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Controlled foreign corporation
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==United States Subpart F rules== Enacted in 1962, these rules incorporate most of the features of CFC rules used in other countries. Subpart F<ref>[[Internal Revenue Code]], Chapter 1 Subchapter N, Part III, Subpart F, being sections [https://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_A_20_1_30_N_40_III_50_F.html 951-964], hereafter IRC section xxx. Also see [http://www.access.gpo.gov/nara/cfr/waisidx_08/26cfr1j_08.html 26 CFR 1.951-1 ''et seq''.] {{Webarchive|url=https://web.archive.org/web/20100605085645/http://www.access.gpo.gov/nara/cfr/waisidx_08/26cfr1j_08.html |date=2010-06-05 }}.</ref> was designed to prevent U.S. citizens and resident individuals and corporations from artificially deferring otherwise taxable income through use of foreign entities.<ref>{{Cite web|title = The Deferral of Income Earned Through U.S. Controlled Foreign Corporations - A Policy Study|url = http://www.treasury.gov/resource-center/tax-policy/Documents/subpartf.pdf|publisher = Office of Tax Policy, [[United States Department of the Treasury]]|date = December 2000|accessdate = 2012-07-10|archive-url = https://web.archive.org/web/20120925100650/http://www.treasury.gov/resource-center/tax-policy/Documents/subpartf.pdf|archive-date = 2012-09-25|url-status = dead}}</ref> The rules require that: * A ''U.S. Shareholder'' * of a ''Controlled Foreign Corporation'' ("CFC") must include in their/its income currently * Their/its share of Subpart F Income of the CFC ("Subpart F income"), * Their/its share of aggregate income of 10% owned foreign corporations in excess of an aggregate return on depreciable tangible property of such 10% owned foreign corporations ("Β§951A"), and * Their/its share of earnings and profits ("E&P") of the CFC that are invested in ''United States Property'' ("Β§956"), and further exclude from his/its income any dividends distributed from such previously taxed income. Each of the italicized terms above is defined: :* A ''Controlled Foreign Corporation''<ref>IRC section 957(a).</ref> is any corporation organized outside the U.S. (a foreign corporation) that is more than 50% owned by ''U.S. Shareholders''. :* A ''U.S. Shareholder'' is any U.S. person (individual or entity) that owns 10% or more of the foreign corporation. Complex rules apply to attribute ownership of one person to another person.<ref>IRC section 958.</ref> :* ''United States Property'' specifically includes obligations of or investments in related parties, tangible property with a physical situs in the U.S., and stock of a domestic corporation. It does not include bank deposits or obligations of unrelated persons.<ref>IRC section 956.</ref> Subpart F income includes the following:<ref>IRC sections 953 and 954.</ref> :* '''Foreign personal holding company income''' (FPHCI), including dividends, interest, rents, royalties, and gains from alienation of property that produces or could produce such income. Exceptions apply for dividends and interest from related persons organized in the same country as the CFC, active rents and royalties, rents and royalties from related persons in the same country as the CFC, and certain other items.<ref>IRC section 954(c).</ref> :* '''Foreign base company sales income''' from buying goods from a related party and selling them to anyone or buying goods from anyone and selling them to a related party, where such goods are both made and for use outside the CFC's country of incorporation. A branch rule may cause transfers between a manufacturing branch of a CFC in one country and a sales branch in another country to trigger Subpart F income.<ref>IRC section 954(d).</ref> :* '''Foreign base company services income''' from performing services for or on behalf of a related person. A substantial assistance rule can cause services performed for unrelated parties to be treated as performed for or on behalf of a related party.<ref>IRC section 954(e).</ref> :* '''Foreign base company oil-related income''' from oil activities outside the CFC's country of incorporation.<ref>IRC section 954(g).</ref> :* '''Insurance income''' from insurance or annuity contracts related to risks outside the CFC's country of incorporation.<ref>IRC section 953.</ref> but it does not include: :* Items of income which (after considering deductions, etc., under U.S. concepts) were subject to foreign income tax in excess of 90% of the highest marginal U.S. tax rate for the type of shareholder; :* ''[[De minimis]]'' amounts of Subpart F income in absence of other Subpart F income in the period; :* Such income if the CFC has a deficit in E&P, in which case it is deferred from recognition until the CFC has positive E&P.<ref>IRC section 952.</ref> :* Any dividend received which is considered paid from amounts previously taxed under Subpart F.<ref>IRC section 959.</ref> In addition, after 2017 10% U.S. shareholders of CFCs must include in their income currently their share of aggregate return on depreciable tangible assets in excess of 10% for CFCs in which they are shareholders.<ref>IRC section 951A.</ref> Corporations that are U.S. shareholders get to deduct 50% of this inclusion.<ref>IRC section 250.</ref> Corporate U.S. shareholders are entitled to a foreign tax credit for their share of the foreign income taxes paid by a CFC with respect to E&P underlying a Subpart F inclusion. Creditable taxes are reduced by 20% for Β§951A inclusions.<ref>IRC section 960.</ref> To prevent avoidance of Subpart F, U.S. shareholders of a CFC must recharacterize gain on disposition of the CFC shares as a dividend.<ref>IRC section 1248.</ref> In addition, various special rules apply.
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