May 31, 2024

Italy Introduces a Penalty Protection Regime for Hybrid Mismatches: Trick Or Treat?

May 31, 2024/ Ruchelman P.L.L.C.

Anti-hybrid legislation consistent with A.T.A.D. 2 has been in effect in Italy for fiscal years beginning on or after January 1, 2020. But towards the close of last year, legislation was enacted under which penalty relief is available as of the 2023. The key to obtaining relief is the “hybrid dossier,” which is submitted to the tax authorities and provides full disclosure of the hybrid transactions, the relevant laws in Italy and the other country, and the reasoning why the anti-hybrid penalties are inapplicable. While the new rules clearly apply beginning with the 2023 fiscal year, retroactive relief back to the 2020 fiscal year is allowed, provided one hurdle is overcome. Retroactive relief is available if, and only if, Italian tax authorities “have not started a tax audit, investigation activities, or other similar actions for those fiscal years.” It is understood that Italian tax authorities have already begun to notify targeted taxpayers with questionnaires. In their article, Federico Di Cesare, a Partner of Macchi di Cellere Gangemi in Rome and Milan, and Dimitra Michalopoulos, an Associate in the tax practice of Macchi di Cellere Gangemi in Rome, explain the legislation, address the content of the hybrid dossier, and address the most important issue for many taxpayers: have Italian tax authorities taken action similar to a tax audit by the circulation of the questionnaire?

May 31, 2024

Adventures In Transfer Pricing – Practical Experience In Germany

May 31, 2024/ Ruchelman P.L.L.C.

For many years, German tax authorities suspected that M.N.C.’s transfer pricing policies were not in line with the arm’s length principle. Consequently, it comes as no surprise that Germany spearheaded international regulatory developments related to the arm’s length standard. International M.N.C.’s face ever increasing tax controversies in matters related to transfer pricing. In some cases, T.N.M.M. benchmarking is challenged under the view that a German sales entity makes intangible-related D.E.M.P.E. contributions in the field of marketing. In other cases ,C.U.T. benchmarking for intercompany license fees is challenged on grounds that the intangible property licensed to a German affiliate is unique by definition, thereby leading to a profit split. Restructures are attacked using inflated values for routine activities that remain in Germany. However, all is not bleak. In three case studies, Dr. Yves Herve, a Senior Managing Director in the Frankfurt Office of NERA and Philip de Homont, MSc, a Managing Director in the Frankfurt Office of NERA, illustrate in “plain language” the ways by which in-depth economic analysis has been used to overcome aggressive assertions by tax examiners.

April 01, 2024

Altria, C.F.C.’s, Downward Attribution, and the “Real” Congressional Intent

April 01, 2024/ Ruchelman P.L.L.C.

Determining Congressional intent is not often an easy task, especially when Congress has been silent, one way or the other. Nonetheless, when it comes to “downward attribution” of share ownership, the intent of Congress rises to the level of an enigma, at least in the eyes of Altria Group, Inc. As part of the T.C.J.A., the scope of Subpart F was expanded by eliminating a ban on the attribution of ownership in a series of foreign subsidiaries from a foreign parent corporation to all its U.S. subsidiaries. In a nutshell, all such foreign subsidiaries could be categorized as controlled foreign corporations or C.F.C.’s. This did not necessarily raise tax revenue as much as expose significant numbers of U.S. corporations to penalties for failing to file forms required of “U.S. Shareholders” of C.F.C.’s. The Treasury Department says the statutory language is clear with no room for carveouts. Altria looks to several items of legislative history and statements by leading senators to suggest otherwise. As Wooyoung Lee explains in his article, this is the substance of the tax dispute between Altria and the I.R.S., which is now before the U.S. District Court for the Eastern District of Virginia.

April 01, 2024

The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

April 01, 2024/ Ruchelman P.L.L.C.

The Tax Cuts and Jobs Act (“T.C.J.A.”) was enacted in 2017, bringing substantial alterations to the tax landscape for individuals and corporations. Many of these alterations are set to expire at the end of 2025. Understanding these changes, including their implications and timelines, is crucial for individuals and corporations. Michael Bennett addresses some of the more problematic provisions that are scheduled to reappear in the tax law. Among other things, individual tax rates will increase, the standard deduction will decrease, S.A.L.T. deductions will be allowed, corporate tax rates will increase, the Q.B.I. deduction will expire, the corporate tax on G.I.L.T.I. will increase, and the tax benefit for F.D.I.I. will decrease.

April 01, 2024

Israel Proposes Modifications to Tax Reporting Obligations for Olim

April 01, 2024/ Ruchelman P.L.L.C.

