international tax law: post-tcja guidance and more · ˗ planning involved "checking the...

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International Tax Law: Post-TCJA Guidance and More

Stewart L. Kasner, Esq., Holland & Knight LLPJennifer J. Wioncek, Esq., Bilzin SumbergLauren A. Klein, Esq., Holland & Knight LLP

St. Thomas University School of LawSeptember 11, 2019

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Relevant Updates After TCJA

» Section 951(a) - Repeal of 30 Day Rule Planning Considerations after TCJA

» Section 958(b)(4) - Downward Attribution Guidance and Planning Issues

» Section 951A ‐ Global Intangible Low Taxed Income (“GILTI”) Guidance

» Section 962 - Election by Individuals to be Subject to Corp. Tax Rates - Benefits after TCJA

» Sections 902 et seq - Foreign Tax Credit Changes

» Section 965‐ Transition Tax Guidance

» Section 1297 et seq - Proposed PFIC Regulations

» Section 267A – Anti-Hybrid Mismatch Rules

Technology and Ethical Considerations

» Does a US lawyer have a duty to assure that a non-US lawyer has sufficient security protocols in place to

protect client's confidential information?

Agenda

» Prior law required a subpart F income inclusion for a 10% US shareholder only if the foreign corp was a

CFC for an uninterrupted period of 30 days or more during the relevant tax year

» Now subpart F income inclusion if the foreign corp is a CFC during "any time" during the taxable year

» Significant impact on planning for the transfer of wealth from NRA to US persons on death of NRA

˗ Planning involved "checking the box" on the foreign corporation on a day after NRA's death resulting in no subpart F income inclusion (because not a CFC for 30 days)

˗ Dilemma under new law as CTB election effective after death results in a portion of the built-in gains in CFC subject to sub-part F income inclusion, and CTB election effective immediately prior to death exposes US situs assets (e.g., US stock) to estate tax

Planning After Repeal of "30 Day Rule" under §951(a)

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4

Typical (Pre-Repeal) Structure

Investment Portfolio

» Upon death of Settlor, trust automatically receives step-up in basis in shares of FC (if trust structured properly)

» No automatic step-up of FC's basis in IP» FC can elect to change its classification if eligible entity (treated as liquidation

of FC)» Check-the-box election made by FC effective prior to death, except if IP

includes U.S. situs assets» If IP includes U.S. situs assets, check-the-box election made effective post-

death˗ Typically effective between 2 days and 29 days after death to avoid CFC rules;

otherwise potential Subpart F inclusion if gain is realized˗ If IP includes PFICs, indirect disposition of PFICs˗ Usually nominal amount of gain or loss in shares of FC˗ Potential tax position risk

Revocable Foreign Grantor Trust

Foreign Corporation

Settlor

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Planning Option #1: Churn/Cleanse; Separate Corporations for U.S. Situs and Foreign Situs

Investment Portfolio: Only Foreign Situs

» Same as previous slide, except FC1 holds only foreign situs assets and FC2 holds only U.S. situs assets

» Churn and cleanse FC2, not FC1» Check-the-box election made by FC1 effective prior

to death of settlor» Check-the-box election made by FC2 effective at

least 2 days after death of settlor» May not need FC1/portfolio could be owned by trust

RevocableForeign Grantor Trust

Foreign Corporation 1

Settlor


Investment Portfolio: Only U.S. Situs

ChurnDon't Churn

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» Check-the-box election made by FC1 and FC4effective prior to death of settlor (ideal timing for FC4's election)

» Need FC2 and FC3 so FC4's change in classification is treated as a taxable liquidation

» FC1, FC2 and FC3 serve as estate tax blockers» Check-the-box election made by FC2 and FC3

effective at least 2 days after death of settlor (may trigger Subpart F income for U.S. beneficiaries)

» May not need to segregate U.S. situs assets and foreign situs assets

» May not need FC1/portfolio could be owned by trust

RevocableForeign Grantor Trust


Investment Portfolio: Only Foreign Situs

100%

50%

100%

50%


Foreign Corporation 3Foreign Corporation 2

Investment Portfolio: Only U.S. Situs

100%

Planning Option #2: Three Corporations for U.S. Situs Assets

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Planning Considerations

» "No one size fits all". Multiple structuring options - which structure is best?˗ Depends on facts and circumstances˗ Consider combination of planning strategies

» Requires discussions with clients on desire to invest in US stock. Consideration of non-US funds that invest in US stock market.

