On 22 March 2021, the U.S. Internal Revenue Service has published a revised international practice unit on Receipt of Dividends or Interest from a Related CFC.
This Unit was revised to include the extension of the IRC 954(c)(6) look through rule for CFCs with tax years beginning before January 1, 2026. This extension was part of the Consolidated Appropriations Act of 2021. This Practice Unit supersedes the January 5, 2016, and the January 28, 2020, Practice Units with the same title. Generally, the US shareholder of a foreign corporation is able to defer taxation of the corporation’s income until it has been distributed to the shareholder. However, in the case of a controlled foreign corporation (“CFC”), certain types of income are subject to current inclusion (“subpart F inclusion”) by the US shareholder under IRC 951. One such type of income is Foreign Personal Holding Company Income (FPHCI), which includes income of a CFC such as dividends, interest, rents, and royalties. The FPHCI rules eliminate the deferral of US tax on income earned by certain foreign corporations from portfolio types of investments, i.e., where the company is merely passively receiving investment income rather than earning active business income. Consequently, many of the exceptions to current inclusion of FPHCI focus on the recipients of income (i.e., whether the recipients meet certain criteria).