Acting in response to recommendations by the O.E.C.D. Global Forum on Transparency and Exchange of Information for Tax Purposes, legislation has been proposed in Israel to adopt new reporting obligations for Israeli entities, certain trusts, and individuals known as “Residents for the First Time” and “Senior Returning Residents.” The proposed amendment does not alter tax liabilities in Israel or eliminate preferred tax treatment of Olim. Rather, it revises certain reporting obligations in order to increase transparency. As of April 1, 2024, adoption is imminent. Boaz Feinberg, a partner of Arnon, Tadmor-Levy Law Firm, Tel Aviv, explains all.

April 01, 2024

U.K. Budget Proclaims Death Knell For Remittance Basis Taxation

April 01, 2024/ Ruchelman P.L.L.C.

As was widely anticipated, the Chancellor of the U.K. used his budget speech on March 6 to announce the termination of the non-domicile regime and remittance basis of taxation effective April 12, 2025. In its place, a new foreign income and gains (“F.I.G.”) regime will be available for individuals who become U.K. tax resident after a period of 10 tax years of nonresident status. Individuals who qualify for the new regime will be able to bring F.I.G. to the U.K. free from any U.K. tax for up to four years. Current non-doms who cannot qualify for the F.I.G. regime can benefit from a 50% deduction on remittances through April 5, 2026. Kevin Offer, C.A., a partner of Hardwick and Morris L.L.P., London, explains these and other provisions that will apply as the U.K. enters a brave new world.

January 30, 2024

Will Service Automation Companies Qualify for the Q.S.B.S. Exemption?

January 30, 2024/ Ruchelman P.L.L.C.

Many U.S. investors and business owners are familiar with the tax exemption provided to U.S. individuals recognizing gains from the sale of certain U.S. stock, defined as qualified small business stock (“Q.S.B.S.”). The Q.S.B.S. exemption plays an important role in the growth of hi-tech industry, which is dependent on investments by U.S. persons. It typically benefits U.S. individuals who invest in start-up software companies. However, the Q.S.B.S. exemption is not available for investment gains related to corporations engaged in the provision of nonqualified services, such as health care, brokerage, law, engineering, architecture, and accounting. However, a business that develops software that is used in those may qualify in certain circumstances, but not qualify in others. The key is whether the software is a tool for a person performing the nonqualified business or the software supplants the individual in performing the business. In this article, Stanley C. Ruchelman addresses two I.R.S. rulings illustrating the facts that distinguish a computer program that is a tool for service providers from facts that cause a program to be treated as a robot service provider.

January 30, 2024

Unravelling of the Matryoshka Doll – Impact of the C.T.A. on entities having nexus to the U.S.

January 30, 2024/ Ruchelman P.L.L.C.

Aimed at curbing money laundering, terrorism financing, and other nefarious activity, Congress enacted the Corporate Transparency Act (“C.T.A.”) on January 1, 2021. However, the C.T.A. became fully effective from January 1, 2024. It now requires certain domestic and foreign entities to disclose to the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Treasury Department, the identity of their beneficial owners and control persons. A failure to do so can attract heavy penalties. The targets of the C.T.A. are much like Matryoshka dolls, having many layers between what appears on the surface and what exists at the heart. Neha Rastogi and Stanley C. Ruchelman guide the reader through the in’s and out’s of what is likely the most invasive legislation enacted by Congress.

January 30, 2024

Receipt of a Profits Interest in a Partnership by a Service Provider – Not Taxable

January 30, 2024/ Ruchelman P.L.L.C.

In E.S. N.P.A. Holding L.L.C. v. Commr., the U.S. Tax Court decided that the indirect receipt of a profits interest in a partnership in exchange for services was not a taxable event for the recipient. The decision was largely an application of Revenue Procedure 93-27, in which the I.R.S. provided guidance on the tax treatment of an individual who directly provides services to a partnership in exchange for the receipt of a profits interest. However, it is not a run-of-the-mill fact pattern that involves the grant of a profits interest to an individual in the financial services sector. Rather, it is about how an individual running a business through a taxable C-corporation was able to (i) arrange a sale of 70% of the C-corporation’s business to new investors bringing in fresh capital and (ii) by choosing a proper structure open a pathway to receive future profits without channeling income through the C-corporation. Wooyoung Lee, Nina Krauthamer, and Stanley C. Ruchelman explain the applicable I.R.S. regulations defining a “profits interest,” an important 8th Cir. Case reversing a decision of the U.S. Tax Court, the Revenue Procedure, and finally E.S. N.P.A. Holding v. Commr.

January 30, 2024

Notice 2023-80: U.S. Foreign Tax Guidance for Pillar 2

January 30, 2024/ Ruchelman P.L.L.C.

