After the many e-mails and phone calls my office received in response to this prior article, I would like to share with the public at large my experience computing Trump’s repatriation tax and estimating the GILTI tax for my clients.
As a refresher of what we discussed in the last article, Trump’s tax reform imposes an exit tax on the accumulated profits of foreign corporations owned by US citizens. This means that if you have any undistributed profits in your foreign corporation as of the end of 2017, you may be subject to an onerous tax of up to 17.5% on these profits. The US government will also begin taxing the profits of your foreign corporation starting 2018 (this is called the GILTI tax). A full explanation on the mechanics of these taxes can be found here.
My CPA firm is licensed in the US and in Israel, and we have clients all over the world (with the majority based in Israel). From my recent experience estimating this tax for clients, I have concluded that the only American expats who really need to fear these taxes are those who own corporations in low tax jurisdictions. If you live in Israel and use a qualified CPA who understands the new tax rules, it is unlikely that you will be liable to repatriation taxes for several reasons:
- You have the option of making a Sec. 962 election to claim the foreign tax credit for corporate taxes paid in Israel on past profits.
- If you have been claiming the foreign tax credit on your Israeli salary in the last few years, you can use the foreign tax credit carryover to eliminate any tax left over.
- If you make a Sec. 962 election, you will still be taxed in the US on these profits when you take a distribution. But the good news (or bad, depending on how you look at it!) is that tax rate on dividends in Israel is 25%-30%, and your foreign tax credit will eliminate any tax due from these distributions.
Regarding the tax on future profits of your Israeli company (called GILTI), we believe that this tax can also be eliminated in most cases with proper tax planning. Without any tax planning, and even if you make a Sec. 962 election to claim the foreign tax credit against this tax, you may be subject to an additional 6.5% US tax on your company profits.
The content of this post is intended to provide general information on the subject and does not constitute legal or tax advice. You should consult with a tax professional where appropriate.