New Tax Act: 2017 Trap for 10% U.S. Owners of Foreign Corporations

by Snell & Wilmer

Snell & Wilmer

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) modifies Section 965 of the Internal Revenue Code (“IRC”) by expanding the definition of “subpart F income” of United States shareholders (“U.S. shareholder”) for the last tax year beginning before January 1, 2018 (“2017 Tax Year”). IRC Section 965 generally requires U.S. shareholders of certain foreign corporations to include in income in the 2017 Tax Year post-1986 earnings and profits that are not otherwise attributable to income which is subject to U.S. tax as “effectively connected income” and that has not been previously taxed as subpart F income. In order to determine the proper inclusion, U.S. shareholders may need to consider the direct, indirect and constructive ownership of U.S. shareholders in the foreign corporation back to 1986 and the constructive ownership through foreign persons for the 2017 Tax Year, as described further below.
IRC Section 965 applies to Specified Foreign Corporations (“SFC”). An SFC includes a controlled foreign corporation (“CFC”), which is the common starting point for CFC subpart F income. In addition, however, an SFC also includes a foreign corporation that is owned at least 10% (by vote, for years before 2017, or also value for 2017) by a U.S. corporation. Ownership determinations for CFCs have always included the IRC Section 318 constructive ownership rules. For the 2017 Tax Year, however, the application of the constructive ownership rules to SFCs creates subtle and surprising results.

One result is caused by the fact that, under the constructive ownership rules of IRC Section 318(a)(3)(C), a U.S. corporation owned at least 50% by a shareholder is deemed to own the stock owned by that shareholder in a foreign corporation. If the shareholder is a U.S. person, the attribution to the U.S. corporation of the U.S. shareholder’s ownership interest in the foreign corporation occurred prior to the Tax Act, but it previously did not matter if the attribution did not create a CFC. Now, however, the attribution of as little as a 10% ownership interest in a foreign corporation to a U.S. corporation creates a SFC (despite the U.S. corporation having no actual ownership in the foreign corporation). Further, such constructive ownership will result in the foreign corporation having been an SFC for as long as the U.S. person has been a U.S. shareholder in the foreign corporation while simultaneously owning at least a 50% interest in the U.S. corporation (back to 1986).

Thus, the actual U.S. shareholder in the SFC may have additional income in the 2017 Tax Year merely by having been a U.S. shareholder in the foreign corporation in 2017 while simultaneously holding a 50% or greater interest in a U.S. corporation. The calculation of the income to include in the 2017 Tax Year requires that the U.S. shareholder know all tax years during which the foreign corporation was an SFC (back to 1986). In addition, the SFC could have been an SFC as a consequence of the ownership of any U.S. shareholder, not just the U.S. shareholder at issue. Thus, in addition to analyzing their own ownership in U.S. corporations, U.S. shareholders may also need to perform an ownership analysis in relation to other U.S. shareholders back to 1986 in order to determine all years in which the foreign corporation was an SFC.
In addition, the Tax Act eliminated IRC Section 958(b)(4) starting with the 2017 Tax Year. This section previously prohibited IRC Section 318(a)(3)(C) from attributing stock held by a foreign person to a U.S. corporation. Because such attribution is now possible, a U.S. shareholder in a foreign corporation may also need to analyze whether the constructive ownership rules create an SFC for 2017 through foreign owners in the same foreign corporation.

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.

© Snell & Wilmer | Attorney Advertising

Written by:

Snell & Wilmer

Snell & Wilmer on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.