New Contract Manufacturing Regulations Present Planning Opportunities

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The Internal Revenue Service (the "Service") has issued final regulations providing much-needed, and generally taxpayer-favorable, guidance on the tax treatment of contract manufacturing arrangements entered into by controlled foreign corporations ("CFCs"). Under the final regulations, a U.S. parent company can obtain tax deferral on a CFC's income from sales of goods where the CFC, through the activities of its employees, is considered to manufacture such goods in the CFC's country of incorporation even though the goods are physically manufactured in another country by a related or unrelated contract manufacturer. Specifically, the test is whether the CFC's employees make a "substantial contribution" to the overall manufacturing process.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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