989 / When is a U.S. Shareholder in a CFC subject to immediate taxation?

Under IRC Section 951(a), if a foreign corporation is a CFC for any day during a taxable year, every person who is a “United States shareholder” in that corporation on the last day of the year must include the following amounts in gross income for the taxable year in which, or with which, that taxable year of the corporation ends:¹

His pro rata share of the corporation’s Subpart F income (see Q ) for such year; and,

The pro rata share of the corporation’s increase in earnings invested in U.S. property for the year.² (Note that, in this context, if the “investment in U.S. property” rule is applicable, the required U.S. income inclusion is not limited to tax haven or “tainted” (i.e., Subpart F) income.)

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Planning Point: These income inclusion rules are extremely complex. Any U.S. shareholder in a CFC should consult competent tax counsel when determining U.S. income tax liability, as well as when determining U.S. reporting obligations.

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Further, two additional and more arcane income inclusion rules may apply, including: (i) income previously deferred and repatriated from less developed countries and (ii) previously deferred foreign base company shipping income.³

Prior to 1996, inclusion was also required for a shareholder’s pro rata share of the corporation’s earnings invested in excess passive assets, but this inclusionary provision was repealed.⁴