This is the first in a series of weekly alerts about the what, why, who, and when of the new international tax provisions, along with action items that we believe should be considered. This alert provides a summary of key provisions in migrating from a system[DW1] of world-wide taxation to a participation exemption system; in the coming weeks, we will provide more bite-sized information and action items or dive deeper into specific areas.
Foreign Source Dividends. There is a 100% deduction for the foreign source portion of dividends received by a domestic corporation from specified 10% owned foreign corporations. This is to encourage repatriation of overseas funds, and applies to most C corporations [not real estate investment trusts or regulated investment companies], for tax years beginning after 12/31/2017.
Action item - consider global cash needs and possibly moving funds to the US; compute the foreign source portion of projected dividends, i.e., using a ratio that the undistributed foreign earnings bears to the total undistributed earnings of the foreign corporation.
Deemed Repatriation - US shareholders owning at least 10% of a foreign corporation must generally include into income the shareholder's pro rata share of the net post-'86 historical earnings & profits ["E&P"] of the foreign corporation. This serves as a transition method to the new participation exemption system, so that previously deferred foreign corporation earnings can get taxed. It is effective for the last taxable year of the foreign corporation that begins before 2018.
Action item - perform a study to accurately gauge E&P, and to analyze when and how to elect the reporting of such E&P.
We have developed tools to help our clients analyze these and other action items. If you have questions about how you or your business may be impacted, please contact Daniel Won at DWon@SingerLewak.com or dial 310.477.3924 and ask for an International Tax Specialist.