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Transition Tax Burden Still Looms Over US Expats

Tom Burroughes

11 October 2018

newly enacted Section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of US companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 per cent rate, and the remaining earnings are taxed at an 8 per cent rate. The transition tax generally may be paid in instalments over an eight-year period,” it said.

The new transition tax moves US corporate tax from a worldwide tax system to a participation exemption system by giving US (that is, domestic) corporations a 100 per cent dividend received deduction for dividends distributed by a controlled foreign corporation. To move to the new regime, the measure imposes a one-off repatriation tax, payable over eight years, on un-remitted earnings and profits at a rate of 8 per cent for illiquid assets and 15.5 per cent for cash and cash equivalents. 

The deduction is not available to individuals, nor is it available to foreign corporations, which, for example, are owned by US individuals, including individuals living abroad. On the other hand, the repatriation tax would apply to everyone, not merely US corporations, ACA explained. 

For example, a US citizen residing abroad who is a shareholder in a controlled foreign corporation, might have to pay the repatriation tax, even if they do not have the money to pay it.

ACA said the kind of businesses affected include consultancies, restaurants, boutiques and small businesses.

The problems faced by US citizens living overseas has prompted a number of them to renounce their citizenship. It has also prompted a number of specialist wealth managers to provide financial services for them. While estimates vary widely, there are said to be as many as eight million US expats.