CFR > Title 26 - Internal Revenue > CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY > SUBCHAPTER A—INCOME TAX (Parts 1–19) > PART 1—INCOME TAXES > 1.960-2—Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.

1.960-2—Interrelation of section 902 and section 960 when dividends are paid by third-, second-, or first-tier corporation.

(a) Scope of this section. This section prescribes rules for the application of section 902 in a case where dividends are paid by a third-, second-, or first-tier corporation, as the case may be, from its earnings and profits for a taxable year when an amount attributable to such earnings and profits is included in the gross income of a domestic corporation under section 951, or when such earnings and profits are attributable to an amount excluded from the gross income of such foreign corporation under section 959(b) and § 1.959-2, with respect to the domestic corporation. In making determinations under this section, any portion of a distribution received from a first-tier corporation by the domestic corporation which is excluded from the domestic corporation's gross income under section 959(a) and § 1.959-1, or any portion of a distribution received from an immediately lower-tier corporation by the third-, second-, or first-tier corporation which is excluded from such foreign corporation's gross income under section 959(b) and § 1.959-2, shall be treated as a dividend for purposes of taking into account under section 902 any foreign income taxes paid by such third-, second-, or first-tier corporation which are not deemed paid by the domestic corporation under section 960(a)(1) and § 1.960-1.
(b) Application of For purposes of paragraph (a) of this section and paragraph (c)(1)(i) of § 1.960-1, section 902(b) shall apply to all dividends received by the first- or second-tier corporation from the immediately lower-tier corporation other than dividends attributable to earnings and profits of such immediately lower-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such immediately lower-tier corporation.
(c) Application of For purposes of paragraph (a) of this section, section 902 (a) shall apply to all dividends received by the domestic corporation for its taxable year from the first-tier corporation other than dividends attributable to earnings and profits of such first-tier corporation in respect of which an amount is, or has been, included in the gross income of a domestic corporation under section 951 with respect to such first-tier corporation.
(d) Allocation of earnings and profits of a first- or second-tier corporation having income excluded under (1) First-tier corporations. If the first-tier corporation for its taxable year receives dividends from the second-tier corporation to which in accordance with paragraph (b) of this section 902(b)(1) or section 902(b)(2) applies and other dividends from the second-tier corporation to which such sections do not apply, then in applying section 902(a) pursuant to this section and in applying section 960(a)(1) pursuant to § 1.960-1(c)(1)(i), with respect to the foreign income taxes paid and deemed paid by the second-tier corporation which are deemed paid by the first-tier corporation for such taxable year under section 902(b)(1) —
(i) The earnings and profits of the first-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for the taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) and
(ii) For the purposes of so applying section 902(a), distributions to the domestic corporation from such earnings and profits which are attributable to the dividends to which section 902(b)(1) does not apply (in determining the domestic corporation's credit for taxes paid by the second-tier corporation) or which are attributable to the dividends to which sections 902(b)(1) and 902(b)(2) do not apply (in determining the domestic corporation's credit for taxes deemed paid by the second-tier corporation) shall not be treated as a dividend.
(2) Second-tier corporations. If the second-tier corporation for its taxable year receives dividends from the third-tier corporation to which, in accordance with paragraph (b) of this section, section 902(b)(2) applies and other dividends from the third-tier corporation to which such section does not apply, then in applying section 902(b)(1) pursuant to this section, and in applying section 960(a)(1) pursuant to paragraph (c)(1)(i) of § 1.960-1, with respect to the foreign taxes deemed paid by the second-tier corporation for such taxable year under section 902(b)(2) —
(i) The earnings and profits of the second-tier corporation for such taxable year shall be considered not to include its earnings and profits which are attributable to such other dividends from the third-tier corporation, and
(ii) For the purposes of so applying section 902(b)(1), distributions to the first-tier corporation from such earnings and profits which are attributable to such other dividends from the third-tier corporation shall not be treated as a dividend.
(e) Separate determinations under If in the case of a first-, second-, or third-tier corporation to which paragraph (b) or (c) of this section is applied—
(1) The earnings and profits of such foreign corporation for its taxable year consist of—
(i) Dividends received from an immediately lower-tier corporation which are attributable to amounts included in the gross income of a domestic corporation under section 951 with respect to the immediately lower- or lower-tier corporations, and
(ii) Other earnings and profits, and
(2) The effective rate of foreign income taxes paid or accrued by such foreign corporation on the dividends described in paragraph (e)(1)(i) of this section is higher or lower than the effective rate of foreign income taxes attributable to its earnings and profits described in paragraph (e)(1)(ii) of this section,

