American Citizens Abroad Town Hall Seminar Daniel Hyde 14 May 2013

Agenda What’s new (and returning) for 2013? As an entrepreneur, what do I need to know when setting up a company overseas for US tax reporting?

New for 2013: rate changes Top rate of ordinary income tax increases from 35% to 39.6%. Top rate of tax on long term capital gains and qualified dividends increases from 15% to 20%. New rates apply to income over $400,000 for single filers, $450,000 for couples. Top rate of gift and estate tax increases from 35% to 40% – But $5,000,000 exemption amount remains unchanged. Foreign earned income exclusion is $97,600.

New for 2013: Medicare surcharge New Medicare surcharge on unearned income of 3.8% on net investment income. Definition of investment income will be important. Surcharge is non-deductible. Foreign tax credits may not be used to reduce the surcharge. International social security agreements are unlikely to provide an exemption.

Back for 2013: Limitation on exemptions and itemised deductions Applies to income in excess of $250,000 for single filers, $300,000 for married filers. Personal exemptions phased out by 2% for every $2,500 above the thresholds. Itemised deductions reduced by either: – 80% of the total allowable deductions. – 3% of income over the threshold. – whichever provides the highest deduction (usually the 3%).

Controlled Foreign Corporations (CFCs) A foreign corporation where >50% of the vote or value is held by US persons holding >10% of the vote or value. File annual Form 5471 – Penalty for failure to file $10,000. – Consider interests of non US spouses. – Also required for non-controlled foreign corporations when acquire or dispose of certain 10% interests. Possible phantom income (Subpart F income).

Subpart F income Deemed dividend of retained profits of CFC where company earns: – Income from most passive sources. – Income from personal service contracts. Not qualified dividend subject to reduced rate. Will not qualify for foreign earned income exclusion. May be difficult to use credits for foreign taxes.

Passive Foreign Investment Companies (PFICs) A foreign company where: – At least 75% of income is passive income. – At least 50% of assets are passive income producing asset. – Cash is a passive income producing assets. Could a trading business be caught by the asset test? Dividends and any exit proceeds would be ordinary income. Some dividends and all exit proceeds allocated across holding period with deemed interest charge on amounts allocated to prior tax years. “Once a PFIC, always a PFIC”. CFC rules trump PFIC rules after 1997.

Check the box election (1) A foreign company can elect to be treated as a partnership (2+ owners) or disregarded entity (single owner) for US tax purposes (similar to US LLC). CFC/Subpart F rules, and PFIC rules are avoided as not a corporation of US tax purposes. Flow through of all items of income, deduction and credit. Corporate taxes paid flow through and are creditable taxes. Income may qualify for foreign earned income exclusion.

Check the box election (2) Election must be made within 75 days of effective date (three year concession in some circumstances) Election on an existing company creates a deemed taxable liquidation for US tax purposes.

Reporting Foreign corporation interests reported on Form 5471 – $10,000 penalty Foreign partnership interests reported on Form 8865 – $10,000 penalty Foreign disregarded Entities reported on Form 8858 – $10,000 penalty Interests exempt from above reported on Form 8938 – $10,000 penalty Transfers of property to foreign Corporation reported on Form 926 – 10% penalty up to $100,000

Doing business in the US? US tax on profits of a foreign corporation with “Income Effectively Connected” to a “US Trade or Business” Neither term is defined in the Internal Revenue Code! Treaties generally limit taxation to income derived from a “permanent establishment in the US” – Defined term: A place of management A branch An office A factory, etc. Caution: Individual states are not parties to tax treaties.

Questions and discussions Westleton Drake 6, rue de la Croix d’Or CH-1204, Geneva Tel: +41 (0)