How does a Delaware Corporation that owns a foreign corporation handle its 2021 repatriated tax reporting?
Sure, I can address as the new 2021 tax act created considerable tax changes here. First, as you noted in your question ‡ the tax C Delaware Corporation (“DC”) owns 100% of the shares of a foreign corporation which we call a controlled foreign corporation (“CFC”) as noted in Section 951(b). As Treasury says US persons owning greater than 50% of the shares of a foreign corporation has a CFC for tax purposes (Sections 957(b) and 958(a)).In this scenario. The tax C Delaware corporation represents the US person as noted in Sections 957(c) by reference from Section 7701(a)(30)(C). As a side note, the term tax C comes from the fact we use subchapter C tax law for the Delaware corporation or for any other corporation formed under a state statue in the US (Treasury Regulation Section 301.7701-2(b)(1)).The tax C corporation includes the CFC’s deferred accumulated earnings as income it its 1120 corporate tax return for 2021 (Section 965(a)). So, all past income the CFC has generated ends up on the tax C’s tax return for 2021. Further, this tax law provision also requires a foreign corporation (non CFC) with a tax C owner to include such income in its return as noted in subsection (e).The mechanics of this tax provision play out in various steps. First, these deferred earnings represent subpart F income as noted in subsection (a). This fact allows for the inclusion in the 2021 year as subpart F income always get included.This income faces a 15.5% tax for deferred foreign profits made up of cash like investments and a 8% tax for foreign deferred foreign profits made up of non cash investments (subsection (c)). Since the tax C gets taxed at 35% in 2021. and the C includes the full foreign deferred income in the tax C’s return, the C takes a expense deduction for equalizing the rates down to 15.5% and 8% for this particular income (paragraph (2)(A) and (B)).The CFC or other deferred corporation may use its past foreign taxes paid for reducing the tax C’s tax in the US. However, the tax C can only use a portion of these tax credits as noted in subsection (g). The C reduces the credits by 77.1% for the 8% tax and 55.7% for the 15.5% tax as covered in paragraph (2)(A) and (B)).Further, the taxpayer may elect installment payments under Section 965(h).As in all things tax, we are dealing with complex tax law issues here. As I have simplified the above provision for readability. Though, we work through the complexities for filing an accurate and timely 1120 return including the 965 Transaction statement mentioned below.As a side note, Treasury issued a news release (IR-2018-53 March 13, 2021. providing tax mechanical direction for computing these amounts as they provided a Section 965 Transaction statement format.A calendar year tax C corporation has available a six month extension with a final due date of 15 October 2021 as noted in Section 6018(b) for filing the 1120 tax return. The tax C files a Form 7704 for obtaining an extension for filing as noted in Treasury Regulation Section 1.6081-5(b)(2).So, one tax strategy we use centers on estimating amounts and filing the extension election and the above 965(h) installment election with an repatriated tax estimated payment. This provides time for completing a more accurate 2021 return given the particular complexities for this particular year. Another strategy centers on having an outside tax person familiar with international US tax law handle the 965 Transaction report only as a separate engagement. As computing the repatriated earnings from the CFC have very little to do with actually filing the 1120 return.I have included the above information based on subchapter N tax law. If the situation changes in any way, the tax results may change considerably. www.rst.tax