Tax Reform - Specified Foreign Corporations and Importance for Americans Abroad
Who is Affected:
Under the Law H.R. 1 originally known as the “Tax Cuts and Jobs Act”, U.S. persons (citizens, resident aliens, and domestic corporations) with 10% or higher stock ownership in Specified Foreign Corporations (SFC) are subject to “deemed repatriation” tax. New Section 965 was added to Internal Revenue Code.
Which foreign corporations are SFC:
1. All Controlled Foreign Corporations (CFC). A CFC is any foreign corporation in which more than 50% of the total value of the stock is owned directly, indirectly or constructively by U.S. shareholders on any day during the taxable year of the corporation. This means that foreign corporation in which one or more US persons hold more than 50% of stock is a CFC, thus it is also a SFC (except for PFIC corporations explained below).
2. Any foreign corporation, which has a U.S. corporate shareholder.This means that non-CFC is not a SFC unless one of the U.S. shareholders is a U.S. business that owns at least 10% of the foreign corporation.
Important Change on Stock Ownership through Attribution From Non-Residents
Under the new rules, stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) is not considered as owned by a United States shareholder. This was a special limitation to the attribution rules through the family members.
Example A: U.S. shareholder owns 50% stock in a foreign corporation . The NRA spouse owns 10%. The corporation is not a CFC.
Who is not affected:
. Shareholders in PFIC corporations are not affected.
Example C: U.S. person is a single owner of PFIC corporation (75% of the corporation's gross income is "passive" derived from investments). This corporation is a CFC but it is not a SFC. All corporate income is subject to Subpart F inclusion under old rules as well. No changes to PFIC regime.
For tax years starting after December 31, 2017 the privilege to defer earnings of CFC (foreign corporation where US shareholders own over 50% of the voting power) has ended.
All taxpayers affected by the Section 965 mandatory income repatriation of previously deferred income will pay tax on all net company earnings after January 1, 2018. An option to defer part of the company earnings and pay tax upon distribution is no longer allowed. This tax provision is called "GILTI" (Global Intangible Low-Taxed Income).
The provision is effective for the tax years of foreign corporations beginning after December 31, 2017, therefore this category of taxpayers will be affected by the mandatory income repatriation of previously deferred income the following year beginning January 1, 2018.