This authority of taxation comes from the CFC
rules
that tax U.S.
shareholders on "subpart F" income (described below).
A CFC is one in which U.S.
shareholders own more than 50%, by vote or value, of the foreign
corporation.
Only U.S.
persons can be "U.S.
shareholders." IRC Section 957(c) refers to IRC Section 7701(a)(30) for
the definition of a U.S.
person (that is very broadly defined to include individuals,
partnerships,
corporations, trusts and estates).
A U.S. shareholder,
for purposes of determining whether there is a CFC, is one who owns
10% or
more, by vote, in the foreign corporation (IRC Section 951(b)). In
determining the 10% or more ownership, the attribution rules (described
below)
of both IRC Section 958(a) and IRC Section 958(b) apply. Once it is
determined
(through direct ownership, indirect ownership under IRC Section 958(a)
and
constructive ownership under IRC Section 958(b)), that there are, in
the
aggregate, U.S. shareholders who own more than 50%, by vote or value,
in the
foreign corporation, it is classified as a CFC.
Please note that only those shareholders
that
own (directly or indirectly) 10% or more of the foreign corporation
stock are
included in the "more than 50%" ownership test. Thus, if there
are 20 U.S.
shareholders with equal shares of 5% of the foreign corporation, it is
not a
CFC. Or, if a foreign person owns 50% or more of the corporation, then
no
combination of U.S.
persons will be able to own "more than 50%" of the foreign
corporation. If one U.S. person owns 40% of a foreign corporation,
and ten
U.S. persons each own 6%, it is not a CFC even though 100% of the
stock is
owned by U.S.
persons. Only one of those U.S.
persons is a "U.S.
shareholder" as that term is defined for this purpose. However, each
taxpayer's ownership percentage must take into account the attribution
and
constructive ownership rules.
The phrase "attribution" means that one
taxpayer is deemed to own the shares of certain other related
taxpayers, such
as a spouse, child or parent because the law presumes that these
persons have a
common interest. "Constructive ownership" is similar to attribution
but it is usually applied with respect to entities in which the
taxpayer has
some control or beneficial interest. A beneficiary of a trust or estate
is
deemed to own a portion of any stock owned by the trust or estate,
based on the
rights of the beneficiary with respect to distributions from the trust
or
estate.
A shareholder of a corporation or partner in
a
partnership is deemed to have a proportionate interest in whatever
stock may be
owned by the corporation or partnership but only if the shareholder
or
partner has a 10% or greater interest in that corporation or
partnership.
Thus, ownership of a foreign corporation is derived from the direct
ownership
of the taxpayer plus any indirect ownership arising from the
attribution and
constructive ownership rules. With respect to foreign corporations,
these rules
are insanely complicated and this is the shortest explanation we can
offer
without getting involved in the maze of IRC sections relating to this
subject.
However, these terms will be discussed
further in
connection with the explanation of "subpart F" income, below.
