International Tax Planning

Transcription

1 International Tax Planning Davis, California ~ August 7, 2014 School of Law Brian Rowbotham Partner, Tax br@rowbotham.com Peter Trieu Partner, Tax ptrieu@rowbotham.com (415)

2 Table of Contents Corporate Tax Planning 3 Federal Corporate Tax Rates 4 Corporate Taxation Federal Tax 5 Foreign Corporation Permanent Establishment 6 Corporate Taxation State Taxes 7 Delaware Corporation [Fast, Cheap, Simple, Acceptable] 8 Cost to Incorporate 9 California Unitary Tax 11 Second Level Tax on Dividends 12 Foreign Branch 13 Limited Liability Company 14 Partnership 15 Hybrid Structure 16 Structuring Joint Ventures and Investments into U.S. 17 Doing Business in U.S. 18 Structuring Joint Ventures 19 International Taxation of Fund Structures 20 Flipping into U.S. Structure 21 Debt Equity Rates 22 Transfer Pricing Service Company 23 Transfer Pricing Licensing 24 Tax Treaties 25 Tax Treaties: U.S. Outbound 26 U.S. Income Tax Treaties Individual Tax Planning 29 Transfers to U.S. 30 Employee Relocations 31 Example of U.S. Payroll 32 Employee Relocation Procedures 33 U.S. Taxation of Residents 34 Income Tax of U.S. Person 35 Substantial Presence 36 Temporary Assignment in U.S. 37 Pre-Arrival Planning 38 Exercising Stock Options: Timing is Everything 39 Eliminate Foreign Holding Structures 40 Estate & Gift Taxation: Domicile 41 Estate & Gift Taxation (U.S. Citizen and Resident) 42 Estate & Gift Taxation (Non-U.S. Citizen and Resident) 44 Estate & Gift Taxation (U.S. Sited Property) 45 Estate & Gift Taxation: Comparison 46 Estate & Gift Taxation Planning (Non-U.S. Citizen and Resident) 47 Foreign Investment in U.S. Real Property (USRP) 48 Expatriation 49 Foreign Reporting by U.S. Persons 50 Voluntarily Disclosure Appendix 52 Start Up Checklist for New Businesses in the U.S. 63 Pre-Arrival Tax Planning Checklist for Executive 65 Speakers Bio

3 Corporate Tax Planning

4 Federal Corporate Tax Rates For regular income tax purposes, a system of graduated marginal tax rates is applied to all taxable income, including capital gains Taxable Income ($) 0 to 50,000 15% Tax Rate 50,000 to 75,000 $7, % Of the amount over 50,000 75,000 to 100,000 $13, % Of the amount over 75, ,000 to 335,000 $22, % Of the amount over 100, ,000 to 10,000,000 $113, % Of the amount over 335,000 10,000,000 to 15,000,000 $3,400, % Of the amount over 10,000,000 15,000,000 to 18,333,333 $5,150, % Of the amount over 15,000,000 18,333,333 and up 35% This rate structure produces a flat 34% tax rate on incomes from $335,000 to $10,000,000, gradually increasing to a flat rate of 35% on incomes above $18,333,333. 3

5 Corporate Taxation Federal Tax Foreign Owner Second Level Taxation (a) Dividends - 30% Lower Treaty Rate U.S. Inc. (b) Branch profits tax - Same First Level Taxation Net Profits Federal Tax Rates - 35% 4

6 Foreign Corporation Permanent Establishment 1. Foreign Parent Objective: Avoid PE status 2. EXAMPLE: excerpt from U.S.-Mexico Income Tax Treaty Article 5 Permanent Establishment The term permanent establishment includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f ) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; 5

7 Corporate Taxation State Taxes State Charters Foreign Owner State Tax Rates Delaware or California U.S. Inc. U.S. Activities CA NY FL 8.9% 12% -0- CA NY FL 8.9% 12% -0-6

