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A concise plain English introduction to the U.S. tax rules for U.S. shareholders,

officer, directors and their financial and legal advisors regarding the U.S. tax

rules for foreign corporations and other foreign entities owned by U.S. citizens,

residents or corporations.

CoverDesign byAngelaFarley

Designs

Description of U.S. Shareholders of a ForeignCorporation

This authority of taxation comes from the CFC rules that tax U.S. shareholderson "subpart F" income (described below).

A CFC is one in which U.S. shareholders own more than 50%, by voteor value, of the foreign corporation.

Only U.S. persons can be "U.S. shareholders." IRC Section 957(c) refers toIRC Section 7701(a)(30) for the definition of a U.S. person (that is very broadlydefined to include individuals, partnerships, corporations, trusts and estates).

A U.S. shareholder, for purposes of determining whether there is a CFC, is onewho owns 10% or more, by vote, in the foreign corporation (IRC Section951(b)). In determining the 10% or more ownership, the attribution rules

(described below) of both IRC Section 958(a) and IRC Section 958(b) apply.Once it is determined (through direct ownership, indirect ownership under IRCSection 958(a) and constructive ownership under IRC Section 958(b)), thatthere are, in the aggregate, U.S. shareholders who own more than 50%, byvote or value, in the foreign corporation, it is classified as a CFC.

Please note that only those shareholders that own (directly or indirectly) 10%or more of the foreign corporation stock are included in the "more than 50%"ownership test. Thus, if there are 20 U.S. shareholders with equal shares of5% of the foreign corporation, it is not a CFC. Or, if a foreign person owns 50%or more of the corporation, then no combination of U.S. persons will be able to

own "more than 50%" of the foreign corporation. If one U.S. person owns 40%of a foreign corporation, and ten U.S. persons each own 6%, it is not a CFCeven though 100% of the stock is owned by U.S. persons. Only one of thoseU.S. persons is a "U.S. shareholder" as that term is defined for this purpose.However, each taxpayer's ownership percentage must take into account theattribution and constructive ownership rules.

The phrase "attribution" means that one taxpayer is deemed to own the shares

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of certain other related taxpayers, such as a spouse, child or parent becausethe law presumes that these persons have a common interest. "Constructiveownership" is similar to attribution but it is usually applied with respect toentities in which the taxpayer has some control or beneficial interest. A

beneficiary of a trust or estate is deemed to own a portion of any stock ownedby the trust or estate, based on the rights of the beneficiary with respect todistributions from the trust or estate.

A shareholder of a corporation or partner in a partnership is deemed to have aproportionate interest in whatever stock may be owned by the corporation orpartnership but only if the shareholder or partner has a 10% or greater interestin that corporation or partnership.[1] Thus, ownership of a foreign corporationis derived from the direct ownership of the taxpayer plus any indirectownership arising from the attribution and constructive ownership rules. Withrespect to foreign corporations, these rules are insanely complicated and this

is the shortest explanation we can offer without getting involved in the maze ofIRC sections relating to this subject.

However, these terms will be discussed further in connection with theexplanation of "subpart F" income, below.

[1] IRC Section 958(b)(2) and (3), and IRC Section 318(a)(2)(C).

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