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International Tax Lawyer Lectures on US Tax Reporting of Italian Assets and Income

On February 2, 2017, Mr. Eugene Sherayzen, the founder and owner of Sherayzen Law Office (an international tax law firm headquartered in Minneapolis, Minnesota) gave a lecture at the Italian Cultural Center in downtown Minneapolis. The topic of the lecture was an introduction to US tax reporting of Italian assets and income for individual taxpayers. The lecture was well-attended by mostly native Italians (the room was filled to capacity) and caused a great amount of interest in the audience.

US Tax Reporting of Italian Assets Introduction

US Tax Reporting of Italian Assets and Income: Worldwide Income Reporting Requirement

The lecture commenced with the discussion of the worldwide income reporting requirement. After explaining the US tax residency requirement, Mr. Sherayzen focused on the importance of reporting Italian-source income in the United States for those Italians who are considered to be US tax residents (i.e. US citizens, US permanent residents, persons who satisfied the Substantial Presence Test and the US tax residents by choice). The lawyer explained that the Italian-source income must be disclosed by these Italians even if the income is already taxed in Italy and even if it is never brought into the United States.

US Tax Reporting of Italian Assets and Income: Foreign Rental Income Must Be Reported but Real Estate itself Is Reportable Only In Certain Cases

Then, Mr. Sherayzen discussed the subject of reporting by Italians of their foreign real estate and income derived from foreign real estate. The international tax lawyer emphasized that foreign rental income and foreign capital gains must be disclosed on the taxpayers’ US tax returns.

Then, Mr. Sherayzen clarified that, in situations where real estate is owned outright by individuals (i.e. not through any entity or any other complex arrangement), the ownership of the real estate itself is not generally reportable. However, if the Italian real estate is owned through an entity, then it will need to be disclosed as part of the entity’s financial statements prepared as part of Form 5471, 8865 or 8858. The lawyer again emphasized that, even in these circumstances, the income derived from Italian real estate is still reportable on the taxpayers’ US tax returns.

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US Tax Reporting of Italian Assets and Income: FBAR and FATCA Form 8938

After discussing real estate as an exception from the general rule that foreign assets are likely to be reportable on the information returns in the United States, Mr. Sherayzen turned to the subject of reporting of foreign accounts with particular focus on FBAR and FATCA Form 8938. The discussion focused on the types of accounts that needed to disclosed, the reporting thresholds, and the penalties associated with the failure to file these forms. The international tax lawyer also discussed in more depth the history of FBAR.

This discussion caused a great number of questions related to FBAR, its thresholds and its relationship to income reporting. Fewer questions were asked with respect to Form 8938.

US Tax Reporting of Italian Assets and Income: PFICs

Despite the time limitations, Mr. Sherayzen briefly discussed Form 8621 as a hybrid form. The lawyer explained that a “hybrid form” meant that Form 8621 was used for both, income tax reporting and asset reporting, with respect to PFICs. Mr. Sherayzen explicated, in a very general manner, what assets qualified for PFIC status and what were the income tax consequences of PFICs. The Minneapolis international tax lawyer warned the audience that their Italian private pension plans and life insurance policies could contain PFICs.

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US Tax Reporting of Italian Assets and Income: Foreign Inheritance and Foreign Gifts

The lecture ended with a brief discussion of US tax reporting requirements concerning inheritance and gifts from Italian nationals and non-resident aliens (for US tax purposes). At that point, Mr. Sherayzen introduced Form 3520 and its threshold reporting requirements for foreign gifts and foreign inheritance. The lawyer also explained how Form 8938 could be applicable to a foreign inheritance.

After the lecture ended, Mr. Sherayzen continued to take questions in private for the next thirty minutes.

Israeli IT Tax Breaks | Minnesota International Tax Lawyer and Attorney

Israel continues to solidify its leading positions in the IT market by using tax policy. On January 1, 2017, Amendment 73 to the Law for the Encouragement of Capital Investments of 1959 entered into force. The main goal of the Amendment is to clarify, extend and improve the Israeli tax breaks for IT companies operating in Israel. Let’s review some of the most important of these Israeli IT tax breaks.

Israeli IT Tax Breaks: Preferred Technological Taxable Income Tax Rates

Starting year 2017, Israel will have three levels of taxation of what is termed as “preferred technological taxable income” (PTTI) of certain companies, referred to as “preferred enterprises” (PE). The tax rates will be as follows: 12% default rate, $7.5% development area A (special Israeli designation for certain areas) and just 6% in the case of a special preferred technological enterprise (SPTE). All of these rates compare favorably to the standard business tax rate in Israel of 24% (which was also lowered as of January 1, 2017 from 25%).

There is an important exception – R&D centers will not be entitled to a reduced corporate tax rate if the controlling shareholders or the beneficiaries are Israeli residents. Control here can be direct or indirect and it is defined as an entitlement to 25% or more of the income or profits of the R&D center.

