Subpart F Income – Definition

Subpart F Income Definition

Income generated Controlled Foreign Corporations (CFCs) by the United States government is called as ‘Subpart F Income’. CFCs are foreign subsidiaries with more than 50% stake controlled by entities in the United States, and taxed as per the Subpart F code of the US Tax code laws.

A Little More on What is Subpart F Income

While it is applied as deferred tax to some companies only when the income is distributed back as dividends to shareholders and not before, it is also taxed in other cases on a prorata basis depending on the number of shares owned by the U.S. entities in the foreign corporations. CFCs can be controlled directly via stocks ownership, or through other indirect channels.

It is important to note that the IRS isn’t taxing the income of the foreign corporation directly. It is simply taxing the U.S. entities – individuals or institutions, who have a controlling stake in the corporation, deriving income from this source.

Subpart F Income can be moved within different U.S. jurisdictions and is looked upon as passive Earnings and Profits income (E&P). It is usually charged under the following categories:

  1. Foreign Base Company Income (FBCI)
  2. Foreign Personal Holding Company Income (FPHCI),
  3. Foreign Base Company Sales Income (FBCSI)
  4. Foreign Base Company Services Income

These categories include income from stocks, rent, dividends, royalties, and other earnings derived from a foreign investments portfolio.

References for Subpart F Income

Academic Research on Subpart F Income

Deferral of US Tax on International Income: End It, Don’t Mend It-Why Should We be Stuck in the Middle with Subpart F, Peroni, R. J. (2000). Tex. L. Rev., 79, 1609. This paper takes a critical look at the Subpart F tax code and proposes anti-deferral reforms.

Transfer-Pricing with Software Allows for Effective Circumvention of Subpart F Income: Google’s” Sandwich” Costs Taxpayers Millions, Sokatch, J. (2011). The International Lawyer, 725-747. This paper studies the technological advancements that ease circumvention of reporting and taxation of Subpart F income.

The Tax Treatment of Joint Venture Income Under Subpart F: Some Issues and Alternatives, Liebman, H. M. (1976). Bus. Law., 32, 341. This paper studies the regulation around taxation of Subpart F income for joint ventures, discusses issues and provides alternatives.

The New Subpart F Foreign Income Provisions of the Internal Revenue Code, Cherryman, R. R. (1963). Wm. & Mary Law Review, 4, 172. This paper reviews the latest provisions surrounding the Subpart F Income code issued by the IRS, and its implications.

Note on the Tax Treatment of Joint Venture Income Under Subpart F: An Addendum, Liebman, H. M. (1977). The Business Lawyer, 1819-1827. This paper discusses additional features of Joint Venture taxation under the Subpart F Income tax code.

Real Estate Investment Trusts and Subpart F; Characterizing Subpart Inclusions for Purposes of the Reit Income Tests, Brown, N. C. (2006). Emory Int’l L. Rev., 20, 833. This paper sheds light on the taxation of Real Estate Investments from foreign holdings under the Subpart F tax code.

Tax Aspects of Doing Business Abroad-Subpart F Income, Stromberg, M. (1967). DePaul L. Rev., 17, 153. This paper sheds light on the regulations on taxation of income obtained from doing business abroad.

Pre-Sale Check-the-Box Election Avoids Subpart F Income on Sale of Stock, Rothman, R. P., & Hryck, D. M. (2004). Int’l Tax J., 30, 1. This paper discusses the ‘Check-the-box Regulations’ for sale of stocks in foreign holdings in light of Subpart F tax codes.

Updating the Subpart F Rules for Active Income, Yoder, L. D. (2007). Int’l Tax J., 33, 3. This paper reviews the rules of taxing active foreign income and discusses the updates necessary in light of the changing economic scenario.

The Effects of the 1975 Tax Reduction Act on the Taxation of Subpart F Income, Stukenberg, M. (1976). Vand. J. Transnat’l L., 9, 377. This paper studies the impact of the tax reductions act of 1975 on the U.S. Subpart F Income tax code.

Controlled Foreign Corporations: Exclusion of Subpart F Income by Receipt of Minimum Distributions-A Complexity of Rules and Regulations, Symons, R. J. (1973). Notre Dame Law., 49, 907. This paper deciphers the complex tax regulations dealing with exclusions from the Subpart F tax code.

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