Whatever Happened To Subpart F? U.S. CFC Legislation after the Check-the-Box Regulations

Abstract

The U.S. Congress, in 1962, enacted provisions commonly known as subpart F, under which U.S. shareholders of controlled foreign corporations (CFCs) are taxed on their ratable shares of some corporate income, whether or not distributed. A U.S. shareholder is a U.S. person who owns at least 10% of a foreign corporation's voting stock, directly, indirectly, or constructively. A foreign corporation is a CFC if more than 50% of its stock, by vote or value, is so owned by U.S. shareholders.Apart from subpart F, the United States taxes shareholders on corporate income only as it is distributed to them as dividends.Because domestic corporations are taxed on their worldwide incomes, the lack of a shareholder-level tax on undistributed corporate income does not insulate this income from U.S. taxation. However, a foreign corporation is subject to U.S. tax on only [*187] income effectively connected with the conduct of a trade or business in the United States and certain income from U.S. sources, even if its shareholders are U.S. persons. Thus, apart from subpart F, the United States imposes no tax on foreign income of U.S.-owned foreign corporations until it is distributed to the shareholders or the shareholders sell their shares.