Controlled Foreign Corporations & Subpart F Income

A Foreign corporation is not required to pay taxes to the U.S. if it does not source income or has no income connected to the actions of a U.S. trade or business. But U.S. citizens who earn dividends from a foreign corporation have to pay taxes on those dividends. When there was no anti-deferral rules, United States individuals could invest in foreign entities and indefinitely defer taxation in the U.S. by not repatriating income from those investments. But now anti-deferral mechanisms such as PFIC rules together with Subpart F, prevent individuals from deferring taxation of foreign earned income.

What exactly are CFCs?

Subpart F Income Calculations

To be considered a Controlled Foreign Corporation (CFC), U.S. shareholders must own 50% or more of the total value of stock in the foreign corporation, or U.S. shareholders must own 50% or more of the total combined voting power of all classes of stock.  It includes stock owned directly or stock owned indirectly or constructively. So basically CFCs are U.S. corporations that operate overseas. Shareholders, directors, or officers of these CFCs must report their income and pay tax on that income. For U.S. tax purposes, the foreign entity must be a corporation according to U.S. definitions.

Subpart F Income Explained for Dummies

Subpart F Income Examples

Subpart income can be described as passive income and other income that is readily movable from one taxing jurisdiction to another jurisdiction. Subpart F income is taxable to the CFC’s shareholders even if the CFC does not distribute the income to its shareholders in the year earned. To be considered a U.S. shareholder you must be a U.S. party or entity that owns 10 percent or more of the voting power or value of a foreign corporation.

The shareholders must report their share of the income from the CFC and their share of earnings and profits of the CFC that are invested in United States Property. Property can include tangible assets, investments, and stock in the foreign organization. The different types of Subpart F income include Foreign Base Company Income and Insurance income. The 5 specific types of Foreign Base Company Income include:

  • Foreign Base Company sales income
  • Foreign Personal holding company Income (rents, royalties, dividends, annuities and more)
  • Foreign Base Company services income
  • Foreign Base Company Shipping Income
  • Foreign Base Company oil-related income

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Applying For a Green Card

What Non-Compliant Taxpayers Can Do

There are IRS voluntary disclosure programs that can benefit non-compliant taxpayers. They include:

  • Voluntary disclosure program:  allows taxpayers to safely disclose their offshore accounts, assets, income, and investments to the IRS.
  • Streamlined domestic offshore program: designed to bring into U.S. tax compliance non-foreign residents that are not tax compliant as far as their foreign income, investments, and accounts are concerned.
  • Streamlined foreign offshore program: This is an IRS program for foreign residents and is designed to allow foreign residents with U.S. tax status to file now and avoid all penalties.
  • Delinquent international information return submission procedures: For a taxpayer that has not filed one or more required international information returns. The tax payer must have reasonable cause for not filing and must not be under investigation by the IRS.
  • Delinquent FBAR Submission Procedures: For taxpayers that did not fail to report any income and do not owe any tax, but non-willfully failed to file a required FBAR.

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