Key U.S. International Tax Provisions in the New Tax Legislation

Blog
December 28, 2017

The new U.S. Federal tax legislation includes some important revisions to the U.S. international tax rules. These rules are applicable to U.S. taxpayers with outbound cross-border activities in other countries. The following are some important highlights that could have an impact on the U.S. Federal tax obligations beginning as of January 1, 2018.

  1. 100% U.S. tax exemption for dividends received from a foreign corporation. The dividends that a U.S. C corporation receives from a foreign corporation will be exempt from U.S. Federal corporate income tax. The U.S. C corporation must own 10% of the stock of the foreign corporation and hold the stock for more than one year.
  2. S. tax on a foreign corporation’s undistributed earnings. Any U.S. shareholder that owns 10% of the stock of a controlled foreign corporation (CFC) is required to report and pay U.S. Federal income tax on their share of the foreign corporation’s post-1986 accumulated earnings and profits, i.e., undistributed net income. A controlled foreign corporation is any foreign corporation of which more than 50% of the vote or value is owned by U.S. shareholders that each own at least 10% of the stock. The deemed repatriation rule also applies to U.S. shareholders who own 10% of a foreign corporation that is not a CFC if there is at least one shareholder that is a U.S. C corporation. The U.S. Federal tax rate is 15.5% of the U.S. shareholder’s share of the foreign corporation’s undistributed earnings that consist of cash and cash equivalents. The U.S. Federal tax rate is 8% of the U.S. shareholder’s share of the foreign corporation’s undistributed earnings that do not consist of cash and cash equivalents. The U.S. shareholder is allowed to elect to pay the U.S. tax over an eight-year period. A special exception will allow an S corporation to defer the U.S. tax on its share of the foreign corporation’s earnings until the S corporation changes its status, sells substantially all of its assets, ceases business operations, or a shareholder of the S corporation transfers their S corporation stock.
  3. Disallowed U.S. tax deductions for related party interest and royalty expenses. S. taxpayers may not claim tax deductions for disqualified interest or royalty expenses paid or accrued to a related party that is a hybrid entity or pursuant to a hybrid transaction. The expenses are disqualified if the related party is not required to include the income and pay foreign tax on it in the related party’s country of tax residence. In a hybrid transaction, the United States recognizes the transaction as an interest or royalty expense but it is not characterized as such in the related party’s country of residence. A hybrid entity is a foreign entity that is a foreign company that is classified differently for tax purposes in the United States than in the foreign country of formation. An example of a hybrid entity is a foreign company that elects to be classified as a foreign disregarded entity or foreign partnership for U.S. tax purposes but is classified as a foreign corporation under foreign law.
  4. Expanded definition of 10% U.S. shareholder for CFCs. The determination of whether a foreign corporation is a CFC and whether a U.S. person is a 10% shareholder now takes into account the percentage of the value of all classes of shares owned in addition to the voting power.
  5. 30 day control no longer required for CFC deemed dividend inclusions. It is no longer a requirement that a CFC must be controlled for an uninterrupted period of 30 days during the year before U.S. shareholders that own at least 10% are required to pay U.S. tax on inclusions of the CFC’s undistributed income.     
  6. Constructive ownership of foreign corporation stock. Stock of a foreign corporation that is owned by a foreign person is now counted in determining whether a U.S. person related to the foreign person constructively owns the stock. This impacts the determination of whether the foreign corporation is a controlled foreign corporation (CFC) and whether the U.S. shareholder owns at least 10% of the CFC.

Please contact our international tax specialists at 301.231.6200 for more information regarding how the new U.S. international tax provisions may affect you.