» Need to coordinate discussion with investment advisor. ˗ Can't assume investment advisors are aware of this issue.˗ Financial institutions are not tracking gain proactively for clients for "churning" purposes.

» Finding "Tiered Corporate Structure" not attractive to clients.˗ Benefits are only worthwhile if pro rata share of subpart F inclusion from US stock is significant.˗ Greater benefit for US private equity investments that cannot be "churned", or strong desire to have

investments under one "roof".

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Other Planning Ideas and Issues

» Need to consider tax consequences and reporting requirements in relevant jurisdictions other than the U.S.

» Separate trust structures for U.S. beneficiaries and non-U.S. beneficiaries.» Use of life insurance products.» Non-tax issues for implementation of planning (e.g. costs of changing portfolio and churning

assets).» Check-the-box election for companies that own only foreign situs assets can be made

effective when company is formed or at any time prior to the death of settlor (need to make sure company will never own U.S. situs assets; caution with cash).

» Importance of determining whether any company is or can become a CFC due to attribution of ownership by beneficiaries and "downward attribution" rule.

» DON'T forget about PFICs in the portfolio!

Code Section 958(b)(4) Downward Attribution: Pre-TCJA

» Section 958: Sets forth rules for determining stock ownership of CFCs by US shareholders» Direct/Indirect [Section 958(a)]: addresses direct and indirect ownership through foreign entities» Constructive [Section 958(b)]: addresses constructive ownership, or attribution

˗ For purposes of determining of• "US shareholder" • "CFC"• "Related Person"

˗ applies/modifies constructive ownership rules of Section 318• (1) Prevents attribution between non-US and US family members• (2) Treats partnerships, estates, trusts, corporations that own 50% or more of voting stock of a corporation as owning

100% of that corporation, for purposes of upward attribution to their respective partners, beneficiaries and shareholders• (3) Reduces the threshold for upward attribution from a corporations to their 10% or greater value shareholders (instead

of 50%)• (4) Section 318(a)(3)(A) "downward attribution" turned off by Section 958(b)(4)

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Code Section 958(b)(4) Downward Attribution: After TCJA

» Repeal of Section 958(b)(4) - effective for last tax year beginning before 1/1/2018» Now foreign stock owned by non-US persons (e.g., individuals, parent corporations) can be attributed downward

to their US subsidiaries or other US companies to treat affiliated foreign corporations as CFCs» US Shareholders still only include subpart F income based on 958(a) ownership (direct/indirect)» Limited Guidance After TCJA

˗ Legislative history suggests was limited to types of "de-control" transactions˗ Notice 2018-13: Provides limited relief to IRS Form 5471 filing obligations for Cat 5 filers provided:

• No US person owns directly/indirectly an interest in the CFC; and• The foreign corporation is only a CFC because of constructive ownership

˗ Proposed Regulations for Sections 954/958: Turns off "downward attribution" rules for classifying "related person" under Section 954(d)(3) (i.e., controlling persons or controlling entities) which is relevant for certain types of subpart F income. In general, modify rules to ensure that a person is considered related to a CFC only when that person and the CFC are under common control.

˗ Treas Reg. Sec. 1.318-1(b)(1) provides that a corporation cannot be considered to own its own stock by virtue of the attribution rules

» Technical Corrections Bill, H.R. 88 (December 2018; Rep. Brady) would add back Section 958(b)(4)

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CFC Downward Attribution Example

» Prior to TCJA FC2 was not a CFC» After TCJA U.S. corporation treated as the

shareholder of a brother-sister foreign corporation due to their common ownership by a foreign parent corporation

» Section 318(a)(3)(C) triggered - corporation deemed to own what its shareholder owns

» FC 1 owns FC 2» US Corporation constructively owns FC 2» FC 2 a CFC» US Shareholder has indirect ownership and has

subpart F inclusion of FC 2 » US Corporation not subject to subpart F inclusion

because only constructive ownership

Foreign Corporation 2 U.S. Corporation


US Shareholder10% vote or value

Non-US Shareholder90% vote or value

At least 50%100%

Collateral Effects of Downward Attribution - More CFCs!

