Subpart F Income of Controlled Foreign Corporations | U.S. Taxation

U.S. companies have an incentive to shift profits to subsidiaries in low-tax countries. Congress has passed laws to prevent this; one way is by taxing Subpart F income of controlled foreign corporations as a constructive dividend. A controlled foreign corporation (CFC) is a non-U.S. corporation in which at least 50% of (a) the combined voting power of all voting stock or (b) the total value of all stock is owned by U.S. shareholders (a U.S. shareholder is a U.S. person or company that owns at least 10% of the foreign corporation's voting stock). When the CFC has Subpart F income, a U.S. shareholder will be taxed on their pro rata share of the Subpart F income, regardless of whether they receive a distribution. Subpart F income includes: (1) foreign personal holding company income (royalties, interest, dividends, rent, annuities) (2) foreign base company sales income (sales made to customers outside the CFC's country when a related party is involved and the CFC has little connection to the income) (3) foreign base company services income (income from services performed for a related party outside the CFC's country) For example, assume that a U.S. company owns 60% of the voting stock of an Irish subsidiary (the Irish subsidiary is thus a controlled foreign corporation). If the Irish subsidiary has $200,000 of interest income, this interest income would be considered Subpart F income. The U.S. company would be taxed on its pro rata share, which is $120,000 (60% * $200,000). The $120,000 would be taxable to the U.S. corporation as ordinary income (whether or not it receives a distribution) and the U.S. corporation would not receive a dividends received deduction.— Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES AND SPREADSHEETS http://eepurl.com/dIaa5z — SUPPORT EDSPIRA ON PATREON *  / prof_mclaughlin   — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST Apple Podcasts: https://podcasts.apple.com/us/podcast... Spotify: https://open.spotify.com/show/4WaNTqV... Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK   / prof_mclaughlin   — ACCESS INDEX OF VIDEOS https://www.edspira.com/index — CONNECT WITH EDSPIRA Facebook:   / edspira   Instagram:   / edspiradotcom   LinkedIn:   / edspira   — CONNECT WITH MICHAEL Twitter:   / prof_mclaughlin   LinkedIn:   / prof-michael-mclaughlin   — ABOUT EDSPIRA AND ITS CREATOR https://www.edspira.com/about/ https://michaelmclaughlin.com