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CFC Income Recognition: Five Groups | International Tax Lawyer & Attorney

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Ownership of a Controlled Foreign Corporation (“CFC”) presents unique income tax challenges under US international tax law. One of them is the fact that US shareholders of a CFC may have to recognize CFC income on their US tax returns beyond what is required under US domestic tax laws. In this article, I will introduce the readers to the main five CFC income recognition groups.

CFC Income Recognition: General Definitions of “CFC” and “US Shareholder”

Before we describe the five main CFC income recognition groups, we should briefly define the US international tax concepts of “CFC” and “US Shareholder”. I will provide only a general definition of both here; there are some specific circumstances that may modify this definition.

Generally, a foreign corporation is a CFC if US shareholders own more than 50% of the corporation’s stock. One determines the percentage of stock ownership either based on the value of stocks or the voting rights associated with these stocks.

A person is considered to be a US Shareholder if this person is a US person that owns more 10% or more of the total voting power or the total value of all classes of stock in a foreign corporation. Besides the direct ownership of stock, one should also include this US person’s indirect ownership of stock as well as any stock he (or it) owns constructively by the operation of any of the attribution rules of IRC §958(b). These rules are described in detail in other articles on sherayzenlaw.com.

CFC Income Recognition As A Special Set of US International Tax Rules

When we talk about “CFC income recognition”, we mean a set of special US international tax rules that require US shareholders of a CFC to recognize income from the CFC that would not be normally taxed. In other words, this is income that no one would recognize under the normal US domestic tax rules or even any other US international tax rules.

CFC Income Recognition: Five Main Groups

The CFC income recognition rules force US shareholders of a CFC to increase their gross income only by certain types of income of a CFC. There are five main groups of this special CFC income:

  1. §951(a)(1)(A): subpart F income earned by a CFC;
  2. Former §951(a)(1)(A)(ii) and former §951(a)(1)(A)(iii) (both repealed by the 2017 tax reform, but still relevant for the years beginning before January 1, 2018): previously excluded subpart F income withdrawn from certain types of investments;
  3. §951(a)(1)(B): investments in certain types of US property;
  4. §951A: GILTI (Global Intangible Low-Taxed Income) income starting January 1, 2018; and
  5. §59A: base erosion minimum tax starting January 1, 2019.

Note that these are not the only rules that may accelerate recognition of CFC income. As stated above, these five groups of income are the ones that apply only to US shareholders of a CFC. However, there are other tax rules that apply to CFCs as well as other types of corporations.

Contact Sherayzen Law Office Concerning CFC Income Recognition Rules

Each of the aforementioned five groups of CFC income contains a huge amount of highly complex rules and exceptions. There are also important rules for the interaction of these categories with each other as well as other general US tax rules. It is very easy to get into trouble in this area of law without the help of an experienced international tax lawyer.

If you are US shareholder of a CFC contact Sherayzen Law Office for professional tax help. We have successfully helped US shareholders around the world with their US tax compliance concerning their ownership of CFCs, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Subpart F Active Financing Income Exceptions and Look-Through Rule Extended

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The recent American Taxpayer Relief Act of 2012 passed by Congress and signed by the president on January 2, 2013 extended the temporary exceptions for “active financing income” from subpart F foreign personal holding company income, foreign base company services income, and insurance income. The same act also extended the subpart F look-through rule of IRC Section 954(c)(6).

This article will briefly explain the active financing exception to the subpart F rules and the look-through rule of Section 954(c)(6) and detail the extensions of such provisions provided for by the American Taxpayer Relief Act of 2012. The article is not intended to convey tax or legal advice.

IRS Subpart F rules and the IRC sections covering Controlled Foreign Corporations involve many complex tax and legal issues, so it is advisable to seek an experienced attorney in these matters. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Active Financing Income Exception to Subpart F Rules

IRC Section 954(h) provides for a special exception from IRS subpart F rules for “[I]ncome derived in the active conduct of banking, financing, or similar businesses.” In general, a controlled foreign corporation (“CFC”) will be treated as being predominately engaged in the active conduct of banking, financing, or similar businesses if more than 70% of the gross income of the CFC is derived directly from the, “[A]ctive and regular conduct of a lending or finance business from transactions with customers which are not related persons.”

The active financing exception was originally included in the Taxpayer Relief Act of 1997; the same act also modified Passive Foreign Investment Company (“PFIC”) rules to eliminate overlap between Subpart F and PFIC provisions as a special one-year exception (President Clinton vetoed this provision under the Line Item Veto Act, but it was reinstated after the US Supreme Court ruled that the Line Item Veto Act was unconstitutional). IRC Section 954(h)(3) was later amended by the American Jobs Creation Act of 2004 (Public Law 108-357) to provide for the temporary exception, and the Tax Increase Prevention and Reconciliation Act of 2005 subsequently extended the exception for tax years ending in 2007 and 2008. The Middle Class Tax Relief Act of 2010 further extended the active financing exception through 2011. Under the new American Taxpayer Relief Act of 2012, the exception was retroactively extended through the end of 2013.

Subpart F Look-Through Rule of IRC Section 954(c)(6)

IRC Section 954(c)(6)(A) (“Look-thru rule for related controlled foreign corporations “) provides that, in general, “For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States.” Treatment of other types of equivalent interest is also addressed in the section.

The Look-Through Rule was part of Tax Increase Prevention and Reconciliation Act of 2005 and originally applied to tax years beginning after December 31, 2005, and before January 1, 2009. Certain parts of the original look-through rule were subsequently modified by later acts, and the rule itself was extended through the end of 2011 by the Middle Class Tax Relief Act of 2010. Under the new American Taxpayer Relief Act of 2012, the rule now applies to foreign corporation tax years beginning after December 31, 2005, and before January 1, 2014.