TAX 9869 Lecture 61: Foreign Base Company Income

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11 Aug 2020
Foreign Base Company Income Sec 954
•Generally the US does not tax foreign corporation on income not effectively connected with a
US trade or business.
•Congress was concerned that many companies owned by US taxpayers had improper
incentives for investment abroad due to deferrals of US tax.
•They perceived this as an unfair advantage over domestic business.
•At the same time, they US companies competing with foreign companies in the foreign country
would be disadvantaged if the US taxed those operations. Accordingly the rules allow for
deferral of US tax where the CFC carries on business in the same country as it was
Four Categories of Foreign Base Company Income:
I.Foreign personal holding company income.
II.Foreign base company sales income.
III.Foreign base company services income.
IV.Foreign base company oil related income.
Category I: Foreign Personal Holding Company Income (FPHCI)
Section 954(c) includes the following as FPHCI:
•Dividends, interest (including income equivalent to interest).
•Royalties, annuities and rents.
•Certain property transactions.
•Commodities transactions.
•Foreign currency gains.
•Income from notional principal contracts.
•Payments in lieu of dividends.
Sec. 954 does not define dividends, and therefore, Sec. 316 should apply.
959(b) excludes dividends paid from a lower tier subsidiary that is also a CFC and has income
that is taxable to the US Shareholder.
Dividends are not included if the dividend is from a related person and
i.The related person is a corporation organized in the same country as the CFC, and
ii.The related person has a substantial part of its assets used in a trade or business in that
954(c)(6) dividend look through exception set to expire at the end of 2013
Interest (including income equivalent to interest)
-Includes OID and imputed interest under Sections 483 and 7872.
-Includes tax exempt interest under Sec. 103 (state and local bond interest).
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