FOREIGN CORPORATION ESCAPES $1 MILLION EXECUTIVE COMPENSATION DEDUCTION LIMITS

Code Section 162(m) limits the deduction for compensation paid to certain highly paid employees of publicly held corporations to $1 million per year. A recent Private Letter Ruling addressed the applciation of this limitation to a foreign corporation whose American Depository Shares are publicly traded.

The Code Section 162(m) limitations only apply to corporations issuing a class of common equity shares required to be registered under section 12 of the Securities Exchange Act of 1934. In the Private Letter Ruling, the corporation paying the excess compensation was a foreign corporation that was qualified as a "foreign private issuer" under 17 CFR Section 240.3b-4(c) and as such was not required to be registered under section 12 of the Exchange Act (because such issuers are not subject to the executive compensation disclosure rules of the Exchange Act). It qualified as a foreign private issuer because it was incorporated under the laws of a foreign country and did not meet the following definition:

(1) More than 50% of the issuer's outstanding voting securities are directly or indirectly held of record by U.S. residents; and (2) One or more of the following apply: (a) the majority of the executive officers or directors are U.S. citizens or residents; (b) more than 50% of the assets of the issuer are located in the U.S.; or (c) the business of the issuer is administered principally in the U.S.

Therefore, foreign corporations with limited U.S. shareholders or that appropriately limit certain U.S. connections have some confirmation from the IRS that they are outside the $1 million compensation limits.

PLR 200916012