Tax Issues for Shareholders of Controlled Foreign Corporations

 Posted on January 21, 2019 in Taxation Law

The federal government has long been concerned with assets and businesses based abroad but owned by United States citizens. The IRS regularly looks to address income that is purposefully generated outside the country to avoid taxation. As part of the efforts to ensure that foreign investments are taxed correctly, the Tax Cuts and Jobs Act (TCJA), which was passed last year, made sizable changes to taxation rules, such as the addition of regulations mandating that global intangible low-taxed income produced by controlled foreign corporations be included in a taxpayer’s taxable income.

What Is a Controlled Foreign Corporation?

A controlled foreign corporation (CFC) is an American corporation that operates in another country with U.S. shareholders who hold 50% or more of the control of that corporation. American shareholders, directors, or officers of one of these businesses must report their income from the foreign corporation and pay taxes on that income. 

New Laws Under the Tax Cuts and Jobs Act

The TCJA provides that a U.S. taxpayer who possesses at least 10% of the value or voting rights in at least one CFC must now report global intangible low-taxed income from these CFCs as currently taxable income. This holds true even if there are no distributions to shareholders. 

Treasury Secretary Steven T. Mnuchin said that this new tax law will provide clarity to taxpayers and will close loopholes that previously allowed for inappropriate international tax planning and shifting profits overseas. This new law will be applicable to a CFC’s first tax year after Dec. 31, 2017, the U.S. taxpayer shareholder’s tax year within which the CFC’s year ends, and every tax year thereafter. The rules for performing specific tax credit calculations and other details have been proposed by the IRS and will likely become final soon. 

These proposed regulations do not touch on the calculation of foreign tax credits, which are widely considered to be the new law’s most controversial element. The IRS has indicated that proposed regulations on this aspect of the new law will be forthcoming. 

Contact a San Jose Controlled Foreign Corporation Tax Attorney

The Tax Cuts and Jobs Act has changed many facets of American tax law, and it is up to the taxpayer to stay abreast of these changes. One way to ensure that you know about the latest in tax law and how it affects your bottom line is to consult with a trusted San Jose, CA business tax lawyer.

Our firm has helped many business owners develop a tax strategy that is compliant with all applicable tax laws. We also represent business owners who may be getting audited or who are going through a dispute with the IRS. If you are concerned about any area of your business’ taxes, call our firm today at 408-866-1810.

Sources:

https://www.irs.gov/newsroom/irs-issues-proposed-regulations-on-global-intangible-low-taxed-income-for-us-shareholders