On December 11, 2023, the I.R.S. issued Notice 2023-55 (the “Notice”), announcing the intention to issue proposed regulations addressing the interaction between the Pillar 2 GloBE Rules and specific U.S. tax provisions, including the foreign tax credit rules and dual consolidated loss rules. The issuance of this guidance is timely, as the I.I.R.’s of most countries took effect at the start of this year. The U.T.P.R.’s are scheduled to come online in 2025. In his article, Michael Bennett tracks the way Notice 2023-80 addresses GloBE model rules and the foreign tax credit. Topics include the application of the foreign tax credit rules in the U.S. to final Top-Up Tax, the Q.M.D.T.T. in general, how the application of the separate levy rules will apply to a foreign country’s I.I.R., U.T.P.R., and Q.D.M.T.T, and the interplay of the GloBE rules of B.E.P.S. 2 and the dual consolidated loss rules of U.S. tax law.

January 30, 2024

Mauritius – Gateway To Africa

January 30, 2024/ Ruchelman P.L.L.C.

Rightly called “the Pearl of the Indian Ocean,” Mauritius is much more than a popular tourist destination. Recent World Bank statistics identify Mauritius as the country with the second highest per capita G.D.P. in Africa. Mauritius maintains relationships with key African and international bodies, such as the Southern African Development Community (“S.A.D.C.”), the Common Market for Eastern and Southern Africa (“C.O.M.E.S.A.”), the World Trade Organization, and the Commonwealth of Nations. It has a low income tax rate and offers a range of incentives to boost its competitiveness. Sattar Abdoula, the C.E.O. of Grant Thornton Mauritius, and Mariam Rajabally, a partner in the international financial services and tax at Grant Thornton Mauritius, take a deep dive into the tax, financial, and commercial benefits that are available in Mauritius, and why it remains an important gateway into Africa.

January 30, 2024

Square Pegs in Round Holes – You Like "To-May-To" and I Like "To-Mah-To"

January 30, 2024/ Ruchelman P.L.L.C.

In a post-COVID-19 world, anecdotal evidence suggests that individuals and families are relocating to new jurisdictions of residence. Equally, individuals have evidenced renewed vigor in acquiring and structuring assets across a range of jurisdictions. When the individual is a U.S. citizen and the place to relocate or acquire assets is the U.K., care must be taken to avoid common – and not so common – traps and pitfalls regarding taxation. In their article, Ed Powles, a Partner of Maurice Turnor Gardner, London and Emma-Jane Weider, the Managing Partner of Maurice Turnor Gardner, London, identify areas for which tax planning is crucially important prior to a move. Included are (i) tax residence and domicile rules for individuals, (ii) residence tests for trusts, companies, and charities, (iii) identifying areas for which income tax treaties do not necessarily provide relief against double taxation, and (iv) ways in which gift and estate planning, dissolution of marriages, forced heirship, and structures to own personal use residential real property are affected by the move.

January 30, 2024

Andorra: A Comprehensive Tax And Legal Analysis

January 30, 2024/ Ruchelman P.L.L.C.

Andorra is a tiny landlocked principality nestled in the Pyrenees mountains between France and Spain. While it offers many quality-of-life benefits, the country’s biggest attraction has been its favorable taxation system. In recent years, Andorra has worked diligently to enhance transparency and to promote international cooperation in an attempt to rid itself of a tax haven reputation. Today, Andorra is widely considered to have a modern tax system, making it an approved jurisdiction by the E.U. It is a party to 10 double tax agreements, participates in C.R.S., is not on the O.E.C.D. list of noncooperative tax jurisdictions, and has ongoing discussions of association with the E.U. All the while, Andorra maintains attractive tax rates for individuals and corporations. Albert Folguera Ventura, C.E.O., Partner, and Head of Tax at Addwill Partners, Barcelona, explains the ins-and-outs of the Andorran tax system applicable to corporations and individuals resident in the country.

December 03, 2023

Insights Volume 10 Number 6: Updates & Other Tidbits

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

This month, Wooyoung Lee looks at several interesting items, including (i) Aroeste v. U.S, an F.B.A.R. case that will bring joy to many expat green card holders living abroad and claiming U.S. tax benefits as a resident of a treaty partner country, (ii) continued movement towards passage of the Taiwan tax-treaty bill, reflecting bipartisan support in the Senate and House of Representatives, and (iii) the issuance by FinCEN of final regulations allowing a 90-day period for filing beneficial owner statements for companies formed in 2024.

December 03, 2023

Christensen v. U.S. – Reducing the N.I.I.T. by Claiming an F.T.C.

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

In Christensen, the Federal Claims Court allowed U.S. citizen/French tax resident taxpayers to claim the foreign tax credit to reduce the net investment income tax (“N.I.I.T.”) using Article 24(2)(b) of the France-U.S. Income Tax Treaty. This approach countered the Code’s explicit disallowance of the foreign tax credit as a way to reduce the N.I.I.T. The Federal Claims Court decision built upon the Tax Court’s previous decision in Toulouse, where the Tax Court denied the foreign tax credit claimed against the N.I.I.T. by a U.S. citizen/French resident taxpayer. Michael Bennett explains that the disparity in outcomes did not stem from a conflict in reasoning. Rather, it resulted from the application of different provisions of the treaty.

