Controlled Foreign Corporations Tx 8300

Learning Objectives 1.Explain the reason for Subpart __, 2.Identify ____ and U.S. shareholders, 3.Compute _______ __ income, and 4.Determine when a CFC’s ________ are invested in U.S. ________. You should be able to:

U.S. Tax of FCs and Owners Foreign corporations –Effectively _________ income –U.S. source _________ income –______ profits tax U.S. shareholders of FCs –______ dividends –____________ dividends

Direct Exporting U.S. Company Siva

Shifting Profit to Tax Haven Foreign Sub U.S. Parent No-Tax Country Siva

Time Is Money Discount Rate Years U.S. Residual Tax Deferred Present Value of $100 U.S. Residual Tax Percentage of U.S. Residual Tax Saved 10%5$6238% 10%10$3961% 10%20$1585% 15%10$2575% 15%20$ 694%

CFC Defined Foreign corporation in which Foreign Corporation U.S. Shareholders More than ___% –______ power or –Stock _____ U.S. ____________ own –Directly, –__________, or –Constructively

U.S. Shareholder Defined Foreign Corporation U.S. Persons At least ___% of voting power U.S. ______ owning –Directly, –Indirectly, or –_____________ In foreign corporation U.S. Persons

U.S. Person Defined U.S. ________ and residents Domestic ____________ Non-foreign _______ and trusts

Example: Identifying CFCs Foreign Corporation U.S. Citizen NRA DC FCDC U.S. Citizen DC NRA Identify the U.S. persons and shareholders. Is the FC a CFC? What assumption did we make?

Example: Identifying CFCs Foreign Corporation U.S. Citizen NRA DC FCDC U.S. Citizen DC NRA Identify the U.S. persons and shareholders. Is the FC a CFC?

When Ownership Rules Apply Direct ownership Indirect ownership –Proportionate –Through _______ entities Constructive ownership –Attribution ____ –Attribution __

Example: Indirect Ownership FC 1 FC 2 FC 3 FC 4 FC 1 FC 2 DC 3 FC 4 What is John’s indirect ownership in FC 4 ? What is Mary’s indirect ownership in FC 4 ? JohnMary

Attribution from Family Individuals constructively own stock that parents, children, and grandchildren directly or indirectly own.

Example: Family Business Forco a. Identify Forco’s U.S. shareholders. Joe (U.S. citizen) Joe’s sister (RA) Joe’s granddaughter (U.S. citizen) Joe’s father (NRA) b. Is Forco a CFC?

Attribution from Transparent Entity FC P/S Partner _____________ attribution If transparent owns > ___%, it’s treated as ___% ___attribution FC Beneficiary FC Shareholder Estate SCorp

Attribution from Corporation _____________ attribution only if SH owns ≥ ___% If corporation owns > ___%, it’s treated as ___% ___attribution FC Shareholder C

Examples: Attribution from Rules FC P/S Partner FC Shareholder C FC Beneficiary Estate

Examples: Attribution from Rules FC P/S Partner FC Shareholder C FC Shareholder C

Example: Ownership Rules Forco U.S. P/S U.S. Citizen Domco How much of Forco does the individual own? Who are Forco’s U.S. shareholders? Is Forco a CFC? Assuming Forco has Subpart F income, who receives a constructive dividend?

Example: Ownership Rules DC FC1 FC2 Identify the U.S. shareholders of FC1. Resident Alien Assuming FC1 has Subpart F income, who receives a constructive dividend? Identify the U.S. shareholders of FC2. Assuming FC2 is a CFC with Subpart F income, who receives a constructive dividend?

Example: Ownership Rules How much of Forco does the U.S. partnership own? How much of Forco does the U.S. citizen own? Is Forco a CFC? If Forco has Subpart F income, who receives a constructive dividend? Forco U.S. P/S U.S. Citizen For P/S

Example: Ownership Rules How much of FC2 does citizen A own? How much of FC2 does citizen B own? Is FC2 a CFC? If FC1 earns Subpart F income, who recognizes the constructive dividend? FC1 FC2 Citizen A Citizen B

Example: Ownership Rules Who are the U.S. shareholders of FC? Is FC a CFC? If FC earns Subpart F income, who recognizes the constructive dividend? DC FC Citizen A Citizen B

Attribution to Transparent Entity FC P/S Partner _____ attribution No attribution via ________ persons No ___attribution BeneficiaryShareholder Estate SCorpFC

Attribution to Corporation _____ attribution if SH owns ≥ ___% No attribution via ________ persons No ___attribution Shareholder CorpFC

Examples: Attribution to Rules Shareholder CorpFC P/S Partner FC P/S Partner Shareholder CorpFC P/S PartnerShareholder CorpFC

Example: Ownership Rules FC U.S. Citizen NRA U.S. P/S How much of FC does the U.S. P/S own? Who are the U.S. shareholders of FC? Is FC a CFC? If FC earns Subpart F income, who recognizes the constructive dividend?

Example: Ownership Rules FC U.S. Citizen A U.S. Citizen B How much of FC does the DC own? Who are the U.S. shareholders of FC? Is FC a CFC? If FC earns Subpart F income, who recognizes the constructive dividend? DC

Example: Voting Power Forco has class A and class B shares, both with 100 outstanding shares. Class A stock carries sufficient voting power to elect __ directors. Class B shareholders can elect __. Domco owns __ class A shares and __ class B shares. Is Domco a U.S. shareholder?

Example: Voting Power Domco owns ___% of Forco. Unrelated foreign persons own the other ___%. Forco’s articles of incorporation vest all powers normally reserved for the board of directors in Dilbert, Domco’s director of foreign operations. Domco can replace Dilbert at any time. Is Forco a CFC?

