January 24, 2020

German Supreme Tax Court Rules in Favor of Taxpayer – U.S.-German Repatriation Non-taxable

January 24, 2020/ Ruchelman P.L.L.C.

In a recent decision, the German Federal Tax Court (Bundesfinanzhof or "B.F.H.") held that repayment of capital by a U.S. subsidiary to its German parent company is not taxable in Germany. While this decision is in line with prior caselaw, it is significant because the B.F.H. held that domestic rules apply when determining the extent to which a distribution by a non-E.U. subsidiary to its German parent comes from profits and the extent to which it comes from capital. Because the participation exemption rules under German law exempts only 95% of the dividend through a disallowance of deemed expenses, tax is due on the 5% of the distribution that is attributable to earnings. Under the decision, two factors control the treatment of a distribution from a non-E.U. country: (i) the domestic accounting or corporate law treatment of the residence country and (ii) the ordering rules under German tax law. Beate Erwin and Nina Krauthamer explain the decision and how it interfaces with the ordering rules of U.S. domestic law under which distributions care treated as dividends, return of capital, and capital gains.

September 30, 2019

Cryptocurrencies – Latest Developments on Either Side of the Atlantic and Beyond

September 30, 2019/ Ruchelman P.L.L.C.

The issues raised by virtual currency and the underlying blockchain technology affect tax law, transfer pricing, regulatory rules, civil law accounting rules, and valuation. The issues in all these areas share one common goal: protection of users and investors through the prevention of fraud and abuse. Beate Erwin explains recent guidance by the Financial Action Task Force in this area and the likely effect of the guidance on national laws around the world.

May 30, 2019

Proposed F.D.I.I. Regulations: Deductions, Sales, and Services

May 30, 2019/ Ruchelman P.L.L.C.

The foreign derived intangible income (“F.D.I.I.”) regime allows for a reduced rate of corporate tax rate on hypothetical intangible income used in a U.S. business to exploit foreign markets. Many implementation issues that were left open when the provision was enacted have been addressed in proposed I.R.S. proposed regulations issued early March. In their article, Fanny Karaman and Beate Erwin explain (i) which taxpayers benefit from the regime, (ii) the way deductions are taken into account, (iii) whether the deduction is always available when a U.S. corporation sells on a foreign market, (iv) the way in which foreign use of sales or services is established, and (v) the way in which related-party transactions can qualify as F.D.D.E.I. sales or services.

April 30, 2019

Anti-Tax Arbitrage the U.S. Way

April 30, 2019/ Ruchelman P.L.L.C.

Hybrid arrangements come in various forms but share a common goal: Each is designed to enhance beneficial tax results by exploiting differences in tax treatment under the laws of two or more countries. Anti-hybrid rules were adopted as part of the T.C.J.A., which was enacted in the waning days of 2017. In December 2018, the I.R.S. released proposed regulations that provide guidance on anti-hybrid rules adopted by Congress. New terms must be understood, including (i) the deduction/no inclusion (“D./N.I.”) rules, (ii) tiered hybrid dividends, (iii) the hybrid deduction account (“H.D.A.”) that addresses timing, and (iv) a principal purposes test denying the benefit of the dividends received deduction. If final regulations are adopted by June 22, 2019, they will be effective retroactively to the date of enactment of the statute. In their article, Beate Erwin and Fanny Karaman explain the workings the proposed regulations.

March 29, 2019

More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

March 29, 2019/ Ruchelman P.L.L.C.

Nothing is certain in this world, except death and taxes – and even taxes are subject to change. The ever-expanding definition of a permanent establishment (“P.E.”) and ever diminishing exceptions to a P.E. under the O.E.C.D.’s B.E.P.S. Project has made one thing clear – the restrictions local jurisdictions put on activities by foreign taxpayers to trigger taxation are tightening. The dwindling preparatory and auxiliary activities exception is a prime example. Neha Rastogi and Beate Erwin explain.

March 29, 2019

The I.R.S. Approach to the Dependent Agent Concept

March 29, 2019/ Ruchelman P.L.L.C.

When foreign corporations have certain limited activities in the U.S., a question that arises is whether a taxable presence exists in the U.S. for Federal income tax purposes. A foreign corporate taxpayer with direct activities or operations in the U.S. is subject to U.S. corporate income tax and branch profits tax if it conducts a U.S. trade or business generating effectively connected income. Recently, the I.R.S. Large Business and International division published an international practice unit (“I.P.U.”) addressing the creation of a P.E. through the activities of a “dependent agent.” Fanny Karaman and Beate Erwin lead the reader through the I.P.U. and explain the four-step process that is used by the I.R.S. to evaluate whether a permanent establishment exists.

January 28, 2019

Mirror, Mirror, On the Wall, Which Is My Tax Home of Them All? – Foreign Students Face Dilemma in the U.S.

January 28, 2019/ Ruchelman P.L.L.C.

The U.S. Department of State administers the Exchange Visitor Program, which designates sponsors to provide foreign nationals with opportunities to participate in educational and cultural programs in the U.S. and return home to share their experiences. These students receive taxable stipends, file tax returns, and reduce taxable income by costs associated with participation. Unfortunately, a recent Tax Court case, Liljeberg v. Commr., has determined that the travel and lodging costs of these individuals could not be deducted. Neha Rastogi and Beate Erwin explain that while home is where the heart is, a “tax home” is where a person is expected to live taking into consideration the person’s principal place of employment.

November 29, 2018

How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

November 29, 2018/ Ruchelman P.L.L.C.

