The Tax Cuts and Jobs Act 2017 (TCJA) changed many things, including reporting and taxing requirements for US taxpayers living abroad. While the plan was marketed as a much needed tax simplification for Americans; the TCJA did not provide much relief, let alone simplification, for U.S. taxpayers living abroad (Expats).
Listed below are 5 more items about TCJA that U.S. Expats need to know in this Part II (We previously listed 7 items about TCJA that U.S. Expats need to know in Part I):
8. Corporate Taxes Have Changed Significantly. The tax reform bill has transitioned the U.S. to a territorial system of corporate taxation. Before, the U.S. operated using worldwide taxation, meaning that corporations had to pay taxes on the income they earned abroad. This change will affect expats who own corporations outside the U.S., because they will face a one-time deemed repatriation tax of 15.5 percent of any previously untaxed overseas profits as the U.S. transitions to a territorial system for corporations instead of a worldwide system (See Forced Repatriation Below).
The individual reporting requirements are, for the most part, the same. U.S. expats who own small businesses abroad may find their situation is worse under the TCJA than under the old system. Most American Taxpayers living abroad will not find their taxes streamlined by the provisions of the TCJA.
9. Forced Repatriation of CFC Deferred E&P (Post 1986 Retained Earnings). The bill’s forced repatriation rule applies to U.S. individuals who own CFCs, or non-U.S. corporations that have at least one 10 percent U.S. shareholder that is a U.S. domestic corporation. It does not apply to individuals who own non-CFC PFICs. The tax applies as a Subpart F inclusion on all of the CFC’s pre-effective date foreign earnings at an individual rate of approximately 9.05% for non-cash earnings and profits and 17.5% for earnings and profits held in cash. Individuals will not be afforded the benefit of foreign tax credits for any foreign tax imposed on the CFC’s earnings.The new provision will allow for an 8-year deferral on payment of the tax owed, meaning the majority of payments will be owed in the later part of the 8-year period. If the CFC was owned by an S corporation, there is an indefinite deferral of the tax that may apply until one of the following triggering events is met:
i) The first type of triggering event is a change in the status of the corporation as an S corporation.
ii) The second category includes liquidation, sale of substantially all corporate assets, termination of the company or end of business, or similar event, including reorganization in bankruptcy.
iii) The third type of triggering event is a transfer of shares of stock in the S corporation by the electing taxpayer, whether by sale, death or otherwise, unless the transferee of the stock agrees with the Secretary to be liable for net tax liability in the same manner as the transferor.
10. Create an Alternative Methods for Taxing CFC Global Intangible Low-Taxed Income (GUILTI). The GILTI regime may cause income of a CFC that is not otherwise caught by the existing Subpart F rules to be includable in the gross income of its U.S. shareholders. This regime will affect almost all U.S. individuals that own CFCs, unless the CFC has incurred significant investment in tangible assets.
This GILTI tax would apply to U.S. shareholders of foreign IP Heavy CFCs, service provider CFCs, and CFCs with low basis assets, and which otherwise would not cause Subpart F inclusions for its U.S. shareholders.
If a U.S. individual owns the CFC directly or through a pass-through entity, then the GILTI inclusion will be subject to ordinary U.S. federal tax rates of up to 37%. Furthermore:
- The individual will not be able to apply a tax credit against the income for taxes paid by the CFC.
- The CFC will be subject to tax in the foreign country plus
- The individual will be subject to an immediate 37% tax on GILTI income. and
- Finally, the dividend withholding by the CFC’s country of incorporation will likely not be able to be offset by foreign tax credits.
The GILTI tax should not apply if the CFC’s foreign income is subject to foreign tax at a rate of 18.9% or more for non-C corporation shareholders.
11. Participation Exemption for Foreign Source Dividends. The TCJA has a provision that exempts 100% of foreign source dividends paid by a specified 10-percent owned non-U.S. corporation would apply only to U.S. C corporation shareholders of non-U.S. corporations. When a U.S. individual shareholder receives a dividend from a non-U.S. corporation, the dividend is includable in the shareholder’s gross income. U.S. individual shareholders of CFCs cannot claim indirect tax credits for non-U.S. taxes paid by the CFC.
There are several options to improve the tax position of U.S. individual shareholders holding non-U.S. investments, such as forming a U.S. corporation to own the shares of a non-U.S. corporation. This can be especially beneficial to U.S. individual shareholders that own non-U.S. corporations in jurisdictions that do not have a treaty with the United States.
An alternative is for the shareholder to make an election under Section 962(b) to treat the CFC as if it were owned by a domestic C crporation. The 100% foreign source dividends exemption will not apply to dividends from passive foreign investment companies (“PFICs”) even if the U.S. shareholder is a corporation.
12. Expatriation Rules for Relinquishing US Citizenship and/or US Green Card Remain the Same. Congress did not touch Sections 877A or 2801 of the Internal Revenue Code. Those are the two special-purpose statutes that impose tax on people who renounce US citizenship or abandon their green cards. Therefore, someone who expatriates in 2018 will face the same tax laws that applied to someone expatriating in 2017, 2016, or before.