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The Door to a New World: Decentralized Finance (DeFi)

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The Door to a New World: Decentralized Finance (DeFi)

1. The world of crypto is fast-moving. An exciting development in this space is Decentralized Finance (“DeFi”), which entered the scene in March 2020. Its use has exploded ever since. The term refers to the offering of traditional financial services not by centralized players such as banks, insurance companies, and exchanges, but through smart contracts running on blockchains. Niklas Schmidt, a partner of the Vienna office of Wolf Theiss and leader of the firm-wide tax team, and Lioba Mueller, a Rechtsreferendarin at the Regional Court of Aachen and PhD student at the University of Bonn, Germany, explain the ups and downs of this relatively new financing vehicle.

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Use it or Lose it: The Future of Shell Entities in the E.U.

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Use it or Lose it: The Future of Shell Entities in the E.U.

Shortly before Christmas, the European Commission published a proposal for a directive laying down rules to prevent the misuse of shell entities for improper tax purposes. The “Unshell Directive” applies to any company or other “undertaking,” regardless of its legal form that (i) is considered tax resident in an E.U. Member State and (ii) is eligible to receive a tax residency certificate. Targeted by the Unshell Directive are entities that have the following characteristics: (a) they lack real economic activities, (b) they are involved in certain cross-border arrangements forming a scheme to avoid and evade taxes, and (c) they allow their beneficial owners or parent company to access a tax advantage. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam, explains the general exemptions, the gateway indicators, the reporting obligations, the presumptions, and potential rebuttals in this attack on certain special purpose vehicles.

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Off to New Shores: Tax Extern at Ruchelman P.L.L.C.

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Off to New Shores: Tax Extern at Ruchelman P.L.L.C.

· Ruchelman P.L.L.C. actively participates in the extern arrangement for students in the LLM Program at New York Law School. We provide real life professional experience to the extern and the extern receives two credits towards his or her degree requirement. Our younger lawyers benefit by providing hands-on supervision of the extern, a needed step in professional development. Recently, we expanded our extern program to include European externs and trainee lawyers. Lioba Mueller spent two months with us as an extern, sponsored by the University of Bonn. She also qualified for a PROMOS scholarship, offered by the German Academic Exchange Service, under the German Ministry of Education and Research. In her article, Ms. Mueller tells of her experience in the U.S., both professionally with us and socially with others. Our experience with Ms. Mueller is that doing a good deed is, indeed, its own reward.

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Goodwill and Mister Donut – A Going Concern?

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Goodwill and Mister Donut – A Going Concern?

· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

Canadians and Americans share many things in common. Common language, one border, a love for teams in the National Hockey League, a slew of dual citizen individuals in Canada and Canadian residents in the U.S., and a common history up to the time of the American Revolution. But many differences exist, nonetheless. To illustrate, when wealth is transferred, the U.S. imposes gift and estate taxes based on value. Canada imposes capital gains tax. The U.S. imposes income taxes on global income based on citizenship as well as residence. Canada imposes income tax on global income based only on residence. Canada imposes departure taxes when any resident leaves the country to establish a residence elsewhere. The U.S. imposes departure tax only when citizenship is renounced, or when a long-term green card holder relinquishes his or her green card. These differences trigger several tax traps, many of which can be avoided by unique provisions in the Canada-U.S. Income Tax Treaty. But the treaty is not perfect. In his article, Andreas Apostolides explains the taxation rules for wealth transfers in both countries, the applicable provisions in the income tax treaty designed to be helpful, and most importantly, a solution that is followed by many Canadian tax advisers when the treaty fails to provide a solution for disparities in adjusted cost basis for certain assets received as a gift or a bequest.

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The More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business

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The More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business

When a U.S. person disposes of a business situated in a foreign country, the nature of the gain as capital or ordinary and the source of the gain may sound like simple issues that require simple tax advice. It may, however, turn out to be far more complex as one begins to review the relevant provisions of U.S. tax law in light of the facts and circumstances that exist. It is not uncommon for issues to pop up, one after the other and on a never-ending basis. In their article, Neha Rastogi and Stanley C. Ruchelman discuss the various U.S. Federal income tax issues that must be addressed by a U.S. seller in connection with a sale of a business as a going concern held indirectly through an entity that is treated as a disregarded entity for U.S. tax purposes. Mind-blowing complexity is not an overstatement.

