PROBLEM 5 P is a domestic corporation. In each of the following independent scen

Question

PROBLEM 5 P is a domestic corporation. In each of the following independent scenarios, identify the foreign corporations (F1 through F4) for which P can claim a deemed paid foreign tax credit, assuming the foreign corporation's earnings are distributed up to P. P owns 50% of F1, F1 owns 50% of F2, and F2 owns 50% of F3. Powns 100% of F1, F1 owns 100% of F2, and F2 owns 9% of F3 P owns 100% of F1. F1 owns 100% of F2, F2 owns 1 00% of F3, and F3 owns 50% a. b. C. of F4. All the other shareholders of F4 are unrelated foreign persons. d. P owns 100% of F1 and 100% of F2. F1 owns 5% of F3, and F2 owns 5% of F3.

Explanation / Answer

A domestic corporation can claim a deemed paid foreign tax credit only if it owns 10% or more of the voting stock of a foreign corporation. Code Sec. 902(a). A domestic corporation that operates abroad through two or more tiers of foreign subsidiaries also can claim a deemed paid credit for taxes paid by lower—tier foreign corporations. However, there must be a minimum ownership of 10% at each link in the chain, a minimum of 5% indirect ownership through the chain, and the earnings must be distributed as a dividend up to the US. parent. Fourth-, ?fth, and sixth—tier foreign corporations must be CFCs in order to qualify for a deemed paid credit.

a. The 10% ownership test is met for each link in the chain, and P’s indirect ownership is 25% for F2 and 12.5% for F3. Therefore, P can claim a deemed paid credit with respect to all three foreign corporations.

b. P can claim a deemed paid credit with respect to F1 and F2, but cannot claim a credit with respect to F3 because the 10% ownership test is not met for the link between F2 and F3.

c. P can claim a deemed paid credit with respect to F1, F2 and F3, but cannot claim a credit with respect to F4. The problem is that F4 is not a CFC because the more than 50% ownership test is not met.

d. P can claim a deemed paid credit with respect to F1 and F2, but cannot claim a credit with respect to F3 because neither F2 nor F3 singularly owns 10% or more of F3.

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