CFCs — Foreign Personal Holding Company Income provides a detailed analysis of foreign personal holding company income, which is one of the categories of foreign base company income, which in turn is one of the categories of “Subpart F income.”

Under so-called “Subpart F” of the Internal Revenue Code, certain income of a “controlled foreign corporation” is currently taxed to its “U.S. Shareholders,” whether or not the corporation has made any distributions to shareholders.

Written by Lowell D. Yoder, Esq., this Portfolio provides a comprehensive legislative and regulatory history; an overview of foreign personal holding company income including categories that fall within the FPHCI definition and exceptions; general rules and definitions that apply; in-depth discussion on dividends, interest, rents, royalties and annuities; comprehensive explanation of gains from certain property transactions; commodity transactions; foreign currency gains; income equivalent to interest; income from notional principal contracts; and more.

Generally speaking, foreign personal holding company income includes dividends, interest, related person factoring income, rents, royalties, and income from annuities, commodities transactions, foreign currency transactions, and personal service contracts.

CFCs — Foreign Personal Holding Company Income allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

Detailed Analysis

I. Introduction

II. Legislative and Regulatory History

A. General

B. Legislative History

C. Regulatory History

III. Overview

Introductory Material

A. Categories of FPHCI

B. Exceptions to FPHCI

IV. General Rules and Definitions

Introductory Material

A. Coordination of Overlapping Definitions

1. Priority Rules

2. Application of Exceptions

B. Changes in the Use or Purpose for Which Property Is Held

1. General

2. Majority Use

3. Anti-Abuse Rule

4. Hedging Transactions

C. Bona Fide Hedging Transactions

1. Background

2. Definition

a. General

b. Related Person Risks

c. Change in Purpose of Hedging Transaction

3. Section 1221 Hedging Definition

a. General

b. Rules of Application

(1) General

(2) Normal Course of Taxpayer's Trade or Business

(3) Risk Reduction

(4) Ordinary Property, Ordinary Obligation or Borrowing Defined

(5) Ineligible Hedges

4. Identification and Recordkeeping Requirements

a. Background

b. General Identification Requirements

c. Specific Identification Requirements for Certain Hedges

d. Manner of Identification

e. Effect of Misidentification and Nonidentification

(1) General

(2) Misidentification of Transaction that Does Not Qualify as a Hedging Transaction

(3) Nonidentification of Hedging Transaction

(4) Anti-Abuse Rule

D. Inventory and Similar Property

E. Dealer Definitions

1. Regular Dealer

a. General Definition

b. Related Persons

2. Dealer Property

a. General Definition

b. Securities Dealer

c. Hedging Transaction

V. Dividends, Interest, Rents, Royalties and Annuities

A. Dividends

1. General Rule

2. Definition of Dividend

a. General

b. Earnings and Profits Limitation

c. Other Transactions Treated as Dividends

d. Section 964(e)

3. Exception: Related Corporation/Same Country

a. Basic Requirements

b. Related Corporation

c. Same Country of Organization

d. Same Country Trade or Business Requirement

(1) General

(2) Trade or Business

(3) Location of Trade or Business

(4) Assets Used in a Trade or Business

(a) General

(b) When Property Considered Used in a Trade or Business

(c) Debt Instruments

(d) Stock Interests

(e) Interests in Partnerships

(5) Location of Assets

(a) Tangible Property

(b) Intangible Property

(c) Inventory and Dealer Property

(d) Debt Instruments

(e) Stock Interests

(6) Substantial Assets Test

(a) 50% Threshold

(b) Value of Assets

e. Prior Year Satisfaction of Requirements

(1) General

(2) Same Country/Related Person Requirements

(3) Direct or Indirect Stock Ownership

(4) Order of Distributions

f. Exceptions to Exception

(1) Section 964(e)