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

The C.T.A. was enacted on Jan. 1, 2021, ad to shed light on the beneficial owners of certain entities by requiring those entities to report information on their beneficial owners and other individuals known as company applicants. Many think of it as “Son of F.B.A.R.,” but its application is much wider and is focused on small companies. FinCEN published proposed regulations on December 27, 2021, which are intended to answer questions left open in the legislation. What companies must report? What companies are exempt? Who is a control person? What are the penalties for noncompliance? Andreas Apostolides, Nina Krauthamer, and Wooyoung Lee explain all. Those who ignore the obligations to report do so at their peril.

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

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Israeli Start-Up Expansion to the U.S.: Who Should Be On Top?

Israeli high-tech companies have been quite successful in the past year in developing new technologies in Med Tech and Fin Tech spaces. Naturally, liquidity events followed. In their article, Anat Shavit and Yuval Peled, partners in the tax practice of FBC & Co., Tel Aviv, and Galia Antebi address the tax planning decision points that must be addressed in Israel and the U.S. Where should the I.P. be owned? What structures are demanded by angel investors? What tax issues are raised by the Israeli tax authorities? Can structures be revised? Is there a taxable presence in the U.S. for an Israeli company? What U.S. anti-deferral regimes could apply with a U.S. company as parent? When should planning take place for Q.S.B.S. tax benefits in the U.S.? Is there a cookie-cutter solution that fits all situations? These and other questions are addressed.

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Mexico: Recent Developments

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Mexico: Recent Developments

The Mexican government adopted its 2022 budget in late October 2021. Several provisions place special emphasis on plugging gaps in tax compliance. More power has been given to the Mexican tax administration when conducting tax examinations. Taxpayers under tax examinations face serious penalties where noncompliance is found to exist, including potential application of the domain extinction law, a forfeiture provision that applies ordinarily in serious criminal investigations. G.A.A.R. has been introduced, tax reporting obligations have been imposed on advisers reflecting policies behind D.A.C.6 in the E.U., and a new regime to disregard foreign entities and arrangements without legal personality have been adopted. Alil Álvarez Alcalá, the founding partner of Álvarez Alcalá, in Mexico City dives into these and other new regimes.

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

In an age of spectacular liquidity events for Israeli start-up companies, the Israel Tax Authority has proposed significant revisions to the tax law designed to bring more income and gains into the Israeli tax net. In part, this reflects a global trend among governments and to close a perceived tax gap among the wealthy, especially those having one foot at home and a second foot abroad. In Israel, the proposals directed at individuals include (i) adoption of objective rules for determining tax residence with greater certainty, (ii) tightening of exit tax rules to ensure collection of deferred amounts, (iii) expansion of C.F.C. rules to cover more foreign companies, (iv) elimination of foreign tax credit carryovers for unused foreign tax credits, and (v) changes to basis step-up rules for property inherited from foreign decedents. Daniel Paserman, a partner in the Tel Aviv office of Gornitzky, attorneys, and the head of the firm’s tax practice, and Inbar Barak-Bilu, a partner in the Tel Aviv Office of Gornitzky, attorneys, caution that the proposals are groundbreaking and are likely to have an influence on persons considering a move to or from Israel.

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The "Value Creation" Question has Escaped the New Pillar 1 Mousetrap

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The "Value Creation" Question has Escaped the New Pillar 1 Mousetrap

In every decade, a phrase or a term pops up that is widely used, although its meaning may vary from person to person. Examples in past decades include “groovy,” “viral,” “neat,” and “heavy.” In his article, Michael Peggs identifies “value creation” as a phrase that has gone “viral” among the O.E.C.D., the G-20, and tax authorities. The “neat” aspect is that, over the centuries, the term has meant different things to different commentators. Nonetheless, it remains the central foundational feature of controlling policy for global policy wonks. It could mean that while everyone appears to be marching in unison, they are really marching in different directions, much to the chagrin of multinational enterprises. “Heavy!”

