Cross Border Corporate and Individual Tax Planning UBS

Cross Border Income and Estate Tax Planning

Rowbotham& c o m p a n y l l p

November 11, 2014UBS

Brian Rowbotham, CPAPeter Trieu, Esq., LL.M.

Rowbotham and [email protected]

[email protected]

mailto:[email protected]

mailto:[email protected]


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Agenda

U.S. Income Tax

U.S. Estate and Gift Tax

Pre-Arrival Planning


Income TaxPlanning and Reporting

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Income Tax of U.S. Persons U.S. residents taxed on worldwide income

Certain amount of foreign earned income excluded from taxation- $100,800 (2015)

Must reside in foreign country for entire tax year

Foreign tax credit available for income taxes paid to foreign country

Three principal ways to become a U.S. tax resident:

Substantial presence test (formula)

Lawful permanent resident (Green Card)

Citizen

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Substantial Presence Substantial Presence Test Met

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 Actual Days Multiplier Days Counted

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

Available to green card holders

No exemption from reporting requirements (e.g. FBARs)

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Income Sourcing Nonresidents taxed only on U.S. sourced income

Source of income rules are largely codified by income category

Interest income- generally is an individual debtor's place of residence and a corporate debtor's place of incorporation. IRC §§861(a)(1) and 862(a)(1).

Dividend income- generally is the place of the paying corporation's incorporation. IRC §§861(a)(2)(A) and 862(a)(2).

Income from personal services- generally is the place where services are performed. IRC §§861(a)(3) and 862(a)(3).

Rentals and royalties- sourced either to the geographic location of the property or the place of permitted use of the property. IRC §§861(a)(4) and 862(a)(4).

Income from a disposition of a U.S. real property interest- determined according to the situs of the property. IRC §§861(a)(5) and 862(a)(5)

Income from the sale of inventory is sourced to the place of sale. IRC §§861(a)(6) and 862(a)(6).

Income from the sale of other property- generally sourced by the residence of the seller. IRC §865(a)

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Reporting Requirements

Non-U.S. Trust & Gift 3520 35% of distribution Non-U.S. Trust 3520A 5% per month up to 25% Non-U.S. Partnership 8865 $10,000/ year per entity Non-U.S. Disregarded Entity 8858 $10,000/ year per entity Non-U.S. Corporation 5471 $10,000 / year per company Transf. to a non-U.S. corp. 926 25% of value up to $10,000 Non-U.S. Financial Asset 8938 $10,000/year up to $50,000 Non-U.S. Bank Account FinCEN 114 50% of highest balance/year

Potential Penalties

IRS Form for Non-compliance


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Statement of SpecifiedForeign Financial Assets

Individual US taxpayers who are required to file an income tax return must file Form 8938 if foreing financial assets exceed following thresholds: Single living in US: $50K at 12/31 or $75k during year Married living in US: $100K at 12/31 or $150k during year Single living abroad: $200K at 12/31 or $300k during year Married living abroad: $400K at 12/31 or $600k during year

Specified foreign financial assets include: Financial accounts (savings, checking, brokerage, CDs) Stocks and bonds Partnership interests Insurance contracts Beneficiary interests in estate or trust

Excluded Assets: real estate; currency; US mutual funds, brokerage accounts, IRAs, or 401k accounts invested in foreign securities


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Foreign Bank Account Reports U.S. persons holding any financial interest in, or authority over,

bank or other financial accounts in a foreign country must report these accounts

U.S. person U.S. citizen or resident An entity formed under laws of U.S. (corporations, partnerships, LLCs,

estates, trusts)

A U.S. person has a financial interest in account if owner of record is Such U.S. person (self) Person acting on behalf of the U.S. person (agent) An entity majority owned by the U.S. person A grantor trust where U.S. person is owner A trust in which U.S. person has majority present beneficial interest


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Voluntary Disclosure Offshore Voluntary Disclosure Program (OVDP)

File 6 years of returns, and 8 years of FBARs 27.5% in lieu of penalty

Highest account balance in last 8 years Assets acquired with unreported income Assets producing unreported income

Streamlined Processing File 3 years of returns, and 6 years of FBARs Taxpayers residing in U.S.- 5% miscellaneous penalty Taxpayers residing outside U.S.- No penalties Must prove failure 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 requirements of the law.


