• India
  • February 27, 2019

U.S. shareholders and recharacterization of income

Generally, under U.S. tax law, a foreign corporation may be classified a controlled foreign corporation (CFC) where it has U.S. shareholders. Additionally, a foreign business owner who has recently relocated to the U.S. is likely to be considered a U.S. shareholder of a CFC. Unfortunately, the U.S.’s latestreforms on the taxation of CFCs have failed toprovide these business owners with enough time to perform their newly imposed tax obligations. As such, these business owners must either struggle to quickly come into compliance, or face a punishment for failing to do so.

Additionally, foreign business owners may become reluctant to relocate to the U.S. due to the widening scope of foreign entities being classified as CFCs under the last tax reforms in the U.S. The issues such as taxation of their profits under GILTI provisions (i.e. a formula to tax profits of foreign enterprises which have not been not included under Subpart F income) and the retrospective tax on profits parked in offshore subsidiaries are game changing as global effective tax rates may rise. These provisions mean that it will be very easy to see a situation in which GILTI and Subpart F income derived by Indian-owned CFCs will be attributed to and taxable to high net worth Indians who own a minority stake in non-U.S. corporate groups.

Our whitepaper titled Interaction of Indian and U.S. Tax Laws describesthe interaction of U.S. and Indian tax laws through an application of the U.S. CFC provisions. In doing so, it provides an analysis on various questions, including whether an Indian corporation with Indian and U.S. subsidiaries will be classified as a CFC and, with regards to Indians who have relocated or plan to relocate to the U.S., and which Indian and U.S. reporting and tax requirements they will be subject to.


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