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then, for purposes of applying paragraph (b) or (c) of this section to dividends paid by such foreign corporation to the domestic corporation or the first- or second-tier corporation, sections 902(a), 902(b)(1), and 902(b)(2) shall be applied separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(i) of this section and separately to the portion of the dividend which is attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section. In making a separate determination with respect to the earnings and profits described in paragraph (e)(1)(i) or (e)(1)(ii) of this section, only the foreign income taxes paid or accrued (or, in the case of earnings and profits of a first- or second-tier corporation described in paragraph (e)(1)(ii) of this section, deemed to be paid) by such foreign corporation on the income attributable to such earnings and profits shall be taken into account. For purposes of applying this
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paragraph (e), no part of the foreign income taxes paid, accrued, or deemed to be paid which are attributable to the earnings and profits described in paragraph (e)(1)(ii) of this section shall be attributed to the dividend described in paragraph (e)(1)(i) of this section; and no part of the foreign income taxes paid or accrued on the dividend described in paragraph (e)(1)(i) of this section shall be attributed to the earnings and profits described in paragraph (e)(1)(ii) of this section. Furthermore, the effective rate of foreign income taxes paid or accrued shall be determined consistently with the principles of paragraphs (b)(3)(iv) and (viii) and (c) of § 1.954-1 . Thus, for example, the effective rate of foreign income taxes on dividends received by such foreign corporation shall be determined by taking into account any intercorporate dividends received deduction allowed to such corporation for such dividends.
(f) Illustrations. The application of this section may be illustrated by the following examples. In all of the examples other than examples 6, 7, 9 and 10, it is assumed that the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation, as the case may be, in respect to dividends received from the immediately lower-tier corporation, is the same as the effective rate of foreign income taxes paid or accrued by the first- or second-tier corporation with respect to its other income:

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Example 1. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $50 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. For such year, B Corporation distributes a dividend of $45, but A Corporation does not make any distributions. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1), after applying section 902(b)(1) for such year of A Corporation, are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation):
Pretax earnings and profits $100.00
Foreign income taxes (40%) 40.00
Earnings and profits 60.00
Dividends paid to A Corporation $45.00
Foreign income taxes paid by B Corporation on or with respect to its accumulated profits 40.00
Foreign income taxes of B Corporation deemed paid by A Corporation for 1978 under section 902(b)(1) ($45/$60×$40) 30.00
A Corporation (first-tier corporation):
Pretax earnings and profits:
Dividends from B Corporation $45.00
Other income 100.00
Total pretax earnings and profits 145.00
Foreign income taxes (20%) 29.00
Earnings and profits 116.00
Foreign income taxes paid, and deemed to be paid, by A Corporation on or with respect to its earnings and profits ($29 $30) 59.00
Amount required to be included in N Corporation's gross income under section 951 with respect to A Corporation 50.00
Dividends paid to N Corporation 0
N Corporation (domestic corporation):
Foreign income taxes of A Corporation deemed paid by N Corporation for 1978 under section 960(a)(1) ($50/$116×$59) 25.43

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Example 2. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year, which B Corporation distributes during such year. Corporation N is not required for 1978 to include any amount in gross income under section 951 attributable to the earnings and profits of A Corporation, but A Corporation distributes for such year $135 from its earnings and profits attributable to B Corporation's dividend. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1)(C) and section 902(a) are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation):
Pretax earnings and profits $250.00
Foreign income taxes (20%) 50.00
Earnings and profits 200.00
Amounts required to be included in N Corporation's gross income under section 951 with respect to B Corporation 150.00
Dividends paid to A Corporation 150.00
Foreign income taxes paid on or with respect to earnings and profits of B Corporation 50.00
A Corporation (first-tier corporation):
Pretax earnings and profits:
Dividends from B Corporation $150.00
Other income 200.00
Total pretax earnings and profits 350.00
Foreign income taxes (10%) 35.00
Earnings and profits 315.00
Dividends paid to N Corporation 135.00
Foreign income taxes paid by A Corporation on or with respect to its accumulated profits 35.00
N Corporation (domestic corporation):
Foreign income taxes of B Corporation deemed paid by N Corporation for 1978 under section 960(a)(1) ($150/$200×$50) 37.50
Foreign income taxes of A Corporation deemed paid by N Corporation for 1978 under section 902(a) ($135/$315×$35) 15.00
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Total foreign income taxes deemed paid by N Corporation under section 901 52.50

