<nobr>Jan 13, 2005</nobr>
ERIC MEMBER ALERT: IRS Repatriation Guidance Permits Funding Qualified Plan
MEMBER ALERT: IRS GUIDANCE ON REPATRIATION OF FOREIGN EARNINGS PERMITS USE OF REPATRIATED FUNDS FOR QUALIFIED BENEFIT PLAN FUNDING (IRS Notice 2005-10)
January 13, 2005: The IRS and the Treasury Department today released IRS Notice 2005-10, the first in a series of guidance for domestic companies planning to repatriate earnings subject to the temporary reduced tax rate provided under the American Jobs Creation Act (AJCA, or the Act). The reduced tax rate is available only if funds are used for certain investments. Among the permitted investments is the use of funds for "financial stabilization for the purposes of U.S. job retention or creation". Today's notice provides that, among other things, an employer may use repatriated funds to satisfy an obligation to a fund a qualified plan as part of a 'financial stabilization' investment.
A copy of Notice 2005-10 is below.
ERIC is considering organizing a FocusOn call to discuss this topic. If you believe a call would be of interest, please email Vanessa Scott at email@example.com.
IRC Section 965, enacted as part of the AJCA, allows domestic companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate. Under this section, domestic companies may elect an 85% dividends received deduction for eligible dividends from their foreign subsidiaries for either: a.) the taxpayer's last taxable year which begins before 10/22/04 or b.) the taxpayer's first taxable year which begins during the one-year period beginning on 10/22/2004. However, Section 965 also contains several limitations on the use of the repatriated dividends, including a requirement that the repatriated funds must be invested by the company pursuant to a domestic reinvestment plan approved by company management before the funds are repatriated. The approved domestic reinvestment plan must describe anticipated investments in reasonable detail. Section 965 identifies the types of U.S. investments for which repatriated funds may be used under a domestic reinvestment plan. Among the permitted investments is the use of repatriated funds for financial stabilization for purposes of U.S. job retention or creation, including funding a section 401(a) qualified benefit plan.
Notice 2005-10 provides detailed guidance to assist companies in meeting the requirements of the "financial stabilization" provision. Specifically, the notice provides that the satisfaction of an obligation to fund a qualified plan ordinarily will contribute to the financial stabilization of the taxpayer, and, therefore, is a permitted use of repatriated funds (pg. 21). The Notice provides that the taxpayer is not required to demonstrate the extent to which the plan covers current employees or the extent to which those covered by the plan perform (or performed) services within the United States. While executive compensation is listed explicitly as one of the investments not permitted for repatriated funds, the Notice provides that a taxpayer may use a reasonable method to apportion the funding between amounts related to executive compensation and non-executive compensation, and between amounts related to services performed within and without the United States (pg. 17).
Please contact Vanessa Scott at firstname.lastname@example.org of you have future questions.
Vanessa A. Scott
The ERISA Industry Committee
1400 L Street, NW Suite 350
Washington, DC 20005
Tel: 202.789.1400 Fax 202.789.1120
IRS Repatriation Guidance 2005-10
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