March 20, 2020

Foreign Tokens – U.S. Tax Characterization: Questions and Discussion

March 20, 2020/ Ruchelman P.L.L.C.

· Initial coin offerings (“I.C.O.’s”) provide blockchain-based companies with a new way to raise capital. Companies in the U.S. and abroad have been raising capital using blockchain technology since 2016. As this means of raising funds gained popularity, the S.E.C. ruled that some tokens are securities, making U.S. I.C.O.’s subject to Federal securities laws. Tax questions also arose, but not all questions have been addressed by the I.R.S. Specifically, no guidance exists with respect to the proper characterization of a token, and as a result, U.S. investors are not assured of the tax consequences of their investments. Galia Antebi and Andreas A. Apostolides guide the reader through the issues, identify the problems, and suggest solutions where appropriate.

March 20, 2020

O.E.C.D. to Use Hybrid Model to Develop Digital Economy Nexus and Profit Attribution Rules

March 20, 2020/ Ruchelman P.L.L.C.

The O.E.C.D. announced on January 31, 2020, that its policy development efforts under Pillar One, related to the taxation of the digital economy, will move forward using the non-consensus “Unified Approach” as a working model. The O.E.C.D.’s deadline for obtaining a consensus outcome is highly ambitious. Michael Peggs provides his views. Despite what people may think about when this effort should have begun, it is crucially important that it has begun at last and in an organized way.

March 20, 2020

Variety Is the Spice of Life: Alternate Tax Structures for a U.S. Individual Disposing of Foreign Real Property

March 20, 2020/ Ruchelman P.L.L.C.

When U.S. individuals acquire personal use real property or fallow land located abroad, the property often is owned by a corporation. Typically, that decision is driven by local considerations, of one kind or another. However, corporate ownership poses income tax issues in the U.S. at the time the property or the shares are sold. Neha Rastogi, Nina Krauthamer, and Stanley C. Ruchelman explore various ways by which a sale can be effected and the U.S. tax considerations that result. The answers may not be what the client expects to hear, especially if the sale transaction is cast as a sale of real property by a foreign corporation.

March 20, 2020

Transfer of Business Contracts – I.R.S. Disagrees with Greenteam, No Capital Gains Without a Fight

March 20, 2020/ Ruchelman P.L.L.C.

In an Action on Decision (“A.O.D.”) published in late 2019, the I.R.S. announced its nonacquiescence to the Tax Court’s decision in Greenteam Materials Recovery Facility v. Commr. The case involved Code §1253, the provision that standardizes the rules under which payments that are incident to the transfer of a franchise, trademark, or trade name may or may not be properly treated as capital gains. The case was decided in the taxpayer’s favor because the taxpayer’s agreement avoided all the terms that would otherwise cause the sales proceeds to be characterized as ordinary income. The nonacquiescence means that the I.R.S. will not follow the holding in cases appealable in Circuit Courts of Appeals other than the 9th Circuit. The I.R.S. position is that the assets were limited-term contracts to provide services under fixed-term arrangements and looked more like a sale of future income than the sale of an appreciated asset. Lisa Marie Singh and Stanley C. Ruchelman discuss the case and the nonacquiescence, cautioning that a franchise contract that cannot appreciate over time because the payments are fixed in amount or in scope of service is not an appreciating asset in the eyes of the I.R.S.

March 20, 2020

J-5 Step Up Anti-Money Laundering in 2020, Sights Set on Central America

March 20, 2020/ Ruchelman P.L.L.C.

The Joint Chiefs of Global Tax Enforcement, known as the J-5, is a coordinated team of crime-fighting tax authorities from the U.K., the U.S., Canada, Australia, and the Netherlands. Formed in 2018, the mandate of the J-5 is to stop the facilitation of offshore tax evasion and money laundering. In January, the J-5 conducted coordinated action regarding a Central American financial institution believed to be involved in money laundering and tax evasion on a global basis. Denisse Lopez reports.

January 24, 2020

A gRETT-able Situation: New Trends in German Real Estate Transfer Tax on Share Deals

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

For decades, the German Real Estate Transfer Tax Act ("gRETT Act") has imposed a transaction tax on the sale of real estate in Germany. In recent years, the tax has applied to the sale of shares that indirectly transfer real estate located in Germany. When initially enacted, a sale of all shares was taxable under the gRETT Act. In the year 2000, the triggering percentage was reduced to 95%. Last year, proposed legislation would have reduced the triggering percentage to 90%, but the draft bill was never enacted. In 2020, the triggering percentage may be reduced to as low as 75% or some other percentage whenever new legislation is adopted. Exactly what constitutes an indirect sale of German real estate is surprisingly broad, and unlike comparable taxes in other countries, the sales need not be related nor contemporaneous. In recent years, a populist clamor has arisen to broaden the scope of indirect transfers subject to the tax. Michael Schmidt of Schmidt Taxlaw, Frankfurt am Main, Germany, explains how and when the tax is imposed under current law and how it may be modified in the coming months.

