Thousands of wealthy Israeli-Americans to get repatriation tax reprieve
Thousands of Americans living in Israel just got a one-year reprieve from a onetime corporate repatriation tax – which the US Congress had intended to apply to companies like Apple and Google, not to individuals.
The Internal Revenue Service announced on Monday that American citizens and American green card holders who had a total “deemed repatriation tax” liability of less than $1,000,000 (NIS 3.575 million) would be exempt for the following year.
The “deemed repatriation tax” had been delayed to take effect this month, ahead from an initial date of March. Now, the one-year reprieve is signaling that the US congress could reconsider the tax levy entirely from applying to individuals.
“This is very meaningful relief,” said Monte Silver, a US tax attorney and senior counsel at Eitan Mehulal Sadot in Herzliya Pituah. “To reach $1,000,000 in total tax liability, an expat must have at least $6.5m. in earnings and profits held in cash form, or $12.5m. in non-cash form.”
And for more affluent individuals who exceed that limit, good news awaited them. “Chances are that after taking into account foreign tax credit,” Silver said, “expats with more than these cash/non-cash amounts” will likely be exempt.
Barring the delay, self-incorporated Americans residing in Israel would have been taxed at 15.5% for profits held in cash and at 8% tax for profits held in non-cash form – on 30 years of profits accumulated in their Israeli corporations, from 1986 to 2017.
The US had intended for the tax to persuade US corporations – which were sitting on trillions of dollars in their foreign subsidiaries THE INTERNAL REVENUE SERVICE building in Washington. As part of the tax reform, any US citizen or green card holder who owns more than 10% of a ‘controlled foreign corporation’ would be subject to the tax. – to repatriate the cash to the United States, by imposing a relatively modest 15.5% tax.
Instead, the hastily-written legislation ensnared millions of individuals – like small business owners, lawyers and doctors – who self-incorporate in order to benefit from a more favorable tax rate and avoid paying taxes on the self-employed such as US Social Security.
As part of the tax reform, any US citizen or green card holder who owns more than 10% of a “controlled foreign corporation” would be subject to this tax. An Israeli corporation is “foreign” by definition, and it is a controlled foreign corporation if US citizens or green card holders control more than 50% of its shares.
Approximately 170,000 Americans live in Israel. In total, more than one million US citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax.
Many expatriate Americans set up corporations in order to avoid American tax rules that could result in double taxation. Unlike the vast majority of countries that tax based on residency, the United States taxes individuals on the basis of citizenship, regardless of residency abroad.
Aside from the delay, it was unclear how those affected by the deemed repatriation tax could calculate what constitutes 15.5% of profits. And many of the affected taxpayers might not have had enough cash on hand to pay the bill.
“Most individuals do not have a clue as to how to run that number and develop a number for their accumulated earnings and profits and doing the calculation for the tax,” Charles Bruce, a US tax lawyer who is affiliated with the American Citizens Abroad advocacy group, told The Jerusalem Post in February.
The first payment would have been due by June 15, with the option to pay the tax over eight years.
Attorney Silver, who has been active in rallying political support against the new tax, added that Democrats Abroad and Republicans Overseas were cooperating to fix the tax legislation, hastily passed and signed into law by President Trump in December 2017.