US Tax Reform Series -The Impact of the US Tax Reform on LATAM Families

Simon Beck and Seth Entin

STEP-Miami February 15, 2018

Agenda1 Introduction – Changes in Tax Law

2 How does this Affect Planning for NRAs and Grantor Trusts?

3 How does this Affect Planning for U.S. Family Members?

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1 Introduction – Changes in Tax Law

Individuals

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Individual rates and brackets Rates decreased; 37% maximum rate (retained 7 brackets)

Standard deduction Increased to $12,000 (Single), $24,000 (MJ)

Personal exemption Suspended

Carried interest 3-year holding period

SALT deduction Capped at $10,000 of state and local taxes

Estate, gift, and GST exclusion $11.2 million in 2018 (indexed for inflation); $22.4 million per married couple with portability election

AMT Retained with higher exemption amounts

Individuals provisions sunset in 2025 and pre-Act provisions apply beginning 2026

Individuals

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Miscellaneous itemized deductions

Suspended

Pease limitation Suspended

Net investment income tax 3.8% (retained)

Long-term capital gain and qualified dividends

0%, 15%, 20% (rates retained)

Individuals provisions sunset in 2025 and pre-Act provisions apply beginning 2026

Limitation on SALT Deduction

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• State and local tax deduction capped at $10,000 • Does not change deductions for state and local taxes paid or accrued in carrying

on a trade or business or investment activity • Deduction for foreign real property taxes suspended

Increased Estate & Gift Tax Exclusion

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• Increased estate, gift and GST tax exclusion to (expected) $11.2 million for decedents in 2018 and $22.4 million for married couples

• The increased exemption sunsets December 31, 2025 and pre-2018 levels apply with inflation adjustments

• Annual exclusion inflation adjusted to $15,000; $152,000 for non-citizen spouse • 1014 basis step-up retained • Valuation discount techniques should continue to apply • No change for nonresident, non-US citizens, who are subject to US estate tax

on real and tangible personal property located in the United States as well as on shares of US securities, to the extent such property exceeds $60,000

Business Tax Changes

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• 21% corporate tax rate • Reduced dividends received deduction • 100% deduction for adjusted basis of qualified property (including used property)

placed in service after September 27, 2017 and before January 1, 2023 (2024 for certain property); phase-out 2024 with sunset after 2026; shortened recovery period for real property

• Interest deduction limitation • NOL deduction limitation • 1031 like kind exchange treatment limited to real property • 20% deduction for pass-through income

Interest Deduction Limitation

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• Limits the deduction of net business interest to 30% of the taxpayer’s adjusted taxable income • “Adjusted taxable income” generally means EBITDA through 2021 and EBIT

starting 2022 (becoming less generous) • Disallowed interest is carried forward indefinitely • Exemption for electing real property trade or business • Exemption for business with 3-year average of $25 million gross receipts test

• Open questions • Attribution of trade or business through partnership • Aggregation and attribution for 3-year average $25 million gross receipts test

NOL Deduction Limitation

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• NOL deduction limited to 80% of taxable income • Carryforward allowed indefinitely • Carryback eliminated

Pass-through Business Income Deduction

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• 20% deduction for non-corporate taxpayers to effectively reduce the 37% marginal rate to 29.6% if the full benefit of the deduction applies

• 20% deduction capped at 50% of W-2 wages or 25% plus 2.5% of unadjusted basis of depreciable property during longer of depreciable tax life or 10 years

• Applies at partner level but partners receive allocable share of income, W-2 wages and unadjusted basis through the partnership

• W-2 basis limitation does not apply to taxpayers with taxable income below a threshold ($157,500 single, $315,000 MJ)

• Phase out for specified services trade or business owner with income over $315,000 (MJ); deduction eliminated for owner with income over $415,000 (MJ)

