Transition Tax

Section 965 Transition Tax

Many Americans with overseas business interests (i.e. business interests outside the USA) will face additional tax bills this year under the new transition tax rules enacted on 22 December 2017. Although these rules were intended to persuade the likes of Apple and Google to repatriate their historic profits to the US from low tax jurisdictions, they have also swept up other US citizens and green card holders who have more than a 10% interest in a controlled foreign corporation (CFC). A CFC is any overseas business in which US citizens, US parent or subsidiary companies or green card holders together control more than 50% of the voting rights.

The transition tax is calculated based on the Earnings and Profits of the business on either November 2, 2017 (the date the tax reform bill was introduced to the House of Representatives) or December 31, 2017, whichever is the higher amount. This amount is includable in income at full income tax rates (corporations 35%, individuals 39.6%) for 2017. However, as a result of applying various deductions which depend upon how those retained profits are currently held within the CFC, the ordinary corporate and individual tax rates that are applied to the deferred income net of the deduction will result in effectively taxing the cash assets of the foreign corporation at 15.5% or 17.54% for individuals and the non-cash assets at 8%.

An election to pay the transition tax in installments over an eight-year period is available. The election must be made with the first tax return of the US shareholder that follows the year-end of the specified foreign corporation. For example, in a situation where a foreign corporation has a calendar year-end of December 31, 2017, the US individual or corporate shareholder will have a tax return due date of April 16, 2018. The election to pay by installments must be filed by that date, and the first of those installments must also be paid on that date.

Those affected by this new transition tax therefore have just a month to calculate what tax is due overall, file their election and settle that first installment. In the first five installments, 8% of the total transition tax liability is due,15% is due for the sixth installment followed by 20% in the seventh installment and 25% for the final installment.

Who is affected?

US Citizens who have an interest in a controlled foreign corporation (more than 50% owned and controlled by US persons) should consider as a matter or urgency, whether that business has retained profits. Typically, a family owned UK registered and resident company which is controlled by a US Citizen shareholder will fall within this definition.

It is imperative that US Citizens who consider that they may potentially be affected seek assistance with these issues as soon as possible. If the first installment date is missed, the full transition tax amount may be due with your 2017 return rather than spread over 8 years.

Further details of this new Transition Tax can be found on the IRS website by following this link. Anyone seeking further advice or support should please contact us by email to enquiries@taxadvisorypartnership.com or by phone to 0208 037 1040. There is no obligation to engage the services offered by TAP and any initial consultation will be completely free of charge.

Sam Ashley
Senior Tax Manager
US Tax Advisory Partnership LLP