Trump tax reform hits US expat business owners hard

Monte Silver Photo: Herbert Bisko
Monte Silver Photo: Herbert Bisko

While Trump and the US congress focused on multinational corporations, they didn't notice that US expats were subject to the same penalty, says US tax attorney Monte Silver.

One of the major provisions of the US Tax Reform forced large US companies like Apple and Google to pay a sizable tax on profits they held outside the US in their foreign subsidiaries (called CFC -controlled foreign corporations). Under the reform, all profits of these CFCs that accumulated between 1986 through December 31, 2017 are treated as income to their US parent company (Apple and Google, for example) and taxed at 15.5% for profits held in cash form, and 8% for profits held in non-cash form.

This new law has major unintended consequences for American expats (US citizens or Green Card holders) living outside the US who own or have interests in companies incorporated outside the US. Why? The US reform treats such individuals exactly the same way as it treats large US corporations. Therefore, if an American expat owns at least 10% of a foreign corporation, and over 50% of that foreign corporation is owned by Americans, that corporation is a CFC for purposes of the tax. Accordingly, the individual US expat will pay the same tax as Apple on accumulated profits.

This unintended consequence of the repatriation tax is particularly harmful to US expats. American expats around the world conduct their business through companies in their countries of residence. For expats, working through an Israeli corporation has several tax benefits, such as lawfully avoiding having to pay US social security on business profits. To clarify, an expat living in Israel pays social security on wages in Israel. Why should the expat pay social security twice, especially where (i) there is no Social Security tax treaty to avoid double taxation, and (2) the expat does not want US social security benefits?

While Trump and the US congress were focusing on multinational corporations, they simply did not notice that US expats were subject to the same penalty. This provision does not only impact the super wealthy. No matter what the size of the Israeli company, its accumulated profits are subject to a huge 15% tax.

It is doubtful that this repatriation tax, payable to the US starting 31 December 2017, will be entitled to tax credit in Israel, where the expat lives. Or alternatively, will the expat be able to avoid the US tax by having the Israeli company distribute a post-2017 dividend, paying personal income tax on the distribution in Israel, and then seeking a foreign tax credit against this new US tax? The Trump reform puts significant limits on such credits. This opens the very real possibility that despite tax treaties, expats will effectively pay tax twice on this money - to the US now, and later to the country of residence when the CFC distributes dividends.

To find a solution to this mess required serious tax analysis. In parallel, the author and other people and organizations around are exploring tax advocacy to change this unintended consequence.

Monte Silver is a US tax attorney and Senior Counsel at the Israeli law firm of Eitan Mehulal Sadot. He previously worked at the IRS estate & gift tax division and the US Tax Court

Published by Globes [online], Israel business news - www.globes-online.com - on February 13, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Monte Silver Photo: Herbert Bisko
Monte Silver Photo: Herbert Bisko
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