LOST IN SPACE
Professor and Mrs. John Robinson
Jupiter 2 Spacecraft
Lost in Space, en route from Alpha Centauri
GILTI/Subpart F/US real estate
Dear Professor Robinson:
Recall our conversation from earlier this month about Alpha Centauri tax rules that apply to inter-planetary transactions.
We are assuming that you will base your operations on Alpha Centauri, whose tax rules are identical to those of the United States.
You are sending Galactic Gladiator to PLANET OF THE CFCS to provide plundering and pillaging services to local leadership on that planet. The question we need to wrestle with is whether the tribute income paid to Galactic Gladiator in exchange for his plundering and pillaging services will be taxable to you even if you never teleport Galactic Gladiator’s earnings back to Alpha Centauri.
In our last correspondence, we identified three paths for getting caught owing Alpha Centauri, that is, your home country, income taxes, as follows: Subpart F, GILTI issues and rules relating to income from real property.
Before your brain gets overloaded with no end of GILTI this and subpart F that, please take a moment to unzip the tinfoil around one of your ears and stick the following into it:
The Subpart F Family and GILTI Clan both live on Planet of the CFCs. Specifically, they live in a certain part of CFC that has a fence around it. The way to get into that part of CFC is to show the guard at the gate two things: first, that you are a “US Shareholder” and, second, that you -- plus all those visiting with you -- own, directly or indirectly, more than fifty percent of your company.
Got that? Let me repeat: If you are showing up in hopes of challenging Monsieur Subpart F to a friendly round of boule (or horseshoes if you are not charmed by my pretentious reference to a French game played in well-tended French gardens), or if you have your heart set on downing a sixpack of Heinekens at Senora GILTI’s spread, you have to show:
1. that you are a US Shareholder, and
2. that you, together with all others qualifying as US Shareholders, own more than fifty percent of Gladiator GmbH.
Let’s dive into the details of each of those two tests:
US Shareholder
Any US-resident shareholders with ten percent or more ownership. Think of this as the decimal question. I say that because ten is the magic number, not some number more than ten. Got it? Ten percent is the threshold, not more than ten percent. As noted above, Galactic Gladiator plans to conduct plunder operations on Planet of the CFCs through Gladiator GmbH, a corporation organized under Planet of the CFCs law. The threshold issue, of course, with each of the subpart F and the GILTI questions, is whether Gladiator GmbH, which is a non-Alpha Centauri-resident entity, is a CFC. That in turn means looking at ownership, direct and indirect, in Gladiator GmbH.
Out of the 100 shares outstanding:
· you own 36,
· your shipmate, the Doctor of Intergalactic Environmental Psychology (“Doctor Intergalactic”), owns ten,
· your wife, the glamourous June Lockhart, owns four, and
· the remaining fifty shares are owned five each by ten others, nine of the ten being space aliens and the tenth being an Alpha Centauri-registered robot entity named Traitorous Transistorized Toad LLC.
So far, we see that there is only one US Shareholder, you, since you are the only owner who has more than ten percent. Oops, oh yeah, think decimal…if it’s ten percent, it’s inside the fence. So Doctor Intergalactic is a US shareholder, also, meaning that 46 percent of Gladiator GmbH shares, measured by either value or shares, are owned by owners who are consider to have the status of US Shareholders.
Since the cut-off is 50 percent, we are good, yes?
No.
The glamourous June Lockhart owns four shares. Her shares are constructively owned by her spouse (that’s you, right?), so the 36 shares that you thought you owned under these rules is now considered to be 40, since, in addition to the 36 titled in your name, you constructively own the glamourous June Lockhart’s four shares. With Doctor Intergalactic’s 10 shares, that makes fifty percent.
Recall that the decimal thing is a memory peg for the threshold for US Shareholder status, that is, for the ten percent threshold. The 50 percent threshold for US Shareholder shares used to decide if it’s a CFC is more than fifty percent.
Got it. So, because the owners who satisfy the definition of US Shareholders own exactly fifty percent, rather than more than fifty percent, we are saved from CFC status, no?
Yes.
Unless you happen to be one of the owners of Traitorous Transistorized Toad LLC. Are you, perchance?
Uh..yes. Forty percent. Hmmm.
Let me guess. That’s not good, right?
Not good.
If Traitorous Transistorized Toad LLC is a transparent entity (which we are going to assume to be the case), and you are a 40 percent partner in that entity, then you own 40 percent of what it owns. Forty percent of Traitorous Transistorized Toad LLC’s shares of Gladiator GmbH means two shares. Therefore, you constructively own two of Traitorous Transistorized Toad LLC’s five Gladiator GmbH shares.
That’s it for now on controlled foreign corporation ownership. My next letter will get into the details of Subpart F.
Kind regards
David
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