• Expires for tax years beginning after December 31, 2025

Gain on Sale of Partnership Interest by Non-U.S. Person

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• Non-US partner’s gain or loss on sale of interest in non-US partnership engaged in US trade or business treated as ECI • Codification of Rev. Rul. 91-32, overriding Grecian Magnesite • New withholding will require the sale of all partnership interests to be similar

to real estate closings (e.g., provide residence of seller)

ESBT

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• A nonresident alien individual can be a qualifying beneficiary of an electing small business trust (ESBT) effective January 1, 2018

Outbound International Tax

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• Changes to CFC tests • Modified territorial regime • GILTI • Deduction for foreign-derived intangible income and GILTI • BEAT

Modified CFC Tests

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• Expanded downward CFC attribution – Allows downward attribution of stock from certain foreign partnerships, estate, trusts, and corporations to US persons for purposes of determining CFC status • Retroactive effective date (January 1, 2017) means that this can trigger

transition tax • Eliminated 30-day “safe harbor” • Expanded definition of US shareholder of CFC – 10% of vote or value, rather

than just vote

Transition Tax

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• Deemed repatriation of deferred earnings and profits from CFCs and from any non-US corporation that is at least 10% owned by a US corporation • US corporate shareholders: 15.5% for cash and 8% for non-cash • US individual shareholders: 17.5% for cash and 9.05% for non-cash

• 962 election • 3.8% net investment tax

• Measuring date for E&P inclusion is greater of Nov. 2, 2017, or Dec. 31, 2017 • Installment payment and deferral without interest charge • Indefinite deferral is possible if non-US corporation is owned by an S corporation

until the occurrence of triggering events (conversion to C corporation, sale assets, liquidation, termination of business, and sale of shares)

GILTI

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• Global intangible low-taxed income (“GILTI”) regime taxes offshore income in excess of a deemed return • Taxes the aggregate net income of a US shareholder’s CFC’s income not

otherwise captured under the subpart F or ECI rules (“net CFC tested income”) less a deemed return on the tangible assets held by those CFCs used for the production of tested income in a trade or business (the “deemed tangible income return”)

• Inclusion operates like a Subpart F inclusion

Participation Exemption System

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• Foreign source dividends received by a US corporation are eligible for a 100% deduction

• US shareholder must be a 10% US shareholder by vote or value • If the dividend qualifies, the US shareholder cannot claim a foreign tax credit or

deduction with respect to the dividend • US shareholder must hold the stock for at least a year before ex-dividend date

and more than two years for preferred stock • Deduction is not available for “hybrid dividends” and dividends from PFICs • Effective beginning January 1, 2018

Base Erosion and Anti-Abuse Tax (BEAT)

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• The BEAT applies to corporations (other than RICs, REITs, or S corps) with gross receipts of at least $500 million over a three-year testing period and a “base erosion percentage” for the taxable year of at least 3% (2% for banks and registered securities dealers)

• Applies to US branches with effectively connected gross receipts of $500 million or more

• Base erosion minimum tax is the excess of 10% of the taxpayer’s modified taxable income over the taxpayer’s regular tax liability (reduced to 5% for tax years beginning in 2018 with increase to 12.5% for taxable years after 2025) (the percentage is 1 point higher for banks and registered securities dealers)

Foreign Derived Intangible Income (FDII)

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• Special deduction for a domestic corporation’s FDII • Pre-2026 – 37.5% of FDII (13.125% ETR on FDII) • Post-2025 – 21.875% of FDII (16.406% ETR on FDII) • Does not apply to earnings generated by a foreign branch

Treatment of certain Hybrid Transactions and Hybrid Entities

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• Denies a deduction for certain interest or royalties paid or accrued to a related party pursuant to a hybrid transaction or by, or to, a hybrid entity • Applies if the related party: (i) does not have a corresponding inclusion under the tax law of the

country of which it is a tax resident, or (ii) is allowed a deduction with respect to the amount paid under the tax law of such country

2 How does this Affect Planning of NRAs and Grantor Trusts?

Repeal of 30-Day Rule

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Basis: $10 million FMV: $100 million

