U.S. Taxation of Foreign Corporations  
U.S. Source Income of a Foreign Corporation
A foreign corporation, whether owned by U.S. shareholders or foreign shareholders, may be subject to U.S. income taxation. If the foreign corporation has U.S. source business income (defined in IRC Section 861) that is effectively connected with the conduct of a U.S. trade or business or if the foreign corporation has a permanent establishment in the U.S., then it is subject to U.S. taxation. The foreign corporation, irrespective of who the shareholders are, will file a Form 1120 and pay U.S. corporate income taxes on its U.S. source income from a trade or business in the U.S.

"Subpart F" income
The U.S. authority of taxation over U.S. shareholders comes from the controlled foreign corporation (CFC) rules: Only "Subpart F" income can be taxed. Passive income from interest, dividends, investments, etc. are all "subpart F" income, but there are other income situations that are deemed "Subpart F" income so it is important to make sure your CFC is not generating such income. "Subpart F" income flows through to the shareholders of a CFC and is taxable on your personal return.

The other (relevant) types of income that are "Subpart F" income are "Foreign base company sales income" [IRC Section 954(d)] and "Foreign base company services income" [IRC Section 954(e)] so it is important (in this strategy) to make sure the income being generated is NOT "Subpart F" income.

"Foreign Base Sales Income" generally includes income from selling personal property purchased from a related person or sold to a related person. Making sales between related persons can get complicated, so we like to avoid this one all together!

"Foreign base company services" income is defined as "income (whether in the form of compensation, commissions, fees or otherwise) derived in connection with the performance of Professional Services which are performed for or on behalf of any related person and are performed outside the country under the laws of which the controlled foreign corporation is incorporated. In general a "Professional Service" is unlikely to be able to be performed 100% "in the cloud" and as a consequence, this business model is not a good candidate for our services. If however you can demonstrate that your particular "Professional Service" can be performed 100% "in the cloud" we are willing to consider your business model.

Selling Services other than Professional Services to related persons can be negated by simply locating the computer server (in the "Cloud Business" model) in the same jurisdiction as the company is incorporated (Hong Kong in our example).