international tax lawyers

IRS Classification of Foreign Entities: “Per Se” Foreign Corporations

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For the U.S. tax compliance purposes, it is very important to properly classify foreign business entities, because there are special IRS requirements associated with ownership of foreign business entities. For instance, a list of various tax forms is tied to particular classification (for example, certain U.S. taxpayers are required to file Form 5471 with respect to foreign corporations; a similar requirement (form 8865) would apply to certain filers with respect to a foreign partnership) and esoteric tax reporting requirements may need to be disclosed on your personal tax returns (such as subpart F income in case of Controlled Foreign Corporation).

The process of a foreign entity classification can be very complex.  In this article, however, I would like to discuss a shortcut available in certain situations  –“per se foreign corporations”. This term means the IRS decided to treat certain business entities as a foreign corporation irrespective of the taxpayer’s position.  For practical purposes, this means that, if your entity is on the list of the “per se corporations”, then it is a foreign corporation, there is no need to explore the issue further and “check-the-box” rules will not apply

Where to Look For the IRS List of Per Se Corporations

Once you are able to determine that you are dealing with a foreign entity and this entity is a business entity, you should check with the Treasury Regulation to see if this business entity is part of the long list of entities that the IRS considers as foreign corporations.  The list is detailed in Treas. Reg. §301.7701-2(b)(8).

List of Per Se Corporations

Treas. Reg. §301.7701-2(b)(8) classifies the following foreign entities as corporations (keep in mind that this may not be the most up-to-date list and you will need to check with the relevant updates of this regulation):

American Samoa, Corporation

Argentina, Sociedad Anonima

Australia, Public Limited Company

Austria, Aktiengesellschaft

Barbados, Limited Company

Belgium, Societe Anonyme

Belize, Public Limited Company

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Bulgaria, Aktsionerno Druzhestvo.

Canada, Corporation and Company

Chile, Sociedad Anonima

People’s Republic of China, Gufen Youxian Gongsi

Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or Compania Anonima

Egypt, Sharikat Al-Mossahamah

El Salvador, Sociedad Anonima

Estonia, Aktsiaselts

European Economic Area/European Union, Societas Europaea

Finland, Julkinen Osakeyhtio/Publikt Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbuka

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik Kogham

Republic of Korea, Chusik Hoesa

Latvia, Akciju Sabiedriba

Liberia, Corporation

Liechtenstein, Aktiengesellschaft

Lithuania, Akcine Bendroves

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Public Limited Company

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands, Corporation

Norway, Allment Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societate pe Actiuni

Russia, Otkrytoye Aktsionernoy Obshchestvo

Saudi Arabia, Sharikat Al-Mossahamah

Singapore, Public Limited Company

Slovak Republic, Akciova Spolocnost

Slovenia, Delniska Druzba

South Africa, Public Limited Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Publika Aktiebolag

Switzerland, Aktiengesellschaft

Thailand, Borisat Chamkad (Mahachon)

Trinidad and Tobago, Limited Company

Tunisia, Societe Anonyme

Turkey, Anonim Sirket

Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu

United Kingdom, Public Limited Company

United States Virgin Islands, Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or Compania Anonima

 

Exceptions, Inclusions and Complications With Respect To the List of Per Se Foreign Corporations

In addition to the list of entities above, the regulations also provide various inclusions, exceptions, and complications.  For example, a Nova Scotia Unlimited Liability Company (or any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law) will not be treated as a corporation. The same applies to Sendirian Berhad of Malaysia and some companies in India.

On the other hand, the IRS regards the whole family of “Sociedad Anonima” entities are considered corporations, disregarding their variable capital provisions (such as, “Sociedad Anonima de Capital Variable”).

The regulations further clarify the scope of terms such as “public companies” and “limited companies”.  With regard to Cyprus, Hong Kong, and Jamaica, the term “Public Limited Company” includes any Limited Company that is not defined as a private company under the corporate laws of those jurisdictions.  In all other cases, where the term Public Limited Company is not defined, that term shall include any Limited Company defined as a public company under the corporate laws of the relevant jurisdiction.

Furthermore, with respect to limited companies, a Limited Company includes companies limited by shares and companies limited by guarantee.

