A temporary subpart F exception from foreign personal holding company income and foreign base company services for certain active financing income was scheduled to expire at the end of 1998. A modified one-year extension signed into law last month may have a significant impact on affected Canadian parent companies with US operations engaged in those activities outside the United States.
Taxpayers can expect the exception to be revisited next year.
For income earned from the active conduct of a banking, financing, or similar business, the new rule differs in several ways. CFCs must conduct substantial activity with respect to that business. The tests are modified for determining whether a CFC is predominantly engaged in the active conduct of such a business. The rule now extends to income from certain cross-border transactions. Treasury will issue rules to determine a customer's location.