Scope and Changes of the New Tax Bill to Overseas US Businesses
The H.R. 1 or “Tax Cuts and Jobs Act” has brought great changes in tax rates, policies, credits, and deductions. It will affect all individuals and citizens, both in the US and overseas. Here are some concerns, especially by foreign-based US citizens and companies.
Who will be affected?
The law states that all US citizens, resident aliens, and domestic corporations with 10% or higher stock ownership in Specified Foreign Corporations (SFC) are under the “deemed repatriation” tax.
What is deemed repatriation?
This approach considers all foreign profits as already brought back to the US. It is immediately taxed.
What is Specified Foreign Corporation (SFC)?
There are two kinds of corporations that can be considered as SFC:
- Controlled Foreign Corporations (CFC). It is any foreign corporation whose total value of stocks of more than 50% is owned directly, indirectly, or constructively by US shareholders on any day during the taxable year of the corporation.
- Foreign Corporations with a US Corporate Shareholder. A non-CFC can be considered as SFC if there is one US shareholder that owns at least 10% of the foreign corporation.
Who is not affected?
Shareholders in Passive Foreign Investment Companies (PFIC) are not affected. PFIC are foreign-based corporations whose 75% of income came from investments. These investments are earned interest, dividends, and capital gains.
A PFIC can be considered as CFC if its US shareholders hold more than 50% of its stocks. Yet, it is not considered as SFC because of 75% of its investments are passive rather than regular taxable income.
Are there any other major changes brought by the bill?
The issue of stock ownership through attribution from non-residents has changed. Under the new tax bill, stock owned by a non-resident alien (NRA) is not considered as owned by a US shareholder. Foreign trusts and estates are not included. This is a special limitation to the attribution rules through family members. For example, a US businessman owns 50% stock in a foreign corporation. He cannot add 10% stock owned by his NRA wife to qualify the corporation as CFC.
Also, the definition of a US shareholder is revised. The new law includes individual US people who own at least 10% of shares of the foreign corporation. They are also included on the subpart F income. Since this is effective after December 31, 2017, these taxpayers are not affected by the mandatory repatriation of previously deferred income.
