Tag Archives: international tax

Provocative International Tax News

offshore tax planning, offshore tax strategies, controlled foreign corporation,

Tax Planning Small Business Are Taxed at 14%

Government Report Shames Businesses Paying More than 14% in Taxes.    Hard to believe that Senator Bernie Sanders  (who paid tax at 13%) released the report.  It states that a business that plans its taxes are taxed at 14%. Here’s what’s going on.    

saving taxes, how to save taxes, tax planning,

Saving taxes with an IRS approved tax plan is called a private letter ruling.

International Gift Tax Plans with this IRS internal letter on this link. Fantastic legal tax avoidance for the foreign person with family in the U.S. is explained in this letter.

  • Avoiding state income taxes this new IRS  designer  Nevada trust.  IRS tells how to use your Nevada corporation as your trustee to legally stop paying state taxes on your investment income. Here’s what’s happeningon this link.

New- Department of the Treasury letter to the U.K. tax authorities on U.S.  tax planning for UK and EU companies.  Here is the letter from the U.S. to the U.K. 

Be an IRS tax wizard with our new custom Google search, on this link.  This custom Google app to read 300,000 pages deep inside the IRS’s website and the tax court’s website and it is free!.  Find the answers to your tax question quickly and accurately.

Tax planning, with the Supreme Court common tax laws

Tax planning with Supreme Court common tax laws

18th Century Supreme Court case destroys IRS tax penalty law. Using this case, the Tax Court gave the IRS a significant defeat.  Here is what happen.   The Supreme Court is the “Law of the Land.”  It rules over the IRS and Congress.   

It works both ways.  The blog on this link explains the most missed Supreme Court Doctrine used by the IRS to blow up this offshore plan.

international tax planning, international, tax, planning,

International tax planning and international tax savings with this Treasury Department report. 

The secret report on tax savings international tax plans that the IRS cannot stop was issued by the U.S. Department of the Treasury (a branch of the White House).

They reported the successful foreign tax plans of international businesses. We have obtained a copy.  It is on this link.   Here you will learn the legitimate foreign tax plans that Congress likes. 

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,    Since the Middle Ages, the wealthy have capitalized on trusts to avoid paying taxes. During the Great Crusades, upon the death of a knight, his entire estate went to the king.    Nine hundred years later, things have not changed much except the ‘King” takes only half.

Trusts are the most efficient tax tool. International tax planning should start with a Nevada trust to own the foreign company.  Learn trust tax planning and asset protection in this easy to read blog post.    It has the blueprint for successful trust tax planning.   IRS memo on asset protection and tax planning with an offshore trust.  Get it now on this blog post.

internet tax planning, saving taxes, cloud tax planning

Saving taxes with the offshore cloud computer. 

Cloud tax planning. Learn how businesses are using the cloud to avoid taxes on this link.  E-commerce companies are avoiding state income taxes and in some cases deferring U.S. taxes.
Is the U.S. a tax haven for citizens of the UK, Sweden, Belgium, Canada, Luxembourg, and Austria?  Yes, says the IRS in its Publication.  Learn the magic Tax Treaty words for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria on this link.

Amazon International Tax Planning Books by Brian Dooley, CPA, MBT

Our most popular and best value book is International Taxation in America for the Entrepreneur. An easy two hour read that will teach you tried and true tax saving plans. You can buy it now for $9.50 at Amazon on this link (return it in seven days if you do not like the book).

Each of our foreign tax books include links to hundreds of additional offshore tax planning strategies. For the CPA and attorney, the book on this link provides an indepth explanation of international income tax and international estate and gift taxes.  It includes a free PDF version that is used for tax research.  The Adobe Reader find function quickly locates the most complex tax issue.

If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.

