VIII.   CFC - Controlled Foreign Corporation

A foreign corporation where US shareholders own more than 50% of the voting power or stock is a controlled foreign corporation.

Certain income is included in taxable income of the shareholder, even if the CFC's income is not distributed. This generally only applies to US shareholders who own 10% or more of the CFC's stock. The income inclusion, only passes to the stockholders who own stock on the last day in the taxable year in which the company is a CFC.

The shareholder must generally include the pro rata share of subpart F income and increase in earnings invested in US property.

Subpart F income is generally:

1. Insurance income of US risks

2. Foreign base company income

This is the sum of:

a. FPHC income

This generally includes:

• Dividends, interest, royalties, rents and annuities
• Net gains from certain property transactions
• Net gains from certain commodities transactions
• Certain foreign currency gains.

b. Foreign base company sales income

Can arise in the following four types of transactions:

• The purchase of personal property from a related person and sale to any person
• The purchase of personal property from any person and sale to a related person
• The sale of personal property to any person on behalf of a related person
• The purchase of personal property from any person on behalf of a related person.

c. Foreign base company services income

Income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services. The services must be performed for or on behalf of a related party. The services must be performed outside the country under which the CFC is organized. Services performed for a related party include:

• The related party pays the CFC for the services
• The related party is or was obligated to perform the services
• The performance of the services was a condition or material item of a sale of property for the related party
• The related party contributed "substantial assistance" in the performance of the service.
• It does not include income a CFC derives for services that relate directly to the sale of goods made by the corporation, nor when a CFC derives income from services that relate to an offer to sell goods made by the corporation.

d. Foreign base company shipping income

e. Foreign base company oil related income

3. "International boycott income"

4. Illegal payments to foreign government officials

5. Income from blacklisted countries

Exceptions to subpart F income:

• Income is excluded as subpart F income, if the income is subject to a rate of taxation by the foreign country which is higher than 90% of the maximum corporate US tax rate.
• Foreign base company income may have to include all other income, if the sum of the base company income and gross insurance income exceeds 70% of its gross income.
• If the sum of base company income plus gross insurance income is less than 5% of gross income and less than $1 million, then the company generally has no foreign base company income.

Generally, US individuals or corporations owning foreign incorporated companies will be CFC's. The temptation is to minimize tax in the the foreign country. Just remember to weigh the tax savings against US compliance costs.