October 03, 2023

British Virgin Islands Economic Substance Requirements

October 03, 2023/ Ruchelman P.L.L.C.

Just as water flows downhill, action to prevent aggressive tax planning flows from (i) the O.E.C.D. in its B.E.P.S. Action Plan, especially Action 5 applicable to no or nominal tax jurisdictions (“N.T.J.’s”) to (ii) the E.U. Code of Conduct Group (“C.O.C.G.”), in its scoping paper identifying nine relevant activities and economic substance criteria for N.T.J.’s to avoid the E.U. blacklist, to (iii) the N.T.J.’s, themselves, in steps taken to police economic substance requirements of local law. The B.V.I. heard the message and has implemented a robust information reporting system for relevant entities. In their article, Joshua Mangeot, a partner in the B.V.I. office of Harneys and Kiril Pehlivanov, a member of the investment funds and regulatory team in the B.V.I office of Harneys, explain the effect of the B.V.I. economic substance regime on companies and limited partnerships registered in the B.V.I. and provide practical guidance for compliance and reporting.

October 03, 2023

Singapore: Tax on Disposal of Foreign Assets

October 03, 2023/ Ruchelman P.L.L.C.

During the summer, the Singapore Ministry of Finance released a proposal calling for the imposition of tax on the receipt in Singapore of proceeds of gains arising from the sale or disposal of foreign assets. When effective in 2024, the proposal will align Singapore law to guidance on economic substance prepared by the E.U. C.O.C.G. Unless prescribed or excepted, the proposal applies to all companies and limited liability partnerships resident in Singapore. In his article, Sanjay Iyer, the founder of Silicon Advisers, based in Singapore, explains the workings of the tax, including (i) entities that are within scope, (ii) entities that are not within scope, (iii) the definition of foreign assets, (iv) the circumstances in which proceeds are considered to be received in Singapore, and (vi) the ability to use losses from the sale of foreign assets to reduce the amount of foreign gain that is taxed on remittance to Singapore.

May 30, 2023

Farhy v. Commr. – The Penalty for Failing to Timely File Form 5471 May Not Be Assessed Administratively

May 30, 2023/ Ruchelman P.L.L.C.

Sometimes, good things happen to the undeserving. In the play “Pygmalion,” Alfred Doolittle – the undeserving father of Eliza Doolittle – receives a bequest from a faraway benefactor. In Farhy v. Commr., a scofflaw who refused to file Form 5471 for several Belize companies and received penalty notices regarding the seizure of his property convinced the Tax Court that the penalty was not self-enforcing. Rather, the Department of Justice would be required to initiate enforcement proceedings in District Court to collect the assessed penalties. Stanley C. Ruchelman and Wooyoung Lee explain the reasoning of the decision and then ask which other penalties have similar requirements. In answer, they survey client alerts published on the internet by various firms. Surprisingly, the answers are not consistent.

May 30, 2023

All Eyes on the I.C.-D.I.S.C. Part Two: I.R.S. Examinations

May 30, 2023/ Ruchelman P.L.L.C.

The Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) is an undervalued tax planning tool for exporters that can provide substantial tax advantages to U.S. export companies and their shareholders. In the March edition of Insights, Michael Bennet addressed the technical aspects, and tax benefits of the I.C.-D.I.S.C. In this month’s edition, he addresses Part Two reviewing the I.R.S. examination procedure and key aspects taxpayers should keep in mind. Based on the I.C.-D.I.S.C. audit guide published by the I.R.S., the article explains the steps that should be followed to stand up to the questions that will be asked by the examiner. Those who read Part One are strongly urged to read Part Two to understand the internal steps to be taken to ensure the I.C.-D.I.S.C. benefit is real after an I.R.S. examination is completed.

May 30, 2023

New Tax Relief on Repatriation of Intangible Property

May 30, 2023/ Ruchelman P.L.L.C.

