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What are the Two Main Categories of Subpart F Income?

There are two major categories of Subpart F income. First, there is insurance income, which is income that is earned by a CFC from the sale of insurance or annuity contracts to U.S. insureds. IRC §953.

Second, there is foreign base company income, which is further broken down into many categories. It includes: (1) foreign personal holding company income, (2) foreign base company sales income, (3) foreign base company services income, (4) foreign base company shipping income, and (5) foreign base company oil related income. The most important are the first three.

(1) Foreign personal holding company income. IRC §954(c)(1). This income includes dividends, rents, royalties, interest, and annuities that do not arise out of the active conduct of a trade or business. It also includes gains from the sale of certain properties—including gains from the sale (or other disposition) of any interest in a partnership or trust.

(2) Foreign base company sales income. IRC §954(d). This income is income derived from the sale (or purchase) of personal property with a related person, provided two other conditions are met: (1) the property that is purchased/sold is made/manufactured outside of the country where the CFC is incorporation, and (2) the property is also sold for use/consumption/disposition outside of the country where the CFC is incorporated.

(3) Foreign base company services income. IRC §954(e). At a general level, this is income that is performed for a related party who is located outside of the country where the CFC is incorporated.