Estate & Gift Tax Treaties – Square Pegs and Round Holes ACTEC FLORIDA FELLOWS PRESENTATION

Estate & Gift Tax Treaties – Square Pegs and Round Holes ACTEC FLORIDA FELLOWS PRESENTATION July 2014 Charles (Chuck) Rubin, Attorney at Law Gutter Chaves Josepher Rubin Forman Fleisher Miller, PA 2101 NW Corporate Blvd., Ste 107 Boca Raton, FL 33431 561-998-7847 crubin@floridatax.com www.floridatax.com www.rubinontax.blogspot.com Charles (Chuck) Rubin www.rubinontax.blogspot.com

How to Listen to the Audio on This Presentation • Click on this icon on each page that looks like a loudspeaker, and then click the play icon, to hear the audio on that page (try it now!): Charles (Chuck) Rubin www.rubinontax.blogspot.com

15vs.55 Charles (Chuck) Rubin www.rubinontax.blogspot.com

15Transfer Tax Treatiesvs.55Income Tax Treaties Charles (Chuck) Rubin www.rubinontax.blogspot.com

Riddle: What are the two oldest active elements in the U.S. transfer tax system? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Clue: Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs-Type(WW II Through Mid-1950’s)Domicile-Type(1960’s through 1980’s)New Phase? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Charles (Chuck) Rubin www.rubinontax.blogspot.com

What For?? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Double Charles (Chuck) Rubin www.rubinontax.blogspot.com

DOUBLE TAX Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs Type Charles (Chuck) Rubin www.rubinontax.blogspot.com

U.S. Citizen Real Property in a Treaty Country (Treaty country can tax) U.S. can tax, too, but must provide a credit for treaty country tax Charles (Chuck) Rubin www.rubinontax.blogspot.com

Finland Treaty: What’s missing?? Charles (Chuck) Rubin www.rubinontax.blogspot.com

What Is An “Estate Tax?” Ballard criteria Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs of Assets What if conflict with domestic law? Charles (Chuck) Rubin www.rubinontax.blogspot.com

What if situs country does not impose a tax? "provided that if, apart from this paragraph, tax would be imposed by one Contracting Party on any property which is situated in its territory, this paragraph shall not apply to such property unless, by reason of its application or otherwise, tax is imposed or would but for some specific exemption be imposed thereon by the other Contracting Party." Ireland at Article III(2) Charles (Chuck) Rubin www.rubinontax.blogspot.com

Some issues with property that is not given a situs under the treaty… Charles (Chuck) Rubin www.rubinontax.blogspot.com

Asset Not Covered by Treaty Situs Rules Treaty Partner (treaty partner domestic law treats the property as sitused in the treaty partner country) U.S. (U.S. domestic law treats the property as sitused in the U.S.) DOUBLE TAX CONFLICT! Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs in a Third Party Country (e.g., real property in a third country) U.S. (U.S. taxes based on affiliation [citizenship, residency, domicile]) Treaty Partner (treaty partner taxes based on affiliation [citizenship, residency, domicile]) DOUBLE TAX CONFLICT! Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs Issue Whose law determines if property fits within a specific category (e.g., real property)? Charles (Chuck) Rubin www.rubinontax.blogspot.com

More Situs Issues • Immovable vs real property • Lease as real property • Trust interests • Power of appointment Charles (Chuck) Rubin www.rubinontax.blogspot.com

More Situs Issues • Partnership interests • LLC, LLP, Hybrid Entities • Bank deposits Charles (Chuck) Rubin www.rubinontax.blogspot.com

More Situs Issues • Corporate stock • Stock options • ADRs Charles (Chuck) Rubin www.rubinontax.blogspot.com

More Situs Issues • Intellectual property (patents, trademarks, licenses, franchises) Charles (Chuck) Rubin www.rubinontax.blogspot.com

Situs Issues • Life insurance • Life insurance in trust Charles (Chuck) Rubin www.rubinontax.blogspot.com

AFFILIATION TRAP IN SITUS TREATIES Country A Citizen Country B Domiciliary U.S. Situs Property Under the Code Charles (Chuck) Rubin www.rubinontax.blogspot.com