8 Delaware Corporation [Fast, Cheap, Simple, Acceptable] One Shareholder One Director Officers President, Treasurer, Secretary Common Stock Timing: One Day On Line Can Qualify in All Other States Caution: Easy to Enter, Complicated with Tax Risks to Unwind. 7

9 Cost to Incorporate Delaware Inc. Cost Legal or Accounting (1) Form Delaware Corporation - Online process $500 $1-2,000 - Can do same day (2) Obtain a federal tax identification number - Form SS-4-0- $ (3) With (1) and (2), open a U.S. bank account. Know your customer [KYC] rules can take several weeks. Doing business in California (4) California apply to Secretary of State to Qualify Delaware company to conduct business in California - Takes two to four weeks $1,000 $3,000 - Accelerated approval $2,000 8

10 California Unitary Tax (1) Doing Business through Foreign Company (2) Doing Business through U.S. Inc. Foreign Owner Foreign Owner Branch U.S. Inc. Operating in CA U.S. Operation Outcome Calculate Worldwide Income Calculate CA Tax Pro-Rate CA / Worldwide Factors Sales Wages Property [Water Edge Election] Calculate U.S. Taxable Income Calculate U.S. Tax Pro-Rate CA / U.S. Inc. Factors Sales Wages Property 9

11 California Unitary Tax Tax Calculation Foreign Owner U.S. Inc. U.S. Operation profits = 2M 50% in CA 50% in NY State CA Tax 2M x 50% x 8.9% = $ 89,000 NY Tax 2M x 50% x 12% = 120,000 Total State Tax 209,000 Federal Net Income After State Tax [2M] 1,791,000 Federal Tax First $100k [23%] $ 23,000 Next $1,691,000 [35%] 591,850 Total Federal Tax 614,850 Total 823,850 Total Tax Rate 823/$2M 40.0% 10

12 Second Level Tax on Dividends Income Tax Dividend Tax Dividend $60 Foreign Owner Withholding Tax Brazil Japan Korea $100 Switzerland 30% 5% 10% 5% U.S. Inc. Net after Withholding Tax U.S. Activities <40% Rate> Brazil Japan Korea Net 60 Switzerland $42 $57 $54 $57 11

13 Foreign Branch Foreign Owner Federal Tax Rates State Tax Rates Foreign Corporation Potential Branch Profits Tax Employees and U.S. Activities (1) Business Activities Taxed in U.S 864 Activities that Create U.S. Tax Nexus Income Tax Treaty Article 4 Residency Permanent Establishment (2) Branch Profits Tax (3) Complicated Allocations of Income and Expense 12

14 Limited Liability Company Foreign Corporation Federal Tax Rates State Tax Rates Potential Branch Profits Tax LLC U.S. Activities (1) Business Activities Taxed in U.S 864 Activities that Create U.S. Tax Nexus Income Tax Treaty Article 4 Residency Permanent Establishment (2) Branch Profits Tax (3) Complicated Allocations of Income and Expense 13

15 Partnership Foreign Owner Foreign or U.S. Owners Partnership U.S. Activities (1) Foreign Owner Considerations Presence in U.S. 864 Tax Treaty Considerations Same as Before (Permanent Establishment) (2) Impact of Partnership Does It Create U.S. Permanent Establishment? (3) Withholding Taxes at Source:

16 Hybrid Structure Foreign Owner LLC or Foreign Company (1) Basis Step-Up (2) Foreign Owner Considerations Presence in U.S. 864 Tax Treaty Considerations Same as Before (Permanent Establishment) (3) Impact of Partnership Does It Create U.S. Permanent Establishment? (4) Withholding Taxes at Source:

17 Structuring Joint Ventures and Investments into U.S. Foreign Investor (s) U.S. Investor (s) Owners Owners Managing Members (A) (B) General Partners LLC Limited Partnership Investments Investments Limited Liability Companies Control Liability Litigation Limited Partnership Control Liability Litigation 16

18 Doing Business in U.S. Directly or Through Partnership / LLC Simple No Tax if Covered by Treaty Still May Need to File U.S. Return Risk of State Taxation Using a U.S. Corporation Preferred Due to Federal Tax Predictable, No Branch Profits Tax Blocks Exposure to State Tax 17