Example: Voting Power Domco owns ___%, a foreign trust owns ___%, and a foreign bank owns ___% of Forco. The bank lends $12 million to finance Forco’s operations. During loan negotiations, the bank orally agrees to vote its ___% the same as Domco. Is Forco a CFC?

Constructive Dividend Subpart F Income Earnings Invested in U.S. Property

Subpart F Income Does Not Include Aggregate limits –Amounts exceeding ____ –FBCI and insurance income if ___ __ smaller of $__ million or __% of gross income Transaction limits –U.S. ___ unless _____ reduces U.S. tax –____ or insurance income if effective foreign tax rate > ___% of top U.S. rate

Foreign Base Company Sales Income Sale of personalty if CFC –Purchases from _______ person, –Sells to _______ person, or –Acts as purchase or sales _____ of related person, Buyer uses or consumes item _______ ___ country, and Item manufactured _______ ___ country

Not FBCSI Sale of ______, Sale not involving _______ person, Use or consumption ______ CFC country, or Manufacture ______ CFC country

Manufacturing Defined ___________ transformation of raw materials, Direct _____ + ________ ≥ ___% of CGS, or Major ________ of component parts –Substantial processes that –________ considers manufacturing

Example: Manufacturing Hogshead Processors (an Estonian CFC) slaughters hogs and packages the meat. HPP buys hogs from its U.S. parent for $____ each. The cost to slaughter, process, and package a hog is $____. HPP sells the packaged meat from each hog to a Romanian wholesaler for $____. Is the profit Subpart F income?

Branch Rule Applicable if –Branch located _______ ___ country, –___ country doesn’t tax ______ profits, and –___ in branch country ≤ ___% of ETR in CFC country and at least __ percentage points less Results –Branch treated as ________ CFC and –Branch profit treated as ___ _____ income of actual CFC

Example: Branch Rule Domco manufactures and sells health products. Ten years ago, Domco set up a manufacturing CFC in Hitaxia. Hitaxia normally imposes a ___% tax, but Domco qualified for a tax holiday. Now, the tax holiday is expiring. To serve its foreign market in the future, Domco will set up a sales branch in Lotaxia where the tax rate is ___%. Assuming all customers reside outside Hitaxia and Lotaxia, does the branch rule apply?

Foreign Base Company Services Income Commissions, fees, or other compensation Received for technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or ______ services If services are performed –_______ ___ country and –For _______ person

Example: FBC Services Income Domco sells personal digital assistants to the Pakistani government under a long-term repair contract. In which of the following cases does foreign base company services income result? a.Domco performs repairs in the U.S. b.Domco’s Belgian sub repairs the PDAs in Belgium. c.Domco’s Belgian sub repairs the PDAs in Poland.

Foreign Personal Holding Company Income Most investment income Exceptions –Business rent and royalties from _________ persons –Rent and royalties from _______ corporation for using assets within ___ country –Interest and dividends from _______ corporation with substantial assets and legal domicile within ___ country

Foreign Base Company Oil-Related Income Includes _______ source income from –Processing, transporting, distributing, or selling oil and gas from wells, –Directly _______ services, and –_______ oil-related property When average _____ production < _____ barrels, no FBC oil-related income results.

Foreign Base Company Oil-Related Income Excludes income sourced within country where –Oil and gas _____ are located, –CFC sells oil, gas, or primary product for ___ or consumption, and –Aircraft or vessel _____ oil, gas, or primary product as ____

Insurance Income If –U.S. ____________ own > ___% of FC and –Gross premiums from insuring _______ risks > ___% of total gross premiums Then –FC is a ___ and –Insurance income from insuring _______ risks is Subpart F income

Related Person Insurance Income If –U.S. _______ own > ___% of FC and –Gross premiums from insuring _______ risks > ___% of total gross premiums Then –FC is a ___ and –Insurance income from insuring _______ risks of _______ _______ is Subpart F income

Boycott-Related Income Occurs when CFC, as a _________ for doing business, discriminates Participation or ___________ in international boycott –Produces _________ income –Reduces ___

Ain’t Misbehaving? Subpart F income results when CFCs earn income from countries: –To which U.S. law prohibits sale of _______ items, –With which U.S. has severed ____ or has no _________ relations, or –Supporting international _________. Cuba, Iran, ____, Libya, North Korea, Sudan, and Syria

Bribes and Kickbacks CFCs include as Subpart F income an amount equal to –______ bribes and kickbacks –Paid to __________ personnel Foreign _______ Practices Act is touchstone

Constructive Dividend

Earnings Invested in U.S. Property What does CFC do with _____ (other than Subpart F income) not paid as dividends? If invested in U.S. ________, U.S. shareholders recognize ___________ dividends.

U.S. Property Defined ________ property in U.S. unless –Destined for ______, –Used for _____________ abroad, or –Used in certain _____ activities Stock and securities of DC if –DC is U.S. ___________ or –U.S. shareholders of CFC own ≥ ___% of DC

U.S. Property Defined Obligations of non-_________ U.S. persons other than –U.S. __________ securities, –U.S. currency, –Bank ________, –Debt instruments of ________ persons, and –Trade receivables Rights to use ____________ intangibles in U.S.

Example: U.S. Property During its first year, Domco’s wholly-owned CFC had foreign earnings of $_______. Of this amount, $______ was Subpart F income. The CFC loaned $______ to Domco and deposited the rest in its U.S. bank account. How much is Domco’s constructive dividend?