U.S. Taxability of Foreign Earnings

The Subpart F provisions eliminate deferral of U.S. tax on some categories of foreign income by taxing certain U.S. persons currently on their pro rata share of such income earned by their CFCs. The Subpart F rules operate by treating a U.S. shareholder of a CFC as if they actually received their proportionate share of certain categories of the corporation’s current earnings and profits (E&P). The U.S. shareholder is required to report this income currently in the U.S. whether or not the CFC actually makes a distribution. A foreign corporation is a CFC for a particular year if on any day during such year U.S. shareholders own:

1. More than 50% of the total combined voting power of all classes of the corporation's stock entitled to vote (voting test), OR
2. More than 50% of the total value of all classes of the corporation's stock (value test).

The CFC and Subpart F rules are extremely complex and are a significant trap for the unwary. We can assist taxpayers in navigating these rules and identifying ways in which CFCs might be eliminated, if appropriate.​