In this video, I discuss the passive foreign investment company as it related to outbound transactions covered on the CPA exam. Start your free trial: https://farhatlectures.com/

The United States enforces specific regulations aimed at limiting the deferral of U.S. taxes on foreign-source income, primarily to ensure that U.S. persons cannot indefinitely avoid U.S. taxation on income earned abroad. These regulations are part of two main anti-deferral regimes:

Passive Foreign Investment Company (PFIC) Regime: This set of rules targets investments in foreign entities that primarily earn passive income or hold assets that produce such income, like interest, dividends, and capital gains. The PFIC regime is designed to discourage U.S. persons from deferring U.S. tax by investing in foreign entities that do not conduct substantial active business operations but instead generate income through passive activities. If a foreign corporation meets certain criteria that classify it as a PFIC, U.S. investors in that corporation may be subject to current taxation on certain types of income and gains, even if they do not receive any distributions from the PFIC.

Controlled Foreign Corporation (CFC) Rules/Subpart F Regime: This framework applies to foreign corporations that are controlled by U.S. shareholders, defined as U.S. persons who own more than 50% of the corporation's stock either by vote or value. The Subpart F rules require these U.S. shareholders to include in their current taxable income their share of the CFC's "Subpart F income," which includes certain types of passive income and income from specific types of transactions that are considered to be easily shifted from one jurisdiction to another. The intent behind these rules is to prevent U.S. persons from deferring U.S. tax on income earned through controlled foreign entities by moving profits into low-tax jurisdictions.

Both these regimes aim to limit the tax advantages of deferring U.S. tax on income earned through foreign entities, ensuring that U.S. persons pay U.S. tax on certain types of foreign income in the year it is earned, rather than deferring the tax until the income is repatriated to the United States.

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