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What are the general planning techniques to be utilized to enable a United States corporate taxpayer to maintain corporate accumulated earnings offshore in a low tax sovereign without being subject to United States taxation of world wide income?

International Tax Planning
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William Richards Jr., Esq.
PART I.

FOREIGN CORPORATIONS GENERALLY. A foreign corporation entity is the vehicle of choice in utilizing the benefits of Financial Centers Offshore. A foreign corporation is one which is not created or organized in the United States and therefore is not a domestic corporation. A domestic corporation is taxable on its worldwide income.

By definition, a foreign corporation is not a United States person and income is not taxable as a United States person. It is not subject to taxation of its accumulated earnings and profits until distributed to its United States shareholders. The general taxation of a foreign corporation is subject to the application of Subpart F Income taxation which is specifically designed to re-characterize foreign corporations as controlled foreign corporations.

SUBPART F INCOME TAXATION. Subpart F income rules are the core legislation designed to create controlled foreign corporations. By virtue of the codification, United States shareholders’ accumulated earnings of a foreign corporations’ profits are deemed distributed each taxable year. The accumulated earnings that would otherwise be lodged as foreign corporate accumulated earnings and not taxable until distributed, becomes taxable by Subpart F Income treatment. The essence of Subpart F Income tax treatment is to attribute a tax to United States shareholders of a foreign corporation with respect to their pro rata share of a foreign corporation’s deemed distributed earnings and profits for a corporate taxable year.

There are two planning concepts to avert the requirement that a foreign corporation’s accumulated earnings are deemed distributed each taxable year. One is ownership and the other pertaining to the type of company specific activities performed offshore. That is to say, there are two features to plan around, ownership rules and activities rules of what are known as Foreign Base Company Income. The elimination of either enables the foreign corporate taxpayer to remove itself from Subpart F Income treatment.
Leave a Comment 355 weeks ago

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James Kronenberg
Just two follow up questions but I commend you for clear & concise overview of the relevant tax planning strategies involved ! (1) What reporting requirements for US shareholders arise under those strategies that achieve the "grip" of Subpart F income provisions given the IRS "Offshore Voluntary Disclosure Initiatives" including (A) Foreign Bank & Asset Accounts (FBAR) & (B) IRS form 8939 "Statement of Specified Foreign Assets". (2) Not sure if there are any strategies available under "Transfer Pricing" techniques used especially by pharmaceutical companies with respect to Puerto Rico. Thanks for your feedback & effort to respond !
Reply 353 weeks ago


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