Form 965-C: Transfer Agreement Under Section 965(h)(3)

Form 965-C: Transfer Agreement Under Section 965(h)(3)

Form 965-C is used by U.S. corporations or other entities that need to transfer their Section 965 tax liability to another party under certain circumstances. Specifically, this form is employed in situations where an entity elects to transfer its liability for repatriating deferred foreign income to another business or entity, in accordance with Section 965(h)(3) of the Internal Revenue Code (IRC).

This transfer can occur when a corporation or similar entity has deferred foreign income subject to Transition Tax under the Tax Cuts and Jobs Act (TCJA). The Section 965 Transition Tax was introduced to repatriate foreign earnings and impose taxes on those earnings, and Form 965-C enables a transfer of responsibility for paying the resulting tax liability.

In this guide, we will break down the purpose of Form 965-C, when and why it is used, the process for completing it, and important deadlines. Let’s dive into everything you need to know about this essential form.

What is Form 965-C?

Form 965-C is titled “Transfer Agreement Under Section 965(h)(3)” and is part of the suite of forms developed by the IRS to manage tax obligations related to the repatriation of foreign income under Section 965. It specifically deals with the transfer of liabilities for the Transition Tax imposed on deferred foreign income.

Under Section 965 of the Tax Cuts and Jobs Act (TCJA), U.S. corporations with foreign subsidiaries were required to bring back previously deferred foreign income and pay taxes on it. This tax, referred to as the Transition Tax, applies to earnings held in foreign subsidiaries that were not previously subject to U.S. tax.

Form 965-C comes into play when a business wants to transfer this tax liability to another party. This may be due to certain corporate transactions, reorganizations, or restructuring events where one company assumes the responsibility for paying the Transition Tax.

When is Form 965-C Needed?

Form 965-C is required when a corporation or other eligible entity has transferred the responsibility for paying its Section 965 tax liability to another entity. This can occur under circumstances such as:

1. Corporate Reorganizations: If a company undergoes a merger, acquisition, or other types of corporate restructuring, it may decide to transfer its 965 liability to another company involved in the transaction.

2. Change in Ownership: If a foreign subsidiary is transferred between entities, the liability for the repatriated foreign income might also be transferred, requiring the use of Form 965-C to reflect the change.

3. Election for Liability Transfer: Certain situations allow for the election to transfer the liabilities related to the Transition Tax if the involved parties agree, under the provisions of Section 965(h)(3) of the IRC.

What Does Form 965-C Do?

Form 965-C serves as a formal agreement that documents the transfer of tax liability between two parties. The form specifies:

• The transferor: The entity transferring the liability.
• The transferee: The entity assuming the responsibility for the tax liability.
• The tax liabilities being transferred: The Section 965 tax liability that is being shifted from one party to another, including details about the amounts and applicable tax rates.

It is important to note that the transfer is not simply an automatic process. The transfer must be agreed upon by the parties involved and reported on Form 965-C. This form is part of ensuring that the IRS recognizes the transfer and that the Transition Tax is handled properly by the new responsible party.

How to Complete Form 965-C

Filing Form 965-C requires both the transferor and transferee to accurately document the transfer of tax liabilities. Here are the key steps to completing the form:

Step 1: Provide Entity Information

• At the top of Form 965-C, you will need to enter the name, Employer Identification Number (EIN), and address for both the transferor and the transferee.

Step 2: Identify the Transfer of Liability

• In this section, you will specify the tax liability being transferred. This includes the amount of tax related to the repatriated foreign income that is subject to the Section 965 Transition Tax.

Step 3: Detail the Transfer Agreement

• You will need to describe the terms of the agreement under which the liability is being transferred, as well as the specific reason for the transfer.

Step 4: Tax Payment Details

• Provide information on how the tax liabilities will be handled, including whether the transferor has already made payments and if the transferee is assuming responsibility for future payments.

Step 5: Signatures and Certifications

• Both the transferor and transferee must sign the form to certify that the information is accurate. This section ensures that both parties acknowledge the tax liability transfer and agree to the terms.

Important Deadlines for Filing Form 965-C

The deadline for filing Form 965-C coincides with the filing deadlines for the corporate entity or other party involved. This is generally the same as the due date for your tax return, which is typically the 15th day of the 4th month following the end of the entity’s tax year. For many companies, this means a deadline of April 15 if they are using a calendar year tax period.

If an extension is granted for the tax return filing deadline, it will also apply to Form 965-C. However, it is important to note that the payment of the Transition Tax may still be due by the original filing deadline.

Key Considerations and Common Mistakes

When filing Form 965-C, businesses should be mindful of a few common challenges and mistakes:

1. Failure to Properly Document the Transfer: Ensure that all details about the liability transfer are correctly documented and agreed upon by both parties involved. Any errors here can lead to confusion or delays in processing.

2. Misunderstanding Transfer Terms: Clearly define the terms of the liability transfer. Ensure both the transferor and transferee understand their respective roles and responsibilities.

3. Late Filing or Payment: As with any tax form, timely filing is crucial. Ensure that Form 965-C is filed with your tax return by the appropriate deadline to avoid penalties or interest on unpaid tax liabilities.

4. Overlooking IRS Compliance: Ensure that the transfer is in line with all IRS requirements for Section 965 and that it is reported accurately to avoid complications during an audit.

Conclusion

Form 965-C plays an essential role in corporate tax compliance under the Tax Cuts and Jobs Act (TCJA), allowing for the transfer of Section 965 tax liabilities between parties. Whether your business is undergoing a merger, acquisition, or other restructuring, or simply electing to transfer its tax liability, this form ensures that both the transferor and transferee are in compliance with IRS regulations and properly report the transfer of Transition Tax liabilities.