Category Archives: Tax

Ministry Of Finance Publishes Its View On Certain Aspects Relating To Private Equity Funds

Articles, Latest News, Tax

With the amendment of the Austrian investment fund regime by virtue of including alternative investment funds into its scope, the tax aspects of re-qualifications of existing (private equity) vehicles into investment funds and thus the application of the Austrian investment fund tax regime were rather unclear. With a newly-published opinion, the Austrian Ministry of Finance has now shed some light on its view on selected tax aspects of such re-qualification.

Background

Austrian tax law provides for a specific tax regime for investment funds. This regime is in particular characterised by the fact that an investment fund is not treated as a separate taxable entity, but rather as a look-through vehicle, with any income being taxable on the level of the investors. Such view applies to both Austrian and non-Austrian investment funds.

In the course of the 2013 enactment of the Austrian Alternative Investment Funds Managers Act (“AIFMA“), which implements the provisions of the EC Directive 2011/61/EC on Alternative Investment Fund Managers (“AIFMD“) into Austrian law, significant amendments were made to the definitions of the terms “Austrian investment fund” and “foreign investment fund” for tax purposes. Both terms now also comprise alternative investment funds that may be set up as a corporation, partnership, fund structure or any other type of vehicle, irrespective of their residence — and thus be possibly subject to the Austrian fund taxation regime. Considering the structures that the AIFMD targets in particular, these amendments are of significant importance for private equity fund vehicles.

As a result of the rather broad definition of the term investment fund for Austrian tax purposes, also those entities set up as corporations may be regarded as investment funds from a tax perspective, in particular if they fulfill the criteria of an alternative investment fund. As a result, these corporations may be recharacterised into look-through entities for tax purposes. Besides other tax-related topics, the potential tax aspects of such recharacterisation, in particular taxation of hidden reserves on the level of the corporate fund vehicle, had been discussed in legal writings, but the Austrian tax authorities had not provided any guidance in this respect.

Austrian Ministry of Finance on recharacterisation of entities into investment funds

Just recently, the Austrian Ministry of Finance published its opinion on specific aspects relating to the amendment of the Austrian investment fund tax regime in the course of the enactment of the AIFMA.

In relation to an Austrian corporation that qualifies as an alternative investment fund for Austrian regulatory purposes, the Ministry of Finance takes the view that such qualification is also binding for Austrian tax purposes. As a result, the Austrian corporation loses its shielding effect for Austrian tax purposes and will instead become subject to the Austrian investment fund tax regime. Pursuant to the Austrian Ministry of Finance’s view, this development leads to the realisation of any hidden reserves on the level of the Austrian corporation and thus to a 25% Austrian corporate income tax falling due on any difference between the fair market value and the book value of the corporation’s taxable assets. Assets that are comprised by a tax exemption (eg qualified participations in non-Austrian subsidiaries) remain tax-exempt. On the level of the shareholders, no taxable event is assumed.

As a result of the Austrian corporation’s qualification as an alternative investment fund, its “distributions” will no longer be treated as dividends, but rather as distributions from an investment fund, which trigger Austrian withholding tax in case a credit institution acts as a paying/depository agent. The notification obligations of the fund (or the investor, as the case may be) must be complied with in order to avoid a lump-sum taxation of future “deemed” distributions on the level of the investor according to Austrian fund taxation rules.

In addition to the potential tax aspects of a re-qualification of Austrian or non-Austrian partnerships into (alternative) investment funds addressed in the note, the Ministry of Finance maintains its view that if eg a German corporation is treated as an alternative investment fund for (German) regulatory purposes, such qualification will be relevant for Austrian tax purposes, irrespective of the actual tax treatment of such vehicle in Germany. Any income of such German vehicle will thus directly be attributed to the investors from an Austrian tax perspective, which may entail a conflict of income attribution between Austria (where income is attributed to the investors) and Germany (where income is attributed to the vehicle itself). Based on tax treaty law principles, Austria as the investors’ state of residence will in this scenario be obliged to eliminate double taxation implications.

