SYMMETRICAL TREATMENT OF U.S. INDIVIDUAL SHAREHOLDERS INVESTING IN CONTROLLED FOREIGN CORPORATIONS: PROPOSED AMENDMENT TO IRC § 962(D)
Written by William K. Norman1
A United States shareholder of a controlled foreign corporation (CFC) may be subject to an inclusion in gross income of subpart F income or global intangible low-taxed income (GILTI) of all or a portion of the earnings of the CFC regardless of whether the earnings are currently distributed. A U.S. shareholder of the CFC which is a domestic C corporation will be able to claim a deemed paid foreign tax credit against its Federal corporation income tax with respect to the inclusions. If the domestic corporation onward distributes earnings and profits representing an inclusion to an individual who is a United States person, the individual shareholder will be eligible for the preferred tax rate as the recipient of "qualified dividend income" provided the CFC is a "qualified foreign corporation".
If the U.S. shareholder of the CFC is an individual, she may elect to be taxed as if she were a domestic C corporation on the undistributed gross income attributed to and included in her gross income as subpart F income or GILTI. However, if the CFC actually distributes the earnings and profits representing the inclusion, the inclusion amount less any Federal income taxes previously paid with respect to the inclusion of the individual U.S. shareholder is not eligible to be treated as a "qualified dividend" eligible for a preferred tax rate unless the CFC is a "qualified foreign corporation," essentially a foreign corporation eligible for benefits of a comprehensive income tax treaty with the United States.