There has been a lot of discussion among the expat community about how the new Transition Tax (also called a “Toll Tax” or “Repatriation Tax”) could affect their tax bills.
- a 10% or more share of a controlled foreign corporation (CFC);
- or a 10% share or more of any foreign corporation in which one or more domestic corporations is a U.S. shareholder owning a share of 10% or more (the foreign corporation does not have to be a CFC).
The stated objective of the Transition Tax is to replace the long-standing ability to defer foreign source income through non-U.S. corporate holdings, with a one-time deemed repatriation tax applied to those earnings. While the actual calculations are somewhat complicated and based on information generally included in Form 5471, the tax is essentially determined by calculating the net earnings and profits (E&P) of all SFCs.
Taxpayers affected by the Transition Tax may opt to pay the one-time “deemed repatriation tax” over eight annual installments, with the first installment due on the same date as their tax return. The election to pay the transition tax in eight installments must also be made by the due date of the return.
The tax is paid using a separate voucher specifically used for the Transition Tax, i.e. if you owe taxes for 2017, you will make two payments, one for your tax return and the other for the Transition Tax payment.
Who is affected? For the 2017 tax year, anyone filing Form 5471 under Categories 4 and 5 (Category 2 and 3 filers may be required to file for 2018 and subsequent tax years). The tax also applies to any taxpayer holding 10% or more of a CFC or a CFC with one or more domestic corporations as a U.S. shareholder (see above).
What do to? Tax filers can elect to pay this tax in eight installments, with the first payment due by their tax return’s due date (June 15 for U.S. expat tax filers who are eligible for the automatic two-month extension). The election to pay installments (instead of a one-time lump sum payment) must also be made by your federal tax return’s extended due date. We will need to create a separate letter of engagement for calculations of the total Transition Tax figure and exact amounts due under an eight-year installment election, as this requires a thorough review of your foreign corporation’s financials under U.S. tax law.