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INTRODUCTION
On March 9, 2002, the President signed the Job Creation and Worker Assistance Act of 2002 ("JCWAA"). This Act contains only one international provision; it extends for five years the temporary Subpart F exceptions for active financing and insurance income that had expired at the end of 2001. 1
The exception for active financing income is provided in (sec)954(h).2 Under that provision, income derived by a controlled foreign corporation ("CFC") in the active conduct of a banking, financing or securities business is excluded from the definition of foreign personal holding company income ("FPHCI").3 Therefore, any item of income derived by a CFC that falls within the general definition of FPHCI - e.g., dividends, interest, rents, royalties, and gains - will not be FPHCI to the extent this exception applies.4
This exception is available to CFCs that are licensed to conduct business as a bank or as a securities broker or dealer. It also applies to CFCs that engage in lending or financing transactions with unrelated persons. A U.S. multinational, for example, may organize foreign companies to finance foreign customers of products produced and sold by the group and defer U.S. tax on the finance income.5
This article describes the Subpart F exception for active banking or financing income. As background, it first briefly summarizes the Subpart F rules, and provides an overview of the legislative history to the current exception for banking or financing income. The
requirements to qualify for the exception are complex, and a number of new concepts are introduced into the Subpart F regime, which this article will attempt to distill and provide an analytical framework for applying the active financing income exception.
OVERVIEW OF SUBPART F
General Rules
Subpart F of the Internal Revenue Code ((secs)951-- 964) provides special rules that apply to U.S. persons that own stock in a foreign corporation controlled by such shareholders. The fundamental operative feature of the Subpart F provisions is to require the U.S. shareholders to include in their gross income certain undistributed earnings of the controlled foreign corporation as if the foreign corporation had distributed the earnings as a dividend; i.e., it is an anti-deferral regime.
Shareholders subject to taxation under Subpart F are U.S. persons6 who own 10% or more of...