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U.S. Owners Of Offshore Companies Are Obligated To These New Tax Liabilities

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According Thetaxadviser.com. Recently the IRS clarified the rules for transfer and consent agreements contained in the sections mentioned above and in Regs. Secs. 1.965-7(b)-(c).

SECTION 965
THE TAX CUTS AND JOBS ACT (TCJA) OF 2017, P.L. 115-97
Accordingly, the US moved from a global to a territorial tax system.
Some owners of foreign entities are US taxpayers and are subject to a once-off Sec.965 transition tax on untaxed foreign earnings.
Sec.965 applies to US shareholders as defined by Sec.965(b) in certain foreign corporations (CFC) or a foreign corporation with a corporate US shareholder.
Accumulated post-1986 earnings and profits which not been taxed before, now obligate taxpayers to pay a transition tax of as of November 2,2017 or December 31, 2017 in the foreign corporation’s last tax year beginning before January the 1st, 2018, as if the earnings had been repatriated to the US.
Various elections in respect of a Sec.965 payment can be made by taxpayers:
Sec. 965(h): To pay the tax in installmentsSec. 965(i) To defer payment for an S corporation shareholder until specific triggering events occur.
The taxpayer can pay its tax liability in installments over eight years.When the ‘event or events’ occur, the IRS further alleviates the burden on taxpayers by allowing transfer and consent agreements – if the requirements are met.
INSTALLMENT AMOUNTS:TRIGGERING EVENTS:
 Described in Sec.965(i)(2)(A) and Regs. Sec. 1.965-7(c)(3)(ii):
8% of the liability for the first five installmentsCorporations cease to be an S corporation
15% of the liability for the sixth installmentIn the event of a liquidation, sale, exchange, or disposition of sustainably all of the S corporation’s assets
20% of the liability for the seventh installmentThe cessation of the S corporation’s business
25% of the responsibility for the eighth installmentThe C corporation ceases to exist
When an acceleration event occurs, ALL THE REMAINING INSTALLMENTS become due.When any share of the S corporation stock is transferred by the shareholder
ACCELERATION EVENTS?IN SUCH AN EVENT THE ENTIRE AMOUNT OUTSTANDING BECOMES DUE, UNLESS:
·         Addition to the tax due to failure to timely pay any installment·         A transfer agreement is entered into by eligible parties
·         Bankruptcy, liquidation sale, exchange or disposition of all or a substantial portion of the taxpayer’s assets·         The S corporation shareholder makes a Sec.965(h) election to pay in installments instead of immediately
·         When a resident alien becomes a nonresident alien or when any taxpayer stops being a US person 
·         A person becomes a member of a consolidated group 
·         When the IRS determines based on material misrepresentation in a transfer agreement, that an acceleration event has occurred. 
 CONSENT AGREEMENTS:
 For Sec.965(I)(4)(D) the requirements are highlighted in Regs.Sec.1.965-7(c)(3)(v)(D)
 ·         Make a timely election on the tax return
 ·         Make timely payment of the first installment
 ·         The consent agreement must be filed timely, within 30-days of the triggering event
 ·         Copy of the agreement must be attached to the shareholder’s tax return
 ·         The shareholder must sign the agreement under penalties of perjury
 ·         The agreement must be titled “Consent Agreement Under Section 965(i)(4)(D) and its terms must include the following:
 o   A statement of compliance with all the conditions and requirements of the Code sections and Treasury regulations
 o   The name, address, and TIN of the shareholder
 o   The amount of unpaid deferred net tax liability for Sec. 965(i)
 o   A statement disclosing that the leverage ratio of the shareholders and all subsidiary members of its affiliated group after the event exceeds or not, 3-to-1.
 o   All further information and additions required by the IRS
 
  

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New Guidance

IN TERMS OF Q&A 2;3 AND 5

  1. Transfer and consent agreements must be filed with the IRS at:
COMPLIANCE SERVICE COLLECTION OPERATIONS, at Memphis CSCO,5333 Getwell Road MS 81, Memphis, TN 38118
  1. All agreements will be deemed timely filed if they are submitted within 30-days of the acceleration or triggering event.
  2. In the event of the death of a Sec.965(i) transferor and its related triggering event, the transfer agreement may be filed by the unextended due date of the transferor’s final tax return
  3. The consent agreement must be filed by the S corporation shareholder and not the S corporation
  4. If the S corporation has more than one shareholder, all the shareholders must submit their own consent agreements to be permitted to pay the tax in installments.
  5. The taxpayer is still required to make a timely Sec.965 election
  6. The signed election statement must be attached to the taxpayer’s tax returns
  7. Form 965-A or Form 965-B must be updated for the triggering event, election, and installment payments.

IN TERMS OF Q&A 7

  1. In the event of a Sec.965(h) election, excess remittances in the year of a Sec.965(i) triggering event cannot be refunded or credited to the next year’s income tax until after the tax year’s income tax liability is paid in full, including the Sec.965(h) installments, BECAUSE the previously deferred Sec.965(i) net tax liability is immediately assessed as an addition of tax in the year of the triggering event. The Sec.965(h) defers the payment only – not the obligation.
  2. For a Sec.965(h) election in the year of a triggering event, the tax payments must be applied to the tax liability first without Sec.965 and the first Sec. 965(h) installment after that to any succeeding Sec.965(h) installments.
  3. When the tax year liability is satisfied, the taxpayer may receive a refund or credit to the next year’s income tax if any excess tax remittances remain.

 

IN TERMS OF Q&A 8

  1. The S corporation and the transferor remain jointly and severally liable for the taxpayer’s Sec 965(i) net tax liability even if a Sec.965(h) election was made.
  2. They remain accountable for payments of the net tax liability, penalties and additions to tax or related amounts.
  3. The election does not alter the liabilities of the S corporation or transferor, as discussed in Sec.965(i)5) and related Treasury regulations.

Exceptions to the rule: For a covered acceleration defined in Reg. Sec 1.965-7(b)(3)(iii)(A)(1); when an eligible Sec.965(h) transferor and an eligible Sec.965(h) transferee defined in terms of Sec.1.965-7(b)(3)(iii)(B)(1) enter into a transfer agreement with the IRS.

Offshore Company

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The new regulations modernize the US tax system. It provides a deliberate transition away from a worldwide toward a territorial system to protect the US tax base and provide clarity to taxpayers so that they can grow their businesses. Click here to email us and start your project.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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