Section 965 – Transition Tax

What Was Section 965? A Simple Look at the Transition Tax

If you’ve been a business owner over the last decade, you would know that the tax scene has changed drastically for those with foreign owned assets. The 2017 Tax Cuts and Jobs Act made waves in how foreign monies were taxed. Section 965 was introduced as a one-time tax on foreign profits to close the loophole of leaving trillions of profits overseas to avoid taxation.

The Problem Before 2017

Before 2017, U.S. companies didn’t have to pay taxes on their foreign earnings unless they brought the money home. This led to the problem of companies leaving their money overseas to avoid taxation. While it was a good idea short term, it caused tension. 

What Did Section 965 Do, Exactly?

Section 965 required U.S. shareholders of certain foreign corporations to pay a one-time tax on past foreign profits that hadn’t yet been taxed. Whether the company would bring the money back to the U.S., they were required to pay this tax to be fair. This change encouraged companies to bring money back to the U.S. without facing the steep tax penalties of the past.

Tax Rates and Who It Affected

This section applied to the last taxable year before January 1, 2018 (calendar year 2017). The tax rates were then 15.5% on cash or equivalents, and 8% on non-cash assets.

However – companies didn’t have to pay it all at once – they could pay it over 8 years with this schedule:

1. 8% for years 1-5
2. 15% in year 6
3. 20% in year 7
4. 25% in year 8

This change impacted multinational companies like Apple and Google, but also smaller business with oversea ties. This affected any U.S. shareholder owning at least 10% of a foreign company.

A Turning Point in U.S. Tax Policy

While it may not have been ideal for everyone at the time, Section 965 helped pave the way for a fairer and more modern tax system. It marked a turning point in how the U.S. handles foreign profits—one that many businesses have benefited from since. Though it was a one-time tax, it was a major moment in corporate tax history.