Foreign Personal Holding Companies examines U.S. taxation of U.S. shareholders of foreign personal holding companies. This Portfolio analyzes the provisions of former §§551 through 558 of the Internal Revenue Code along with related provisions and the regulations promulgated thereunder, as generally in effect before the repeal of these provisions for tax years of foreign corporations beginning after 2004 and for tax years of U.S. shareholders with or within which such tax years of foreign corporations end.

Written by Dirk J. J. Suringa, Esq., this Portfolio also discusses rules for determining foreign personal holding company status, amounts subject to taxation, and filing requirements.

Finally, the Portfolio addresses the relationships among these rules, subpart F, the passive foreign investment company rules, and the personal holding company rules.

This Portfolio provides a unique analysis that covers a broad range of topics including 

• Definition of a Foreign Personal Holding Company including what constitutes a “Foreign Corporation”, the Stock Ownership Test, the Gross Income Test, and Exceptions to Foreign Personal Holding Company Status
• Foreign Personal Holding Company Income including Dividends, Interest, Royalties, and Annuities; Stock and Securities Transactions; Commodity Transactions; Estates and Trusts; and more!
• Taxation of U.S. Shareholders including Foreign Tax Credits and Sales of Foreign Personal Holding Company Stock
• Comparison with Other Methods of Taxing U.S. Owners of Foreign Corporations
• Information Reporting, Tax Year Requirements, and Statute of Limitations
• Numerous Working Papers

Foreign Personal Holding Companies 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

Introductory Material

A. Background

B. Legislative Response

1. Value of Deferral

2. Enactment of Foreign Personal Holding Company Rules

3. Similarity to Personal Holding Company Rules

4. Interplay of Foreign Personal Holding Company Rules with Other Limitations on Deferral

a. Foreign Personal Holding Company Rules and Subpart F

b. Passive Foreign Investment Companies

5. Repeal of Foreign Personal Holding Company Rules

II. Definition of a Foreign Personal Holding Company

Introductory Material

A. "Foreign Corporation"

B. Stock Ownership Test

1. In General

2. Determining Value Owned

3. Indirect Ownership

4. Constructive Ownership

a. General

b. Statutory Attribution Scheme

(1) Rule 1: Entity Attribution

(a) Attribution from Corporations

(b) Attribution from Partnerships

(c) Attribution from Trusts

(d) Attribution from Estates

(2) Rule 2: Family and Partnership Attribution

(a) Attribution from Family Members

(b) Attribution from Partners

(3) Rule 3: Option Ownership

(4) Reattribution of Constructively-Owned Stock

(5) Overlapping Option Ownership and Family Attribution

(6) Convertible Securities

c. Nonresident Aliens Becoming U.S. Residents

C. Gross Income Test

1. Threshold Percentage

2. Definition of "Gross Income"

a. General

b. Income Exempted by Tax Treaty

c. Dividends Excluded under Section 959

d. Related-Party Dividends and Interest

e. Gross Income Includes Certain Income of Lower-Tier Foreign Personal Holding Company

(1) Amount Included

(2) Dividend Treatment

D. Exceptions to Foreign Personal Holding Company Status

1. Tax-Exempt Organizations

2. Foreign Banks

III. Foreign Personal Holding Company Income

Introductory Material

A. Dividends, Interest, Royalties, and Annuities

1. Dividends

2. Interest

3. Look-Through Rules for Certain Interest and Dividends

a. General

b. Previous Law

c. Same-Country, Related Person

(1) General

(2) Related Person

4. Royalties

5. Annuities

B. Stock and Securities Transactions

C. Commodity Transactions

D. Estates and Trusts

E. Personal Service Contracts

F. Use of Corporation Property by Shareholders

G. Rents

IV. Taxation of U.S. Shareholders

Introductory Material

A. Deemed Dividend Distribution

1. General

a. Definition of "U.S. Shareholder"

b. Special Indirect Ownership Rule

(1) General

(2) Different Classes of Stock

(3) Regulations to Prevent Double Taxation

2. Deemed Dividend Amount

a. General

b. Multiple Classes of Stock

c. Partial-Year Foreign Personal Holding Company Status

(1) Statutory Provisions

(2) The Marsman Case

d. Restrictions on Actual Dividends

B. Undistributed Foreign Personal Holding Company Income

1. Taxable Income Minus Dividends Paid

a. General

b. Undistributed Foreign Personal Holding Company Income of Lower-Tier Foreign Personal Holding Company

