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Italy: New Clarifications Concerning the Taxation of Trusts and Beneficiaries

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Italy: New Clarifications Concerning the Taxation of Trusts and Beneficiaries

Tax authorities in much of Europe look at trusts as a tax gimmick used by the wealthy as a tool to dodge taxes. However, trusts are commonly used as a tool in estate and succession planning in connection with generational transfers of family assets and businesses, the achievement of charitable purposes, and the protection of vulnerable individuals. In this context, the Italian tax authorities released Circular Letter No. 34/E in October, providing guidance on several key issues surrounding trusts. It provides many important clarifications making trusts more attractive for individuals resident in Italy and international families having one or more beneficiaries resident in Italy or wishing to relocate to Italy. Andrea Tavecchio, the Founder and Senior Partner of Tavecchio & Associati, Tax Advisers, Milan, and Riccardo Barone, a Partner at the same firm, explain how Italian tax authorities will treat various types of trusts in a logical way.

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

A common error among tax advisers is the expectation that tax law in a foreign country is applied in a straightforward way. For example, if a tax treaty provides that a foreign country will provide a foreign tax credit for taxes imposed by the other country, it seems clear that foreign tax will be reduced by that credit. Regrettably, this is not always the case. Francesco Capitta, who is Of Counsel to Facchini Rossi Michelutti, Studio Legale in Milan, and Andrea D’Ettorre, who is an associate at the same firm, explain that, in Italy, a decision of the Supreme Court was required in order to allow an Italian resident individual to reduce Italian tax by a foreign tax credit for U.S. income taxes withheld on U.S. source dividend income. Remarkably, there was a logical reason for the denial, but it was invalidated in the case.

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Insights Volume 9 Number 5: Updates & Other Tidbits

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Insights Volume 9 Number 5: Updates & Other Tidbits

Two recent items of interest are addressed this month in Updates & Other Tidbits. The first is Franklin v. U.S., where the Fifth Circuit upheld the forfeiture of a U.S. passport in the context of a U.S. citizen who was seriously in tax debt to the I.R.S. Code §7345, allows the I.R.S. to effect the revocation of a U.S. citizen’s passport where a taxpayer owes more than $50,000 in tax, penalties, and interest. The taxpayer argued that international travel is a fundamental right of citizenship that was violated by the I.R.S. when it triggered forfeiture of his passport. The court disagreed, holding that a citizen has a fundamental right to travel within the U.S., but not internationally. The second item is an I.R.S. announcement that information on bank account interest will be exchanged automatically with Turkey when a Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) has been provided by the account holder and indicates that he or she is a resident of that country. Wooyoung Lee addresses the case, explains the I.R.S. announcement, and lists all countries that receive information concerning interest received from U.S. bank accounts.

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Medtronic Part Deux: The Best Method Is Yet To Come?

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Medtronic Part Deux: The Best Method Is Yet To Come?

Bad blood exists between the I.R.S. and Medtronic Inc. when it comes to transfer pricing matters. Regarding the tax years 2005 and 2006, the I.R.S. challenged a transfer pricing methodology it approved in an M.O.U. settlement with Medtronic involving the same transactions and issues in the context of an earlier year. The I.R.S. lost in an earlier case, appealed to the 8th Circuit Court of Appeals, which sent the matter back to the Tax Court to address several factual issues. In a recent decision, the Tax Court modified its earlier finding by adjusting the comparable uncontrolled transaction (“C.U.T.”) in a subjective way to obtain a result that seemed to be fair in the view of the court. Michael Peggs suggests that the second trial did not produce practical guidance that was any better than the very limited guidance in the original decision.