(2) Section 367 Inclusion

(3) Full Inclusion Rule

4. Other Exceptions

a. Dividends Out of Previously Taxed Income

b. Deemed § 367 Dividends

c. De Minimis and High-Tax Exceptions

d. Distributions in Tax-Free Liquidation

e. Branch and Partnership Distributions

f. Cash Runaround

5. Exception: Related CFC Look-Through

B. Interest

1. General Rule

2. Definition of Interest

3. Exception: Export Financing Interest

a. General Rule

b. Export Financing Interest

c. Conduct of Banking Business

d. Related Person Factoring Income

(1) Exception Inapplicable

(2) Same Country Exception

(3) Financing Unrelated Distributor Sales

(4) Financing CFC's Own Sales

4. Exception: Related Corporation/Same Country Interest

a. General Rule

b. Corporate Payor

(1) General

(2) Payments Received from Partnership

c. Related Corporation

d. Same Country of Organization

e. Same Country Trade or Business Requirement

f. Exception Inapplicable

(1) General

(2) Expense Reduces Subpart F Income

(a) General

(b) Payment Reduces Payor's Subpart F Income

(c) Payment Creates or Increases Deficit

(d) Offsetting Interest Expense/Payments

(3) Related Person Factoring Income

(4) Portfolio Interest

5. Planning Structures

a. Hybrid Entities

b. Reverse Hybrid Entities

c. High-Tax Exception

6. Tax-Exempt Interest

a. General

b. Background

c. Inclusion in Income

7. Related Person Factoring Income

a. General Rule

b. Legislative Background

c. Override of Subpart F Exceptions

d. Trade or Service Receivable

e. Definition of Related Person

f. Acquisition of a Trade or Service Receivable

(1) General Rule

(2) Indirect Acquisitions

(a) General

(b) Acquisition Through Unrelated Person

(c) Acquisition by Nominee or Pass-Through Entity

(d) Swap or Pooling Arrangements

(e) Financing Arrangements

g. CFC Loans

h. Same Country Exception

(1) Income from Trade or Service Receivables

(2) Income from Financing Arrangements

8. Exception: Related CFC Look-Through

C. Rents

1. General Rule

2. Definition of Rents

a. General

b. Lease vs. Sale

3. Exception: Unrelated Lessee/Active Trade or Business

a. General

b. Unrelated Lessee

c. Active Trade or Business

(1) General

(2) Specific Trade or Business Cases

(a) Property Manufactured or Produced

(b) Real Property Managed by the CFC

(c) Personal Property Temporarily Leased

(d) Property Leased in Connection with Marketing Functions

4. Exception: Related Corporate Lessee/Same Country

a. General

b. Corporate Payor

(1) General

(2) Payments Received from Partnership

c. Related Lessee

d. Country of Organization

e. Place Property Used

(1) General

(2) Property Used Partially in Same Country

f. Exception Inapplicable: Payment Reduces Subpart F Income

5. Planning Structures

a. Active Leasing Income

b. Eliminate Related Person Rents

c. Qualify for Same Country Exception

(1) Reverse Hybrid Entities

(2) Dual Resident Corporation

d. Lease vs. Sale

6. Exception: Related CFC Look-Through

D. Royalties

1. General Rule

2. Definition of Royalties

a. General

b. License vs. Sale

c. Royalties vs. Service

3. Exception: Unrelated Licensee/Active Trade or Business

a. General

b. Unrelated Licensee

c. Active Trade or Business

(1) General

(2) Specific Trade or Business Cases

(a) Property Developed, Created or Produced

(b) Property Licensed in Connection with Marketing Functions

4. Exception: Related Corporate Licensee/Same Country

a. General

b. Corporate Payor

(1) General

(2) Payments Received from Partnership

c. Related Licensee

d. Country of Organization

e. Place Property Used

(1) General

(2) Property Used Partially in Same Country

f. Exception Inapplicable: Payment Reduces Subpart F Income

5. Planning Structures

6. Exception: Related CFC Look-Through

E. Annuities

1. General

2. Contracts Governed by § 72

3. Inclusion of Annuities in Gross Income

a. General

b. Treatment of an Annuity Held by an Entity

c. Amounts Received as an Annuity

d. Amounts Not Received as an Annuity

VI. Gains From Certain Property Transactions

A. General

1. Overview

2. Legislative Background

3. Basic Rules

4. Exceptions

a. Dealer Property

b. Inventory and Similar Property

c. Property Giving Rise to Active Rents and Royalties

d. Active Banking, Finance, Securities and Insurance Income

e. Trade or Business Property

5. Losses

B. Property that Gives Rise to Certain Income

1. General

2. Stock in Subsidiary

3. Debt Instruments

a. General

b. Exceptions

(1) Gain

(2) Loss

C. Property that Does Not Give Rise to Any Income

1. General Rule

2. Forwards, Futures and Options

3. Exceptions to Avoid Double Inclusion

4. Exception for Trade or Business Property

a. General

b. Tangible Property Subject to Depreciation

c. Real Property

d. Intangible Property

e. Disregarded Entity

5. Exception for Notional Principal Contracts

D. Interests in Pass-Through Entities

1. General

2. Interest in Partnership

3. Hybrid Branch

E. Dual Character Property

1. General Rule

2. Change in Use

F. Planning for the Sale of Lower-Tier CFC Stock

1. Amount of Gain

a. General Rule

b. Adjustments for Previously Taxed Income

2. Characterization of Gain

3. Subpart F Income

a. Capital Gains

b. Dividend Income

4. Foreign Tax Credits

a. Capital Gain

b. Dividend Income

5. Pre-Sale Conversion to Hybrid Branch

a. Conversion to Hybrid Branch

b. Treatment of Liquidation

c. Tax Consequences of Sale

d. IRS Attacks

e. Dover Corp. v. Comr.

