Tax treatment liquidating distribution foreign passive investment
Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I.
Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I.
The Portfolio also discusses the tax treatment of liquidations before the repeal of that doctrine., the Portfolio considers the tax consequences to both the liquidating corporation and its shareholders.
The Portfolio highlights traps for unwary taxpayers and discusses planning opportunities in connection with a corporate liquidation.
Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.
Where a foreign corporation is classified as a “controlled foreign corporation” (“CFC”) for an uninterrupted period of 30 days or more during any taxable year, however, its U. shareholders must include in income their pro rata share of the Subpart F income of the CFC for that taxable year, whether or not such earnings are distributed. In addition to the inability to defer taxation on its share of a CFC’s subpart F income, one of the pitfalls of a U. shareholder owning stock in a CFC is that subpart F income is treated as ordinary income to the U. shareholder (currently taxed at a maximum federal income tax rate of 39.6 percent), regardless of whether the CFC is resident in a jurisdiction that has an income tax treaty with the United States. Among other things, subpart F income generally includes passive investment income (e.g., interest, dividends, rents and royalties) and net gain from the sale of property that gives rise to passive investment income.
A CFC is a foreign corporation, more than 50 percent of which is owned (by vote or value), directly or indirectly, by “U. Gain on the sale of stock in a foreign corporation, for example, falls within this category.
The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.
These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption.
Moreover, when a foreign corporation is resident in a jurisdiction with which the United States has a comprehensive income tax treaty, the dividends distributed to its individual U. shareholders are eligible for reduced qualified dividend tax rates (currently taxed at a maximum federal income tax rate of 20 percent). shareholder, for the purpose of the CFC rules, is a U. person who owns, directly, indirectly or constructively, at least ten percent of the combined voting power with respect to the foreign corporation. shareholder would not be able to repatriate its profits at qualified dividend rates.