Mandatory Transition Tax on Overseas Retained Earnings

As part of the recently ratified Tax Reform, the Treasury Department and the Internal Revenue Service issued a newly enacted section 965 of the Internal Revenue Code, which imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies and Individuals by deeming those earnings to be repatriated.

This means, that if you are a US shareholder or tax resident who directly or indirectly owns more than 10% of the shares of a foreign company, you are most likely subject to this mandatory transition tax.

The transition tax will be calculated on the foreign company’s retained earnings as of October 30, 2017 or December 31, 2017, whichever is greater. Foreign earnings held in the form of cash and cash equivalents will be taxed at a 15.5% rate, and the remaining earnings will be taxed at an 8% rate. For individuals the rate will be 17.5% on earnings and profits related to cash assets, and 9.1% on the rest of the accumulated earnings and profits.

To facilitate the payment of taxes, the law allows you to pay the balance in installments over an eight-year period. The first payment should be sent to the Internal Revenue Service before April 17, 2018 to avoid penalties and interest.

This law is a great opportunity for Americans to repatriate their retained earnings abroad at a discount rate and payable on installments.

To help you understand the new transition tax laws, we have compiled several articles, updates and commonly asked questions on this transition tax law that you can use to analyze your situation:

Transition Tax Resources


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