Code §367(d) provides rules for intercompany transfers of intangible property to related parties abroad. Not only are they taxable when first made, but they may continue to give rise to taxable income for the transferor for extended periods of time, notwithstanding a fixed price that is arm’s length at the time of the original transfer. Recently, U.S. companies have considered repatriating intangible property previously transferred abroad, in light of favorable provisions under the F.D.D.I. regime, the inability to defer tax under the C.F.C. rules, both Subpart F and G.I.L.T.I., and the prospect of Pillar 2’s adoption. However, the rules that applied to repatriation of intangible property left issues unanswered. In early May, the I.R.S. published proposed regulations affecting transactions in which U.S. corporations bring intangible property back to the U.S. In their article, Stanley C. Ruchelman and Daniela Shani review the legislative background of the proposed regulations and address the key principles involved before the toll charges of Code §367(d) are turned off. If the repatriation transaction can be effected tax free under U.S. domestic law to the prior transferor or a qualified successor, no gain is recognized.

May 30, 2023

International Marriages – Special U.S. Tax Concepts

May 30, 2023/ Ruchelman P.L.L.C.

Continuing with the theme of cross-border mobility and resulting tax consequences, U.S. tax law contains provisions that affect married couples coming to live in the U.S. from a country that has a community property regimes in force and effect. They may find that income tax consequences are not necessarily controlled by the marital laws of the former home country. The Internal Revenue Code contains provisions that apply to earned income that override community property regimes when one or both spouses are not U.S. residents or citizens. Nina Krauthamer and Galia Antebi address the circumstances controlled by Code §879. They also address rules for filing joint income tax returns when one spouse is not a U.S. citizen or resident, available elections under Code §6013(g) and (h) to allow for the filing of joint tax returns, elections for arriving persons to be treated as residents with an accelerated residency starting date, and tricky trust and estate rules that apply to a donor spouse when the donee spouse is not a citizen. A must read for arriving individuals.

May 30, 2023

The Pour-Over Clause In A Cross-Border Context

May 30, 2023/ Ruchelman P.L.L.C.

With all the career and job opportunities available, many Canadians and Americans choose to cross the border to pursue new goals. Providing trust and estate planning advice to Canadians living in the United States and Americans living in Canada is no longer a rare situation. Where an individual has spent part of his life in one country and part in the other, his will and power of attorney may have been executed in one country but not amended following the arrival in the other country. This can pose problems when an estate plan crafted to meet U.S. rules is applied to a U.S. citizen that relocated to Canada and remained in Canada for the balance of his life. Caroline Rheaume, a member of the Quebec Bar, focuses on pour-over provisions in trusts, frequently used by U.S. estate planners, but which encounter enforceability problems in several Canadian provinces. The takeaway is simple. When in Canada do as the Canadians do, or your legatees may find that you died intestate.

May 30, 2023

Effect of Ruling No. 288/2023 – Italian Anti-Hybrid Rules Attack the 2020 Swiss Corporate Tax Reform

May 30, 2023/ Ruchelman P.L.L.C.

Sometimes, anti-abuse provisions are applied by tax authorities because of what happened in the past, not the present, much like a classic vendetta. This is what happened to an Italian subsidiary of a Swiss company that benefitted from the principal company regime in Switzerland. That regime presumed the existence of a deemed P.E. outside of Switzerland and the allocation of profit to the deemed P.E. The regime was repealed with effect as of January 1, 2020, and replaced by a relatively normal tax regime, with one specific transition rule. The Swiss parent was entitled to a tax-free step-up in the goodwill of the deemed P.E. which could be amortized over 10 years, allowing a tax benefit for the Swiss company. In April of this year, the Italian tax authorities issued tax ruling no. 288/2023 to an Italian subsidiary of a Swiss company that previously benefitted from the principal company regime. It now was taxed under Swiss law in a straightforward way, but with the amortization benefit. In the ruling, the Italian tax authorities determined that the amortization deduction constituted a hybrid mismatch because the goodwill was not purchased. The result is that the Italian subsidiary cannot reduce sales by the related cost of inventory purchased from its Swiss parent. Federico Di Cesare, a Partner of Macchi di Cellere Gangemi, and Dimitra Michalopoulos, an Associate in the tax practice of Macchi di Cellere Gangemi explain the basis of the ruling and strongly suggest that it is not grounded on the existing provisions of the Italian anti-hybrid rules. Sounds like classical vendetta in the context of the A.T.A.D.

