Many years later in 1984, the FSC took its place. Despite this recent WTO challenge, the FSC is an important tax savings strategy for the next few years. Offshore Subsidiaries There is a commonly held perception among taxpayers that a U.S. business may avoid U.S. tax if it has an offshore subsidiary in a foreign tax haven whose function is to collect revenues generated by the U.S. company. If the offshore subsidiary's activities are limited to collection of foreign revenues earned by the U.S. parent, U.S. taxes are not avoided. In non-Code terms, it is any income the CFC doesn't earn due to its own efforts.
Similar provisions apply to services, shipping and passive income.
Despite the CFC rules, there are still valid reasons to set up a foreign subsidiary in a tax haven. For example, assume that a U.S. company is in the early stages of developing intellectual property. The stage of development is such that the property has little value. The U.S. company can transfer its early stage intellectual property to a subsidiary in a tax haven, for example Ireland, where the development of the property will take place. The Irish subsidiary can then, after development, either manufacture the product for distribution throughout Europe or license the manufacture of the product and receive royalties from licensees in Europe.