Trump Tax Reform Will Force U.S. Citizens with Companies Offshore Pay More Taxes
U.S. citizens and U.S. Expats who own a foreign company with over 10% ownership are in for a big surprise and a higher tax rate. After President Trump’s tax reform signed into law in December 2017, two new taxes were created for U.S.citizens holding profit in foreign companies or offshore: the tax on accumulated profits or repatriation tax and the tax on foreign profits or GILTI.
This tax applies to the accumulated profits from offshore and foreign companies owed by U.S. citizens with at least 10% stock holdings. If the profits remained with the foreign company, the U.S. owner must pay a 15.5% one-time tax that should be divided up to 8 yearly installments:
- 8% of the tax liability in current year, second, third, fourth and fifth years
- 15% of the current tax liability in the sixth year
- 20% of the current tax liability in the seventh year
- 25% of the current tax liability in the eight year
The tax first installment was due on April 15, 2018, it was delay until next year FOR U.S. EXPATS only. There is hope the law will be amended to exclude U.S. Expats who own small foreign companies.
The deemed repatriation tax was designed supposedly to persuade the huge multinational companies like Apple and Google to bring their profits back to the US from other countries where they had earned them. Unfortunately, many small company owners living as Expats overseas will also be required to pay, if the law is not changed and providing the company hold an active business and generating profits.
For those foreign companies created for holding personal real estate and not generating profits, there will be no repatriation or GILTI tax payable but they will still be subject to the reporting requirements and calculations even though there is no tax payable to the IRS. Other foreign legal structures such as trusts or fideicomisos are exempt of these new tax calculation, reporting and payment, because foreign trusts have their own set of regulations for reporting to the IRS.
The Internal Revenue Service has now issued new information and guidance. U.S. Expats’ companies with a net tax liability of less than $1m for 2017 are not required to pay the penalty for not paying the first of the eight installments due on April 15, 2018, but the payment of this first tax installment is now delayed until next year in 2019 for U.S.Expats only.
Global Intangible Low Taxed Income or GILTI
The Trump Tax Reform created Section 951A of the Internal Revenue Code and will likely have a huge impact on those American taxpayers who own foreign companies. This new tax is applicable starting in 2018. These new regulations expand Subpart F income (Schedule F reports foreign income and similar to Schedule C reporting self-employed income), so individuals or trusts owning stock within controlled foreign corporations or CFC (U.S. citizens or residents owning over 10% of stock), whether through LLCs or S corporations or directly, will pay higher taxes.
The net income from a foreign subsidiary company CFC that you as a U.S. citizen or resident own, will be added to your regular income on your tax return to determine the additional tax liability. You will be able to deduct taxes paid in the country where the CFC is located. Foreign companies created for holding personal real estate will be subject to the calculations and reporting but will pay no tax. Foreign trust or fideicomisos are exempt of this tax calculation, reporting and payment because they have their own set of regulations and reporting to the IRS.
Remember, the GILTI is a new tax for the net income coming from a foreign subsidiary company starting 2018 and taxable at your regular income tax rate. The repatriation tax is a 15.5% tax paid on accumulated net profits on your foreign subsidiary company and payable in 8 yearly installments (see above for the yearly requirements) starting April 15, 2018.
These are some key areas to help you through the changes:
- If you have not paid the repatriation tax in April 15, 2018, and you are not a U.S. Expat, you must amend your tax return and pay the first installment equivalent to 8% of the tax liability.
- If you have not paid the repatriation tax on April 15, 2018 and you are not an U.S. Expat, you will be subject to the corresponding penalty calculated at the regular penalty rates 0.5% per month plus interest charges.
- Section 951A GILTI tax is very complex. Don’t just hope they will get it right. Have an in-depth discussion about the implications for your situation with your CPA.
- Get your overseas books in order. Get all the foreign accounting records sorted out to be sure your reporting is accurate and timely moving into the future.
Please, contact us with your questions in relation to GILTI and CFCs.
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