December 03, 2023

Moore v. U.S. – A Case for the Ages to be Decided by Supreme Court

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

Moore v. U.S. is a case that asks the following question: does the U.S. Constitution impose any limitations on Congress to impose tax where no Subpart F income is realized during the year by a C.F.C. and no dividends have been paid to shareholders? It does so in the context of the change in U.S. tax law provisions designed to avoid double taxation of income in a cross border context. Prior to 2018, U.S. law eliminated double taxation on direct investment income of a U.S. corporation by allowing an indirect foreign tax credit for income taxes paid by a ≥10%-owned foreign corporation. In 2018, the U.S. scrapped that method and adopted a D.R.D. for dividends paid to a U.S. corporation by a ≥10%-owned foreign corporation. To ensure that accumulated profits in the foreign corporation at the time of transition would be taxed under the old system, the transition tax required a one-time increase in Subpart F income attributable to the deferred foreign earnings of certain U.S. shareholders. However, the tax was imposed in certain circumstances on individuals who never were entitled to claim an indirect foreign tax credit under the old law and were not eligible to claim the benefit of the D.R.D. Mr. and Mrs. Moore were two such individuals. They paid the transition tax, filed a claim for refund, and brought suit in the U.S. Federal District Court to recover the tax paid. They lost in the district court and again on appeal. A writ of certiorari was filed with the U.S. Supreme Court and the case was accepted for consideration. Most pundits believe the Moores have no chance of winning. Stanley C. Ruchelman and Wooyoung Lee evaluate their chances, pointing out that the last chapter of the saga has not yet been written.

December 03, 2023

Did You Just Manifest the Opposite of What You Wanted - (IN)Ability to Use G.I.L.T.I. Losses to Offset Gain

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

Forward-looking tax planning for U.S. taxpayers and their foreign subsidiaries was never an easy task. Since the adoption of the G.I.L.T.I. regime, domestic tax plans must be adjusted when applied to a cross border scenario. In their article, Stanley C. Ruchelman and Neha Rastogi examine a straightforward merger of related corporations, each operating at a loss, followed by a significant gain from the sale of an operating asset. What is a statutory merger when two companies are based outside the U.S.? What information must be reported on a U.S. Shareholder’s U.S. income tax return? What forms are used to report the information? Do the G.I.L.T.I. rules make operating losses of a C.F.C. useless to a U.S. Shareholder when a C.F.C. sells operating assets at a sizable gain? These and other issues are explored by the authors.

December 03, 2023

Entering a New Dimension – O.E.C.D. Transfer Pricing Guidance as Hard Tax Law

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

Except for the U.S., transfer pricing law frequently includes a provision that references the O.E.C.D. T.P. Guidelines as the guidance that must be used to interpret other provisions of relevant law. Nonetheless, national tax administrations publish their own interpretive guides to the O.E.C.D. T.P. Guidelines, thereby adding to a body of administrative guidance that can vary from country to country. The European Commission has recently proposed a Council Directive on transfer pricing released as part of the Business in Europe: Framework for Income Taxation (“B.E.F.I.T.”). The Directive proposes to codify the arm’s length principle and elements of its interpretation from the O.E.C.D. T.P. Guidelines. This elevates the O.E.C.D. T.P. Guidelines into E.U. law, thereby making them more than an arm’s length principle interpretive standard. It does so with several subtle and not-so-subtle variations. Michael Peggs and Michael Bennett caution that making soft law into hard law impairs the ability of tax administrations to compromise on points of controversy.

December 03, 2023

News From Italy – Recent Updates to Inbound Workers Regime and Register of Beneficial Owners

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

This month, the good news regarding special tax regimes in Italy relates to the flat tax. No changes are expected to the regime as Italy finishes its legislative session. The €100,000 flat tax remains intact. Good news also exists for the lesser known Pensioners Regime that imposes a 7% substitute tax on all pension payments paid on non-Italian source pension income if certain conditions are met. However, cutbacks in benefits and more stringent standards for qualification have been announced regarding the Inbound Workers Regime. In addition, the Register of Beneficial Owners of enterprises with legal personality, private legal entities, trusts, and similar legal arrangements has become operational at local Italian Chamber of Commerce offices. Andrea Tavecchio, the Founder and Senior Partner of Tavecchio & Associati, Tax Advisers, Milan, and Alessandro Carovigno, a chartered accountant at Tavecchio & Associati, Tax Advisers, Milan, explain the revisions to the Inbound Workers Regime and the information that must be filed with the Beneficial Owner Register. They also address the persons obligated to file with the Register and the persons who have access to the information filed with the Register.