4 Common Types of IRS Controlled Foreign Corporations: We have summarized 4 Common types of IRS Controlled Foreign Corporations. In tax, One of the best methods for understanding how a Controlled Foreign Corporation works, is with examples. A Controlled Foreign Corporation (CFC) IRC section 952 is when a foreign corporation is owned more than 50% by U.S. shareholders, who each own at least 10%. When it comes to CFC, attribution and constructive ownership rules apply. Therefore, we wanted to provide you with a few examples of common Controlled Foreign Corporations, along with a basic introduction to how attribution and constructive ownership works.
4 Common Types of IRS Controlled Foreign Corporations
While Controlled Foreign Corporations come in many shapes and sizes, there a few common types, we work with at Golding & Golding.
A Sociedad Anonima, in which the U.S. Person usually owns 90% of the Foreign Corporation, with a local resident owning 10%.
Common example: Nicole is a U.S. person. She decides to invest in rental properties in Belize. She owns a Sociedad Anonima, which owns 4 rental properties. She is the primary owner of the corporation, with a local resident and accountant owning 10%.
This is a CFC, because a U.S. person owns more than 50% and has at least 10% ownership
Hong Kong Limited
A Hong Kong Ltd. is a common business structure on Hong Kong, China and Taiwan. It may also coincide with the ownership of a BVI Company.
Common example: Michelle is a software designer with clients abroad. She owns 5 small companies across the globe in order to maintain local currency and collect fees for her work outside of the U.S.
This is a CFC, because A U.S. person owns more than 50% and has at least 10% ownership
Australian PTY Limited
An Australia PTY Ltd. is a common business structure on Australia.
Common example: Scott is an Australian citizen who resides in Australia. Recently he learned he is being transferred to the U.S. for his employer on an L-1 visa. Prior to relocating to the U.S (and now meeting the Substantial Presence Test), he owns a majority share interest with his wife (who also meets the Substantial Presence Test) in various real estate investment companies in Australia.
This is a CFC, because A U.S. person owns more than 50% and has at least 10% ownership. (Attribution rules apply)
A BVI company is a common business structure used throughout the globe. it has become less common ever since the introduction of transparency rules and registration requirements, but it is still common.
Example: Nigel is a legal permanent residence who owns a BVI, held in a Hong Kong Ltd. He owns the majority share in the BVIm which owns various investments across the globe.
This is a CFC, because A U.S. person (which includes “Green Card Holders”) owns more than 50% and has at least 10% ownership. (Attribution rules apply)
CFC Attribution (26 U.S.C. Section 958)
Attribution is the idea that one person considered to constructively own stock that another person owns only due to the relationship between the two individuals. The main purpose of attribution is to avoid artificially low tax reductions strategies by making sales or transfers between “related” parties. More information can be found in Internal Revenue Code section 958. As provided by the IRS :
Constructive ownership rules apply for determining whether the U.S. person is a U.S. Shareholder and whether a foreign corporation is a CFC, but are not considered in determining the amount of a U.S. Shareholder’s Subpart F inclusion.
– A corporation, partnership, trust or estate that owns more than 50% of the voting stock of a corporation is considered to own 100% of the voting stock of that corporation.
– Stock owned by a non-resident alien individual is not treated as owned by a U.S. person.
– More than one family member can be attributed the same stock. For example, stock owned by a child can be attributed to both a parent and a grandparent.
Further Resources on CFCs
We have additional detailed information on Controlled Foreign Corporations for your reference.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.