Tax Reform Update: Are You Subject to the Repatriation Tax?

The Tax Cuts and Jobs Act, though it is the most sweeping tax reform in recent history, left many of the reporting requirements for expat taxes intact. Small, circumstantial changes were made, but overall expat taxation remains mostly the same as it was a year ago. However, the IRS recently shed some light on previously vague issues in the new tax reform. The big news on the 965 inclusion is that US owners of foreign business will likely face a one-time repatriation tax because previously untaxed earnings will be included when calculating their American taxes. Read on to find out if you will be subject to the repatriation tax!

The New Rules

Under the rules in effect prior to 2018, earnings of foreign companies were not subject to US taxation until they were distributed to owners. However, the tax reform changed the rules as the US moves to a territorial tax system. As a result, previously untaxed earnings will be subject to a one-time repatriation tax.

Repatriation Tax Affects a Specific Subset

US shareholders with ownership in a specified foreign corporation with positive post-1986 earnings and profits. Below, we’ll dive in to the specifics of these terms.

US Shareholder Definition

For this purpose, you are a US shareholder if you are a US person with 10% ownership in a company (by shares or by voting power). Constructive ownership can come into play, so certain relatives with interest in the company will contribute to your effective ownership level.

The Two Types of Specified Foreign Corporations

Controlled foreign corporations constitute the first type of specified foreign corporation. At a high level, these are foreign corporations that are at least 50% owned by US shareholders. As described above, individuals with less than 10% ownership do not count toward this 50% threshold.

For example:
If you are a US person who owns 100% of a foreign corporation, that company is a controlled foreign corporation. If 20 unrelated US persons each own 5% of a foreign company, on the other hand, then it is not a controlled foreign corporation, and would not be subject to the repatriation tax.

The other type of specified foreign corporation is a foreign company with at least one 10% owner that is a domestic corporation. You should be on the lookout for this situation! If you have at least 10% interest in a foreign corporation, you’re not automatically off the hook even if it’s more than 50% owned by non-US persons. If a domestic corporation owns 10%, then the company is automatically a specified foreign corporation, and you will be required to pay the repatriation tax on your share of previously untaxed earnings.

Positive Post-1986 Earnings and Profits

US shareholders of specified foreign corporations with positive earnings and profits since 1986 are required to pay taxes on previously untaxed earnings. However, if you have interest in multiple specified foreign corporations, and some have post-1986 deficits, you may use those deficits to reduce the taxable amounts on the companies with positive earnings.

Have Questions About How the Tax Reform Will Affect Your Taxes?

Greenback has experts who specialize in all facets of expat tax issues, and offers a specific service for US owners of foreign businesses who are subject to the repatriation tax. Contact us today and we’ll help you navigate the process!

Free Guide: 25 Things Every Expat Needs to Know About Taxes

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