Estate and Gift Tax Planning

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Estate & Gift Taxation- Resident Residents are taxed on worldwide assets

Residency determined by one’s domicile Facts and Circumstances- home, family, declarations

Green Card Holder Resides in U.S.: Likely U.S. domiciliary

Green Card Holder Resides outside U.S.: Likely non-domiciliary

Visa: Likely non-domiciliary

Life-time Exemption- $5,430,000 (2015)

Annual Exclusion- $14,000 (2015)

Unlimited Marital Deduction- U.S. citizen

spouse only

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Estate & Gift Taxation- Nonresident Nonresidents taxed only on US sited assets Estate tax exemption- $60,000 Gift tax exemption limited to annual exclusion-

$14,000 (2015) Gifts to noncitizen spouses limited to $147,000 (2015)

Transfer Certificate (Form 5173) required to transfer US assets to foreign beneficiaries


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Nonresident – US-Sited PropertyGift Tax Estate Tax

Cash in U.S. Banks Yes No U.S. Bonds No Yes Non-U.S. Govt. Bonds No No U.S. Stocks No Yes Partnership [U.S.](1) No No Real Property in U.S. Yes Yes Tangible Property in U.S. Yes Yes

(1)- Debate over treatment of partnership interests as being sited to residence of owner


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What is a Foreign Trust?

A foreign trust is any trust that is not a domestic trust. IRC 7701(a)(31)(B).

A trust is a domestic trust if both “court test” and “control test” are met. IRC 7701(a)(30)(E). Court Test- a court within the U.S. is able to

exercise primary supervision

Control Test- only U.S. persons have authority to control all substantial trust decisions


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Outbound- Grantor Trusts

The U.S. grantor of a foreign trust that has one or more U.S. beneficiaries is treated as the owner of the trust's assets, under the grantor trust rules. IRC § 679. Migration- A nonresident alien individual who becomes a resident of the

United States within 5 years after transferring property to a foreign trust will be treated as if he or she made the transfer on the residency starting date. IRC § 679(a)(4).

Status applies regardless of the terms of the trust and regardless of any powers or interests the U.S. grantor or any other person may have with respect to trust income and corpus.

Grantor is taxable on the income of a trust even if he never receives any distributions and has no control or power. Grantor is taxable on trust income only in those years in which there is

a U.S. beneficiary.


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Outbound- Transfers of Appreciated Assets

Any transfer of property by a U.S. person to a foreign trust or estate is, for federal income tax purposes, treated as a sale or exchange made for an amount equal to the fair market value of the property transferred. IRC § 684(a). Transferor must recognize as gain the excess of the fair market value of the property

transferred over the transferor's adjusted basis. A U.S. person may not recognize loss on the transfer of an asset to a foreign trust.

Exception: Gain should not be recognized on transfers to a foreign trust that has a U.S. beneficiary, because the grantor would be deemed to own the trust under §679. IRC § 684(b).

Exception: Gain is not recognized on a transfer to a foreign trust or estate that occurs at the transferor's death. Regs. §1.684-3(c).

Exception: Gain is not recognized on a transfer to an unrelated foreign trust in exchange for assets equal in fair market value to the transferred assets. Regs. §1.684-3(d).

A domestic trust that becomes a foreign trust is deemed to have transferred all of its assets to a foreign trust, to the extent that those assets are attributable to transfers by U.S. persons. IRC § 684(c).


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Inbound- Nongrantor Trusts

A trust is treated as a grantor trust only if the person deemed to own the trust is a U.S. citizen or resident. §672(f)(1). Exception- power to revest absolutely in the grantor exercisable

solely by the grantor. §672(f)(2)(A)(i).

