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 > 1.963-4—Limitations on minimum distribution from a chain or group.

1.963-4—Limitations on minimum distribution from a chain or group.

(a) Minimum overall tax burden— (1) In general. Notwithstanding the fact that distributions of the type described in paragraph (a) of § 1.963-3 are made by a chain or group to the United States shareholder in an amount sufficient to constitute a minimum distribution for the taxable year of such shareholder to which the chain or group election relates, no exclusion shall be allowable under section 963 to such shareholder with respect to such chain or group for such year unless—
(i) Without applying the special rules set forth in paragraphs (b) and (c) of this section, the overall United States and foreign income tax (as defined in subparagraph (2)(ii) of this paragraph) for the taxable year with respect to the distribution which is made equals or exceeds 90 percent of an amount determined by multiplying the sum of the consolidated earnings and profits (as determined under paragraph (d)(3) of § 1.963-2) and the consolidated foreign income taxes (as determined under paragraph (e)(2) of § 1.963-2) of such chain or group for the taxable year with respect to such shareholder by a percentage which equals the sum of the normal tax rate and the surtax rate (determined without regard to the surtax exemption) prescribed by section 11 for the taxable year of the shareholder, or
(ii) With the application of the special rules set forth in paragraphs (b) and (c) of this section—
(a) Such shareholder receives a pro rata minimum distribution (as defined in subparagraph (2)(i) of this paragraph) from such chain or group for such taxable year, or
(b) To the extent necessary, the amount of the foreign income tax allowable as a credit for such year under section 901 with respect to the distribution which is made is reduced and credit for the reduction is deferred, as provided in paragraph (c)(3) of this section, so that the overall United States and foreign income tax for the taxable year with respect to such distribution equals or exceeds the lesser of—
(1) The overall United States and foreign income tax which would be paid or accrued for such year with respect to a pro rata minimum distribution received by such shareholder from such chain or group for such year, and
(2) Ninety percent of an amount determined by multiplying the sum of the consolidated earnings and profits (as determined under paragraph (b)(1) of this section) and the consolidated foreign income taxes (as determined under paragraph (b)(1) of this section) of such chain or group for the taxable year with respect to such shareholder by a percentage which equals the sum of the normal tax rate and the surtax rate (determined without regard to the surtax exemption) prescribed by section 11 for the taxable year of the shareholder.
(2) Definitions. For purposes of §§ 1.963-1 through 1.963.8—
(i) Pro rata minimum distribution. A pro rata minimum distribution from a chain or group for the taxable year is a distribution of earnings and profits to the United States shareholder, with respect to stock to which the chain or group election relates, which is the statutory percentage (applicable with respect to such chain or group as determined under paragraph (b) of § 1.963-2) of the United States shareholder's proportionate share of the taxable year's earnings and profits of each foreign corporation in such chain or group (determined in accordance with paragraph (d)(2) of § 1.963-2 but without making any deduction under paragraph (d)(1)(iii) of such section).
(ii) Overall United States and foreign income tax. The overall United States and foreign income tax for any taxable year of a chain or group with respect to a minimum distribution is the sum of—
(a) The consolidated foreign income taxes of the chain or group for such year with respect to the United States shareholder making the chain or group election,
(b) Any other foreign income tax paid or accrued by a foreign corporation in the chain or group by reason of the receipt of any distributions counting toward such minimum distribution from such chain or group for that year, and
(c) The foreign income tax, if any, and United States income tax paid or accrued by such shareholder upon amounts counting toward such minimum distribution from such chain or group for such year.

