FAQ: Outgoing Investment


  1. Are there any prohibitions or restrictions imposed by the U.S. government against U.S. persons making investments outside the U.S.? The only such prohibitions or restrictions that exist are those that preclude U.S. investment in certain countries. The prohibitions restrictions are administered by the Office of Foreign Asset Control which is part of the Treasury Department.
  2. How does the Internal Revenue Code define the term "foreign"? When applied to a corporation or partnership the term "foreign" means a corporation or partnership, which is not domestic. A domestic corporation or partnership is one that is created or organized in the United States or under the law of the United States or any state within the U.S.
  3. How does the Internal Revenue Code define the term "foreign source income"? The Internal Revenue Code defines foreign source income as income which includes interest other than that derived from sources within the United States; dividends other than those derived from sources within the United States; compensation for labor or personal services performed without the United States; rentals or royalties from property located without the United States; gains, profits, and income from the sale or exchange of real property located without the United States.
  4. How does the Internal Revenue Code define the term "foreign corporation"? A foreign corporation is defined as a corporation which is not created or organized in the United States or under the law of the United States or any state within the U.S.
  5. How does the Internal Revenue Code define the term "foreign partnership"? Foreign, when applied to a partnership, means a partnership, which is not domestic. The term domestic when applied to a partnership means created or organized in the United States or under the law of the United States or any state.
  6. What is a contiguous country subsidiary? A contiguous country subsidiary is a foreign corporation that is:
    • wholly owned or controlled by a U.S. Corp.:
    • organized under the laws of a foreign country contiguous to the U.S.; and
    • maintained solely for the purpose of complying with the laws of the foreign country of incorporation. Contiguous country subsidiary may, at the option of the domestic corporation, be treated for the purpose of income taxes as a domestic corporation.
  7. Does the U.S. tax the income of a foreign corporation that is owned by a U.S. person? The U.S. does not tax income earned by a foreign corporation that is owned by a U.S. person until the earnings are repatriated to United States shareholders. The Code provides various exceptions to this general deferral rule, however, such as the subpart F rules for controlled foreign corporations (CFCs). The Revenue Reconciliation Act of 1993 requires 10 percent United States shareholders of certain CFCs to include in their current income their pro rata shares of a specified portion of the CFC's current and accumulated earnings.
  8. What is a controlled foreign corporation (CFC)? Any foreign corporation in which more than 50% of the total combined voting power of all classes of stock to vote, or more than 50% of the total value of the stock is owned by one or more United States shareholders on any day during the taxable year.
  9. What is subpart F income? Income of controlled foreign corporations, which is taxed to U.S. shareholders of a CFC on a current basis. In general, it includes the sum of income from insurance of U.S. risks, foreign base company income, and income attributable to operations in boycotting countries.
  10. What is foreign base company income? Foreign base company income is comprised of foreign personal holding company income for the taxable year, the foreign base company sales income for the taxable year, foreign base company services income for the taxable year, foreign base company shipping income for the taxable year, and foreign base company oil related income for the taxable year, all as provided and defined in the Code.
  11. What is a passive foreign investment company (PFIC)? The term means any foreign corporation if 75% or more of the gross income of such corporation for the taxable year is passive income, and the average percentage of assets held by such corporation during the taxable year which produced passive income or which are held for the production of passive income is at least 50%.
  12. What is passive income? In general, income from rents, royalties, dividends, interest, annuities, and the like. In connection with passive activities, the term means income from a passive activity.
  13. What is a qualified electing fund (QEF)? Election by any passive foreign investment company to be treated as qualified electing fund. A passive foreign investment company will be treated as a qualified electing fund with respect to the taxpayer if an election by the taxpayer under the Code applies to such company for the taxable year and such company complies with various requirements for the purposes of determining the ordinary earnings and net capital gain of such company, and otherwise carrying out the purposes of the Code.
  14. What is a foreign personal holding company? The term means a foreign corporation, which meets Code tests as to the source of its gross income and its stock ownership. Such tests are similar to those applied to personal holding companies. In general, a foreign personal holding company is not subject to an additional tax, but each United States shareholder is required to include in his gross income his share of the undistributed foreign personal holding company income as if it had been distributed to him as a dividend.
  15. What is a possessions corporation? In general, a possessions corporation is a U.S. corporation, which elects benefits of the possession tax credit under the Code. Such corporation is taxed on possession source income only.
  16. What is a foreign sales corporation (FSC)? Any corporation which was created or organized under the laws of any foreign country, which meets Code requirements, or under the laws applicable to any possession of the United States, has no more than 25 shareholders at any time during the tax year, does not have any preferred stock outstanding at any time during the tax year, and maintains an office located outside the United States in a foreign country or in any possession of the United States which meets other Code requirements.
  17. What is a small foreign sales corporation (small FSC)? The term means a foreign sales corporation which has made an election under the Code to be treated as small FSC, and such corporation is not a member, at anytime during the taxable year, of a controlled group of corporations which includes a FSC unless such other FSC has made an election under the Code which is in effect.
  18. What is exempt foreign trade income? Aggregate amount of all foreign trade income of a foreign sales corporation (FSC) for the taxable year which meets Code requirements.
  19. What are expropriation losses? For any taxable year, the sum of the losses sustained by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing.
  20. What purposes does IRS Form 5471 serve? It is an information return with respect to a foreign corporation and it is used by U.S. persons to report their activities with related foreign corporations.