The 962 election - revisited. New Opportunities to save on taxes
Many tax professionals of those afflicted by the Transition tax and GILTI have heard of the 962 election and how it can reduce the tax Transition/GILTI tax liability. As to GILTI, if you live in a country where the corporate tax rates are higher than 13.125%, then the 962 election can eliminate the GILTI liability. As to the transition tax, making the election allows the taxpayer to use the corporate taxes paid in the country of residence between 2007-2018 to reduce or eliminate the Transition tax liability.
In the last few months, I have been retained by numerous people who had previously (i) filed their transition tax statements with their 2017 tax returns without a 962 election, and (ii) made 2 Transition tax payments.
There are the issues that arise:
Question 1. If I did not make a 962 election, but now realize that I could have saved Transition tax using it, can I make the election retroactively?
Answer 1. Yes. You should amend the 2017 return. But if the savings are significant, then it is worth it.
Question 2. If I make the 962 election and save money on the transition tax or GILTI, don’t I have to pay US taxes when I eventually distribute the dividends, which I would not have had to pay if I did not make the 962 election?
Answer 2. In theory yes. In reality, in many cases, no. Dividends from the retained earnings that existed on December 31, 2017 are taxable in the US if the 962 election was made. In practice, in many cases, no taxes will be due. Why? Simple. Since you pay personal taxes on the dividends in your country of residence (30% in Israel for example), you can use these taxes as foreign tax credits against the US tax on the dividends. And if you live in a country that has a tax treaty with the US, these dividends are likely are deemed qualified dividends and taxed at very low US tax rates. In effect - no US taxes on the dividends.
Question 3. Is there any way to avoid the US taxes on the dividends if I took the 962 election?
Answer 3. I have encountered this question in the context of a sale of the company after the 962 election has been made. Does the US tax liability on the dividend transfer to the buyer who takes the dividend? Of what if I gift the company to another person? Does the US tax dividends apply to the receiver of the gift? It depends. But good tax planning can definitely save money.