Foreigners Holding U.S. Real Estate Multi-Tiered Corporations- An Accidental Inversion Just Waiting to Happen

Foreigners Holding U.S. Real Estate Multi-Tiered Corporations- An Accidental Inversion Just Waiting to Happen

Tax Law
By Anthony Diosdi For some time, many non-residents (who are not domiciled in the U.S.) held U.S. real property through U.S. corporations which were wholly owned by foreign corporations. The purpose of these multi-tiered structures was to avoid the U.S. estate and gift tax. At one time, if implemented properly, this type of structure protected the non-U.S. individual from U.S. federal estate and gift tax, and also allowed the non-resident to control the timing of shareholder-level tax on dividend distributions. All this was possible because prior to the 2004 calendar year, a U.S. corporation may reincorporate in a foreign jurisdiction and thereby replace the U.S. parent corporation with a foreign parent corporation. These transactions are commonly referred to as asset inversion transactions. In asset inversions, a U.S. corporation generally recognized…
Read More
A Dive into the IRS Form 5471 Schedule F

A Dive into the IRS Form 5471 Schedule F

Tax Law
By Anthony Diosdi Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders of foreign entities that are classified as corporations for U.S. tax purposes. The schedules of Form 5471 are used to satisfy the reporting requirements of the Internal Revenue Code. Schedule F of Form 5471 is required to be filed by filers. Schedule F of Form 5471 requires the shareholders of a foreign entity classified as a controlled foreign corporation (“CFC”) to prepare a balance sheet for the entity. The balance sheet of the foreign corporation should be prepared and translated in accordance with the U.S. GAAP.This article will take review into each column and line of 2020 Schedule F of the Form 5471. Who Must Complete the Form 5471 Schedule FThere are five…
Read More
The Corporate Anti-Inversion Rules- Don’t Leave Home Without Understanding Them

The Corporate Anti-Inversion Rules- Don’t Leave Home Without Understanding Them

Tax Law
By Anthony Diosdi For some time, corporate inversion transactions have been the focus of Congress and has generated a vigorous political debate. This is in part because of concern by some members of Congress that the tax savings arising from inversion transactions were causing U.S. multinational corporate groups to shift business operations, manufacturing plants, and jobs abroad, with a resulting adverse effect on U.S. job opportunities and the overall U.S. economy. In today’s rapidly growing and changing economy, the practice of “inverting” is no longer restricted to multinational corporations. Smaller companies are considering expatriating from the United States. To combat the practice of “inverting,” Congress has enacted a number of Internal Revenue Code provisions. This article will discuss the different types of inversions that can be used by corporations and…
Read More
Demystifying International Forward and Reverse Tax-Free Mergers

Demystifying International Forward and Reverse Tax-Free Mergers

Tax Law
By Anthony Diosdi The three basic types of reorganizations (Type A, Type B, and Type C) offer rather limited flexibility if the acquiring corporation desires to operate the target as a wholly owned subsidiary. Assume, for example, that Parent Corporation (“P”) wishes to acquire Target Corporation (“T”) and keep T’s business in a separate corporation entity for reasons not related to tax. Although this objective may be met by a Type B reorganization, the Type B reorganization requirement of  “solely for voting stock” requirement might be too much of a hurdle to overcome. Even the flexibility A reorganization may not always be feasible for non-tax reasons. For example, if P wishes to acquire T’s assets in a tax-free acquisitive reorganization, it may be unwilling to incur the risk of T’s…
Read More
Thinking About a Cross Border Tax-Free Reorganization or Merger? Better Consider Section 367

Thinking About a Cross Border Tax-Free Reorganization or Merger? Better Consider Section 367

Tax Law
By Anthony Diosdi Whenever a U.S. person decides to establish a business outside offshore that will be conducted through a foreign corporation, it will likely be necessary to capitalize the foreign corporation with a transfer of cash and other property in exchange for corporate stock. When appreciated assets, such as equipment or intangible property rights (i.e., patents, trademarks, copyrights, and other intangible property), is transferred to a foreign corporation, the U.S. transferor may be subject to taxable gain. This taxable gain will be realized by the transferor unless one of the tax-free exchange provisions of the Internal Revenue Code applies. The same applies to U.S. corporations. If a U.S. corporation is liquidated and its assets are distributed to a foreign corporation, U.S. tax will be imposed on the gains recognized…
Read More
Demystifying International Tax-Free Reorganization, Divisions, and Mergers and Acquisitions

