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Learn how Galitzer & Associates´┐Ż knowledge of international tax laws can help you.

Recent Development

US Taxation of Shareholders of Israeli Companies

US Tax Reform of 2017 has imposed a Repatriation Tax on the retained earnings of non-US companies owned by American individuals or US companies. It is a one time tax on the retained earnings of such companies at December 31, 2017. This article briefly alerts the reader to this tax. (In addition to this one-time Repatriation Tax, the US tax reform act of 2017 also imposes an annual tax on such companies starting with 2018.) The hebrew article is from 'THE MARKER' paper.

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There has been much written regarding the US requirement that US citizens report detailed information about financial accounts outside the USA in which the citizen has a financial interest or signatory authority (even if not owned by that person). If the total value of all such accounts exceeded $10,000 at any time during the year, the citizen is required to file the FBAR (Foreign Bank Account Report) or else be subject to severe penalties. Those who have or have had foreign accounts and do nothing to resolve their unfiled foreign bank account reports, will have to continue to “look over their shoulders” for many years to come. No statute of limitations applies to unfiled tax returns and unfiled Foreign Bank Account Reports. It would be far better for US taxpayers to report their foreign financial accounts than worry about the IRS pursuing them.

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US Requirement to Report Foreign Financial Assets

The US has legislated filing requirements that, require many US citizens, US residents, non-citizens with valid Green Card status, and US Corporations, partnerships and LLC's to report Foreign Financial Assets ("FFA") in addition to the Foreign Bank Account Reporting ("FBAR"). This new FFA report (Form 8938) must be attached as part of the related US tax return and will be due when the related tax return is due (with extensions).

In addition to any financial account maintained at a foreign (non-US) financial institution which is reportable with the FBAR filing, the FFA filing includes:

  • Any financial asset held for investment even if not held in a financial account
  • Any stock or security issued by a non-US issuer
  • Any interest in a foreign (non-US) entity, and—
  • Any financial instrument or contract with a non-US issuer

The over-all total values of all such FFA's that cause one to be required to report are as follows:

If the taxpayer lives outside the USA and --

  Value at Year-end Value at any time in the year
Does NOT file a Joint tax return $200,000 $300,000
Does file a Joint tax return $400,000 $600,000

If the taxpayer lives in the USA and files a US tax return as --

  Value at Year-end Value at any time in the year
Single or Married fling Separate $50,000 $75,000
Married filing a Joint tax return $100,000 $150,000

Penalties that may be imposed for failure to file a complete, accurate and timely report include: 

  • $10,000 - $50,000 for failure to file a complete and correct Form 8938 when due.
  • 40% of the underpayment of tax involving an undisclosed FFA
  • 75% of the underpayment of tax involving an undisclosed FFA due to intentional failure to report
  • Criminal penalties may be assessed in addition to the above.

The new rules are very complicated, important and different than those we have become accustomed to under the FBAR regime. Let us know if we may be of assistance to you.

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In light of all the recent enforcement of new US filing requirements including FBAR and Foreign Financial Interests reporting and FATCA requirements as implemented by Israeli banks (and other non-US banks) under the direction of the Israeli Tax Authorities and other countries’ agencies and the related potential penalties for non-compliance, many clients have started to think about giving up their US citizenship – – "Expatriation". 

The US tax requirements and consequences of giving up US citizenship or giving up US permanent residence (Green Card status) have changed in recent years. Click here for the current rules and possible consequences of expatriation.

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A U.S. person failing to report non-U.S. Financial Accounts and the income from such accounts can incur penalties of 50% or more of the highest value of such accounts in addition to criminal penalties if the U.S. were to discover such failure to report.

Voluntary disclosure penalties have amounted to 27.5% of the highest value of such unreported accounts in the past.

To encourage voluntary disclosure, the U.S. introduced “Streamlined” amnesty where the U.S. person or non-U.S. person who was required to file U.S. tax Returns and/or related filings such as the FBAR, but did not file as required due to non-willful reasons can become compliant without penalty. The “Streamlined” amnesty requires filing the most resent but delinquent 6 years’ FBARs and the most recent but past due 3 years’ tax returns complete with any other required forms such as Forms 8938 and 5471.

If the taxpayer was physically outside the U.S.A. for at least 330 full days in each of the 3 years for which he/she is filing, and did not have a U.S. abode during those 3 years, the IRS will not assess penalties for failure to file and failure to pay the taxes due nor FBAR penalties.

U.S. residents filing under “Streamlined” procedure would be subject to a penalty of 5% of the highest balance on foreign financial accounts or assets that were required to be reported on FBARs but were not reported timely or the income from such accounts was supposed to be reported as taxable but was not so reported.

While some additional requirements apply, the most important requirement is that the IRS is persuaded that the failure to file was not willful.

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Close Relative Trust Election

Israeli legislation of 2013 effective January 2014 changed the definitions of the various types of trusts with related changes in their tax consequences. In particular, the Foreign Creator Trust that was exempt from tax by Israel both on its income from foreign sources and when distributed to Israeli resident beneficiaries, is no more. Now, such trust is to be classified as an Israeli Resident Beneficiary Trust (“IRB Trust”). Such IRB Trustmay then qualify as a Close Relative Trust with its special tax rules or remain an IRB Trust but subject to the tax rules of a regular Israeli Resident Trust (“Israeli Trust”). One important difference between the taxation of an Israeli Trust and an IRB Trust that is also a Close Relative Trust is subtle but may be significant. An election to be treated as a Close Relative Trust is to be filed within 60 days of its creation. Click here for more.

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