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Tax 101: U.S. Tax Compliance For Dual Citizen Young Adults

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Tax 101: U.S. Tax Compliance For Dual Citizen Young Adults

It is not uncommon for a young adult who was born in the U.S. to noncitizen parents living temporarily in the U.S. to live abroad. Although he or she may never have returned to the U.S., the young individual is a U.S. citizen, and that status brings with it U.S. tax obligations. In their article, Nina Krauthamer, Wooyoung Lee, and Stanley C. Ruchelman address the tax obligations in the context of Ms. A, a typical young adult, born in the U.S., but living abroad. She may have a bank account in a foreign county, but ordinarily will not have her own source of income. At some point, Ms. A may receive gifts and bequests from her foreign parents or grandparents. At this point in her life, Ms. A’s U.S. tax compliance obligations become complex. Just how complex is explained by the authors.

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Planning To Realize Capital Loss Upon Liquidation? Better Hurry Up As Change Is In The Air

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Planning To Realize Capital Loss Upon Liquidation? Better Hurry Up As Change Is In The Air

In general, a corporation can set off losses recognized on the sale or exchange of capital assets when determining net capital gain that is subject to U.S. tax. Where the losses arise from a liquidation of a subsidiary, not all losses realized are available to offset gains. Those related to a liquidation covered by Code §331 provide a tax benefit, while liquidations involving a subsidiary defined in Code §332 provide no benefit. While the rule under Code §332 appears to be automatic, case law in the U.S. allows a corporation to restructure its investment in a subsidiary corporation in order to break the parent-subsidiary arrangement. In essence, the choice of which section applies is elective, simply by changing facts. Daniela Shani explains U.S. case law that provide favorable tax treatment, but cautions that the Biden Administration may intend to override case law with a legislative amendment in order to pay for proposed benefits.

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Tax Cases Affecting Remote Workers and Their Employers

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Tax Cases Affecting Remote Workers and Their Employers

The legacy of the pandemic has demonstrated that an employee does not need to be in the office in order to work efficiently. Employees have adjusted to working remotely. In North America, remote working may mean a location in the suburbs surrounding the location of a business office, or perhaps a nearby state. In Europe, remote working may mean relocation to a different country. This raises questions for the employer regarding to the establishment of a P.E. in the country where the employee resides. Sunita Doobay, a partner of Blainey McMurtry, L.L.P., Toronto, discusses two recent tax rulings in Denmark and Spain and one tax case in Finland that address the issue. While all acknowledge that facts control the decision, tax administrations do not exercise judgement consistently.

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Luxembourg Amends Law on Financial Collateral Arrangements

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Luxembourg Amends Law on Financial Collateral Arrangements

Luxembourg is the second largest investment fund center in the world after the U.S. Assets under management exceed U.S. $5.0 trillion. This largely is due to the advanced investment fund legislation and favorable legal framework for investors regarding pledged collateral. Earlier this year, the law was amended to reflect current market concepts. To illustrate, an enforcement event is now defined as an event of default or any other event that triggers an enforcement action as agreed between the parties. If an enforcement event occurs and the collateral consists of financial instruments that are traded on an exchange or market, the holder of the pledgee may, without prior notice (i) assign or cause the pledged collateral to be assigned on that exchange or market or (ii) appropriate the pledged financial instruments or have them appropriated by a third party, at market price. Also, execution on the pledge can be instituted when and as the parties have agreed in the pledge. A final legal determination against the pledgor is no longer a prerequisite for execution against the collateral. These and other aspects of the amended law are explained by Anton Baturin and Graham Wilson, members of Wilson Associates L.L.C., an international business law firm in Luxembourg.

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The U.K. Growth Plan 2022

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The U.K. Growth Plan 2022

Three weeks after Liz Truss became Prime Minister of the U.K., the Chancellor of the Exchequer, Kwasi Kwarteng, announced the new Government’s Growth Plan. Billed as a “Mini Budget,” it became a far greater set of announcements than expected. Among other items, tax rates are slashed at the corporate and individual levels, allowances for businesses are increased, and investment zone benefits enhanced. Kevin Offer, a Partner at Hardwick and Morris L.L.P., London summarizes the provisions.

