26 CFR § 36.3121(l)(8)-1 - Definition of foreign subsidiary.

§ 36.3121(l)(8)-1 Definition of foreign subsidiary.

(a) Prior to August 1, 1956.

(1) For the period January 1, 1955 to July 31, 1956, inclusive, a foreign corporation is a foreign subsidiary of a domestic corporation, within the meaning of the regulations in this part, if -

(i) More than 50 percent of the voting stock of the foreign corporation is owned by the domestic corporation; or

(ii) More than 50 percent of the voting stock of the foreign corporation is owned by a second foreign corporation and more than 50 percent of the voting stock of the second foreign corporation is owned by the domestic corporation.

(2) The application of subparagraph (1) of this paragraph may be illustrated by the following examples:

Example 1.
P, a domestic corporation, owns 51 percent of the voting stock of S-1, a foreign corporation. S-1 owns 51 percent of the voting stock of S-2, a foreign corporation. S-2 owns 51 percent of the voting stock of S-3, a foreign corporation. S-1 and S-2 are foreign subsidiaries of P for purposes of the regulations in this part. Since neither P nor S-1 owns more than 50 percent of the voting stock of S-3, S-3 is not a foreign subsidiary of P within the meaning of the regulations in this part.
Example 2.
Assume the same facts as those stated in example 1 except that 25 percent of the voting stock of S-2 is transferred by S-1 to P. P owns no other voting stock of S-2. Accordingly, after the transfer, P and S-1 together own more than 50 percent of the voting stock of S-2, but neither P nor S-1 alone owns more than 50 percent of such stock. S-2 ceases to be a foreign subsidiary of P when such transfer is effected.

(b) On or after August 1, 1956.

(1) Beginning August 1, 1956, a foreign corporation is a foreign subsidiary of a domestic corporation, within the meaning of the regulations in this part, if -

(i) Not less than 20 percent of the voting stock of the foreign corporation is owned by the domestic corporation; or

(ii) More than 50 percent of the voting stock of the foreign corporation is owned by a second foreign corporation and not less than 20 percent of the voting stock of the second foreign corporation is owned by the domestic corporation.

(2) The application of subparagraph (1) of this paragraph may be illustrated by the following examples:

Example 1.
P, a domestic corporation owns 20 percent of the voting stock of S-1, a foreign corporation. S-1 is, therefore, a foreign subsidiary of P. S-1 owns 51 percent and P owns 15 percent of the voting stock of S-2, a foreign corporation. S-2 is also a foreign subsidiary of P, and this would be so even if P owned none of the voting stock of S-2. S-2 owns 51 percent, S-1 owns 39 percent, and P owns 10 percent of the voting stock of S-3, a foreign corporation. Since P owns less than 20 percent of the voting stock of S-2 and less than 20 percent of the voting stock of S-3, and since S-1 owns not more than 50 percent of the voting stock of S-3, S-3 is not a foreign subsidiary of P within the meaning of the regulations in this part.
Example 2.
Assume the same facts as those stated in example 1 except that 4 percent of the voting stock of S-2 is transferred by S-1 to P. After, as well as before, the transfer of 66 percent of the voting stock of S-2 is owned by P and S-1 together. After the transfer, however, P owns less than 20 percent and S-1 owns not more than 50 percent of the voting stock of S-2. When such transfer is effected S-2 ceases to be a foreign subsidiary of P for purposes of the regulations in this part.

(c) Transfer of stock ownership. The transfer of the voting stock of a foreign corporation which is a foreign subsidiary of a domestic corporation within the meaning of section 3121(l)(8) will not affect the status of the foreign corporation as such a foreign subsidiary if at all times either of the percentage tests stated in section 3121(l)(8), relating to ownership of the voting stock of such foreign corporation, is met.

(d) Meaning of “stock”. The term “stock”, as used in the regulations in this part, has the meaning assigned by paragraph (7) of section 7701(a). Section 7701(a)(7) provides as follows:

Sec. 7701.Definitions.

(a) When used in this title [Internal Revenue Code of 1954], where not otherwise distinctly expressed or manifestly incompatible with the intent thereof -

(7) Stock. The term “stock” includes shares in an association, joint-stock company, or insurance company.

[T.D. 6390, 24 FR 4831, June 13, 1959]