umling primosch subpart f

1

Subpart F

Presented by:

Seth Primosch

Edward Umling

April 19-20, 2010

Discussed in this Module

Policy Overview of “Subpart F” ( 951-964)

How Subpart F Accelerates U.S. tax on a CFC’s

earnings

Branch Rules

Foreign Personal Holding Company Income

Look-through Rules

Non-Dividend Repatriation

Planning for Distributions of PTI

2

Policy Overview

General Rule – Deferral

A U.S. taxpayer is not subject to taxation on the earnings of

a foreign subsidiary until the earnings are repatriated.

Exceptions ─ “tainted income”

(but only to the extent of E&P)

Foreign Base Company Sales Income “FBCSI”

Foreign Base Company Sales Service Income “FBCSvI”

Foreign Personal Holding Company Income “FPHCI”

Certain Investments in US property 956

3

Note: list is not all inclusive

“Tainted” Income

U.S. tax arises only if a CFC earns “tainted” income but

only to the extent of earnings & profit

Personal holding company income (inherently passive

items) dividends, interest, rents, royalties etc.

Exceptions: Look Through and same country exception

through January 1, 2010

Foreign Base Company Income

Section 956 income (earnings invested in U.S. property)

6

“Tainted” Income

Such subpart F income is taxable as a dividend and a

foreign tax credit is available.

Upon a subsequent distribution the dividend is not taxed

but it is treated as previously taxed income.

7

8

Foreign Base Company

Sales Income

I.R.C 954(d)(1)

9

FPHCI

FBCSvI FBCSI

FBCI

FBC oil related

income

Base Company Income has four categories

Additional 951 inclusion under Subpart F not

discussed in the Module

Foreign base company oil related income

Insurance income

Bribe income

Boycott income

Income from blacklisted countries

Withdrawals from investments in less developed

countries

Section 956 – (will be discussed later)

10

A simple explanation

FBCSI represents income from certain related party

transactions where the products acquired or sold do

not have a economic and legal connection to the CFC’s

country of incorporation because they were not

manufactured or consumed in the CFC’s country of

incorporation.

11

Base Company Sales Income

Defined in 954(d)(1)

The purchase from a related person and sale to

any person,

The purchase from any person and sale to, a

related person, and

the purchase from any person or sale to any

person on behalf of a related person.

12

In case of property sold on behalf of a related person,

the property which is sold) is manufactured,

produced, grown, or extracted outside the country

under the laws of which the controlled foreign

corporation is created or organized and;

the property is sold for use, consumption, or

disposition outside such foreign country, or, in the

case of property purchased on behalf of a related

person, is purchased for use, consumption, or

disposition outside such foreign country.

13

Base Company Sales Income

The “foreign base company sales income” referred to

means income from the purchase and sale of property,

without any appreciable value being added to the

product by the selling corporation.

14

Policy Overview

U.S.

Mfg.

Lower Tax

No Mfg

Country Y

Buyer

Country X

100%

15

Example- Separation of selling in

manufacturing from to achieve a

lower tax liability

Example without Sales Subsidiary

US

Sales Price 800

COGS 100

Profit 700

Tax Rate 35%

U.S. Tax245

U.S.

Foreign

Buyers

16

Tax Incurred

Now, interpose a “Sales Subsidiary”

US FBC Buyers

Sales 200 700 800

GOGS 100 125 700

Profit 100 575 100

Tax

Rate

35% 8% 28%

Final

Tax

35 46 28

U.S.FBC sales

sub in low

Tax

Country Y

Foreign

Buyers

Country X

17

Results

US FBC Buyers Total

Tax

Otherwise

US Tax

Difference

Sales 200 700 800 800

GOGS 100 125 700 100

Profit 100 575 100 700

Tax Rate 35% 8% 28% 35%

Final Tax 35 46 28 109245

136

18

How Subpart F Operates

U.S.

Luxembourg

(Mfg.)

UK

Buyer

Sells

Product

100%

Luxembourg

Sales Office

Sales Outside

Luxembourg

constitute FBS Income

19

How Subpart F Operates

U.S.

Luxembourg

(Mfg.)