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Rescission – Undoing a Transaction That Seemed Like a Good Idea at the Time

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Rescission – Undoing a Transaction That Seemed Like a Good Idea at the Time

How many times have we watched a movie, read a book, or listened to a colleague talk about an action that appeared to be a no-risk proposition, only to turn into a nightmare? At some point, the general lament is uttered: “It seemed like a good idea at the time, but . . .” Tax plans can be like that, too. A company identifies an acquisition target, proposes a merger with a supplier, or considers an internal restructure. Teams of lawyers, accountants, and operations personnel perform appropriate due diligence. The deal closes. At some point, blemishes, problems, errors float to the surface. The same lament is uttered: “It seemed like a good idea at the time, but . . .” While the laments are the same, the suffering for a tax planning mistake need not linger forever. If the parties to a transaction act quickly, the doctrine of rescission may apply, allowing the parties to treat the event as if it never occurred. Stanley C. Ruchelman and Neha Rastogi explain the early cases and discuss a published ruling and several private letter rulings in which the principal concern of the I.R.S. is that the transaction and its rescission occur in the same taxable year.

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Trusts Under Attack – The Legislative Landscape

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Trusts Under Attack – The Legislative Landscape

Bad ideas travel globally, especially if the source of information is a progressive crusader. Reducing perceived wealth disparity in the U.S. has become a major political goal of the Biden Administration and the Democratic Party. That goal, together with the goal of increased transparency concerning ownership, have resulted in a number of legislative proposals, which, if enacted will fundamentally alter tax planning regimes for the wealthy. In her article, Nina Krauthamer explores some of these recommendations and their effect.

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Toulouse or Not Toulouse? N.I.I.T.-Picking the Reach of the U.S. Foreign Tax Credit

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Toulouse or Not Toulouse? N.I.I.T.-Picking the Reach of the U.S. Foreign Tax Credit

When is a tax that is based on income not an income tax? When are treaty provisions that provide for relief from double taxation properly ignored? The answer in the U.S. is when the tax is the Net Investment Income Tax, generally referred to as N.I.I.T. In the Toulouse case, the U.S. Tax Court refused to allow a U.S. citizen resident abroad to claim a foreign tax credit when it came to the N.I.I.T. In addition to the technical issue, the case is interesting because it illustrates the choice of procedures to be followed when challenging an I.R.S. increase in tax for reasons unrelated to the computation of income or the availability of a credit. One is the Collection Appeals Program (“C.A.P.”) and the other is the Collection Due Process program (“C.D.P.”). Here, the taxpayer chose the C.D.P., as it allowed the taxpayer an opportunity to challenge an adverse position of the I.R.S. by filing a petition in the U.S. Tax Court. Andreas Apostolides and Wooyoung Lee explain the rationale of the court in denying double tax relief. In particular, it points out that taxpayers who seek treaty relief in matters other than withholding tax rates do so at their peril.

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How New York Courts Provide Broad Support to Parties Engaged in International Arbitration and Litigation

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How New York Courts Provide Broad Support to Parties Engaged in International Arbitration and Litigation

Why is an international tax journal addressing the broad scope of remedies available to parties in foreign litigation or arbitration? The reason is simple. Clients enter transactions, transactions blow-up, and parties sue or can be sued. Even if the parties, the contract, or the dispute at issue have little or no connection to New York, potential documents, assets, or witnesses may be located within the State. If so, New York courts can provide tools (i) to obtain broad information vital to a pending foreign proceeding, (ii) to attach assets to secure an ultimate recovery or incentivize settlement, or (iii) to enforce final judgments or awards, including seizure of assets and other post-judgment remedies. These are important tools to a litigator. Dan J. Schulman, a commercial litigator based in New York, explains all. He has over 35 years of experience managing complex commercial litigations, arbitrations, and appeals in New York, and shares the tools that are available to parties in a litigation.

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Five Reasons Why the Legal Professional Privilege of Belgian Lawyers is Incompatible With the Mandatory Reporting Under D.A.C.6

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Five Reasons Why the Legal Professional Privilege of Belgian Lawyers is Incompatible With the Mandatory Reporting Under D.A.C.6

D.A.C.6 in the E.U. requires Member States to impose a disclosure obligation on intermediaries who advise on, or are involved in, implementing aggressive cross-border arrangements. This poses a conundrum for tax lawyers involved in a transaction because, whatever they do, rights of taxpayers and duties of attorneys to maintain client confidences may be ignored, or significantly cut back. In Belgium, the approach is to ignore Belgian case law that recognizes the obligations of lawyers to keep confidences and forces attorneys to violate various obligations to clients. Not surprisingly, the Belgian Bar Councils and the Belgian Association of Tax Lawyers have challenged the restrictive interpretation of the L.P.P. before national and European courts. Werner Heyvaert, a partner at the Brussels office of AKD Benelux Lawyers, and Vicky Sheikh Mohammad, an associate at the Brussels Office of AKD Benelux Lawyers, explain the five reasons why Belgian implementation of D.A.C.6 is flawed. The case is currently under consideration by the C.J.E.U.