The publication of these statements is helpful for practitioners active in the private equity environment, although there are still a number of open tax issues yet not discussed with or clarified by the Austrian Ministry of Finance in the aftermath of AIFMA’s introduction.

Ireland Ready For VAT Mini-One-Stop-Shop

Articles, Latest News, Tax

Ireland is preparing for the application of the new EU VAT Mini-One-Stop-Shop (MOSS) regime.

The MOSS scheme will apply to businesses that supply telecommunications, broadcasting and electronic services to consumers in Europe. Rather than registering for VAT in each jurisdiction where a business makes supplies of these services to consumers, the MOSS will allow businesses to submit returns and pay the relevant VAT due to member states to the tax authorities of one member state. The MOSS scheme will come into effect on January 1 2015.

The Irish tax authorities have sought to ensure that the implementation of MOSS is as smooth as possible. With this in mind, they have issued detailed guidance and indicated their willingness to engage with any businesses who wish to discuss the application of the MOSS scheme to their business.

It is particularly important that Ireland provides a comprehensive and reliable implementation of the scheme due to the large number of providers of electronic services already based in Ireland.

Other developments

A number of other practical changes regarding Irish VAT have been made during the course of 2014:

  • New rules now require the repayment by taxpayers of amounts of VAT reclaimed where the relevant invoice remains unpaid for a period of six months. This will require closer monitoring by taxpayers of unpaid invoices to ensure that such VAT repayments are correctly made.
  • In a further tightening of administrative obligations, the Irish tax authorities are requiring the timely filing of taxpayers’ annual Returns of Trading Details. The purpose of such returns is to summarise a taxpayer’s taxable activities for the previous 12 months so that it may be reconciled against their regular bi-monthly VAT returns. The Irish tax authorities have now stated that no repayments with respect to VAT or any other taxes will be made where a taxpayer’s most recent Return of Trading Details remains outstanding.
  • As sales of property gain pace in Ireland once again, the Irish tax authorities have produced further welcome clarification as to the application of transfer of business relief to sales of property. These clarifications are particularly important as transfers of large portfolios of property are now beginning to take place and the VAT treatment of such transfers can have more long term effects compared to many other business transfers.

This article first appeared online at International Tax Review, 30 October 2014.

When Requesting The Abatement Of Penalties For Failure To File International Information Returns Can Be A Trap For The Unwary

Articles, Latest News, Tax,

A letter from the Internal Revenue Service (IRS) threatening to impose substantial (some would say draconian) penalties can be a harrowing experience for any taxpayer or their advisor. A natural reaction would be to send a letter or make a phone call to the IRS requesting that the penalty be either abated or not assessed. Although this letter (as all letters from the IRS) must be taken seriously, a trap for the unwary exists in challenging those penalties prior to receiving the final notice in relation to the information return penalty. Failure to wait may cost a taxpayer the opportunity to request a Collection Due Process (CDP) hearing, generally a very effective forum, and reviewable in a court of law.

What is a CDP Hearing?

A CDP hearing is generally offered by the IRS after the imposition of a tax lien or before the execution of a levy and is held with the IRS Office of Appeals (“Appeals”). If a hearing request is timely and proper, an Appeals Officer will be assigned and a hearing held.

Appeals is quasi-independent and separate from the IRS collection office that is threatening adverse action. As such, the value of presenting your case to this more neutral party cannot be overstated. Appeals will review your case from a new/fresh perspective and listen to your arguments for abatement and/or presentation of alternatives to the adverse collections activity. Although the manner in which a CDP hearing should be prepared for and conducted is beyond the scope of this article, preparation is of the utmost importance and should be much the same as preparing for a trial.

Key to the CDP process is that while the hearing is pending, and until the decision of Appeals in your case becomes final, the IRS should not take any adverse actions relating to the liability being protested. Further, if you disagree with Appeals’ decision you may file a petition to have your case heard in US Tax Court. Generally, these cases take a very long time to sort out and become final, such that adverse actions/enforced collections can begin.