UK

Buyer

Sells

Product

100%

Luxembourg

Sales Office

“Base Company Sales Income”

20

Exceptions to the FBCSI

If product is purchased and sold to unrelated party

Product is manufactured in the home country of

incorporation of the CFC

Product that is manufactured by the CFC (954(d)(1)

(Substantial Transformation Test)

Product sold for use and consumption in the CFC

country of incorporation (same country exception)

21

Product that is manufactured by the CFC

(Proposed Reg. 1.954-3(a)(4)(iv)(b))

(Substantial Contribution Test)

Issued December 24, 2008



The CFC satisfies the test if all the facts and

circumstances clearly demonstrate that the CFC made

a substantial contribution

through the activities of its employees to the

manufacture of the Property.

See Proposed Reg. 1.954-3(a)(4)(iv)(a)

22

through the activities of its employees

Old Regulations - Test 1

“Substantial Transformation”

If purchased personal property is substantially

transformed prior to sale, the property sold will be

treated as having been manufactured, produced, or

constructed by the selling corporation.

23

Old Regulations - Test 2

Provides when a CFC is considered Manufacturing

If the activities of the CFC are “substantial in nature”

and are considered to constitute manufacturing”

“substantial in nature” – safe harbor test provided

where conversion costs account for 20% of the cost of

goods sold.

24

Old Regulations

Substantial Transformation Of Property

Examples in Treasury Regulation 1.954-3(a)(4)(ii)

The transformation of wood pulp to paper

The transformation of steel rods to screws and bolts

The transformation of fish into canned fish

25

New Regulations



The CFC satisfies the test if… a substantial

contribution through the activities of its employee

Such as….

26

•Oversight and direction of manufacturing

•Material selection, vendor selection and

control of raw materials, work-in-process,

and finished goods

•Management of manufacturing costs (i.e.

risk of loss, or cost reduction)

•Control of logistics

New Regulations

Application of the


“The weight accorded to the performance of

any quantum of any activity (whether or not

specified…) will vary with the facts and

circumstances of the particular business...”

27

Stated another way…

The Substantial Contribution test is a fact and

circumstance test where no single activity is more

important than another.

Under the New Regulations

How is the Substantial Contribution Test is Applied ?

28

US

P

CFC 2

Country X

CFC 1

Country X

Unrelated

CM

Country Y

Property is purchased from

a related party

Property is

delivered to a

contract

manufacturer

under terms of

agreement


Continued…

29

CFC 1

Country X

Unrelated

CM

Country Y

CM performs substantial

transformation, assembly and

conversion outside of Country X

CFC 1 retains the right to

control raw materials, work

in process, finished goods

and right to oversee and

direct activities or

processes but does not

exercise through its

employees, its powers to

control the raw materials,

WIP, FG and does not

exercise powers of

oversight and direction.

CFC 1does not through its

employees direct the use

or development of the

intellectual property

CFC1 owns intellectual

property used in

manufacturing process


30

CFC 1

Country X

Finally CFC 1 sells the

finished product outside

Country XBuyers

Country T

no substantial contribution to manufacturing

RESULTS

CFC 1 does not satisfy the substantial contribution

test because it does not make a substantial

contribution through the activities of its employees to

the manufacture of the product.

Mere contractual rights to control materials and to

direct the manufacturing activities or process

pursuant to which the property is manufactured,

along with ownership of intellectual property are not

sufficient to satisfy the test.

31

Explanation of Results

Change the Facts - Example

Assume the same facts except for the following:

CFC 1 through its employees, engages in designing the

product, participating in quality control and maintain

control over manufacturing and related logistics.

Moreover, employees of CFC 1 exercise the right to

oversee and direct the activities of CM in the

manufacture of product.

32

Result

Under the facts and circumstances of the business,

CFC 1 would satisfy the test because it makes a

substantial contribution through the activities of its

employees to the manufacture of product.

33

Another Example

Contract Manufacture

34

CFC 1

Country X

CM

Country Y

CM provides its own materials

and physically performs the

substantial transformation,

outside CFC 1 home country of

incorporation

Buyers

Country T

Additional Information

Employees of CFC 1 select the materials that will be

used to manufacture

CFC 1 does not own the materials or work-in-process

during the manufacturing process. However, CFC 1

through its employees, exercises oversight and

direction of the manufacturing process and provides

quality control.

