The Deferral Effects of Passing Through Foreign Subsidiaries’ Passive Income

40 Pages Posted: 17 Jul 2015 Last revised: 17 Jan 2016

See all articles by Chris William Sanchirico

Chris William Sanchirico

University of Pennsylvania Law School; University of Pennsylvania Wharton School - Business Economics and Public Policy Department

Reed Shuldiner

University of Pennsylvania Law School

Date Written: July 17, 2015

Abstract

The immediate U.S. taxation of foreign subsidiaries’ passive, but not active income is a scenario of increasing practical importance. This paper builds on Alvin Warren’s recent analysis of this partially deferral-tempering case. It clarifies some of the legal and economic mechanics behind Warren’s formula. It also makes several points de novo. It highlights the conceptual relationship between passive-income pass-through and delayed realization of accrued gains. It points out that delayed realization inside the subsidiary effectively deactivates passive-income pass-through. And it describes when it does and does not matter that the parent takes interim distributions from the subsidiary, as when it uses such distributions to pay its interim pass-through tax liability.

Keywords: international tax, deferral, lockout, repatriation, pass-through, realization, controlled foreign corporations, subpart F, foreign base company income, passive foreign holding company income, foreign tax credit, deemed paid foreign tax credit, previously taxed earnings and profits, previously taxed

JEL Classification: H25, H2, F23, F21, F2, G32, G38, G3

Suggested Citation

Sanchirico, Chris William and Shuldiner, Reed, The Deferral Effects of Passing Through Foreign Subsidiaries’ Passive Income (July 17, 2015). U of Penn, Inst for Law & Econ Research Paper No. 15-25. Available at SSRN: https://ssrn.com/abstract=2632104 or http://dx.doi.org/10.2139/ssrn.2632104

Chris William Sanchirico (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-4220 (Phone)

HOME PAGE: http://www.law.upenn.edu/faculty/csanchir/

University of Pennsylvania Wharton School - Business Economics and Public Policy Department

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Reed Shuldiner

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6536 (Phone)
215-573-2025 (Fax)

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