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Example 3. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include $180 in gross income attributable to the earnings and profits of A Corporation for such year, but is not required to include any amount in gross income under section 951 attributable to the earnings and profits of B Corporation. Corporation B distributes from its earnings and profits for 1978 a dividend of $50. For 1978, A Corporation distributes $180 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income for such year with respect to A Corporation and $20 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation):
Pretax earnings and profits $100.00
Foreign income taxes (40%) 40.00
Earnings and profits 60.00
Dividends paid to A Corporation 50.00
Foreign income taxes paid by B Corporation on or with respect to its accumulated profits 40.00
Foreign income taxes of B Corporation deemed paid by A Corporation for 1978 under section 902(b)(1) ($50/$60×$40) 33.33
A Corporation (first-tier corporation):
Pretax earnings and profits:
Dividends from B Corporation $50.00
Other income 200.00
Total pretax earnings and profits 250.00
Foreign income taxes (10%) 25.00
Earnings and profits 225.00
Foreign income taxes paid, and deemed to be paid, by A Corporation on or with respect to its earnings and profits ($25.00 $33.33) 58.33
Amounts required to be included in N Corporation's gross income for 1978 under section 951 with respect to A Corporation 180.00
Dividends paid to N Corporation:
Dividends to which section 902(a) does not apply (from A Corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N Corporation's gross income with respect to A Corporation) 180.00
Dividends to which section 902(a) applies (from A Corporation's other earnings and profits) 20.00
Total dividends paid to N Corporation $200.00
N Corporation (domestic corporation):
Foreign income taxes of corporations A and B deemed paid by N Corporation under section 960(a)(1) ($180/$225×$58.33) 46.66
Foreign income taxes of corporations A and B deemed paid by N Corporation under section 902(a) ($20/$225×$58.33) 5.18
Total foreign income taxes deemed paid by N Corporation under section 901 51.84

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Example 4. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $175, consisting of $150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $25 from its other earnings and profits. Corporation A does not distribute any dividends for 1978. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation):
Pretax earnings and profits $250.00
Foreign income taxes (20%) 50.00
Earnings and profits 200.00
Amounts required to be included in N Corporation's gross income under section 951 for 1978 with respect to B Corporation 150.00
Dividends paid by B Corporation:
Dividends to which section 902(b) does not apply (from B Corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N Corporation's gross income with respect to B Corporation) $150.00
Dividends to which section 902(b)(1) applies (from B Corporation's other earnings and profits) 25.00
Total dividends paid to A Corporation 175.00
Foreign income taxes paid by B Corporation on or with respect to its accumulated profits 50.50
Foreign income taxes of B Corporation deemed paid by A Corporation for 1978 under section 902(b)(1) ($25/$200×$50) 6.25
A Corporation (first-tier corporation):
Pretax earnings and profits 175.00
Foreign income tax (10 percent) 17.50
Earnings and profits 157.50
Earnings and profits after exclusion of amounts attributable to dividends to which section 902(b) does not apply ($157.50 less [$150− ($150×0.10)]) 22.50
Amount required to be included in N Corporation's gross income for 1978 under section 951 with respect to A Corporation 22.50
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Dividends paid to N Corporation 0
N Corporation (domestic corporation):
Foreign income taxes deemed paid by N Corporation under section 960(a)(1)(C) with respect to A Corporation:
Tax actually paid by A Corporation ($22.50/$157.50×$17.50) 2.50
Tax of B Corporation deemed paid by A Corporation under section 902(b)(1) ($22.50/$22.50×$6.25) 6.25
8.75
Foreign income taxes deemed paid by N Corporation under section 960(a)(1)(C) with respect to B Corporation ($150/$200×$50) 37.50
Total taxes deemed paid under section 960(a)(1)(C) 46.20

