![]() ![]() So if Alice owns 30% of the foreign corporation and her son George owns 5%, then Alice must recognize a constructive dividend of 30% of the CFC's income while George must recognize 5%. Constructive ownership rules also generally apply, in that the share percentages of related taxpayers are added together. Indirect ownership is the ownership of a CFC through a foreign entity, whether it be a corporation, partnership, or trust. The basis of the stock was $400,000 before the constructive dividend afterwards, it is increased by the amount of the constructive dividend, totaling $460,000.Therefore, the US corporation must recognize a constructive dividend of $60,000.The CFC's income for the year is $100,000.A US corporation owns 60% of the stock of a CFC.So if 20 shareholders have an equal interest in a CFC, then it is not subjected to Subpart F rules.Įxample: Calculating the Constructive Dividend for a US Corporation from a Dividend Received from its CFC This rule is to prevent public corporations owned by many shareholders from being affected by the rule. To prevent double taxation, Subpart F income increases the shareholders' basis in the stock and any distributions decreases the basis.Ī CFC is considered any foreign corporation where US persons own more than 50% of the total voting power or value of the corporate stock and who individually also own at least 10% of the CFC voting stock. ![]() IRC §951Īny actual distributions are excluded if they have already been accounted for by the shareholder, and only include income for the portion of the year that the corporation qualifies as a CFC. enacted, in 1962, Subpart F - Controlled Foreign Corporations, which stipulates that any Subpart F income - which is income with little or no economic relation to the CFC's country of incorporation - earned by a CFC that is not distributed or otherwise taxed for the tax year in which it was earned is considered constructively repatriated, and therefore, US persons - which includes citizens, residents, domestic corporations, partnerships, estates, and trusts of the US - must include the pro rata share of their CFC Subpart F income in their gross income. Only the Cayman subsidiary earns a profit, but pays no tax on it. Then the CFC sells the widgets to its European subsidiary at the market price, so that when the European subsidiary sells it, it earns no profits. Since the widgets are sold to the Cayman subsidiary for cost, the corporation earns no profit. ![]() To avoid tax, the corporation can sell the widgets at cost to its subsidiary in the Cayman Islands. The US corporation manufactures widgets to sell in Europe. For instance, suppose a United States ( US) corporation forms a controlled foreign subsidiary in the Cayman Islands, which assesses no income tax on corporate profits. Always something waiting for the unwary US shareholder! We would be pleased to discuss this issue with you and how it can impact your holding of CFCs in 2021.Subpart F Income of Controlled Foreign Corporations › Money › Taxes › Business Taxes Subpart F Income of Controlled Foreign Corporationsīecause income from a controlled foreign corporation ( CFC) is not taxed by the United States until it is repatriated, corporations have an incentive to try to source income in so-called tax haven countries to reduce taxes. Of course, there is still the GILTI rules lurking out there to trip up US shareholders of CFCs. This allows related CFCs to move funds around for business operations without worrying about the Subpart F deemed distribution rules. Fortunately, the CFC look-through rule was extended for five years through 2025. While some extenders were made permanent (like the lower excise tax on craft beer mentioned above), others continued to be extended for another one or two years after 2020. This is particularly favorable to individuals who are US Shareholders who otherwise would have to pick up the income at ordinary income tax rates (without any cash) at a 37% rate rather than actual dividend distributions that presently receive the favorable qualified dividend rate of 20%. 954(c)(6) provision exempts these payments from being Subpart F deemed income distributions to the US shareholders of these CFCs. Probably lost in the legislation that ran to over 5,500 pages is the extension of the favorable provision for Controlled Foreign Corporations (CFC) that make payments between themselves of dividends, interest and royalties. These are favorable provisions that have bumped along in Congress, being extended periodically, often after they have expired. ![]() Although the provision that allows for the deduction for expenses paid with PPP loan proceeds and the lower excise tax on craft beer might be more popular and have received more press, an important part of the second coronavirus stimulus bill signed yesterday by President Trump was the passage of several tax extenders. ![]()
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