Signed into law on December 22, 2017, H.R.1 (also known as the Tax Cuts and Jobs Act) represents the most significant US tax reform legislation since 1986. Many of the provisions became effective on January 1, 2018, and have implications for business entities, charities, and individuals within and outside of the United States.
We want to bring some key points to your attention, because they affect non-US people investing into the United States, and non-US people with US family members. Many of the changes are positive and create exciting new planning opportunities. Others are worth noting to avoid new, unexpected pitfalls.
US Income tax
Structuring US investments
With the cut in the corporate Federal income tax rate from 35% to a flat rate of 21%, and the elimination of the corporate alternative minimum tax, investors will want to look at US inbound investment structures to review whether a corporate structure would result in a preferable tax result. Non-US people investing in US real estate have tended to use pass-through structures in order to avoid the high rate of corporate tax, but the corollary of this could potentially have meant that the investor would have had to accept US estate tax exposure. Investors can now achieve a 21% Federal tax rate on gains and income using a corporate structure, potentially with more secure US estate tax protection.
Undoubtedly investors will want to review many of their business structures in light of the very significant rate changes. There is also a new withholding tax on the sale of an interest in a partnership which is actively engaged in a US business, so that the purchaser is now required to withhold 10% of the proceeds of sale, similar to FIRPTA real estate withholding.
Investors in non US corporate structures will need to review the changes in the controlled foreign corporation (CFC) tax rules, since there are a number of legislative changes which increase the risk of CFC status. There are technical changes in the attribution rules which increase the risk that corporate ownership of CFC stock will be attributed to a US shareholder. In addition, the former rule which ignored CFC status for an interest held for less than 30 days in a tax year has been repealed.
The repeal of the 30 day rule means that there are implications for non-US people with US heirs, who may have created "grantor" trusts or other structures for those US family members. These structures and the range of post-death grantor trust planning alternatives should be reviewed with US tax advisors.
US estate and gift tax
The big change here is the large increase in the exempt amount (referred to as the unified credit amount) which increases from an inflation adjusted $5 million to an inflation adjusted $10 million. This means that the effective exempt amount in 2018 is $11.18 million per person or $22.36 million for a US married couple. This increase will provide significant gift planning opportunities for Americans.
US estate and gift tax for non-US persons
Note that the estate tax exemption available for people who are not US citizens or US domicilaries, remains at US$60,000. There is no exemption for gifts of US sited assets by non-US persons. For this reason, structuring advice is still recommended for non-US investors considering a purchase of US real estate or US stock.
To discuss these changes further, please contact your usual Withers advisors, or a member of our US team in Hong Kong.