Do you have a 10% or more interest in a foreign corporation? If so, then you may have a repatriation tax issue on your 2017 (not 2018!) tax return.
Although the new tax legislation signed into law by President Trump on December 22, 2017, generally does not affect 2017 tax liabilities, this is one provision that does.
Where does the repatriation tax come from?
In the past, the United States taxed corporations on their worldwide income (with measures in place to mitigate double taxation of income taxed in other countries). Under the new legislation, the U.S. is shifting to a territorial system, where it taxes corporations primarily on the income generated within the U.S.
Under the old system, corporations were able to defer their U.S. tax by reinvesting earnings overseas and keeping related cash offshore. Only when the cash was returned to the U.S. (“repatriated”) was it considered a taxable dividend to the U.S. corporation. Many corporations reinvested overseas, and consequently, much of their accumulated earnings have not yet been taxed in the U.S.
In order to transition from the old system to the new, there will be a repatriation tax on the 2017 tax return to tax these accumulated earnings and provide a clean slate for the new system, which began on January 1, 2018.
Who is affected by the repatriation tax?
The rules are complex, but in general, two groups are affected by this tax:
- Individuals who, together with family members, own or control a foreign corporation (generally, have more than 50% ownership), and
- Individuals who have at least a 10% voting interest in a foreign corporation, assuming that at least one of the other 10% shareholders is a U.S. domestic corporation.
How is the repatriation tax calculated?
The new tax law sets the repatriation tax at 15.5% on cash or cash equivalents and 8% on all other earnings. At this point, however, it is unclear as to how the IRS will define “cash or cash equivalents,” and it is equally unclear what “all other earnings” will encapsulate. These details are currently being fleshed out.
When is the repatriation tax due?
At least 90% of the repatriation tax must be paid on or before April 17, 2018. Unless the new law is changed or adjusted, the payment is due by April 17 whether or not an extension is filed for the tax returns.
Alternatively, one can elect to pay the repatriation tax in eight installments as follows:
- Years 1 through 5 – 8% of the net tax liability
- Year 6 – 15% of the net tax liability
- Year 7 – 20% of the net tax liability
- Year 8 – 25% of the net tax liability
The election to pay installments must be made by the due date for the tax return, and installment payments must be made annually by the original due date (without extensions) for the tax return. Should one cease business, fail to make timely payments, liquidate or sell the company, or go into bankruptcy, then an acceleration clause makes the remaining balance due immediately.
How do I find out more? Our recent blog post by International Tax Director Mishkin Santa provides further details on the repatriation tax, as well as contact information should you have questions relevant to your situation.