American citizens, green card holders, and U.S. “tax” residents are subject to U.S. tax, for domestic and foreign income despite where the individual resides or earns a living. The new tax code bill H.R.1. known as Tax Cuts and Jobs Act (TCJA) established the exemption for taxation of foreign income by domestic corporations.
The bill bestow 100 percent deduction for:
The foreign-source portion of any dividend obtained from a specified 10-percent owned foreign corporation with U.S. partner. This amount carries the same portion to such dividend.
- The undistributed foreign earnings of the specified 10-percent owned foreign corporation, carries to the total undistributed earnings of such foreign corporation.
A specified 10-percent owned foreign corporation is any foreign corporation, in which a domestic corporation is an American taxpayer shareholder. It excludes passive foreign investment companies.
Hybrid-Dividends
Hybrid dividends are not qualified for deduction if received by a U.S. shareholder. According to the new tax reform bill, “A hybrid dividend is an amount received from a controlled foreign corporation for which a deduction would be allowed under this provision and for which the specified 10-percent owned foreign.”
Undistributed Foreign Earnings refers to the portion of the undistributed earning which cannot be attributed to the foreign source-portion, or to the specified 10-percent owned foreign corporation.
The bill is not allowing foreign tax credit for taxes that have been paid or accrued in relation to a dividend that qualifies for the deduction. For a domestic corporation to be allowed a deduction for any dividends must go through a holding period.
Shareholders of a foreign corporation should include its pro rata share of accumulated foreign income after 1986. A portion of that pro rata share of foreign earnings is deductible. The new reduced tax rate is 15.5% for cash and equivalents; and 8% for all other earnings.
Unfortunately the foreign tax credit is limited to a taxable portion of the included income. However, there is an generally an eight-year period to pay off the increased tax liability. These special rules are available for S corporations and real estate investment trusts (REITs).
Foreign intangible income: For domestic C corporations that are not regulated investments or REITs, are provided reduced tax rates on “foreign-derived intangible income” (FDII) and “global intangible low-taxed income” (GILTI).
The effective tax rate on FDII will be
After 2017 and before 2026: 13.125%
After 2025: 16.406%
The effective tax rate on GILTI will be
After 2017 and before 2026: 13.125%
After 2025: 10.5%
With the new tax laws implemented by Trump, there are many changes for foreign taxpayers who are considered U.S. “tax” residents, as well as for Multinationals with foreign earned income. Give us a call today to find out how these changes affect you.