There was new U.S. international tax legislation enacted in the Tax Cuts and Jobs Act in December 2017. The new law requires a U.S. shareholder of a foreign corporation to pay U.S. federal tax on the undistributed offshore earnings of the foreign corporation.
What is the U.S. repatriation tax?
Certain U.S. shareholders of a foreign corporation must pay a U.S. federal tax at 15.5% of the foreign corporation’s undistributed and non-previously taxed earnings and profits (E&P) attributable to cash and cash equivalents. The tax is 8% of the U.S. shareholder’s share of the foreign corporation’s E&P attributable to noncash assets. The U.S. shareholder’s share of the taxable E&P is determined at December 31, 2017, or November 2, 2017, whichever is greater.
Who does the U.S. repatriation tax apply to?
Any U.S. shareholder that owns 10% of a controlled foreign corporation (CFC) must pay the U.S. repatriation tax. A CFC is any foreign corporation of which more than 50% is owned by U.S. shareholders who each own at least 10%. Any U.S. shareholder that owns 10% of a foreign corporation that is not a CFC must pay the U.S. repatriation tax if there is at least one 10% U.S. C corporation shareholder of the foreign corporation. A U.S. shareholder can be a U.S. citizen, a U.S. green card holder, a U.S. tax resident based on the U.S. substantial presence test, a U.S. C corporation, a U.S. S corporation, a U.S. partnership or multi-member LLC, a U.S. trust, or an estate of a U.S. decedent individual.
When is the U.S. repatriation tax required to be reported and paid?
The U.S. repatriation tax rule applies for the last year of the foreign corporation that begins before January 1, 2018. For the U.S. shareholder, the U.S. repatriation tax is reportable on the U.S. federal income tax return for the U.S. shareholder’s tax year in which or with which that year of the foreign corporation ends. For a U.S. shareholder and a foreign corporation with a December 31, 2017, tax year end, the U.S. shareholder must report their share of the taxable E&P and the U.S. repatriation tax with the 2017 U.S. federal income tax return. The U.S. shareholder may elect to pay the U.S. repatriation tax over eight years. In the first five years, 8% of the tax is required to be paid each year. In the sixth year, 15% of the tax is paid. In the seventh year, 20% of the tax is paid. In the eighth year, 25% of the tax is paid. If the U.S. shareholder is required to report the taxable E&P of the foreign corporation on the 2017 U.S. federal income tax return, the election to pay the U.S. repatriation tax over eight years must be made with the 2017 U.S. tax return.
What is the special deferral rule allowed for U.S. S corporations and their U.S. individuals shareholders?
There is a special exception which allows a U.S. S corporation and its U.S. shareholders to defer the U.S. repatriation tax indefinitely until there is a triggering event. A triggering event is the termination of the U.S. S corporation’s Subchapter S corporation election status, a complete disposition of all of the S corporation’s assets, a termination of the S corporation’s business operations, or when a U.S. shareholder transfers their stock in the S corporation. This exception means that the U.S. S corporation and its U.S. shareholders are not required to pay the U.S. repatriation tax until a triggering event occurs.
How should U.S. shareholders of a foreign corporation plan for the U.S. repatriation tax?
A U.S. S corporation shareholder should consult a qualified U.S. international tax accounting advisor as soon as possible. Depending on the tax year end of the U.S. shareholder and the foreign corporation, the U.S. shareholder may have an obligation to report the U.S. repatriation tax and file the election with a 2017 U.S. federal income tax return. If a formal E&P analysis has not been prepared to determine the foreign corporation’s E&P based on U.S. tax principles, it is advisable to consider doing this as early as possible. The U.S. repatriation tax liability is based on the U.S. shareholder’s share of the foreign corporation’s undistributed and non-previously taxed offshore E&P during the time when the foreign corporation was a CFC or a foreign corporation with at least one 10% U.S. C corporation shareholder.
For further questions regarding U.S. repatriation tax, please contact our international tax specialists at 301.231.6200.