The US Court of Appeals for the Sixth Circuit recently issued its opinion in Whirlpool Financial Corporation & Consolidated Subsidiaries v. Commissioner,1 affirming the decision made by the US Tax Court. The Tax Court held that income derived by a controlled foreign corporation (CFC) was foreign base company sales income (FBCSalesI) under the regulatory manufacturing branch rule.2 While the Sixth Circuit’s majority decision would significantly expand the scope of the Subpart F branch rule, the opinion is best viewed as only affirming the Tax Court’s legal conclusion under the particular facts, and thus, the broad implications of the Court’s analysis are best viewed as dicta.
Under the facts, Whirlpool-owned a Luxembourg CFC (Lux CFC) that had one administrative employee located in Luxembourg. Lux CFC owned a Mexican disregarded entity (Mex DE) that manufactured products for the Lux CFC pursuant to a toll manufacturing services arrangement using seconded employees of a related Mexican CFC. Lux CFC sold the products to related persons. Lux CFC owned the raw materials, work-in-process and finished goods, as well as the machinery and equipment used to manufacture the products—all of which were located in Mexico.
Mexico taxed the manufacturing service fee earned by the Mex DE. Under a Mexican Maquiladora incentive regime, Lux CFC was deemed to not have a taxable permanent establishment (PE) in Mexico, and thus, its income was not subject to taxation in...
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