U.S. shareholders in foreign corporations are subject to some of the most complex and confusing tax rules in the entire Tax Code. I’ll be attending a workshop (see below) in Las Vegas Dec. 7, 2007 designed to help U.S. shareholders in foreign corporations, and their advisors, understand these rules and avoid the many "tax traps" that accompany them.
The most severe tax traps are reserved for what the Tax Code calls "controlled foreign corporations." Here’s a highly simplified summary of the rules:
If "U.S. shareholders" own 50% or more of the shares in a foreign corporation (e.g., an international business company or IBC), by vote or value, the foreign corporation is classified as a CFC. U.S. shareholders are defined as any U.S. natural persons, partnerships, corporations, trusts, and estates who own, respectively, a 10% or greater interest in the foreign corporation.
If you’re a U.S. shareholder in a CFC, and it generates what the IRS calls "subpart F" income, you won’t be able to defer tax on that income, even if it’s not distributed as a dividend. Subpart F income includes passive investment income, income from personal service contracts, income from transactions with related U.S. persons or entities and income from certain industries such as insurance, banking, mining and others.
Naturally, various exceptions apply to many of these general rules.
If that’s not enough, if your foreign corporation is classified as a CFC:
- The 15% income tax rate on capital gains and dividends isn’t available;
- Losses on investments can’t be allocated against gains until the corporation is liquidated;
- Any investments in the United States may result in double taxation;
- The basis of the stock does not step-up to its fair market value at the death of a shareholder for estate tax purposes; and
- Complex reporting requirements also apply.
Confused? You have a right to be. The CFC provisions are designed to prevent multi-national corporations from indefinitely deferring income on their offshore operations, but they also affect the smallest international business operated by a start-up entrepreneur.
The CFC "Boot Camp" in Las Vegas is designed to shed some clarity on the complex CFC rules. It’s will provide a non-technical briefing on CFCs, along with creative ways to avoid CFC tax traps, and will be taught by leading experts in the field of international tax:
- J. Richard Duke, JD, LL.M;
- Thomas P. McQueen, CPA;
- Joel M. Gross, Esq.; and
- Vernon Jacobs, CPA.
For more information on this event, click here. Hope to see you there!
Copyright © 2007 by Mark Nestmann