CFC 1 manages the manufacturing costs and

capacities with respect to the product by managing the

risk of loss and engaging in planning and production

scheduling.

35

Question

36

CFC 1

Country X

CM

Country Y

Buyers

Country T

Is there a

subpart F

pickup here?

Result

If the manufacturing activities undertaken with

respect to product occur through the activities of its

employees prior to sale then CFC 1 would qualify for

the manufacturing exception because it makes a

substantial contribution through the activities of its

employees to the manufacture of product.

37

39

Foreign Base Company Service

Income

(“FBCSvI”)

I.R.C. 954(e)(1)

FBCSvI

Policy Overview

Performing services “For, or on behalf of”

Substantial Assistance Test

40

Policy Overview

U.S.

Low Tax

Country Y

Buyer

Country X

Sells Items that Require

Service Contracts

Services the Product as a

condition of the sale

41

Policy Purpose for BCSvI

Deny tax deferral where the service subsidiary is

separated from the manufacturing activity or related

corporation and organized in a country to obtain a

lower tax rate from service income

Exception

Same Country Exception

Unrelated Person

42

FBCSvI 954(e)(1)

Income (whether in the form of compensation,

commissions, fees, or otherwise) derived in connection

with the performance of technical, managerial,

engineering, architectural, scientific, skilled, industrial,

commercial or like services which

CFC performs for or on behalf of a related person

(954(e)(1)(A) )

Outside the country of incorporation (954(e)(1)(B) )

43

“For, or on behalf of”

Services must be performed “for, or on behalf of,” a

related person to constitute foreign base company

services income.

The regulations identify four situations where a CFC

is to perform services for, or on behalf of, a related

person when the services are not directly provided to a

related person, but the related person is involved with

the services transaction

44

“For, or on behalf of”

Treas. Reg. 1.954-4(b)(1)(i) thru (iv)

The receives a financial benefit from, a related person

for performing services

CFC performs services which a related person was

obligated to perform

CFC performs services for the property sold by a

related person and that performance constitutes a

condition of the sale

The CFC receives substantial assistance from a related

person by performing the CFC's services

45

Substantial Assistance Test

Treas. Reg. 1.954-4(b)(2)(ii)

If substantial assistance furnished by a related person

then, the CFC is deemed to have provided services (i.e.

supervision, know-how, financial assistance and

equipment, material, or supplies).

Test of substantial - If assistance is a principal element

in producing the income

46

Measuring

“if assistance is the “Principal Element”

The cost to the controlled foreign corporation of the

assistance furnished equals or exceeds 50% or more of

the total cost to of the services performed by such

corporation.

47

Example – Substantial Assistance 1.954-4(b)(3)

48

CFC

A

US

CFC

B

CFC

C

B Manufactures and

sells machines to CB Pays A to do

installation and

maintenance

Exceptions to FBCSvI

An exception to the definition of foreign base

company services income is provided for income

derived by a CFC in connection with certain

services related to sales of property which is

produced, manufactured, grown or extracted by

the CFC.

See I.R.C. 954(e)(2); Treas. Reg. 1.954-4(d).

49

51

Branch Rules

I.R.C. §952(d)(2 )

Congressional Concerns

Companies may circumvent anti-deferral by using a

branch company

Separation of the sales and manufacturing functions

inappropriately

Causes profits to end up in a lower tax jurisdiction

52

General Rule - 954(d)(2)

Branch rule is implicated where a CFC carries on

purchasing or selling activities by or through a branch

outside the CFC’s country of incorporation and using

that branch has substantially the same tax effect as if

the branch were a wholly owned subsidiary.

Branch is then treated as a separate corporation in

determining FBCSI.