AFFILIATION TRAP IN SITUS TREATIES Treaty Country A Citizen Country B Domiciliary U.S. Situs Property Under the Code • For the U.S. treaty to apply, usually need: • Decedent is a citizen or domiciliary of the U.S., or • Domiciliary or resident of the treaty country. • Typically, being a citizen is not enough. • Exceptions include Norway and Italy. DOUBLE TAX RISK Charles (Chuck) Rubin www.rubinontax.blogspot.com

Other Affiliation Issues Under Situs Treaties Charles (Chuck) Rubin www.rubinontax.blogspot.com

Deduction Issues underSitus Treaties Charles (Chuck) Rubin www.rubinontax.blogspot.com

Foreign Tax Credit under Situs Treaties When an Issue? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Foreign Tax Credit under Situs Treaties When an Issue? Situs Jurisdiction Personal Connection Jurisdiction Must Provide A Credit Charles (Chuck) Rubin www.rubinontax.blogspot.com

Foreign Tax Credit under Situs Treaties First Limitation: Second Limitation: Charles (Chuck) Rubin www.rubinontax.blogspot.com

Foreign Tax Credit under Situs Treaties First Limitation: Personal jurisdiction credit can be limited to the situs jurisdiction taxes on jointly taxed assets (e.g., situs tax of 25 and personal jurisdiction tax of 50 – PJ credit of 25 only) Second Limitation: Charles (Chuck) Rubin www.rubinontax.blogspot.com

Foreign Tax Credit under Situs Treaties First Limitation: Personal jurisdiction credit can be limited to the situs jurisdiction taxes on jointly taxed assets (e.g., situs tax of 25 and personal jurisdiction tax of 50 – PJ credit of 25 only) Second Limitation: Personal jurisdiction credit can be limited to the personal jurisdiction taxes on the jointly taxed assets (e.g.situs tax of 50 and personal jurisdiction tax of 25 – PJ credit of 25 only) Charles (Chuck) Rubin www.rubinontax.blogspot.com

Interpretative Issues (due to need to compute taxes attributable to specific assets in one or both jurisdictions) • What if more than one rate applies – marginal vs. lowest rate? • Which country’s valuation applies? • How deal with currency conversions? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Secondary Credit When? How Much? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Secondary Credit When? (a) both countries tax based on affiliation, and (b) the subject property is in both or neither treaty country How Much? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Secondary Credit When? (a) both countries tax based on affiliation, and (b) the subject property is in both or neither treaty country How Much? (a) take the lesser of taxes imposed by both countries, (b) give a credit to each based on apportionment of that lower number to each country based on the relative amount of tax imposed by each Country 1 - $100 tax Credit = $50 x $100/$150 =$33.33 Country 2 - $50 tax Credit = $50 x $50/$150 =$16.66 Charles (Chuck) Rubin www.rubinontax.blogspot.com

Treaty Credit vs. Code Credit (§2014) Charles (Chuck) Rubin www.rubinontax.blogspot.com

Full Unified Credit for NonresidentsAgainst U.S. Estate Tax? Terminology: “U.S. estate tax exemption” Charles (Chuck) Rubin www.rubinontax.blogspot.com

Full Unified Credit for Nonresidents – Computation and Issues • §2102(b)(3)(A) allows partial use based on ratio of U.S. situs assets to worldwide assets when treaty allows for it • Code or treaty situs rules? • Reduce for prior use of credit while a U.S. person • Worldwide disclosure of assets required • No use for lifetime gifts (exception: Japan) Charles (Chuck) Rubin www.rubinontax.blogspot.com

Recap • Intro • Situs-type Treaties (Act I) • What’s next? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Domicile-type Treaties Purpose? Charles (Chuck) Rubin www.rubinontax.blogspot.com

Domicile-type Treaties Methodology Charles (Chuck) Rubin www.rubinontax.blogspot.com

Estate & Gift Tax Treaties – Square Pegs and Round Holes ACTEC FLORIDA FELLOWS PRESENTATION