Changes to subpart F services "substantial assistance" test.

• Author: Arber, Stephen C.

Subpart F of the Code provides that U.S. taxpayers doing business through the use of certain controlled foreign corporations (CFCs) may be subject to current income inclusion when a CFC derives foreign base company services income (FBCSI). FBCSI generally includes income from services a CFC performs outside its country of incorporation for (or on behalf of) a related person (subpart F income); see Sec. 954(e)(1).

In addition, services performed by a CFC may be considered performed for, or on behalf of, a related person when the CFC has received assistance from a related party to perform such services. Notice 2007-13 amends the criteria for determining when such assistance constitutes FBCSI. The IRS has advised that it is amending the regulations that define "substantial assistance" for purposes of determining FBCSI under subpart F.

Current Regs.

In defining FBCSI, Regs. Sec. 1.954-4(b)(1)(iv) provides that "services which are performed for, or on behalf of, a related person" include "substantial assistance" furnished by a related person to the CFC. This assistance is generally determined through either the subjective or the objective test.

Under the subjective test, assistance (in the form of direction, supervision, services or know-how, financial assistance (not including capital contributions), equipment, material or supplies) is "substantial" if it is obtained from related persons and provides the CFC with skills that are a principal element in producing its services income. Under the objective test, assistance (in the form of direction, supervision, services or know-how) is deemed substantial if the cost to the CFC of the assistance provided by related persons is 50% or more of its total cost of performing the services. Financial assistance would meet the objective test if the amount actually paid by the CFC to...