Fiscal Cliff: The International Fallout

Fiscal Cliff: The International Fallout

1. Extension of withholding tax exemption for “interest related dividends and short-term capital gains dividends” paid by Regulated Investment Companies (RICs) to foreign persons. This provision had expired for tax years beginning after December 31, 2011, but was extended to tax years beginning after December 31, 2011, and before January 1, 2013.
2. Regulated Investment Companies will continue to be treated as Qualified Investment Entities for purposes of the “Foreign Investment in Real Property Tax Act” (FIRPTA) through 2013. What does this mean? Generally, foreign investors are not subject to tax on U.S. source capital gains unless the gain is effectively connected with a U.S. trade or business. Gain from the disposition of a “U.S. Real Property Interest” (USRPI) is always considered “effectively connected”. Stock or beneficial interests in U.S. Real Property Holding Corporations are considered USPRIs and thus subject to U.S. tax upon disposition. Qualified Investment Entities could avoid the FIRPTA withholding tax requirements if either the “regularly traded” or “domestically controlled” exceptions were met. Prior to the 2012 ATRA, the inclusion of RICs as Qualified Investment Entities terminated on December 31, 2011. Last minute congressional action will continue to define RICs as a Qualified Investment Entities through December 31, 2013.
3. Active Financing and Exempt Insurance Income will not be considered “SubPart F” income through 2013. For tax years beginning after December 31, 1998, and before January 1, 2012, SubPart F income (a part of the Internal Revenue Code that requires certain types of foreign income to be included as income immediately on the tax return of U.S. owners of certain “controlled foreign corporations”) excluded active financing and exempt insurance income. The temporary exclusion was extended two years by the 2012 ATRA (through tax years beginning before January 1, 2014).
4. Possessions Tax Credit for American Samoa extended through 2013. The Internal Revenue Section 936 Possessions Credit generally expired for tax years beginning after December 31, 2005. 2006 tax law changes extended the possessions tax credit, but only for U.S. corporations operating in American Samoa which qualified for the credit and had an election in place on October 13, 1995. Prior law allowed the credit for the first four tax years that began after December 31, 2005 and before January 1, 2014. The 2012 ATRA allows the credit for the first eight years, provided certain criteria are met.

If you have any questions, please contact our International Tax Services Group at 609.520.1188 or e-mail [email protected].

Kimberlee Phelan
CPA, MBA, Partner
Practice Leader, International Tax Services Group
609.520.1188
[email protected]

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