What is a Specified Foreign Corporation (SFC), IRC 951(e)

What is a Specified Foreign Corporation (SFC), 26 U.S.C. 951(e)

The Specified Foreign Corporation (SFC) 

With the introduction of the Tax Cuts and Jobs Act (TCJA) came increased complexity with matters involving foreign income generated by certain domestic and corporate US shareholders. Prior to the introduction of the TCJA, most foreign income was not taxable until it was repatriated back to the United States (subject to rules involving foreign branch income and Subpart F income). But, with the introduction of the TCJA came increased complexity and the expansion of international tax-related income. While the United States corporate tax system has morphed from a worldwide income tax system into a quasi-territorial tax system, the introduction of GILTI does limit the application of the benefits — especially in scenarios in which there are no foreign taxes being paid. One important concept is understanding the Specified Foreign Corporation, beyond CFC rules. Let’s walk through the basics of what is a specified foreign corporation and why it is important.

Specified Foreign Corporation Definition 965(e)(1)

Let’s breakdown the definition of a Specified Foreign Corporation:

“(e) Specified foreign corporation

Section 965 (e)(1)

• • • “(1) In general

      • For purposes of this section, the term “specified foreign corporation” means—

        • (A) any controlled foreign corporation, and

        • (B) any foreign corporation with respect to which one or more domestic corporations is a United States shareholder.”

To begin, a specified foreign corporation includes any controlled foreign corporation (CFC) as well as any foreign corporation in which one or more domestic corporations is a U.S. shareholder. The controlled foreign corporation rules have been around for many years, with the main purpose being that it requires certain tax and reporting implications for US persons who own certain foreign corporations, including Subpart F income and Form 5471 filing. But, for purposes of Section 965, it also includes foreign corporations in which a domestic corporation is a United States shareholder. It is important to note, that ‘U.S. Shareholder’ is a defined term and includes any domestic corporation that owns 10% or more of the total combined voting power.

Section 965 (e)(2)

• • • “(2) Application to certain foreign corporations

      • For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for purposes of applying subsection (f)).”

This rule limits the application of these rules to when a specified corporation, that may not be considered a controlled foreign corporation. More specifically, it limits the applicability of the rules to the degree that the foreign corporation is only considered a controlled foreign corporation for purposes of subpart F income.

Section 965 (e)(3)

• • • “(3) Exclusion of passive foreign investment companies

      • Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.”

Many times, when there are controlled foreign corporations, these controlled foreign corporations may also operate as a pastor foreign investment company, such as when a foreign corporation is a holding company that merely holds passive assets. In that type of scenario, it is important to note that the specified foreign corporation definition does not include a corporation that qualifies as a PFIC but is not a CFC. In other words, the definition of a specified foreign corporation does not include non-CFCs that qualify as passive foreign investment companies.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.