The Deemed Dividend Problem

16 Pages Posted: 3 Aug 2004


Subpart F currently taxes US shareholders on deemed dividends of Subpart F income from controlled foreign corporations (CFCs), rather than taxing the CFCs directly. This approach is based on a similar approach taken in the 1930s to taxing US shareholders in foreign personal holding companies (FPHCs). The reason for this approach was that in 1937, when the FPHC regime was first enacted, the Treasury took the view that it would be a breach of international law to tax a foreign person (the FPHC) directly on foreign source income. However, today it is clear that the US can in fact tax US-controlled foreign persons on foreign source income, as evidenced by the application of the personal holding corporation (PHC) regime to foreign corporations. Moreover, the deemed dividend approach leads to considerable complexity and planning opportunities, as evidenced in the Brown Group case and in Enron's Apache transaction. Instead of trying to close these loopholes one by one, Congress should substitute direct taxation of CFCs (and repeal the FPHC regime, which is obsolete). This can be done without resolving the continuing debate on what should be the scope of Subpart F income.

Suggested Citation

Avi-Yonah, Reuven S., The Deemed Dividend Problem. Available at SSRN: or

Reuven S. Avi-Yonah (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4033 (Phone)

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