TAM 115478-97 Contains a Great Structure That Removes a Foreign Corporation From the CFC Statute

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