1.904-1—Limitation on credit for foreign taxes.
(a) Per-country limitation—
(1) General.
In the case of any taxpayer who does not elect the overall limitation under section 904(a)(2), the amount allowable as a credit for income or profits taxes paid or accrued to a foreign country or a possession of the United States is subject to the per-country limitation prescribed in section 904(a)(1). Such limitation provides that the credit for such taxes paid or accrued (including those deemed to have been paid or accrued other than by reason of section 904(d)) to each foreign country or possession of the United States shall not exceed that proportion of the tax against which credit is taken which the taxpayer's taxable income from sources within such country or possession (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. For special rules regarding the application of the per-country limitation when the taxpayer has derived section 904(f) interest or section 904(f) dividends, see § 1.904-4 or § 1.904-5.
(2) Illustration of principles.
The operation of the per-country limitation under section 904(a)(1) on the credit for foreign taxes paid or accrued may be illustrated by the following examples:
Code of Federal Regulations
| Taxable income (computed without deductions for personal exemptions) from sources within the United States | $50,000 |
| Taxable income (computed without deductions for personal exemptions) from sources within Great Britain | 25,000 |
| Total taxable income | 75,000 |
| United States income tax (based on taxable income computed with the deductions for personal exemptions) | 44,712 |
| British income and profits taxes | 18,000 |
| Per-country limitation (25,000/75,000 of $44,712) | 14,904 |
| Credit for British income and profits taxes (total British income and profits taxes, reduced in accordance with the per-country limitation) | 14,904 |
Code of Federal Regulations
| Taxable income (computed without deductions for personal exemptions) from sources within the United States | $50,000 |
| Taxable income (computed without deductions for personal exemptions) from sources within Great Britain | 15,000 |
| Taxable income (computed without deductions for personal exemptions) from sources within Canada | 10,000 |
| Total taxable income | 75,000 |
| United States income tax (based on taxable income computed with the deductions for personal exemptions) | 44,712 |
| British income and profits taxes | 10,800 |
| Per-country limitation on British income and profits taxes (15,000/75,000 of $44,712) | 8,942.40 |
| Credit for British income and profits taxes as limited by per-country limitation | 8,942.40 |
| Canadian income and profits taxes | 4,500.00 |
| Per-country limitation on Canadian income and profits taxes (10,000/75,000 of $44,712) | 5,961.60 |
| Credit for Canadian income and profits taxes (total Canadian income and profits taxes, since such amount does not exceed the per-country limitation) | 4,500.00 |
| Total amount of credit allowable (sum of credits—$8,942.40 plus $4,500) | 18,442.40 |
Code of Federal Regulations
| Taxable income from sources within the United States | $50,000 | |
| Taxable income from sources within Brazil | 50,000 | |
| Total taxable income | 100,000 | |
| United States income tax | 46,500 | |
| Dividend tax paid at source to Brazil | 19,000 | |
| Income and profits taxes deemed under section 902 to have been paid to Brazil, computed as follows: | ||
| Dividends received from Brazilian corporation during 1954 | 50,000 | |
| Income of Brazilian corporation during 1954 | 200,000 | |
| Income and profits taxes paid to Brazil on $200,000 | 30,000 | |
| Accumulated profits ($200,000 minus $30,000) | 170,000 | |
| Brazilian taxes applicable to accumulated profits distributed: | ||
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Code of Federal Regulations
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| 50,000/170,000 of 170,000/200,000 of $30,000 | 7,500 | |
| Total income and profits taxes paid and deemed to have been paid to Brazil | 26,500 | |
| Per-country limitation (50,000/100,000 of $46,500) | 23,250 | |
| Credit for Brazilian income and profits taxes as limited by per-country limitation | 23,250 | |
(b) Overall limitation—
(1) General.
In the case of any taxpayer who elects the overall limitation provided by section 904(a)(2), the total credit for taxes paid or accrued (including those deemed to have been paid or accrued other than by reason of section 904(d)) shall not exceed that proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. For special rules regarding the application of the overall limitation when the taxpayer has derived section 904(f) interest or section 904(f) dividends, see § 1.904-4 or § 1.904-5.
(2) Illustration of principles.
The operation of the overall limitation under section 904(a)(2) may be illustrated by the following example:
Code of Federal Regulations
(c) Special computation of taxable income.
For purposes of computing the limitations under paragraphs (a) and (b) of this section, the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b).
