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On Tuesday, February 7, We're offering a free, 1-hour CPE course for U.S. accountants in controlled foreign corporations. You can sign up at this link.
The ownership rules are at the heart of the controlled foreign corporation statute: (a) General rule: For purposes of this subpart, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of-- (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation. Majority ownership by a “U.S. shareholder” is key; once a U.S. person owns 50.01% of a foreign company, it’s a CFC. The statute assumes evenly divided ownership between a U.S. and foreign interest creates sufficient management tension to prevent issues from arising. This offers potential planning opportunities. If you'd like to discuss this in more detail, please contact me at 832.330.4101. Or, you can email me at halestewart@halestewartlaw.com TAM 115478-97 Contains a Great Structure That Removes a Foreign Corporation From the CFC Statute1/10/2017
On February 7, we're giving a free course on controlled foreign corporations, which is good for 1-hour of credit. You can sign up at this link. The controlled foreign corporation statute is a very powerful anti-deferral regime. Key to its application is the following definition: For purposes of this subpart, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of-- (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation. According to the statute, the CFC rules don't apply if the U.S. shareholder owns less than 50% of the foreign company's shares. This allows U.S. residents to keep money overseas outside of the U.S. taxing jurisdiction. The overseas profits will only be taxed when repatriated (this largely explains the why there is currently several trillion dollars outside the U.S. waiting to be repatriated). With that in mind, consider the following fact pattern:  Corp. B is a domestic corporation, while Corp. C and D are foreign. The three companies formed an offshore entity to manufacture an unspecified product. The U.S. company provided technical know-how, for which it received a recurring royalty payment. The companies shared management duties equally.
This structure places the foreign company outside the CFC statute. TAM 115478-97: https://www.irs.gov/pub/irs-wd/9914034.pdf Suppose you’ve been made trustee of a trust. While a formal trust document exists, the indenture contains little detail on investment choice, leaving the Uniform Prudent Investor Act to provide guidance regarding investment specifics. Key to that concept is the preservation of capital, which the Restatement of Trusts defines as: Safety of capital includes not only the objective of protecting the trust property from the risk of loss of nominal value but, ordinarily, also a goal of preserving its real value--that is, seeking to avoid or reduce loss of the trust estate’s purchasing power as a result of inflation. This objective will also normally tend to protect the purchasing power of the income flow in the future. Reasonable ²return² refers to total return, including capital appreciation and gain as well as trust-accounting income. Thus, return objectives and safety of capital are at least partially interrelated. The capital-growth element of these return objectives, however, is not necessarily confined to the preservation of purchasing power, but may extend to growth in the real value of principal in appropriate cases. In balancing the return objectives between flow of income and growth of principal, the investment emphasis depends not only on the purposes and distribution requirements of the trust but also on its other circumstances and specific terms, such as the beneficiaries’ tax positions and whether the trustee has power to invade principal. Here are some brief points to consider based on the above two paragraphs: 1. What is the current inflation rate and what are future projected inflation rates? We can use the BLS’ overall CPI rate for the current level. The St. Louis Fed’s FRED system has 4 different measures of future inflation calculated as the difference between the treasury and tips spread of a certain year’s issue:  All assets with an income component should be selected with an eye toward these benchmarks. 2. Assuming two beneficiaries, what is the present value of the final beneficiaries’ potential payout (including income and final principal payouts) and how does that compare to the annual outflows of payments comprised only of portfolio income paid to the first beneficiary? You’ll need multiple calculations usig reasonable return projections to comply with the trustee's duty of impartialty. 3. The need to preserve capital potentially limits portfolio selection to a conservative set of investments as shown in this graph:  The X-axis plots standard deviation – the standard measure for portfolio risk. Points farther away from the origin represent higher risk. While increased risk leads to higher return it also means a higher probability of increased losses. The downside of higher risk leads to a more conservative investment selection, all things being equal.
We're now offering NASBA approved CE for Accountants. We're offering courses in:
Basic US International Tax, Controlled Foreign Corporations, Tax Treaties Captive Insurance. A quick reminder about sending investment portfolios offshore. The U.S. taxes residents on worldwide income. From the Treasury Regulations: In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. Sending assets to an offshore trust might create unwanted capital gains: Except as provided in regulations, in the case of any transfer of property by a United States person to a foreign estate or trust, for purposes of this subtitle, such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of-- (1) the fair market value of the property so transferred, over (2) the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor. Sending appreciated assets to an offshore corporation creates the same problem; see generally section 367 of the tax code. And that’s before considering the potential implications of the foreign personal holding company rules of the controlled foreign corporation statute contained in section 954. And anytime you use a partnership, the income naturally flows back to the partner due to the partnership's flow-through nature. In short: it’s much more complicated than you might think. Or, in standard parlance: if it sounds too good to be true, it probably is. |
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