New Repatriation Tax on Foreign Corporate ShareholdersJanuary 2, 2018
The tax reform bill signed into law last week could signal a significant one-time deemed repatriation tax on owners of foreign corporations. For a calendar-year foreign corporation with a calendar-year shareholder, the tax would apply to 2017. For others, it would apply to the last year of the foreign corporation that begins before 2018.
You may be subject to this tax if you own 10% or more of a foreign corporation, other than a passive foreign investment company (PFIC). Individuals, partnerships, estates and trusts are all subject to the tax, while there is a deferral for S corporations and special rules for REITs.
Generally speaking, this tax will be assessed on the untaxed retained Earnings and Profits (E&P) of the foreign corporation at a rate of 15.5% on E&P invested in cash and cash equivalents and 8% on the remaining amount of E&P. (A deduction may be allowed to arrive at these rates.)
What this means for you
Although this one-time tax will be assessed immediately on affected shareholders, there is some leniency in the form of a partial foreign tax credit on the affected E&P (minus the deducted amount), as well as an election that allows a taxpayer to spread the pickup of the tax liability over 8 years (8% due in years 1-5; 15% in year 6; 20% in year 7; and 25% in year 8). Furthermore, nothing in the new tax law limits the utilization of any foreign tax credit carry forwards that the taxpayer incurred prior to 2017.
While more guidance from the IRS is needed, you will see changes to corporate and individual tax forms and instructions that need to be modified to account for this change.
It is uncertain at this time how your particular state will treat this deemed repatriation, as it is likely to vary by state. The Marks Paneth International Tax Group will keep you informed as more details are available.