CDP Hearing in the Context of Certain International Information Penalties

Amongst what many consider to be International Information Penalties (IIPs), the penalty that is the most widely known and gets the most attention is the penalty for failing to file a Foreign Bank Account Report (FBAR) aka FinCen Form 114. The FBAR penalty is NOT a penalty that will be afforded the opportunity to request a CDP hearing and, as a result, many are unaware that some of the other IIPs should be afforded the opportunity to request a CDP hearing.

The hearing should be offered prior to the imposition of penalties for failure to file required returns, reporting:

  • The ownership of or transactions with a foreign corporation or partnership;
  • Transactions with foreign trusts;
  • Foreign owned entities engaged in a US trade or business; and
  • Specified foreign assets owned by a US taxpayer.

The Opportunity to Request a CDP Hearing and Obtain Judicial Review may be Lost Forever

The proposed imposition of IIPs is frequently met with panic and an urge to “make them go away” as soon as possible. Where the above IIPs (again excluding the FBAR) are involved, that impulse should be resisted until the final notice that affords the opportunity to request a CDP hearing is received. Importantly, should a penalty abatement be requested prior to that final notice, the IRS will generally take the position that because you had a prior opportunity to contest that penalty, a CDP hearing in relation to that issue is waived forever.

Summary

Knee-jerk reactions when dealing with the IRS are frequently ill-advised but especially so where that reaction can cause one’s client or oneself to be unable to take advantage of an important opportunity to be heard. If the decision is made to wait in order to take advantage of a CDP hearing, it is of critical importance to be certain that: the penalty threatened is one that will indeed qualify for review in a CDP hearing; and that the request is properly and timely filed.

Footnotes

Throughout this article the reader will note that I use “should” as opposed to “will” when it comes to certain IRS actions. I do this because although IRS policy states that certain penalties will be afforded the opportunity to request a CDP hearing, too frequently the IRS (perhaps) mistakenly does not follow its own guidance.

Tax Legislative Outlook For The Lame-Duck Session

Articles, Latest News, Tax,

There has been plenty of speculation as to what will happen in the 114th US Congress, with the House and Senate both under Republican control and President Barack Obama in his last two years in office. But before the new Congress arrives on Jan. 3, 2015, the old Congress is returning for a post-election, “lame-duck” session.

If one takes at face value all of the statements made by members of Congress and interested parties regarding what they expect (or at least hope) Congress will do in the lame-duck session, the lame-duck session will be a complete 180-degree turn in productivity, with Congress quickly settling disputes and finding common ground on issues and legislation where agreement has previously eluded them.

In this article, we do not seek to reconcile or evaluate all of those suggestions, threats and vows. Rather, this article observes that, rhetoric aside, lame-duck sessions dealing with expiring tax provisions have become the norm and describes how Congress is expected to deal with tax provisions in the lame-duck session, notwithstanding what may be said or hoped.

Three basic principles should be kept in mind. First, there is very little time in the lame-duck session to deal with the issues before Congress. “Must-do” items will necessarily take up most of Congress’ time and attention, leaving little opportunity for congressional leaders to focus on “discretionary” items.

Third, there will be strong resistance to doing exactly what was done in previous years. Particularly in light of the election results and a surly electorate that sees the country on the wrong track, there will be a need to demonstrate that this is not “business as usual.” So, in dealing with the extenders, members will need to show (or at least credibly say) that the results this time were different. Changes need not be big but they have to be symbolic.

A Lot to Do and a Short Time to Do It

Congress must pass a bill continuing to fund the federal government before Dec. 11 and must also deal in the lame-duck session with other expiring (or, in the case of most extenders, expired) provisions of law. Of course, Congress could, assuming the president agreed, pass short-term extensions simply to get them into the next Congress and deal in earnest with spending, taxing and regulatory decisions then. However, statements by Sen. Mitch McConnell and Speaker John Boehner have made clear that Republicans in Congress want to take advantage of their increased numbers in the next Congress to address their own issues and priorities.

