IX.   "FPHC" - Foreign Personal Holding Company

This is a foreign company where 5 or fewer US individuals own more than 50% of the stock AND at least 60% of its income is foreign personal holding company income. (Banks and tax exempt corporations are excluded from the definition). FPHC income is basically:

• Dividends
• Interest
• Royalties
• Annuities
• Gains from sale or exchange of stock or securities (dealers are excluded)
• Gains from futures transactions in commodities (excluding bona fide hedging transactions of producers)
• Income from trusts or estates
• Income from personal service contracts (if the contract designates the individual (or that person can be designated by some person other than the corporation) and that person owns more than 25% of the stock by value)
• Payment for use of corporate property by stockholders (owning more than 25% of the stock by value) and more than 10% of the FPHC's gross income is FPHC income (without rents and payments for the use of that property).
• Rents
• Certain US shareholders must pay tax on their share of undistributed FPHC income (viz taxable income).

A (US) Personal Holding Company is subject to 28% taxation. A FPHC is not subject to this tax. The shareholders are, however, subject to taxation at the usual rates, as deemed dividends - ON THE ENTIRE CORPORATE INCOME (adjusted for tax purposes).

The taxable income includes foreign and domestic source taxable income adjusted for:

• Federal income taxes, except accumulated earnings tax or personal holding company tax; and income, war profits, and excess profits taxes to foreign countries
• charitable contributions
• may not claim dividends-received deductions
• may only deduct preceding taxable year losses
• disallowance of certain deductions related to the use of property to the income received. This may be negated if the income is the highest obtainable, it is held in the course of a business, and there was a reasonable expectation of profit.
• no deductions for certain deferred compensation
• no deduction for taxes paid on behalf of shareholders

Tax on undistributed FPHC income is essentially taxed to the shareholders of all the company's undistributed FPHC income and is treated as dividends to the shareholders.

In general terms, at all costs, avoid becoming a FPHC. Even if the tax is not material, then the paperwork will be!