53

General Rule - 954(d)(2)

The December Regulations treat the branch rules as

mutually exclusive: If the manufacturing branch

rules apply the sales branch rules does not apply (i.e.

no overlap)

Note- There are different rules for

sales and manufacturing branches

54

Two Scenarios – Two Tests

MFG Sales

Sales MFG

US US

55

Sales Test

MFG Sales

Sales MFG

Mfg. Test

56

Sales Test

MFG

Country Y

Sales

Country

X

Branch rule applies to

sales/purchase branch when the

tax rate imposed by the country

where the branch is located is

less than 90% of and at least 5

percentage points below the

ETR if it had the income

otherwise been earned in the

country where the CFC is

located

57

Sales Test

MFG

Country Y

Sales

Country

X

1. Compare the actual tax rate

on income in country X to a

hypothetical tax that would

apply if those sales were

earned in country Y

2. Apply the rate disparity test

Test

looks

up

Tax determinations shall be made by

taking into account only the income, war

profits, excess profits, or similar tax laws

(or the absence of such laws) of the

countries involved. Treas. Reg. 1.954-

3(b)(2)(i)(e) 58

Sales

Country

Y

MFG

Country

X

Mfg. Test

Branch Rule applies if the tax

rate in the country in which the

CFC is organized is less than

90% of and at least five

percentage points below, what it

would be if the income was

earned where the

manufacturing branch is

located.

The test is REVERSED

for the Mfg branch

59

Test

looks

down

Sales

Country

Y

MFG

Country

X

Mfg. Test•Compare the actual tax rate on

sales income to a hypothetical

tax that would apply if the sales

income were earned in the

Manufacturing branch home

country

•Hypothetical tax is determined

under foreign law

Test

looks

down

60

Manufacturing branches are tested separately

Manufacturing branches are tested separately if the

CFC manufactures “different” products in separate

branches or hybrid entities.

“Different” = “Distinct”

61

Branch

A

Branch

B Example

Results

Branches A&B are tested separately if they are

making distinct products.

NOTE: One branch cannot taint another

.

Testing Separately

Country A sells to

related and unrelated

parties and does not

make substantial

contributions to the

manufacturing through

its employees. Country

A does not tax Country

B and C branches

62

Country A

10%

Country

B

12.5%

UK

28%

.

Manufactures flat

screens (LCD’s) for

TV’s

Manufactures

Television Chassis

Sells Televisions

Results

The Analysis starts with the

Country B. The tax rate is not

5 percentage points below the

tax rate in Country B that

would apply if the LCD’s

were sold in the Country B

63

Country

A

10%

Country

B

12.5%

Country

C

28%

.

Manufactures flat

screens (LCD’s) for

TV’s

Manufactures

Television Chassis

Sells Televisions

Test

looks

down

Results - Continued

Next, analyze the Country

C. The Country A rate is

low taxed when compared

with Country C if the

Chassis were sold through

the Country C branch.

Therefore, the branch

rules apply to the chassis

but not to the LCD’s.

64

Country A

10%

Country

B

12.5%

Country

C

28%

.

Manufactures Flat

screens for TV’s

Manufactures

Television Chassis

Sells Televisions

Test

looks

down

Discussion

The branch rules do not automatically mean that

the income is FBCSI but that the parent

company and the branches are treated as

separate CFC’s.

The income from Country B is not tainted and

therefore excluded however, the income from

Country C is included and currently taxable

assuming no exception applies.

65

Two tests…but six procedural steps

1. Identify the sales and purchasing locations

2. Determine the ETR in the locations

3. Identify what locations the sales or purchasing

should be compared with to determine whether low-

tax jurisdiction exists

4. Determine how the sales and purchasing would have

been taxed in the manufacturing or the country of

incorporation (if relevant)

5. Apply the tax rate disparity test (mechanical test)

6. Determine the otherwise FBCSI

66

Discussion - The Substantial Contribution Test

Under the December Regulations, if the substantial

contribution test is met then, it is the same as physical

manufacturing. So if only one location satisfies the

substantial contribution test then that location

represents the manufacturing location for purposes of

applying the branch rules.

67

B

Mfg

A

Sales

C

Mfg

.

Did not meet the

substantial

contribution test

so tax rate

disparity test is

applied against B

Test 1

looks

Test 2

looks

down

Trying to locate the tested manufacturing branch

when more than one location satisfies the

manufacturing test

68

Country

10%

Country

18%

Country

21%

.

Manufactures

Television Chassis

Sells Televisions

Manufactures

Television Chassis

If more than one

location independently

satisfies the

manufacturing test on

the same item of

property then, the

location with the lowest

ETR is the

manufacturing location

69

Country A

10%

Country

B

12.5%

Country

C

28%

.

