Tax Law Requires Repatriation of Overseas Income

Back to Updates (Home)

 

The Tax Cuts and Jobs Act, passed last December, added section 965 to the Internal Revenue Code. It is known as a "repatriation tax" because it requires taxpayers to report income that has accumulated in foreign corporations under stricter guidelines than in previous years.

 

As you may know, US taxpayers pay tax to the IRS on all income earned worldwide. Since corporations are treated as separate taxpayers, shareholders have been generally taxed only when a corporation pays them dividends. This policy allowed many owners of foreign corporations to avoid paying US taxes on their profits by leaving the money parked in the overseas corporation without paying dividends. Since no income was received by the shareholder, no US tax was due.

 

Section 965 tightens these rules by specifying that earnings and profits that have accumulated in certain foreign corporation before 2018 must be included on the owner's 2017 return whether or not the funds are paid out to shareholders. The return must include a required statement and may contain elections. The one-time income is taxed at special rates of either 8% or 15.5%. US shareholders may elect to pay this tax in eight annual installments with no interest. The first payment is due with the 2017 return and remitted to the IRS separately from any regular income tax. Taxpayers who have already filed their 2017 return should consider filing an amended return if section 965 applies.

 

The statute applies to both US individuals and businesses that own shares in certain foreign corporations (controlled foreign corporations, or CFCs) either directly or through pass-through entities such as partnerships, LLCs, S corporations, or trusts. Once the foreign income has been reported, overseas assets may be brought into the US (repatriated) at any time without further tax liability.

 

Details of these repatriation rules are complex - two IRS notices providing preliminary guidance earlier this year totaled 74 pages, and new proposed regulations issued this month ran 249 pages. The full rules are far beyond the scope of this Tax Alert (this IRS FAQs has further information). We are providing this overview so you can consider whether you need to look further into section 965. If you own an interest, directly or indirectly, in a foreign corporation, your LM Cohen professional can help determine if section 965 applies to you and guide you through the process.

 

Update

A Special State Tax Alert in April discussed a New York law to shield taxpayers from TCJA's $10,000 limit on state and local tax deductions. Taxpayers could contribute to special charitable funds and claim credit against their state income tax or local real estate tax. We warned that the IRS had yet to weigh in on these efforts.

 

This week the IRS issue proposed regulations denying a deduction for contributions made to these funds by the amount of any state or local tax credit received for the payment, blunting the efforts by New York (and other states, such as Connecticut) to get around the new limit.

 

Our prior Tax Cuts and Jobs Act Alerts are available for you to view on the Updates page of our website.

 

 

Back to Updates (Home)