Individuals’ Use of Offshore Holding Companies (Part I) — footnotes

¹ Sec. 957(a)(2) applies the attribution rules of Sec. 958(a) and (b).

² U.S.-source active business income of a CFC generally will be subject to U.S. Federal income tax only if it is effectively connected with a U.S. trade or business of the CFC within the U.S., or when an in- come tax treaty is applicable, if such income is attributable to a permanent establishment within the U.S. Passive U.S.-source income earned by a CFC may be subject to a gross-basis tax within the U.S. collected through withholding at the source.

³ Sec. 1(h)(11)(C) provides for a 15% rate on qualifying dividends paid in tax years beginning before 2011. Dividends from qualified foreign corporations (including CFCs) may qualify for the 15% rate. Because subpart F inclusions technically are not dividends, however, it is the IRS’s position that the preferential rate is not available. See Notice 2004-70, IRB 2004-44, 1.

⁴ The subpart F sales and services income rules are found in Sec. 954(d) and (e).

⁵ See Sec. 954(c)(6). The rule permitting dividends, interest, rents and royalties received by a CFC from a related person to be taxed on a lookthrough basis expires for tax years beginning after 2008. Thus, lookthrough treatment will not be available after such time, except for certain dividends paid by a lower-tier subsidiary organized in the CFC’s same country of incorporation; see Sec. 954(c)(3). Consequently, such dividends that do not qualify for the limited same-country exception received in tax years beginning after 2008 will be treated as subpart F income (unless Congress extends the lookthrough rule).

⁶ See Regs. Sec.1.954-2(e)(3).

⁷ See Sec. 951(a)(1)(A). The inclusion is required if the shareholder is a shareholder on the last day of the CFC’s year and the foreign corporation qualifies as a CFC for an uninterrupted 30 days or more during the year.

⁸ Sec. 1(h)(1) generally provides a maximum long-term capital gain rate of 15% for tax years beginning before 2011.

⁹ Regs. Sec. 1.6038B-1(f).

¹⁰ See 31 USC Section 5321(a)(5)(B)(i). A willful violation will result in penalties equal to the greater of $100,000 or 50% of the amount of the transaction or of the balance of the account at the time of the offense; see 31 USC Section 5321(a) (5)(C). The U.S. has also entered into various agreements with other countries to share information in furtherance of tax administration. Information exchange provisions are included in U.S. bilateral income tax treaties; in addition, the U.S. has also entered into taxpayer information exchange agreements with various non-treaty partners concerning the exchange of information necessary to prevent tax fraud and tax evasion.

¹¹ Sec. 6038(b)(1).

¹² Sec. 6038(b)(2).

¹³ See Sec. 6501(c)(8). There have been a number of tax-avoidance schemes using offshore entities and credit cards to access cash that have caught the attention of the IRS and Congress; see, e.g., Rev. Proc. 2003-11, 2003-1 CB 311 (announcing partial amnesty for taxpayers that have participated in offshore credit card arrangements targeted under the IRS’s Offshore Credit Card Program). See also the U.S. Troop Readiness, Veterans’ Health, and Iraq Accountability Act (HR 1591) (proposing that fines and penalties on certain offshore financing arrangements be doubled) and the Stop Tax Haven Abuse Act (S 681) (proposing additional penalties and modified investigation procedures in relation to U.S. taxpayer activities in so-called offshore secrecy jurisdictions).