Category Archives: News / Updates

Proposed Section 385 Regulations

Proposed Section 385 Regulations

In April 2016, IRS issued proposed regulations under IRC section 385 which would dramatically change the treatment of intercompany debt issued among the members of certain corporate groups. The proposed regulations would apply to debt instruments issued on or after April 4, 2016 if finalize. Based on the President’s public remarks targeting corporate inversions, tax professionals expect IRS to finalize this package before the end of the Obama Administration. In general, the proposed regulations would:

• Treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes.
• Authorize the IRS to treat certain related-party interests in a corporate as indebtedness in part and stock in part for federal tax purposes.
• Established extensive documentation requirements in order for certain related-party interest in a corporation to be treated as indebtedness for federal tax purposes.

If the documentation and information requirements are not satisfied on a timely basis, then the instrument will be treated as equity for federal income tax purposes. The documentation and information that must be prepared on a timely basis to satisfy the requirements of this section include written documentation establishing:

• That the issuer has entered into an unconditional and legally binding obligation to pay on demand at one or more fixed dates,
• That the holder has the rights of creditor to enforce the obligation,
• That, as of the date of issuance of the instrument and taking into account all the relevant circumstances, the issuer’s financial position supported a reasonable expectation that the issuer intended to, and would be able to, meet its obligations pursuant to the terms of the instrument,
• Evidence of payments of principal and interest, and in the event payments were not made, the holder’s efforts to assert its rights as creditor.

    Take Away

When companies issue debt instruments to related corporations and partnerships, the instruments must have characteristics in form and in substance, and must fulfill documentation requirement provided under the 385 regulations to avoid any complicit with taxing authorities.

FATCA Reporting Requirement for Domestic Entities

FATCA Reporting Requirement for Domestic Entities

IRS has announced about the final regulations of 6038D requiring a “specific domestic entity” to make an annual disclosure of its specific foreign financial assets. This regulation is effective for taxable years beginning after December 31, 2015.

The final regulations extend the Form 8938 reporting requirement to specific domestic entities. A specific domestic entity is defined as a domestic corporation, domestic partnership or a domestic trust “formed or availed” of for purposes of holding (directly or indirectly) specific financial assets.

An entity is “formed or availed” for purpose of this regulation if below two conditions are met:

1. The entity must be closely held – 80% constructive ownership requirement.
2. At least 50 percent of income or assets are passive in nature.

It is anticipated that the IRS will modify current Form 8938 to incorporate entity filers. Please refer to the Regulation section 6038D-6 (attached below) or contact our office for further detail.

6038D Final Reg.pdf

Surprise tax bills for Foreign Companies

Surprise tax bills for Foreign Companies

많은 외국계 기업들이 국제 조세협약을 통해 미 연방과세 없이 미국내에 매출을 발생시키고 있는데, 이는 “고정사업장”(“ PE”) 이라는 중요한 요인에 의해 결정된다. 즉, “PE” 를 야기시키지 않는다면 미 연방 정부 과세로부터 보호를 받을 수 있다는 것이다.

하지만 미국내의 50개주는 연방 정부 세법에 준하지 않으며, 각자 주별로 독립된 세법이 존재한다. 이러한 이유에서, 기업들은 연방 정부에는 과세의무를 가지고 있지 않더라도 주 정부 차원에서는 과세의무를 가질 수있다. 보통 주 정부의 과세 기준은 재고, 종업원, 고정자산, 창고 혹은 사무실등의 요소들이 실제로 존재하는가에 따라 결정된다 (“Physical Presence Test”). 하지만, 최근 약 40개의 주들이 각자 독자적인 경제 넥서스 (Economic Nexus) 라는 기준을 도입하였다. 각 주의 독자적인 경제 넥서스 기준에 따라, 기업들의 매출이 경제적 연관성을 가지고 있다고 보여진다면, 상기 요소의 존재 유무와 상관없이 그들에게 과세의 의무를 가지도록 하고있다.

예를 들어, California의 경제 넥서스 (Economic Nexus)는 기업이 실질적으로 주 내에 사업장을 가지고 있지 않더라도 연간 매출액이 $500,000 이상이되면 과세의 의무를 가지고 있다고 본다.

만약, 어떤 외국계 기업의 미국 내 자회사가 미국내에서 발생한 소득만을 보고하도록 하는 Water’s edge election(WE) 을 통해 과세소득을 보고한다. 그리고, 이 외국계 기업과 미국 내의 자회사가 경제 넥서스 (Economic Nexus) 기준아래 경제적 연관성을 가진 이익을 창출하고, 서로 동일한 회사 (Unitary Relation) 로 간주된다면, 주 세무 당국 감사자들은 자회사의 WE를 통한 미국 내 과세소득 보고는 무효화 될 수 있다고 보고있다.

또한, 이런 경우, 전 세계에서 발생한 매출을 기준으로 하는 과세의무와 단지 WE 에서 계산된 과세의무의 차이는 클 수 있으며, WE 방식으로만 계산된 과세의무는 무시될 수 있다. 최근, California 주 세무 당국 감사 요원들은 이러한 문제에 관해 교육을 받았으며, 감사시, 이 issue 에 대해 적극적으로 조사하고 있다.

현 경제 넥서스 (Economic Nexus) 기준에서는, 많은 외국계 기업들이 상당한 납세의무, 가산세, 이자에 잠재적으로 노출되어있다. 따라서, 미국내 매출이 많은 외국계 기업들은 주 과세를 계산하는 과정에서 생기는 이러한 혼란을 피하기 위해서 경제 넥서스 (Economic Nexus)로 인한 세무영향 및 Water’s Edge Election 의 잠재적 영향을 평가해 볼 필요가 있다.

Increase Enforcement of IRC Section 6038B Disclosure Requirements

Increase Enforcement of IRC Section 6038B Disclosure Requirements

The IRS Large Business and International (LB&I) division publicly announced that it will increase enforcement of IRC section 6038B disclosure requirement. A formal training material has been distributed to field agents, and each entity needs to ensure that it is in compliance of the disclosure requirement.

Here is a quick summary of IRC section 6038B.

Under IRC section 6038B, a disclosure must be made with annual return when:

(1) US person (i.e. individuals, corporations, estates and trusts) transfer property to a foreign corporation in exchange for sections 332, 351, 354, 355, 356 or 361 (mainly stock related exchanges – see additional info below);
(2) US person contributes property to a foreign partnership; or
(3) US person makes a distribution under 336 to a person who is not a US person

Failure to comply with the reporting requirement may result in a penalty equal to 10 percent of the value of transferred property up to $100,000. Please ensure that you file Form 926 to fulfill the 6038B reporting requirement when applicable.

332 – liquidation
351 - in exchange for stock
354 – Reorganization
355 – Distribution
356 – Additional consideration
361 – nontaxable distribution
721 – partnership contribution
336 – property distribution in a complete liquidation

If you have any question regarding this update, please contact our office.