988 / How is voting power determined for purposes of determining whether an entity is a CFC when multiple classes of stock are outstanding?

Determining the allocation of the voting power of the stock of a corporation is fairly simple when the foreign corporation has only one outstanding class of stock. However, the foreign corporation may have more than one class of stock outstanding. The process of defining whether U.S. shareholders own more than 50 percent of the combined voting power is more complicated under these circumstances.

CFC status is determined under these circumstances by considering the combined voting power of all classes of stock entitled to vote, as well as all of the facts and circumstances of each particular case.¹

Example: Assume that a Swiss corporation has two classes of capital stock outstanding: 60 shares of class A stock, and 40 shares of class B stock. Each share of each class of stock has one vote for all purposes. A U.S. shareholder owns 51 shares of the class A stock. The Swiss corporation is a CFC because more than 50 percent of the combined voting power is owned by a U.S. shareholder (namely, the U.S. shareholder owning 51 percent of the total voting shares).²

Under certain circumstances, U.S. shareholders will be deemed to own the requisite percentage CFC classification purposes even though the nominal ownership by U.S. shareholders is not more than 50 percent.³

Example: Assume that the voting power of the foreign corporation is divided equally between two shareholders, a foreign shareholder and a U.S. shareholder. The U.S. shareholder has the power to elect a majority of the board of directors. In this case, the requisite majority voting power will reside with the U.S. shareholder and the foreign corporation will be classified as a CFC for U.S. tax purposes.