In a whitepaper, that I had published in the Tax Specialist in April of 2018, I made the bold assertion that people may start looking at the US as a holding company jurisdiction of choice. Today I am a little less bullish about the prospect of this occurring. Founders moving to the US need to be aware of the unexpected corporate tax consequences of the Trump Tax Reforms and why, in my opinion, this US tax system is still at the back of the bus.
One of the cornerstone international tax reforms was the amendment to the definition of Controlled Foreign Corporation to address perceived abuses associated with corporate inversions. These transactions previously allowed US parent companies to acquire foreign subsidiaries and invert them so that the US parent company became a subsidiary of a foreign holding company. The tax consequence that followed resulted in all foreign subsidiaries ceasing to be CFCs because they were no longer directly owned by a US resident company.
The so called fix has had a dramatic impact on group structures that are owned by foreign families and founders that have migrated to the US.
In circumstances where a US shareholder (the US shareholder could have previously been a non resident)owns 11% of a foreign company that has a US subsidiary, other non US subsidiaries can become CFCs and their income attributed to the US Shareholder in the US because of the way in which the US rules now track direct, indirect and constructive ownership.
A quick recap of the key classification elements of the CFC rules is as follows. A foreign company is a CFC if more than 50% of the voting rights or value of its stock is held by US Shareholders. US Shareholders are US Persons that own 10% or more of the foreign company’s stock (again by voting or value). If a company is a CFC and income it derives is classified as Subpart F income it will be attributed to the US Shareholder and taxable to them.
In the above example, the Singapore and UK Subsidiaries are, due to the recent changes considered to be constructively owned by the US company as to 100%,making them CFCs. As a US Shareholder then indirectly owns more than 10% of the stock in those companies the income of those companies that is subpart F income is then attributable to the US shareholder on a proportionate basis (ie proportionately to its share of the total company).
This is a crazy outcome. It means for foreign holding companies that have US owners and US operations they need to consider whether there is any benefit in segregating holding structures. ie, is there value to having an operating structure for the world and a separate one for the US.
Founders and members of wealthy families that have assets or businesses in multiple countries need to review their structures and determine whether any changes need to be made to their existing structures.