Question

International Taxation Question

USP, a domestic corporation, operates abroad through Fco1, which is a wholly-owned foreign corporation. During the current year, Fco1 has total gross income of $10 million, including $400,000 of interest income that qualifies as foreign personal holding company income, and $9.6 million of gross income from the sale of goods that Fco1 manufactured in its country of incorporation. Determine the amount of Subpart F income, if any, that Fco1 must report.

Answer 1

Fco1 has no Subpart F income. Although the $400,000 of interest income qualifies as foreign personal holding company income, the $9.6 million of income from the sale of goods that Fco1 manufactured in its country of incorporation does not qualify as foreign base company sales income (Code Sec. 954(c) and (d)). Therefore, under the de minimis rule, no part of Fco1's gross income is treated as Subpart F income because Fco1's gross Subpart F income of $400,000 is less than both $1 million and 5% of its total gross income (5% of $10 million total gross income equals $500,000) (Code Sec.954(b)).