If Republican members want to focus on issues of their choosing, they must clear the decks as much as possible in the lame-duck session because they will not be able to emphasize new matters and legislation while dealing with the distractions of, and mixed communications sent by, the postponed, must-do items. So, there will be a strong incentive for both Republicans and Democrats, albeit for different reasons, to deal substantively with the must-do items and not just punt them to the beginning of the next Congress.

Because there will be limited legislative days in November and December to deal with these must-do items, they will take up most of the time available for serious negotiating and legislating. That leaves little time for tax measures that require significant negotiation and technical drafting to reflect the results of those negotiations.

What Can Be Postponed and What Cannot

The extenders that expired at the end of last year must be dealt with in the lame-duck session. They cannot be postponed to the new Congress without seriously delaying the tax filing season. The expiring Internet tax moratorium does not have the same looming tax return preparation concerns, but Congress is unlikely to let it expire for any significant period of time. The handful of tax provisions that expire at the end of this year do not have the same urgency as those that have expired, but it would be strange for Congress to deal with the bulk of the extenders and not address them as well, at least if the expired provisions are extended for more than one year.

Moreover, whatever Congress decides regarding the extenders, the drafting changes to existing law to implement those decisions would be minimal. That makes it possible to include extenders in a final legislative package, even if the decisions are made very late in the lame-duck session.

On the other hand, tax items that proponents hope to have addressed in the lame-duck session, such as the Marketplace Fairness Act, “repatriation” legislation and anti-inversion legislation, do not fall within this cannot-be-postponed category. Further, even if Congress wanted to deal with these issues in the lame-duck session, in contrast to the extenders and Internet tax moratorium, these proposals would require significant technical work once conceptual agreement is obtained. Proponents of these measure should not give up, but they should be realistic in their expectations.

Doing the Same Thing, But Differently

For each expired or expiring tax provision, Congress must decide whether to extend it and for how long. Many of these tax provisions have been extended temporarily several times now, leading to their moniker of “extenders.” Of course, this shared label obscures the differences among the provisions. Some, like the research credit, have existed in a “temporary” state for decades and are otherwise thought of as part of our permanent tax law. Others, like “bonus depreciation” are newer and were initially intended to be only temporary, but appear to have since earned “extender” status.

No one thinks it is a good idea to treat all of these disparate provisions the same way, but each time they have come up for extension, the same-size-fits-all approach has been the path of least resistance. None of these provisions is considered important enough to move on its own (if it had, it would have already) and none has been considered to be clearly unworthy of extension (otherwise it would have been allowed to lapse earlier). Giving them all the same extension date is not ideal either; it is widely acknowledged that for those provisions intended to affect long-term behavior, short-term and retroactive extensions significantly diminish their effectiveness. Nonetheless, when the fate of the extenders is not addressed until the end of the legislative session, it is invariably easier to give them all the same extension date than it is to prioritize among them.

Seeking to break this cycle, the House Ways and Means Committee took a different approach this year, voting to extend only some of the provisions and for those so chosen to make the extensions permanent. The full House ratified this approach, at least for some of the extenders. Meanwhile, the Senate Finance Committee voted to follow the more traditional temporary extension approach. The Senate Finance Committee started with extension of only a subset of extenders, but by the time mark-up was finished, nearly all of the extenders were included.

This has led some to debate whether the approach taken by the House Ways and Means Committee (fewer items, permanent extensions) will prevail over the approach taken by the Senate Finance Committee (nearly all expired and expiring provisions extended for a temporary period). While there is pressure to handle the extenders differently this year, the House approach is not likely to be adopted.

First, the administration has threatened to veto permanent extensions that are not paid for. Second, it is not realistic to expect Congress to be able to reach agreement in December as to which extender goes into which category, even if there were agreement as a conceptual matter. At the same time, however, there will be opposition to the Senate approach, which could be pejoratively characterized as “business as usual.”

A compromise between approaches would seem to be the most logical way to address these conflicting pressures. That would mean making some — if only a few — provisions permanent and letting some — if only a few — provisions expire or remain expired. If permanent extension (even if only for a lucky few) is not possible, then a long-term extension (such as five years) could be touted as a victory, at least politically (although any long-term extension would not have the revenue “baseline” implications as a permanent extension).