19 Structuring Joint Ventures Foreign Investors Foreign Investors Corporate (1) (2) Partnership (3) (1) Foreign Ownership Gains Generally not Taxed in U.S. 871 / 881 (2) U.S. Corporate Ownership Full versus Corporate Tax (3) Partnership [Foreign or U.S.] Generally No Taxation in U.S. 18

20 International Taxation of Fund Structures GPS GPS LLC (2) GP LLC Cayman (1) Carried Interest (15 20%) LP (1) LP (2) Management Company U.S. / Foreign Notes (1) Cayman LP (2) Delaware LLC LP (1) Main Fund Issues Taxation of Income Reporting Requirements - Income of Local Jurisdiction - Income of Investors Country Use of LPs vs. LLCs Use of Hybrids Investments 19

21 Flipping into U.S. Structure Foreign Company Foreign Company Delaware Inc. U.S. Inc. Other Subs. U.S. Inc. Other Subs. Raising Fund Going IPO in U.S. Tax-free Entry Complex to Unwind 20

22 Debt Equity Rates Foreign Owner U.S. Inc. Operations Ability to Pay Back Debt before Dividends Interest Charges Push Down U.S. Earnings Limitations: 385 Old Regs 3:1 Related Party Debt 10:1 Earnings Stripping 163(j) 60:40 Ratio Used Carryover of Disallowed Interest Documentation Advances Practical Approach Reasonable Interest Follow-up Documentation 21

23 Transfer Pricing Service Company Foreign Owner U.S. Inc. Cost Plus? 482 Risks Reallocation of Income & Expenses Documentation to Support Arms Length Pricing Marketing & Distribution in U.S. 22

24 Transfer Pricing Licensing Foreign Owner Foreign Owner Licensing Intellectual Property Debt Payment Sale U.S. Inc. U.S. Inc. U.S. Operations U.S. Operations are More Profitable Licensing 30% Withholding Tax or Lower Treaty Rate Royalty Rates Must Be Arms Length Pricing 23

25 Tax Treaties Foreign Company IP Licensing Co License U.S. Inc. Royalty Payments Use of Tax Treaties to Reduce U.S. Withholding Tax Limitation of Benefits Rules in Treaty 24

26 Tax Treaties: U.S. Outbound Microsoft Transfer R&D via Cost Sharing Arrangements 367 Irish Holding Co FC FC FC FC Royalty Charges to Foreign Subsidiaries Transfer Pricing Applies to Inter-Company Charges Base Erosion Controversy Rules Result in Aggressive Pricing and Reduction of Home Country Taxes 25

27 U.S. Income Tax Treaties 26

28 U.S. Income Tax Treaties (Continued) 27

29 Individual Tax Planning

30 Transfers to U.S. Immigration L-1 Visa E Visas H1-B Visas O Visa EB5 Green Card Tax Residence Substantial Presence Legal Permanent Resident 29

31 Employee Relocations Foreign Company Foreign Owner U.S. Inc. Employee in U.S. Exposure of Foreign Company to Federal and State Tax Withholding Taxes Hard to Deal With Tax Treaty Avoids U.S. Tax on Employees for Short Assignments (Art. 15) Employees in U.S. Blocker: Only U.S. Company Exposed to Federal and State Tax No Withholding Tax No U.S. Treaty Benefit to Employees 30

32 Example of U.S. Payroll Employee Relocation L-1 transferee, or H1-B or E-2 Employee $10,000 Gross Monthly Payroll [San Francisco] Gross Pay $10,000 Withholding Federal income tax 2,000 State income tax 700 Social security tax (1) 855 $3,575 Federal and state Withholding tables based on number of dependents Form W-4 completed by employee % on gross wages up to $117,000 base amount % on wages over base amount Net pay $6,445 (1) Employer pays equal amount of social security taxes 31