May 30, 2023

Economic Substance: Views From the U.S., Europe, and the B.V.I., Cayman, and Nevis

May 30, 2023/ Ruchelman P.L.L.C.

Like concepts of beauty, the presence or absence of economic substance in the tax context often is in the eye of the beholder. More importantly, economic substance means different things to tax authorities in different jurisdictions and the approaches in taxpayer obligations varies widely. This article looks at the concept of economic substance in three separate localities. Stanley C. Ruchelman and Wooyoung Lee look at the U.S., addressing case law establishing the requirement and the 2010 codification of the concept into the tax code. Werner Heyvaert, a partner in the Brussels Office of AKD Benelux Lawyers, and Vicky Sheik Mohammad, an associate in the Brussels Office of AKD Benelux Lawyers, look at the Danish Cases that establish an abuse of rights view for aggressive tax planning – the taxpayer abused rights granted to it by E.U. law – and the Unshell Directive designed to remove certain tax benefits from shell companies. David Payne, Global Head of Governance for Bolder Group, looks at the self-certification rules that have been adopted in the B.V.I., Cayman, and Nevis.

March 28, 2023

Insights Volume 10 Number 2: Updates & Other Tidbits

March 28, 2023/ Ruchelman P.L.L.C.

This month, Michael Bennett and Wooyoung Lee look briefly at four items. The first is Bittner v. U.S., a Supreme Court case holding that the non-willful penalty for failing to file a complete and accurate F.B.A.R. form is $10,000 for the annual form and not $10,000 for each account. The second is Aroeste v. U.S., a U.S. District Court case holding that a dual resident individual whose residence is allocated to a treaty partner jurisdiction is not a U.S. person for purposes of filing F.B.A.R. reports. The third is a concession by the I.R.S. that a person had reasonable cause for the failure to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) when following bad advice from his tax adviser. Finally, the BE-12 Benchmark Survey of Foreign Direct Investment in the U.S., conducted every five years by the Department of Commerce’s Bureau of Economic Analysis, is due this year. The final due date for filing is (i) May 31 for those filing by mail or fax or (ii) June 30 for those filing electronically.

March 28, 2023

All Eyes on the I.C.-D.I.S.C. Part I: the Export Gift That Keeps on Giving.

March 28, 2023/ Ruchelman P.L.L.C.

Regardless of their political affiliations, presidential administrations and members of Congress share the goal of maintaining U.S. competitiveness on the global market. We often hear statements directed toward strengthening the U.S. manufacturing sector and bringing production activity back to the U.S. These words would be futile without implementing initiatives favoring U.S. business interests. An often-overlooked incentive is the Interest Charge Domestic International Sales Corporation (“I.C.-D.I.S.C.”) regime. For an export business operated in the form of an L.L.C. owned by individuals, an I.C.-D.I.S.C. can produce tax savings for export profits of about 40% for the owners, when operated properly. More importantly, it can be run on automatic pilot once set up. In Part I of a two-part series, Michael Bennett explains the basics of setting up and operating an I.C.-D.I.S.C. In Part II, he will discuss issues that have been raised in years past when the goal of a D.I.S.C. was to promote exports by permanently deferring the export profits rather than recognize taxable income immediately, but at lower rates.

March 28, 2023

Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

March 28, 2023/ Ruchelman P.L.L.C.

