DOES YOUR CLIENT OWN SHARES IN A FOREIGN CORPORATION? IMPACT OF TCJA

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

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 individualshareholder: • 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-CORPshareholder: • 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 MOREAND 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 MOREAND 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 MOREAND 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 CFCSEC 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 - imunshi@munshicpa.com