Taxes

Taxation in the United States: Further Tax Changes, Corporate Taxation, Intangible Assets

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Modification of previous losses

Further Tax Changes, Corporate Taxation

From January 1 2018, they can only be deducted up to a limit of 80% of the taxable income of each year.

The repeatability of the same also changes.

And indeed, the carryforward will no longer be subject to any time limit compared to the current 20 years. The carryback, previously expected up to 2 years, is, however, eliminated.

Limitation of interest expense

A limitation on the deductibility of interest expense to 30% of gross income, Adjusted Taxable Income (A.T.I.), has been introduced, comparable to EBITDA (Earnings Before Interest Taxes and Depreciation Allowances).

The rule applies to all taxpayers, whether they are natural persons or legal entities, with one exception for small businesses, i.e. medium-small companies, with average revenues in the three previous tax periods (therefore 2015-16- 17 for the calculation in 2018) of less than $ 25 million.

Furthermore, the rule no longer applies only to inbound groups, but also to outbound ones.

The new section provides that the 30% limitation is linked to EBITDA until 2021 and, subsequently, to EBIT (Earnings Before Interest and Taxes) before, therefore, depreciation and amortization.

Deductibility of dividends

Modification of the deductibility of dividends Dividend Received Deduction (D.R.D.) provided for by section § 243 of the I.R.C.

The pre-reform legislation allowed companies that received a dividend from an investee company, in which they held a percentage of share capital and voting rights, exercisable at the shareholders’ meeting, between 20% and 80%, of deducting 80% of the dividend.

70% in cases where they held less than 20%.

The aim was to mitigate the potential triple taxation resulting from the taxation of the same form of income, first of all, in the company that issues the dividend, then in those that receive it and, finally, in the hands of the shareholder to whom the dividend is distributed.

The new legislation significantly reduces deductibility: 80% becomes 65%, while 70% passes to 50%.

The reform maintains the possibility of deducting 100% of dividends in cases where these are paid by a company of the group, pursuant to section § 243 (b) (2).

Therefore, from January 1 2018 dividends subject to a 50% D.R.D. will be taxed at a rate of 10.5%, or 50% of the 21% corporation tax.

Dividends subject, however, to a D.R.D. of 65% will be taxed at a rate of 7.35%, or 35% of the 21% corporation tax.

The reduction in deductibility is, for many, a consequence of the lowering of the tax rate, to 21%, on corporate income.

Dividend Received Deduction (D.R.D.)

Participation %Pre Reform DVRDVR Post ReformTax Rate on Dividends
<20%70%50%10,5% [=21% x (1-50%)]
20÷8080%65%7,35% [=21% x (1-65%)]
>80%100%100%0,0% [=21% x (1-1000%)]

Intangible Assets

Modification of intangible assets and, in particular, the deductibility of research costs regulated by section § 179 of the I.R.C. This is an important change due to the numerous implications for both American and foreign companies investing in the research and development sector.

The pre-reform legislation gave companies a right of choice. These, in fact, could choose between deducting costs entirely in the relevant year, or capitalizing them and amortizing them in instalments for a period not exceeding 60 months.

The new legislation establishes, instead, that the expenses made, paid or incurred according to the original text, after December 31, 2021, must be capitalized and amortized in instalments, for a period of 5 years (15 in the event that these expenses are carried out abroad).

Research and development costs include software system development costs but exclude mineral, gas and oil research costs.

Taxation for joint-stock and limited liability companies

The “Corporation”, and the “Limited Liability Company”, in short, “L.L.C.”, although presenting notable similarities in the management and limitation of liability, have a substantial difference in the tax treatment.

The L.L.C., in fact, is assimilated to a Partnership, that is to a partnership, which on the one hand avoid double taxation for the shareholders but which for this reason are not advisable for non-US tax resident shareholders.

Corporate Taxation

A Corporation is taxed directly on corporate profits. At the time of distribution to members, U.S. members are required to pay personal taxes, and foreign members are subject to withholding tax. The amount of the percentage of withholding also depends on any treaties as is the case with the double taxation treaty between Italy and the United States:

On the basis of this treaty, in the event of dividend distributions to an Italian shareholder of a Corporation, a withholding tax of 15% is applied, a percentage that drops to 5% if the Italian shareholder has held more than 25% of the capital for more than twelve months. of American society.

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