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

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

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.

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C.J.E.U. Judgments on Danish Beneficial Ownership Cases

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C.J.E.U. Judgments on Danish Beneficial Ownership Cases

Earlier this year, the C.J.E.U. released two judgments dealing with the interpretation of the Parent-Subsidiary Directive (“P.S.D.”) and the Interest & Royalties Directive in the E.U.  In each case, a structure was meticulously built to comply with national and E.U. law allowing global investors to bring funds to the E.U. in return for dividends and interest that were subject to little or no national tax in any E.U. country.  Nothing in the structure was unique, other than the reticence of the Danish tax authorities to grant withholding tax exemptions.  To the surprise of many, the C.J.E.U. looked at the structure and concluded that it lacked economic substance and should be disregarded by reason of a general E.U. anti-abuse principal.  The internal E.U. recipients of the dividend and interest payments were not considered to be the beneficial owners of the income.  Almost 50 years after the Aiken Industries case in the U.S. Tax Court and 25 years after the anti-conduit regulations were adopted by the I.R.S., European substance-over-form rules have now been adopted by judicial fiat.  Thierry Lesage and Adnand Sulejmani of Arendt & Medernach SA, Luxembourg, meticulously explain the reasoning of the court and suggest that the court may have erred by conflating anti-abuse rules with beneficial ownership concepts.

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Employers in the Netherlands: Prepare for Changes to Labor and Dismissal Laws In 2020

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Employers in the Netherlands: Prepare for Changes to Labor and Dismissal Laws In 2020

In May, the Dutch Senate adopted the Labor Market in Balance Act designed to reduce the gap in legal protection and financial compensation between employment arrangements under fixed-term contracts and employment arrangements with indefinite term. The act provides greater rights on termination and, as a result, is unpopular with employers. It also aims to resolve some of the negative effects of an earlier amendment to the law that has been the subject of relentless criticism. Rachida el Johari and Madeleine Molster of Sagiure Legal, Amsterdam, explain the way Dutch labor law will affect termination rights for employees and suggest a path forward for management. This is another area of E.U. law in which companies will need to re-educate executives on proper patterns of behavior.

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The Devil in the Detail: Choosing a U.S. Business Structure Post-Tax Reform

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The Devil in the Detail: Choosing a U.S. Business Structure Post-Tax Reform

Prior to the T.C.J.A. in 2017, the higher corporate income tax rate made it much easier to decide whether to operate in the U.S. market through a corporate entity or a pass-thru entity. With a Federal corporate income tax rate of up to 35%, a Federal qualified dividend rate of up to 20%, and a Federal net investment income tax on the distribution of 3.8%, the effective post-distribution tax rate was 50.47%, before taking into account State and local taxes. With the post-tax reform corporate income tax rate of 21% and the introduction of the qualified business income and foreign derived intangible income deductions, the decision to choose a pass-thru entity is no longer apparent. In their article, Fanny Karaman and Nina Krauthamer look into some important tax considerations when choosing the entity for a start-up business in the U.S.

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Debt Characterization and Deductibility Under Domesticated International Rules

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Debt Characterization and Deductibility Under Domesticated International Rules

The limitation of interest deductibility to 30% of adjusted E.B.I.T.D.A. has focused the attention of U.S. corporations and their lenders on new constraints. How does a borrower demonstrate the capacity to carry and service debt, and how do related parties demonstrate that the rate of interest and other terms attaching to a cross-border loan are arm’s length? Michael Peggs and Stanley C. Ruchelman address these issues, explaining the three methods used to identify the boundary between debt and equity: (i) the qualitative approach of case law (I know it when a I see it, although I can’t agree to a uniform standard of application), (ii) the data-driven approach of comparative analysis (I know it when I can measure the effect, much like gravity), and (iii) the procedural approach for borrowers as set out in the Code §385 regulations which were in effect for a short period of time (I know it when I follow the recipe in the regulatory cookbook).

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Qualified Opportunity Zones: Second Set of Proposed Regulations Offers Greater Clarity to Investors

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Qualified Opportunity Zones: Second Set of Proposed Regulations Offers Greater Clarity to Investors

The Opportunity Zone tax benefit, which was crafted as part of the 2017 tax reform, aims to encourage taxpayers to sell appreciated capital properties and rollover the gains into low-income areas in the U.S.  One major benefit – reducing recognition of deferred gains by up to 15% – is available only to investments made before the end of 2019, although other benefits will continue to be available to later investments.  The clock is ticking on the 15% reduction, and the I.R.S. is accelerating the issuance of guidance.  In late April, the I.R.S. released a second set of proposed regulations that address many of the issues that were deferred in the initial set.  They also address issues raised by written comments and testimony at the well-attended public hearing in February.  In their article, Galia Antebi and Nina Krauthamer lead the reader through the important and the practical parts of the second set of guidance.