2. Adjustments to Taxable Income

a. Taxes

b. Charitable Contributions

c. Dividends-Received and Other Special Corporate Deductions

d. Net Operating Losses

e. Expenses and Depreciation Applicable to Property

3. Computation of Undistributed Foreign Personal Holding Company Income

4. Dividends-paid deduction

a. General

b. Definition of Dividend

(1) Timing of Dividend Payments

(2) Distributions to Intervening Entities that Are Not Foreign Personal Holding Companies

(3) Dividend in Kind

(4) Liquidating Distributions

c. Preferential Dividends

d. Late-Paid Dividends

e. Consent Dividends

C. Subsequent Distributions by Foreign Personal Holding Companies-Capital Accounts

D. Effect of Deemed Dividend on Shareholder Basis

E. Exception to Carryover Basis at Death

F. Foreign Tax Credit

G. Sales of Foreign Personal Holding Company Stock

1. Section 1246-Foreign Investment Companies

2. Section 1248-CFC Stock Sales

3. Section 1291-Sales of § 1291 Funds

V. Comparison with Other Methods of Taxing U.S. Owners of Foreign Corporations

A. Subpart F

1. Background

2. Priority Rule

3. Structural Differences

a. Passive Income Requirement

b. Stock Ownership Requirement

(1) General

(2) Constructive Ownership Rules

(3) Prior Law

4. Manner of Inclusion in Income

a. Determination of Amount Includible

b. Prior Operating Losses

c. The "Hop-Scotch" Principle

d. Allocation of Distributions to Previously Taxed Earnings and Profits

e. Exclusion of Certain U.S. Source Income

f. Blocked Income

5. Definition of Foreign Personal Holding Company Income

a. Rents and Royalties

b. Dividends, Interest, Sales of Stock or Securities

c. Personal-Services and Shareholder-Use Income

d. Notional Principal Contracts and Securities Lending Arrangements

e. Miscellaneous Additions

B. Passive Foreign Investment Companies

1. General

2. Passive Income or Assets Test

VI. Information Reporting, Tax Year Requirements, and Statute of Limitations

A. Required Tax Year for Certain Foreign Personal Holding Companies

B. Returns of Officers, Directors and Shareholders

1. "10% Shareholder" Defined

2. Time for Filing

3. One Person May File for Others

4. Information Necessary to Complete Form 5471

a. Corporate Information

b. Shareholder Information

c. Income Information

C. Statement Required of 5% U.S. Shareholders

D. Fast-Pay Preferred Arrangements

E. Extended Statute of Limitations

Working Papers

Table of Worksheets

See the following Tax Management Portfolios for additional forms:

Worksheet 1 Comparison of Foreign Personal Holding Company, Subpart F, PFIC, and Personal Holding Company Rules

Worksheet 2 Excerpts from S. Rep. No. 1242, 75th Cong., 1st Sess. (1937)

Worksheet 3 Excerpts from H.R. Rep. No. 1546, 75th Cong., 1st Sess. (1937)

Worksheet 4 Excerpts from the Staff of the Joint Committee on Taxation, General Explanation of the Revue Provisions of the Deficit Reduction Act of 1984

Worksheet 5 Excerpts from the Staff of the Joint Committee on Taxation, Explanation of Technical Corrections to the Tax Reform Act of 1984 and Other Recent Tax Legislation

Worksheet 6 Excerpts from H.R. Rep. No. 100-795 [on H.R. 4333 that became P.L. 100-647, the Technical and Miscellaneous Revenue Act of 1988], 100th Cong., 2d Sess. 309-11 (1988)

Bibliography

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Statutes:

Treasury Regulations:

Legislative History:

Administrative Pronouncements:

Cases:

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