Ships Product to

unrelated CM

Sells Product

Substantial

Contribution made

through its employees

to Product of CM

Contract

Manufacturer

Country D

70

Country A

10%

Country

B

12.5%

Country

C

28%

.

Contract

Manufacturer

Country D

Result The branch rule does NOT apply...

Substantial transformation test is

met by country C branch AND, the

new substantial contribution test is

met by Country B branch.

Therefore, the branch rule uses only

the 12.5% rate for the tax rate

disparity test.

What happens if no single location satisfies

the manufacturing test when substantial

contribution is present?

71

CFC 1

Sales

CM

Components

CM

Final

Product

identify the sales location

that should be tested

Identify purchasing

locations.

Assume substantial

contribution made to

mfg through its

employees by CFC 1

Group various locations together (i.e. all

locations that are not treated as “high-tax” are

grouped together and all locations that are

treated as “low-tax” are grouped together)

72

CFC 1

Sales

CM

Components

CM

Final

Product

Determine which grouping that provides the

“demonstrably greater” contribution to

manufacturing and test that grouping first.

73

CFC 1

Sales

CM

Components

CM

Final

Product

This example assumes the low tax jurisdictions

provides the “demonstrably greater” contribution

to the manufacture than the “high-tax”

jurisdictions.

74

CFC 1

Sales

CM

Components

CM

Final

Product

Perform tax rate disparity test on low tax

jurisdictions

75

CFC 1

Sales

CM

Components

CM

Final

Product

After you do the tax rate disparity test how much

income is FBCSI?

What if you have included in some of the low tax

groupings locations that do not purchase or sell. Is

this included as FBCSI?

The branch rule is intended to tax sales and

purchasing income that has been separated from the

manufacturing process. However, the December

Regulations are not quite clear on this issue.

76

Question?

Debrief

Step 1 – identify the tested sales and purchasing locations.

Step 2 – group various locations together (i.e. all locations

that are not treated as “high-tax” are grouped together and

all locations that are treated as “low-tax” are grouped

together)

Step 3 – determine which grouping provides the

demonstrated greater contribution to manufacturing

Step 4 – perform tax rate disparity test on that grouping

first

Step 5 – Include FBCSI as subpart F77

International Tax Planning Issues to Consider

Suppose a CFC purchases manufactured product

from an unrelated party and sells to an unrelated

party? Assume also that the CFC makes a substantial

contribution through its employees to the manufacture

of the final product.

Is there FBCSI? Do the branch rules apply?

78

80

Foreign Personal Holding

Company Income

(“FPHCI”)

I.R.C. 954(c)

FPHCI Includes…

FPHC income is that portion of income that includes:

dividends, interest, royalties, rents, and annuities

the excess of gains over losses from the sale or exchange

of property on certain property where a deemed

dividend occurs

other items: f(x) currency gains, interest equivalents,

commodity transactions (list is not all inclusive)

81

Exceptions to FPHCI

Temporary provision granting look-through rules

beginning after December 31, 2005 and before

January 1, 2010.

Applies to dividends, interest, rents and royalties to the

extent not allocable to subpart F income

Exception provided for rents and royalties from a related

corporation received for the privilege of using property

within the country where the CFC is organized (same

country exception)

Active Trade or Business Exception for rents and

royalties (Treas. Reg. 1.954-2(b), (c) and (d))

Export Financing (banks only)82

How to Apply the Same Country Exception

Dividends and interest ─ if CFC is incorporated where

the business of the payor is located

Rents and royalties ─ if CFC is incorporated where the

property is used

•Payor ─ is related to CFC

•Payor ─ is organized under laws of same country as

CFC

•Payor ─ uses substantial part of assets in trade or

business in country of incorporation (50% test)