What if the company is named in a different but means the same thing as in the usual name? The regulations specifically state that “different linguistic renderings of the name of an entity listed in paragraph (b)(8)(i) of this section shall be disregarded”.  Treas. Reg. §301.7701-2(b)(8)(v).  For example, an entity formed under the laws of Switzerland as a Societe Anonyme will be a corporation and treated in the same manner as an Aktiengesellschaft.

Finally, very important complications may arise where a business entity is formed under the laws of more than one jurisdiction.  Detailed complex rules will determine whether such an entity should be treated as a corporation for U.S. tax purposes, in some cases over-ruling the classification patterns described in this essay.  This is a topic for a future article, though.

Contact Sherayzen Law Office for Legal Help With Foreign Business Entity Classifications

Classification of a foreign business entity for U.S. tax purposes is a very complex process.  This article only describes one of many variations and it does NOT constitute legal advice; only an international tax attorney looking at the specific circumstances of your case may determine how your foreign business entity should be classified.

If you have a foreign business entity and you are not sure how you should classify it and what will be the U.S. tax compliance consequences of such classification, contact Sherayzen Law Office. Our experienced international tax firm will analyze your business entity in detail,  help you find the correct classification (or adopt a classification that is likely to withstand an IRS challenge), and identify the necessary IRS tax reporting requirements.

Will You be Subject to the AMT in the Tax Year 2012?

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The Alternative Minimum Tax (AMT) is an additional tax that certain individuals must pay on top of their regular tax liability.  When the original “minimum tax” was enacted in 1969, its purpose was to limit the ability of high-income earners from paying little or no tax by using certain tax breaks.  Tax breaks that may trigger the AMT include various itemized deductions, accelerated depreciation, and incentive stock option benefits, among others.

Unfortunately, as many taxpayers have learned in the past few decades, the AMT can hit even middle-class individuals and those who do not take many tax breaks.  This problem is further exacerbated by the effects of inflation.

What about Tax Year 2012?

Congress has generally enacted a “fix” or “patch” to prevent non-high-earners from being subject to the AMT in past years.  Unfortunately, as it currently stands, Congress has not acted yet for the tax year 2012 Since this is an election year and the government is looking for more ways to increase revenues, there is doubt as to whether the Congress will actually adopt such a “fix”.  If it does not, tens of millions of additional taxpayers may face a much higher tax bill because of the AMT.  The Congressional Budget Office (CBO) has estimated that the average tax increase for such taxpayers will be $3,900, and some may pay over $8,000 in additional taxes.

If you believe you may be one of the many people subject to the AMT for tax year 2012, you may want to consult with an experienced tax attorney in order to minimize your potential tax liability.

Contract Sherayzen Law Office for AMT Tax Planning

If you believe that you are facing the AMT in the tax year 2012, contact Sherayzen Law Office.  Our experienced tax attorneys will analyze your situation and advise you on how shield yourself from over-taxation with proper tax planning pursuant to the Internal Revenue Code provisions.

Form 941 Penalties

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In a previous article, we covered some of the basics of Form 941. In this article, we will explore some of the major penalties that may apply for failure to comply with the requirements of Form 941. These penalties may be severe and, in certain circumstances, may even lead to criminal charges.

Failure to File Penalty

The IRS may apply a failure to file penalty for any month, or part of a month, for which a required return is not filed (disregarding extensions). The penalty is 5% of the unpaid tax due on such return, with the maximum penalty typically 25% of the tax owed.

Failure to Pay Penalty

The IRS may also apply a failure to pay penalty for any month, or part of a month, for which the tax due is paid late. This penalty is 0.5% per month of the amount of the tax. In certain circumstances, individual filers may be able to qualify for a reduced penalty of 0.25% per month, if an installment agreement is in effect. The maximum amount of the failure to pay penalty is also 25% of the tax owed.

Interaction between the Failure-to-File and Failure-to-Pay Penalties; Reasonable Cause Defense

If both of the above-mentioned penalties apply to a given month, then the failure to file penalty will be reduced by the amount of the failure to pay penalty. It is important to note that a “reasonable cause” defense is applicable to these penalties – i.e. if the employer’s attorney is able to demonstrate, in writing, that the failure to file or to pay was due to a reasonable cause, then such penalties will be abated by the IRS.

Interest

Interest may also be charged, in addition to any applicable penalties. Interest begins to accrue from the date due of the tax owed on any unpaid amount.