January 24, 2020

Portuguese Taxation of Distributions from Trust Capital: A Critical Assessment

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

How does a country adopt a law to tax the income of an entity that generally is not recognized under local law? In Portugal, there is room for improvement. The 2014 reform of the Portuguese Personal Income Tax ("P.I.T.") Code introduced certain taxing provisions that specifically address "fiduciary structures," the Portuguese term for trusts. Two separate categories of payments were established for purposes of imposing tax. Under the first category, all amounts paid or made available to a Portuguese tax resident are taxable. This includes capital distributions. Under the second category, gains realized by the taxpayer who formed the fiduciary structure are taxed at the time of a final distribution incident to the structure’s liquidation, unwinding, or termination. Other beneficiaries can receive liquidation distributions without suffering any tax. João Luís Araújo and Álvaro Silveira de Meneses of Telles Advogados, Porto and Lisbon, Portugal, suggest that solid arguments support the view that certain distributions should be seen as outside the scope of the P.I.T. Code, including (i) distributions of trust capital to the settlor during the ongoing existence of a trust and (ii) distributions to non-settlors that are akin to gifts.

January 24, 2020

O.E.C.D. Unified Approach Garners Less Unified Comments from Europe’s Tech Producers and Users

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

How does a group of experts comment on the indescribable in order to arrive at a consensus? Inconsistently is the answer. As the O.E.C.D. continues its work on the taxation of the digital economy, the O.E.C.D. Centre for Tax Policy and Administration received comments in advance of a public consultation in late November 2019. The public consultation heard input from interested parties on the policy development aspects of a "Unified Approach" to the determination of tax nexus and profit allocation rules relevant to customer-facing corporate participants in the digital economy. From the consultation, a "great divide" appears to exist on the Unified Approach. The policy interests are clearly inconsistent when looking at (i) tech haves v. have-nots and (ii) consumers v. producers. The broadly North-South partition that caused the demise of the E.U. Commission’s significant digital presence and D.S.T. directives continues to be argued in the larger forum of the O.E.C.D. Tech haves and producers appear to share a common view with U.S. tech firms. Michael Peggs explains the divide in quantitative terms and suggests that, with the exception of the U.K., the adage that looks to see "whose ox is being gored" is a useful tool in identifying those jurisdictions that support digital taxes and others that are opposed.

January 24, 2020

Same Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person

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

While tax rules generally appear to be similar in India and the U.S., several divergent provisions in the domestic law of each country produce adverse consequences for those who are not well-advised. The prime example involves the taxation of gains from the sale of shares of an Indian company by a U.S. person: India sources the gain based on the residence of the target while the U.S. sources the gain based on the residence of the seller. No relief from double taxation is provided, notwithstanding the capital gains and relief from double taxation articles in the U.S.-India income tax treaty. The result is tax that can be as high as 43.8% of the gain. Rahul Jain and Sanjay Sanghvi of Khaitan & Co., Mumbai, India, along with Neha Rastogi and Stanley C. Ruchelman explain the problem and, more importantly, suggest a path forward for U.S. individuals realizing sizable gains.

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.

December 13, 2019

IR35 – Why Are U.K. Businesses So Concerned?

December 13, 2019/ Ruchelman P.L.L.C.

New U.K. tax rules are being introduced from April 2020 to make businesses liable for determining the employment tax status of contractors who work through personal service companies (“P.S.C.’s”). These outsourcing arrangements have had a devastating effect on tax collections and funding for National Insurance, the U.K. version of Social Security. The goal of the new rules is to make customers of P.S.C.’s liable for collecting wage withholding tax and National Insurance contributions that are not collected by the P.S.C. when the worker of the P.S.C. would otherwise be properly characterized for U.K. tax purposes as an employee of the customer of the P.S.C. under tests published by H.M.R.C. Any company involved in the P.S.C. arrangement may have inchoate liability for payments of wage withholding tax and National Insurance. Penny Simmons, of Pinsent Masons LLP, London, explains the scope of the exposure and expounds on procedures that should be adopted in advance of the April 2020 effective date.

November 20, 2019

Collecting Another Country’s Taxes – Recent Experience in the Canada-U.S. Context