» Subpart F inclusions» GILTI inclusions» Section 956 inclusions» Transition tax implications» Disqualification of portfolio interest exemption for interest paid to CFC from "related

persons"» Denial of DRD for hybrid dividends in tiered CFC structures» Application of CFC/PFIC overlap rule (a good thing)» Affecting private client structures in conjunction with the repeal of the "30 day rule"» Basically anything in the Code that interacts with the definition of "CFC"

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Ways to Mitigate Downward Attribution

» Remove the US entity from the structure » Check-the-box planning» Make use of the subpart F income and GILTI "high tax exception" rules» Interpose US C Corp to get 100% DRD and 50% GILTI deduction» Consider Section 962 election» Actually liquidate the CFC

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Code Section 951A Global Intangible Low-Taxed Income (“GILTI”)

GILTI is a new category of Subpart F income attributed to US Shareholders of CFCs.» Formula backs into a deemed intangible income inclusion amount» Exempts certain types of income, and compares remaining gross income to artificial 10% deemed return

on depreciated cost bases of specified tangible property used in a trade or business˗ Depreciated costs bases is computed using alternative depreciation system under IRC s. 168(g).˗ Only takes into account specified tangible property used in the production of tested income.

» Taxed at ordinary income tax rates, with a deduction for domestic C corporations˗ After tax GILTI treated as PTI, not subject to second level of tax on distribution

GILTI tested income starts with the gross income of each CFC and then excludes:˗ (1) effectively connected income (“ECI”), ˗ (2) Subpart F income, ˗ (3) high-taxed income (taxed at rate exceeding 90% of U.S. corporate income tax rate, i.e., 18.9%), ˗ (4) dividends from related subsidiaries with >50% vote or value, and ˗ (5) foreign oil and gas extraction income.


Deduction available only for domestic C corporation shareholders of CFCs» TYs 2018-2025: deduction equal to 50% of GILTI (effective tax rate of 10.5%)» TYs after 2025: deduction equal to 37.5% of GILTI (effective tax rate of 13.125%)

Deemed paid foreign tax credits available to domestic C corporations» 80% of the foreign taxes paid and attributable to GILTI inclusion. Code s. 960(d)(1).

Potential Planning Opportunities» Code s. 962 election to treat individual CFC shareholder as a domestic C corporation

˗ GILTI taxed at corporate rates (with corresponding deduction)˗ Allows foreign tax credit to be claimed as if individual shareholder were a domestic C corporation.˗ Tax due on actual payment of (qualified) dividend from “domestic C corporation”

» US shareholder must be CFC shareholder on last day of tax year to be subject to GILTI tax.

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GILTI Regulations Issued on June 14, 2019

» On June 14, 2019, IRS and Treasury issued additional guidance (in the form of final, temporary and proposedregulations) on GILTI, the determination of subpart F income under Section 951, and availability of a dividends received deduction (“DRD”) under Section 245A.

» The Final GILTI Regulations largely adopt the proposed regulations. Some favorable provisions include:˗ Treating U.S. partnership generally as aggregate for GILTI purposes (and similarly providing rules under proposed

regulations treating U.S. partnership generally as an aggregate for subpart F inclusion purposes) (Proposed Regulations contemplated hybrid approach).

˗ Exempting domestic partnerships from GILTI inclusions (in final regulations) and subpart F inclusions (in Code Section 951 proposed regulations).

˗ Narrowing scope of pro-rata share anti-abuse rule.˗ Abandoning proposed tested loss "recapture" regime for net used tested losses.˗ Providing election to eliminate disqualified basis for all U.S. tax purposes (and thus avoid losing foreign tax credits under

Code Section 901(m)). ˗ Clarifying interaction of subpart F income and GILTI for purposes of determining tested income.

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Continued:

˗ Confirming subpart F income resulting from Section 952(c)(2) recapture is not gross income considered in determining subpart F income, which means gross tested income can give rise to both subpart F income and tested income in the same tax year. Perceived as “double inclusion” during recapture year.

˗ Providing that reductions to subpart F income as a result of qualified deficits or chain deficits do not increase gross tested income.

˗ Modifying definition of specified tangible property to exclude items typically considered intangible property - namely computer software, qualified film or television productions, and qualified live theatrical productions.

