Legal Question in Business Law in Minnesota

Re: more on: how to register ecommerce firm when development is overseas

Doing business over the Internet is by its very nature transnational. If you intend to pay your self and are domiciled in the U.S. and a U.S. citizen, you must pay tax on the money you receive. This has always been true even before more recent legislative controls on foreign corporations.

Primary considerations in the structuring of your business must include the effect of controlled foreign company ("CFC") and passive foreign investment company ("PFIC") legislation. Before the passage of CFC legislation, non-U.S. corporations, even if American controlled, were not subject to U.S. tax laws on foreign source income. Consequently, no U.S. tax was imposed on the foreign source earnings of such corporations, unless and until dividends paid by the foreign corporation were received by their American parent corporations or American shareholders..

In 1962, the U.S. was the first country to introduce controlled foreign company ("CFC") legislation. Under US CFC legislation, certain U.S. shareholders of CFCs are currently taxed on their pro rata share of certain types of undistributed profits of the CFC. This legislation curtails tax avoidance through the use of tax haven devices. In essence, the rules seek to place US investment on a level playing field with offshore investment by eliminating tax considerations as a motivating factor in the choice of where to invest.

A controlled foreign company ("CFC") is a foreign company if the stock is, by vote or value, more than 50 percent owned by U.S. shareholders. A "U.S. shareholder" is, the CFC purposes, any U.S. person who owns at least 10 percent of the foreign corporation's voting stock.

In determining the 10 percent threshold of ownership necessary to constitute a US shareholder, actual, indirect and constructive ownership are taken into account. Indirect ownership is constituted by stock beneficially owned by a U.S. person through foreign corporations, partnerships, trusts and estates. Stock held by a foreign entity is deemed to be held indirectly proportionately by its shareholders, partners, or beneficiaries.

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