OWNERSHIP BY VOTE may not be an easy matter to determine
The US tax laws require that a parent company own a subsidiary at least 80% by vote in order to file a consolidated tax return. Some strategies to defer US taxes on offshore investments – particularly in Latin America – require that one own a subsidiary more than 50% by vote. Most companies look simply at the number of board members to determine ownership by vote. For example, if the parent can appoint four of five board members, then it owns the subsidiary 80% by vote.
A decision last year by the 6th circuit court of appeals in Alumax v. Commissioner has thrown a wrench into these calculations. In the case, US company Amax controlled eight out of ten votes on the board of its subsidiary Alumax. Japanese interests controlled the other two. However, the Japanese held a veto right in essense over all important matters. In addition, the board had to pay dividends amounting to 35% of its net income; it had no discretion.
The court said the 80% voting control by Amax was illusory.
The case was a focus of discussion at meetings of the tax section of the New York State Bar Association this fall. The bottom line is US companies must look more closely at the details of how control is shared with minority partners.