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

2. 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

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

4. 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

5. How High Are Corporate Income Tax Rates in Your State?

6. 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

7. 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

8. 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?

9. 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

10. 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

11. 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

12. 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)

13. 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

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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)

24. QUESTIONS?