US Treasury Provides Guidance On Allocation Of Earnings Of CFCs

by Glen Shapiro, LawAndTax-News.com, New York

09 August 2004

The US Treasury Department and the Internal Revenue Service on Thursday issued proposed regulations providing guidance for determining a US shareholder's pro rata share of the income of a controlled foreign corporation (CFC) that the shareholder must include in gross income for US tax purposes under the subpart F rules.

The proposals are intended to update the existing regulations in this area (which date back to 1965) in order to reflect the increased complexity of international business arrangements, Greg Jenner, Acting Assistant Secretary for Tax Policy explained, observing that:

"The proposed regulations provide results that are more consistent with the economic interests of shareholders in a controlled foreign corporation."

Specifically, the proposed regulations provide detailed rules for determining a US shareholder's pro rata share of subpart F amounts when the controlled foreign corporation has multiple classes of stock outstanding and the distribution of earnings among two or more classes of stock depends upon the exercise of discretion by the board of directors or similar governing body of the corporation. For purposes of determining a US shareholder's pro rata share, classes of stock with such discretionary distribution rights are taken into account based on their relative value.

The draft regulations also provide that restrictions or limitations on the distribution of earnings to a US shareholder that are structured by the corporation or its shareholders (e.g., as part of the terms of a class of stock or through other arrangements) generally are not be taken into account in determining a US shareholder's pro rata share of subpart F amounts, subject to certain specified exceptions.

When they are finalised, the regulations will be effective for taxable years beginning on or after January 1, 2005.

Recommended