IRS Ruling that Civil Law Trusts Are Not Trusts for U.S. Tax Law

I originally wrote this post in 2013.  I am updating it now because I am receiving many phone calls from Americans whose deceased parents formed a foundation or a trust in a non-common law country (such as Panama).  If an entity is not a trust, then it is either a foreign corporation or if you are lucky, an alter ego.  The inheritance of a foreign corporation causes unexpected and undesired income taxes. 

Saving taxes by contract manufacturing in Mexico. International tax strategies for the U.S. manufacturer.

IRS teaches trust inheritance planning with its ruling on Mexcian trusts.  Beware in that a civil law trust does seldom works for American tax planning.

When I first wrote this post, CPAs were freaking out over the foreign trust reporting of a Mexican land trust. 

Their clients owned property along the beautiful Baja California, Mexico, Pacific Coast.   Mexico has an anti-immigrant law that prohibits foreigners from owning property.  Instead, a trust with a fixed period of 30 years owns the property.   

If the Mexican land trusts is a trust, then Form 3520-A and  Form 3520 must be filed.  The penalty for late filing is five percent per year of the gross value of the trust’s assets. 

The IRS does great work.  It knows that just because an entity is called a “trust”, the name means nothing.   This 2013-14 revenue ruling is a great educational tool. Knowing the definitions is necessary for tax planning. The tax laws for trusts are unique.  

The IRS ruling is below in blue. If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free, one-hour consultation.  Or get my easy to read book on international estate tax planning at Amazon on this link

See the end of the blog is an IRS warning issued in its international tax audit guide.

Part I    Section 7701 — Definitions  26 CFR 301.7701-4: Trusts

ISSUE

Is the fideicomiso or Mexican Land Trust arrangement (“MLT”), described below, a trust under Treasury Regulation § 301.7701-4(a)?

FACTS

The Mexican Federal Constitution prohibits non-Mexican persons from directly holding title to residential real property in certain areas of Mexico (“restricted zones”). Non-Mexican persons, however, may hold residential real property located in the restricted zones through an MLT with a Mexican bank after obtaining a permit from the Mexican Ministry of Foreign Affairs.

Situation 1

A, a U.S. citizen, is the sole owner of X, a limited liability company organized under the laws of state Z in the United States. X is disregarded as an entity separate from its owner under § 301.7701-2(a) (a disregarded entity). A, through X, wanted to purchase Greenacre. Greenacre is Mexican residential real property located in a restricted zone. Neither A nor X may hold title directly to Greenacre under Mexican law.

X obtained a permit from the Mexican Ministry of Foreign Affairs and signed an MLT agreement with B, a Mexican bank. X negotiated the purchase of Greenacre directly with the seller of the property and paid the seller directly.

The seller had no interactions with B with respect to the sale. At settlement, legal title to Greenacre was transferred from the seller to B, subject to the MLT agreement, as of the date of sale. No property other than Greenacre is subject to the MLT agreement.

Under the terms of the MLT agreement, X has the right to sell Greenacre without permission from B. Further, B must grant a security interest in Greenacre to a third party, such as a mortgage lender, if X so requests. X is directly responsible for the payment of all liabilities relating to Greenacre. X must pay any taxes due in Mexico with respect to Greenacre directly to the Mexican taxing authority. X has the exclusive right to possess Greenacre and to make any desired modifications, limited only by the need to obtain the proper licenses and permits in Mexico.

If Greenacre is occasionally leased, X directly receives the rental income and A, as the owner of X, reports the income on A’s U.S. federal income tax return.

Although B is identified as a fiduciary in the MLT agreement, it disclaims all responsibility for Greenacre, including obtaining clear title. B has no duty to defend or maintain Greenacre. B collects a nominal annual fee from X. There is no other agreement or arrangement between or among A, X, B, or a third party that would cause the overall relationship to be classified as a partnership (or any other type of entity) for U.S. federal income tax purposes.

Situation 2

The facts are the same as in Situation 1 except that X is a corporation organized under the laws of State Z in the United States. X is treated as a corporation under § 301.7701-2(a). If Greenacre is occasionally leased, X directly receives the rental income and reports the income on its U.S. federal income tax return.

