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.
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.
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.”
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.
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
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.