A concise plain English introduction to the U.S. tax rules for U.S.

shareholders, officer, directors and their financial and legal advisors regarding the U.S. tax rules for foreign corporations and other foreign entities owned by U.S. citizens, residents or corporations.

Cover Design by Angela Farley Designs

Description of U.S. Shareholders of a Foreign Corporation
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

such as a spouse.of certain other related taxpayers. [1] . "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. 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. 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. 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. and IRC Section 318(a)(2)(C). below. based on the rights of the beneficiary with respect to distributions from the trust or estate. child or parent because the law presumes that these persons have a common interest. IRC Section 958(b)(2) and (3).[1] Thus. A beneficiary of a trust or estate is deemed to own a portion of any stock owned by the trust or estate. these terms will be discussed further in connection with the explanation of "subpart F" income.