Don’t let your foreign sub invest in US property

…that is, unless you don’t mind picking up US taxable income that may otherwise be deferred.

If you have a Controlled Foreign Corporation (CFC), then you may be benefiting from some income deferral.  Generally the income earned by a CFC is not taxable in the US until it is paid to the US owner as a dividend.  The tax law defines categories of income referred to as, “Subpart F,” income that are an exception to that generality and would be taxable in the US.  Another exception is when your CFC makes an investment in US property.

If your CFC has earnings and profits, which is a tax metric for income earned by a corporation, that hasn’t yet be distributed to owners, then you are at risk for what international tax planners call a, “956 inclusion.”  Tax planners are referring to internal revenue code section 956, which is a complex set of tax rules designed to catch companies that may use investments in US property to access the value of their CFC without paying tax.

The concept is that an investment in US property by a CFC is substantially equivalent to paying a dividend back to the US owner.

Of course the real fun is determining what is or isn’t considered US Property.  The law provides both lists of what is considered US Property and what is excluded for the purpose of the 956 inclusion..  Qualifying as US Property is not desired in this case and is a topic I’ll save for another article.  For now,  I’ll summarize with a simple example.  If you own a CFC which has earnings and profits of $100K and that CFC were to say, buy machinery in the US, with a value of $20K, you would have US taxable income of $20K, under the 956 inclusion rule.

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