33 Employee Relocation Procedures Euro Ltd. X X X U.S. Inc. X X X Employees of U.S. Subsidiary 1. Employees of Euro Ltd. - Obtain tax ID # - Complete Form W-7, takes time and documents - No visa s needed for short-term assignments - If U.S. presence exceeds 182 days, employee will generally be taxed as a U.S. resident 2. Employees of U.S. Inc. - Not allowed unless entering the U.S. with proper visa: E-2, L-1, H-1B, O - Apply for social security number - Form SS-4 - apply in person at local service office - With social security number, an employee can open a bank account, obtain credit cards 3. Totalization Agreements - South Korea - Switzerland 32

34 U.S. Taxation of Residents 33

35 Income Tax of U.S. Person U.S. citizens/residents taxed on worldwide income Certain amount of foreign earned income excluded from taxation- $99,200 (2014) - Must reside in foreign country for entire tax year Foreign tax credit available for income taxes paid to foreign country 34

36 Substantial Presence The Substantial presence test met if taxpayer is: - Present in the U.S. at least 31 days in the current year; and - Present in the U.S. for 183 days according to a formula: Year days multiplier / / Exceptions: - Taxpayer has a closer connection to a foreign country - Treaty tie breaker test Treaty does not exempt person from foreign reporting requirements 35

37 Temporary Assignment in U.S. ARTICLE 15 Dependent Personal Services (See Treasury Technical Explanation of Article 15) 1. Subject to the provisions of Articles 16 (Director's Fees), 19 (Pensions, Annuities, Alimony, and Child Support) and 20 (Government Service), salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in a 12 month period; b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. 36

38 Pre Arrival Planning Realize income prior to becoming a U.S. tax resident - Exercise Stock Option - Pre-Arrival Sale of Assets Step up basis in assets - File Check the Box Election Pre-arrival foreign trust planning 37

39 Exercising Stock Options: Timing is Everything Options awarded in Arrival in U. S. Alternative 1 Exercise Options Alternative 2 Exercise Options Worldwide Taxation May August November June Early exercise avoids taxation of in the money options 38

40 Eliminate Foreign Holding Structures FP U.S. Residence Foreign Corporation Direct Ownership U.S. Trust U.S. Partnership Foreign Disregard U.S. Foreign Asset U.S. Assets Foreign Corporation Creates Ordinary Income to U.S. Person Tax Reporting is Very Complex Liquidate Prior to Becoming U.S. Resident 39

41 Estate & Gift Taxation: Domicile Residents are Subject to Tax on Worldwide Assets Nonresidents for Gift/Estate Tax Purposes are Subject to Tax on Only U.S. Assets - Gift Tax 2501, Reg Estate Tax 2101, Reg For Gift/Estate Tax Purposes, Residents are Defined by One s Domicile Examples: - Facts and Circumstances - Permanent Home - Intent U.S. Citizen Living Abroad Domicile = U.S., Subject on Worldwide Assets Green Card Holders Living in U.S. Domicile = U.S. Green Card Holder Living Outside U.S. Domicile = Uncertain. Possibly Non-Domiciled in U.S. Visa Holders Living in U.S. Domicile = Uncertain. Likely Non-Domiciled in U.S. 40

42 Estate & Gift Taxation (U.S. Citizen and Resident) Transfers to non-u.s. Citizen spouses Gift tax annual exclusion $145,000 (2014), but no marital deduction Qualified Domestic Trust (QDoT) estate tax deduction All income payable annually to surviving spouse Trustee must be U.S. citizen or corporation Estate tax payable on distributions of principal (during spouse's lifetime and upon spouse s death) 41

43 Estate & Gift Taxation (Non U.S. Citizen and Resident) Non-resident/non-citizen donors and estates Determination of residence (domicile) Only transfers of property located or situated in the U.S. are taxable Lifetime transfers gift tax Real and tangible personal property (including money) located in the U.S. Not applicable to any intangible personal property (stock, bonds, partnership interests, promissory notes, etc.) Annual and medical/educational exclusions apply Testamentary transfers estate tax Real and tangible personal property (including money) located in the U.S. Stock in U.S. Corporations Debt obligations of U.S. Persons (but not bank accounts or portfolio debt obligations, the interest on which is not subject to U.S. Income taxation) 42

