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American Citizens Abroad Town Hall Seminar

American Citizens Abroad Town Hall Seminar. Daniel Hyde daniel.hyde@westletondrake.ch 14 May 2013. Agenda. What’s new (and returning) for 2013? As an entrepreneur, what do I need to know when setting up a company overseas for US tax reporting?. New for 2013: rate changes.

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American Citizens Abroad Town Hall Seminar

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  1. American Citizens AbroadTown Hall Seminar Daniel Hyde daniel.hyde@westletondrake.ch 14 May 2013

  2. Agenda • What’s new (and returning) for 2013? • As an entrepreneur, what do I need to know when setting up a company overseas for US tax reporting?

  3. New for 2013: rate changes • Top rate of ordinary income tax increases from 35% to 39.6%. • Top rate of tax on long term capital gains and qualified dividends increases from 15% to 20%. • New rates apply to income over $400,000 for single filers, $450,000 for couples. • Top rate of gift and estate tax increases from 35% to 40% • But $5,000,000 exemption amount remains unchanged. • Foreign earned income exclusion is $97,600.

  4. New for 2013: Medicare surcharge • New Medicare surcharge on unearned income of 3.8% on net investment income. • Definition of investment income will be important. • Surcharge is non-deductible. • Foreign tax credits may not be used to reduce the surcharge. • International social security agreements are unlikely to provide an exemption.

  5. Back for 2013: Limitation on exemptions and itemised deductions • Applies to income in excess of $250,000 for single filers, $300,000 for married filers. • Personal exemptions phased out by 2% for every $2,500 above the thresholds. • Itemised deductions reduced by either: • 80% of the total allowable deductions. • 3% of income over the threshold. • whichever provides the highest deduction (usually the 3%).

  6. Controlled Foreign Corporations (CFCs) • A foreign corporation where >50% of the vote or value is held by US persons holding >10% of the vote or value. • File annual Form 5471 • Penalty for failure to file $10,000. • Consider interests of non US spouses. • Also required for non-controlled foreign corporations when acquire or dispose of certain 10% interests. • Possible phantom income (Subpart F income).

  7. Subpart F income • Deemed dividend of retained profits of CFC where company earns: • Income from most passive sources. • Income from personal service contracts. • Not qualified dividend subject to reduced rate. • Will not qualify for foreign earned income exclusion. • May be difficult to use credits for foreign taxes.

  8. Passive Foreign Investment Companies (PFICs) • A foreign company where: • At least 75% of income is passive income. • At least 50% of assets are passive income producing asset. • Cash is a passive income producing assets. • Could a trading business be caught by the asset test? • Dividends and any exit proceeds would be ordinary income. • Some dividends and all exit proceeds allocated across holding period with deemed interest charge on amounts allocated to prior tax years. • “Once a PFIC, always a PFIC”. • CFC rules trump PFIC rules after 1997.

  9. Check the box election (1) • A foreign company can elect to be treated as a partnership (2+ owners) or disregarded entity (single owner) for US tax purposes (similar to US LLC). • CFC/Subpart F rules, and PFIC rules are avoided as not a corporation of US tax purposes. • Flow through of all items of income, deduction and credit. • Corporate taxes paid flow through and are creditable taxes. • Income may qualify for foreign earned income exclusion.

  10. Check the box election (2) • Election must be made within 75 days of effective date (three year concession in some circumstances) • Election on an existing company creates a deemed taxable liquidation for US tax purposes.

  11. Reporting • Foreign corporation interests reported on Form 5471 • $10,000 penalty • Foreign partnership interests reported on Form 8865 • $10,000 penalty • Foreign disregarded Entities reported on Form 8858 • $10,000 penalty • Interests exempt from above reported on Form 8938 • $10,000 penalty • Transfers of property to foreign Corporation reported on Form 926 • 10% penalty up to $100,000

  12. Doing business in the US? • US tax on profits of a foreign corporation with “Income Effectively Connected” to a “US Trade or Business” • Neither term is defined in the Internal Revenue Code! • Treaties generally limit taxation to income derived from a “permanent establishment in the US” • Defined term: • A place of management • A branch • An office • A factory, etc. • Caution: Individual states are not parties to tax treaties.

  13. Questions and discussions Westleton Drake 6, rue de la Croix d’Or CH-1204, Geneva Tel: +41 (0)22 310 6450 info@westletondrake.ch www.westletondrake.ch

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