˗ Final Regulations not add general exclusion for high-taxed income (however, see below discussion related to new GILTI proposed regulations).

˗ Modified all three anti-abuse rules.

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Code Section 951A Global Intangible Low-Taxed Income (“GILTI”) – High Tax Exception

» U.S. Shareholders of CFCs can elect to exclude a CFC’s items of gross “tested” income subject to foreign income tax at rates exceeding 18.9% (greater than 90% of current corporate maximum tax rate of 21%) from GILTI inclusion.

» If high tax exception (“HTE”) election made:˗ HTE is excluded from GILTI inclusion˗ For corporate U.S. Shareholders : Can repatriate tax free ˗ For non-corporate U.S. Shareholders: Can repatriate at treaty rate (23.8%) or non-treaty rate (40.8%)˗ Lose QBAI associated with production of HTE˗ Lose FTCs attributable to HTE˗ Applies to all CFC members of the same controlling domestic shareholder group˗ Binding on all U.S. Shareholders of CFC

» HTE made by controlling U.S. shareholder.» Final GILTI Regulations did not extend subpart F high-tax exclusion to GILTI.» Proposed Regulations included framework that would allow taxpayers to make election to except income subject to effective foreign tax at a rate

higher than 90% of U.S. corporate tax rate (21% X 90% = 18.9%) from being treated as GILTI. » Whether or not an item of income is subject to an effective foreign tax rate higher than 90% of U.S. corporate tax rate is determined separately for

each item of income.» Election only available after Proposed Regulations are finalized. Therefore, likely not available for 2018 taxable year.» Financial modeling will be required in order to determine whether to make HTE.

Code Section 962

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Background

» Permits individuals who are U.S. Shareholders of a CFC to elect (annually) to be taxed on amounts included in their income under Subpart F, Transition Tax or GILTI at U.S. corporate tax rates and obtain benefits of deemed paid FTCs.

» Originally was meant to treat U.S. individual as if he or she owned a CFC through a U.S. corporation, particularly with respect to benefit of CFC’s deemed-paid FTCs.

Benefits of Code Section 962 Following TCJA» Until proposed regulations were issued, it was not clear whether elections enabled benefitting from GILTI 50% deduction for

taxable years prior to 2026, subject to taxable income limitation. Proposed regulations confirmed election is available.» Inclusion (Subpart F, Transition Tax or GILTI) taxed at current favorable corporate tax rates (21%) rather than individual tax

rates (maximum rate of 37%).» GILTI deduction (50% for tax years prior to 2026).» 80% deemed paid FTCs offset U.S. income tax.» Upon distribution by CFC of CFC income for which a Section 962 election was made, individual U.S. Shareholder is subject

to U.S. federal income tax at individual tax rates on the amount distributed that exceeds U.S. tax (at corporate tax rate) paid by the individual U.S. shareholder (after taking into account deemed-paid FTC); viz., 23.8% rate for distributions from treaty-protected CFCs, but ordinary tax rates (maximum rate of 37% + 3.8%) for distributions from non-protected CFCs.

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Proposed Foreign Tax Credit Regulations

» On November 28, 2018, IRS and Treasury released proposed regulations providing guidance to determine allowable foreign tax credits (“FTCs”).

» Proposed Regulations: ˗ Attempt to conform TCJA changes with respect to a number of Code Sections, including Code Sections 78,861, 904, and

906.˗ Address certain FTC issues that arose prior to TCJA.˗ Include rules requiring allocation of expenses to new GILTI basket for purposes of determining a U.S. taxpayer’s FTC

limitation.• However, see Treasury relief allowing taxpayers to treat a portion of Code Section 951A inclusion and related foreign

corporation stock as exempt income and an exempt assets, respectively, for Code Section 904 purposes.˗ Provide gross income offset by Code Section 250 deduction is treated as exempt income, and stock giving rise to GILTI

inclusion is treated as a partially exempt asset for purposes of expense allocation and apportionment rules.˗ Provide that domestic corporation’s gross income that is foreign-derived intangible income (“FDII”) is also treated as exempt

income based on the amount of the Code Section 250 deduction allowed.• Value of domestic corporation’s assets that produce FDII for expense allocation and apportionment purposes to account

for fact that a portion of income from such assets is treated as exempt.• Exempt portion of assets equal to the amount of such corporation’s FDII-producing assets multiplied by a fraction that

equals the amount of its deduction allowed under Code Section 250(a)(1)(A) (taking into account any reduction under taxable income limitations of Code Section 250(a)(2)(B)(i)) divided by its total FDII for the year.