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Foreign Tax Credit Regulations: Nexus as the New Credo

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Foreign Tax Credit Regulations: Nexus as the New Credo

A U.S. taxpayer that is subject to income tax in both the U.S. and a foreign country can reduce the amount of tax payable to the U.S. by claiming a credit for foreign income taxes paid or accrued to one or more foreign countries. The principle is simple: taxpayers should not pay tax twice with regard to the same item of income. The application of the principle is not so easy, requiring a taxpayer to overcome several hurdles, including a determination of the source of income and whether the tax is a creditable income tax. Faced with Pillar 1 of B.E.P.S. and digital services taxes, both of which look to the location of customers when determining the source of income – and the primary right to impose tax – the I.R.S. adopted a new set of foreign tax credit regulations. They warn U.S. taxpayers that until U.S. tax law is changed, foreign income taxes imposed on the basis of customer location will not be allowed as a credit against U.S. tax when nexus does not exist between the foreign country imposing tax and the place where the income generating activity takes place. Wooyoung Lee explains the new “nexus” requirement for a tax to be considered an income tax under U.S. concepts and provides a real-life illustration of how the tax result may have changed.

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Perenco v. Ecuador and Achmea B.V. v. The Slovak Republic: Practical Limitations When Seeking Relief Under a B.I.T.

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Perenco v. Ecuador and Achmea B.V. v. The Slovak Republic: Practical Limitations When Seeking Relief Under a B.I.T.

While resorting to a B.I.T. provides a corporation access to an independent body when seeking to resolve a dispute with a foreign government, success is not always obtained easily or at all. Stanley C. Ruchelman and Marie de Jorna, a member of the Paris Bar learning U.S. tax law during a period of training with Ruchelman P.L.L.C., dive into two cases where relief has either been denied for over a decade (Perenco v. Ecuador) or where access to a B.I.T. was eliminated as a mechanism to resolve disputes for corporations that are resident in an E.U. Member State with the government of another E.U. Member Sate (Achmea B.V. v. The Slovak Republic).

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Bilateral Investment Treaties: A Potential Legal Remedy in International Tax Disputes

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Bilateral Investment Treaties: A Potential Legal Remedy in International Tax Disputes

Traditionally, international tax disputes tend to focus on provisions in treaties for the avoidance of double taxation. Typically, income tax treaties reduce withholding tax on various types of investment income, provide an increased threshold for imposing tax on business profits, and offer procedures to claim relief in the event of double taxation or the imposition of tax that is not in accordance with the terms of the relevant treaty. However, income tax treaties are not the only legal remedy available in an international tax dispute. Countries also conclude bilateral investment treaties (“B.I.T.’s”) with the aim of protecting and stimulating cross-border investment. In comparison to an income tax treaty, disputes under B.I.T.’s generally are settled by an independent arbitration panel. While a country may “dig in its heals” during the course of the arbitration process, it cannot follow a strategy of agreeing to disagree with its counterpart in the treaty partner country. Once an arbitration panel renders its decision against a government, the award can be converted into a judgment that is enforceable through seizure of assets owned by the government. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam has authored the quintessential monograph on the use of a B.I.T. to obtain relief from confiscatory taxes or unfair treatment imposed by a signatory to an applicable B.I.T.

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

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Dividend Income from India: Tax Treaty Issues for Nonresident Shareholders

Effective April 1, 2020, the dividend distribution tax (“D.D.T.”) imposed on Indian companies paying dividends was abolished. While Indian politicians may say otherwise, tax advisers outside India viewed the D.D.T. as a workaround allowing India to collect the equivalent of dividend withholding tax without having to take into account a lower rate provided by an income tax treaty. With the demise of the D.D.T., the Indian tax authorities are challenging claims for dividend withholding tax benefits. Sakate Khaitan, the senior partner of Khaitan Legal Associates, Mumbai, and Abbas Jaorawala, a Senior Director and Head-Direct Tax of Khaitan Legal Associates, Mumbai, review issues that have been raised by the Indian tax authorities at the time dividends are declared and paid to residents of several countries that are treaty partners of India. Terms such as G.A.A.R., P.P.T., and M.L.I. are often raised. In addition, treaties that have most-favored-nation (“M.F.N.”) provisions are now regularly challenged.