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Example 5. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $22.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $175, consisting of $150 from its earnings and profits attributable to amounts required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $25 from its other earnings and profits. For 1978, A Corporation distributes $225, consisting of $135 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross, income with respect to B Corporation, $22.50 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to A Corporation, and $67.50 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a)(1) are determined as follows upon the basis of the facts assumed:
B Corporation (second-tier corporation):
Pretax earnings and profits $250.00
Foreign income taxes (20%) 50.00
Earnings and profits 200.00
Amounts required to be included in N Corporation's gross income for 1978 under section 951 with respect to B Corporation 150.00
Dividends paid by B Corporation:
Dividends to which section 902(b) does not apply (from B Corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N Corporation's gross income with respect to B Corporation) $150.00
Dividends to which section 902(b) applies (from B Corporation's other earnings and profits) $25.00
Total dividends paid to A Corporation $175.00
Foreign income taxes paid by B Corporation on or with respect to its accumulated profits 50.00
Foreign income taxes of B Corporation deemed paid by A Corporation for 1978 under section 902(b)(1) ($25/$200×$50) 6.25
A Corporation (first-tier corporation):
Pretax earnings and profits:
Dividends received from B Corporation 175.00
Other income 100.00
Total pretax earnings and profits 275.00
Foreign income taxes (10 percent) 27.50
Earnings and profits 247.50
Earnings and profits after exclusion of amounts attributable to dividends to which section 902(b) does not apply ($247.50 less [$150 −($150×0.10)]) 112.50
Amount required to be included in N Corporation's gross income for 1978 under section 951 with respect to A Corporation 22.50
Distributions paid by A Corporation:
Dividends to which section 902(a) does not apply (From A Corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N Corporation's gross income with respect to A Corporation) 22.50
Dividends to which section 902(a) applies (from A Corporation's other earnings and profits) 202.50
Total dividends paid to N Corporation 225.00
N Corporation (domestic corporation):
Foreign income taxes deemed paid by N Corporation under section 960(a)(1) with respect to—
B Corporation ($150/$200×$50) 37.50
A Corporation:
Tax paid by A Corporation ($22.50/ $247.50×$27.50) 2.50
Tax of B Corporation deemed paid by A Corporation under section 902(b)(1) ($22.50/$112.50×$6.25) 1.25 3.75
Total taxes deemed paid under section 960(a)(1) 41.25
Foreign income taxes deemed paid by N Corporation under section 902(a)(1) with respect to A Corporation:
Tax paid by A Corporation ($200.50/$247.50×$27.50) 22.50
Tax of B Corporation deemed paid by A Corporation ($67.50/ $112.50×$6.25) 3.75
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Total taxes deemed paid under section 902(a)(1) 26.52
Total foreign income taxes deemed paid by N Corporation under section 901 67.05

