Foreign personal holding company

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Foreign personal holding company income (FPHCI) is defined for U.S. controlled foreign corporation rules [1] and, with modifications, for U.S. foreign tax credit rules. [2] It consists of interest, dividends, rents, royalties, gains on property producing FPHCI, and certain other items. Exceptions are provided for active rents and royalties, certain related party rents and royalties, same country income, and certain other items. For purposes of the foreign tax credit, an additional exception requires look-through of certain income received from a controlled foreign corporation.

Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.

A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income, to mitigate the potential for double taxation. The credit may also be granted in those systems taxing residents on income that may have been taxed in another jurisdiction. The credit generally applies only to taxes of a nature similar to the tax being reduced by the credit and is often limited to the amount of tax attributable to foreign source income. The limitation may be computed by country, class of income, overall, and/or another manner.

Interest fee paid by the debtor to the creditor for temporarily borrowed capital

Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.

Contents

Exceptions

Under the basic definition, there are exclusions and exceptions, which include:

A car rental, hire car, or car hire agency is a company that rents automobiles for short periods of time, generally ranging from a few hours to a few weeks. It is often organised with numerous local branches, and primarily located near airports or busy city areas and often complemented by a website allowing online reservations.

Generally, the related party exclusions do not apply if the item in the hands of the payor must be allocated or apportioned to Subpart F income. [4] Thus, rents paid by CFC1 to CFC2 would be Subpart F income to CFC2 regardless of exceptions or exclusions if CFC1 would allocate the rental expense to Subpart F activities.

Look-Through

For Foreign Tax Credit purposes, certain types of income are re-characterized (looked-through) based on the character of the income underlying the payment. [5] Dividends received from a 10% or more owned controlled foreign corporation (CFC) with respect to which the recipient is a U.S. shareholder (whether or not the controlling shareholder) are re-characterized based on the earnings and profits (E&P) of the payor CFC. Interest, rents and royalties received from a similar CFC are recharacterized based on the type of income to which the payor must allocate and apportion the corresponding item of expense. Thus, if a Swiss corporation that has two owners, both U.S., pays its 20% owner interest of $1,000 and under allocation and apportionment principles its interest expense must be apportioned 42% to passive and 58% to general limitation income, then the interest income of that U.S. person from the Swiss corporation is $420 passive and $580 general limitation, and only the passive income constitutes FPHCI.

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References

  1. ↑ 26 USC 954(c) and 26 CFR 1.954-2. This definition is also used in other sections of 26 USC, including the passive foreign investment company rules.
  2. ↑ 26 USC 904(d). See the discussion of passive income on pages 10-11 of IRS Publication 514 Also, prior foreign personal holding provisions, 26 USC 551-558, repealed in 2004, provided a separate definition.
  3. ↑ 26 USC 954(c)(6), added by P.L. 109-222 section 103(a)(2), including the expiration provision, which was subsequently extended.
  4. ↑ 26 USC 954(c)(3)(B).
  5. ↑ 26 USC 904(d)(3).
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