Corporate Structuring When Entering the U.S. Market Stuart M. Schabes, Esquire Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. sschabes@bakerdonelson.com November 16, 2017

Overview Why is it important to determine best type of structure to be used in the United States Effective tax planning Need to recognize differences in US and Israeli tax consequences and rates Possible new tax laws in US in 2018 Choice of entity especially in light of new US Tax Court decision in Grecian Magnesite Mining case - possible reversal by pending Senate Bill

Overview Characterization of income Availability of Foreign Tax Credit Which country has “first bite”

Corporate Level Income Tax 44 out of 50 States impose a corporate level income tax ranging from 3% (North Carolina) to 12% (Iowa) 7 States including Alaska, Connecticut, District of Columbia, Iowa, Minnesota, New Jersey and Pennsylvania have top rates of 9% or higher 7 States including Arizona, Colorado, Mississippi, North Carolina, North Dakota, South Carolina and Utah have top rates at ≤ 5% In contrast to a corporate level income tax the State of Nevada, Ohio, Texas and Washington impose a “gross receipts” tax Neither South Dakota nor Wyoming impose a corporate level income tax nor gross receipts tax

How High Are Corporate Income Tax Rates in Your State?

Comparison of US and Israeli Maximum Corporate Tax Rates Income United States (excludes Medicare tax) Israel Pending U.S. Tax Bills Ordinary Income 15 – 35% (branch profit tax can impose additional 3% on foreign corporations engaged in U.S. trade or business -must also consider State and local taxes) 24% (branch profit may be subject to additional 15% tax) 7.5% - 16% (preferred enterprise – Area A, could be significantly less if Approved or Business Enterprise) House/Senate: 20% rate (business income flowing to non-corporate taxpayers from S Corporation, Partnerships and LLCs – subject to 25% max tax rate) House – effective for 2018 Senate – delayed till 2019

Pass-through – Limited Liability Companies Senate Bill: Will provide a 17.4% deduction for non-wage income Deduction would not be available to many types of service businesses except for those whose taxable income falls below $150,000 for joint filers or $75,000 for all others House Bill: qualified pass-through business owners could choose to count 70% of their income as wages subject to their individual tax rate and 30% as business income taxable at a 25% rate or set the ratio of their wage income to business income based on their capital investment provides a 9% rate for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business instead of ordinary 12% rate

Typical Ways of Doing Business in the United States Start-up typically needs to enhance marketing and sales efforts in the United States and hire U.S. based employees/independent contractors/agents R & D and operations will remain in Israel No separate US entity -- selling direct Subject to US taxation? Authorized to do business in the US let alone in the various States?

Typical Ways of Doing Business in the United States Choice of entity (or entities) in the US Limited Liability Company (LLC) Partnership Corporation – cannot be a flow through Subchapter S if owned by foreign shareholders New United States Tax Court decision in Grecian Magnesite Mining creating opportunity for no US tax on sale of U.S. LLC/Partnership interest owned by non US person which is not connected to real estate

Impact of Grecian Magnesite Mining Case It is unclear whether the IRS will Appeal this decision IRS could respond by attempting to publish Treasury Regulations to reinstate its position that sale is fully taxable in the US Note: pending Senate Bill has provision to reverse this decision and subject sale to U.S. taxation

Possible Planning Opportunities Increase use of “foreign blocker” corporations rather than using US blocker corporations Blocker corporations have been used extensively by private equity companies foreign private equity typically invest in US operating partnerships to protect foreign investors from recognizing income that is subject to US tax (effectively connected income) as well as tax exempt investors Use of multiple domestic LLCs may provide additional tax planning opportunities

Israeli Parent and US Sub Maximum U.S. corporate tax rate – 35% If dividend to Israel, additional 25% (although can be reduced under the Treaty to 12.5%) Must factor in U.S. (federal and State/local tax)

Some Tax Planning Opportunities Popular States for US Company (especially for holding company) Delaware Nevada Alternative Structures use of multiples tiers and use of brother/sister entities for each State’s activities

Some Tax Planning Opportunities Israeli Parent US Holding Company - Delaware Alabama California Nevada Texas

Additional Pending Tax Changes House/Senate Tax Bills introduce three (3) major proposals for U.S. taxation of international tax matters New territorial tax system New mandatory tax on deferred foreign earnings New anti - base erosion rules

New Territorial Tax System 100% of the foreign sourced portion of dividends received by U.S. corporation from a foreign corporation in which a U.S. corporation owns a 10% stake Holding Period Senate Bill requires more than a one (1) year holding period in the stock of a foreign corporation House bill requires only a six-month holding period

New Territorial Tax System Hybrid Dividends Senate Bill disallows exemption for any U.S. dividend received by a U.S. shareholder from a CFC if the dividend is deductible by the foreign corporation when computing its taxes Effective Date Senate Bill applies to taxable year of foreign corporations beginning after December 31, 2017 House Bill applies to distributions made after December 31, 2017 regardless of fiscal year

Additional Pending Tax Changes Special Role for Sale of Foreign Corporation Senate Bill applies the dividend exemption to the sale of foreign stock (on gain to the extent of its earnings and profits) would also apply on gain from the sale of lower tier CFCs to the extent of CFC’s E&P (House Bill did not address either provision) Determining Loss On sale of stock of 10% owned foreign corporation, U.S. parent would reduce its basis in stock of foreign corporation equal to the amount of exempt dividend received. Senate Bill disallows exemption for any U.S. dividend received by a U.S. shareholder from a CFC if the dividend is deductible by the foreign corporation when computing its taxes

Additional Pending Tax Changes Mandatory tax on deferred foreign earnings Senate Bill: multi national companies accumulated off shore earnings would be taxed at 10% tax rate for cash holdings and 5% for non-cash holding. House Bill: provides for a tax rate of 14% for cash holdings and 7% for non-cash holdings. Companies would have eight (8) years to pay regardless of whether they plan to return that income to the U.S. special rules for restriction of use of Foreign Tax Credits Senate Bill: “Anti-Inversion” rule requiring U.S. Corporation to pay full 35% rate on deferred Foreign earnings and not offset by Foreign Tax Credits

Anti-Base Erosion Rules Unlike House Bill, the Senate Bill has an incentive for U.S. companies to actually sell goods and services abroad effective tax would be only 12.5% while under House Bill would be taxed at 20% Senate Bill imposes a tax on U.S. shareholder’s aggregate net CFC income at a rate that would be similar to the rate on incentive to U.S. companies (≤12.5%) Net CFC income is Gross Income exceeding extraordinary returns from tangible assets excluding effectively connected income, sub-part F income, dividends from related parties, foreign oil, gas extraction income and some other income items

Anti-Base Erosion Rules Intangible property repatriation - under Senate Bill would be allowed to repatriate intangible property “tax free” Significant changes to Sub-part F income Modification of stock attribution rules for CFC status Repeal of tax on investment in United States property Significant restriction on interest expense based on worldwide ratio

Carried Interest House Bill: carried-interest tax break would be limited by tripling the length of time assets would have to be held to qualify for capital gains rate of 23.8% under current law an investment funds assets have to be held for at least a year or more to qualify Senate Bill: still pending

Interest Deductibility Senate Bill: restrict interest deduction for businesses to 30% of adjusted taxable income while allowing interest not allowed as a deduction to be carried forward indefinitely House Bill: preclude companies from deducting interest expense that exceeds 30% of their earnings before taxes, interest and depreciation amortization would not apply to real estate firms and small businesses special rules for finance high class inventory such as car dealers (if completely write off their interest payments then would not be able to write off capital investments immediately)

QUESTIONS?