6. Section 338 Election

G. Coordination with Other FBCI Categories

1. FPHCI Categories

2. Foreign Base Company Sales Income

3. Foreign Base Company Shipping Income

4. Foreign Base Company Oil Related Income

VII. Commodities Transactions

A. General

1. Overview

2. Legislative Background

3. Basic Rules

4. Commodities Losses

B. Definition of Commodity

C. Commodities Transactions

1. General

2. Futures or Forward Contract in a Commodity

3. Leverage Contract in a Commodity

4. Exchange of Futures for Physical Transaction

5. Transaction in Which Income or Loss Is Measured by Reference to a Commodity, Pool of Commodities or Index of Commodities

6. Purchase or Sale of Option or Other Right to Acquire or Transfer a Commodity, Futures Contract in a Commodity or Index of Commodities

7. Delivery of One Commodity in Exchange for Delivery of Another Commodity, Same Commodity at Another Time, Cash, or Nonfunctional Currency

D. Exception: Qualified Active Sales

1. General

2. Sale of Commodities

3. Active Conduct of a Commodities Business

a. General

b. Inventory or Dealer Property

c. Substantial Commodities Business Activities

d. Investment or Financial Transactions

4. Substantially All

E. Exception: Qualified Hedging Transactions

F. Exception: Dealer Transactions

G. Exception: Foreign Currency Transactions

H. Coordination with Other FBCI Categories

1. Foreign Personal Holding Company Income

2. Foreign Base Company Sales Income

3. Foreign Base Company Oil Related Income

VIII. Foreign Currency Gains

A. General

1. Overview

2. Legislative Background

3. Basic Rules

4. Foreign Currency Losses

B. Foreign Currency Gains or Losses

1. General

2. Section 988 Transactions

3. Functional Currency

4. Amount of Foreign Currency Gain or Loss

5. Currency Transactions Outside § 988 (Non-§ 988 Transactions)

a. General

b. Investments

c. Limitation for Derivative Instruments

d. Regulated Futures Contracts and Nonequity Options

(1) General Rules

(2) FPHCI Commodities Gains or Losses

C. Exclusions for Certain Foreign Currency Gains or Losses

1. General

2. Capital Gains or Losses

3. Foreign Currency Gain or Loss Treated as Interest Income or Expense

a. Interest Under § 988(a)(2)

b. Interest-Bearing Liabilities

c. Gain or Loss Allocated Under Regs. § 1.861-9

4. Section 988 Hedging Transactions

5. DASTM Gains or Losses

a. General

b. U.S. Dollar Functional Currency

c. Subpart F Treatment

(1) General

(2) DASTM Allocation Rules

(3) Non-DASTM Currency Gains and Losses

D. Business Needs Exception

1. Overview

a. General Rules

b. Scope of Application

c. FPHCI Priority Rules and Exceptions

2. Business Transactions

a. General

b. Specific Business Transactions

(1) Acquisition of Debt Instruments

(2) Becoming the Obligor Under Debt Instruments

(3) Accrual of Items of Gross Income

(4) Accrual of Items of Expense

(5) Entering into Forward Contracts, Futures Contracts, Options and Similar Instruments

