2017 Tax Law impact on Expats with Businesses
2018-03-14

To put it mildly, we all got thrown under the bus by Congress, first and foremost by Section 965. If you own a Controlled Foreign Corporation the accumulated profits in the company are treated as a dividend to you on 12/31/17 and you have to pay tax on that full amount starting April 15, 2018. The payments are calculated at two different effective tax rates, 15.5% for the share related to cash and net receivables and 8% on the share related to everything else. There is an election you can make to spread the payments over 8 years. But until yesterday no one knew how to make the payments and how to make the calculations and elections, since the IRS has not had time to issue new forms for this. Yesterday the IRS announced how people should deal with the new law; the details are here.

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns

The two primary takeaways from the announcement are that the 965 Tax needs to be paid separately from your regular taxes, by wire, check or money order. Second the reporting and elections are to be prepared on a PDF file to be attached to the return. Needless to say the details to be provided and the calculations to determine the proper amount to pay are going to require a lot of work. We strongly advise clients to make their best effort to calculate what is due but then extend the tax return until we get additional guidance.

The second hit we will all take is based on the fact that humans don't get treated as well as corporations. We're called "GILTI" by the new law, quite intentionally. Global Intangible Low Taxed Income is what we have. For 2018 and future years the profit of your Bonaire business will be treated as a direct flow through and reported on your US tax return every year. There is no more deferral of income. There may be a small amount that won't be taxed if you have a Bonaire company which owns tangible assets like machinery and equipment; you're given a 10% return on that type of investment to subtract from the earnings on which you have to pay tax. The only "solution" would be to be like one of the beneficiaries (i.e., campaign contributors) of the bill and create a US C corporation to own your Bonaire company. Those shareholders don't pay tax in the US on the distributed foreign profits; they do have GILTI income to report but at a lower tax rate. Of course you'll incur additional costs of setting up a new US company and filing tax returns for it, and you'll eventually pay tax on a dividend from the C Corp to you, but in some cases it might be worth considering.

We're here to help, deal with the compliance problems as well as look at any cost-effective solutions going forward for you. Contact us if you have fallen into this hole.

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