Exception- the only amounts distributable from trust during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor. §672(f)(2)(A)(ii).

A U.S. beneficiary of a trust created by a foreign grantor is, nonetheless, treated as the grantor of the trust to the extent the U.S. beneficiary has made prior gifts to the foreign grantor. §672(f)(5).


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Inbound- Taxation of Distributions The U.S. beneficiaries of a nongrantor foreign trust include in their

income trust distributions to the extent of their share of DNI. IRC §§652(a), 662(a). Loans by a foreign trust to a U.S. grantor or beneficiary, or someone

related, is treated as a distribution. IRC § 643(i). Exception- “qualified obligations”. Notice 97-34.

Uncompensated use of trust property by a U.S. grantor or beneficiary, or someone related, is treated as a distribution. IRC § 643(i).

Accumulation distributions from a foreign trust are subject to an “interest” charge on the beneficiary's tax for each year of accumulation. IRC 668. Interest charge is in addition to tax on the distribution.

A foreign trust makes an accumulation distribution in any year in which the trust distributes more than its current year's DNI, if it has Undistributed Net Income (UNI). IRC §665(b).


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Planning with Foreign Trusts A U.S. grantor with one or more U.S. beneficiaries

Grantor trust under §679; In nongrantor period, accumulation distributions subject to the interest charge.

A U.S. grantor with only foreign beneficiaries Nongrantor trust (i.e. §679 does not apply); Gain must be recognized under §684

A foreign grantor and one or more U.S. beneficiaries Grantor trust status allows tax-free accumulation and distribution of

income/corpus; Nongrantor trust status still allows tax-free accumulation, but distributions

subject to interest charge Consider making distributions only when beneficiaries are non-U.S. Consider domesticating trust to avoid interest charge.

Creation prior to migration to U.S. may result in U.S. grantor trust status. Avoid result by creating 5 years prior to migration Embrace result, and reap benefits of reducing estate for estate gift tax purposes tax-

free (i.e. IDGT)


Pre-Arrival andPre-Departure Planning

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Pre-Arrival: Exercise Stock Options

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2012 2013 2014

Arrival in U. S.

Exercise Options

August November

Early exercise avoids taxation of “in the money options”

May

Options awarded in 2011

Alternative 1

Exercise Options

June

Alternative 2

Worldwide Taxation


Pre-Arrival: Eliminate Foreign Holding Structures

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FP

Foreign

Corporation

U.S.

Foreign

Asset

U.S.

Assets

U.S. Residence

Direct

OwnershipU.S.

Trust

U.S.

Partnership

• Foreign Corporation Creates Ordinary Income to U.S. Person

• Tax Reporting is Very Complex

• Liquidate Prior to Becoming U.S. Resident

• Electing pass-through treatment sufficient; also provides stepped-up basis

Foreign

Disregard


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% 35% 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)

(a) For nonresident individuals and high net worth families.

(b) For corporate and institution investors.

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

Limited Liability

CompanyPartnership Trust

U.S. Inc. Foreign Corp.

U.S. Inc.

Foreign Corp. Foreign Mgmt.

Corp.

Foreign Hybrid


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Pre-Departure: Sale/Gift to Foreign Family

US FP

ForeignTrustUS

LLC

-foundershares

ForeignCorp

Sale

USLLC

-foundershares

Notes:•US resident owns assets likely to substantially appreciate•US resident sells/gifts to foreign family member•Family member sells at appreciated value free of US tax•Family member contributes funds to foreign grantor trust•Trust benefits family member during life•Distributions to US resident treated as gift from abroad•Trust should domesticate after death, benefit US resident and successive generations

Gift


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Pre-Departure: WING/NING TRUST

CA

WING/NINGTrust

Notes:•CA resident owns substantially appreciated assets•CA resident contributes assets to WING/NING Trust

•Gift is incomplete•Trust is nongrantor

•Trust sells assets•No CA taxation

•CA resident leaves CA•Distributions to non-CA resident not subject to CA tax


Expatriation

The expatriation tax provisions apply to U.S. citizens who renounce their

citizenship and to long term residents who give up their green cards

An exit tax applies that is equivalent to a tax on a “deemed sale” of assets

Tax applies to persons with assets with fair market value in excess of $2M,

or have an average income tax liability exceeding $160,000 (for 2015), 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. Years during which a nonresident return are filed are not counted

Filing a treaty-based nonresident returns may be considered an expatriating

act.