83


Rents and royalties ─ if CFC is incorporated where the

property is used, payor is related and the royalty is for

the privilege of using the property within the country

of the laws of the CFC

Exception – rents allocated to insurance income or FBCI

84


Portfolio interest is not excluded

Interest allocable to payor’s foreign base company

income is not excludable

Dividends must be paid out of E&P earned when the

amounts were owed to the owner of the stock

85

Example ─ same-country exception rule

GmbH 1

GmbH 2

GmbH 1 acquires GmbH 2 and GmbH 2 dividends up

RESULT

Same country exception

will not apply to pre-

acquisition earnings &

profit

86

Alternate Scenario of Same-Country Exception

GmbH P

GmbH Holding

GmbH S

GmbH forms a Holding company to acquire

GmbH Sub

RESULT


should apply to pre-

acquisition earnings &

profit because GmbH held

stock when GmbH

Holding earned its E&P

87

Process for Inclusion of “Subpart F income”

( 954) ─ Determine income included as Subpart F

( 954(b)(5)) ─ Allocate and Apportion Expenses

( 954(b)(3);(4)) ─ Either full inclusion; de minimis

exception or high tax exception

( 952)(c)) ─ Is there an E&P limitation?

88

Full Inclusion Rule 954(b)(3)(B)

If the sum of the foreign base company income and the

gross insurance income for the taxable year exceeds

70% gross income, the entire gross income for the

taxable year shall be treated as foreign base company

income or insurance income (whichever is

appropriate).

89

Exception For Certain Income Subject To High Foreign

Taxes (“High Tax Exception”)

income that was subjected to an effective rate of by a

foreign country greater than 90 percent of the

maximum U.S. rate of tax will not be considered FBC

income. This exception does not apply to Oil related

income.

Shareholders must elect to exclude income under the

high-tax exception (Treas. Reg. 1.954-1(d)(1)(i)).

90

91

Non-Dividend Repatriation

I.R.C. 956

91

Introduction

Generally when a loan is made by a subsidiary CFC

corporation to its parent or to another affiliate it is not

considered a taxable event. However, Code Section

956, provides an exception, by treating an amount

loaned by a controlled foreign corporation (CFC) to a

related U.S. person as a deemed dividend to the CFC's

U.S. shareholders.

92

Example

93

US

Parent

GmbH

S.A.

956 is implicated to

the extent of

Earnings and Profit

(unless an exception

applies)

Non-Dividend Repatriation 956

Applies to U.S. shareholders of CFC

Attempts to tax dividend equivalents

Hypothetical deemed distribution

Even if U.S. taxpayer had no “tainted” income,

if the CFC makes a loan to the U.S. parent or

invests in certain types of U.S. property, the U.S.

taxpayer is taxed on the amount of that

investment

94

Tax Court in Ludwig v. Comr.

In Ludwig, the court rejected the Service's

argument that a U.S. shareholder's pledge of

CFC stock as collateral for a loan caused the

CFC to be a “guarantor” of the loan and therefore

subject to §956.

The government argued that “[t]he purpose of

section 956 of the Code is to terminate the tax

deferment privilege with respect to the earnings

of controlled foreign corporations when such

earnings are directly or indirectly repatriated.”

95

The Treasury provides two exceptions to 956

Notice 88-108 provides “30/60” day exception

These are obligations the CFC collects within 30

days as long as the CFC does not have loans

outstanding during the year for 60 or more days

Notice 2008-91 provides “60/180” day exception

expanded the exception to obligations collected

within 60 days as along as the CFC does not have

loans outstanding to a related person during the

year for 180 days or more

96

There is a General legal Advice Memorandum

(“GLAM”) on Notice 2008-91

GLAM 2009-13 provides guidance with regard to

multiple obligations of one or more CFC’s

Provides insight in the governments' views on the

application of 956

If taxpayer relies on “60/180” there is no requirement

for a formal election

Done on a CFC by CFC basis

Applies for 2009, 2009 and 2010

97

GLAM Notes

The GLAM points out that the CFC is deemed to

have acquired property as of the date it acquires

an adjusted basis in US property. This would

include obligations on the date the loan was

made or guaranteed.

Counting days for obligations – date of issuance

is excluded and the date of repayment is included.

Counting days for purposes of §951-964 the

holding period of the asset is determined by

excluding the day the asset was acquired and

including the day the asset was disposed.

98

What about a loan made on December 31st ?

GLAM indicates (unless an exception applies)

that §956 would apply to the loan for 2008 even

though the date of issuance is not counted as a

day in the holding period.

99

What about a series of loans?