At a certain point in the life of a corporation that operates more than one business, management may wish to separate the different businesses into two or more separate corporate entities. In most cases, demergers are structured based on the requirements of the corporate law in the place of domicile of the corporation. Typically, a demerger of a foreign corporation that follows the corporate law provisions of applicable foreign law would also be exempt from tax in the relevant country. However, when one of the shareholders is a U.S. individual or corporation, U.S. Federal tax considerations should be taken into account to prevent unexpected U.S. tax for a U.S. investor. Demergers are given tax-free treatment under U.S. tax law only if the requirements of Code §355 are met. If not met, both the corporation that undergoes the demerger and its shareholders recognize gain in connection with an actual or deemed distribution of appreciated property. While the foreign corporation may have no U.S. tax to pay, the U.S. investor may find that tax would be due in the U.S. if the foreign corporation undergoing the demerger is a C.F.C. Stanley C. Ruchelman and Daniela Shani explain the various categories of tax free demergers under U.S. tax concepts and the consequences of failing to meet the requirements in the context of a corporation formed outside the U.S.

March 28, 2023

Tax Considerations for a U.S. Holder Of Bare Legal Title in a Usufruct Arrangement

March 28, 2023/ Ruchelman P.L.L.C.

When European parents engage in inheritance planning by transferring bare legal title in shares of a privately held company to children resident in the U.S., the gift may bring with it a pandora’s box of tax issues. If the value of the bare legal title exceeds 50% of the value of the property when computed in accordance with U.S. tax rules for valuing split interests in property, the foreign company may become a C.F.C. That can trigger certain reporting requirements in the U.S. related to Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) even though the children have no right to income from the company. Separate and apart from C.F.C. status, the basis which the children have in the shares is a carryover basis that will not be stepped up then the usufruct interest and the bare legal title are merged. Separate and apart from the foregoing issues is a potential F.B.A.R. filing requirement on FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) with immediate effect. In their article, Nina Krauthamer, Wooyoung Lee, and Stanley C. Ruchelman explain these issues, why they pop up, and potential ways to mitigate some if not all of the problems.

March 28, 2023

Bittersweet Christmas in Spain – Beckham Regime 2.0 and Solidarity Tax

March 28, 2023/ Ruchelman P.L.L.C.

Last year, Christmas in Spain brought with it good news for some individuals and bad news for others. Regarding the good news, the Beckham Regime was improved as was the start-up ecosystem regime for entrepreneurs. Regarding the bad news, Spain adopted a second wealth tax to soak up wealth tax that appropriately went unpaid where certain regions provided relief for assets situated in the local region. Spanish residents that previously paid no Wealth tax will be subject to the Solidarity tax. Luis J. Durá Garcia, the Managing Partner of Durá Tax & Legal, Madrid and Valencia, tells all.

March 28, 2023

French Tax Residence, Income Tax Treaties and Newcomers Regimes: Where Does France Stand?

March 28, 2023/ Ruchelman P.L.L.C.

The determination of an individual’s tax residence is a delicate exercise, combining a review of factual elements in light of different sets of criteria and rules. Most jurisdictions other than the U.S. impose tax solely on the basis of residence. Hence, a definition of tax residence is required. French domestic tax law adopts a single definition of tax residence for personal income and inheritance taxes, relying on several alternative criteria. The matter of residence also can be looked at under a relevant income tax treaty. France has in effect a network of more than 120 income tax treaties. Michaël Khayat, a Partner of the Arkwood Law Firm, Paris, and Edouard Girard, an Associate of the Arkwood Law Firm, Paris, explain the criteria for determining tax residence under French domestic tax law and to resolve a dual resident situation under the O.E.C.D. Model Income Tax Treaty. They then address recent cases under which tax authorities challenged application of an income tax treaty for an individual claiming benefits under a favorable newcomer regime in a treaty partner jurisdiction.

March 28, 2023

A.T.A.D.3 and How to Deal With Uncertainty in its Interpretation: A Quantitative Approach

March 28, 2023/ Ruchelman P.L.L.C.

A.T.A.D.3 adds a layer of complexity to an increasingly complex tax world. To illustrate, the rules under the Unshell Directive appear clear, but are nothing short of ambiguous. Moreover, certain elements of the A.T.A.D.3 analysis depend heavily on the facts and circumstances of the case, which often are not binary. Many questions are raised, and the answers affect the way operations will be carried out. Is an entity affected by A.T.A.D.3? What is A.T.A.D.3’s expected impact on a structure? Should an entity report as a shell entity in its tax return? Can a position be improved and is it worthwhile to do so? Firm answers do not come easily and nuanced responses by advisers often mean one thing to the adviser and another thing to the client. In their article, Stephan Kraan and Mark van Casteren, Partners in Huygens Quantitative Tax Consulting, Amsterdam, suggest that the proper approach involves quantitative analysis rather than qualitative advice. The goal is to adopt a statistical approach to evaluate potential results based on probability. At that point, rational decisions can be made by management and advisers. It is a fascinating read.