(d) Election of overall limitation—
(1) In general—
The initial election under section 904(b) of the overall limitation provided by section 904(a)(2) may be made by the taxpayer for any taxable year beginning after December 31, 1960, without securing the consent of the Commissioner. The taxpayer may, for the first taxable year for which the election is to be made, make such election at any time before the expiration of the period referred to in paragraph (d) of § 1.901-1 for choosing the benefits of section 901 for such taxable year. Having made the initial election, the taxpayer may, within the time prescribed for making such election for such taxable year, revoke such election without the consent of the Commissioner. If such revocation is timely and properly made, the taxpayer may make his initial election of the overall limitation for a later taxable year without the consent of the Commissioner. If, however, the taxpayer makes the initial election for a taxable year and the period prescribed for making such election for such taxable year expires, the taxpayer must continue the election of the overall limitation for all subsequent taxable years (whether or not foreign taxes were paid or accrued for any such year and notwithstanding that a deduction for foreign taxes under section 164 was claimed for any such year) until revoked with the consent of the Commissioner. See section 904(b)(1). If the election for any taxable year is revoked with the consent of the Commissioner, the taxpayer may not make a new election for such taxable year or for any subsequent taxable year without the consent of the Commissioner. If the election of the overall limitation is revoked for a taxable year, the per-country limitation shall apply to such taxable year and to all taxable years thereafter unless a new election of the overall limitation is made, either with or without the consent of the Commissioner in accordance with this section.
(ii) Revocation for first taxable year beginning after December 31, 1969.
Notwithstanding subdivision (i) of this subparagraph, if the taxpayer has made an initial election under section 904(b) of the overall limitation for a taxable year beginning before January 1, 1970, and the period prescribed for making such election for such taxable year has expired, or if he has made a new election for such a taxable year with the consent of the Commissioner, he may revoke such election effective with respect to his first taxable year beginning after December 31, 1969, without the consent of the Commissioner. Such revocation may be made within the time prescribed for making an initial election for such first taxable year beginning after December 31, 1969. If such revocation is timely and properly made, the taxpayer may make a new election of the overall limitation for a later taxable year without the consent of the Commissioner. Such new election for a later taxable year may be made at any time before the expiration of the period referred to in paragraph (d) of § 1.901-1 for choosing the benefits of section 901 for such taxable year. The revocation of an election, or the making of a new election, pursuant to this subdivision shall be made in the same manner provided in subparagraph (2) of this paragraph for revoking or making an initial election. This subdivision applies even though the taxpayer is not required under section 901(e) and § 1.901-3 to reduce the amount of any foreign taxes paid, accrued, or deemed to be paid with respect to foreign mineral income for any taxable year beginning after December 31, 1969.
(2) Method of making the initial election.
The initial election of the overall limitation under section 904(b) shall be made on Form 1116 in the case of an individual or on Form 1118 in the case of a corporation. The form shall be attached to the appropriate income tax return for the taxable year to which such election applies. Such election may be made, however, only for a taxable year for which the taxpayer chooses to claim a credit under section 901. If the taxpayer revokes the initial election without the consent of the Commissioner, he must file amended Form 1116 or 1118 and amended income tax returns or claims for refund, where applicable, for the taxable years to which the revocation applies. For rules relating to the filing of such forms, see paragraph (a) of § 1.905-2.
(3) Method of revoking an election and making a new election.
A request to revoke an election of the overall limitation under section 904(b) when such revocation requires the consent of the Commissioner, or to make a new election when such election requires the consent of the Commissioner, shall be in writing and shall be addressed to the Commissioner of Internal Revenue, Washington, D.C. 20224. The request shall include the name and address of the taxpayer and shall be signed by the taxpayer or his duly authorized representative. It must specify the taxable year for which the revocation or new election is to be effective and shall be mailed within 75 days after the close of the first taxable year for which it is desired to make the change. It must be accompanied by a statement specifying the nature of the taxpayer's business, the countries in which the business is carried on, or expected to be carried on, within the taxable year of the requested change, and grounds considered as justifying the requested revocation or new election. The Commissioner may require such other information as may be necessary in order to determine whether the proposed change will be permitted. Generally, a request for consent to revoke an election or make a new election will be granted if the basic nature of the taxpayer's business changes or if there are changes in conditions in a foreign country which substantially affect the taxpayer's business. For example, a taxpayer who enters substantial operations in a new foreign country or who loses an existing investment due to nationalization, expropriation, or war would be granted consent to revoke an election or make a new election.
(e) Joint return—
(1) General.
In the case of a husband and wife making a joint return, the applicable limitation prescribed by section 904(a) on the credit for taxes paid or accrued to foreign countries and possessions of the United States shall be applied with respect to the aggregate taxable income from sources within each such country or possession, or from sources without the United States, as the case may be, and the aggregate taxable income from all sources, of the spouses.
(2) Electing the overall limitation.
If a husband and wife make a joint return for the current taxable year, but made a separate return for the preceding taxable year and the overall limitation applied for such preceding taxable year to one spouse or to both spouses (whether or not then married), then, unless revoked with the consent of the Commissioner, the overall limitation shall apply for the current taxable year and for subsequent taxable years of both spouses, whether or not they remain married, whether or not joint returns are filed for such subsequent taxable years, and whether or not one of such spouses could have elected the overall limitation for the current taxable year only with the consent of the Commissioner if he had filed a separate return for such year.