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Adventures in Cross-Border Tax Collection: Revenue Rule vs. Cum-Ex Litigation→

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Published in Tax Notes Federal Volume 175, No. 3 & Tax Notes International Volume 106, No. 3: April 18, 2022. Copyright © 2022, Sunita Doobay and Stanley C. Ruchelman.

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule→

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Re-printed as part of LexisNexis’s Practical Guidance product on April 26, 2022.

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New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

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New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

The U.S. tax system is a “self-assessment” system: upon determining how tax provisions apply to their transactions, taxpayers pay the tax they determine is due, and report the transactions to the I.R.S. in sufficient detail to permit the I.R.S. to confirm that liability was correctly calculated. Paradoxically, the tax system is so complex that it incessantly creates ambiguity and opportunity for abuse. Determining one’s tax obligations is often difficult, even for taxpayers with simple profiles. In a lighthearted article, Andreas A. Apostolides looks at two recent events – the first is a letter written by Senate Finance Committee Chairman Ron Wyden to the Chairman of Bristol-Myers Squibb questioning a ten-year-old transaction and the second is a court decision striking down the I.R.S. system of listed transactions and transactions of interest, both part of the anti-tax shelter provisions of U.S. tax law.

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The Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties

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The Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties

Ever wonder what happens to well-crafted reasonable cause statements attached to late-filed I.R.S. information returns, such as Forms 5471, 5472, and 3520? In a presentation before the San Francisco Tax Club, a retired long-term I.R.S. attorney named Daniel Price provided the answer: nothing happens to them. Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. To keep up the pace, I.R.S. delegates many tasks to lower-level employees who may not have been trained sufficiently to make discretionary judgments. Moreover, they are managed by relatively inexperienced supervisors. Stanley C. Ruchelman and Wooyoung Lee explain the problem and several suggestions offered by Mr. Price. Recent experience with F.B.A.R. penalty inconsistencies are also discussed.

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The Last Days of Dummy Companies

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The Last Days of Dummy Companies

The use of anonymous shell companies or “dummy companies” that may be availed of to conceal the true identities of the ultimate beneficial owners is viewed by financial regulators as a tool to facilitate money laundering and the financing of terrorism. The benefit of anonymity may soon be a thing of the past in the U.S. as well as in Europe. Amendments made to Recommendation 24 by the Financial Action Task Force, proposed regulations by FinCEN to require reporting on “beneficial owners,” and pronouncements on the I.R.S. website that explain the meaning of the term “responsible party” that must be reported when applying for an employer identification number in the U.S. all demand that a U.S. corporation report its controlling person. Ibn Spicer, an experienced attorney whose practice focuses on entertainment and corporate law, and who is currently enrolled in the LLM in Taxation Program of New York Law School, observes that the opportunities for hidden ownership are shrinking rapidly.

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Expanded I.R.S. Reporting Obligations for Digital Assets

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Expanded I.R.S. Reporting Obligations for Digital Assets

If DeFi is the Ying in the crypto world, new I.R.S. reporting obligations are the Yang. I.R.S. reporting requirements for cryptocurrency and other digital assets have been substantially expanded, and as a result, are expected to have a significant impact on the wide range of businesses and individuals to which they apply. Among other things, information reporting requirements for certain brokers now include digital assets, and digital assets valued at more than $10,000 are treated as “cash.” Lawrence S. Feld, a New York attorney whose practice concentrates on Federal and State criminal and civil tax controversies, explains all.

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