d.Foreign base personal holding-company income
e.Foreign base company oil-related income
2.Insurance income
3.Illegal bribes, kickbacks, and other payments paid by, or on behalf of, the cor-
poration, directly or indirectly, to an official, employee, or agent of a govern-
ment
4.Boycott income
5.Income derived from certain countries, such as LibyaThe provisions contain “words of art” that form a special vocabulary by which inter-
national tax practitioners communicate with one another. The Subpart F provisions
provide that, if a foreign corporation is a “controlled foreign corporation” (CFC) for
an uninterrupted period of 30 days or more during the taxable year, every “person”
who is a “U.S. shareholder” and owns stock in such corporation on the last day of the
corporation’s year must include in gross income its pro rata share of the corporation’s
tainted income, whether or not such income is distributed.
A CFC is a foreign corporation in which more than 50% of the total combined vot-
ing power or fair market value is owned directly, indirectly, or constructively by
“U.S. shareholders” on any day during the taxable year. A “U.S. shareholder” is a
“U.S. person” who owns, directly, indirectly, or constructively, 10% or more of the
foreign corporation, such as U.S. corporations, citizens, and residents of the United
States.
A special definition applies to foreign insurance companies. For purposes of tak-
ing into account certain income derived from the insurance of U.S. risks and risks
earned outside the country of the foreign corporation’s organization, the term CFC
includes a foreign corporation of which more than 25% of the total combined voting
power is owned, directly, indirectly, or constructively, by U.S. shareholders during
any day during the taxable year. If the foreign insurance company insures the risks of
related persons, then, in determining whether the 25% of total voting power test is
met, shares owned by all U.S. persons are counted, even if they own less than 10%
of the CFC stock. For these provisions to apply, the gross amount of premiums with
respect to U.S. risks or related-party risks must exceed 75% of the gross amount of
all premiums or other consideration with respect to all risks.
The most common of the five components of Subpart F income is foreign base
company income. Certain exclusions apply to this foreign base company income.
Ade minimisrule applies: If foreign base company income is less than the lesser
of 5% of the CFC’s gross income or $1 million, the CFC is deemed not to have any
foreign base company income. Certain income from a related party that is organized
in the same country as the CFC is excluded from foreign base company income. For
this purpose a related person includes not only subsidiaries but also corporations that
are controlled by the same shareholder that controls the CFC. For this purpose, con-
trol means 50% or more of either voting power or fair market value.
Foreign base company sales income is income derived in connection with (1) the
sale or purchase of personal property if (2) a related person is involved in either the
sale or the purchase, (3) the property is produced outside the CFC’s country of in-
corporation, and (4) the property is used outside the CFC’s country of incorporation.
For example, a Panamanian subsidiary of a U.S. corporation purchases goods from
its U.S. parent and resells the property to customers located in Europe; the profits de-
30.3 U.S. TAXATION OF A FOREIGN OPERATION 30 • 5