Understanding Constructive Share Ownership

The Tax Cut and Jobs Act (TCJA) has significant implications for United States persons who own shares in a Controlled Foreign Corporation (“CFC”), which is a non-U.S. corporation that is more than 50% owned (votes or value)  by “United States”  shareholders.  In determining whether a corporation is a CFC, for U.S. tax purposes, it is necessary to review the corporation’s share register to determine who the ultimate U.S. shareholders are.

One, however, does not only look at shares directly held by a United States person.   One must also look at shares indirectly owned and shares constructively owned.  This is true in a U.S. domestic context but even more so in the case of a foreign corporation.

The constructive ownership rules, however, do NOT attribute income.  These rules are only used to determine the status of the foreign corporation for U.S. tax purposes.

Internal Revenue Code (IRC) section 318 provides the basic rules in determining constructive ownership.  The provisions address ownership to or from family members, to or from partnerships, estates, trusts and corporations and where a person holds options.  In context of foreign corporations, IRC section 958 modifies section 318 as required.

Members of family

In general, an individual shall be considered as owning the stock owned directly or indirectly by his spouse, children, grandchildren and parents.  A legally adopted child is treated as a child.  Note that the definition does not include siblings, nieces or nephews.  The general provision is modified such that an individual is NOT considered as owning stock if the family member is a nonresident alien.  Constructive ownership only applies from a U.S. person to another U.S. person.

From an estate

Property of a decedent shall be considered as owned by his or her estate if such property is subject to administration by the executor or administrator.  The term “beneficiary” includes any person entitled to receive property of a decedent pursuant to a will or pursuant to laws of descent and distribution.

From a trust

Any stock owned directly, or indirectly, by or for a non-grantor trust will be considered as being owned by its beneficiaries only to the extent of the interest of such beneficiaries in the trust.  Accordingly, the interest of income beneficiaries, remainder beneficiaries, and other beneficiaries will be computed on an actuarial interest.  In computing a beneficiary’s actuarial interest the “factors and methods” prescribed in the Estate Tax regulations shall be used in determining a beneficiary’s actuarial interest for these purposes.

Any stock owned directly, or indirectly, by a grantor trust are treated as being owned by the grantor or owner of the trust.

From a corporation

If 50 % or more in value of stock in a corporation is owned, directly or indirectly, by or for a person, such person shall be considered as owning the stock owned by or for such corporation, in that proportion which the value of the stock which such person owns bears to the value of all the stock in such corporation.

For example assume Albert owns 70% of Holdco and Robert owns the remaining 30%. Holdco owns 50% of Opco while Albert owns, directly, the remaining 50% of Opco.  Since Holdco owns 50% or more in Opco it will be deemed to own 100% of Opco . In addition, Albert will be considered as owning  85% in Opco – 50% directly and 35% indirectly (70% x 50%).


The U.S. constructive ownership rules can be complicated, especially in a foreign corporation context.  Cadesky U.S. Tax can assist in determining the status of your foreign corporation for U.S. tax purposes.  If you require our assistance please do not hesitate to reach out to us.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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