Penalty Rates for Amounts not Properly or Timely Deposited

In general, penalties may also apply if a filer does not make required timely deposits, or if the amounts deposited are less than required. If a filer is able to establish a reasonable cause defense and demonstrates that the failure to comply with the requirements was not due to willfully neglect, then the IRS will not impose the penalties. In certain other circumstances, the IRS may also agree to waive penalties.

For amounts that are not timely or properly deposited, the following penalty rates will apply:

2% – Deposits 1 to 5 days late.
5% – Deposits 6 to 15 days late.
10% – Deposits 16 or more days late.
10%- Amounts paid within 10 days of the date of the first IRS notice requesting the tax due.
10% – Deposits paid directly to the IRS, or paid with a tax return.
15% – Amounts unpaid more than 10 days after the date of the first IRS notice requesting the tax due, or the day on which an IRS
notice and demand for immediate payment was received by afiler, whichever is earlier.

Late deposit penalty amounts are calculated from the due date of the tax liability, and are determined using calendar days.

Trust Fund Penalty

If income, Social Security, or Medicare taxes that are required to be withheld are not withheld or paid, a filer may be personally liable for the Trust Fund Penalty. Important note: use of a third-party payroll service provider or other type of agent will not relieve a required filer of the responsibility of ensuring that deposits are timely and properly deposited, and that returns are filed.

The Trust Fund Penalty is the full amount of the unpaid trust fund tax. The penalty may be imposed on any person determined by the IRS to be responsible for collecting, accounting for, and paying over required taxes, and who acted willfully in not doing so, and the penalty may apply to individuals personally if such unpaid taxes cannot be collected from the employer or business directly.

Criminal Penalties

Those who fail to comply with the bank deposit requirements for the special trust account for the U.S. Government may also be charged with criminal penalties. We will cover the criminal penalties in more detail in future articles.

Averages Failure to Deposit (FTD) Penalty

The IRS may also assess an “averaged” failure to deposit (FTD) penalty of 2% to 10% for filers who are scheduled to make monthly deposits, and who do not properly complete Part 2 of Form 941 when a tax liability listed on Form 941, line 10, equals or exceeds $2,500. The IRS may also assess an “averaged” FTD penalty of 2% to 10% for scheduled semi-weekly depositors who show a tax liability on Form 941, line 10, equaling or exceeding $2,500, and who fail to complete Schedule B of Form 941, fail to attach a properly completed Schedule B of Form 941, or improperly complete Schedule B of Form 941.

The averaged FTD penalty is calculated by distributing a total tax liability listed on Form 941, line 10, equally throughout the tax period. As such, deposits and payments may not be counted as timely because the actual dates of tax liabilities may not be accurately determinable.

Contact Sherayzen Law Office for Legal Help With Negotiating Form 941 Penalties

If you are facing Form 941 penalties, contact Sherayzen Law Office NOW. While the exact options available to you will depend on your particular fact pattern, our experienced tax firm will rigorously represent your interests in IRS negotiations and strive to reduce such penalties, exploring all viable legal options.

Taxation of Oil & Gas Royalty Interests

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The recent oil boom in regions such as the Bakken Oil Field has created millionaires overnight based upon royalty interests in oil and gas leases of investors. While fortunes can be made from such payments, it is important to understand that there may be various potential risks involved, as well as numerous taxes. This article will generally discuss three common types of royalty interests, and taxation of payments received from such interests.

Oil and Gas Interests Royalties

There are generally three main types of royalties received for oil and gas interests: standard royalty interests, overriding royalty interests, and working interests

Standard Royalty Interests

A standard royalty interest (also called a “landowner’s royalty”) entitles an owner of mineral rights (a lessor in a lease) to an agreed-upon part of the total oil and gas production attributable to the lease, minus reasonable production costs of the producer (the lessee in a lease). Royalties are usually expressed as a percentage or a fraction of the total production of the well.

Drilling and producing oil and gas wells entail certain types of costs. Unless stated otherwise in a lease, exploration, marketing and production costs are generally paid by the production company, whereas post-production costs may be shared by the landowner with the production company. Depending upon the terms of the lease, certain post-production costs incurred that add value to the oil and gas drilled at the wellhead prior to the place of sale (such as various treatment, compression, processing and transportation costs) may be deducted by the lessee when calculating the royalty payment amount. Additionally, royalty interest payments may be subject to various federal, state and county taxes (which will be detailed later).