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Example 6. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. A and B corporations are organized under the laws of foreign country X. All of B corporation's assets used in a trade or business are located in country X. Country X imposes an income tax of 20 percent on B corporation's income. For 1978, N Corporation is required under section 951 to include in gross income $100 attributable to the earnings and profits of B Corporation for such year. For 1978, B Corporation distributes $150, consisting of $100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $50 from its other earnings and profits. Country X imposes an income tax of 10 percent on A Corporation's income but exempts from tax dividends received from B Corporation. N is not required to include any amount in gross income under section 951 for 1978 attributable to the earnings and profits of A Corporation for such year. For 1978, A Corporation distributes $175, consisting of $100 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation, and $75 from its other earnings and profits. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed:
B Corporation (2d-tier corporation):
Pretax earnings and profits $200.00
Foreign income taxes (20%) 40.00
Earnings and profits 160.00
Amount required to be included in N Corporation's gross income for 1978 under section 951 with respect to B Corporation 100.00
Dividends paid by B Corporation:
Dividends to which section 902(b) does not apply (from B corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N corporation's gross income with respect to B corporation) $100.00
Dividends to which section 902(b)(1) applies (from B corporation's other earnings and profits) 50.00
Total dividends paid to A corporation 150.00
Foreign income taxes of B corporation deemed paid by A corporation for 1978 under section 902(b)(1) ($50/$100× $40) 12.50
A corporation (1st-tier corporation):
Pretax earnings and profits:
Dividends received from B corporation 150.00
Other income 100.00
Total pretax earnings and profits 250.00
Foreign income taxes:
On dividends received from B corporation None
On other income ($100×0.10) 10.00
Total foreign income taxes 10.00
Earnings and profits:
Attributable to dividends received from B corporation to which section 902(b) does not apply 100.00
Attributable to other income:
Attributable to dividends received from B Corporation to which section 902(b)(1) applies 50.00
Attributable to other income ($100−$10) 90.00
Subtotal 140.00
Total earnings and profits 240.00
Earnings and profits after exclusion of amounts attributable to dividends to which section 902(b) does not apply ($240−$100) 140.00
Amount required to be included in N corporation's gross income for 1978 under section 951 with respect to A corporation None
Dividends paid by A corporation:
Dividends to which section 902(a) does not apply (from A corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N corporation's gross income with respect to A corporation) None
Dividends to which section 902(a) applies (from A corporation's other earnings and profits) $175.00
Total dividends paid to N corporation $175.00
N corporation (domestic corporation):
Foreign income taxes deemed paid by N corporation under section 960(a)(1) with respect to B corporation ($100/$160×$40) 25.00
Foreign income taxes deemed paid by N corporation under section 902(a) with respect to A corporation (allocation of earnings and profits being made under pars. (c)(2) and (d) of this section):
Tax paid by A corporation in respect to dividends received from B Corporation to which section 902(b) does not apply ($100/ $100×$0) None
Tax paid by A corporation in respect to its other income ($75/ $140×$10) 5.36
Tax paid by B corporation deemed paid by A corporation in respect to such other income ($75/$140×$12.50) 6.70
Total taxes deemed paid under section 902(a) 12.06
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Total foreign income taxes deemed paid by N corporation under section 901 37.06

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Example 7. Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which owns all the one class of stock of controlled foreign corporation B. All such corporations use the calendar year as the taxable year. For 1978, N Corporation is required under section 951 to include in gross income $150 attributable to the earnings and profits of B Corporation for such year and $47.50 attributable to the earnings and profits of A Corporation for such year. For 1978, B Corporation distributes $200, consisting of $150 from its earnings and profits attributable to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation and $50 from its other earnings and profits. The country under the laws of which A Corporation is incorporated imposes an income tax of 5 percent on dividends received from a subsidiary corporation and 20 percent on other income. For 1978, A Corporation distributes $100 from its earnings and profits to N Corporation, such amount being attributable under paragraph (e) of § 1.959-3 to the amount required under section 951 to be included in N Corporation's gross income with respect to B Corporation. The foreign income taxes deemed paid by N Corporation for 1978 under section 960(a)(1) and section 902(a) are determined as follows on the basis of the facts assumed: <




B Corporation (2d-tier corporation):
Pretax earnings and profits $250.00
Foreign income taxes (20 percent) 150.00
Earnings and profits 200.00
Amount required to be included in N Corporation's gross income for 1978 under section 951 with respect to B corporation 150.00
Dividends paid by B corporation:
Dividends to which section 902(b) does not apply (from B corporation's earnings and profits in respect of which an amount is required under section 951 to be included in N corporation's gross income with respect to B corporation) $150.00
Dividends to which section 902(b)(1) applies (from B corporation's other earnings and profits) 50.00
Total dividends paid to A corporation 200.00
Foreign income taxes of B corporation deemed paid by A corporation for 1978 under section 902(b)(1) ($50/$200×$50) 12.50
A corporation (1st-tier corporation):
Pretax earnings and profits:
Dividends received from B corporation 200.00
Other income 100.00
Total pretax earnings and profits 300.00
Foreign income taxes:
On dividends received from B corporation to which section 902(b) does not apply ($150× 0.05) 7.50
On other income:
Dividends received from B corporation to which section 902(b)(1) applies ($50× 0.05)