Tax Alerts
The U.S. Department of the Treasury announced on June 17, 2024, that the United States has formally notified the Russian Federation about the suspension of certain articles and provisions of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Washington, June 17, 1992. This suspension will take effect on August 16, 2024, and will continue until otherwise decided by the two governments. This decision is in response to the Russian Federation's notification on August 8, 2023, expressing its desire to suspend specific articles and provisions of the Convention and the Protocol. The announcement can be seen at United States’ Notification of Suspension, By Mutual Agreement, of the 1992 Tax Convention with Russia | U.S. Department of the Treasury . Taxpayers who rely on the U.S.-Russia income tax treaty should plan for this suspension. Please contact International Capital Associates, LLC if you need help planning for the treaty suspension or if you need other U.S. tax services .
In November 2023, the U.S. Internal Revenue Service released an updated Form W-8EXP. The Form W-8EXP is a U.S. withholding tax certificate for foreign governments or other foreign organizations. Confusingly, the words “qualified foreign pension fund” do not appear on the Form W-8EXP. However, the updates to the Form W-8EXP are intended to allow a non-U.S. pension fund (or qualifying entity) to certify its Qualified Foreign Pension Fund status. A non-U.S. pension fund may certify that it is a “Withholding Qualified Holder Under Section 1445” provided it meets the requirements of Section 897(l) and Treas. Reg. 1.897(l)-1 as a Qualified Foreign Pension Fund. A “Qualified Holder” includes certain wholly-owned entities that meet the requirements of Treas. Reg. 1.897(l)-1(d)(2) or (3). A “Withholding Qualified Holder” also consists of a non-U.S. partnership wholly owned by Qualified Holders. Unfortunately, Form W-8EXP still does not contain sections to allow the taxpayer to claim the benefits of a U.S. income tax treaty. Non-U.S. pension funds and governments will still need to complete Form W-8BEN-E to claim U.S. income tax treaty benefits with a U.S. withholding agent, such as reduced dividend and interest withholding rates. The release of the updated Form W-8EXP does not invalidate any prior Qualified Foreign Pension Funds certifications. In the future, U.S. withholding agents may request a valid Form W-8EXP instead of other Qualified Foreign Pension Fund certifications. A Withholding Qualified Holder should ensure that the Form W-8EXP is complete and valid to make a Qualified Foreign Pension Fund certification using the Form W-8EXP. Please contact International Capital Associates, LLC if you need help determining if the entity is considered a Withholding Qualified Holder, if you need assistance completing Form W-8EXP , or if you need other U.S. tax services .
On Wednesday, November 15, 2023, the U.S. Tax Court (“Court”) served its opinion regarding YA Global Investment, LP (“YA Global”), a Cayman Islands partnership. The opinion was primarily unfavorable to YA Global, holding that YA Global was engaged in a U.S. trade or business due to the activities of the partnership’s asset manager. The U.S. Tax Court held that YA Global's income should be treated as ordinary and as effectively connected income. One of the central issues addressed in this opinion is the agency relationship between YA Global and its asset manager. YA Global had no employees of its own. The asset manager had a U.S. office with over 50 employees. During the issues under examination, the asset manager discontinued or merged its other funds with the result of YA Global as the only fund managed by the asset manager. The U.S. Tax Court examined the degree of control YA Global had over its asset manager, finding that the asset manager was an agent of YA Global. The Court held that the activities of the asset manager can be attributed to YA Global. After holding that the activities of the asset manager can be attributed to YA Global, the opinion then focuses on whether YA Global was engaged in a U.S. trade or business. YA Global funded portfolio companies through convertible debentures, Standby Equity Distribution Agreements (SEDAs), and other securities. In one of YA Global’s SEDAs, the partnership committed to purchasing up to a specified dollar amount of a portfolio company’s stock over a fixed period. YA Global acquired more than 100 convertible debentures a year during the years under examination. The terms of some of the convertible debentures allowed YA Global to receive stock of the issuer upon conversion at a discount. The opinion noted that YA Global would generally exercise the conversion feature of the debenture only when it was ready to sell the stock it would receive on conversion. Most of the net income reported on YA Global’s Form 1065 was interest and short-term capital gains. The U.S. Internal Revenue Service (“IRS”) contended that YA Global was engaged in lending activities, noting that “YA Global made hundreds of loans directly to companies in exchange for promissory notes and convertible debentures.” The SEDAs usually required the portfolio company to pay YA Global and its asset manager various fees