Israeli IT Tax Breaks: IT Company Owners Dividend Tax Rates

The owners of IT companies get another tax break in the form of dividend withholding rates. Generally, the tax withholding rate for dividends paid to an owner of an IT company will be 20% (subject to any applicable tax treaty). However, the rate goes down to a mere 4% if the dividend is distributed to at least a 90% foreign resident corporate shareholder.

Again, these rate are below the general tax withholding rate of 30-33% for dividends paid out to shareholders who own at least 10% of the company.

Israeli IT Tax Breaks: Certain Capital Gains

The Israeli IT tax breaks also expand to capital gains in certain limited situations. Israeli IT companies that sell IP to a related foreign company will qualify for a reduced 6% capital gains tax rate, but only if the Israeli company developed or acquired the IP from a foreign company after January 1, 2017. Such sales are subject to the approval of the National Authority for Technological Innovation.

A Combined Effort of US and Israeli Lawyers Needed to Properly Plan A US Company’s Expansion to Israel

All of the tax law changes that I mentioned above are described here in a very general manner. There are very specific qualifications that need to be satisfied by a company in order to qualify for the Israeli IT Tax Breaks. This is why a US company will need to contact a specialized Israeli tax attorney to properly plan the expansion of its IT business to Israel.

At the same time, however, the work of the Israeli tax attorney should be coordinated with proper US tax planning, because US companies are taxed on their worldwide income and may potentially even be taxed on the income of their foreign subsidiaries. Therefore, the tax planning efforts of an Israeli tax attorney should be combined with those of a US tax attorney in order to produce a tax plan that will function properly in both jurisdictions at the same time.

Contact Sherayzen Law Office for Professional Help With Your Business Tax Planning

If you wish to expand your business overseas, you need to contact Sherayzen Law Office for professional US business tax planning. Additionally, we can also help you with your US annual compliance with respect to your foreign assets and foreign income.

Contact Us Today to Schedule Your Consultation!

Importance of Outbound Business Tax Planning | International Tax Attorney

February 1, 2017/0 Comments/in business tax lawyers minneapolis, Legal Notes /by Manager

Outbound business tax planning should form part of every outbound business transaction, whether it is in technology transfers, export of goods or an investment overseas. In this article, I would like to discuss the main goal of the outbound business tax planning and identify the overall “global” (i.e. looking at the entire genre of outbound transactions) strategies which are utilized to achieve this goal.

The Main Purpose of the Outbound Business Tax Planning

The main goal of the outbound business tax planning is not difficult to discern – legal reduction of tax burden and, thereby, maximization of profits. What is important to understand is that the outbound business tax planning seeks to optimize the after-tax financial return from a transaction by reducing the taxes paid. It is not concerned so much with the pre-tax business details of the outbound transaction (although, these details may play a very important role in tax planning, but as a strategy and not a goal).

In other words, instead of treating taxes as just another cost of doing business, a business can significantly increase its real return from an outbound transaction through careful business tax planning.

Three Global Strategies to Achieve the Main Goal of the Outbound Business Tax Planning

How can the goal of after-tax financial return be achieved? There are three main strategies that can be utilized by an international tax attorney. The first strategy is to avoid the existence of any taxing jurisdiction in the destination country (i.e. the foreign country that is the object of the outbound business transaction). In other words, the transaction is structured in such a way as to avoid (or, at least, significantly reduce) the taxation of profits overseas.

The second strategy is to postpone for a significant period of time the US taxation of foreign profits until these profits are repatriated into the United States. Since US businesses are taxed on their worldwide income, the focus of this strategy is on deferral of US income tax, rather than its complete avoidance. The economic benefits of such deferral can be very significant, because the profits can be either reinvested tax-free, accumulate interest (also tax-free) or serve as a collateral for borrowing in the United States.

What happens if the income taxation in the destination country cannot be avoided? Does the outbound business tax planning have anything to offer in this case?

The answer is yes – the prevention of significant double-taxation of foreign income in the United States. This is the third main strategy of the outbound business tax planning. A prominent example of such strategy is the utilization of foreign tax credit to offset US tax liability.

Contact Sherayzen Law Office for Help with Your Outbound Business Tax Planning

If you are planning to expand your business overseas, contact Sherayzen Law Office for professional help. We will thoroughly analyze your planned business transaction, create a tax plan for you and implement it. Moreover, our firm will also provide you with the annual US tax compliance support with respect to US tax compliance requirements that may arise as a result of the tax plan (such as Form 5471 or 8865 compliance).

Contact Us Today to Schedule Your Confidential Consultation!

