International Tax Planning

(1)

International Tax Planning

Davis, California ~ August 7, 2014

School of Law

(415) 433-1177 Brian Rowbotham Partner, Tax [email protected] Peter Trieu Partner, Tax [email protected]

(2)

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

For regular income tax purposes, a system of graduated marginal tax rates

is applied to all taxable income, including capital gains

Federal Corporate Tax Rates

Taxable Income ($)

Tax Rate

0 to 50,000

15%

50,000 to 75,000

$7,500 + 25% Of the amount over 50,000

75,000 to 100,000

$13,750 + 34% Of the amount over 75,000

100,000 to 335,000

$22,250 + 39% Of the amount over 100,000

335,000 to 10,000,000

$113,900 + 34% Of the amount over 335,000

10,000,000 to 15,000,000

$3,400,000 + 35% Of the amount over 10,000,000

15,000,000 to 18,333,333

$5,150,000 + 38% 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.

(5)

Corporate Taxation ‐ Federal Tax

Second Level Taxation

(a) Dividends

- 30%

Lower Treaty Rate

(b) Branch profits tax

- Same

Net Profits

First Level Taxation

Federal Tax Rates - 35%

U.S. Inc. Foreign Owner

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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;

(7)

Corporate Taxation ‐ State Taxes

• State Charters

• State Tax Rates

U.S. Activities Delaware or California CA NY FL 8.9% 12% -0-CA NY FL 8.9% 12% -0-U.S. Inc. Foreign Owner

(8)

• 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.

(9)

Cost to Incorporate

Legal or

Cost

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-

$150

- www.irs.gov

(3) With (1) and (2), open a U.S. bank

account. Know your customer [KYC]

-0-

-0-rules can take several weeks.

(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

Doing business

in California

Delaware Inc.

(10)

California Unitary Tax

Branch

Foreign Owner Operating in CA (1) Doing Business through Foreign Company U.S. Operation (2) Doing Business through U.S. Inc.

Outcome Calculate Worldwide Income Calculate CA Tax

Pro-Rate CA / Worldwide Factors • Sales

[Water Edge Election] Calculate U.S. Taxable Income Calculate U.S. Tax

Pro-Rate CA / U.S. Inc. Factors • Sales

(11)

California Unitary Tax

U.S. Operation – profits = 2M 50% in CA 50% in NY

Tax Calculation

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%

(12)

Second Level Tax on Dividends

U.S. Activities

Income Tax

Dividend Tax

Dividend

Withholding Tax

‐ Brazil

‐ Japan

‐ Korea

$100 ‐ Switzerland

Net after Withholding Tax

<40% Rate> ‐ Brazil

‐ Japan

‐ Korea

Net 60 ‐ Switzerland

$60

30%

5%

10%

5%

$42

$57

$54

$57

(13)

Foreign Branch

Foreign Corporation

Foreign Owner

Employees and U.S. Activities

• Federal Tax Rates • State Tax Rates

• Potential Branch Profits Tax

(1) Business Activities Taxed in U.S

(2) Branch Profits Tax

(3) Complicated Allocations of Income and Expense • §864 – Activities that Create U.S. Tax Nexus • Income Tax Treaty – Article 4

• Residency

(14)

Limited Liability Company

Foreign Corporation

U.S. Activities

• Federal Tax Rates • State Tax Rates

• Potential Branch Profits Tax

(1) Business Activities Taxed in U.S

(2) Branch Profits Tax

• §864 – Activities that Create U.S. Tax Nexus • Income Tax Treaty – Article 4

• Residency

• Permanent Establishment

(15)

Partnership

U.S. Activities (1) Foreign Owner Considerations

(2) Impact of Partnership

(3) Withholding Taxes at Source: §1446 • Presence in U.S. – §864

• Tax Treaty Considerations – Same as Before (Permanent Establishment) • Does It Create U.S. Permanent Establishment?

Partnership

Foreign or U.S. Owners Foreign Owner

(16)

Hybrid Structure

Foreign Owner LLC or Foreign Company (1) Basis Step-Up

(2) Foreign Owner Considerations

(3) Impact of Partnership

(4) Withholding Taxes at Source: §1446 • Presence in U.S. – §864

• Tax Treaty Considerations – Same as Before (Permanent Establishment) • Does It Create U.S. Permanent Establishment?

(17)

Structuring Joint Ventures and Investments into U.S.

Investments

• Limited Liability Companies

• Limited Partnership • Control • Liability • Litigation LLC Foreign Investor (s) U.S. Investor (s) (A) (B) General Partners Owners Managing Members Owners Limited Partnership Investments • Control • Liability • Litigation

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Directly or Through Partnership / LLC

Doing Business in U.S.

• 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

(19)

Structuring Joint Ventures

Foreign Investors

(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. Corporate

Foreign Investors

Partnership

(1)

(20)

International Taxation of Fund Structures

GP LLC Cayman (1) LLC (2) LP (1) LP (2) LP (1) Main Fund GPS Management Company U.S. / Foreign Carried Interest (15 – 20%) Notes (1) Cayman LP (2) Delaware LLC GPS Issues • Taxation of Income • Reporting Requirements

- Income of Local Jurisdiction - Income of Investors’ Country • Use of LPs vs. LLCs

(21)

Flipping into U.S. Structure

• Raising Fund • Going IPO in U.S. • Tax-free Entry • Complex to Unwind U.S. Inc. Foreign Company Other Subs. Foreign Company

U.S. Inc. Other Subs.

(22)

Debt – Equity Rates

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 U.S. Inc.

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Transfer Pricing – Service Company

Marketing & Distribution in

U.S.

