New 2010 Tax Relief Act Addresses and Extends Rules Regarding Payments Between Related Controlled Foreign Corporations Under The Foreign Personal Holding Company Rules
Under the controlled foreign corporation rules, i.e., a foreign corporation defined under §957(a) as owned more than 50% of its combined voting power or value is owned by 10% (or such higher percentage) by U.S. shareholders on any day of the taxable year that is involved. A “U.S. Shareholder” per §951(b) is a U.S person, i.e., a citizen or resident of the U.S., a domestic partnership or corporation or a nonforeign trust or estate that owns 10% or more of the corporation’s combined voting power. See also §958. U.S. shareholders of a CFC are required to include in gross income their share of the CFC’s subpart F income currently regardless of whether the income is distributed to the shareholders.
Subpart F income includes foreign base company income. One category of foreign base company income is foreign personal holding company income. For subpart F purposes, foreign personal holding company income generally includes dividends, interest, rents, and royalties, among other types of income. There are several exceptions to these rules. For example, foreign personal holding company income does not include dividends and interest received by a CFC from a related corporation organized and operating in the same foreign country in which the CFC is organized, or rents and royalties received by a CFC from a related corporation for the use of property within the country in which the CFC is organized. Interest, rent, and royalty payments do not qualify for this exclusion to the extent that such payments reduce the subpart F income of the payor. In addition, subpart F income of a CFC does not include any item of income from sources within the United States that is effectively connected with the conduct by such CFC of a trade or business within the United States (“ECI”) unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a tax treaty.
Under the “look-thru rule” contained in §954(c)(6), dividends, interest (including factoring income per §954(c)(1)(E) ), rents, and royalties received by one CFC from a related CFC are not treated as foreign personal holding company income to the extent attributable or allocable to income of the payor that is neither subpart F income nor treated as ECI. For this purpose, a related CFC is a CFC that controls or is controlled by the other CFC, or a CFC that is controlled by the same person or persons that control the other CFC. Ownership of more than 50% of the CFC's stock (by vote or value) constitutes control for these purposes. The Secretary is authorized to prescribe regulations that are necessary or appropriate to carry out the look-thru rule, including such regulations as are appropriate to prevent the abuse of the purposes of such rule.
The look-thru rule is effective for taxable years of foreign corporations beginning before January 1, 2010, and for taxable years of U.S. shareholders with or within which such taxable years of such foreign corporations end. The 2010 Tax Relief Act extends for two years the application of the look-thru rule, to taxable years of foreign corporations beginning before January 1, 2012, and for taxable years of U.S. shareholders with or within which such taxable years of such foreign corporations end.
