What is Subpart F Income?
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.
How Does Subpart F Income Work?
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 pro rata 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 isnt 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:
- Foreign Base Company Income (FBCI)
- Foreign Personal Holding Company Income (FPHCI),
- Foreign Base Company Sales Income (FBCSI)
- Foreign Base Company Services Income
These categories include income from stocks, rent, dividends, royalties, and other earnings derived from a foreign investments portfolio.