The President signed The Tax Increase Prevention Act of 2014 on December 19, 2014. The new Public Law No. 113-295 (H.R. 5771) retroactively extended various tax provisions that had expired as of December 31, 2013. A U.S. international tax provision under I.R.C. Section 954(c)(6) was extended for the year 2014 through December 31, 2014. This provision is a look-through rule which provides some relief from the anti-deferral regime of Subpart F for U.S. shareholders of controlled foreign corporations (“CFCs”). A controlled foreign corporation is a foreign corporation of which more than 50% of the vote or value is owned by U.S. shareholders who each own at least 10% of the voting stock.
The look-through rule under I.R.C. Section 954(c)(6) provides that dividends, interest, rents and royalties that one CFC receives or accrues from a related CFC are not treated as foreign personal holding company income. Foreign personal holding company income is a type of Subpart F income which is subject to U.S. Federal taxation even before the U.S. shareholder receives an actual dividend distribution from the CFC. The look-through rule applies only if the source of the payment from the related CFC is not from Subpart F income or income that is effectively connected with a U.S. trade or business. For purposes of the look-through rule, CFCs are considered to be related if they are controlled by the same person(s) or if one CFC controls or is controlled by another CFC. Control is determined by ownership of more than 50% of the CFC’s stock by vote or value.
What is the practical effect of the Section 954(c)(6) CFC look-through rule?
The CFC look-through rule provides some tax planning opportunities for intercompany transactions between related CFCs without triggering deemed inclusions of undistributed taxable income to the U.S. shareholders. It also enables the payment of dividends from lower tier CFCs while allowing more discretion in the timing of repatriating CFC earnings to the U.S. shareholders.
For more information, please contact our international tax advisor at 301.231.6200.