![]() ![]() ![]() 952(c) recapture for the CFC's 2006-2008 tax years. The new provision's lookthrough treatment of FPHCI income may trigger Sec. 952(c) recapture if a CFC earned significant FPHCI over a period of years that did not generate subpart F income, and incurred non-subpart F losses during those same years. While the new law poses many tax planning opportunities, there are a few drawbacks. The redeployment of earnings within the group of foreign disregarded entities would not constitute FPHCI because, as foreign branches, such transactions were disregarded for Federal income tax purposes. The CFC would generally engage in financing transactions with these wholly owned entities, or the entities would enter into transactions among themselves. 954(c)(6), taxpayers frequently had to restructure their foreign operations so that a CFC owned several foreign disregarded entities. subpart F income recognition.īefore the enactment of Sec. Effectively, B's high-taxed E&P has been moved to A, with no U.S. 954(c)(6), and local foreign country deductions have been created for B in its high-taxed jurisdiction. B's dividend and interest payments to A are not FPHCI, under Sec. ![]() B also has additional debt capacity and distributes a dividend to A simultaneously, A makes a loan to B, or alternatively, B distributes a note to A see the exhibit on p. B has high-taxed earnings and profits (E&P) arising from non-subpart F income. recognition of subpart F income.Įxample 2: The facts are the same as in Example 1. Under the new law, this transaction will not trigger U.S. Before the TIPRA, B's payments of interest or royalties to A (located in a different country) would trigger subpart F income recognition in the U.S. parent company, X Corp., controls foreign company A, a holding company in a low-taxed jurisdiction, and foreign company 13, a per se corporation in a high-taxed jurisdiction (e.g., 32% rate) wholly owned by A. Note: This provision applies to tax years beginning after 2005 and before 2009.Įxample 1: A U.S. Control, for these purposes, is demonstrated by owning more than 50% of a corporation's stock (by vote or value). multinational companies the same opportunity to transfer earnings among foreign related parties, regardless of the country of incorporation, without creating subpart F income.įor this purposes, a related CFC is either controlled by or controls another CFC, or is a CFC controlled by the same person controlling the other CFC. multinationals, as most foreign countries allow multinational companies to reinvest their active foreign earnings without an additional tax burden. This expansion of the law is meant to level the playing field for U.S. 954(c)(6), enacted by TIPRA Section 103(b), treats dividends, interest, rent and royalties received or accrued from a related CFC to be outside the definition of FPHCI, to the extent attributable or properly allocable to the related person's income that is not subpart F income. This exception does not apply if the payer's subpart F income is reduced by the interest, rent or royalty payments. 954(c)(3), also applies to a CFC's receipt of rent and royalties from a related corporation for the use of property within the country in which the CFC is organized. The "same country exception," included in Sec. shareholder need not recognize the income) if the CFC's dividends or interest arise from a related corporation organized and operating in the same foreign country in which the CFC is organized. ![]() shareholders must include a "deemed dividend" in income in the year the CFC earns the subpart F income (rather than when the CFC distributes the income).Īn exception to subpart F income inclusion occurs (and, thus, a U.S. If a CFC generates subpart F income, typically its U.S. 957(a) provides that a foreign corporation is a CFC if it is owned more than 50% by U.S. Such income includes foreign personal holding company income (FPHCI), generally consisting of dividends, interest, rents and royalties. shareholders") of a CFC are required to recognize their pro-rata share of subpart F income under Sec. In general, this new provision provides an exception from the subpart F rules for dividends, interest, rents and royalties received from related CFCs, if the income that gives rise to the repatriated earnings does not originate from subpart F income when earned by the CFC. One of the TIPRA's provisions allows related parties of certain controlled foreign corporations (CFCs) to transfer international earnings without triggering subpart F income. On May 17, 2006, Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). multinationals involves the new subpart F lookthrough rules. Retrieved from Ī single provision that will have a powerful effect on U.S. APA style: New subpart F lookthrough rules.New subpart F lookthrough rules." Retrieved from MLA style: "New subpart F lookthrough rules." The Free Library. ![]()
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