{"id":2041,"date":"2020-01-28T13:25:13","date_gmt":"2020-01-28T21:25:13","guid":{"rendered":"http:\/\/159.89.119.110\/?p=2041"},"modified":"2020-01-28T13:44:37","modified_gmt":"2020-01-28T21:44:37","slug":"final-regulations-partially-mitigate-overbroad-controlled-foreign-corporation-attribution-rules-passed-as-part-of-2017-u-s-tax-reform","status":"publish","type":"post","link":"https:\/\/previous.ca.andersen.com\/fr\/blog\/final-regulations-partially-mitigate-overbroad-controlled-foreign-corporation-attribution-rules-passed-as-part-of-2017-u-s-tax-reform\/","title":{"rendered":"Final Regulations Partially Mitigate Overbroad Controlled Foreign Corporation Attribution Rules Passed as Part of 2017 U.S. Tax Reform"},"content":{"rendered":"\n

The U.S. Internal Revenue Service (\u201cIRS\u201d)\nrecently finalized tax regulations under its complex controlled foreign\ncorporation (\u201cCFC\u201d) regime that partially mitigate some of the harsh tax\nconsequences resulting from an apparent drafting error contained in the 2017 U.S.\ntax reform legislation. The 2017 US tax reform (i.e., the Tax Cuts and Jobs Act of 2017<\/em>) repealed a limitation on the\n\u201cdownstream\u201d CFC constructive ownership rules that had historically been in\nplace to prevent non-sensical characterizations of certain non-U.S.\ncorporations as being owned by U.S. persons. \nHowever, in lieu of doing a surgical modification of the constructive\nownership rules to shut down a perceived tax loophole used by a relatively\nlimited number of taxpayers, Congress repealed the limitation rule in its\nentirety!  <\/p>\n\n\n\n

One example of the potential problems that could be caused by the law change is that U.S. subsidiaries that are owned by a Canadian parent corporation can be deemed to \u201cown\u201d their Canadian parent corporation (essentially turning the actual ownership structure on its head!). This counter-intuitive approach can result in substantial compliance nightmares for a wide range of U.S. taxpayers.<\/p>\n\n\n\n

Controlled Foreign Corporation Rules<\/h2>\n\n\n\n

By way of brief background, the CFC rules\nare a complex set of rules that require certain U.S. shareholders of non-U.S.\ncorporations to currently include in income various types of undistributed\nincome earned within the CFC. The CFC rules can be particularly problematic in\ncertain fact patterns for individual U.S. shareholders, and can impact\ncorporate U.S. shareholders as well.<\/p>\n\n\n\n

As another example, assume there are two otherwise unrelated U.S. citizen residents of Canada, Allan and Cole, and they own a 6% and 3% interest in a Canadian limited partnership, respectively. Allan and Cole each also owns Can Co 1 and Can Co 2, both of which are CFCs. Under U.S. tax law, the partnership would be treated as owning any stock owned directly or indirectly by Allan and Cole. Thus, the partnership would be treated as controlling any corporations, including CFCs, regardless of the size of Allan\u2019s or Cole\u2019s ownership interest in the partnership. Therefore, Can Co. 1 and Can Co. 2 would be treated as related to each other.<\/p>\n\n\n\n

Impact of Treating Controlled Foreign Corporations as Related Persons<\/h2>\n\n\n\n

Treatment of CFCs as related persons with\nrespect to one another can give rise to certain types of Subpart F income of\nCFCs, which results in a current year income inclusion to U.S. shareholders of\nCFCs, and adds complexity to computation of Global Intangible Low-Taxed Income\n(\u201cGILTI\u201d), which was also introduced in the 2017 US tax law and came effective\nfor 2018.* <\/p>\n\n\n\n

The rules closed the loophole of being a related party to a CFC that resulted from the attribution rules. Before the final rules were released, the \u201cdownward attribution\u201d made certain unrelated CFCs related to each other due to being controlled by the same person(s) which control the CFCs. The person can be a partnership, corporation, estate or trust.<\/p>\n\n\n\n

Until such time as Congress can pass a statute to provide a more fulsome fix to this \u201cdownstream\u201d constructive ownership issue, U.S. taxpayers will continue to deal with unexpected tax consequences of the overbroad rule change to the CFC regime.  <\/p>\n\n\n\n

Questions about Controlled Foreign Corporations?<\/h2>\n\n\n\n

If you have any questions about whether you might be impacted by the Controlled Foreign Corporation rules, feel free to contact Catherine Shen-Weafer<\/a> or Eric Trumbull<\/a> at 604-448-0200, or via email at catherine.shen-weafer@ca.andersen.com<\/a> or eric.trumbull@ca.andersen.com<\/a>.<\/p>\n\n\n\n

* For more information about GILTI, review\nour previous blog entries:<\/p>\n\n\n\n