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Remember when Code §1248 was intended to right an economic wrong by converting low-taxed capital gain to highly-taxed dividend income? (If you do, you probably remember the maximum tax on earned income (50% rather than 70%) and income averaging over three years designed to eliminate the effect of spiked income in a particular year.) Tax law has changed, and dividend income no longer is taxed at high rates. Indeed, for C-corporations receiving foreign-source dividends from certain 10%-owned corporations, there is no tax whatsoever. This is a much better tax result than that extended to capital gains, which are taxed at 21% for corporations. Neha Rastogi and Stanley C. Ruchelman evaluate whether the conversion of capital gains into dividend income produces a meaningful benefit in many instances, given the likelihood of prior taxation under Subpart F or G.I.L.T.I. rules for the U.S. parent of a multinational group. Hence the question, is the conversion of taxable capital gains into dividend income under Code §1248 a real benefit, or is it simply a glistening

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Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

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Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

The battle is over. It is agreed that the emporer’s new clothes are made of fairy dust, and Rev. Rul. 91-32 is not worth the paper on which it was printed in the I.R.S. Cumulative Bulletin for 1991. In June, the Court of Appeals for the D.C. Circuit affirmed the 2017 Tax Court ruling in the matter of Grecian Magnesite Mining v. Commr., which held that a foreign corporation was not liable for U.S. tax on the gain arising from a redemption of its membership interest in a U.S. L.L.C. treated as a partnership. In their article, Galia Antebi and Stanley C. Ruchelman address the history of the I.R.S. position and the disdain given to it by the courts. However, they caution that the taxpayer victory applies only to sales, exchanges, and dispositions effected through November 26, 2017. Thereafter, new Code §864(c)(8) modifies the law by adopting a look-thru rule when determining the character of gain from the sale of a membership interest. Win some, lose some.

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Updates & Other Tidbits

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Updates & Other Tidbits

This month, Fanny Karaman, Galia Antebi, and Stanley C. Ruchelman look at interesting items of tax news, including (i) the I.R.S. announcement that French contribution sociale généralisée ("C.S.G.") and contribution au remboursement de la dette sociale ("C.R.D.S.") are now considered creditable foreign income taxes as they are no longer considered to fall under the provisions of the France-U.S. Totalization Agreement, (ii) the Senate Foreign Relations Committee has recommended approval of protocols to income tax treaties with Japan, Luxembourg, Spain, and Switzerland, paving the way for Senate approval, and (iii) proposed regulations under Code §951A now allow taxpayers to claim the benefit of the high-tax kickout to limit the inclusion of G.I.L.T.I. income, thereby allowing individuals to avoid current taxation of net tested income when the controlled foreign corporation incurs foreign income taxes imposed at a rate that exceeds 18.9%.

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

The exponential expansion of information and communication technology has made it possible for businesses to be conducted in ways that did not exist 15 years ago.  It has given rise to new business models that rely almost exclusively on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks.  So how and where should these companies be taxed?  Sunil Agarwal, an advocate and senior tax partner of AZB & Partners New Delhi, evaluates proposals already enacted in India and the U.K. and those under consideration at the level of the European Commission and E.U. member countries Italy, France, and Austria.  Should the digital tax be a consumption tax passed on to the final consumer or a minimum income tax based on global profits or substantial economic presence?  At this point, consensus does not exist.

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2020 Will Mark the End of an Era: Swiss Corporate Tax Reform Accepted

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2020 Will Mark the End of an Era: Swiss Corporate Tax Reform Accepted

On May 19, 2019, Swiss Federal and Genevan cantonal voters accepted proposed corporate tax reforms by a large majority.  As explained by Thierry Boitelle and Aliasghar Kanani of Bonnard Lawson Geneva, Switzerland will abolish its widely criticized cantonal special tax regimes and certain Federal regimes.  At the same time, Switzerland and the cantons will introduce generally applicable reduced and attractive corporate income tax rates and several new special regimes, meeting current international standards and requirements.  These changes will be effective as of 2020.

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Reflections on My 66 Years in Public Accounting

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Reflections on My 66 Years in Public Accounting

Periodically in life, one comes across an individual who is best described as follows:  He or she “gets it.”  Difficult to describe analytically, in the tax world, the term means that (i) in solving technical problems, the person focuses the material, leaving the immaterial to others; (ii) in making decisions, the person can separate the important from the unimportant; and (iii) in advising others on the impact of a new accounting rule or provision of tax law, the person can digest the complex and explain it in a series of simple sentences.  Often, the individual is self-effacing.  Arthur J. Radin was all of the above.  He passed away in April.  In his memory, we are pleased to republish an article written for the CPA Journal describing the way professional accounting changed during his 60-year career and, more importantly, the way the world changed.  Arthur will be missed.

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

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

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.

