Making Sense of Tax Treaty LOB Provisions

Making Sense of Tax Treaty LOB Provisions

Tax Law
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…
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A Closer Look at the United States- France Income Tax Treaty

A Closer Look at the United States- France Income Tax Treaty

Tax Law
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,…
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Demystifying the Use of a Intentionally Defective Grantor Trust

Demystifying the Use of a Intentionally Defective Grantor Trust

Tax Law
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…
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A Closer Look at the W-8BEN-E Used by Foreign Entities to Document their Status for U.S. Tax Withholding Purposes

A Closer Look at the W-8BEN-E Used by Foreign Entities to Document their Status for U.S. Tax Withholding Purposes

Tax Law
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…
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A Case Study of an Outbound Forward Triangular Reorganization

A Case Study of an Outbound Forward Triangular Reorganization

Tax Law
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…
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A Case Study of an Outbound Forward Triangular Reorganization Part II- The Limited Interest Exception

A Case Study of an Outbound Forward Triangular Reorganization Part II- The Limited Interest Exception

Tax Law
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…
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A Closer Look at the W-8BEN-E Used by Foreign Entities to Document their Status for U.S. Tax Withholding Purposes

A Closer Look at the W-8BEN-E Used by Foreign Entities to Document their Status for U.S. Tax Withholding Purposes

Tax Law
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.…
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A Closer Look at the W-8BEN Used by Foreign Individuals to Document their Status for U.S. Tax Withholding Purposes

A Closer Look at the W-8BEN Used by Foreign Individuals to Document their Status for U.S. Tax Withholding Purposes

Tax Law
By Anthony Diosdi Form W-BBEN is used by foreign individuals 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.…
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IRS Form 5472: Do You Need to File it?

IRS Form 5472: Do You Need to File it?

Tax Law
By Anthony Diosdi The Form 5472 is a mandatory return that must be filed with the Internal Revenue Service (“IRS”) for reportable transactions between a reporting corporation and its foreign related party. This article will discuss whether an entity has an obligation to file a Form 5472.Form 5472: Basic TerminologyA Form 5472 is required to be filed by a domestic corporation (or a disregarded entity) that can be classified as a reporting corporation. An entity can be classified as a reporting corporation, if, at any time during the taxable year, 25% or more of its stock, by vote or value, is owned directly or indirectly by at least one foreign person.A foreign person is:1) An individual who is a citizen or resident of a U.S. possession who is not otherwise…
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Dynamo Holdings L.P. v. Commissioner- A Blueprint of How Related-Party Inbound Foreign Investment in U.S. Real Estate Should and Should Not be Handled for FIRPTA and FDAP Purposes

Dynamo Holdings L.P. v. Commissioner- A Blueprint of How Related-Party Inbound Foreign Investment in U.S. Real Estate Should and Should Not be Handled for FIRPTA and FDAP Purposes

Tax Law
By Anthony Diosdi In Dynamo Holdings L.P. v. Commissioner, T.C. Memo 2018-61 (2018), (hereinafter Dynamo Holdings) the U.S. Tax Court issued an opinion finding, in part, in favor of a Canadian U.S. family that engaged in successful real estate developments both in Canada and the U.S. that certain bona fide indebtedness existed with respect to cross-border restructuring as described below, but also finding that certain transfers were not made at fair market value, thus also finding that certain transfers were not made at fair market value, thus, triggering a constructive distribution, withholding tax exposure, and other hazards. This article analyzes the Dynamo Holdings case, which is a blueprint of how inbound restructuring should be carefully addressed and handled.Factual BackgroundThe Canadian-based Moog family had a strong track record in successful real…
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