Permanent (or sufficiently long-term) extension of even one or two sufficiently symbolic extenders, such as the research credit, could be the means of distinguishing this year from previous years. The hardest aspect of this compromise approach would be deciding which extenders get left on the cutting-room floor. All of the expired and expiring provisions have defenders, and allowing a provision to remain lapsed could be contentious if it is a high-profile one as well. Indeed, some of the provisions that generate the most opposition, such as the production tax credit, also have some of the strongest support.

So, proponents and opponents of extenders should not delay in making their views known. Most extenders will likely get the same temporary extension as in previous years. But a lucky few may get made permanent and an unlucky few may get left behind. Considering the stakes, it makes sense to weigh in if you feel strongly about a particular provision. The odds of any particular extender getting treated differently than its peers may not be great, but it looks very possible that a few will be singled out. You will want your provision to be singled out for the right reason.

The Three Most Common Tax Traps For US Persons Moving To The UK

Articles, Immigration, Latest News, Tax,

There are a number of important US and UK tax issues that a US citizen or green card holder should consider prior to becoming a resident in the UK for UK tax purposes; however, many of these individuals fail to take advice prior to moving. This article discusses the three most common tax traps we see on a day-to-day basis when these individuals move to the UK without taking proper tax advice.

Tax Trap #3 – Improper investments

The US and UK each tax investments in different manners. An investment that produces a favourable tax result in one jurisdiction may produce a larger than expected tax bill in the other jurisdiction. Many US individuals come to the UK with existing relationships with US investment advisors who are unfamiliar with the UK tax issues, or unaware that the US individual has moved to the UK. It is also becoming increasingly common for US individuals to invest their assets directly without an investment advisor. Ultimately, there is usually a failure to consider the tax result in both jurisdictions, and this failure can result in additional to tax pay which would ultimately reduce the investor’s return.

For example, a tax free municipal bond may look like a wonderful investment for US federal tax purposes because the bond provides tax exemption from US federal income tax. In the UK, however, this investment does not benefit from a UK tax exemption so the UK taxation may decrease the attraction of the investment.

US individuals should be especially cautious if they invest in mutual funds or collective investment funds. A non-US mutual fund is usually a passive foreign investment company (PFIC) for US federal tax purposes. A US individual who owns a PFIC is subject to a punitive tax regime which is meant to put the taxpayer in a similar position to which he or she would have been if they had purchased a US mutual fund; however, the PFIC regime does a poor job achieving this objective. Various elections are available to the US individual which would allow him or her to be taxed on the PFIC income and growth on an ongoing basis; however, he or she is typically unable to make such an election either because the PFIC is not publicly traded or it does not provide the individual with the additional information required. Absent an election, the US individual pays tax at a higher rate, and is subject to an interest charge which is meant to approximate the deferral of the tax paid. Unless there is a very good investment reason for purchasing a PFIC, US taxpayers should avoid purchasing PFICs. A US individual who invests his or her assets directly without an advisor, or hires a local UK advisor who is unaware of his or her US tax status, will often purchase non-US funds, not realising that they are purchasing a US income tax disaster.

To complicate things further, the UK tax system subjects most non-UK funds to punitive taxation as well. US funds are likely to trigger a higher rate of UK tax for UK resident individuals. There are, however, a limited number of US mutual funds which also have a favourable tax status in the UK, and by purchasing these US funds it may be possible to avoid the punitive PFIC rules and reduce UK tax liabilities (although the investment credentials of such funds will need to be carefully considered).

To avoid these tax inefficient investments, the US individual should have his or her investment portfolio reviewed by qualified US and UK tax advisors to determine the tax consequences of current and future potential investments prior to moving across the Atlantic. We at Withers, unfortunately, do not give investment advice; therefore, if the US individual intends to hire an investment advisor, we recommend that he or she hires an investment advisor who is qualified to give both the US and UK investment advice, and who is familiar enough to spot the potential US and UK tax issues and to seek advice to avoid unexpected tax issues arising in the future.