• §482 Risks

– Reallocation of Income & Expenses

– Documentation to Support Arms Length Pricing Cost Plus ?

(24)

Transfer Pricing – Licensing

U.S. Operations

• Licensing – 30% Withholding Tax or Lower Treaty Rate • Royalty Rates Must Be “Arms Length” Pricing

Intellectual Property

Licensing

U.S. Operations are More Profitable Sale Debt Payment U.S. Inc. Foreign Owner U.S. Inc. Foreign Owner

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Tax Treaties

• Use of Tax Treaties to Reduce U.S. Withholding Tax • Limitation of Benefits Rules in Treaty

U.S. Inc. Foreign Company License IP Licensing Co Royalty Payments

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Tax Treaties: U.S. Outbound

• Transfer Pricing Applies to Inter-Company Charges

• Base Erosion Controversy – Rules Result in Aggressive Pricing and Reduction of Home Country Taxes Microsoft

Royalty Charges to Foreign Subsidiaries Irish

Holding Co Transfer R&D via

Cost Sharing Arrangements §367

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Immigration

• L-1 Visa

• E Visas

• H1-B Visas

• O Visa

• EB5

• Green Card

Transfers to U.S.

Tax Residence

• Substantial Presence

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• 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)

Employee Relocations

Foreign Company

Employees in U.S. Employee in U.S.

• Blocker: Only U.S. Company Exposed to Federal and State Tax

No Withholding Tax

No U.S. Treaty Benefit to Employees U.S. Inc.

(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

Net pay

$6,445

Federal and state

Withholding tables based on number of dependents Form W-4 completed by employee

- 8.55% on gross wages up to $117,000 base amount - 2.35% on wages over base amount

(33)

Employee Relocation Procedures

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

Euro Ltd.

U.S.

Inc.

Employees of U.S. Subsidiary X X X X X X

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(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

(36)

• 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

2014

120

1

120 2013

120 1/3

40 2012

120 1/6

20

180

• Exceptions:

- Taxpayer has a closer connection to a foreign country

- Treaty tie breaker test

Substantial Presence

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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.

(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

(39)

2012

2013

2014

Arrival in U. S.

Exercise Options

August November

Early exercise avoids taxation of “in the money options” May Options awarded in 2012 Alternative 1 Exercise Options June Alternative 2 Worldwide Taxation

Exercising Stock Options: Timing is Everything

(40)

FP

Foreign Corporation U.S. Foreign Asset U.S. Assets

U.S. Residence

Direct

Ownership _TrustU.S.

U.S. Partnership

• Foreign Corporation Creates Ordinary Income to U.S. Person • Tax Reporting is Very Complex

• Liquidate Prior to Becoming U.S. Resident

Eliminate Foreign Holding Structures

Foreign Disregard

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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

• For Gift/Estate Tax Purposes, Residents are Defined by One’s Domicile

-

Gift Tax – §2501, Reg. §25.2501-1

-

Estate Tax – §2101, Reg. §20.0-1

-

Facts and Circumstances

-

Permanent Home

-

Intent

Examples:

• 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.

(42)

• 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)

(43)

• 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)

(44)

• 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

(45)

U.S. Property

Gift Tax

Estate Tax

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

Yes

No

Yes

No

Yes

No

Yes

No *

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.

(46)

Estate & Gift Taxation: Comparison

Gift Tax

Resident

(Domicile)

Gift Tax

Nonresident

(Non-domicile)

Estate Tax

Resident

(Domicile)

Estate Tax

Nonresident

(Non-domicile)

Annual

Exemption

2014

$14,000 on

Worldwide

Assets

$14,000 on

U.S.

Properties

Excess:

Tax Rate

40%

Lifetime

Exemption

$5.34MM

(2014)

None

$5.34MM

(2014)

$60,000 on

U.S.

Properties

(47)

• 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

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Top Tax Rates

Income Tax - Operating Income Capital Gains on Sale

Estate Tax Risk [40% Rate]

39.6% 39.6% 39.6% 39.6% 20% 20% 20% 20% Yes Yes * Yes * No

NR USRP NR USRP NR USRP NR-1 USRP NR-2 (4) (1) (2) (3)

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

Top Tax Rates

Income Tax - Operating Income Second Level Dividend Tax Capital Gains on Sale Estate Tax Risk [40% Rate]

35% 35% 35% 39.6% 30% 30% 30% -0-35% -0-35% -0-35% 20% Yes No No No NR USRP NR USRP NR USRP (8) (5) (6) (7) Corporate Ownership (b) (5) U.S. Corporation (6) Foreign Corporation

(7) Foreign / U.S. Corporation

(8) Hybrid Structure USRP NR 99% 1% (for 99% owner) Limited Liability

Company Partnership Trust

U.S. Inc. Foreign Corp.

U.S. Inc.

Foreign Corp. Foreign Mgmt.

Corp.

Foreign Hybrid

Foreign Investment in U.S. Real Property (USRP)

(49)

• 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.

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.

• A long term resident is a U.S. green card holder who has held the green card in at

least 8 years.

(50)

• 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

Potential Penalties

IRS Form

for Non-compliance

Foreign Reporting by U.S. Persons

3520

3520A

8865

8858

5471

926 8938

FinCEN114

35% of distribution

5% per month up to 25%

$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

(51)

• 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

(52)

(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

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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

(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

(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

(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

(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

(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

(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

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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

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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.

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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.

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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.

Pre‐Arrival Tax Planning Checklist for Executive

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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.

Pre‐Arrival Tax Planning Checklist for Executive (Cont.)

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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 Email: [email protected]

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.

Email: [email protected]

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.

International Tax Planning