Foreign personal holding company

Under the basic definition, there are exclusions and exceptions, which include:

• Rents and royalties derived in the active conduct of a trade or business (e.g., a car rental business). For royalties to qualify, the property must have been substantially developed by the recipient of the royalties.
• Interest and dividends received from related parties organized in the same country as the recipient.
• Rents and royalties received from related parties for use of property in the same country as the recipient is organized.
• For 2006 through 2009, interest or dividends received from any related party.^[3]

Generally, the related party exclusions do not apply if the item in the hands of the payor must be allocated or apportioned to Subpart F income.^[4] Thus, rents paid by CFC1 to CFC2 would be Subpart F income to CFC2 regardless of exceptions or exclusions if CFC1 would allocate the rental expense to Subpart F activities.

For Foreign Tax Credit purposes, certain types of income are re-characterized (looked-through) based on the character of the income underlying the payment.^[5] Dividends received from a 10% or more owned controlled foreign corporation (CFC) with respect to which the recipient is a U.S. shareholder (whether or not the controlling shareholder) are re-characterized based on the earnings and profits (E&P) of the payor CFC. Interest, rents and royalties received from a similar CFC are recharacterized based on the type of income to which the payor must allocate and apportion the corresponding item of expense. Thus, if a Swiss corporation that has two owners, both U.S., pays its 20% owner interest of $1,000 and under allocation and apportionment principles its interest expense must be apportioned 42% to passive and 58% to general limitation income, then the interest income of that U.S. person from the Swiss corporation is $420 passive and $580 general limitation, and only the passive income constitutes FPHCI.