Congress has passed the Tax Cuts and Jobs Act(the Act), and the President signed it on December 22, 2017. The most important changes in the area of corporate taxation are:

Main corporate tax rate:  Under the new Act, the corporate tax rate decreased to 21% from the previous maximum 35% from 2018. The new law also repealed the corporate alternative minimum tax (AMT). The Act introduced a base erosion anti-abuse tax (BEAT). This applies to corporations with average annual gross receipts of at least USD 500 million for the three tax years ending with the preceding tax year. The tax is intended to apply to companies that significantly reduce their U.S. tax liability with base erosion payments to foreign affiliates. The tax is charged at 10% of a domestic corporation’s modified taxable income, reduced by tax otherwise payable by the corporation after reduction for certain credits. The 10% rate is reduced to 5% for 2018 and is increased to 12.5% for years beginning in 2026. The rate is increased by 1% in the case of a group that includes a bank or securities lender.

Tax Base for resident companies: The Tax Cuts and Jobs Act introduced a limit on deductible interest for tax purposes for tax years beginning after 31 December 2017. The interest deduction is capped at 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA). For years beginning from 1 January 2022 the computation of the restriction will be based on 30% of earnings before interest and taxes (EBIT), i.e. without adding back depreciation and amortisation. The Act also prohibits a tax deduction for any disqualified related party amount paid or accrued under a hybrid transaction or paid by, or to, a hybrid entity.

Incentives: The Tax Cuts and Jobs Act extended the additional first year depreciation deduction (known as bonus depreciation). The bonus depreciation is increased from 50% to 100% for the cost of qualified property acquired and placed into service after 27 September 2017 and before 2023. Qualified property is tangible property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS) and the definition also includes certain computer software, water utility property, qualified improvement property and property related to qualified film, television or live theatrical production. The Act also changes the definition of qualified property (eligible for bonus depreciation) by including in the definition used property acquired by purchase provided that the taxpayer has not previously used the property and it is not acquired from a related party. From 2023 the bonus depreciation is to be phased out over four years by providing a deduction of 80% for property placed in service in 2023; 60% in 2024; 40% in 2025 and 20% in 2026. Property with a longer deduction period and certain aircraft are given an additional year to be placed in service at each rate.

Treatment of Losses : Net operating losses arising in taxable years beginning after 2017 may be carried forward indefinitely. However the use of the NOLs is limited to 80% of the taxable income for the year. The NOLS are however increased by an interest factor to preserve their value. NOLs already existing (for periods up to and including 2017) continue to be carried forward for up to 20 years and may offset 100% of taxable income.

Dividends: Taxable as ordinary income. A dividends received deduction is available for dividends received by a domestic corporate taxpayer from a resident corporation. The deduction in 2018 is 50% (previously 70%) for a shareholder owning less than 20% of the company paying the dividend, 65% (formerly 80%) for participations above 20% and 100% for a dividend payment within an affiliated group of companies if certain conditions are met.

From 2018 a participation exemption system applies for dividends received from foreign corporations in which the US resident corporation holds an interest of 10% or more. The US corporation receives a 100% deduction on dividends received from the 10%-owned foreign corporation. This deduction is generally only given if the stock of the foreign corporation has been held for more than 365 days during the 731 day period beginning 365 days before the ex-dividend date. The deduction is denied for certain hybrid dividends where the foreign corporation paying the dividend receives a deduction for income tax in its own jurisdiction.

A one-time deemed repatriation tax applies to accumulated, untaxed earnings of foreign corporations. The deemed repatriation tax applies to all US shareholders owning 10% or more of a foreign corporation’s stock if the foreign corporation is a CFC or with respect to which a domestic corporation is a US shareholder (excluding PFICs that are not CFCs). The accumulated untaxed earnings of a foreign corporation are measured as at 2 November 2017 or 31 December 2017 whichever is higher. Earnings held as cash or cash equivalents are taxed at 15.5% and other deemed repatriated earnings are taxed at 8%.

CFC:  The Tax Cuts and Jobs Act introduced a new Section 951A requiring a US shareholder of a CFC to include in its income the global intangible low-taxed income (GILTI) of the CFC. A 50% deduction (37.5% from 2025) is permitted to US shareholders (apart from RICs and REITs) so the income is taxed at a rate that is effectively half the US tax rate. Under this provision the GILTI is defined as the excess of the US shareholder’s net CFC tested income over a net deemed tangible income return. This provision takes effect for taxable years of foreign corporations beginning after 31 December 2017 and for taxable years of US shareholders in which the taxable years of the foreign corporations end.