NRA

GrantorTrust

Foreign Corp

U.S. & Foreign Stock

Repeal of 30 Day Rule Dilemma

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CTB Effective Immediately Following Death • Outside and inside basis step-up • $90 million of Subpart F income (ordinary income (37%) + Medicare

surtax (3.8%)) CTB Effective Immediately Prior to Death • Outside and inside basis step-up • No Subpart F • U.S. estate tax

Possibility #1

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NRA

GrantorTrust

• After death, weigh benefits of step-up/cleaning out earnings vs. estate tax exposure of foreign partnership

• Consider nonrecourse debt

• Don’t forget timely 754 election!

Foreign Corp

99% 1%

Foreign Corp

Possibility #2

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NRA

GrantorTrust

Foreign Corp A

Foreign Corp B

Foreign Situs Assets U.S. Situs Assets

• Foreign Corp A: - CTB effective pre-death

• Foreign Corp B: - CTB effective after death/

proration of Subpart F income

- Sell/buy assets regularly ▪ Distribute/recontribute?

Circular flow? - Consider domesticating +

“S” election (but beware of “sting” taxes)

- “S” corp. sale of assets + 1014 step-up = capital loss

- Note that now ESBT may have foreign beneficiaries

Repeal of 30 Day Rule Dilemma

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• Also consider irrevocable trust • But no basis step-up

US Real Estate Structures for Non-US Individuals

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US Corporation/ US LLC with CTB

US real property

Non-US Individual or non-US trust

Non-US Corporation

US real property

Non-US Individual or non-US trust

US Corporation/ US LLC with CTB

Non-US Partnership

US real property

Non-US Individual or non-US trust

US Partnership / US LLC with no corporate CTB

Non-US Corporation

0.2%

0.2%

99.8%

99.8%

US Real Estate Structures for Non-US Individuals

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• Corporations now more attractive because of 21% federal corporate tax rate ▪ But, Florida 5.5% corporate tax rate applies (deductible for federal

corporate tax purposes) ▪ Can liquidate without double tax

• Trusts and partnerships still avoid 30% dividend withholding tax, 30% branch profits tax, and Florida corporate tax

▪ Domestic trust is subject to 3.8% Medicare surtax

3 How does this Affect Planning for U.S. Family Members?

Modification of CFC Attribution

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Foreign Corp.

US Corp. Foreign Corp.

CFC as of 1/1/17

US Individual

Foreign Individual

Foreign Corp. US Corp.

CFC as of 1/1/17?

10% 90% 100%

Estate Planning

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• Planning with increased estate and gift tax exemptions • Sunset provisions mean that the need for planning remains • Utilize increased exemption before 2026 • Forcing inclusion in estate can provide income tax basis step-up with no estate tax

exposure if within limits • Allow for flexibility in estate planning documents so that executor/surviving spouse can

decide whether it is better to hold exemption amount in by-pass trust or rely on portability in order to achieve basis step-up

• Note that GST exemption does not qualify for portability • Valuation discount planning strategies remain

Estate Planning Next Steps

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• Review current estate planning documents • Do they accomplish your goals under current tax laws? • Would your plan be unnecessarily complicated and burdensome to

administer under new laws? • Flexibility is key when drafting planning documents

Estate Planning Documents for US Residents/Citizens

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Revocable grantor trust

All assets outright to spouse

Trustee

Disclaimer trust for spouse

Any assets spouse

disclaims to take advantage of

estate tax exemption

All assets if spouse desires full step up on his/her death and to rely on

portability

Revocable grantor trust

Credit shelter/GST trust for spouse eligible for QTIP treatment up to

$5.6M NY exemption amount

Trustee

Reverse QTIP trust to take full advantage

of $11.2M GST exemption

Additional $5.6M of assets

QTIP election only if spouse wants to get full step up on death, rely on portability, and forego NY

exemption

US Grantor

US beneficiaries (spouse and

children)

