IRS Disallows Foreign Tax Credits Claimed for Cross-Border Trust

Excerpt from Practical US/International Tax Strategies by Lawrence Hill and Alexander Roberts (Dewey & LeBoeuf LLP)

Recently, the IRS issued a Chief Counsel Advice memorandum (CCA) advising the disallowance of foreign tax credits claimed by a U.S. corporation (U.S. Corporation) in connection with income and assets transferred to a cross-border trust (Trust) on the grounds that the Trust arrangement lacked economic substance. The IRS determined that the cross-border trust “served no legitimate non-tax purpose and was not reasonably expected to generate an economic profit for the taxpayer.” In the alternative, the IRS concluded that the series of transactions involved in the arrangement lacked economic substance as an integrated transaction. In addition, the IRS determined that the foreign tax credits should be denied under Section 269(a)(1) and (2) because the taxpayer formed and transferred funds to a subsidiary with the principal purpose of avoiding U.S. federal income tax.

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Dutch Cooperatives Provide Tax Planning Opportunities

Excerpt from Practical European Tax Strategies by Joseph B. Darby III, Thomas van der Vliet(Greenberg Traurig LLP) andShane Kigen (Ernst & Young)

There is a famous Dutch proverb that states, “The art is not in making money, but in keeping it.” To help achieve this laudable goal, the Dutch have thoughtfully provided a Dutch cooperative holding structure that allows multinational enterprises and private equity funds to keep a significantly greater after-tax share of the money they make.

Cooperatives have been a business form used in the Netherlands for well over a century. However, only recently have tax lawyers fully begun to exploit this distinctive vehicle in international tax planning. What makes a cooperative exciting to tax planners is its unique treatment under the Dutch dividend withholding tax. Unlike its close relatives, the Dutch private or public company (BV/NV), a cooperative is not subject to the 15 percent withholding tax on dividend distributions. The absence of a levy of dividend withholding tax makes the cooperative a logical choice as a holding company. In conjunction with the Netherlands’ extensive treaty network, a cooperative holding structure generally permits foreign members of a cooperative to repatriate profits free from Dutch withholding tax.

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