• Treating FDII-producing assets as tax-exempt assets for expense allocation purposes may offset some of the benefits associated with treating a portion of CFC stock giving rise to GILTI as exempt.

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Proposed Foreign Tax Credit Regulations» Introduced new CFC stock characterization rules, which allocate and apportion deductions for the purposes of

Code Section 904, under either the asset method, which includes a five-step process for characterizing CFC stock, or the modified gross income method.˗ The five-step process involves allocating the CFC stock to various groupings based on the type of income that the stock of the

CFC generates, has generated or may reasonably be expected to generate.

» Other Special Allocation Rules:˗ Research and Experimental Expenditures˗ Specified Partnership Loans˗ Revised CFC Netting Rule˗ Worldwide Affiliated Group Rules

» FTC Limitation and Basketing Rules˗ TCJA introduced two new FTC baskets – the GILTI basket and the foreign branch basket

• In relation to these two baskets, the proposed regulations provide additional rules dealing with the following: Carryover of Unused Foreign Taxes Carrybacks Overall foreign loss, Separation Limitation Loss and Overall Domestic Loss

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TCJA introduced new foreign branch basket in Code Section 904(d)(1)(B).» Foreign branch income is defined as business profits of a U.S. person attributable to one or more qualified business units (“QBUs”) as defined in Code

Section 989(a).» Proposed regulations:

˗ Provide guidance on foreign branch definition and items of gross income attributable to a foreign branch.˗ Modify the QBU definition for purposes of the foreign branch basket.

• First, the trade or business may be outside the U.S.• Second, activities that give rise to a permanent establishment in a foreign country under a relevant U.S. tax treaty are presumed to constitute a trade

or business.• Third, disregarded activities are considered in determining whether a trade or business exists.• Fourth, a partnership or trust must have a trade or business;• Fifth, separate books and records are not required for partnerships and trusts to constitute a QBU.

˗ Provide that gross income is attributable to a foreign branch to extent gross income is reflected on separate books and records of foreign branch, but exclude the following items from the foreign branch basket:• Items of income from activities carried on in U.S.• Items of income arising from stock, including subpart F inclusions, GILTI inclusions, etc.• Gain realized on disposition of a disregarded entity, partnership, or other pass-through interest.

˗ Clarify that the QBU’s books and records will be adjusted to conform to federal income tax principles, and provide adjustments to reallocate income between the general basket and the foreign branch basket to reflect disregarded transactions.• Adjustments do not change the total amount, character, or source of the U.S. person’s gross income.• Adjustments for disregarded payments from a branch to its branch owner are determined first, followed by adjustments for disregarded payments from

a branch owner to its branch.

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Items Resourced Under a Treaty

» In 2010, Code Section 904(d)(6) was enacted to create a separate section 904(d) basket for each item of income that is: (1) U.S. source under domestic law; (2) resourced as foreign source under the relevant income tax treaty; (3) and the taxpayer elects to benefit from such treaty.

» Proposed regulations provide that items of income under the same treaty can be grouped together (rather than requiring separate baskets for each item of income resourced under the same treaty).

» Also clarify that Code Section 904(d)(6) applies to items of income resourced under a competent authority agreement.

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Code Section 965 - Transition Tax

» On February 5, 2019, Treasury and IRS issued final regulations on Section 965, relating to transition tax (also known as deemed repatriation tax) (“Transition Tax”).

» Purpose of Transition Tax˗ Section 965 was a mechanism to smooth the transition to the participation exemption system of taxation. ˗ Transition Tax was a one-time increase in the subpart F income of certain foreign corporations.

» Who is impacted?˗ 10% U.S. Shareholders (corporate and individuals) of a Specified Foreign Corporation (“SFC”) which is defined as:

• (1) Controlled Foreign Corporations (“CFCs”)• (2) Foreign Corporations with at least one 10% U.S. Shareholder that is a domestic corporation (other than a PFIC that is not also a CFC)

» What is the Transition Tax? ˗ Under Section 965, deferred foreign income corporation (“DFIC”) was required to increase subpart F income in its last taxable year that

began before January 1, 2018, by the greater of its “accumulated post-1986 deferred foreign income” as of November 2, 2017 or December 31, 2017 (“E&P measurement dates”).

