Donald Trump's 2017 tax reform has had and will continue to have huge implications for US expats who have an investment in non-US businesses. The two main new laws in place relating to Controlled Foreign Corporations (CFCs): any non-US business that is at least half owned by US shareholders, each of whom owns at least 10%.
For most, this tax will have already been paid. Payable by April 17th 2018 if the CFC had a December 31st year end date, corporate shareholders were required to pay a one-off tax of 15.5% on cash or cash-equivalent assets and 8% on non-cash assets that were accumulated after 1986 determined as of November 2, 2017, or as of December 31, 2017 (depending on which was higher). This transition to a 'territorial tax regime' means most foreign income earned by corporations in the future will not be taxed when it is moved back to the US.
While this was a daunting prospect for many US expats, they were provided with the option to pay the tax interest-free over a period of 8 years. If they elected to do so, the liability would be paid in 8 instalments beginning with 8% of the net tax liability for the first 5 instalments, 15% for the sixth, 20% for the seventh and finally ending with a 25% of the net tax liability payment to finish the obligation. This tax does not apply to previously-taxed earnings and profits but deferred foreign income.
Global Intangible Low-Taxed Income (GILTI)
Global Intangible Low-Taxed Income (“GILTI”) is a newly defined income that is required to be recognized by US shareholders of CFCs. It is the recognition of a certain amount of untaxed foreign earnings each year included as part of the gross income, defined as the “deemed tangible return.” This is an income from the CFC that exceeds a 10% return on the certain tangible property.
US corporate shareholders can reduce the amount of the GILTI they are required to recognize by 50%, however, this reduces to 37.5% after 2025. Moreover, they are able to claim a foreign tax credit of the foreign taxes incurred during the year of up to 80%. Unfortunately, the same rules do not apply to individuals who do not get to apply the 50% deduction or receive a tax credit. Therefore, US individuals are being urged to closely review the new rules and seek advice from a professional to consider alternative options.
In light of these changes, it is assumed the appeal of foreign corporations will diminish. The implementation of GILTI will be required to be negotiated annually, adding yet another complication for expats to consider before investing in non-US businesses. A thorough review of your personal finances is highly recommended to ensure the disruption of these new tax burdens is minimal should you believe they will impact you.