US beneficiaries (spouse and

children)

US Grantor

Retained if spouse

desires full step up on

his/her death and relies on

portability

Balance outright to spouse

Disclaimer trust for spouse

Any outright or QTIP assets

spouse disclaims to take

advantage of estate tax exemption

State Estate Tax

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• Currently 15 states still impose an Estate Tax • 6 states impose an Inheritance Tax • Maryland and New Jersey currently impose both • New Jersey’s Estate Tax exemption increased from $675K to $2 Million and is

slated to be eliminated in 2018, but the Inheritance Tax will remain • Some states have exemptions that are tied to the federal exemption • New York maintains $5 million exemption and cliff with no portability • Illinois has bills to mirror Federal law (HB0380), eliminate state law (HB0432)

and provide special accommodations (HB0648) • Just search “35 ILCS 405/2” under “Bills” at http://www.ilga.gov

State and Local Deductions

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• SALT deduction planning • States may restructure SALT taxes with heavier reliance on employee payroll

taxes, charitable contributions, business taxes • Consider utilizing business entities to maximize SALT deduction • Relocate to low or no tax states • Trust planning must focus on state tax reduction – NINGs, WINGs, DINGs

Planning with Corporations

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• Optimize lower 21% corporate tax rates • US domestic corporation can be an effective blocker where shareholder

does not need regular access to corporate earnings • SALT impact • Contribution of 28% capital gain property? • Corporate as partner in a partnership • Must consider personal holding company and accumulated earnings tax

implications • What activities and income should be earned through corporate form?

Modification of CFC Attribution

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Foreign Corp.

US Corp. Foreign Corp.

CFC as of 1/1/17

US Individual

Foreign Individual

Foreign Corp. US Corp.

CFC as of 1/1/17?

10% 90% 100%

Outbound Structures

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Foreign Co. US Corp.Foreign Corp.

Foreign Corp.

US Corp.

U.S.Individual

U.S.Individual

U.S.Individual

U.S.Individual

U.S.Individual

Foreign Corp.

962 Election

Outbound Structures

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• Check-the-Box • 37% flow-through (phantom income), with FTC • Capital gain or sale/undistributed income steps-up basis

• U.S. Individual/Foreign Corp. • Approximately 40% GILTI and Subpart F

• Asset sale triggers GILTI • No participation exemption • No indirect FTC

Outbound Structures

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• U.S. Individual/ U.S. Corp./ Foreign Corp. • 10.5% rate on GILTI • Indirect FTC on GILTI and Subpart F • Participation exemption (without FTC)

• No participation exemption on sale of stock of Foreign Corp., but may be able to plan to convert income to GILTI

• Double U.S. tax (corporate tax + shareholder tax)

Outbound Structures

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• U.S. Individual/ Foreign Corp./ 962 Election • Indirect FTC on GILTI and Subpart F • No participation exemption • 10.5% GILTI rate or 21% rate • Qualified dividend rates on distributions of previously taxed GILTI and

Subpart F? • Allows individual capital gains rates on stock sale

• Asset sale can trigger GILTI

Outbound Structures

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U.S. Corp. • 21% corporate tax rate • Lower 13.125% FDII rates (scope of FDII is narrower than GILTI) • Double tax

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The information and materials provided as part of this presentation are intended and provided solely for informational and educational purposes. Such information and materials are not intended for use as the basis of any legal or tax advice and should not be used as legal or tax advice. The views expressed herein are solely those of the authors, and should not be attributed to the authors’ firm or their clients.

Simon P. Beck Partner

Baker & McKenzie LLP 452 Fifth Avenue New York, NY 10018 Tel: +1 212 626 4751 Fax: +1 212 310 1751

Speakers

Seth Entin Shareholder

Greenberg Traurig 333 SE 2nd Avenue Suite 3300 Miami, FL 33131 Tel: +1 305 579 0615 Fax: +1 305 579 0717