Controlled Foreign Corporations
"Control" of a foreign company is defined in the United States by the percentage of shares that are owned by United States citizens. This percentage can be 10 percent or more of its total stock or 50 percent or more of its total voting stock or 10 percent or more of its voting control. A “controlled foreign corporation” is a corporation that is registered and conducts their business in a country other than where the controlling owners reside. The Internal Revenue Code classifies foreign corporations that are more than 50 percent owned by United States shareholders as a controlled foreign corporation.
Tax treaties, which the United States and other countries have entered into to alleviate the effects of double taxation, and Controlled Foreign Corporation laws (CFC) work together to direct how foreign earnings are declared by taxpayers. The CFC was created to combat against tax evasion as offshore companies were set up in areas with little or no tax. CFC laws are specific to each country, but many specifics are similar.
United States shareholders of a foreign corporation that deals with non-U.S. trade or business has a set of complex tax rules, definitions, exceptions, exclusions and limitations that need to be considered carefully. It is best to leave this up to knowledgeable attorneys who specialize in international tax law. The expert attorneys at Moskowitz LLP keep up-to-date on all rules, changes and updates to international tax law.