Overriding Royalty Interests

Another type of royalty is the overriding royalty interest. A holder of such interest is entitled to a share of the production revenues from a well, free of production and monthly operating costs. Like a standard royalty interest, overriding royalty interests are subject to taxes and post-production costs. Unlike standard royalty interests, holders of overriding royalty interests do not own the underground minerals, and they will not have any ownership rights once well production ends. Overriding royalty interests can be both assigned from holders of a working interest (defined below), as well as created by a leaseholder who retains an override after assigning a leasehold to a working interest owner.

Working Interests

A working interest is the interest obtained by a lessee under an oil and gas lease. Under this interest, holders fully participate in production revenues based upon the percentage of working interest that is owned along with other investors. Unlike royalty interests, holders of working interests fully participate in the profits generated from successful wells. However, owners of working interest are generally directly liable for payment of the applicable share of drilling costs, and other associated costs, such as operating, leasing and exploration costs. Working interest holders generally do not own the underground minerals. Working interests may offer significant tax advantages.

Taxation of Royalties

Landowners must pay taxes on royalties received from production companies, in addition to numerous other potential taxes. Under the Federal income tax, royalties are considered to be ordinary income. However, royalty owners may generally deduct up to 15% of their income received from mineral interests through depletion allowances.

Most states in which oil and gas are produced also levy a severance tax on such production. These taxes are deducted from royalties received, and are calculated based upon either the value of the production, or the production volume, depending upon the state’s tax laws. Additionally, many counties also levy annual ad valorem taxes based upon the value of oil and gas wells in production.

Contact Sherayzen Law Office for Tax Help With Oil and Gas Royalty Interests

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Federal, state and local taxation planning and reporting often necessitates an experienced understanding of complex regulations, statutes, and case law, and penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your tax needs. Email [email protected] or call (952) 500-8159 for a consultation today.

Criminal Tax Evasion

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This article provides some general background to IRC Section 7201 criminal tax evasion charges and describes Section 7201 principal criminal penalties.   As you will see, the penalties are severe, and you should immediately seek the advice of a tax attorney if you have any doubts as to whether you are complying with the law and IRS rules.

Legal Test under IRC Section 7201

IRC Section 7201 deals with criminal tax evasion charges.  In Sansone v. United States, 380 U.S. 343, 354 (1965), the United States Supreme Court stated that two different charges can be brought pursuant to Section 7201: (1) the offense of willfully attempting to evade or defeat the assessment of a tax, and (2) the offense of willfully attempting to evade or defeat the payment of a tax.

The legal test that the government must satisfy consists of three elements:(1) that a tax deficiency existed, (2) an affirmative act of tax evasion, or an attempt to evade taxes, and (3), willfulness. The government is required to prove each of three elements beyond a reasonable doubt – the standard of proof in criminal cases – in order to show a violation of this section. By contrast, in a typical civil case, the standard of proof is only a preponderance of the evidence.

In general, the courts have held that filing a false return may demonstrate an attempt to evade the assessment of a tax, but it is not necessary for an individual to have filed a false return in order to show an attempt of tax evasion.  Certain courts have also held that it is not required for the government to prove the exact amount of tax due in order to show tax evasion.

Each of the elements necessary to prove a violation may involve complex factual matters and/or legal arguments, so you may be well advised to seek an experienced tax attorney if you find yourself in such a case.

Penalties under IRC Section 7201

Under IRC Section 7201, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

Thus, the criminal penalties under Section 7201 may consist of two parts.  First and foremost, imprisonment of up to five years (this charge may have its complications when combined wiht other penalties – therefore, the particular facts of your case will determine whether you potentially face more than five years in prison).  Second, the monetary penalty of up to $100,000 if the defendant is an individual or up to $500,000 if the defendant is a corporation.  The statute allows for the combination of both types of penalties in a single case.

Contact Sherayzen Law Office for Legal Help in Dealing with Section 7201 Charges

If you are or may potentially be in a situations where the U.S. government may charge you with criminal tax evasion offenses, contact Sherayzen Law Office for legal help.  Our experienced tax firm will analyze your case, help you determine whether you may potentially face criminal charges (if you not yet charged), determine the probability of a successful criminal prosecution by the U.S. government, build a creative ethical defense (while considering other possibilities to turn this into a civil case), and rigorously represent your interests in court and during negotiations with the U.S. Department of Justice or IRS.