United States International Tax Planning: Division F The Basis for Controlling Foreign Companies
Division F Rules Restrict the extension of foreign ownership by foreign company owners. The earnings of foreign companies owned by US taxpayers are generally not taxed in the United States until remitted. This general rule is governed by several regimes of deferral, including sub-sector FUS shareholders (typically Americans with 10% or more voting rights) of a controlled foreign corporation (CFC) who must include certain types of income Of CFC, according to the provisions of Division F. These include the credit of the shareholders of the same company as the shareholders who pay the local credit. However, Section F contains a qualifying dividend that is not subject to a 15% tax reduction
A series of articles in Part I, Part F, covers the basic rules.
CFC is a foreign company that owns more than 50% of the shares (by voting or value) of the United States owning more than 10% of the voting foreign capital of the foreign company the company. 50% and 10% are determined by the rule of attribution, so for example the father and son count together and the parent and the subsidiary count together. US residents include US citizens, US resident individuals, US companies, US LLCs, and partners under the laws of any of the 50 states or DCs
CFC 10% or more must Of her / her / his / her taxable income each year he / she / its prorated share:
· Net Subpart F Income, and
Sub-part F income includes income from three main types of the majority of the population:
• Interest, dividends, rents and royalties, as well as income from property that generate such income (known as FPHCI or foreign individual holding company income), with a few exceptions,
• Revenue from the purchase and sale of goods from or sales of goods to or from any person, which is produced and used outside the country in which the CFC is established (FBC sales revenue), and
• Revenue from services performed, represented or substantially assisted by related parties in countries other than the country of incorporation of CFCs (FBC service income)
If sub-sector F gross income (gross income minus Sales commodity costs) are less than $ 1 million, less than 5% of total CFC revenue and are therefore ignored. If more than 70%, then all CFC revenues are treated as subsector F income.
Example: Fred, a US citizen, owns 51% of UK-based Buy-Lo Ltd. Buy-Lo buys nuts and bolts from Indonesian companies, while Fred owns 51%. Buy-Lo had a pretax profit of £ 2m in 2011, selling nuts and bolts in Europe and selling only a small amount in the UK. Buy-Lo pays £ 500,000 in British tax. Fred must include in its 2011 taxable income its share of net tax on purchases, in United States dollars. If the pound is $ 2 = £ 1, Fred's taxable portion F contains $ 1.53 million.
Net Division F Revenue is the total revenue of segment F minus all expenses and deductions related to gross income. Sub-portion F income is after deducting income from distributable income tax. The inclusion of subsection F is limited to CFC income and profit (E & P). If an amount can be included in sub-section F, future income amounts are re-characterized as sub-section F. In addition, if CFC income is subject to a foreign income tax of more than 31.5%, the high tax rate test is According to the United States rather than foreign principles.
Several exceptions apply. FPHCI does not include rental or royalty income activities of the activities of the business rental or royalty income, there are several important conditions. Example: Paris Rent-All Srl (PRA) rents construction equipment through its offices in France and Switzerland. All rents are short-term, including hourly rates. PRA's employees clean, inspect and repair the equipment after each lease.
FPHCI does not include countries that receive interest or dividends from related parties organized in the same country or rent or royalties of property used in the same country. For 2006-2012, dividends, interest, rent or royalties received from any affiliated party are excluded, unless the project is part of the payor's F income.
FBC sales revenue includes trading income, not manufacturing and sales. If a component is purchased from a related party, a question arises as to whether the CFC is manufacturing the goods. Manufacturing involves a process of substantially changing the goods, and generally considered to be manufacturing.
Special branch rules apply to FBC sales revenue. If a branch of CFC produces goods and sells the goods in a branch in a different country, the profit from the sales branch is F segment revenue if the tax cut test is met. A branching rule treats a low-tax branch as a separate entity, resulting in sales between branches as sales, and then selling goods purchased from related parties to customers. Example: The Swiss company manufactures the machine in Germany and sells it in Europe from the Swiss sales office. The branch rule treats the machine as being sold to CFCs from CFCs in Germany and then sold them to customers. Therefore, the profit of the sales segment is segment F income.
CFCs receiving FBC service income may provide services to customers or related parties. If a subcontractor subcontracts a service to a CFC, and the CFC performs those services outside its home country, US shareholders must include net income in their taxable income to earn revenue as CFC.
] US shareholders must also include the E & P amount of CFC investment in US property in their income. To this end, the definition of US property is very narrow. It includes the physical assets of the United States and the amount owed to CFC by the relevant US parties. As a result, the return to the CFC's US shareholder loan results in the income of the US shareholder, almost as if the dividend had been paid. American trade in goods payable is defined in United States property without the exception of the normal terms of trade. CFC's guarantee of related US debt is considered an investment in US property and US shareholders are mortgaging CFC stocks.
No double taxation. Subpart F also includes a mechanism to ensure that shareholders do not tax E & P on CFC allocations.
Conclusion: US shareholders of controlled foreign companies must include certain income in their income each year even if their shares are not distributed. They must also include in their income loans or advances to related parties in the United States. Need to be carefully planned to reduce the impact of sub-part F