United States: US Tax Reforms – The Impact Abroad

Last Updated: January 12 2018
Article by Withers LLP

Income tax

For Americans resident in European countries with relatively high income taxes the bracket broadening effect of the tax changes will be limited except for those individuals who are not subject to worldwide tax in their country of residence. For example, UK non domiciliaries who claim the remittance basis of tax (now only available for the first 15 years of UK residence), Italian residents claiming the Italian non domiciliary regime and Swiss residents with a forfait agreement will be able to benefit from the lower rates of US income tax and higher standard deduction. Note that all individual tax changes expire on 31 December 2025.

Most European residents will not be affected by the limitation on the deduction for state and local taxes, but more will be affected by the limitation of the mortgage interest deduction to interest on $750,000 principal, down from $1M, for debt incurred after 15th December 2017 and eliminated for home equity lines of credit. The itemised deductions are generally eliminated except for charitable contributions, although effectively investment expenses can still be deducted by trustees of non grantor trusts. Many expatriate Americans will have found that itemised deductions were similarly of little practical use. The standard deduction increases to $24,000.

The new pass-through deduction for partnership, LLC and S corporation income will be of limited utility to many expatriate Americans. The deduction is limited to US business income where the business has a significant wage bill or qualified capital assets. It will not apply to non US businesses, but it will be available for US and non US investors in US real estate including REIT investments. This then complements the reduced corporate income tax rate for US real estate investors using a corporate structure.

An item that has attracted relatively little attention but which will affect self-employed expatriate Americans relates to the change in the foreign tax credit baskets. There are now two new foreign tax credit baskets, one for 10 percent shareholders of US owned foreign companies and more significantly a new foreign branch basket. A foreign branch of a business is defined to mean any foreign business which broadly keeps separate books and records, so it is a fairly broad definition and there is no requirement for it to be a branch of any other business. Therefore a partner in a partnership in the UK or elsewhere would from 2018 or 2019 (depending on the relevant fiscal year) find that the partnership income is now in a new basket. Congress has not however provided any transition relief for carry forward foreign tax credits which will now be in a different basket from the income going forward. Potentially this could lead to a significant economic loss to foreign resident taxpayers but possibly the IRS will offer transition relief.

With the cut in the corporate income tax rate to 21% and the elimination of the corporate alternative minimum tax investors will want to look at US inbound investment structures to review whether a corporate structure would result in a preferable tax result. In particular US real estate investors have regularly used pass through structures in order to avoid the high rate of corporate income tax and branch profits tax, but the corollary of this has usually been to accept a US estate tax risk. Investors should now be able to achieve a 21% tax rate on gains and income with a more secure estate tax protection. However, our preliminary analysis shows that a leveraged US real estate investment may still achieve a rate advantage using a pass through structure. Undoubtedly investors will want to review many of their business structures in light of the very significant rate changes. Account will also need to be taken of a new withholding tax on the sale of an interest in a partnership which is actively engaged in a US business, so that the purchaser is now required to withhold 15% of the proceeds of sale on account of the partner's income tax liability, similar to the real estate withholding and like that its effects can be modified by a certificate obtained in advance.

US investors in non US corporate structures will need to review the changes in the controlled foreign corporation (CFC) tax rules since there are a number of changes which increase the risk of CFC status. There are technical changes in the attribution rules which increase the risk that corporate ownership of CFC stock will be attributed to a US shareholder. In addition the former rule which ignored CFC status for less than 30 days in a tax year has been repealed so that inadvertent CFC status as a result of a change in status during a year increases and this also affects a popular planning for ownership of US assets through a company which checks the box immediately after estate tax protection is triggered.

Fund principals should be pleased that the various proposals to end the favourable treatment of carried interests as long term capital gain has been preserved but the holding period has been increased to 3 years. In practice we do not think that this will impact many fund principals.

Estate and gift tax

The big change here is the large increase in the exempt amount (referred to as the unified credit amount) which increases from an inflation adjusted $5M to an inflation adjusted $10M which means that the effective exempt amount is approximately $11M per person or $22M for a married couple. Like all the individual tax provisions this is time limited and is scheduled to expire in 2025 unless Congress acts to extend it. There have been statements made in Congress that legislators hope to extend these provisions but similar intentions were expressed in 2003 and those rate changes and exemptions were not extended although Congress did act subsequently to modify the exemption and increase it to $5M. One question that has been raised by a number of commentators is whether there would be any potential for claw back if a US person made life time gifts of $11M and then died after the exemption reduced to $5M (inflation indexed). Based on the position in 2011, we would anticipate that there would be no claw back but
the IRS is directed to provide guidance.

This offers a big incentive for UK resident Americans to ensure that the exemption amount is used to the greatest extent possible through lifetime gifts. These gifts can be made in trust if the donor is not UK domiciled at the time of the trust creation or by way of outright gifts (or gifts using a partnership structure) if the donor is UK domiciled. Without lifetime gifts the donor risks losing the benefit of the greatly increased exemption amount.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions