Structuring to Avoid CFC Status Arising from Downward Attribution of Foreign Corporation Stock Ownership
Prior to 2017 Tax Reform, U.S. tax law provided that a U.S. person (including a domestic corporation) could not be attributed ownership of stock from a foreign person for purposes of determining if a foreign corporation was a more than 50 percent owned CFC. Tax Reform repealed this favorable rule with the result that foreign subsidiary stock owned by a foreign parent company can now be attributed down to a U.S. subsidiary of the foreign parent. See image below.
As displayed in the image, the repeal of this rule now causes many foreign corporations that would not otherwise have U.S. owners to be classified as controlled foreign corporations (“CFCs”). Furthermore, to the extent US individuals or entities up the chain own a direct or indirect interest in the foreign subsidiary, they may be subject the CFC GILTI tax and reporting regime.
A foreign corporation is a CFC if it is owned over 50% control by “U.S. Shareholders.” US Shareholders are US individuals or entities that own at least 10% of a foreign corporation.
GILTI = “Global Intangible Low Taxed Income”, which is generally active income of a CFC in excess of a fixed 10% return on tangible, depreciable assets of the foreign corporation. Per 2017 U.S. Tax Reform, a CFC’s GILTI income is immediately includible in U.S. shareholder’s gross income as a deemed dividend.
U.S. corporations are taxed on the GILTI deemed dividend at an effective rate of 10.5% tax after applying a 50% deduction on the deemed dividend. The deemed dividend may also be offset by up to 80% of FTCs. U.S. individual shareholders are subject to maximum rate of 37% on GILTI. In some cases, relief available for individuals via a 962 election to be taxed as a corporation.
Outcome and Benefit
Prager Metis has helped several clients mitigate the significant U.S tax and reporting impact of having CFCs caused by downward attribution via various strategies that result in completely eliminating the downward attribution of foreign corporate stock.