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Treasury Issues Regulations Clarifying that Partners Providing Services to a Disregarded Entity Owned by the Partnership are Treated as Self-Employed

The U.S. Treasury Department recently issued proposed and temporary regulations clarifying that partners of a partnership providing services to a disregarded entity that is owned by the partnership are treated as self-employed, and not employees of the disregarded entity. Under current treasury regulations, a disregarded entity may be treated as a corporation for employment tax and employee benefit plan purposes, provided that the rule doesn’t apply to the single owner that operates the disregarded entity as a sole proprietorship. In response to certain practitioners interpreting the regulation to permit partners to be treated as employees of the disregarded entity and allowing such partners to participate in a disregarded entity’s tax-favored employee benefit plans, the Treasury Department issued these regulations to clarify that if a partnership is the owner of a disregarded entity, the partners of such partnership are subject to the same self-employment tax rules as if they directly owned… Continue Reading

Israeli District Court: Costs of Equity-Based Compensation Should Be Included in Cost-Plus Transfer Pricing Arrangements

In this case, an Israeli subsidiary provided certain research and development services to its U.S.-based parent under a transfer pricing agreement that established the subsidiary’s income as an amount equal to its costs plus a 7 percent margin. Employees of the subsidiary received various stock awards under the “capital gains course” of Section 102 of the Israeli Tax Ordinance (“Section 102”). Section 102 generally applies to Israeli resident companies and non-Israeli companies that have a permanent research and development center in Israel. The subsidiary did not include accounting expenses for employee stock awards in its cost base and retroactively amended the transfer pricing agreement with its parent to reflect this treatment. The Israeli Tax Authority (“ITA”) disagreed with the exclusion of these expenses. The Tel Aviv District Court agreed with the ITA, ruling that (i) the accounting expenses for employee equity-based compensation should be included in the subsidiary’s cost base… Continue Reading

May 2016
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