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February 23, 2017 - Haoshen Zhong

Lookthrough Rules When Your Foreign Corporation Owns PFICs

What happens when a US citizen owns shares of a foreign corporation, and the foreign corporation owns shares in PFICs–for example, foreign mutual funds or money market funds? Does the US citizen need to look through the top level foreign corporation to the PFICs?

When a shareholder looks through a corporation to an underlying PFIC, he must pretend that he owned the underlying PFIC shares directly.

Does the US citizen look through the top level foreign corporation? The answer depends on the percentage of the shares in the top level corporation the US citizen and whether the top level corporation is itself a PFIC.... continue reading

PFIC and CFCs
February 9, 2017 - Haoshen Zhong

Deferring tax on PFIC income using your foreign operating company

Today’s post is a war story about a pair of US citizen former clients whose PFIC issues we helped clean up. The question, paraphrased, is more or less like this:

We are equal shareholders of a successful Portuguese company (LDA). Our company accrued a lot of profits. We really do not want to let the profits sit idle. Can we safely invest them in exchange traded funds?

This post will discuss how to use a mix of the mark-to-market regime for foreign investment companies (PFICs) and the de minimis exception to foreign base company income for controlled foreign corporation (CFCs) to defer US tax on the profits from the exchange traded funds.... continue reading

PFIC and CFCs
January 26, 2017 - Haoshen Zhong

Reducing PFIC Tax by Annualizing the First Year Distributions

This is a question we got in an email:

My client bought shares in a foreign mutual fund a few years ago. I see from the client’s statements that the average distribution for the last few years has been about the same, but I do not have statements for the entire first year. Can I annualize the first year distribution?

This post will discuss how to annualize the first year distribution to reduce the tax on distributions from a passive foreign investment company.

PFIC defined

A passive foreign investment company (PFIC) is a foreign corporation that meets either one of the following two tests (IRC §1297(a)):

  1. Income test: At least 75% of the corporation’s gross income is passive income.
... continue reading
PFIC and CFCs
January 12, 2017 - Haoshen Zhong

Gaps Between PFIC and Controlled Foreign Corporation Anti-Deferral Coverage

Gaps between subpart F income and PFIC classification

Today’s post is about a few gaps between taxation under the subpart F rules for controlled foreign corporations and passive foreign investment company (PFIC) rules. If your business happens to fall into one of these gaps (or can be reconfigured to fall into one of these gaps), it can be useful for deferring US taxes on income.

Complement between subpart F rules and PFIC rules

Congress enacted the subpart F rules, applicable to controlled foreign corporations (CFCs), to prevent US persons from conducting certain kinds of operations through a corporation organized in a tax haven to avoid or defer US taxes.... continue reading

PFIC and CFCs
December 29, 2016 - Haoshen Zhong

Running Your IP Licensing Subsidiary

Today’s post is a followup to a post I made back in May. The setup is this:

I own 40% of a BVI corporation, and a nonresident alien owns the other 60%. The BVI corporation owns an operating subsidiary in country X. We set up a 2nd subsidiary in the Cayman Islands to hold IPs (software copyright, trademarks, domain name) and license them to the operating subsidiary.

We got into a lawsuit, and we settled it by having our IP licensing subsidiary grant a license to the other party for a modest royalty. Do we need to worry about anything?

... continue reading
PFIC and CFCs