Determining US Ownership

Since we know clearly by now, a US citizen is an individual who has a Green card or has been born in the United States of America. We know for a fact that ownership is clearly when all the rights of access and usage, legally and otherwise, could be called ownership. Now breaking this topic further, what are foreign entities? Here, all the organizations owned by US citizens or show their ownership in any way in a country apart from the United States would be Foreign entities. Now, this was a vague elaboration but to go deeper, we must read ahead.

To understand what a foreign entity is, we must take a trip down the road to the CFC.
A Controlled Foreign Corporation could be termed a CFC. How can we leave our IRS behind when this could be a source of income for US citizens? Hence, the Controlled Foreign Corporations Tax Laws are scrutinized and are always under surveillance by the Internal Revenue Service.

However, how can we term an organization is termed as a CFC? A foreign corporation becomes a CFC when either, A. More than 50 percent of the voting power of the corporation is in the hands of a US shareholder, B. More than 50 percent of the value of the corporation is owned by a US shareholder. To decipher a US shareholder, one can say that he is a person having or rather owning 10 percent or more voting power of that foreign corporation. There are special rules applied to certain foreign insurance companies for determining the CFC statutes. It is so because primarily there is a low US ownership threshold for the foreign insurance companies to be considered a CFC.

There is a deferral of the US tax because the income is ideally distributed in the form of dividend and then to the owners. Although this is a form of income from the tax, a deferral is faced. Thus, to discourage this process of deferral, there are special reporting requirements laid down for the US taxpayers with the CFCs’.  This special reporting format is originally known as Subpart F.

Subpart F is a provision concerned with the income earned by foreign corporations.  They help in eliminating the deferrals of the US tax for certain incomes earned from certain categories of these foreign corporations. How this works is very interesting to know. This could also indicate that there are really sound and structured ways of attaining tax from individuals. It operates such that the rules apply on the US shareholders of the CFC where irrespective of the fact that he/she has received its share is chargeable. They are obligated to pay their tax for the proportionate amount received for the income received in the share of certain categories of the CFC’s current earnings. The US shareholder is asked to report exactly about this income received from the CFC’s share of earning as a part of the Subpart F compliance, even when the CFC has or has not made their distribution to the US shareholders.

Our main concerns with FATCA have been the identification of the right individual and then keeping a track of their income. When we talk about keeping a track of the Controlled Foreign Corporation, the owners or one of the owners of the CFC are required to file an IRS Form 5471, “Information Returns of US Persons With Respect To Certain Foreign Corporations.” This would help the IRS to keep tracks of the incomes received by these owner/owners, the US persons so as to discontinue the tax frauds.

But let us understand the ownership criterion a little better.

The US Ownership of more than 50% in the Controlled Foreign Corporation:

As we already read that is a US person owns more than 50% of the Foreign Corporation to be called the Controlled Foreign Corporation. For clarification, the Foreign Corporation if owned 50% by the US person and 50% by a non-US person would not be known as the Controlled Foreign Corporation since does not legally mean controlled.

The 10% ownership:

Although we saw that there should be more than 50% of shares taken over by the US persons so as to take ownership and turn a Foreign Corporation into a Controlled Foreign Corporation. On top of that, all the shareholders under the 50% plus holdings should have an ownership of 10% shares each. In a rhetorical situation, if 06 unrelated US persons own 9% of shares each, they would make it to more than 50% shareholdings but still not comply with the requirements. It is so because they do not have 10% shares each and thus, it would not be considered a Controlled Foreign Corporation.