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[1] See References in Text note below.
§ 952. Subpart F income defined
(a)
In general
For purposes of this subpart, the term “subpart F income” means, in the case of any controlled foreign corporation, the sum of—
(3)
an amount equal to the product of—
(A)
the income of such corporation other than income which—
(i)
is attributable to earnings and profits of the foreign corporation included in the gross income of a United States person under section
951 (other than by reason of this paragraph), or
multiplied by
(4)
the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of section
162
(c)) paid by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government, and
(5)
the income of such corporation derived from any foreign country during any period during which section
901
(j) applies to such foreign country.
The payments referred to in paragraph (4) are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person. For purposes of paragraph (5), the income described therein shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income.
(b)
Exclusion of United States income
In the case of a controlled foreign corporation, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporation of a trade or business within the United States unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States. For purposes of the preceding sentence, income described in paragraph (2) or (3) of section
921
(d) [1] shall be treated as derived from sources within the United States. For purposes of this subsection, any exemption (or reduction) with respect to the tax imposed by section
884 shall not be taken into account.
(c)
Limitation
(1)
In general
(A)
Subpart F income limited to current earnings and profits
For purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year.
(B)
Certain prior year deficits may be taken into account
(i)
In general
The amount included in the gross income of any United States shareholder under section
951
(a)(1)(A)(i) for any taxable year and attributable to a qualified activity shall be reduced by the amount of such shareholder’s pro rata share of any qualified deficit.
(ii)
Qualified deficit
The term “qualified deficit” means any deficit in earnings and profits of the controlled foreign corporation for any prior taxable year which began after December 31, 1986, and for which the controlled foreign corporation was a controlled foreign corporation; but only to the extent such deficit—
(I)
is attributable to the same qualified activity as the activity giving rise to the income being offset, and
In determining the deficit attributable to qualified activities described in subclause (II) or (III) of clause (iii), deficits in earnings and profits (to the extent not previously taken into account under this section) for taxable years beginning after 1962 and before 1987 also shall be taken into account. In the case of the qualified activity described in clause (iii)(I), the rule of the preceding sentence shall apply, except that “1982” shall be substituted for “1962”.
(iii)
Qualified activity
For purposes of this paragraph, the term “qualified activity” means any activity giving rise to—
(iv)
Pro rata share
For purposes of this paragraph, the shareholder’s pro rata share of any deficit for any prior taxable year shall be determined under rules similar to rules under section
951
(a)(2) for whichever of the following yields the smaller share:
(v)
Qualified insurance company
For purposes of this subparagraph, the term “qualified insurance company” means any controlled foreign corporation predominantly engaged in the active conduct of an insurance business in the taxable year and in the prior taxable years in which the deficit arose.
(vi)
Qualified financial institution
For purposes of this paragraph, the term “qualified financial institution” means any controlled foreign corporation predominantly engaged in the active conduct of a banking, financing, or similar business in the taxable year and in the prior taxable year in which the deficit arose.
(vii)
Special rules for insurance income
(I)
In general
An election may be made under this clause to have section
953
(a) applied for purposes of this title without regard to the same country exception under paragraph (1)(A) thereof. Such election, once made, may be revoked only with the consent of the Secretary.
(II)
Special rules for affiliated groups
In the case of an affiliated group of corporations (within the meaning of section
1504 but without regard to section
1504
(b)(3) and by substituting “more than 50 percent” for “at least 80 percent” each place it appears), no election may be made under subclause (I) for any controlled foreign corporation unless such election is made for all other controlled foreign corporations who are members of such group and who were created or organized under the laws of the same country as such controlled foreign corporation. For purposes of clause (v), in determining whether any controlled corporation described in the preceding sentence is a qualified insurance company, all such corporations shall be treated as 1 corporation.
(C)
Certain deficits of member of the same chain of corporations may be taken into account
(i)
In general
A controlled foreign corporation may elect to reduce the amount of its subpart F income for any taxable year which is attributable to any qualified activity by the amount of any deficit in earnings and profits of a qualified chain member for a taxable year ending with (or within) the taxable year of such controlled foreign corporation to the extent such deficit is attributable to such activity. To the extent any deficit reduces subpart F income under the preceding sentence, such deficit shall not be taken into account under subparagraph (B).
(ii)
Qualified chain member
For purposes of this subparagraph, the term “qualified chain member” means, with respect to any controlled foreign corporation, any other corporation which is created or organized under the laws of the same foreign country as the controlled foreign corporation but only if—
(2)
Recharacterization in subsequent taxable years
If the subpart F income of any controlled foreign corporation for any taxable year was reduced by reason of paragraph (1)(A), any excess of the earnings and profits of such corporation for any subsequent taxable year over the subpart F income of such foreign corporation for such taxable year shall be recharacterized as subpart F income under rules similar to the rules applicable under section
904
(f)(5).
(3)
Special rule for determining earnings and profits
For purposes of this subsection, earnings and profits of any controlled foreign corporation shall be determined without regard to paragraphs (4), (5), and (6) of section
312
(n). Under regulations, the preceding sentence shall not apply to the extent it would increase earnings and profits by an amount which was previously distributed by the controlled foreign corporation.
(d)
Income derived from foreign country
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subsection (a)(5), including regulations which treat income paid through 1 or more entities as derived from a foreign country to which section
901
(j) applies if such income was, without regard to such entities, derived from such country.
[1] See References in Text note below.
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