New Rules Offer Relief for Individual Taxpayers
A recent proposed rule aims to provide relief to U.S. taxpayers who own interests in controlled foreign corporations (CFCs).
Before the 2017 Tax Cuts and Jobs Act, U.S. taxpayers were generally able to defer U.S. tax on foreign income earned from overseas investments. The 2017 reform requires recognition of almost all of a CFC’s global income, and nearly eliminates the ability of U.S. taxpayers to defer tax on overseas income. The consequences are far more severe for individual U.S. shareholders than for those holding interests through corporations, which benefit from a lower tax rate and a 50% deduction for much of their global income. Corporations are also allowed a credit for foreign taxes, whereas individuals are not. In essence, individuals are double taxed at a U.S. rate up to three or four times higher than that applicable to a similarly situated corporation.
The proposed rule provides guidance on determining the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), and maps out how taxpayers can coordinate the FDII and GILTI rules with other laws to address the disparity between individuals and corporations. This guidance allows individual U.S. shareholders to claim a credit for certain foreign taxes paid by their CFC.
Additional issues addressed include the ability of individuals to make an election to be taxed as corporations for purposes of the deferral regime, applying the rules to consolidated groups, and reporting requirements for certain foreign corporation and partnership interests. Other topics clarified include: how to establish foreign use of general and intangible property, how to define documentation reliability and safe harbor standards, how to treat non-U.S. services and bundled transactions, and how to treat related party transactions.
U.S. resident and taxpayer shareholders who earn foreign derived income should examine whether the foreign source income entity will be characterized as a CFC by the IRS, plan to take advantage of the new guidance as best they can, and review their contracts and documentation practices to ensure compliance with the new regime going forward. Barbosa Legal can help. Contact at jbarbosa@barbosalegal.com or eberd@barbosalegal.com to schedule an assessment of what the new Treasury rules mean for you.