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The easiest way to avoid Sub F base company service income issues is to ensure that the services are performed where your offshore business is incorporated. Thus, all service businesses must strive to eliminate Sub F income and must be prepared to deal with the issue in an audit. There is no US tax benefit when Sub F income, including foreign base company services income, is generated in an offshore or Puerto Rican corporation. For more information, see: Puerto Rico Eliminates 5 Employee Requirement You can now set up an Act 20 company with only 1 employee (you, the business owner). That is to say, Subpart F income must be included in the parent company’s US tax return and is taxable in the United States as earned.ĮDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20.

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Income that is deemed to be foreign base company services income is not eligible to be retained offshore tax deferred and not eligible to be tax free in Puerto Rico under Act 20. Thus, where a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income.”

The services are performed outside of the country in which the CFC is organized (IRC Section 954(e)(1) and Treasury Reg 1954-4(a)).

The services are performed by the CFC for, or on behalf of, a related person or company and.

The income is derived in connection with the performance by the CFC of certain specified services.

Under this definition, income earned by a CFC will constitute foreign base company services income only if it satisfies all three of the following tests:

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Sub F foreign base company service income is defined under Section 954(e) of the Internal Revenue Code as income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that are performed for, or on behalf of, a related person, and are performed outside the country under the laws of which the CFC is incorporated. Puerto Rico, which is right for your business? For a basic summary of offshore and Puerto Rico, see: Panama vs. This analysis applies to a business setup in a low tax country, such as Panama, or in the US territory of Puerto Rico under Act 20. Service income is not profits from the sale of a physical good into the United States market. Service income is earnings and profits generated by work done in a foreign country or a US territory. This article is focused on service income of a foreign division. Subpart F applies to income of a Controlled Foreign Corporation (CFC). Subpart F issues are the most common tax planning hurdles to overcome when you have a division of a US company operating abroad.

#Irc 954 how to

In this article I’ll explain how to eliminate Subpart F Foreign Base Company Service Income issues in an offshore corporation.