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Tax Tips for Development & Deals

Mark A. Nicastro, CPA, MST Partner & Practice Leader Emerging Growth Business Services ParenteBeard LLC. Next Generation Software & Internet Solutions, The Cloud and Beyond. Tax Tips for Development & Deals. Topics. Forms of Outbound Business Taxation Types Software Licensing Services

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Tax Tips for Development & Deals

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  1. Mark A. Nicastro, CPA, MSTPartner & Practice LeaderEmerging Growth Business ServicesParenteBeard LLC Next Generation Software & Internet Solutions, The Cloud and Beyond Tax Tips for Development & Deals

  2. Topics • Forms of Outbound Business • Taxation Types • Software Licensing • Services • US Tax Benefits for Exporters

  3. Investment in Israeli Business • US income tax reporting will be required depending on the form of the business • Starting a business in Israel can be done in various ways • Israeli distributor or agent • Joint venture with Israeli business (contractual arrangement) • Partnership with Israeli business • Investment in Israeli corporation • Formation of Israeli subsidiary

  4. US Reporting Requirements

  5. Israeli Distributor, Agent or Joint Venture • Income from Israeli business must be reported on US income tax return • Possible Israeli income tax (discussed below) • Joint venture contractual arrangement - no annual separate US reporting

  6. Partnership • Israeli Partnership • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships • US Partnership • Form 1065, U.S. Return of Partnership Income • Forms 8804, 8805 and 8813, Partnership Withholding Tax (for payments to Israeli partner)

  7. Corporation • Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations • prepared annually • if entity is owned more than 50% by US persons • Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities • If election is made to disregard entity • Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

  8. Israeli Investment in US Corporation • US entity may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business • Deduction for interest paid to a non-US owner may be limited

  9. Taxation Types • Direct Taxes • Income Tax • Taxes on Net Income • Withholding Tax (Source-based Tax) • Indirect Taxes • Sales and Use Taxes (US) • Value Added Taxes (Israel) • Customs Duties

  10. When Can the Other Jurisdiction Tax Income? • Israeli company with income effectively connected to a US trade or business (a permanent establishment, or “PE”) will be subject to US income taxation • A US company doing business in Israel through a PE will be subject to taxation in Israel • The level of activity determines if there is a PE • An office or other fixed place of business will generally be a PE

  11. Permanent Establishment Example 1 • US Exporter sends a US-based sales representative to Israel • Sales representative has the authority to sign binding contracts for the US Exporter • Sales representative locates a Israeli customer, negotiates a contract, and signs it before returning to the United States

  12. Permanent Establishment Example, cont. • Israel tax authority could claim that the US Exporter is doing business in Israel • Could assert that an Israeli tax return is due • US Exporter might have to invoice Israeli VAT

  13. Permanent Establishment Strategies • If only activity is sales into Israel, consider • Having an officer in the United States sign the contract • Have final approval for the contract done in the United States • Sell the goods ex dock or DDU (title transfers before importation) • Customer becomes the importer of record and will be responsible for self-assessed VAT and customs clearance • US Exporter will not be doing business in Israel for tax purposes

  14. License of Software from Israel • Payment to Israeli licensor will be subject to US withholding tax at a 15% rate • Contract should specify that the Israeli company should bear this tax, not the US licensee • Israeli licensor must provide Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding • If W-8BEN is not received, US licensee must withhold tax at a 30% rate • Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, must be filed by the licensee

  15. License of Software from a US Licensor • US licensor is subject to a 15% Israeli tax under the US/Israel income tax treaty • US licensor must supply a certification to the licensee that it is entitled to the benefits of the US/Israel income tax treaty • Certification obtained from the IRS

  16. Withholding Tax Example • Israeli company licenses software from a US vendor for $100 • Withholding tax is 15% • Israeli company pays the vendor $85 and deposits $15 with the Israeli tax authority

  17. Withholding Tax Example • US vendor recognizes revenue of $100 • Vendor receives cash of $85 • Vendor has paid Israeli tax of $15 • Vendor can potentially claim a $15 foreign tax credit on its US income tax return

  18. Services • Consulting or other services provided in the other country could create a PE • Employees providing services in the other county could become taxable on their personal compensation in the other country if they are there for more than 183 days in a year

  19. US Tax Benefits for Exporters • Foreign Tax Credit • Domestic Production Activities Deduction • Interest Charge Domestic International Sales Corporation

  20. Questions?

  21. Disclaimer The informal comments and the information presented in these slides should not be construed as constituting tax advice applicable to any specific taxpayer because each taxpayer’s facts are different. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice mentioned in the presentation or contained in these slides is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transactions or matters addressed herein.

  22. Contacts Jamie Robbins, Practice Leader, International Tax Services James.Robbins@ParenteBeard.com 212.736.8734 ParenteBeard LLC 350 Fifth Avenue New York, New York 10118 Rob Arthur, Principal, International Tax Services Rob.Arthur@ParenteBeard.com 215.557.2285 Ellen Hickman, Director, International Tax Services Ellen.Hickman@ParenteBeard.com 215.972.2528 ParenteBeard LLC 1650 Market St., Suite 4400 Philadelphia, PA 19103

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