The first step in advising a foreign individual who is neither a U.S. citizen nor a green card holder on U.S. income tax laws is to determine the person's residence for income tax purposes. But what is to be done when the individual is resident in multiple jurisdictions? A recent LB&I International Practice Unit offers a quick understanding of the tax issues I.R.S. examiners raise when dealing with individuals who are dual residents for tax purposes. Virtually all income tax treaties entered into by the U.S. contain a tiebreaker rule under which the exclusive residence of an individual is determined for purposes of applying the income tax treaty. Fanny Karaman and Beate Erwin explain how these rules are applied. One point to remember is that the tiebreaker test for treaty residence purposes does not affect an individual's obligation to file an F.B.A.R. form.

October 31, 2018

Transition Tax – Proposed Regulations Are Here

October 31, 2018/ Ruchelman P.L.L.C.

The I.R.S. has published proposed regulations on Code §965, which requires a U.S. Shareholder to pay income tax on a pro rata share of previously untaxed foreign earnings held in a C.F.C. and certain other foreign corporations. The tax is commonly referred to as the transition tax. It is designed to tax deferred foreign income prior to the transition to a participation exemption system for intercompany dividends from certain foreign corporations. A multi-step computation is required to (i) measure post-1986 E&P, (ii) allocate E&P deficits among affiliated foreign corporations, (iii) calculate the aggregate foreign cash position, (iv) compute allowed deductions, and (v) determine foreign tax credits. Elizabeth V. Zanet, Rusudan Shervashidze, and Beate Erwin detail the required steps as well as special rules applicable to individuals.

September 26, 2018

Hybrid Mismatches: Where U.S. Tax Law and A.T.A.D. Meet

September 26, 2018/ Ruchelman P.L.L.C.

When U.S. tax planners attend foreign conferences, it is not uncommon to hear pointed barbs that the U.S. is an outlier when it comes to rules enforcing “best practices” on global business transactions. However, when it comes to reverse hybrids and hybrid mismatches, the rules are not all that different on both sides of the Atlantic. Fanny Karaman and Beate Erwin compare approaches taken by ATAD 2 with U.S. tax law after the Tax Cuts and Jobs Act.

July 30, 2018

Inbound Acquisition Due Diligence Under U.S. Tax Reform

July 30, 2018/ Ruchelman P.L.L.C.

M&A transactions have accelerated as the U.S. economy reacts to the adoption of favorable rules under the Tax Cuts & Jobs Act. But, as mentioned in “Coming to the U.S. After Tax Reform,” an article by Jeanne Goulet in this edition of Insights, many adverse sleeper provisions have also been introduced. For those tax advisers assigned due diligence tasks in advance of an M&A transaction, several additional pages have been added to the D.D. Checklist. Elizabeth V. Zanet and Beate Erwin address the new exposure areas that must be identified by the D.D. team.

June 28, 2018

A Fundamental Change of the Professional Sports Landscape under the 2017 U.S. Tax Reform? The End of Like-Kind Exchanges for U.S. Sports Trades→

June 28, 2018/ Ruchelman P.L.L.C.

Published by Nolot in Global Sports Law and Taxation Reports vol. 9, no. 2 (June 2018): pp. 49-54.

June 14, 2018

The F-1 Visa – Privileged U.S. Tax Status and How to Keep It

June 14, 2018/ Ruchelman P.L.L.C.

Foreign students leaving their home country and arriving in the U.S. for higher education may come across many things that seem alien to them – like the accent, culture, and inexplicably large food portions. But one area where they are treated as the aliens is under U.S. Federal income tax law, where foreign students holding F-1 visas are treated as nonresident aliens who are subject to special tax provisions. Neha Rastogi and Beate Erwin discuss tax residence status, Federal income tax consequences, and U.S. reporting requirements for holders of F-1 visas.

May 09, 2018

I.R.S. Notice 2018-28 Announces Code §163(j) Regulations on Interest Payment Deductions

May 09, 2018/ Ruchelman P.L.L.C.

Prior to recent tax reform legislation, Code §163(j) was an earnings stripping provision that placed a cap on interest expense deductions on debt instruments held or guaranteed by foreign related persons that were not subject to full 30% withholding tax on U.S.-source interest income or guarantee fees. Under the T.C.J.A., Code §163(j) is now simply a cap on all business interest expense. Notice 2018-28 addresses open matters arising from the change. This includes the carryover of disallowed interest from prior years to 2018, the Super-Affiliation Rules under the new law, and the loss of excess limitation carryforwards. Elizabeth V. Zanet and Beate Erwin explain these and other items in the Notice.

November 30, 2017

Texas District Court on Anti-Inversion Legislation – One Down but Not Out

November 30, 2017/ Ruchelman P.L.L.C.

The final months of the Obama administration saw the hurried adoption of temporary regulations in an attempt to extend its tax policy into the current administration. However, reliance on temporary regulations that are adopted without a public comment period may have been misguided. In October, a U.S. District Court struck down a provision under temporary anti-inversion regulations for violating the required notice and comment period under the Administrative Procedure Act. Beate Erwin and Sheryl Shah explain the web of issues involved in the decision.

October 24, 2017

O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

October 24, 2017/ Ruchelman P.L.L.C.

In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention. Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and provides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues. Areas covered include whether competent authority agreements can define undefined terms thereby removing the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty.

September 20, 2017

O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

September 20, 2017/ Ruchelman P.L.L.C.

Earlier this year, the O.E.C.D. proposed amendments to Article 5 (Permanent Establishment) of the Model Tax Convention and Commentary. The revisions eliminate loopholes that exist for commissionaire arrangements, artificial characterization of core activities as “preparatory,” avoidance of permanent establishment status through artificial fragmentation of contracts, and the use of not-so-independent agents. Neha Rastogi, Beate Erwin, and Stanley C. Ruchelman explain the replacement provisions.