Category: Tax Law

In determining whether a U.S. person meets the Section 951(a) definition of a U.S. shareholder and whether a foreign corporation meets the Section 957(a) definition of a controlled foreign corporation (“CFC”), Section 958 applies direct, indirect, and constructive ownership rules to determine stock ownership in the foreign corporation. Stock ownership under all three types of rules counts for purposes of determining whether a shareholder is a “U.S. shareholder” and whether a foreign corporation is a “controlled foreign corporation.”Section 958(a)(1) provides the direct ownership rules for determining stock ownership for such purposes. Section 958(a)(2) provides indirect ownership rules to determine beneficial ownership of shares when a foreign entity is interposed between the U.S. person and the foreign corporation. Specifically, stock of a foreign corporation owned, in turn, by another foreign corporation…

Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in respect of certain foreign entities that are classified as corporations for U.S. tax purposes. The Form 5471 and schedules are used to satisfy the reporting requirements of Internal Revenue Code Section 6038 and 6046 along with the applicable regulations.Substantively, it backstops various international sections of the Internal Revenue Code including Sections 901/904 (Code Section 901 and 904 provide rules governing foreign tax credits), Section 951(a) (Section 951a provide rules governing Subpart F income and Section 956. Generally, a U.S. shareholder of a foreign corporation must include in income his or her pro rata share of the foreign corporation’s increase in its earnings and profits in U.S. property), Section 951A (Section 951A provides rules governing the…

Schedule R is used to report basic information pertaining to distributions from foreign corporations. According to the instructions for Schedule R, the information reported on the schedule is required by Sections 245A, 959, and 986(c) of the Internal Revenue Code. Form 5471 filers that are classified as Category 3 and Category 4 filers must complete and attach Schedule R to their Form 5471.The Schedule R consists of four columns. Below, we will discuss the meaning of each column.(a) Description of DistributionEach filer required to complete Schedule R will be required to state whether it received a distribution in cash, non-cash, taxable, or nontaxable distributions from the foreign corporation. The distribution will need to be identified under code sections. For example, “taxable cash dividend eligible for a dividends received deduction under…

Because tax treaties provide lower withholding tax rates on dividend, interest, and royalty income, some multinational corporations can reduce U.S. withholding taxes by establishing a subsidiary in a jurisdiction that has a favorable tax treaty with the United States. This type of planning is often referred to as “treaty shopping.” Because of a concern of treaty shopping, the United States insists that any newly negotiated tax treaty contain an anti-treaty shopping provision known as a limitation on benefits (or “LOB”) provision. This article discusses typical LOB provisions contained in U.S. tax treaties.An Overview of an LOB ProvisionThe principal target of a LOB provision is a corporation that is organized in a treaty country by a resident of a non-treaty country merely to obtain the benefits of that country’s income tax…

The major purpose of an income tax treaty is to mitigate international double taxation through tax reduction or exemptions on certain types of income derived by residents of one treaty country from sources within the other treaty country. Because tax treaties often substantially modify U.S. and foreign tax consequences, the relevant treaty must be considered in order to fully analyze the income tax consequences of any outbound or inbound transaction. The U.S. currently has income tax treaties with approximately 58 countries. This article discusses the implications of the United States- France Income Tax Treaty.There are several basic treaty provisions, such as permanent establishment provisions and reduced withholding tax rates, that are common to most of the income tax treaties to which the United States is a party. In many cases,…

This article discusses the importance of using an “intentionally defective grantor trust” (or “IDGT”) for estate, gift, and income tax purposes. An IDGT involves setting up a trust that accumulates income (while the settlor or the grantor pays the income taxes owed on such income) and yet will not be included in his or her estate for estate tax purposes.  An Introduction to the Taxation of Grantor Trusts U.S. federal law imposes a transfer tax upon the privilege of transferring property by gift, bequest, or inheritance. During an individual’s lifetime, his transfer tax takes the form of a gift tax. For gift tax purposes, a gift is defined as the transfer of property for less than adequate and full consideration in money or money’s worth, other than a transfer in…

Form W-BBEN-E is used by foreign entities to document their status for purposes of Chapter 3 and Chapter 4, as well as for certain other Internal Revenue Code provisions. Generally, withholding agents are required to withhold U.S. tax at the source on certain payments made to nonresident aliens and foreign corporations. A withholding agent for Chapter 3 means any person required to deduct and withhold any tax under Internal Revenue Code Sections 1441, 1442, 1443, or 1461. The withholding rate is typically 30%. FATCA introduced Chapter 4, a documentation regime imposed in addition to the existing Chapter 3 for certain payments to foreign payees that include FFIs and NFFEs. Chapter 4 withholding can be considered a penalty tax imposed when certain withholding payments are made and the U.S. payer does…

This article provides an overview of the rules governing outbound forward triangular mergers. This article uses a hypothetical Singapore corporation which acquires a U.S. corporation to discuss the issues commonly faced by tax professionals in outbound forward triangular merger. A forward triangular reorganization occurs when an acquiror uses the shares of its parent as merger consideration when the target merges into the acquiror, resulting in the acquiror receiving substantially all of the target’s assets.  Let’s assume that a Singaporean corporation (“SingCo”) is entering into a forward triangular merger and for that it is setting up a new Delaware entity as NewCo with the purpose of acquiring business of the target corporation as TargetCo. The consideration is in the form of shares (50 percent) and the balance will be paid in…

This article provides an overview of the rules governing outbound forward triangular mergers. This article uses a hypothetical Singapore corporation which acquires a U.S. corporation to discuss the issues commonly faced by tax professionals in outbound forward triangular merger. A forward triangular reorganization occurs when an acquiror uses the shares of its parent as merger consideration when the target merges into the acquiror, resulting in the acquiror receiving substantially all of the target’s assets.  Let’s assume that a Singaporean corporation (“SingCo”) is entering into a forward triangular merger and for that it is setting up a new Delaware entity as NewCo with the purpose of acquiring business of the target corporation as TargetCo. The consideration is in the form of shares (50 percent) and the balance will be paid in…

By Anthony Diosdi Form W-BBEN-E is used by foreign entities to document their status for purposes of Chapter 3 and Chapter 4, as well as for certain other Internal Revenue Code provisions.Generally, withholding agents are required to withhold U.S. tax at the source on certain payments made to nonresident aliens and foreign corporations. A withholding agent for Chapter 3 means any person required to deduct and withhold any tax under Internal Revenue Code Sections 1441, 1442, 1443, or 1461. The withholding rate is typically 30%. FATCA introduced Chapter 4, a documentation regime imposed in addition to the existing Chapter 3 for certain payments to foreign payees that include FFIs and NFFEs. Chapter 4 withholding can be considered a penalty tax imposed when certain withholding payments are made and the U.S.…