Outbound taxation: passive income
A US person owns 100 percent of the shares of a foreign corporation. The corporation earns foreign-source income (for example, from importing purchased goods into the US with title passing offshore). The corporation has no assets or employees – it is a pure shell – and all decisions are made by the shareholder who is also the CEO and the Board of Directors. What is the tax result?
Generally, the surprising answer is no current US tax. US tax law generally does not “pierce the corporate veil” by ignoring the separateness of a corporation, even if it is a shell. Establishing corporate status is easy under today’s “check-the-box” entity-classification rules, which generally allow taxpayers to elect whether an entity is to have corporate or pass-through treatment; and establishing foreign status even easier since any corporation incorporated out of the US is foreign. Attempts by the IRS to attribute income to the shareholder have generally failed both under transfer pricing and under judicial doctrines like assignment of income, substance over form, economic substance, or sham. As long as the shareholder is careful about documenting the sales as made through the corporation the shareholder is safe, even though no actual business is done by the corporation (the goods are shipped directly from the supplier to the US, without passing through the tax haven that the corporation would typically be located in).
To be sure, what is achieved here is, under the US worldwide approach to taxation, deferral, not exemption. The...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.