˗ A DFIC is a SFC of a U.S. shareholder that has accumulated post-1986 deferred foreign income greater than zero as of an E&Pmeasurement date.

˗ A U.S. shareholder of a DFIC must include in gross income its pro rata share of DFIC's Section 965(a) increase in subpart F income. Adjustments to Section 965(a) inclusion amount under Section 965(b) and Section 965(c).

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» Transition tax applies even though individuals not eligible for participation exemption.» S corporations that are U.S. Shareholders of a CFC can elect to defer until triggering event.» Rates (assume calendar year):

˗ 17.5% (cash)˗ 9.1% (non-cash)˗ 3.8% NIIT (generally upon repatriation)

» Inclusion created previously taxed income (PTEP)» U.S. Shareholders had an option to elect to defer (Section 965(i)) or to pay the Transition Tax in installments (8-year

installment election) (Section 965(h)). ˗ However, certain triggering events or acceleration events can cause the unpaid portion of Transition Tax liability to become immediately due.

Triggering events or acceleration events include:• ◾Failure to make an installment payment;• ◾Liquidation, sale, exchange or disposition of substantially all assets of the taxpayer;• ◾Cessation of business;• ◾Change of an individual status as U.S. person;• ◾Death of the taxpayer;• ◾Joining a U.S. consolidated group; and• ◾Deconsolidation of a U.S. group.

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» Certain events may not cause the Transition Tax liability to be accelerated or triggered, provided that specific requirements are satisfied, one of which includes, when an eligible transferor and eligible transferee enter into a transfer agreement.

» A transfer agreement to be filed within 30 days of the acceleration/triggering event. » The transfer agreement process for taxpayers making Section 965(i) elections is only available for a “covered triggering

event.”» Eligible transferor must attach Form 965-A or Form 965-B to the transfer agreement (if the transferor was required to file

Form 965-A or Form 965-B). ˗ Form 965-A or 965-B not required to be filed until due date of 2018 income tax return, but taxpayers filing transfer agreement before the due

date of their 2018 income tax return should consider submitting the applicable form with their transfer agreement.

» The Final Regulations require for transfer agreements to include a statement as to whether the "leverage ratio" of the eligible Section 965(h) transferee or eligible Section 965(i) transferee immediately after the acceleration event or triggering event exceeds three to one. The term "leverage ratio" is defined as the ratio the eligible transferee's total indebtedness bears to the sum of its money and the adjusted bases of all other assets reduced (but not below zero) by the total indebtedness.

» Final Regulations provided relief for taxpayers who made Section 965(h) or Section 965(i) elections for their 2017 Transition Tax liability, and who may have had an acceleration or triggering event on or before the Final Regulations were issued by giving taxpayers until March 7, 2019 to file transfer agreements.

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PFIC Proposed Regulations

» Published July 11, 2019 (Reg-105474-18)

» Provides guidance on various aspects of the passive foreign investment company ("PFIC") rules under Code Sections 1291, 1297, and 1298.

» Applicability Date: Proposed to apply to taxable years of U.S. persons beginning on or after the date that the rules are published as final regulations, but "until these regulations are finalized, taxpayers may choose to apply these proposed regulations…in their entirety to all open tax years as if they were final regulations provided that taxpayers consistently apply the rules of these proposed regulations."

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PFIC Classification and Tax Consequences

» A foreign corporation (referred to as a "Tested Foreign Corporation" or "TFC" under the Proposed Regulations) is classified as a PFIC if it meets either of the following tests in any given year:˗ Income Test: 75% or more of the corporation’s gross income is passive income; or˗ Asset Test: 50% or more of the corporation’s average percentage of assets are passive assets

» Negative U.S. federal tax consequences are triggered upon the disposition of PFICstock and upon receipt of certain distributions ("excess distributions")

» Taxation at highest ordinary income tax rates (37%) + interest charges» "Once a PFIC, Always a PFIC"

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Summary of Proposed Regulations» Clarify which exclusions from passive income under the Subpart F rules (Code Section 954(c)) are relevant for PFIC

purposes.˗ Not available for PFIC purposes is 954(c)(3) ("related person payments"); 954(c)(6) ("look through exception"); 954(i) ("active

insurance exception")˗ More liberal application of active rents/royalty exception as the TFC can take into account the activities of officers, directors, and

employees of the TFC and any other FC or pship of which the TFC owns more than 50%.

