These provisions are primarily directed at the Arab boycott of Israel. Periodically,
the IRS issues a notice listing countries that may require participation in, or cooper-
ation with, an international boycott. Boycotts sanctioned by the United States are not
affected by this provision, such as the boycotts of Cuba and Libya.
Taxpayers can elect an exception from foreign base company income if that in-
come is subject to a foreign tax of at least 90% of the maximum U.S. corporate tax
rate. If a CFC is engaged in a trade or a business within the United States, any item
of income from U.S. sources that is effectively connected with a conduct of that U.S.
trade or business is excluded from Subpart F income, unless the income is exempt
from taxation or subject to a reduced rate of tax under an income tax treaty.
Even if the CFC does not have Subpart F income, U.S. shareholders are subject to
a tax on their pro rata share of a CFC’s increase in earnings and profits invested in
U.S. property. U.S. propertyis very broadly defined as
- Tangible property located in the United States
- Stock of a domestic corporation
- Obligation of a U.S. person (including the guarantee of such obligation)
- Any right to use in the United States:
a.A patent, copyright, invention, model, design, secret formula, or process.
b.Any other similar property right which is acquired or developed by the
CFC for use in the United States.
Although the definition of U.S. property is extremely broad, the tax law then ex-
cludes from the term U.S. propertythe following items:
- Obligations of the United States
- Money and bank deposits
- Assets acquired in normal commercial transactions without any intention of per-
mitting them to remain in the United States, for example, accounts receivable - Certain transportation equipment used predominantly outside the United States,
for example, aircraft used in foreign countries - Assets of an insurance company equivalent to the unearned premiums or ordi-
nary and necessary reserves for the proper conduct of its insurance business at-
tributable to certain contracts - Stock or obligations of an unrelated corporation (for this purpose, a corporation
is considered related if 25% or more of the total combined voting power is
owned by the U.S. shareholders of the CFC directly, indirectly, or construc-
tively) - Any movable property (other than a vessel or aircraft) used for the purpose of
exploring, developing, removing, or transporting resources from or under ocean
waters in the U.S. continental shelf, such as drilling platforms - Assets equal to the earnings or profits accumulated after 1962 and excluded
from Subpart F income as income effectively connected with a conduct of a U.S.
trade or business - Property held by a foreign sales corporation that is related to its export activities
- Any indebtedness (other than indebtedness arising in connection with the sale
of, or processing of, property) which is either collected within the period de-
30 • 8 INTERNATIONAL TAXATION