1. DOES YOUR CLIENT OWN SHARES IN A FOREIGN CORPORATION?
IMPACT OF TCJA
IMTIAZ MUNSHI, CPA
President, Munshi CPA, PC
Co-founder & CEO, Aztec LLC
Vice President, myCPE LLC
LINKEDIN - -

2. LEARNING OBJECTIVES
Taxation of shareholding in foreign corporations before TCJA
What’s changed under TCJA and what’s remained the same ?
What happens to foreign corporation’s old undistributed earnings? Sec 965 Transition Tax
What happens to foreign corporation’s new undistributed earnings? Sec 951A GILTI explanation
Relief for individual shareholders of foreign corporations – Sec 962 election
Planning ideas to mitigate tax
Reporting caution: Form 5471, FBAR, Form 8865

3. INTRODUCTION International taxation is a very complex area of the law
The Tax Cuts and Jobs Act of 2017 (“TCJA”) has made some fundamental changes to the international tax regime
This material is designed as a general guide
to alert the attendee about issues that might exist for clients with ownership in foreign entities
Once issues are identified, deeper research or specialist advice is recommended

4. THE CONTEXT FOR THIS DISCUSSION
This discussion applies to ownership by US persons:
in FOREIGN, NON-PUBLIC (i.e. privately held) CORPORATIONS
This discussion does NOT apply to:
Shares invested in foreign Public companies
Report income as before
1099-B if through a US brokerage house
Foreign broker’s statement, or client’s foreign income tax return if applicable

5. THE CONTEXT FOR THIS DISCUSSION – cont.
This discussion also does NOT apply to:
Ownership in “flow through” foreign businesses (branch, partnership or disregarded entity)
Report flow-through income, deductions and foreign tax credits as before
Form 8865 for foreign partnerships and DREs
Ownership in a Passive Foreign Investment Company (“PFIC”)
Form 8621

6. WHAT YOU SHOULD GATHER FROM YOUR CLIENT
Foreign Company’s legal name, address, foreign tax ID
Percentage of ownership by client
Percentage owned by US persons and percentage of voting rights by US persons
Ownership changes in the company during the client’s current fiscal year
Is the client an officer or director?
Balance Sheet and Income Statement of Foreign Company
As of its fiscal year that falls within client’s fiscal year

7. WHAT YOU SHOULD GATHER FROM YOUR CLIENT -cont.
Does the client have signatory authority on the company’s bank account?
Distributions received during the year
Purchase and Sale information of some or all of client’s shares
Did the client receive or give gifts of shares during the year?
Copy of foreign income tax return filed by client, if applicable

8. WHAT YOU SHOULD DETERMINE
Which band does the client’s ownership percentage fall under?
Up to 10%
10% to 50%
More than 50%
Be sure to take into account attribution rules when determining % of vote and value
Lineal family relationships (not siblings)
Is the foreign corporation a “Controlled Foreign Corporation” (CFC)?
More than 50% vote or value by US persons
TCJA has changed attribution rules so some foreign corps are now CFCs

9. WHAT YOU SHOULD DETERMINE – cont.
Even if not a CFC, is the foreign business a Specified Foreign Corporation (SFC)?
At least one shareholder is a US domestic corporation
What information reporting requirements apply?
FBAR (if signatory authority or financial interest in foreign financial accounts)
Form 5471 (if 10% or more ownership or if officer / director)
Form 3520 (if gifts to or from a foreign person were made during the year)
If any apply, become familiar with reporting rules and follow instructions
CAUTION: Automatic penalties of up to $25,000 per form can apply

10. IF LESS THAN 10% Essentially no changes made by TCJA
Continue as before:
Income is taxed only when distributed
No indirect foreign tax credit for tax paid by foreign corporation
Foreign tax credit allowed for tax paid (or withheld) as a shareholder
Individual shareholder can treat foreign dividends as “Qualified Dividends” if from treaty country

11. 10% TO 50% AND FOREIGN CORP IS NOT A CFC & NOT A SFC
For US individual shareholder:
Essentially no changes made by TCJA
Continue as before:
Income is taxed only when distributed
No indirect foreign tax credit for tax paid by Foreign Corporation
Foreign tax credit allowed for tax paid (or withheld) as a shareholder
Individual shareholder - dividends are “Qualified Dividends” if from treaty country
For US C-Corp shareholder:
Not applicable (since non-CFC non-SFC wont have US corp as shareholder)

