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 - https://www.linkedin.com/in/imtiaz-munshi-57725a Email - imunshi@munshicpa.com

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

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

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

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

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

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

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

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

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

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)

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

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”

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

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

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

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

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

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

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

THANK YOU DO YOU HAVE ANY QUESTIONS??? REACH ME - imunshi@munshicpa.com