Controlled Foreign Corporations Tx 8300. Learning Objectives 1.Explain the reason for Subpart __,...
-
date post
19-Dec-2015 -
Category
Documents
-
view
219 -
download
1
Transcript of Controlled Foreign Corporations Tx 8300. Learning Objectives 1.Explain the reason for Subpart __,...
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
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 $62 38%
10% 10 $39 61%
10% 20 $15 85%
15% 10 $25 75%
15% 20 $ 6 94%
CFC Defined
• Foreign corporation in which
ForeignCorporation
U.S.Shareholders
• More than ___%– ______ power or– Stock _____
• U.S. ____________ own– Directly,– __________, or– Constructively
U.S. Shareholder Defined
ForeignCorporation
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 ____________
• Domestic ____________
• Non-foreign _______ and trusts
Example: Identifying CFCs
ForeignCorporation
U.S.Citizen
NRA
DC
FC DC
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
ForeignCorporation
U.S.Citizen
NRA
DC
FC DC
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
FC1
FC2
FC3
FC4
FC1
FC2
DC3
FC4
What is John’s indirect ownership in FC4?
What is Mary’s indirect ownership in FC4?
John Mary
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
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.
ResidentAlien
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 RulesHow 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
ForP/S
Example: Ownership RulesHow 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
CitizenA
CitizenB
Example: Ownership RulesWho are the U.S. shareholders of FC?
Is FC a CFC?
If FC earns Subpart F income, who recognizes the constructive dividend?
DC
FC
CitizenA
CitizenB
Attribution to Transparent Entity
FCP/S
Partner
• _____ attribution• No attribution via ________ persons• No ___attribution
Beneficiary Shareholder
Estate SCorpFC FC
Attribution to Corporation
• _____ attribution if SH owns ≥ ___%• No attribution via ________ persons• No ___attribution
Shareholder
Corp FC
Examples: Attribution to Rules
Shareholder
Corp FCFCP/S
Partner
FCP/S
Partner
Shareholder
Corp FCFCP/S
PartnerShareholder
Corp FC
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. CitizenA
U.S. CitizenB
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?
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: ManufacturingHogshead 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 RuleDomco 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 IncomeDomco 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
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.