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Tax Reform – Mandatory Repatriation of Deferred Foreign Income for Owners of Foreign Corporation

The recent tax reform is generally considered as a boon to corporations, reducing the U.S. corporate tax rate. However, the changes affect a wider net than the Exxons and the Apples of the world. The little fish in the big pond, individuals who own incorporated entities globally, are affected as well.  This article will describe the changes that these Joe Schmoe’s face.

Prior to the passage of the tax bill, U.S. persons (citizens, resident aliens, and domestic corporations) were taxed on worldwide income, whether earned in the U.S. or abroad. Foreign income earned by a U.S. shareholder of the foreign corporation generally was not subject to U.S. tax until the income was distributed as salary or dividend to the U.S. shareholder.

Under the Law H.R. 1 (originally known as the “Tax Cuts and Jobs Act.”) a U.S. person with the stock ownership of 10% or more in a Specified Foreign Corporation (SFC), must include their pro rata share of previously untaxed accumulated E&P (Earnings and Profits) in subpart F income of the tax year ending before January 1 2018. The “measurement date” for the calculation of Subpart F income subject to deemed repatriation is Nov. 2, 2017 or Dec. 31, 2017, whichever date had the higher  E&P balance.

Dividends paid to US shareholders during the mandatory repatriation year do not reduce the amount of E&P available for subpart F mandatory inclusion.

Whole Story at TFX.

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