[2] It consists of interest, dividends, rents, royalties, gains on property producing FPHCI, and certain other items.
Under the basic definition, there are exclusions and exceptions, which include: Generally, the related party exclusions do not apply if the item in the hands of the payor must be allocated or apportioned to Subpart F income.
[5] Dividends received from a 10% or more owned controlled foreign corporation (CFC) with respect to which the recipient is a U.S. shareholder (whether or not the controlling shareholder) are re-characterized based on the earnings and profits (E&P) of the payor CFC.
Interest, rents and royalties received from a similar CFC are recharacterized based on the type of income to which the payor must allocate and apportion the corresponding item of expense.
Thus, if a Swiss corporation that has two owners, both U.S., pays its 20% owner interest of $1,000 and under allocation and apportionment principles its interest expense must be apportioned 42% to passive and 58% to general limitation income, then the interest income of that U.S. person from the Swiss corporation is $420 passive and $580 general limitation, and only the passive income constitutes FPHCI.