Code of Federal Regulations

Such overall United States and foreign income tax shall be determined with respect to such minimum distribution without taking into account any foreign income tax which is deemed paid for such year under section 904(d), relating to carryback and carryover of excess tax paid. For purposes of this subdivision, the consolidated foreign income taxes of the chain or group shall be determined under paragraph (e)(2) of § 1.963-2 , applied without regard to the second sentence of paragraph (d)(1) of that section.
(3) Taxes paid by foreign corporation on distributions received during its distribution period. For purposes of determining foreign income tax deemed paid by the United States shareholder for the taxable year under section 902, if a distribution received by a foreign corporation in a chain or group from another foreign corporation in such chain or group after the close of the recipient's taxable year but during its distribution period for such year is allocated to the earnings and profits of such recipient corporation for such year under paragraph (c)(2) of § 1.963-3, any foreign income tax paid or accrued by such recipient corporation on such distribution shall be treated as paid or accrued for such taxable year.
(4) Illustration. The application of this paragraph may be illustrated by the following example:

Code of Federal Regulations

Example. (a) Domestic corporation M directly owns all of the one class of stock of foreign corporation A, which in turn directly owns all of the one class of stock of foreign corporation B. Corporation M makes a chain election with respect to A Corporation and B Corporation. All such corporations use the calendar year as the taxable year. Assuming that A Corporation does not incur foreign tax on amounts distributed by B Corporation, the foreign income tax and earnings and profits of corporations A and B, the effective foreign tax rate, and the statutory percentage for 1966, are as follows:
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A B Consolidated
Pretax and predistribution earnings and profits $100 $100 $200
Foreign income tax 20 40 60
Earnings and profits 80 60 140
Effective foreign tax rate ($60/[$140 $60]) 30%
Statutory percentage under section 963(b) 69%
(b) Corporation M is entitled for 1966 to exclude its pro rata share of the subpart F income of corporations A and B for such year if it receives from the 1966 consolidated earnings and profits of the chain distributions totaling at least $96.60 (0.69×$140) and if— (1) The sum of the consolidated foreign income taxes ($60) of the chain for 1966 and of the United States income tax for 1966 (determined by taking into account the foreign tax credit under section 901 without regard to paragraph (c) of this section) imposed on such distributions equals at least $86.40 (0.90×0.48×$200); (2) Under the special rules of paragraphs (b) and (c) of this section, the distributions received consist of a distribution from each of corporations A and B which is 69 percent of the earnings and profits for 1966 of such corporation, that is, a distribution of $55.20 (0.69×$80) from A Corporation and of $41.40 (0.69×$60) from B Corporation; or (3) Under the special rules of paragraphs (b) and (c) of this section, the foreign tax credit is reduced and deferred to such an extent that the sum of the consolidated foreign income taxes ($60) of the chain for 1966 and of the United States income tax for 1966 (determined by taking into account the foreign tax credit under section 901 as modified by paragraph (c) of this section) imposed on such distributions equals the lesser of $86.40 (0.90×0.48×$200) and the amount which the sum of such taxes would be if M Corporation were to receive a distribution of $55.20 (0.69×$80) from the 1966 earnings and profits of A Corporation and $41.40 (0.69×$60) from the 1966 earnings and profits of B Corporation.
(b) Special rules for determining earnings and profits and foreign income taxes. For purposes of determining the minimum overall tax burden under paragraph (a)(1)(ii) of this section, §§ 1.963-2 and 1.963-3 shall apply as modified by the following subparagraphs:
(1) Exclusion of tax on intercorporate distributions. The consolidated earnings and profits and consolidated foreign income taxes of a chain or group for the taxable year shall be determined in accordance with § 1.963-2, except that foreign income tax referred to in paragraph (d)(1)(iii) of such section may be taken into account in determining the effective foreign tax rate only—
(i) To the extent that such tax is not deemed paid by the United States shareholder under section 902 (as modified by paragraph (c) of this section) for its taxable year to which the chain or group election relates, or
(ii) If, by taking the tax into account, the effective foreign tax rate with respect to such chain or group, as determined under paragraph (c)(2) of § 1.963-2, exceeds the highest effective foreign tax rate requiring a distribution under section 963(b) for such year of the shareholder.
(2) Allocation of deficits. For purposes of determining the amount of each foreign corporation's share of a pro rata minimum distribution from a chain or group for the taxable year and for purposes of determining the foreign tax credit under paragraph (c) of this section of the United States shareholder with respect to any minimum distribution from a chain or group for the taxable year—