44 Estate & Gift Taxation (Non U.S. Citizen and Resident) Cont d Gift and estate tax exemptions No lifetime gift tax exemption amount Only a $60,000 estate tax exemption amount Unlimited marital and charitable deductions generally No gift-splitting between spouses 43

45 Estate & Gift Taxation U.S. Sited Property Cash in U.S. Banks U.S. Bonds Non-U.S. Govt. Bonds U.S. Stocks Partnership [U.S.] Real Property in U.S. Tangible U.S. Properties ** Non-U.S. Assets U.S. Property Gift Tax Estate Tax Yes No No No No Yes Yes No No Yes No Yes No * Yes Yes No * Law uncertain for treatment of U.S. Partnership interest for the purpose of estate tax. ** Tangible Y.S. property includes cars, art, jewelry, etc. 44

46 Estate & Gift Taxation: Comparison Gift Tax Gift Tax Estate Tax Estate Tax Resident Nonresident Resident Nonresident (Domicile) (Non-domicile) (Domicile) (Non-domicile) Annual Exemption 2014 $14,000 on Worldwide Assets $14,000 on U.S. Properties Excess: Tax Rate 40% 40% 40% 40% Lifetime Exemption $5.34MM (2014) None $5.34MM (2014) $60,000 on U.S. Properties 45

47 Estate & Gift Taxation Planning (Non U.S. Citizen and Resident) Planning for non-u.s. Citizens or residents with U.S. Citizen or resident children, etc. The non-u.s. citizen or resident should own U.S. situs assets through a foreign holding company (e.g., a BVI corp.) Establish revocable trusts for the benefit of each children and issue, with the child as trustee after attaining a mature age Non-U.S. situs assets could be owned directly by the trust U.S. situs assets should be owned by a foreign holding company Income (including capital gains) would not be subject to current U.S. income taxes Assets would not be subject to U.S. gift, estate or GST transfer taxes on death of the non-u.s. citizen or resident Avoid establishing a U.S. domicile if not planning to become U.S. Citizens. Retain home in current domicile Retain memberships in clubs and other social connections in current domicile Retain drivers license in current domicile Continue to vote in elections in current domicile 46

48 Foreign Investment in U.S. Real Property (USRP) Direct and Indirect Ownership (a) (1) Foreign Person (2) U.S. or Foreign LLC (3) U.S. or Foreign Partnership (4) U.S. or Foreign Trust (1) (2) (3) NR NR Limited Liability Company NR-1 Partnership NR-2 (4) NR Trust Top Tax Rates Income Tax - Operating Income Capital Gains on Sale Estate Tax Risk [40% Rate] USRP USRP USRP USRP 39.6% 39.6% 39.6% 39.6% 20% 20% 20% 20% Yes Yes * Yes * No Corporate Ownership (b) (5) (6) (7) (8) (5) U.S. Corporation (6) Foreign Corporation (7) Foreign / U.S. Corporation (8) Hybrid Structure NR U.S. Inc. NR Foreign Corp. NR Foreign Corp. U.S. Inc. 99% NR Foreign Hybrid Foreign Mgmt. Corp. 1% Top Tax Rates Income Tax - Operating Income Second Level Dividend Tax Capital Gains on Sale Estate Tax Risk [40% Rate] USRP USRP USRP USRP (for 99% owner) 35% 35% 35% 39.6% 30% 30% 30% -0-35% 35% 35% 20% Yes No No No (a) For nonresident individuals and high net worth families. (b) For corporate and institution investors. * Depends on whether situs of the entity is U.S. or foreign. 47

