The 2017 U.S. tax reform imposed a one-time transition tax on earnings of certain foreign corporations — and, for affected U.S. individuals who own shares in these entities, it is critical to determine whether the new tax applies, and comply on a timely basis, U.S. tax accountant Brandon Vucen tells AdvocateDaily.com.
As Vucen, a principal of U.S. Tax IQ, explains, the Tax Cuts and Jobs Act, enacted in December 2017, made a number of critical changes that impact U.S. citizens and Green card holders residing in Canada and outside the United States. One of these provisions is a one-time transition tax — also referred to as mandatory repatriation — imposed by Internal Revenue Code (IRC) Section 965.
IRC Section 965 requires U.S. shareholders to pay a transition tax on the accumulated post-1986 deferred earnings of specified foreign corporations.
The tax, says Vucen, also applies to U.S. citizens and Green card holders who do not live in the United States, and own shares in non-U.S. corporations —called Specified Foreign Corporations (SFCs) that include Controlled Foreign Corporations (CFCs) or other foreign corporations with a 10 per cent domestic corporate shareholder.
The United States discourages a deferral of U.S. tax via several anti-deferral regimes, including Subpart F regime. For example, certain categories of foreign income — such as interest, dividends and foreign-based company services income — may be taxed currently to U.S. shareholders, even when they did not receive a distribution from the CFC.