Situation 3

The facts are the same as in Situation 1 except that A deals directly with B without interposing X or any other entity. A obtained the permit from the Mexican Ministry of Foreign Affairs, signed the MLT agreement with B, and negotiated the purchase of Greenacre. Additionally, the provisions of the MLT agreement that apply to X in Situation 1 instead apply to A.

If Greenacre is occasionally leased, A directly receives the rental income and reports the income on A’s U.S. federal income tax return. B collects a nominal annual fee from A. There is no other agreement or arrangement between or among A, B, or a third party that would cause the overall relationship to be classified as a partnership (or any other type of entity) for U.S. federal income tax purposes.

LAW AND ANALYSIS

Section 301.7701-1(a)(1) provides that whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law.

Section 301.7701-2(a) defines a “business entity” as any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code.

If a business entity with only one owner is disregarded as separate from its owner, its activities generally are treated in the same manner as a sole proprietorship, branch, or division of the owner.

Section 301.7701-4(a) provides that the term “trust” refers to an arrangement created by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries.

Usually, the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of a trust may be the persons who create it, and it will be recognized as a trust if it was created for the purpose of protecting and conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them.

Generally, an arrangement is treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees the responsibility for the protection and conservation of the property for beneficiaries who cannot share in the discharge of this responsibility.

Rev. Rul. 92-105, 1992-2 C.B. 204, addresses the transfer of a taxpayer’s interest in an Illinois land trust under § 1031. Under the facts of the ruling, an individual taxpayer created an Illinois land trust and named a domestic corporation as trustee. Under the deed of trust, the taxpayer transferred legal and equitable title to the real property to the trust, subject to the provisions of an accompanying land trust agreement.

The land trust agreement provided that the taxpayer retained exclusive control of the management, operation, renting and selling of the real property, together with an exclusive right to the earnings and proceeds from the real property. Under the agreement, the taxpayer was required to file all tax returns, pay all taxes, and satisfy any other liabilities on the real property.

Rev. Rul. 92-105 concludes that, because the trustee’s only responsibility was to hold and transfer title at the direction of the taxpayer, a trust, as defined in § 301.7701-4(a), was not established. The ruling holds that, on the facts described in the ruling, the trustee was a mere agent for the holding and transfer of title to the real property, and the taxpayer retained direct ownership of the real property for federal income tax purposes.

Situation 1

Because B’s only duties under the MLT agreement are to hold the legal title to Greenacre and transfer title at the direction of X, the MLT is not a trust. X retains the right to manage and control Greenacre. X has the right to collect any rent on Greenacre.

 Also, X has the obligation to pay directly any taxes and other liabilities due on Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701-2, A is treated as the owner of Greenacre.

Situation 2

The MLT is not a trust, and the analysis is the same as in Situation 1 except that because X is treated as a corporation under § 301.7701-2(a), X is treated as the owner of Greenacre.

Situation 3

Because B’s only duties under the MLT agreement are to hold the legal title to Greenacre and transfer title at the direction of A, the MLT is not a trust. A retains the right to manage and control Greenacre. A has the right to collect any rent on Greenacre. In addition, A has an obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, A is treated as the owner of Greenacre.

HOLDING(S)

In all three situations described above, the MLT is not a trust within the meaning of § 301.7701-4(a). If, under the MLT agreement, B holds legal title to any assets other than Greenacre or is permitted or required to engage in any activity beyond holding legal title to Greenacre, the holding of this revenue ruling does not apply and the rules of §§ 301.7701-1 through 301.7701-4 will determine the federal tax classification of the MLT.

DRAFTING INFORMATION

The principal author of this revenue ruling is Wendy L. Kribell of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Ms. Kribell at (202) 622-3050 (not a toll-free call).

The IRS’ international tax planning warning.