GLAM states that a series of loans must be

executed independently or else periods of

disinvestments will be ignored. GLAM holds

that if it is determined a series of obligations

constitutes successive rollovers of a single

obligation then the disinvestment period will be

ignored for the 60 and 180 day requirements.

100

Debrief

General Rule for Subpart F is: “Deferral”

A U.S. taxpayer is not subject to taxation on the earnings of

a foreign subsidiary until the earnings are repatriated.

Exceptions ─ “tainted income”

(but only to the extent of E&P)

US shareholder can claim a FTC

Subsequent distributions qualify as PTI

Lesser of $1M or 5% of CFC gross income (de minimis)

70% of CFC income is “Subpart F” then 100% rule

High tax kick-out (90% of U.S. tax)


101

Debrief

Generally, in order for income to be considered

foreign base company sales income, the property

purchased must be manufactured or produced

outside the country in which the CFC is organized

and must also be sold for use outside that country.

Sec. 954(d)(1)(A) and (B).

102

103

Planning for Distributions of

Previously Taxed Income

PTI distributions excluded from income

I.R.C. 959 excludes from income distributions of

E&P which were previously included into income

(includes actual and deemed distributions)

Section 959(d) generally provides that a distribution

from PTI is NOT a dividend.

Result upon distribution is that the CFC’s E&P and

tax pools are immediately reduced to preclude the

USSH from inappropriately gaining a 902 credit

104

Exception to non-dividend treatment

A distribution of PTI through a chain of ownership.

Section 960(a)(3) provides that, for purposes of

calculating a U.S. corporate Shareholder's 902 credit

for taxes paid on PTI as it is distributed through a

chain of ownership to a U.S. Shareholder a

distribution of PTI is counted as a dividend when

ultimately received by the corporate U.S. Shareholder

(where no credit was previously given under 960)

105

Planning for Distributions

under the

“Ordering Rules”

A distributions is first deemed to made from earnings

that were previously taxed and included into income

as investments in U.S. property (I.R.C. 956)

A distribution is next deemed to be made out of

earnings that were currently or previously

required to be included into income under

951(a)(1)(A).

106

Planning for Distributions

under the

“Ordering Rules”

Finally, distributions that occur in excess of the CFC’s

PTI are attributable to the remaining untaxed and

undistributed E&P…first out of current then,

accumulated E&P …

107

Planning for Distributions using a chain of corporations

GmbH 2 invested 150

in U.S. property. The

U.S. P must include

150 into income

(I.R.C. 951(a)(1)(B))

U.S. P

GmbH 1

GmbH 2

US property

108


Additional Facts

During the tax year

GmbH dividends 150

to GmbH 1. The U.S. P

does not have to

include this into

income under 951(a)

due to the 959(b)

exclusionary rule

U.S. P

GmbH 1

GmbH 2

US property

109


Additional Facts

Suppose GmbH

subsequently invests in US

property in the next year

without the occurrence of a

distribution, U.S. P would

have to include into

income because US p

received the exclusion in

the prior year

U.S. P

GmbH 1

GmbH 2

US property

The exclusionary rule

contemplates an actual

distribution that must occur

110

Debrief

Distributions of PTI are not considered a dividend

( 959(d))

Distributions of PTI reduce E&P

Exception is provided ( 960 (a)(3))

111

Disclaimers

113

The informal comments and the information presented in

these slides should not be construed as constituting tax

advice applicable to any specific taxpayer because each

taxpayer’s facts are different.

To ensure compliance with requirements imposed by the

IRS, we inform you that any U.S. tax advice mentioned in

the presentation or contained in these slides is not

intended or written to be used, and cannot be used, for the

purpose of (i) avoiding penalties under the Internal

Revenue Code or (ii) promoting, marketing or

recommending to another party any transactions or matters

addressed herein.

Contact Information

114

Edward Umling CPA, LLM

Senior Manager

Urish Popeck LLC

3 Gateway Center, Suite 2400

Pittsburgh, PA 15222

Tel: 1 412 391-1994

[email protected]

Seth Primosch

Senior Accountant

ParenteBeard, LLC

1650 Market Street, Suite 4500

Philadelphia PA 19103

[email protected]

mailto:[email protected]

mailto:[email protected]

umling primosch subpart f

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