Understanding what are Controlled Foreign Corporations
As a U.S. person, being a business owner of a foreign company may affect your U.S. tax regardless of whether you receive any distribution from the foreign company. Depending on the percentage of your shares or the tax status of other shareholders, such a business entity can be classified as a “controlled foreign corporation” (CFC). Generally, a foreign corporation is a CFC if U.S. shareholders own more than 50 percent of its voting power or value. CFC tax regulations typically apply to U.S. shareholder who owns 10 percent or more of the total voting power of that foreign corporation. Special rules apply if the foreign corporation is an insurance company. Typically, the ownership threshold for a foreign insurance corporation to be considered a CFC is much lower. Besides, circumstantial factors will also be considered when it comes to determining a foreign corporation’s CFC status.
Subpart F Income
What is Subpart F income, and why is it important? Subpart F income earned by a controlled foreign corporation is taxed to its U.S. shareholders regardless of whether such income has been distributed or not. Subpart F income has different categories. Typically, Subpart F income includes investment income such as dividends, rents, annuities, and interests. Subpart F income also includes gains the CFC receives from purchasing or selling personal property involving a related person and performing services by a related person. A person will qualify as a related person with respect to a CFC if such person (or business entity) controls or is controlled by such CFC (or by the same person who controls the CFC).
Wherever the U.S. shareholder of a CFC resides, he or she should include in their gross income his or her pro rate share of the CFC’s subpart F income as constructive distribution. Although direct, indirect, and constructive ownership is used to determine whether a U.S. person is a U.S. shareholder, only direct and indirect ownership is used for the purpose of assessing the subpart F income inclusion. The good news is that the included constructive distribution can be deducted in the future when the U.S. shareholder receives such income. However, the calculation of such constructive distribution is no simple task. If you want to speak to a professional, contact us today and let us know how we can help.
This area of law is particularly complex and requires a high level of training. For this reason, our attorneys train continuously and hold a significant amount of experience in the field of tax law. THEVOZ & Partners is a law firm with offices in Austin and Lausanne specializing in the provision of tax and legal services to individuals and companies in the United States and Europe. We help clients navigate a litany of domestic and international tax issues ranging from compliance to planning and even litigation. We understand that each client has unique needs and goals, and we pride ourselves on taking a personalized approach to tailor our services to meet those needs.
Olivier Thevoz
Partner and Founder
Anthony E. Parent
Partner
Stephen M. Tannenbaum
Partner
Olivier Francioli
Partner
Fabrice Kuhn
Partner
THEVOZ & Partners has an experienced team that is resolutely devoted to protecting the interests of its clients. The firm's attorneys are committed to maintaining the highest level of expertise in their fields of activity and are continuously developing their professional and technical skills by participating in seminar courses and staying informed of the most recent legal literature. They publish scientific articles and participate in specialized conferences.
THEVOZ & Partners is an international law firm best known for its practice in international tax, civil litigation, and business transaction structuring. We are committed to providing our clients with tailored and competent services.
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