“Note that a fideicomiso (Mexican Land Trust) that is described in Rev. Rul. 2013-14, 2013-26 I.R.B. 1267, is not treated as a trust for U.S. tax purposes and thus the U.S. owner of the fideicomiso is not required to file a Form 3520 or a Form 3520A. 

If the fideicomiso at issue is not one that is described in Rev. Rul. 2013-14, then, depending on the facts and circumstances, it may be treated as a trust for U.S. tax purposes and the U.S. owner, as well as other U.S. persons that engage in transactions with the fideicomiso, may have information filing requirements as well as income tax filing requirements.”

European Court Allows Google Ireland Billions in French Tax Avoidance

European Court allows Google billions in legitimate French tax avoidance.

European Court allows Google Ireland billions in legitimate French tax avoidance. Learn how this applies to your U.S. state income tax planning. 

The concepts in tax treaties are ancient and provide tremendous tax savings for internet businesses.  International  E-commerce businesses can follow this Google model and avoid taxes.

Additionally, this Google model works in avoiding state income taxes in the United States.

Today’s tax treaties are based on the ides of business from the days of hard assets businesses (factories, warehouses, office buildings).   By keeping these ancient concepts, tax treaties make legal tax avoidance is easy for an internet business and an e-commerce business. 

In the summer of 2017, the Paris Administrative Tribunal, the Court found that France could not charge Google Ireland $1.4 billion in taxes.   Google France had assisted Google Ireland in its advertising business.  However, Google Ireland’s advertising computers were in Ireland, and none were in France.

The Google victory was ruled on Ireland-France Tax Treaty (1968).  The victory reflects the flaw of the ancient permanent establishment concept found in the 2014 European Model Treaty and the American model treaty. 

Continue reading

Bona Fide Debt Versus Non-Bona Fide Debt for International Tax Planning

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

The IRS has an easy tax win if you mess up your related party loans.  When a cross-border loan is classified as not being bona-fide, the transaction is not a debt.   Then, the IRS gets to determine what took place.  You can expect the IRS to decide what took place will cost you the most in taxes.

On this blog, you will learn  what to do and what not to make your  a loan a bona fide debt.

Most of the court cases are from the first part of last century involving a closely held domestic corporation.  Thus, this blog will look at those cases.   You will see that in those cases, the IRS collected the most money by classifying the transaction as a taxable dividend.

The tax issue  of a bona fide debt is not in the Internal Revenue Code.  The courts have created a tax law that the debt must be bonafide.   A law established by the courts is called a “common law.”

Many small business owners believe that if they merely record in their accounting books the transaction is a debt, then it is a debt.  No so.  Much more is required, and you will learn what to do and what not to do in this blog.

IRS agents are trained to examine an amount classified as a related party loan is whether there is a bona fide debt. The IRS uses this fundamental issue: When the loan was made, was there a genuine intent that the borrowed funds would be repaid?

Courts looked beyond mere labels or the parties’ testimony. The court looks at the objective facts and circumstances surrounding a transaction.

In Baird v. Commissioner, the judge ruled that “The treatment of petitioners’ (the taxpayer) withdrawals on the corporate (accounting) books as ‘Notes Receivable’ is not controlling.”  “It is well settled that book entries can not be used to conceal realities as a means of relieving the taxpayer from liability for income taxes.”[1]

Key Determining Factors

The IRS assumes that the loan in question is a dividend to the shareholder.  If the  transaction is between two related companies, then  two taxable events occurred.   First, a taxable dividend to the shareholder.  Next, the money going into the other corporation is treated by as a capital contribution by the shareholder to the corporation.

When a shareholder owns the majority of a company’s stock,  the IRS knows that he can exercise direct control over the business’s earnings.

Example, a shareholder controls exactly 50 percent of a corporation’s stock.  The other shareholder does not object to the loan.  This fact suggests that a bonafide loan was made.  Since the shareholder does not own a majority of the stock,  then the likelihood of a bonafide transaction is far greater.

