New 2010 Tax Relief Act Extends Subpart F Exception for Active Financing Income Extended Through Tax Years Beginning Before 2012
Under the Subpart F rules, §§951-964, 10% or greater U.S. shareholders of a controlled foreign corporation (“CFC”), i.e.,foreign corporations where more than 50% of the stock of the foreign corporation is owned, directly or indirectly, by U.S. shareholders, are required to currently report in taxable income their share of the CFC’s Subpart F income regardless of whether such income is distributed to the 10% or more shareholders, In particular, Subpart F income also includes insurance income and foreign base company income. Foreign base company income includes, among other things, foreign personal holding company income and foreign base company services income (i.e., income derived from services performed for or on behalf of a related person outside the country in which the CFC is organized).
Under pre-2010 Tax Relief Act law, certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”) was temporarily excluded from Subpart F income, but only for tax years of foreign corporations beginning after Dec. 31, 1998 and before Jan. 1, 2010, and for tax years of U.S. shareholders with or within which any such tax year of the foreign corporation ended. Under pre-2010 Tax Relief Act law, for tax years of foreign corporations beginning after Dec. 31, 2009 (and tax years of U.S. shareholders ending with or within any such tax year), the insurance income exemption rules of §953(a), were to be applied in the same manner as if the tax year of the foreign corporation began in '1998. Thus, for tax years beginning after Dec. 31, 2009 in which the temporary exception for insurance income was not in effect, the same-country exception from Subpart F insurance income was to apply as under pre-'99 law.
The new law extends the active financing rules for an additional two years. This will allow banks, finance, insurance and similar revenue generating CFCs to continue to defer current taxation with respect to foreign source financing and insurance income under Subpart F. See §§953(e)(10), 954(h)(9).