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Brian Rowbotham, Managing Partner

Brian Rowbotham has over 35 years of experience advising individuals and businesses on complex domestic and international tax issues. Current engagements include:

•Income and estate tax planning for executives entering the U.S. from Asia and Europe•Software and social media companies based in Asia, Europe and the U.S•Global investment funds with portfolio and real estate investments in the US, Europe and Asia•U.S. companies with manufacturing and distribution located outside the U.S.•Corporate structuring and expansion including cross border M&A transactions, licensing and IP transfers•Complex tax audits and representation before the IRS related to recent IRS voluntary tax compliance programs where significant non-

reporting penalties have been assessed

Speaking Engagements: Mr. Rowbotham is a guest lecturer at the Haas Business School at the University of California, Berkeley. He has given presentations worldwide on tax and investment related issues to professional organizations, including: STEP programs in Geneva, Jersey – Channel Islands, Mumbai, Zurich, Los Angeles and the Silicon Valley; International Tax Planning Association and the Offshore Investmentprograms in Luxembourg, Hong Kong, Shanghai, Puerto Rico, and Singapore. He has been a speaker at the World Economic Forums in Mumbai and New Delhi and maintains close ties to the Indian business community in the U.S. and abroad. Locally, he has given presentations to the CPA Society and to the San Francisco Bar Association.

Articles and Publications: Mr. Rowbotham was recently a speaker at the AICPA conference on International tax planning for executives living abroad in Washington DC. He was featured on the cover of the California CPA publication for his lead article on Doing Business in China. He has been a contributor to many international tax and investment journals, including a feature article in Thompson Reuters Venture Capital Journal about the lack of corporate governance that lead to the financial collapse. He was awarded the 2012 Distinguished Service award by the San Francisco Chapter of the California CPA Society. He was the past president of The San Francisco Tax Club and is a member of the Foreign Tax Club in Northern California.

Experience & Education: Mr. Rowbotham founded the firm in San Francisco in 1991. He was formerly with Price WaterhouseCoopers in their London and San Francisco Offices, and formerly with Arthur Andersen. Mr. Rowbotham is a Certified Public Accountant, and earned his bachelors degree and MBA, with honors, from the University of California, Berkeley Haas School.


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Peter Trieu, Tax Director

Peter Trieu is the Tax Director 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 has been a guest lecturer at the Haas Business School at the University of California, Berkeley, and has been a speaker for several U.S. and international tax planning organizations. He has also written numerous articles including some published in CalCPA magazine.

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.


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Harriet Leung, Audit Partner

Harriet Leung, Partner of Advisory Services at Rowbotham & Company, heads the firm’s substantial Asia practice of high net worth individuals and works with many technology startup companies in multi-media gaming and social media. Ms. Leung also advises companies in the financial due diligences, audit and business advisory areas. She has substantial experience servicing companies that were seeking listings on both foreign and U.S. stock exchange markets. She has successfully represented and worked with companies in Asia completing reverse mergers into the U.S. public companies.

Ms. Leung has spoken at various tax and financial conferences in China, Hong Kong, Thailand and the U.S. Ms. Leung serves on the Board of Directors for the Hong Kong Association of Northern California where she recently organized and chaired a highly successful event on tax and immigration planning

Ms. Leung is originally from Hong Kong, and moved to the U.S. in 1991. She has a Bachelor’s degree in Accounting and an MBA in Finance with honors from Golden Gate University, and is a Certified Public Accountant in California.


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ROWBOTHAM &C o m p a n y

Accountants and International Tax Consultants

www.rowbotham.com

http://www.rowbotham.com/