Introduction to IRC Section 956
IRC Section 956 is a tax law provision that deals with the inclusion of certain income earned by controlled foreign corporations (CFCs) in the gross income of US shareholders. This provision is designed to prevent US taxpayers from avoiding taxes by shifting income to foreign subsidiaries.
The inclusion under Section 956 is intended to ensure that US taxpayers are subject to current taxation on certain types of foreign earnings, even if those earnings are not distributed to the US shareholder.
How IRC Section 956 Works
Section 956 inclusion applies to US shareholders of CFCs, which are foreign corporations where US persons own, directly or indirectly, more than 50% of the total combined voting power or total value of the corporation. The inclusion is calculated based on the increase in earnings invested in US property.
The US property includes tangible and intangible assets, such as inventory, plant and equipment, and intellectual property, among others. The inclusion is subject to certain exceptions and limitations, and taxpayers may be able to reduce their tax liability by claiming foreign tax credits.
Implications of IRC Section 956 Inclusion
The inclusion under Section 956 can have significant tax implications for US taxpayers with foreign earnings. It can result in increased tax liability, as the taxpayer is required to include the undistributed earnings of the CFC in their gross income.
Taxpayers may need to reevaluate their international tax planning strategies to minimize the impact of Section 956 inclusion. This may involve restructuring their foreign operations, repatriating foreign earnings, or claiming foreign tax credits to reduce their tax liability.
Calculating the IRC Section 956 Inclusion
The calculation of the Section 956 inclusion involves determining the increase in earnings invested in US property. This requires tracking the CFC's earnings and profits, as well as the amount of those earnings invested in US property.
Taxpayers must also consider the application of certain exceptions and limitations, such as the exception for certain foreign oil and gas extraction income, and the limitation on the amount of earnings that can be included under Section 956.
Compliance and Planning Strategies
To ensure compliance with Section 956, taxpayers must accurately calculate the inclusion and report it on their tax return. This requires careful tracking of the CFC's earnings and profits, as well as the amount of those earnings invested in US property.
Taxpayers may also want to consider consulting with a tax professional to develop a comprehensive international tax planning strategy that takes into account the implications of Section 956 inclusion and other relevant tax laws and regulations.
Frequently Asked Questions
What is the purpose of IRC Section 956?
The purpose of Section 956 is to prevent US taxpayers from avoiding taxes by shifting income to foreign subsidiaries.
Who is subject to IRC Section 956 inclusion?
US shareholders of controlled foreign corporations (CFCs) are subject to Section 956 inclusion.
What types of income are included under Section 956?
The inclusion under Section 956 applies to certain types of foreign earnings, including earnings invested in US property.
How is the Section 956 inclusion calculated?
The inclusion is calculated based on the increase in earnings invested in US property.
Are there any exceptions to the Section 956 inclusion?
Yes, there are certain exceptions and limitations to the Section 956 inclusion, such as the exception for certain foreign oil and gas extraction income.
What are the tax implications of Section 956 inclusion?
The inclusion under Section 956 can result in increased tax liability, as the taxpayer is required to include the undistributed earnings of the CFC in their gross income.