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

When Congress expanded the definition of a “U.S. Shareholder” in the T.C.J.A. by requiring the measurement of value as an alternative to voting power, it opened a Pandora’s box of issues.  First, more U.S. Persons became U.S. Shareholders.  Second, it imposed a difficult task for shareholders and corporations to measure relative value of all classes of shares and all holdings of shareholders.  Finally, many plans based on the existence of direct or direct or indirect dividend rights of foreign shareholders were shut down. Proposed regulations will modify the way Subpart F Income is allocated to various classes of shares having discretionary dividend rights. Neha Rastogi and Stanley C. Ruchelman explain the broadened scope of income inclusions under Subpart F.

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Missed Opportunities – Tax Court Shows No Mercy for Indirect Partner

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Missed Opportunities – Tax Court Shows No Mercy for Indirect Partner

In the U.S., there are several options to challenge an I.R.S. adjustment in the courts, including the U.S. District Court, the U.S. Court of Federal Claims, and the U.S. Tax Court.  Of the three options, only a challenge in the Tax Court can be pursued without first paying the tax.  Strict time limits are placed on filing a petition to the Tax Court.  If a taxpayer misses the deadline, it must first pay the tax and then sue for refund in either of the other courts.  The petition deadline is easy to determine when the I.R.S. proposes an adjustment to an individual or corporation, but when the adjustment is made to the income of a partnership – which yields tax exposure for partners – it is not always clear when the time limit has run out.  In a recent memorandum decision, the Tax Court ruled that an indirect partner was not able to challenge the tax liability of a partnership because the petition came too late.  In their review of the decision, Rusudan Shervashidze and Nina Krauthamer explain the strange facts involved and point out that the taxpayer did not have “clean hands.”

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Corporate Matters: Delaware Law Allows L.L.C. Divisions

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Corporate Matters: Delaware Law Allows L.L.C. Divisions

Delaware recently amended its company law to enable a limited liability company (“L.L.C.”) to be divided into two or more newly-formed L.L.C.’s, with the original company either continuing or terminating its existence.  The amendment provides L.L.C. members with significant flexibility in separating from each other so that assets, liabilities, rights, and duties of the company can be allocated among the resulting companies.  Simon Prisk explains the change in company law.

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New York State Renews the Three-Year Clawback for Gifts

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New York State Renews the Three-Year Clawback for Gifts

Generally, Federal estate and gift taxes are imposed on a person’s right to transfer property to another person during life or upon death.  State rules may differ from the Federal regime, imposing either an estate tax, inheritance tax, or gift tax or some combination of these taxes.  New York State limits its taxation to an estate tax on the transfer of property at the time of death.  There is no gift or inheritance tax.  But, as of April 1, 2014, gifts made by a N.Y. resident between April 1, 2014, and December 31, 2018, were clawed back into the taxable estate if the gifts were made within three years of death.  The clawback has been extended to cover gifts made through December 31, 2025.  Rusudan Shervashidze and Nina Krauthamer explain.

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New York State Says No to Annual Pied-A-Terre Tax, Yes to Increased Real Estate Transfer Taxes

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New York State Says No to Annual Pied-A-Terre Tax, Yes to Increased Real Estate Transfer Taxes

As part of New York State’s annual budget process, law makers proposed an annual pied-à-terre tax on homes worth $5 million or more that do not serve as the buyer’s primary residence.  At the last minute, the tax was dropped and replaced by a 0.25 percentage point increase to the real estate transfer tax on sellers and a new graduated mansion tax, a special transfer tax imposed on purchasers.  Nina Krauthamer addresses the ins and outs of both taxes.

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Austria, France, and Italy to Introduce Digital Services Taxes

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Austria, France, and Italy to Introduce Digital Services Taxes

A limerick that is popular among members of the U.S. Congressional tax writing committees sheds wisdom on the development of tax policy:  “Don’t tax you.  Don’t tax me.  Tax the person behind the tree.”  Several countries in Europe have taken the rhyme to heart in developing unilateral digital services taxes designed to impose tax on extra-territorial activity of out-of-country companies.  The issue, as Austria, France, and Italy see it, is that these companies make huge profits in Europe but pay no tax there, while payments for digital services are often tax deductible in the countries where the services are used.  According to proponents such as Austria, it is only fair to tax those profits on a destination basis.  Benjamin Twardosz of CHSH Attorneys-at-Law, Vienna, explains the various proposals under consideration.

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Foreign Investment in U.S. Real Estate – A F.I.R.P.T.A. Introduction

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Foreign Investment in U.S. Real Estate – A F.I.R.P.T.A. Introduction

Many economic, political, and cultural factors make U.S. real estate an attractive investment for high net worth individuals resident in other countries.  These factors are supported by a set of straightforward tax rules that apply at the time of sale.  Alicea Castellanos, the C.E.O. and Founder of Global Taxes L.L.C., looks at the U.S. Federal income taxes and reporting obligations that apply to a foreign investor from the time U.S. real property is acquired to the time of its sale.

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