Discuss the advantages of conducting overseas business activities through a foreign corporation.

Question

What will be an ideal response?

Answer 1

1) The foreign corporation's liabilities are separated from those of the parent corporation, thus limiting the domestic corporation's losses to its capital investment.
2) The U.S. income tax levy on the domestic corporation's ratable share of the foreign corporation's earnings is postponed until the earnings are remitted to the U.S. corporation. The postponement of the U.S. tax liability can be lost if the foreign corporation is classified as a controlled foreign corporation (CFC), foreign personal holding company (FPHC), or passive foreign investment company (PFIC). These special corporations characteristically have majority U.S. ownership and earn in many cases primarily passive or holding company income.
3) A domestic corporation receiving a dividend from a foreign corporation can claim a special deemed paid foreign tax credit for a ratable share of the foreign income taxes paid by the foreign corporation. The deemed paid tax credit is available only if the foreign corporation makes dividend payments out of E&P and if the domestic corporation owns at least 10% of the foreign corporation's stock on the distribution date.