Earlier this year, the IRS finalized Treasury Regulations under Section 965, as amended by the 2017 tax reform legislation. The finalized Regulations address the 'transition tax' which imposes a tax on previously untaxed post-1986 foreign earning and profits of certain foreign corporations owned by certain US shareholders.
As the amounts due could be significant, Section 965(h) allows a taxpayer to elect to pay his or her Section 965 tax liability over a series of eight instalments. However, the Regulations state that certain events following a Section 965(h) election accelerate the tax liability immediately on the occurrence of such event. The Regulations provide that an acceleration event includes an event that results in a person no longer being a US person, such as a resident becoming a non-resident. Although not explicitly stated, this seems to apply to individuals who renounce their US citizenship. Therefore, when advising clients who may be considering expatriation, it is important for advisors to enquire into whether the individual has been impacted by Section 965 and whether a Section 965(h) has been made. Failing to do so could result in an immediate and unexpected US tax liability.