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Subpart F income is now deemed to be ordinary income taxed at higher rates rather than as a deemed dividend where lower tax rates would apply.

In a recent 2013 case, Fifth Circuit Court of Appeals confirmed the U.S. Tax Court decision stating that what is commonly referred to as "Subpart F" income (which includes specific types of income earned by foreign corporations including purchases and sales or services between a foreign corporation and a related party) is to be taxed currently not as a deemed dividend distribution (as has always been the case since the enactment of Subpart F Internal Revenue Code provisions)-but instead as ordinary income thus denying this income the benefit of reduced tax rates. Although if an income tax is payable to a foreign tax jurisdiction on this income a credit is allowable against the U.S. tax liability, in many countries where a sale by a resident country is transacted outside the country where the corporation is located, the local jurisdiction will not charge income tax. So instead of paying tax as a deemed dividend of earnings and profits from a foreign subsidiary or otherwise related corporation at a 20% tax rate (formerly 15%), the income can be subject to the much higher marginal tax rates imposed on corporate income. However income that does not fall into the Subpart F category may be accumulated outside the U.S. by the U.S. owned foreign corporation and when ultimately distributed it will continue to be taxed as a dividend of E&P at the lower dividend rates.

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