12. 10% TO 50% AND FOREIGN CORP IS AN SFC (BUT NOT A CFC)
For US individual shareholder:
Sec 965 transition tax on “old” undistributed earnings of foreign corp
Future distributions of previously taxed earnings will not be taxed
Post 965 transition-tax “new” income is taxed only when distributed
No indirect foreign tax credit for tax paid by foreign corporation
Foreign tax credit allowed for direct tax paid (or withheld) as a shareholder
Dividends are “qualified dividends” if from treaty country

13. 10% TO 50% AND FOREIGN CORP IS AN SFC (BUT NOT A CFC)
For US C-CORP shareholder:
Sec 965 transition tax on “old” undistributed earnings of foreign corp
Future distributions will not be taxed
TCJA changed tax regime to a “territorial system”
100% deduction of foreign-source dividend per Sec 245A(c)
No indirect foreign tax credit allowed against the excluded dividend
Section 902 indirect FTC is repealed
Individual shareholder of C Corp - dividends are “qualified dividends”

14. 10% OR MORE AND FOREIGN CORP IS A CFC
The rules have completely changed!
INCOME:
Sec 951A “GILTI” (Global Intangible Low Taxed Income)
Generally applies to Foreign Corp’s earnings after 12/31/2017
GILTI is taxable whether or not distribution is received
Corporations get a 50% deduction – 10.5% tax rate
Individuals pay tax on GILTI at highest tax rate
Distributions of GILTI are not taxed

15. 10% OR MORE AND FOREIGN CORP IS A CFC – contd.
FOREIGN TAX CREDIT:
Corporations – 80% indirect FTC
No carryover of unused GILTI FTC
Individuals – NO FTC!
Sec 965 transition tax on “old” undistributed earnings of Foreign Corp.
Future distributions will not be taxed

16. 10% OR MORE AND FOREIGN CORP IS A CFC – GILTI
GILTI concept
Foreign derived business income of foreign corporation
that exceeds a 10% return on depreciable assets
earnings from IP (amortizable under Sec 197) do not have a 10% exclusion
GILTI =
Net CFC “tested” income
excludes U.S. effectively connected income
excludes Subpart F income (since already taxed under old rules)
Minus 10% x Qualified Business Asset Investment
Minus interest expense
RESULT
US C-Corp shareholder – generally little or no tax on GILTI
US individual shareholder – gets slammed at highest rate and no FTC

17. 10% OR MORE AND A CFC SEC 965 TRANSITION TAX
Tax calculated on foreign corp’s accumulated E&P
As of Nov 2, 2017 or Dec 31, 2017 in most cases
Calculation based on foreign corp’s balance sheet on those dates
15.5% tax on apportioned liquid assets (cash and cash equivalents)
8% tax on apportioned non-liquid assets
Sec 965 Statement attached to tax return and tax paid separately
Why is this still important?
Election to pay tax over 8 years
Distributions should be excluded from income
S Corp shareholders may have elected to defer tax
Triggering event would cause end of deferral
New IRS Form 965 and Form 965A

18. PLANNING OPPORTUNITIES
“Check the box” Form 8832 for Eligible Foreign Corporation
to convert to a partnership or disregarded entity
enables FTC to be claimed
Form 8865
Transfer shares to a C-Corp
C-Corp will avoid individual being currently taxed on GILTI
C-Corp taxed at 10.5% with additional offset of 80% of indirect FTC
Deferral of foreign corp distributions (reinvest / payoff debt at C Corp level)
Treated as Qualified Dividend when C-Corp makes distribution

19. PLANNING OPPORTUNITIES –cont.
Make Sec 962 election
US individual elects to be taxed as a corporation
Annual election
GILTI may result in little or no tax in year of inclusion
taxed at 10.5% with offset of 80% of indirect FTC
Earnings can be built up in foreign corp for reinvestment abroad
Distributions from foreign corp
Direct FTC (foreign withholding on dividends) allowed
US tax as a Qualified Dividend

20. SUMMARY Very complex area of tax Law Made more complex by TCJA
Greatest changes are in the case of CFCs
Good planning opportunities
Identity issues that might exist for clients with ownership in foreign entities
Once issues are identified, conduct deeper research or get specialist advice

21. THANK YOU DO YOU HAVE ANY QUESTIONS???
REACH ME -