Written by Fabiano Lins
Attorney at Law / Advogado
Dlm2 Advogados Associados.
The US income taxation law imposes taxes on the American citizen’s worldwide income, regardless of place of residence or location where income is earned. By contrast, foreign corporations and foreign mutual funds cannot be considered American income sources insofar as they are not American citizens or entities.
As a result, most of the American income sources have been under control of these companies located abroad and mainly situated in tax havens. However, over the years the IRS policy has become much more strict than it was in the 80’s. While Americans holding their money abroad structured creative forms in order to defer US income tax, the IRS was working on innovative ways to obstruct such far-reaching deferments.
Today, there are several tax rules regulating capital in offshore companies. These rules reach out to Americans citizens and American companies beyond the United States’ boundaries, but now it is even worse because such rules set up special mechanisms for anti-deferment. Although companies can withhold for a while distribution of dividends in order to take advantage of the long-term capital gains rules in US, these special rules, even in the absence of distribution, can levy tax income on retained earnings.
There are six antideferral regimes, each one directed at different businesses structured abroad.
These rules are located in subpart “F” income, and they are the following:
1. Foreign personal holding companies (FPHC) - sections 551 to 558;
2. Controlled foreign corporations (CFC) - sections 951 to 964;
3. Foreign investment companies (FIC) - sections 1246 to 1247;
4. Passive foreign investment companies (PFIC) - sections 1291 to 1298;
5. Personal holding companies (PHC) - sections 541 to 547;
6. Accumulated earnings tax (AET) - sections 531 to 537.