49 Expatriation The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and to long term residents (as defined in IRC 877(e)) who have given up their green cards and ended their U.S. resident status for federal tax purposes. An exit tax applies to these persons that is equivalent to a tax on a deemed sale of their assets Tax applies to persons with assets with fair market value in excess of $2M, or have an average income tax liability exceeding $155,000 (for 2014), over most recent past 5 years. A long term resident is a U.S. green card holder who has held the green card in at least 8 years. Filing a treaty-based nonresident returns may be considered an expatriating act. 48

50 Foreign Reporting by U.S. Persons IRS Form Potential Penalties for Non-compliance Non-U.S. Trust & Gift Non-U.S. Trust Non-U.S. Partnership Non-U.S. Disregarded Entity Non-U.S. Corporation Transf. to a non-u.s. corp. Non-U.S. Financial Asset Non-U.S. Bank Account A FinCEN114 35% of distribution 5% per month up to 25% $10,000/ year per entity $10,000/ year per entity $10,000 / year per company 25% of value up to $10,000 $10,000/year up to $50,000 50% of highest balance/year 49

51 Voluntary Disclosure Offshore Voluntary Disclosure Program - File eight years of returns and FBARs - Penalty of 27.5%, but as high as 50% if any account is with a bank that has been publicly disclosed to IRS or DOJ Streamline Procedure - File 3 years of returns, and 6 years of FBARs - Penalties limited to 5% for U.S. residents living in the U.S. - No penalties for U.S. residents living outside the U.S. - Must prove violation was non-willful Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake; or conduct that is the result of a good faith misunderstanding of the law 50

52 Appendix

53 Start Up Checklist for New Businesses in the U.S. Subsidiaries or Branches of Foreign Corporations Corporations Partnerships Trusts Page 2. Information Requested 3. Business Formation 4. Employee Matters 5. Foreign Companies Expanding Into The U.S. 6. Foreign Investment In U.S. Real Property 7. Tax Filings Domestic 8. Tax Filings International 9. Pre Arrival Checklist 52

54 Start Up Checklist for New Businesses in the U.S. 1. Information Requested Federal Tax Identification Number Articles of Incorporation Partnership Agreements Trust Documents Business Plan Prior Two Years Federal and State Tax Returns Cap Table Financial Statements [Audited or Unaudited] List of Current Officers Current Information Name Address for Correspondence Business Phone Mobile Phone Other Phone Correspondence Sent To Name of Attorney Name of Banker Rowbotham & Company Contact Services Requested Accounting Tax Consulting 53

55 Start Up Checklist for New Businesses in the U.S. 2. Business Formation: To Review Business Plan Founders Names Capital/Cap Table Debt vs. Equity Structure EIN Number U.S. Bank Accounts U.S. Credit Cards Local Permits Local Payroll Taxes Board Restitutions Partnership Agreement Records Maintenance Nexus of Company In State Or Multi State Activities Delaware vs. CA Corporations IP Matters [Trademarks, Patents, Copyrights] IP Ownership Franchise And Licensing Issues Software R&D Other Subsidiaries Nondisclosure Agreement Short Midterm Plans Accounting Systems Accounting Procedures Monthly/Quarterly/Annually Agreements Suppliers, Licensing, Distribution Secretary Of State Registration 54

56 Start Up Checklist for New Businesses in the U.S. 3. Employee Matters Handbook On Employee Procedures Employee vs. Independent Contractor Insurance Medical Life Disability Workers Compensation Employee Contracts Stock Plans Nonqualified Plans Qualified Plans Option Plans Vesting Plans 409A Valuation Requires Payroll Setup 55

57 Start Up Checklist for New Businesses in the U.S. 4. Foreign Companies Expanding Into The U.S. IP Transfers Will Foreign Parent Flip Into U.S. Structure Employee Relocations From Foreign Country States Where Business Is Located Licensing Activity With U.S. Clients Licensing Activity From Parent Licensing Activity From The U.S. Buy Sell Or Commission Structure Transfer Pricing Study Assets Contributed Into U.S. Company Capital Or Debt Cost Plus Sales Subsidiary Stock Options In U.S. Parent Or Subsidiary Totalization Agreements Use Of Income Tax Treaty Employee Related Tax Equalization Per Diem Payments Tax Issues And Planning In Initial Year Pre Arrival Checklist Employees, Executives, Founders Tax Treaty Benefits Company, Employees Visa Types 56

