Saturday, 28 July 2012

Controlled foreign Corporation

|In certain joint venture situations certain co-venture partners will be anxious to ensure that the income of the joint venture entity is not attributed back to one of the co-venturers due to their home jurisdiction tax rules based on an assertion that the joint venture entity is a "controlled foreign corporation" or a "foreign affiliate" (and other similar terminology used by various jurisdictions for income attribution purposes). Again, the legislative structure of the UAE companies law is sufficiently flexible to enable such problems to be addressed. For example, in such an instance it would be advisable for any such co-venturer ("A Co.") running a risk of the joint venture entity being deemed a "controlled foreign corporation" to have the share ownership of the joint venture entity structured as follows. Rather than A Co. being a directparticipant in the joint venture, an offshore purpose trust ("JV Purpose Trust") would be created with A Co. as the "enforcer" to JV Purpose Trust. JV Purpose Trust would in turn cause an offshore IBC to be incorporated which in turn would acquire the relevant share ownership in the Dubai joint venture company ("DubaiCo"). Under existing U.S. taxation rules DubaiCo would arguably not be deemed a controlled foreign corporation of A Co. for the reason that the JV Purpose Trust has no beneficiaries and no settlor. Despite the fact that A Co. is the enforcer to the JV Purpose Trust, that should not result in DubaiCo being a controlled foreign corporation of A Co. Such an ownership structure may very well permit A Co. to accomplish its goals and it is generally possible for the JV Purpose Trust instrument to be drafted in such a way to ensure that A Co. participates in the joint venture financially through consultancy and/or other similar fee arrangements.

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