Foreign Corporations

• A fundamental aspect of our taxation system is that corporations within the U.S. must pay tax on all types of income, whether earned from domestic or foreign sources. However, the Internal Revenue Code generally does not impose tax on foreign corporations that operate exclusively outside of the U.S. So, a U.S. parent company could set up wholly-owned foreign subsidiaries to distribute product offerings to foreign customers, and the earnings from these sales retained in the foreign subsidiaries would not suffer U.S. taxation.
  
  

Transfer Pricing

• Even though a U.S. parent company may essentially control the actions of its related foreign subsidiary, the two entities still need to interact with each other in a formally structured manner. This means maintaining separate accounting records, legal filings, employment relationships and the like. Inter-company transactions should be conducted at a fair value that clearly reflects the taxable income of both parties. Tax professionals refer to the concept of determining what amount represents a fair value between related parties as transfer pricing, and it is one of the most important and inherently subjective aspects of U.S. corporate tax planning.
  
  

IRC Subpart F

• Aside from transfer pricing considerations, transactions between a U.S. parent company and its foreign subsidiaries must be carefully structured to avoid the adverse consequences outlined in the Internal Revenue Code Subpart F. For example, certain foreign subsidiaries engaged in investment-type activities that generate dividend, interest, rent or royalty income may be subject to U.S. taxation. Likewise, foreign subsidiaries that do not meaningfully contribute to the value chain of a product offering or undertake the provision of services in locations outside of their respective countries of incorporation may also face unwanted U.S. tax complications.
  
  

Other Considerations

• The use of wholly-owned foreign subsidiaries to minimize U.S. income taxes represents a highly effective method of strategic corporate tax planning. Keep in mind, however, that foreign subsidiaries may be subject to taxation in their home countries, too. Although almost all foreign countries have lower corporate tax rates than the U.S., the IRS allows taxpayers to credit foreign tax payments against U.S. tax liabilities under certain circumstances. Finally, as these techniques may contain significant risks and complexities, do not hesitate to consult with a qualified tax adviser about your corporation's specific issues.