» Specify that various look-through rules under the CFC rules are irrelevant for PFIC testing purposes, and that the only look-through rules under the PFIC provisions are to be used for PFIC testing purposes

» Discussion in more detail the operation of the PFIC look-through rule for 25% subsidiaries, including domestic subsidiaries, and payments from related parties.

» Provide that an interest of less than 25% in a partnership is a passive asset and produces passive income for PFICtesting purposes.

» Clarify application of attribution rules for purposes of determining whether a partner in a partnership is subject to the PFIC rules when the partnership owns PFIC stock through a non-PFIC foreign corporation. Apply rules on a "top down" approach as opposed to "bottom up" approach.

» Guidance on the change of business exception and qualified stock exception.» Clarifications on measuring assets for the Asset Test.» Additional guidance for insurance companies.

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Reaction to Proposed Regulations

» Practitioners waiting for many years on further guidance» Generally taxpayer friendly» Continues "aggregate approach" of partnerships taking place in various post-TCJA guidance

˗ Note: Interaction with final and proposed regulations issued in June 2019 for taxation of partners investing in foreign corporations through domestic partnerships will result in more minority US shareholders in PFICsituations without the benefit of PFIC/CFC overlap rule under Section 1297(d)

» Do not address unanswered questions related to attribution through discretionary foreign nongrantortrusts

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» New Code Section 267A denies a deduction for interest and royalties paid to related parties in connection with a hybrid transaction, including amounts paid by, or to, a hybrid entity.˗ Interest or royalties cannot be deducted under the provision to the extent there is no corresponding income inclusion

to the related party under the tax law of the country where the related party is resident or otherwise subject to tax, or to the extent such related party is provided a deduction in the local country.

˗ Section 267A(e) provides Treasury broad, open-ended authority to issue regulations or other guidance to address situations involving conduit arrangements, branch transactions, structured transactions, tax preference items, participation regimes and dual residence situations, and other areas.

» Purpose˗ Introduced in response to international concerns regarding hybrid arrangements used to achieve double non-taxation.˗ TCJA’s legislative history explains that Code Section 267A is intended to be “consistent with many of the approaches

to the same or similar problems [regarding hybrid arrangements] taken in the Code, the OECD base erosion and profit shifting project (“BEPS”), bilateral income tax treaties, and provisions or rules of other countries.

˗ Action 2 of the BEPS project, and two final reports thereunder, address hybrid and branch mismatch arrangements.

Code Section 267A

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Code Section 267A Cont.

» On December 20, 2018, the IRS and Treasury issued proposed regulations under Code Section 267A, which addressed certain items, included the following:˗ Implement provisions that deny the Code Section 245A DRD with respect to a hybrid dividend received by a

domestic corporation from a CFC. ˗ Provide rules related to hybrid dividends of tiered corporations and require an inclusion under Code Section

951(a) with respect to a hybrid dividend received by a CFC from another CFC in a tiered structure to the extent that the amount would be a hybrid dividend if the receiving CFC were a domestic corporation.

˗ Define “specified payment” and “specified parties” for which a deduction for interest and royalty would not be allowed.

˗ Provide rules for determining amount of a deduction / no inclusion (“D/NI”) outcome.˗ Address timing differences, for example, from different methods of accounting.˗ Introduce examples and guidance on application of hybrid transactions, disregarded payments, deemed

branch payments, reverse hybrids, and branch mismatch payments.˗ Mandate link between hybridity and D/NI outcome

• Proposed regulations provide that a D/NI outcome gives rise to a disqualified hybrid amount “only to the extent that the D/NI outcome is a result of hybridity.” Note no corporate income tax example.

˗ Define “interest” and “royalty” for purposes of applying the anti-abuse rule.˗ Introduce an anti-avoidance provision.

