To Socrateaser:I've got another scenario to consider, and it is related to guidance you provided a while back. Consider a software developer in the US with a history of development over the years. After a while, the developer will have amassed a collection of reusable software code and libraries. When we considered the case where this developer later moved to another country and started a CFC, we concluded that the income derived from using these libraries in products would not be subpart F as long as the products/libraries were only sold in the foreign corporation's country. According to previous guidance:If the code libraries are being "sold on your behalf," rather than your licensing the code to the corporation and receiving royalties for their sales (so that you're taxed on your U.S. Source income), and the code libraries are being sold outside of the nation in which the foreign corporation is taxed, then you are liable for Subpart F income. IRC 954(d)(1).Now consider the scenario where this developer decides to start a gaming software company in Hong Kong, an business software company in the US, and another software company in a 3rd country. Since the same developer is traveling, working for each company in its domestic country, and developing with his personal libraries and code, one might argue that it would be difficult to say that the code libraries are not being "sold outside of the nation in which the foreign corporation is taxed", because for all the corporations, there are 2 other corporations in other countries selling software with the same libraries. In this case, would the previous solution you mentioned resolve this (the solution where the developer gets paid either royalties or a one-time license for the libraries)? This way the developer can pay US taxes for the historical US sourced legacy library development... If that solution was used, would this trigger subpart F income via a "related party" exception ? (Because the developer is creating something, then selling to foreign company (who is related by ownership and employee), who incorporates it in product and resells it)...Or is all that not necessary at all... Would it be OK for each company to sell software in its domestic country using the libraries without triggering SubPartF income? One may argue that in no case is either company selling "outside of the nation in which the foreign corporation is taxed"? Perhaps the fact that other entities are using the same libraries is completely irrelevant...
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In order for the software library to be foreign base company sales income it must be both purchased and sold outside of the country in which the controlled foreign corporation is organized. A software library purchase from outside of the foreign nation in which the corporation is located, but sold within that nation, or the reverse, is not Subpart F Income.So, if library A is created in nation X, and combined with library B in nation Y, and then sold outside of nation Y, then income based on library A is Subpart F income. But, if sold in nation Y, it's not Subpart F income. You could probably recompile library A while located in nation Y, while making some small but material change, and then claim that it was manufactured therein -- which would avoid the Subpart F finding. Note: These issues are incredibly complex by design. The IRS doesn't want U.S. citizens creating offshore businesses and avoiding taxes by claiming them to be foreign and simultaneously selling into the U.S. market. There is always the possibility that when you make a change to a scenario that fixes one tax problem that you are creating a new one. There's no way for me to be absolutely certain that you have "threaded the needle." I would have to develop an expert system to try to calculate every conceivable possibility. I'd wager that there is at least one law or accounting firm somewhere that has done exactly that -- but, I'm sure it would cost you a small fortune to get that sort of certainty for your scenarios.I'm "covering my assets" here. Hope you understand. NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation. If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!
Makes total sense, and your example clarifies everything. Does the fact that all the companies involved in these scenarios are owned/run by the same parties trigger any "related party" conditions?Thanks for the help
Actually, I think I may have ignored an important point: the intellectual property, even if recompiled, was originated outside of the HK jurisdiction. See my answer to the other post, i.e., the ideal would be to not sell the intellectual property to the new company, and simply refrain from suing the new company for "creating" a new software application based upon the old software. I suppose the IRS could create a new concept of claiming that the failure to protect one's rights in intellectual property is a taxable event -- but, I think that's a stretch. Hope this helps.
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