March 28, 2023

Tax Issues for Remote Workers and Their Swiss Employers

March 28, 2023/ Ruchelman P.L.L.C.

While COVID-19 had a profound effect on remote working in various countries, Switzerland has long experience with one form of remoter worker – the daily commuter across national borders. Surrounded on three sides by Italy, France, and Germany, Switzerland has negotiated several tax agreements with its neighbors that split the income tax pie and address social security coverage. Some agreements have national coverage, while others have local coverage affecting only the cantons and municipalities that straddle a specific international frontier. The stakes are high for a Swiss employer as the income tax rates and the social security charges can vary dramatically based on which country is allocated the right to tax. Thierry Boitelle, the founder of Boitelle Tax Sàrl, Geneva, and Sarah Meriguet, a Senior Tax Attorney at Boitelle Tax Sàrl, Geneva, explain all.

March 28, 2023

Teleworking From Bulgaria: Different Arrangements Have Different Consequences

March 28, 2023/ Ruchelman P.L.L.C.

Bulgaria has benefitted as a preferred remote working location for digital businesses. While it does not have a digital nomad visa for work, it has a cadre of skilled individuals working as computer engineers available to be employed by foreign based multinationals. In their article, Viara M. Todorova, a Partner of Djingov, Gouginski, Kyutchukov & Velichkov, Sofia, and Ivan Punev, a Senior Associate at Djingov, Gouginski, Kyutchukov & Velichkov, Sofia explain the specific tax issues that face a foreign company looking to engage local talent to carry on functions from Bulgaria. Several different arrangements are common, and each has its own set of employment tax obligations for the service provider and the company. Adding to the mix, the threshold of activity in Bulgaria that creates a P.E. is relatively low and the choice of arrangement can affect the outcome.

March 28, 2023

Telecommuting: Good Intentions, Bad Outcome

March 28, 2023/ Ruchelman P.L.L.C.

In 2017, the O.E.C.D. stated that the question of whether a home office constitutes a P.E. is rarely a practical issue because the majority of employees reside in the state where their employer has an office. Although that observation was undoubtedly accurate at the time, today it is safe to say that it did not age well. Paul Kraan, a Partner of Van Campen Liem, Attorneys and Tax Advisers, Amsterdam, and Mitchell Karman, an associate at Van Campen Liem, Attorneys and Tax Advisers, Amsterdam, explain the international tax implications of remote workers from a corporate income tax perspective, based on the O.E.C.D. Model Convention framework. Not surprisingly they point out ways in which the current framework arguably does not result in a desirable outcome. The article concludes with several recommendations.

March 28, 2023

Let's Talk About Nomad Employees!

March 28, 2023/ Ruchelman P.L.L.C.

Over the years, a consensus developed overseas that the U.S. doeEmployees working from overseas is hardly a new phenomenon. However, the COVID-19 pandemic forced employees to work remotely. Indeed, some were forced to work abroad under lockdown or shelter-in-place rules. Not surprisingly, remote working morphed into nomad employees choosing to work from anywhere, any place, in any time zone. The hiring of remote employees brings with it exposure to all sorts of remote taxes for the employer in each place where a remote worker is based. Is there a P.E. for corporate income tax? Is there a fixed base for V.A.T.? Are there income tax withholding obligations for compensation payments? Are there social security obligations? Martin Phelan, a Partner in the Dublin Office of Simmons & Simmons where he is Head of Tax, and Fiachra Ó Raghallaigh, an Associate in the Dublin Office of Simmons & Simmons, provide big picture commentary. Interestingly, the United Nations Tax Committee is examining the policy issues that face nations and employers.