A clause in the US tax reform bill, which came into force on 1 January, is attracting growing concern in the American expatriate community, as it imposes a one-time “deemed repatriation tax” of 15.5% on the profits businesses have accumulated overseas, whether or not they choose to repatriate them.
As Withers LLP partners Richard Cassell and Jaime McLemore pointed out here last month, certain clauses in the Tax Cuts and Jobs Act have increased the risk that American expats who own stakes in overseas businesses could end up qualifying for so-called controlled foreign corporation (CFC) tax status. In addition, where the former tax code allowed a 30-day grace period during which CFC status was ignored, this has now been repealed.
The result, Cassell and McLemore noted, is that such individuals may now find themselves caught in the same new repatriation tax net that was designed to persuade such companies as Apple and Google to bring back to the UK any profits they had keep abroad, in lower-tax jurisdictions – a fact which has been highlighted in a Financial Times report today, which quotes a number of experts as warning that the CFC tax could be a major blow to expats with as little as a 10% holding in an overseas business.
That their requirement to pay this tax will be due to the fact of their being US citizens is likely to add to the already-significant disquiet in the expatriate American community over the way the US taxes them on the basis of their citizenship rather than, as almost every other country, their country of residence.
According to the FT’s article, tax experts in Washington, Tel Aviv and London are saying that “large numbers of their clients would be hit” by this clause, contained in the tax reforms legislation.
It notes that a CFC is an overseas business in which US shareholders control more than 50% of the voting rights..
The FT quotes Charles Bruce, a former tax counsel at the Senate finance committee who now serves as legal counsel to American Citizens Abroad, as noting that any individual US citizen or green card holder owning more than 10% of a CFC will be forced to pay this tax within eight years.
Monte Silver, a US tax attorney and senior counsel at Eitan Mehulal Sadot in Israel, told the FT that he foresaw “some sort of uproar” as more expats and their advisers realised they are going to be expected to pay this new tax.
Silver didn’t say how many of the estimated 9 million American expats were thought likely to be hit by this tax, but told the FT: “I know hundreds just in Israel.”
The FT report also quotes Cassell, of Withers, as saying that there is “little that any taxpayers can do to mitigate the ‘repatriation’ tax – it is a corporate provision that sweeps up individual US taxpayers as well”.
To read the FT report, “Americans abroad hit by Trump’s new repatriation tax rules ” on the FT’s website, click here.