Non–Controlled Foreign Corporation (Non-CFC)

• How to be a non-CFC
  • Has to be a foreign corporation
  • A foreign corporation is considered a CFC if more than 50 percent of its total combined voting power of all classes of stock, or the value, is owned by a single U.S. Shareholder.
    • A U.S. Shareholder is defined as a U.S. person who owns at least 10% of the total combined voting power or at least 10% of the total value of all stock of that foreign corporation.
  • People who each own more than 10% of the business can’t, all together, own more than 50% of it.
  • Anything your family owns (i.e. wife, kids) is considered owned by you.
  • Non-linear family member (i.e. nephew or aunt) are not considered part of your family
• Form 5471
  • Tool for IRS to track track Americans’ involvement in foreign corporations.
  • Key purposes: (1) Report ownership or control of a foreign corporation (2) Disclose the financial activity of that foreign corporation (3) Help the IRS prevent tax evasion using offshore entities
  • Non-CFC are not required to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations), which is mandatory for CFC shareholders.
• Subpart F
  • Subpart F is a section of the U.S. Internal Revenue Code that deals with foreign income earned by Controlled Foreign Corporations (CFCs).
  • Subpart F stops Americans from "parking" passive or easily movable income offshore to avoid paying U.S. taxes.
  • Subpart F rules apply to CFCs and require the immediate taxation of certain types of income (e.g., passive income, income from related-party transactions) on U.S. shareholders, even if the income is not repatriated.
  • An CFC is subject to Subpart F rules, meaning its earnings are generally not taxed in the U.S. until they are distributed as dividends to U.S. shareholders.
  • A non-CFC is not subject to Subpart F rules
• Global Intangible Low-Taxed Income (GILTI)
  • GILTI is a category of income introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 to discourage U.S. companies from shifting profits to low-tax foreign jurisdictions. It applies to U.S. shareholders of Controlled Foreign Corporations (CFCs) and acts as a minimum tax on certain foreign earnings.
  • Does not apply to non-CFC
• Taxes
  • If there is a CFC issue -- even for a split second -- there is a reporting requirement in 2024.
  • The filing, Form 5471, would presumably be very simple because there is no income
  • However, assuming there will not be a reporting requirement in 2025 (Form 5471) assuming the CFC issue is addressed
  • In general, CFC and non-CFC is looked at a percentage. So 99% of income is non-CFC and 1% is CFC.
• The Continuum Between CFC and Non-CFC
  • Peimin: on a separate note, the OBBBA has modified the CFC income pro rata share rule. According to OBBBA, each US shareholder determines their pro rata share of subpart F income (including CFC tested items) based on the period they are a US shareholder with respect to the CFC, without regard to ownership on the last day of the CFC’s tax year.
    • Pro rata share: A shareholder’s proportional share of the CFC’s income.
    • Tested items: This includes tested income, tested loss, and QBAI (qualified business asset investment) under GILTI (Global Intangible Low-Taxed Income) rules.
    • What the Rule Previously Meant:
      • Before this change, a U.S. shareholder's share of a CFC’s Subpart F income was generally determined based on their ownership on the last day of the CFC’s tax year
    • What Has Changed:
      • Under the new OBBBA rule:
        • A U.S. shareholder's pro rata share is now based on the actual period during the year they were a U.S. shareholder of the CFC.
        • It no longer depends on whether they owned the shares on the last day of the CFC’s tax year
    • Example
      • Suppose a U.S. person owns 40% of a CFC from Jan 1 to Aug 31, and then sells it. Under the old rule, if they didn't own the stock on Dec 31 (CFC’s year-end), they might not have any Subpart F income inclusion.
      • Under the new OBBBA rule, they would have to include 8 months' worth of Subpart F income proportionate to their ownership—even though they didn’t hold the stock at year-end.

Structures to Arrive at on-CFC Status

They look at “vote” and “value” - if Justin or any problematic shareholders (i.e. wife, kids) has a path to get it back, then it could be a problem.

| Third party trustee can make investment decisions | DVE 2024 Trust

• Trustee is Blanca Gomez-Cisneros
• Beneficiaries include all of the descendants of your grandparents (other than your parents, you, and your children). Beneficiaries cannot be changed.
• | | Foundation | | Subject to business holding rules* if stock is voting

Not subject to business holding rule is stock is non-voting | Elder-Park Foundation

• Has non-voting shares
• Justin is the President |

*Business holding rules

• A foundation can own up to 20% of a business’ voting stock if it is combined with ownership by “disqualified persons” (like founders, major donors, or their family members).
• Self-dealing involves a transaction between foundation and one of these disqualified persons. The can’t sell each other stock.
• Foundations that are in violation of the business holding rule
  • The foundation usually has 5 years (from the date the violation is discovered) to reduce its holdings to within the allowed limits.
  • In some cases, the IRS can extend this period to 10 years if the foundation is making a good-faith effort to correct the issue.