Question

5-6 A Taxing Problem

P, a Florida corporation, is the sole shareholder of another Florida corporation (Sub) and a country X corporation (F2). Sixty percent of the stock of F1, a country Y corporation, is owned by P, is owned 15% by Sub, and 15% by F2. The remainder of F1’s stock is held by residents of country X. F1’s only asset is an office building in country X that it leases under a long-term net lease to one tenant. For year 1, F1’s pretax profits computed under US tax principles are $100. Because of generous depreciation allowances under country X law, F1’s country X taxable income for year 1 is only $50, and its country X tax on this income is $20 (40% of $50). F1 pays no dividend. Is F1’s income subject to US tax for year 1?

Answer 1

Since the majority of the shareholding of F1, 60% of the total shareholding of the company, is owned by P, a Florida Corporation, thus, the income of the company, i.e. the income of F1, is subjected to the US tax for year 1. This is despite the fact that F1 is a country Y corporation and does not run its business operations in the US. By the reason of majority of the shareholding of F1 it is a US company and accordingly, is liable to be taxed in the US for the income it earns from its business in any part of the globe.

Hence, F1’s income is subjected to US tax for year 1.