upon executing the SEDA and additional fees upon each advance of funds. The fees paid by the portfolio could include commitment, structuring, and transactional fees. The asset manager could remit excess fees to YA Global or apply them in satisfaction of the management fee owed to the asset manager by YA Global. The IRS contended that fees paid by the portfolio companies reinforced that YA Global was engaged in a services business. The attorneys for YA Global argued that YA Global because YA Global was simply an investor and it met the trading safe harbor from a U.S. trade or business. The U.S. Tax Court held that YA Global did not meet the trading safe harbor from a U.S. trade or business. The U.S. Tax Court cited that it did not meet the trading safe harbor “because the income the partnership earned from portfolio companies went beyond returns on invested capital.” Further, the U.S. Tax Court held that YA Global was engaged in a U.S. trade or business and that YA Global should be treated as a dealer in securities. The U.S. Tax Court further held that YA Global, as a dealer in securities, did not properly identify which assets were held as investments. The Court further held that YA Global's income was ordinary income that should be treated as effectively connected with a U.S. trade or business. The Court’s holdings were mainly in favor of the IRS. The IRS has reportedly been auditing investment funds for U.S. trade or business risk. This case is likely to bolster the IRS’s efforts in this area. U.S.-based funds and non-U.S. investors should review their funds' U.S. trade or business risk. A U.S. trade or business determination is based on a taxpayer's particular facts and circumstances. U.S. trade or business income generally creates U.S. federal and state income tax filing obligations for non-U.S. taxpayers. There are steps that funds can take to reduce U.S. trade or business income risk to non-U.S. investors. Please contact International Capital Associates, LLC if you need help with inbound tax planning and structuring , U.S. investment tax reviews , or other tax services .
On December 28, 2022, the U.S. Department of Treasury (“the Treasury”) released final regulations regarding the Qualified Foreign Pension Fund exemption from taxation concerning gain or loss attributable to certain U.S. real property interests. The regulations are effective on December 29, 2022, when the regulations are published in the Federal Register. The regulations address the qualifications for Qualified Foreign Pension Fund (“QFPF”) and the withholding requirements under Sections 1441, 1445, and 1446 regarding dispositions subject to FIRPTA and distributions described in Section 897(h) (e.g., distributions from real estate investment trusts and mutual funds). QFPFs should note the new certification requirements below. U.S. withholding agents will require the new certification for eligible transactions on or after December 29, 2022, until the new Form W-8EXP is released. The regulations provide changes and clarifications regarding the requirements of a QFPF. The clarifications addressed the condition that a QFPF is established to provide retirement and pension benefits. For the first time, the regulations define retirement and pension benefits. The definition of retirement and pension benefits is intended to be broad to accommodate a wide variety of non-U.S. pension funds and non-U.S. laws. The regulations also provide limited exceptions when a pension fund provides more than retirement and pension benefits. The rules also clarify ownership requirements for Qualified Controlled Entities of pension funds. The regulations also clarify the requirement for a pension fund to provide, or otherwise make available, annual information about its beneficiaries to the relevant tax authorities in the country where the pension fund is established or operates. The final regulations require that the pension fund annually provides information about the amount of qualified benefits provided to each recipient to the relevant tax authorities or other relevant governmental units. The requirement is also met if such information is otherwise available to the relevant tax authorities or other governmental units. The preamble to the final regulations acknowledges that Internal Revenue Service will be revising the Form W-8EXP withholding tax documentation for use by QFPFs. Until the new Form W-8EXP is released, a QFPF should indicate its status with a certification signed under penalties of perjury. Notably, the QFPF is not required to provide a U.S. Employer Identification Number if it does not have one. Also of interest, the regulations provide a withholding exemption for certain non-U.S. partnerships wholly owned by QFPFs. Please contact International Capital Associates, LLC if you need help with inbound tax planning and structuring or U.S. investment tax reviews .
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“the Act”).
This tax alert highlights the key proposed U.S. tax law changes impacting U.S. investments of non-U.S. investors by the Inflation Reduction Act of 2022.
The U.S. Department of Treasury has terminated the tax treaty with Hungary.
The U.S.-Chile Income Tax Treaty is On the Move
