USAco, a domestic corporation, manufactures and sells widgets in the United Stat
ID: 2418155 • Letter: U
Question
USAco, a domestic corporation, manufactures and sells widgets in the United States.
Determined to enter the lucrative European market for widgets, USAco forms CAYco,
a Cayman Islands corporation. The Cayman Islands does not have a corporate income
tax. USAco sells widgets at arm’s length to CAYco, which exports the widgets to
Europe. The income of CAYco is:
a) foreign base company sales income.
(b) foreign personal holding company income.
(c) foreign base company oil-related income.
(d) foreign base company services income.
Explanation / Answer
a) foreign base company sales income.
Foreign base company sales income of a controlled foreign corporation shall consist of gross income (whether in the form of profits, commissions, fees or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person.Personal property sold by a controlled foreign corporation will be considered to be the same property that was purchased by the controlled foreign corporation regardless of whether the personal property is sold in the same form in which it was purchased, in a different form than the form in which it was purchased, or as a component part of a manufactured product. This section shall apply to the purchase and/or sale of personal property, whether or not such property was purchased and/or sold in the ordinary course of trade or business, except that income derived in connection with the sale of tangible personal property will not be considered to be foreign base company sales income if such property is sold to a person that is not a related person, after substantial use has been made of the property by the controlled foreign corporation in its trade or business. This section shall not apply to the excess of gains over losses from sales or exchanges of securities or from futures transactions, to the extent such excess gains are includible in foreign personal holding company income of the controlled foreign corporation; nor shall it apply to the sale of the controlled foreign corporation's property (other than its stock in trade or other property of a kind which would properly be included in its inventory if on hand at the close of the taxable year, or property held primarily for sale to customers in the ordinary course of its business) if substantially all the property of such corporation is sold pursuant to the discontinuation of the trade or business previously carried on by such corporation.
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