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New Transition Tax on Foreign Earnings


On December 22 of last year, Congress enacted new tax legislation that called for the imposition of a transition tax on the foreign earnings of certain international companies. The new law comes with a number of regulations and rules regarding the calculation of the tax, although many have yet to be published. The new rules are complex, so if you have questions about how the law could affect you or your business, it is critical to consult with an experienced tax attorney who can evaluate your situations and explain your legal rights and obligations.

Prior Law  

Prior to the passage of the transition tax amendment, profits that U.S. companies earned abroad were subject to federal taxes minus a credit for foreign taxes that had already been paid, although the earnings did not have to be taxed until repatriation. Essentially, this meant that a company’s taxes could be deferred until its foreign subsidiary had repatriated the profits to the parent company in the form of a dividend, which resulted in the accumulation of a large amount of untaxed foreign earnings. These earnings will now be subject to a tax under the new amendments with the rate being determined by the form that the earnings take.

Computing the Transition Tax 

Recently, Congress enacted a new amendment to the Internal Revenue Code, which places a transition tax on the untaxed earnings of foreign subsidiaries of U.S. companies. Under the new changes, earnings in the form of cash or cash equivalents are taxed at a 15.5 percent rate, while all remaining illiquid assets will be taxed at eight percent. Taxpayers will also be charged a lower rate on accumulated profits if those earnings have been productively re-invested abroad.

Although historically, these types of foreign earnings were not subject to federal income tax, the new rate is still lower than the general corporate tax rate. Furthermore, the transition tax does not need to be paid all at once, but can be paid in installments over an eight year period.

The IRS and the Treasury Department have yet to issue rules for determining how the amount of cash will be calculated, nor have they stated how the impact of intra-company transactions, such as distributions, on the foreign earnings that are subject to the transition tax will be determined.

Call Today for a One-on-One Consultation with an Experienced Florida Tax Attorney  

If you own stocks in a foreign subsidiary of a U.S. company, you may need to calculate a transition tax on foreign earnings. For an explanation of your rights and obligations in this regard, please call skilled Florida tax attorney Ronald Cutler, P.A. at 386-490-9949. We know how stressful tax season can be and so take great pains to help you schedule a consultation that fits in with your busy schedule. We are even happy to meet with you on weekends, so if you have questions about filing taxes or another tax-related matter, please call or contact our office online.