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The Importance of Earnestly Modeling Earnouts: Pitfalls and Planning Relating to the Purchase of a Service Business

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The Importance of Earnestly Modeling Earnouts: Pitfalls and Planning Relating to the Purchase of a Service Business

In representing a taxpayer interested in purchasing a business, it is important for tax counsel to understand, in simple terms, what each party is seeking to accomplish. The tax adviser’s greatest contribution is often simply asking the right questions and then taking the time to think through the structure from different angles in a manner that helps the client reach a decision. In a light-hearted approach to the subject, Andreas Apostolides takes the reader through the various alternatives available in negotiating the purchase and sale of a service business conducted through a tax-transparent entity such as an L.L.C. Some alternatives may work; others may not.

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The Cameco and Glencore Transfer Pricing Cases – Comments on the Common Complications in Commodities Commerce Controversy

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The Cameco and Glencore Transfer Pricing Cases – Comments on the Common Complications in Commodities Commerce Controversy

Two transfer pricing cases, Commissioner of Taxation of the Commonwealth of Australia v Glencore Investment Pty Ltd. in Australia and Cameco Corporation v. Her Majesty The Queen in Canada, address arm’s length transfer pricing methodology for mined minerals during a period of steep increases in spot prices. In each case, the revenue authority challenged the taxpayer’s revision of pricing from the use of fixed prices to adjusted prices that were comparable in methodology to contemporaneous uncontrolled transactions. Each case was decided in favor of the taxpayer. Michael Peggs explains the reasons why the approaches of the tax authorities were rejected. He cautions that the precedential value of the cases may be limited in light of changes made in the 2017 version of the O.E.C.D. Guidelines. One ongoing takeaway from the two cases is that, to settle a transfer pricing dispute, a large multinational company must be prepared to make significant investments in data gathering, executive, time, and cost of litigation.

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Domestic Trust – Does Yours Satisfy the Court Test?

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Domestic Trust – Does Yours Satisfy the Court Test?

In comparison to tax laws in many countries, where the tax residence of a trust may depend on the residence of the trustee or the relevant law for the trust, U.S. tax law provides that the residence of a trust is dependent on two factors. All trusts no matter where formed are considered to be foreign trusts unless two tests are met, causing the trust to be considered a domestic trust. The first is a court test, under which a U.S. court is able to exercise primary supervision over trust administration. The second is a control test, under which U.S. persons control all substantial trust decisions. Nina Krauthamer and Galia Antebi point out that while the tax law is clear, applicable trust law – not tax law – may contain hidden risk regarding the court test. Comments to Section 108 of the Uniform Probate Code and Uniform Trust Code provide that the identification of a trust’s principal place of administration will ordinarily determine which the court that has primary jurisdiction over the trust. Advisers representing foreign families should be mindful because facts change and unknown facts may exist. Officers of a privately held trust company may live and carry out their duties outside the U.S. or an individual trustee may move outside the U.S. Where either fact exists, a U.S. domestic trust may find that it has become a U.S. foreign trust. The result may not be pretty.

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Taxation of Foreign Pensions in Ireland – Walking the Tricky Tightrope

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Taxation of Foreign Pensions in Ireland – Walking the Tricky Tightrope

As more individuals relocate to Ireland, the taxation of assets brought with them takes on importance once Irish tax residence is established. Of special concern are pension products that individuals accumulate while living and working outside of Ireland. The taxation of lump sum payments from foreign pensions is a complex affair. Under Irish law, most foreign pensions schemes are considered nonqualifying overseas pension plans. Consequently, lump sum payments from such pension plans should not be taxable in Ireland because no domestic legislation exists to tax lump sums. Lisa Cantillon, a Director in the Dublin office of KTA, explains all, but cautions that the Irish Revenue have a different view, notwithstanding the absence of statutory support.

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