Subpart F Rules on Taxation of Controlled Foreign Corporations Navigating the Complexities in Tax Planning for Navigating the Complexities in Tax Planning for presents presents Multinational Companies A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Daniel L. Gottfried, Partner, Rogin Nassau , Hartford, Conn. Jeff Rubinger, Partner, Holland & Knight , Fort Lauderdale, Fla. Michael J. Miller, Partner, Roberts & Holland , New York Tuesday, March 9, 2010 The conference begins at: 1 pm Eastern p 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View , select Navigational Panels , and chose either Bookmarks or Pages . If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10
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Subpart F Subpart F Rules on Taxation of Rules on Taxation of Controlled Controlled Foreign Corporations: Foreign Corporations: Navigating the Navigating the Complexities in Tax Planning for Complexities in Tax Planning for Multinational Companies Multinational Companies Multinational Companies Multinational Companies March 9, 2010 Strafford Publications Strafford Publications Daniel Gottfried, Partner, Rogin & Nassau Hartford, CT dgottfried@ dgottfried@ roginlaw .com roginlaw .com Jeff Rubinger, Partner, Holland & Knight Fort Lauderdale, FL jeffrey.rubinger@ hklaw .com Michael Miller, Partner, Roberts & Holland New York, NY mmiller@ rhtax.com
Overview Overview Discuss relevant issues under Subpart F i F including: l di • What is a CFC • Who is a US shareholder • What is Subpart F Income p • Planning opportunities • Recent Developments Recent Developments • Reporting Requirements 2
What is a CFC? Who is a US shareholder? Who is a US shareholder? 3
Definition of CFC Definition of CFC Definition of CFC Definition of CFC • A foreign corporation is a CFC if “US shareholders” own: More than 50% total voting power, or M More than 50% total value h 0% l l • US shareholder is A US person (including a US LLC or US limited A US (i l di US LLC US li it d partnership) With a 10%-or-greater voting interest With a 10% or greater voting interest • Indirect and constructive ownership rules apply for purposes of both CFC and US shareholder p p status 4
US Shareholder Status US Shareholder Status US Shareholder Status US Shareholder Status What Can US 2 Do To Avoid US Shareholder Avoid US Shareholder US 1 US 2 Status? • Reduce to 9.9% 90% 90% 10% 10% • Different Classes of Stock CFC CFC • Options? Options? • Careful of the PFIC rules! 5
CFC Status CFC Status CFC Status CFC Status What Can US Do To Avoid CFC Status? US US FC FC • Reduce to 50% • Different Classes of 40% 60% Stock? Stock? • Options? CFC • What if FC sells to a What if FC sells to a domestic person? 6
CFC Status CFC Status CFC Status Variation CFC Status - Variation Variation Variation Wh t C What Can US 2 Do To US 2 D T US 1 FC US 2 Avoid CFC Status? 45% 45% 10% What effect on US 1? C C CFC 7
What is What is Voting Pow er? What is What is Voting Pow er? Voting Pow er? Voting Pow er? • Generally power to elect the Board of • Generally, power to elect the Board of Directors • Be wary of “understandings” • Be wary of “tie-breaker” provisions, special powers, and other arrangements that may shift voting power • See Garlock, Alumax 8
Indirect Stock Ow nership Indirect Stock Ow nership Indirect Stock Ow nership Indirect Stock Ow nership • Stock owned by a foreign corporation, St k d b f i ti partnership, trust or estate, is considered to be owned “proportionately” id d t b d “ ti t l ” by its shareholders, partners, or b beneficiaries. fi i i 9
Indirect Stock Ow nership Indirect Stock Ow nership - Examp E E xample l l M M US • R owns 72% of T 75% % (80% X 90% = 72%) R F • M owns 54% of T (75% X 72% = 54%) 80% S F F 90% T T F 10
Constructive Ow nership Constructive Ow nership Constructive Ow nership Constructive Ow nership • Family • Family • From Entity to Owner • From Owner to Entity • From Owner to Entity • Deemed Exercise of Options • Special Rules S i l R l No attribution from non-US person to US person person If entity owns > 50%, treated as owning 100% 100% 11
Constructive Stock Ow nership Constructive Stock Ow nership - Examp E E xample l l M US Indirect Ownership 75% 75% • M owns 36% of T R (75% * 80% * 60% = 36%) F Constructive Ownership 80% • M owns 100% of T S F F 60% T F 12
Constructive Ow nership – Constructive Ow nership – Surpr S S urprising i i i ng E E Examp E xample l US 1 US 2 • US 2 is a US shareholder 100% vote 100% t 0% 0% vote t of CFC 2, but not CFC 1! 10% value 90% value CFC 1 CFC 1 • CFC 2 voting stock CFC 2 ti t k attributed to shareholders of CFC 1 based on value 100% 100% of CFC 1 stock owned of CFC 1 stock owned. CFC 2 13
Constructive Ow nership – Constructive Ow nership – Pl Pl Plann Pl anning i ng O O O Oppor pportun t unit it ity it Four grandchildren. Each has: Grandpa: 0% vote 100% vote 22% value 12% value 12% value • Grandpa is a US shareholder; includes 12% of the CFC’s Subpart F income CFC CFC •No attribution from grandparent to grandchild •Grandchildren are not US shareholders, so do not include any Subpart F income y p •However, they must worry about PFIC issues 14
15 What is Subpart F Income? p
What is Subpart F Income What is Subpart F Income • In general In general • Insurance income • Foreign base company income F i b i • International boycott income • Illegal bribes and kickbacks • Income from blacklist countries Income from blacklist countries 16
Subpart F Income; In General G l US shareholder includes its pro rata share of US shareholder includes its pro rata share of Subpart F income in its gross income – Pro rata share is hypothetical dividend on P t h i h th ti l di id d Subpart F income – Pro rata share is based on shares owned, Pro rata share is based on shares owned directly or indirectly, by US shareholder – Subpart F income is ordinary income Subpart F income is ordinary income 17
Insurance Income Insurance Income Insurance Income Insurance Income • Includes income from Includes income from – insuring or reinsuring any insurance or annuity contract where risks are in country other than country where CFC is organized – intra-country risks where counterparty receives same premiums for risks arising in other countries premiums for risks arising in other countries • Risks include property/casualty, life and health • Subchapter L limitation • Subchapter L limitation • Other rules/exceptions 18
Foreign Base Company Foreign Base Company Income ncome Most common types of foreign base Most common types of foreign base company income (FBCI): – Foreign personal holding company income F i l h ldi i – Foreign base company sales income – Foreign base company services income 19
Foreign Personal Holding Foreign Personal Holding Company Income Company Income • Foreign personal holding company income Foreign personal holding company income (FPHCI) is generally passive income – Dividends, interest, rents, royalties and , , , y annuities – Gains from sale of property that produces passive income i i – Gains from commodity transactions, foreign currency transactions notional principal currency transactions, notional principal contracts, etc. • Exceptions for active business Exceptions for active business 20
Foreign Base Company Foreign Base Company S l S l Sales es I I I Income ncome • Foreign base company sales income is: Foreign base company sales income is: – Income from sales to or on behalf of a related person or purchased from or on behalf of a person, or purchased from or on behalf of a related person – Does not include sale of property for use, Does not include sale of property for use, consumption or disposition in CFC’s country of organization • Includes commissions, profits, fees, etc. 21
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