Units 15 - 18 - updated

Units 15 - 18 - updated - Units 15 18 Controlled Foreign...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Units 15 - 18 Controlled Foreign Corporations (CFC)
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Overview To minimize current tax liability, U.S. taxpayers often attempt to defer the recognition of taxable income. One way to do this is to shift foreign-income generating activity to a foreign corporation (most likely a subsidiary). U.S.-owned foreign corporations with exclusively overseas operations are not subject to U.S. corporate income tax on their profits. Such profits are taxed to the U.S. shareholders only upon repatriation back to the U.S. as dividends.
Image of page 2
3 Overview For CFCs, there is no deferral of U.S. taxation on subpart F income . Instead, subpart F income is taxed currently (similar to foreign branch income) to U.S. shareholders without regard to actual distributions. To limit the use of tax havens (i.e. low-taxed countries) by U.S. companies to avoid paying U.S. taxes, Congress created controlled foreign corporation (CFC) rules in 1962.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 Overview Two Objectives 1. We first determine whether the foreign corporation is a CFC ( controlled foreign corporation ). 2. If the foreign corporation is CFC, we then determine the amount of the CFC’s income which is Subpart F income .
Image of page 4
5 Overview U.S. shareholders include in gross income their pro rata share of Subpart F income (and increase in earnings that the CFC has invested in U.S. property) for the tax year. For Subpart F to apply, the foreign corporation must have been a CFC for an uninterrupted period of 30 days or more during the taxable year.
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 Example Muave, Inc, a calendar year corporation, is a CFC for the entire tax year. Lucky Company, a U.S. corporation, owns 60% of Muave’s one class of stock for the entire year. Subpart F income is $100,000, and no distributions have been made during the year. Lucky, a calendar year taxpayer, includes $60,000 in gross income as a constructive dividend for the tax year.
Image of page 6
7 Example Muave, Inc is a CFC until July 1 of the tax year (a calendar year) and earns $100,000 of Subpart F income. Jerrinu, a U.S. citizen, owns 30% of its one class of stock for the entire year. She includes $14,877 [$100,000 x 30% x (181/365 days)] in gross income as a constructive dividend for the tax year.
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8 U.S. Shareholder A CFC is any corporation in which U.S. shareholders hold more than 50% of the combined voting power or fair market value of the stock. Only those U.S. taxpayers (corporations, citizens, or tax residents) who own 10% or more of the stock are considered U.S. shareholders in determining whether the 50% threshold is met (to determine if the foreign entity is a CFC). Stock owned directly, indirectly, or constructively (refer to next slide for definitions) is counted. All majority-owned foreign subsidiaries of U.S.-based companies are CFCs.
Image of page 8
9 U.S. Shareholder Indirect ownership Includes stock held through a foreign entity (foreign corporation, foreign partnership, or foreign trust).
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern