technical explanations are available at treasury.gov.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

Tax Residency and the 2017 World Rowing Championships

The Sarasota-Manatee area recently hosted the 2017 World Rowing Championships, bringing nearly a thousand athletes from seventy countries to the world class rowing facilities at Nathan Benderson Park. The tax consequences of such a visit were probably far from the thoughts of the rowers, coaches, support teams, and fans arriving from all over the world. At what point should someone consider how their visits to the United States could create tax problems? Could you owe tax to the United States just by visiting the country for a rowing competition?

The United States taxes the worldwide income of those who are United States citizens and residents. Generally, any person born or naturalized in the United States will be considered a United States citizen. A person will be considered a resident of the United States by receiving U.S. permanent resident status in the way of a green card or by meeting the substantial presence test. Frequent visitors to this country or those who stay in the country for extended periods must be aware of how the substantial presence test could affect their residency status.

The substantial presence test looks at the number of days a person has spent in the United States over the past three years. Seasonal visitors to the United States, those who make frequent trips to the country for business purposes, or those who vacation in the United States may all establish residency by spending too many days on U.S. soil.

Those in the United States competing in sports may have a slight glimmer of good news. Professional athletes receive a partial exception from counting days for the substantial presence test, but only for days where a professional athlete is temporarily in the United States to compete in a charitable sporting event that is organized to benefit a tax-exempt charity, contributes 100 percent of the proceeds to charity, and uses volunteers for substantially all the work needed to run the event.

If the 2017 World Rowing Championships was your first and only trip to the United States then you likely won’t run into residency problems. But those that have fallen in love with the Sarasota-Bradenton area and plan to return for more visits need to be aware of how your stay in the United States could create tax consequences.

Jamie E. Koepsel
(941) 552-2562
jkoepsel@williamsparker.com

Canada to treat Florida and Delaware LLLPs and LLPs as Corporations for Tax Purposes

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.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Proposed Regulations Expand Reporting Obligations for Foreign-Owned Disregarded Entities

In the wake of the Panama Papers leak, Treasury promulgated proposed regulations that require a US disregarded entity that is wholly-owned by a foreign owner to comply with the reporting, record maintenance, and associated compliance requirements that currently apply to US corporations that are owned 25% or more by a foreign owner under Code section 6038A, including the obligation to file Form 5472. The regulations also expand the types of transactions that must be reported. For example, contributions and distributions between the disregarded entity and its foreign owner would be subject to reporting even though these transactions would otherwise be ignored for tax purposes because of the involvement of the disregarded entity.

A link to the proposed regulations is here: https://www.gpo.gov/fdsys/pkg/FR-2016-05-10/pdf/2016-10852.pdf

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Going Global: What Are the International Tax Issues for a Small or Mid-Size Company

From a legal perspective, global expansion can have many forms, structures, and functions, including creating contractual relationships with distributors or licensees; establishing international legal entities for sales, manufacturing, or other business functions; or entering into an international joint venture. Regardless of the form or size of the contemplated global business expansion, there are a host of complex tax issues that have to be wrestled with in addition to the plethora of business and regulatory issues. Mike Wilson recently authored an article on this topic, which can be found here: http://www.williamsparker.com/docs/default-source/PDFs/international-tax-small-business_mjw

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Changing Investment Structures for Foreign-Owned US Real Property has Many Traps for the Unwary

There are various ways to structure a foreign investment in US real property and each has its own advantages and disadvantages (see below for a link to a previous blog post on this topic). A frequently chosen structure is a pass-through or fiscally transparent structure which, very generally, has income tax advantages (especially upon a disposition of the property), but US estate tax disadvantages. Over time, however, clients age and their plans change, and so we are sometimes called upon to convert a pass-through structure to a structure with US estate tax advantages (i.e., typically by inserting a foreign corporation into the structure), but which has income tax disadvantages. Converting such structures can at first blush seem relatively simple, but there are several traps for the unwary. A common approach to converting such structures is for the foreign client to contribute their ownership interests in the US pass-through entity (such as a partnership or LLC taxed as a partnership or disregarded for federal income tax purposes) to a foreign corporation. Normally, such a transaction would be tax-free under IRC section 351 as a contribution to the capital of a corporation. However, FIRPTA complicates the picture. Specifically, FIRPTA rules add additional requirements in order for this transaction to be tax-free, including that the ownership interest in the US pass-through entity (which is considered a US real estate property interest (“USRPI”) for FIRPTA purposes), be exchanged for another USRPI. Stock of a foreign corporation is generally not a USRPI, and therefore the contribution of the ownership interests in the pass-through entity to the foreign corporation would be considered a taxable sale. There are at least two planning techniques to avoid this issue that involve the use of a US corporation or having the foreign corporation elect to be treated as a US corporation for federal income tax purposes, but both techniques have their own set of advantages and disadvantages that must be carefully considered.

A previous blog post on structuring options for foreign investment in US real estate can be found here:
blog.williamsparker.com/businessandtax/2014/04/15/tax-planning-foreign-investors-purchasing-real-estate

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Tax Planning for Foreign Investors Purchasing Real Estate

Foreigners, especially Canadians, continue to comprise a significant percentage of Florida real estate purchases. The National Association of Realtors reported that during the recent 12-month period ending July 2013 the total sales volume of Florida residential real estate purchases by foreigners was $6.4 billion (9% of total Florida residential sales volume). 30% of these foreign purchasers were Canadian. These figures do not included foreign purchases of commercial real estate. Unfortunately, many Canadians and other foreign real estate purchasers do not sufficiently consider the U.S. tax ramifications of their purchase. There are many alternatives for structuring a foreigner’s purchase of U.S. real estate, and each alternative has tax advantages and disadvantages.

Below is a link to an article that discusses the U.S. tax issues and planning techniques that can help minimize tax headaches for Canadian (and other foreign) owners of Florida real property.

Tax Planning For Canadians Purchasing Property In Florida

If you need assistance with a foreign purchaser of U.S. real estate, please contact us.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043