58 Start Up Checklist for New Businesses in the U.S. 5. Foreign Investment In U.S. Real Property Corporate, Partnership, Or Trust Ownership Structure Multiple Properties Or Single Investment Or Development Expected Holding Period Debt Financing Branch Tax Issues For Foreign Corporation Portfolio Interest Exemption Avoiding Estate Tax Withholding Partnerships Or Corporations Sale Of Property Certificate To Reduce Withholding Federal State 57

59 Start Up Checklist for New Businesses in the U.S. 6. Tax Filing Domestic Individual Income Tax Returns (Form 1040) Federal (Form 540) California (Form 1040 ES) Estimates (Form 1041) Trust & Estate Corporate Income Tax Returns (Form 1120) Federal (Form 100) State Partnership Income Tax Returns (Form 1065) Federal State K 1 Reporting (Form 990) Private Foundation Other Forms (Form 2848) Power Of Attorney (Form SS 4) Application For EIN (Form W 2) Wage and Tax Statement (Form W 4) Employee s Withholding Allowance Certificate (Form W 7) Individual Taxpayer Identification Number (Form W 9) Taxpayer Identification Number Officers, Directors Annual Report (Form 541 L) Property Tax Local City Tax Sales Tax 58

60 Start Up Checklist for New Businesses in the U.S. 7. Tax Filing International (Form 1040NR) Federal Individual Income Tax Returns (Nonresident Aliens and Foreign Trust) (Form 540NR) California (Form 1120F) Foreign Corporation Income Tax Returns (Form 1065) Foreign Partnerships Doing Business In The U.S. (W 8BEN) Certificate Of Foreign Status Of Beneficial Owner For United States Tax Withholding (W 8ECI) Certificate Of Foreign Person s Claim For Exemption From Withholding On Income Effectively Connected With Conduct Of A Trade of Business In The U.S. (W 8IMY) Certificate Of Foreign Intermediary, Foreign Partnership Or Certain U.S. Branches Of U.S. Tax Withholding (Form 926) Return By A U.S. Transfer Of Property To A Foreign Corporation (Form 1042) Annual Withholding Tax Return For U.S. Source Income Of Foreign Person (Form 1042S) Foreign Person s U.S. Source Income Subject To Withholding (Form 3520 Or Form 3520A) Annual Return To Report Transactions With Foreign Trusts And Receipt Of Certain Foreign Gifts 59

61 Start Up Checklist for New Businesses in the U.S. 7. Tax Filing International Continued (Form 5471) Information Return Of U.S. Persons With Respect To Certain Foreign Corporations (Form 5472) Information Return Of 25% Foreign Owned U.S. Corporation Or A Foreign Corporation Engaged In A U.S. Trade Or Business (Form 8804) Annual Return For Partnership Withholding Tax (Form 8805) Foreign Partner s Information Statement of Section 1446 Withholding Tax (Form 8813) Partnership Withholding Tax Payment Voucher (Form 8832) Entity Classification Election (Form 8833) Treaty Based Return Position Disclosure (Form 8854) Initial And Annual Expatriation Statement (Form8858) Transactions Between Foreign Disregarded Entity Of A Foreign Tax Owner And the Filer Or Other Related Entities (Form 8865) Return Of U.S. Persons With Respect To Certain Foreign Partnerships (Form 8873) Extraterritorial Income Exclusion (Form 8913) Credit For Federal Telephone Excise Tax Paid (FinCEN Form 114) Report Of Foreign Bank And Financial Accounts 60

62 Start Up Checklist for New Businesses in the U.S. 8. Pre Arrival Checklist Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save global tax Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax laws Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 39.6% Consider exercising options prior to arrival. Review deferred compensation and retirement benefits, to determine how to efficiently access these sources with minimum tax before and after arrival. If you have a foreign stock plan, you should check whether vesting will be taxable to you after entering the U.S. 61

