USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
holder must reduce its basis in its CFC stock by the amount of such PTEP distribution and, if a PTEP dis - tribution exceeds stock basis, the excess results in capital gain. In contrast, non-PTEP distributions are included in a shareholder’s gross income. Notably, however, certain corporate shareholders may be eligible for a full dividends-received deduction (DRD) provided certain requirements are satisfied. The DRD, however, is not permitted for dividends received from tax-exempt organisations, certain entities sub - ject to specialised tax regimes, or for certain hybrid dividends (or if certain holding period requirements are not satisfied). A “return of capital” distribution is not a taxable event to the recipient US shareholder. Finally, if a distribution exceeds the amount of non- PTEP and the US shareholder’s basis in its CFC stock, any excess generally gives rise to a capital gain. 6.4 Taxation of Intangibles Developed by Local Corporations The use of intangible property (including transfers or licences of such intangible property) is subject to US transfer pricing principles and other provisions of the Code (see 4.4 Transfer Pricing Issues for Inbound Investors and 5.5 Formula-Based Income Attribu- tion ), which require that arm’s length compensation and/or consideration be furnished. Regarding trans - fers or licences of intangible property, the income must be commensurate with the income attributable to the intangible. In this regard, the IRS has author - ity to mandate the method used to value transfers of intangible property (in the context of outbound trans - fers and intercompany pricing allocations) as well as to require that the valuation of such transfers be made on an aggregate basis (or on the basis of the realistic alternative principle if the IRS determines that such method constitutes the most reliable means of valua - tion of such transfers). Certain special rules apply for outbound transfers of intangible property (eg, intellectual property) by a US person to a foreign corporation in certain specified transactions. Generally, under these rules, when a US person transfers intangible property to a foreign cor - poration in an otherwise tax-free exchange under US tax law, the US transferor is treated as having sold
the intangible property in exchange for annual royalty payments over the useful life of the intangible property (or a lump sum payment in the case of a disposition of the intangible property following the initial outbound transfer). The US transferor treats such annual inclu - sion and lump sum as ordinary income and royalties for purposes of determining source and the FTC limi - tation category. 6.5 Controlled Foreign Corporation-Type Rules A foreign corporation is a CFC if US shareholders (ie, US resident persons that directly, indirectly or con - structively own at least 10% of the vote or value of the foreign corporation) own stock that represents more than 50% of the vote or value in such corporation. The two major consequences of CFC classification are that its 10% US shareholders must include in income: • their pro rata share of the CFC’s “subpart F income” (generally passive-category income such as dividends, interest, royalties, capital gains or “foreign base company income”); and • their net CFC tested income (CFC Tested Income), which is generally the excess of the shareholders’ pro rata share of the CFC’s gross income (reduced by certain items). US corporations are generally taxed on CFC Tested Income at a preferential tax rate of 12.6% starting in 2026, and amounts taken into account in determining subpart F income are disregarded in calculating CFC Tested Income. Effective 1 January 2026, if a foreign corporation is not treated as a CFC under the rules described above but would be a CFC using expanded attribution-of- ownership rules, then US resident persons that own, using those expanded attribution-of-ownership rules, more than 50% of the vote or value of such foreign corporation are generally taxed as if such foreign cor - poration were a CFC. In addition, a foreign corporation with predominantly passive-category income or assets may be classified as a “passive foreign investment company” (PFIC), which may subject its owners to several onerous con -
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