Demystifying International Tax-Free Reorganization, Divisions, and Mergers and Acquisitions

Tax Law
By Anthony Diosdi The Internal Revenue Code provides for nonrecognition of gain or loss realized in connection with a considerable number of corporate organizational changes. These include acquisitive and other reorganization defined in Internal Revenue Code Section 368(a)(1) and divisive reorganizations under Internal Revenue Code Section 355. They are permitted on a tax-free basis on the rationale that they involve a change in the organizational form of the conduct of the business and that there should be no tax penalty imposed on such a change. Equally important in the context of international reorganizations and merger transactions is Internal Revenue Code Section 367. Instead, this article will focus on Sections 368 and 355 of the Internal Revenue Code. This article will not discuss Section 367. However, we have written extensively on…
Read More
Taking the 3520 Penalty Fight to the IRS by Attacking the Penalty on Technical Grounds

Taking the 3520 Penalty Fight to the IRS by Attacking the Penalty on Technical Grounds

Tax Law
By Anthony Diosdi Under Internal Revenue Code Section 6677(a), if any United States Person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to make a return with respect to such a trust using Internal Revenue Service (“IRS”) Form 3520, and show thereon the name of the trust, the amount of the aggregate distribution received, and any other data the IRS may require. A foreign gift, bequest, or inheritance that exceeds $100,000 must also be disclosed on a Form 3520. The IRS may assess an annual penalty equal to 35 percent of the gross value of the trust or 35 percent of the gross value of the property transferred from the trust if a Form 3520 is not timely filed. The IRS may also…
Read More
International Tax-Free Exchanges and the Deemed Royalty Regime for Intellectual  Property

International Tax-Free Exchanges and the Deemed Royalty Regime for Intellectual Property

Tax Law
By Anthony Diosdi Whenever a U.S. person decides to establish a business abroad that will be conducted by a foreign corporation, it will be necessary to capitalize the foreign corporation with a transfer of cash and other property in exchange for its stock. When appreciated property, such as equipment or intangible property rights (e.g., foreign patents, knowhow and trademarks), is transferred to a foreign corporation, gain will often be realized by the U.S. person. This gain will be recognized and subject to U.S. tax unless one of the tax-free-exchange provisions of the Internal Revenue Code applies. The imposition of U.S. tax on a transfer of appreciated property to a foreign corporation is a substantial deterrent in many cases. Accordingly, tax planning is necessary to ensure that the transaction is structured…
Read More
Two Potential Strategies to Avoid the Section 367 “Toll Charge” on the Outbound Transfer of Intellectual Property

Two Potential Strategies to Avoid the Section 367 “Toll Charge” on the Outbound Transfer of Intellectual Property

Tax Law
By Anthony Diosdi In response to changing business conditions, U.S. corporations routinely organize new subsidiaries and divide, merge, and liquidate existing subsidiaries. These routine corporate adjustments generally are tax-free transactions, based on the principle that the transactions involve a change in the form of the corporation’s investment, not the parent corporation’s ultimate control of the investment. For example, in a wholly-domestic context, if a domestic corporation transfers appreciated property to a newly-organized subsidiary in exchange for all the shares of that subsidiary, the gain on that exchange is not recognized immediately, but instead postponed by having the subsidiary take a carryover basis in the property received. See IRC Section 351(a) and 362. However, if the subsidiary is a foreign corporation, then the ultimate disposition of the appreciated property may occur…
Read More
Can a Foreign Investor Utilize a “Triangular” Tax Treaty Position to Reduce or Eliminate FDAP and FIRPTA Withholdings?

Can a Foreign Investor Utilize a “Triangular” Tax Treaty Position to Reduce or Eliminate FDAP and FIRPTA Withholdings?

Tax Law
By Anthony Diosdi Two different U.S. federal tax methods apply to foreign investors. First, foreign investors engaged in a trade or business in the United States are taxed on income that is effectively connected with a trade or business. Such income is taxed at applicable graduated U.S. federal individual income tax rates. Foreign investors are subject to a different set of rules for income that is not effectively connected with a trade or business in the U.S. Under this method, a flat 30 percent tax is imposed on U.S. source fixed or determinable annual or periodic income such as (interest, dividend, rents, annuities, and other types of “fixed or determinable annual or periodic income,” which is also known as “FDAP.”). Under FDAP, tax is imposed on gross income and no…
Read More