(6) Disposition of Nonfunctional Currency

(7) Transactions in Business Assets

c. Limitations on Scope of Exception

(1) Subpart F Income

(2) Financial Contracts

d. Identification Requirements

3. Bona Fide Hedging Transactions

a. General

b. Temporary Regulations

(1) General Rules

(2) Change in Purpose of Hedging Transaction

c. Final Regulations

(1) General Rules

(2) Hedges of Business Transactions

(3) Bona Fide Hedging Transaction

(4) Identification

(5) Change in Purpose of Hedging Transaction

4. Dealer Transactions

5. Currency Coordination Centers

E. Special Elections

1. Reclassification in Another Subpart F Category

2. Inclusion of All Foreign Currency Gains and Losses

F. Coordination with Other FPHCI Categories

IX. Income Equivalent to Interest

A. Overview

B. Legislative History

C. Definition

1. General

2. Items Excluded

a. Interest

b. Liability Hedging Transactions

3. No Specific Exceptions

D. Transactions in Which Payments Reflect Use of Money

E. Factoring Income

1. Definition

2. Factored Receivable

3. Amount Realized

4. Exceptions

a. Related Person Receivables

b. Acquisition After Interest Begins to Accrue

c. Acquisition After Principal Due

F. Income from Certain Integrated Sales Transactions

G. Certain Income from Services

H. Loan Commitment Fees

I. Conversion Transactions

J. Income Attributable to the Transfer of Debt Securities Under § 1058

X. Income from Notional Principal Contracts

A. General Rules

B. Definition of NPC

C. Subpart F Treatment of NPCs Under Pre-1997 Law

1. General

2. Foreign Currency Gains or Losses

3. Commodities Gains or Losses

4. Income Equivalent to Interest

a. Temporary Regulations

b. Notice 89-90

c. Final Regulations

(1) General

(2) Dealer Exception

(3) Liability Hedging Transactions

D. Subpart F Treatment of NPCs Under 1997 Law

1. 1997 TRA

2. General Rules

3. Hedging NPC

4. Dealer Exception

XI. Income from Stock Lending Transactions

XII. Special Exceptions

A. Exception for Active Banking, Financing or Securities Income

1. General

a. Overview

b. Legislative Background

(1) General

(2) Treatment of Finance Income Under Prior Law

(a) Revenue Act of 1962

(b) Tax Reform Act of 1986

(c) Taxpayer Relief Act of 1997

(3) Post-1998 Exception for Financing Income

(a) Tax and Trade Relief Extension Act of 1998

(b) Extension of Exception

c. Basic Rules

2. Eligible CFC

a. General

b. Predominantly Engaged Requirement

(1) General

(2) Lending or Finance Business

(a) 70% Gross Income Test

(b) Lending or Finance Business

(c) Unrelated Foreign Customers

(d) Direct, Active and Regular Business

(3) Banking Business

(4) Securities Business

c. Substantial Business Activity Requirement

(1) Substantial Activity

(2) Substantially All Activities

(3) Performance of Activities

(a) Activities of QBUs

(b) Activities of Related Persons

3. Qualified Banking or Financing Income

a. General

b. Activities Generating Qualifying Income

c. Foreign Customers

(1) Transactions with Customers

(2) Non-U.S. Customers

d. Substantially All Activities

(1) General

(2) Connection with Transaction

(3) Conducted Directly

(4) Performed in Home Country

(5) Separate Determination

e. Taxed in Home Country

f. Illustration

4. Income from Cross-Border Transactions

a. General

b. Cross-Border Transactions

(1) General

(2) Home Country

(3) Location of Customers

c. Substantial Activity in Home Country

d. Lending or Finance Business: 30% Test

5. Anti-Abuse Rules

6. Coordination with Other Rules

a. Securities Dealers

b. Sale of Assets of an Active Financing Business

c. Exception from Foreign Base Company Services Income

d. Same Country Exception

B. Exception for Active Insurance Income

1. General

2. Exempt Insurance Income

a. General

b. Exempt Insurance Income

c. Qualifying Insurance Company and Branch

3. FPHCI Exception

a. General

b. Qualifying Insurance Company

c. Qualified Insurance Income

d. Unearned Premiums and Reserves

(1) Property and Casualty Contracts

(2) Life Insurance and Annuity Contracts

(3) Limitation on Reserves

C. Exceptions for Dealers

1. General

2. Regular Dealers

3. Securities Dealer

XIII. CFC-Owned Partnerships

A. General

B. Overview of Partnership Regulations

1. Section 702 Regulations

a. Character of Partnership Gross Income

b. Partners Separately Take into Account Subpart F Items

2. Subpart F Regulations

a. General Aggregate Rule

b. FBCI Entity Rules

3. Partnership Matters Unaddressed

a. CFC's Transactions with Partnership

b. Partnership Deductions

C. Related Person and Country Determinations

1. Related Person

a. General Rules

b. Partner/Partnership Transactions

(1) CFC Partner's Distributive Share

(2) CFC Partner's Own Income

2. Country of Incorporation

D. Application of FPHCI Rules

1. General Aggregate Approach

2. Related Person/Same Country Exceptions

a. General

b. Payments Received by Partnership

c. Payments Made by Partnership

3. Business Exceptions to FPHCI

4. Exception for Active Banking and Financing Income

a. General Rules

b. Development of the Regulations

c. Final Regulations

E. Sale of Interest in Partnership

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Staff of the Joint Committee on Taxation's, General Explanation of the Tax Reform Act of 1986, 99th Cong., May 4, 1987 (Excerpts)

Worksheet 2 H.R. (Conf.) Rep. No. 220, 105th Cong., 1st Sess. (1997) (Excerpts)

Worksheet 3 H.R. (Conf.) Rep. No. 105-825, 105th Cong., 2d Sess. (1998) (Excerpts)

Worksheet 4 T.D. 8216, Regs. § 1.954-1T and -2T, 1988-2 C.B. 257

Worksheet 5 Preamble to Regs. § 1.954-1 and -2, T.D. 8618, 1995-2 C.B. 89

Worksheet 6 T.D. 8704, 1997-1 C.B. 154

Worksheet 7 Prop. Regs. § 1.954-9, REG-113909-98, 1999-30 I.R.B. 125 (7/26/99)

Bibliography

OFFICIAL

Statutes:

Legislative History:

Joint Committee on Taxation Reports:

Treasury Reports:

Treasury Rulings and Procedures:

Cases:

UNOFFICIAL

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