US-Slovenia Totalization Agreement Signed | International Tax Lawyer Ohio

January 24, 2017/0 Comments/in international tax lawyer, Legal Notes /by Manager

On January 17, 2017, US-Slovenia Totalization Agreement was signed in Slovenia. Ms. Anja Kopac Mrak, the Slovenian minister of labor, family, social affairs, and equal opportunities, signed on behalf of Slovenia. Mr. Brent Hartley, US Ambassador to Slovenia, signed on behalf of the United States. Signing of the US-Slovenia Totalization Agreement represents a major step toward finalization of the agreement, but there is still a long road ahead.

US–Slovenia Totalization Agreement: What is a Totalization Agreement?

A Totalization Agreement is essentially a Social Security Agreement between two countries aimed to eliminate the burden of dual social security taxation for individuals and businesses who operate in both countries. The Totalization Agreements are authorized by Section 233 of the Social Security Act.

US–Slovenia Totalization Agreement: Why Is It Relevant to US and Slovenian Workers?

As I explained above, a Totalization Agreement is meant to prevent workers and their employers from paying social security taxes on the same earnings in both countries that are signatories to the Agreement. Typically, the potential for this type of double-taxation arises when a worker from country A works in Country B, but he is covered under the social security systems in both countries. In such cases, without a totalization agreement, the worker has to pay social security taxes to both countries A and B on the same earnings.

The US-Slovenia Totalization Agreement, once it enters into force, will prevent the dual taxation by specifying the rules that will determine which of the two countries will impose a social security tax on worker while the other country will be prohibited from doing so. Furthermore, it should be mentioned that the US-Slovenia Totalization Agreement will allow the combination of work credits earned in both countries for the purposes of benefit eligibility determination. Finally, the Certificate of Coverage should be available under the US-Slovenia Totalization Agreement.

US–Slovenia Totalization Agreement Will Become Effective When Both Countries Ratify It

Right now, only 26 Totalization Agreements are in force between the United States and another country: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom.

The reason why the number of Totalization Agreements is so low lies in the fact that it takes a long time to negotiate them and, even more importantly, ratify them. The benefits offered by such an agreement are very extensive and may have to overcome significant domestic opposition before they are ratified. For example, the Totalization Agreement with Mexico was signed on June 29, 2004 and it still has not been ratified (nor is it likely to be in the short future due to significant political position within the United States).

Hence, the fact that the US-Slovenia Totalization Agreement has been signed does not mean that it will be ratified soon. Moreover, it has an important competitor in the form of the US-Brazil Totalization Agreement that was signed on June 20, 2015 and still has not been ratified. Nevertheless, the signing of the US-Slovenia Totalization Agreement was a prerequisite step toward its eventual ratification.

Given the important of the US-Slovenia Totalization Agreement, US international tax lawyers need to closely follow any developments with respect to it.

Taxation of Royalties Ceases Under Estonia-UK Tax Treaty | MN Tax Lawyer

January 23, 2017/0 Comments/in international tax lawyer minnesota, Legal Notes /by Manager

On January 18, 2017, the HM Revenue & Customs announced that the withholding tax on royalties under the 1994 Estonia-UK tax treaty has been eliminated retroactively as of October 16, 2015.

Under the original Estonia-UK tax treaty, the rates had been 5 percent for industrial, commercial, and scientific equipment royalties and 10 percent in other cases. However, paragraph 7 of the Exchange Notes to the Treaty contains the Most Favoured Nation” (MFN) provision relating to royalties (Article 12). Under the MFN provision, UK tax residents only need to pay the lowest tax withholding rate ever agreed by Estonia in a Double-Taxation Treaty (DTA) it later agrees with an OECD member country that was a member when the UK-Estonia tax treaty was signed in 1994.

It turns that Switzerland was an OECD member country in 1994. In 2002, Estonia signed a tax treaty with Switzerland, but the treaty did not impact the UK withholding tax rate at that time. In 2014, however, Estonia and Switzerland signed an amending protocal to the 2002 Estonia-Switzerland tax treaty. Under the protocol, the treaty was revised to provide for only resident state taxation of royalties.

It was this provision in the 2014 protocol to the Estonia-Switzerland tax treaty that triggered the 1994 MFN provision of the Estonia-UK tax treaty. Therefore, when the 2014 protocol entered into force on October 16, 2015, it effectively eliminated tax withholding on royalties not only in Switzerland (wth respect to Estonia), but also in the United Kingdom. While the taxation of royalties under the Estonia-UK tax treaty ceased on October 16, 2015, the HM Revenue & Customs waited for more than a year to announce it on January 18, 2017.

It should be pointed out that MFN provisions, such as the one in Estonia-UK tax treaty, quite often have an important impact throughout the treaty network of a country. This ripple effect of the MFN provisions creates enormous opportunities for international tax planning that is often utilized by international tax lawyers, including US international tax law firms such as Sherayzen Law Office, Ltd.