When Congress enacted Subpart F, it recognized the need for U.S. § 954(e) FPHCI (Foreign Personal Holding Company Income) shareholder to include its pro-rata share of the CFC’s FBC Services Income in income currentlyįBC Services Income consists of income derived by a CFC in connection with the performance outside the CFC’s country of incorporation of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial or like services for or on behalf of any related person. Subpart F addresses this abuse by requiring the U.S. FBC Services Income (Foreign Based Company Services Income)Īnother area of abuse is where a service corporation is separated from the activities of a related corporation and organized in another country primarily to obtain a lower rate of tax for the service income. shareholder(s) of the CFC may have a subpart F inclusion. When a CFC buys/sells tangible personal property (1) from/to (or on behalf of) a related person and the property is (2) manufactured, produced, constructed, grown, or extracted outside the CFC’s country of incorporation and the property is purchased/sold (3) for use, consumption or disposition outside the CFC’s country of incorporation, the income from the sale of the property by the CFC is FBCSI, a type of Subpart F income. The FBCSI rules of Subpart F address this abuse. shareholders using their CFCs to shift sales income from the U.S. One of the abuses that Subpart F is intended to prevent is U.S. There are various different types of Subpart F Income: FBCSI (Foreign Base Company Sales Income) What are the Different Types of Subpart F Income? citizen/resident, domestic partnership, domestic corporation, or any estate/trust that is not a foreign estate/trust as defined in I.R.C. person” for purposes of Subpart F by referencing the definition in I.R.C. person who owns 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation. (2) more than 50% of the total value of all classes of the corporation’s stock (value test). (1) more than 50% of the total combined voting power of all classes of the corporation’s stock entitled to vote (voting test), or 952.Ī foreign corporation is a CFC for a particular year if on any day during such year U.S. Subpart F income is codified under 26 U.S.C. We will summarize the basics of Subpart F Income and interaction with CFC rules. And, with the Internal Revenue Service taking an aggressive position on issues involving Foreign Accounts Compliance and Unreported Foreign Income - compliance is important to avoid offshore penalties. *Subpart F Income overlaps with various other related issues, such as Form 5471, GILTI, and PFIC. shareholder, even if the income is never distributed to the shareholder. The kicker is that the ratable share of Subpart F income may be attributable to the U.S. shareholders may have to pay tax on the earnings. When a CFC has Subpart F income under IRC Section 952, that means the U.S. Essentially, Subpart F Income involves CFCs ( Controlled Foreign Corporations) that accumulate certain specific types of income (primarily passive income). Shareholder Foreign Earnings are very complicated. Subpart F Income & Controlled Foreign Corporations (CFC): The IRSRules for Subpart F Income, CFC, and U.S.