The IRS is aware of situations where one shareholder owning only a small percentage of the stock exerted nearly total control of a corporation. [2]   This is common in family owned businesses when dad runs the family.  In these cases, the minority shareholder is treated as the majority shareholder.

 Was security was given?

The failure to provide security is an indication of a non-bonafide loan.   Most commercial lenders require security.  Your loan needs to look like a commercial loan.

Is the shareholder in a position to repay the loan?

As I wrote above, the test is the day the loan was made. The IRS looks at a  shareholder’s income and net worth in determining the shareholder’s ability to repay.   You need to have this proof in your files before you make the loan.  You want to act as if you are a commercial lender.

If the shareholder falls upon bad times, you want to document the change of status in corporate minutes.   The IRS will try to use this event to classify the loan as not bona fide.

The shareholder who is in a position to repay the advances based on his current financial status supports a bona fide loan.  An excellent credit rating is not conclusive that the shareholder is in a position to repay the loan.[3]

If a loan is a dividend,  the tax consequences are different for a S-corporation, C-corporation and a foreign company.

For a C-corporation, where the company does  have current or accumulated earnings and profits (E& P) at the time of distribution (including a loan that is later classified as a distribution because it is not bonafide), the distribution is  dividend.[4]

For an S-corporation, the classification by the IRS of a loan as a distribution can:

1. terminate the S-election if the loans are made disproportionate of the ownership.
2. disallow losses to be reported on the shareholder’s income tax return because of lack of tax basis.

Was a promissory note given to the corporation by the shareholder at the time of the loan?

The fact that  a promissory note of indebtedness wasn’t issued to the corporation is one of the determinative factors.   However, in a few court cases where no notes were issued for advances, the advances were accepted as bona fide loans because of other factors.

 Is there a repayment schedule or an attempt to repay?

Despite repayments being made, if the “loan” continues to increase over the years, the courts tend to see the transaction as a not a bona fide debt.

When the regular repayment schedule is followed the transaction looks more like a loan and not a dividend.

Is there a set due date in the written loan document.

A loan payoff time is important.[5]   Your bank would not make a loan with a due date.  You want your related party loans to be like a commercial loan.

The due date must be decided at the time of the advance.   With the absence of a fixed due date,  the advances can still be classified as a loan if it is repaid within a reasonable period.

Was interest was charged?   This a factor that by itself is not determinative.Whether the corporation has made attempts to get repaid.

If the shareholder borrower falls upon hard times and is not repaying a loan, the IRS will see this proof that the loan was not bonafide.

To counter the IRS position, the corporation must take steps to collect the loan.  If the company does not apply pressure on a borrowing shareholder for repayment, the court may not see the bonafide loan transaction.

You will want to document the steps taken to get repaid in the corporate minutes and letters (or emails) to the shareholder.

The size of the advances.   A corporation making big advances to a controlling shareholder looks like a distribution.  Proving that the shareholder has the ability (when the loan was made) is important.

Also, if the shareholder’s ability to repay is contingent on future events, the transaction looks more like a dividend.

A corporation with a history not paying dividends has high IRS risk.

Money advanced to a shareholder of a C-corporation with substantial   earnings and profits and with no history of paying dividends must be extremely careful.  A foreign corporation has the same issue.

So, while the IRS strongly emphasizes to its agents that the above-listed factors are viewed as a whole, and any one factor by itself is not determinative, the IRS will be suspicious.

In Summary:   Following the same procedures as a commercial lender may make your transaction bona fide.

Footnotes

[1] 25 T. C. 387, 395 (1955)

[2] Baird v. Commissioner, 25 T. C. 387, 395 (1955)

[3] Smith v. Commissioner, T. C. M. 1980-15

[4] IRC section 301. See IRC section 316 (Dividend Defined).

[5] United States v. Title Guarantee & Trust Co., 133 F. 2d 990 (6th Cir. 1943).