63 Start Up Checklist for New Businesses in the U.S. 8. Pre Arrival Checklist Continued Plan the proper timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country. If you are in the U.S. for a short period of time, you may be exempt from U.S. tax under the relevant income tax treaty. Transferring appreciated assets to a foreign trust or foreign company will usually trigger current income tax on the appreciation if the transfer is made when you are a U.S. resident. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the U.S., you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer getting your green card if your stay in the U.S. is not permanent. Reporting bank balances and foreign investments is required under Federal and State rules. 62

64 Pre Arrival Tax Planning Checklist for Executive 1. Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany. 2. Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save global tax. 3. Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S. 4. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax laws. 5. Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 39.6%. Consider exercising options prior to arrival. 6. Review deferred compensation and retirement benefits, to determine how to efficiently access income minimum tax before and after arrival. 7. Foreign stock plan: Check whether vesting will be taxable after entering the U.S. 83(b) election time may have expired. 8. Plan your timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax. 9. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country. 63

65 Pre Arrival Tax Planning Checklist for Executive (Cont.) 10. If you are in the U.S. for less than 183 days in the year, you may be exempt from U.S. tax under the relevant income tax treaty. 11. Transfer appreciated assets to a foreign trust or foreign company prior to arrival to avoid triggering tax will on the appreciation. 12. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the US, you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer obtaining your green card if your stay in the US is not permanent. 13. Reporting bank balances and foreign investments is required under federal and state rules. The following IRS forms need to be filed: FinCEN 114 Foreign Bank Account Report For balances in excess of $10,000 Form 3520 Receipt of any distributions or benefits from a foreign trust Form 3520 Receipt of gifts or bequests over $100,000 from a foreign person Form 3520A Annual return for a foreign trust Form 5471 Return of U.S. person in certain foreign corporations Form 8865 Return of U.S. person in certain foreign partnerships Form 8621 Investment in a passive foreign investment company (e.g. foreign mutual fund) Form 8938 New in 2011 Statement of foreign financial assets Caution: Many foreign holding structures may fall within these reporting requirements. Significant penalties will be assessed if appropriate reporting is not done. 64

66 Speakers Bio Brian Rowbotham is the founder and partner in charge of the firm s international tax practice. Mr. Rowbotham has 35 years of experience in the cross-border tax planning structures for real estate. He has given presentations on real estate tax strategies in Hong Kong, Shanghai, Guangzhou, Mumbai, Singapore, and throughout Europe and the U.S. He is a frequent guest speaker at the Haas Business School, UC Berkeley on international tax where he received his bachelors and MBA degrees. In 2012 he was awarded the Distinguished Service Award by the California CPA Society for support of the profession and was featured on the cover of the California CPA for doing business in China. br@rowbotham.com Peter Trieu is a Partner at Rowbotham & Company. His practice focuses on advising clients regarding domestic and international tax planning and compliance. He also assists clients with their estate plans. His clients include entrepreneurs, multi-national families, high net-worth individuals and businesses. Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney. Mr. Trieu is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in Business-Economics with a minor in Accounting from University of California, Los Angeles. He graduated cum laude from University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University ptrieu@rowbotham.com Rowbotham & Company is based in San Francisco. Its practice is unique with its global clientele in Asia and Europe with many of its clients being foreign institutions and ultra high net worth families investing in U.S. real estate. Clients include large institutional investors in the U.S., and real estate funds in the U.S. and foreign countries. Projects in the past include real estate structures for joint ventures by foreign governments from Middle East (Kuwait, Qatar) and Germany. Private investment structures involve large investment funds based in Europe and Asia and with publicly traded enterprises and high net worth families. The firm s practice in this area was established in 1990 and is well recognized as one of the premier firms on the West Coast with its consulting and advisory group of experienced accountants and lawyers. The firm is a member of Geneva Group International, an organization of professional firms in over 100 locations worldwide. 65