Tax Trap #2 – Serving as trustee of a US trust

A US individual ordinarily moves to the UK without revising his or her estate plan. A typical US estate plan involves a US individual (a ‘settlor’) creating a revocable trust which the settlor funds during his or her lifetime to serve as a substitute for a will. The settlor is typically the sole beneficiary and trustee of the trust during his or her lifetime. The terms of the trust often allow the settlor to do almost anything that he or she could do with the trust assets if he or she continued to own the assets outright.

The settlor also executes a will which transfers all of his or her assets to the trust when he or she passes away. This is colloquially referred to as a pour-over will.

After the settlor passes away, the successor trustees or co-trustees hold the trust assets for the benefit of remainder beneficiaries in accordance with the terms of the trust. Trusts can be a useful vehicle to pass wealth to future generations. The revocable trust also can provide additional privacy, ease of administration, disability planning, and the avoidance of probate.

For US federal income tax purposes, the trust is a ‘grantor trust,’ which means the settlor is treated as the owner of all of the trust assets. The grantor of a grantor trust must include in his or her personal US tax computation all items of income, gain, deductions and credits generated from the trust assets.

For UK tax purposes, this very basic estate plan can cause a potential disaster. If the US individual becomes UK resident while he or she is sole trustee of the revocable trust, the trust will become a UK resident trust. The revocable trust will then be subject to UK income and capital gains tax on an arising basis. The aggregate amount of tax paid by the US settlor and the UK trustee is typically higher than it would be if the US settlor owned the assets outright. More worryingly, if the trust is UK resident and then becomes non-UK resident, for example because the settlor/trustee moves back to the US, then there will be a deemed disposal of trust assets from a UK tax perspective, which could trigger significant UK capital gains tax charges. UK tax advice should therefore be sought to avoid having the trust unintentionally become UK tax resident. For instance, consideration should be given to the settlor stepping down as trustee, or appointing additional non-UK resident co-trustees before moving to the UK.

Tax Trap #1 – Failing to file US tax returns

A US citizen or green card holder is taxed on his or her worldwide income no matter where he or she lives. The biggest mistake an individual can make is failing to file US federal income tax and informational returns and, therefore, failing to pay any US federal tax which would otherwise be due.

Substantial civil penalties exist for failure to file US federal tax and informational returns regardless of whether any tax is due. In addition to the punitive civil penalties, if an individual is aware that he or she must file a US tax return and he or she intentionally does not file, he or she has committed a crime.

Most individuals, however, do not possess the requisite intent which would otherwise give rise to a crime. Instead, they simply have a mistaken belief that they did not have to file, usually wrongly believing that either (i) the US tax system is based on residency in the form of physical presence and not citizenship, or (ii) the UK tax they have paid is higher than the US tax owed and is automatically credited against US tax and, therefore, he or she is under no obligation to file US tax returns because no tax would be due. These beliefs are clearly wrong, but may sound reasonable to an individual with no experience in US taxation.

If an individual has not been filing his or her US federal tax returns, he or she should act quickly to resolve the noncompliance. This mistake is so common that the IRS has created special procedures for US individuals who do not reside in the US to file delinquent tax returns. This program is referred to as the ‘Streamlined Filing Compliance Procedures,’ and it offers individuals who qualify the ability to file a limited number of delinquent US federal tax and informational returns without being subject to additional civil penalties or criminal prosecution.

The IRS also has an ongoing compliance program for individuals who knew they needed to file, but intentionally disregarded that legal obligation, and who therefore have potential criminal exposure. The Offshore Voluntary Disclosure Program offers a form of amnesty from criminal prosecution along with a fixed civil penalty framework which is more favourable than the potential civil penalties which the individual would be subject if audited by the IRS.

We strongly recommend that US individuals who have not filed past due US federal tax or informational returns come to our office and discuss their situation on a basis which preserves the attorney client privilege. This will ensure that they can make an informed decision on how best to forward with their US tax compliance obligations.