Repatriation tax may apply to certain foreign corporation shareholders
Under the Tax Cuts and Jobs Act of 2017 (TCJA) certain foreign corporations (including all U.S. controlled foreign corporations, or CFCs), must pay an immediate one time tax on their deferred foreign earnings as early as 2017. Another provision of the TCJA makes an apparently minor technical change to special stock ownership attribution rules used to determine whether a foreign corporation is a CFC. However, because this provision applies retroactively to 2017, this ‘minor’ change could result in the deemed repatriation tax applying to foreign corporations that have never been CFCs in the past. Many taxpayers and tax advisors who found themselves confronted with this unexpected tax were hoping, and perhaps even expecting, that the Treasury Department would grant some form of relief to these newly caught CFCs. However, statements made by government officials at a recent conference suggest that such relief may not be coming.
At issue is the repeal of Code Sec. 958(b)(4), which prohibited ownership of stock from being attributed from a foreign person to a U.S. person (so called ‘downward attribution’). The removal of this guardrail now means that a U.S. person can, in certain cases, be treated as a constructive owner of a foreign corporation even where U.S. persons have less than 50 percent actual economic ownership (the threshold that normally applies to qualify a foreign corporation as a CFC).
Many in the tax community anticipated Treasury regulations granting relief from the repatriation tax for downward attribution-based CFCs. However, statements made at a D.C. Bar conference on January 25 by an attorney from the Treasury Department suggests that Treasury believes that the specific language of the TCJA may not allow the government to grant relief.
Although this is certainly a discouranging statement for taxpayers and their advisors, nothing has been finally decided. Potentially affected taxpayers may wish to file for an extension for their 2017 returns, until a more definitive statement is issued by Treasury. In the meantime, please consult your tax advisor regarding your potential exposure to the repatriation tax.