» Law firms being "hacked" is not a question of "if", but rather "when".» Infamous hacking of a prominent Panama law firm (Panama Papers) and prominent Cayman law firm

(Paradise Papers).» US law firms are not immune. The American Bar Association’s 2014 Technology Survey reports that

13.8% of all responding attorneys reported that their firm had suffered a security breach at some time.» A number of ABA and Florida Opinions discussing lawyer's duties in light of technological advances and

cybersecurity threats.» ABA Model Rules and Florida Rules were updated after 2012 to require attorneys using technology to

take competent and reasonable measures to safeguard client data. This duty extends to all use of technology, including computers, mobile devices, networks, technology outsourcing, and cloud computing. This duty is already described in several existing Comments, but the Commission concluded that, in light of the pervasive use of technology to store and transmit confidential client information, this existing obligation should be stated explicitly in the black letter of Model Rule 1.6.” ABA Commission on Ethics 20/20, Report to Resolution 105A Revised, Introduction (2012).

» Does Florida lawyer have a duty to determine sufficiency of a non-US lawyer's security protocols to prevent disclosure of client's confidential information?

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US Lawyer's Duty Re Non-US Lawyer's Security Protocols

» Duty of Competence: To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, engage in continuing study and education, including an understanding of the benefits and risks associated with the use of technology, and comply with all continuing legal education requirements to which the lawyer is subject. Fla. Rule 4-1.1, Comment

» Duty of Confidentiality: A lawyer must make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client. Fla. Rule 4-1.6(e)˗ Requires a lawyer to act competently to safeguard information relating to the representation of a client against

unauthorized access by third parties...The unauthorized access to...does not constitute a violation if the lawyer has made reasonable efforts to prevent the access.... When transmitting a communication that includes information relating to the representation of a client, the lawyer must take reasonable precautions to prevent the information from coming into the hands of unintended recipients. This duty, however, does not require that the lawyer use special security measures if the method of communication affords a reasonable expectation of privacy. Special circumstances, however, may warrant special precautions. Factors to be considered in determining the reasonableness of the lawyer’s expectation of confidentiality include the sensitivity of the information and the extent to which the privacy of the communication is protected by law or by a confidentiality agreement. A client may require the lawyer to implement special security measures not required by this rule or may give informed consent to the use of a means of communication that would otherwise be prohibited by this rule. Fla. Rule 4.1.6, Comment

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US Lawyer's Duty Re Non-US Lawyer's Security Protocols

» ABA Formal Opinion 477R (May 11, 2017, revised May 22, 2017) : Reasonable steps as guidance:˗ Understand the nature of the Threat: Higher risk scenarios generally means that greater effort is warranted.˗ Understand How Client Confidential Information is Transmitted and Where It Is Stored: Each access point, and each device, should be

evaluated for security compliance.˗ Understand and Use Reasonable Electronic Security Measures: A lawyer should understand and use electronic security measures to

safeguard client communications and information (e.g., secure internet access methods to communicate, access and store client information)˗ Determine How Electronic Communications About Clients Matters Should Be Protected: Different communications require different levels of

protection. And, the lawyer should warn the client about the risk of sending or receiving electronic communications using a computer or other device, or email account, to which a third party has, or may gain, access

˗ Label Client Confidential Information (e.g., label emails as "Privileged and Confidential")˗ Train Lawyers and Nonlawyer Assistants in Technology and Information Security.˗ Conduct Due Diligence on Vendors Providing Communication Technology: Does the vendor have proper security protocols in place?

» Ask non-US lawyer regarding their security protocols and any recent breaches.» Discuss with client in advance what information will be shared with non-US lawyer and get client consent if any doubts.» Schedule phone calls and limit sending of confidential information through email.» If necessary, send encrypted or upload to reasonably secured shared information platform.» Remember not all non-US jurisdictions have same level of attorney-client privilege protections, and some jurisdictions have

"snitch" rules.» If there is a breach take all measures required under the rules and relevant law to inform the client.

Best Practices

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Questions?

Stewart L. Kasner, PartnerHolland & Knight [email protected]

Jennifer J. Wioncek, PartnerBilzin [email protected]

Lauren A. Klein, AssociateHolland & Knight [email protected]

The materials contained within this presentation do not constitute legal advice and are intended for informational purposes only.These materials are not intended to be an advertisement and any unauthorized use of the materials is at the user's risk.Reproduction, distribution, republication and retransmission of any materials contained within are prohibited without the expresswritten consent of Bilzin Sumberg Baena Price & Axelrod LLP or Holland & Knight LLP.

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