(i) Deficits of foreign corporations. The total of the United States shareholder's proportionate shares, as determined under paragraph (d)(2)(ii) of § 1.963-2, of the deficit of every foreign corporation in the chain or group having a deficit for the taxable year shall be allocated against and shall reduce such shareholder's proportionate share, as determined under paragraph (d)(2)(i) of § 1.963-2, of the earnings and profits for the taxable year of each other foreign corporation in the chain or group having earnings and profits for such year in an amount which bears to such total of shares of deficit the same ratio which such share of earnings and profits bears to the total of such shareholder's proportionate shares, as so determined, of the earnings and profits of all foreign corporations in the chain or group having earnings and profits for the taxable year.
(ii) Deficits of foreign branches. If for the taxable year a group includes under paragraph (f)(4) of § 1.963-1 foreign branches the aggregate of whose allowable deductions (other than any net operating loss deduction) exceeds the aggregate of their gross incomes for the taxable year, determined as provided in paragraph (f)(4)(ii) of such section, the amount of such excess shall be allocated as provided by subdivision (i) of this subparagraph.
(3) Distributions through a chain or group. In determining whether and to what extent a distribution for any taxable year has been made out of the earnings and profits of a foreign corporation included in a chain of ownership described in section 958(a) consisting of two or more corporations in a chain or group for the taxable year, the following subdivisions shall apply:
(i) Allocation first to income received as a distribution. If any foreign corporation included in the chain or group for the taxable year receives a distribution for such year from another foreign corporation in the chain or group and in turn makes a distribution for the taxable year, the distribution so made shall first be allocated to the earnings and profits, to the extent thereof, attributable to the distribution so received; if distributions are received from more than one other corporation in the chain or group, the distribution made by the recipient corporation shall be apportioned among all such amounts. For purposes of determining whether a distribution is made or received for the taxable year, see paragraph (c) of § 1.963-3.
(ii) Successive distributions through a chain or group. If any foreign corporation included in the chain or group for the taxable year distributes an amount from its earnings and profits of such year, the amount so distributed shall be considered to be received from such earnings and profits by the United States shareholder to the extent the amount is distributed by successive distributions made by each other foreign corporation in the chain or group for the taxable year through the chain of ownership described in section 958(a) into the hands of such shareholder.
(iii) Distribution determined without reduction by taxes of intervening corporations. If, for the taxable year to which the election to secure an exclusion under section 963 applies, the United States shareholder receives a distribution to which subdivision (ii) of this subparagraph applies, the entire amount distributed by the foreign corporation from such shareholder's proportionate share of its earnings and profits for the taxable year shall, except where taxes referred to in paragraph (d)(1)(iii) of § 1.963-2 are taken into account as provided by subparagraph (1) of this paragraph, count toward a minimum distribution and shall not be reduced for such purpose by a foreign income tax paid or accrued on such amount by another foreign corporation in the chain or group through which such amount is distributed by successive distributions into the hands of such shareholder. The application of this subdivision may be illustrated by the following examples:

Code of Federal Regulations

Example 1. For 1966, domestic corporation M makes a chain election with respect to controlled foreign corporation A, all the one class of stock of which is directly owned by M Corporation, and controlled foreign corporation B, all the one class of stock of which is directly owned by A Corporation. All corporations use the calendar year as the taxable year. Corporation M complies with the special rules of this paragraph and paragraph (c) of this section for the taxable year. Corporation A's only income for 1966 is a dividend of $52.50 distributed in such year by B Corporation, on which A Corporation is subject to an income tax of $10.50. The remaining $42 ($52.50 less $10.50) is distributed by A Corporation for 1966 to M Corporation. The full $52.50 distributed by B Corporation counts toward a minimum distribution by the chain for 1966.

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Example 2. For 1966, domestic corporation M makes a chain election with respect to controlled foreign corporation A, all the one class of stock of which it owns directly, and controlled foreign corporation B, all the one class of stock of which A Corporation own directly. All corporations use the calendar year as the taxable year. Corporation M complies with the special rules of this paragraph and paragraph (c) of this section for the taxable year. The predistribution and pretax earnings and profits for 1966 of B Corporation are $100, and of A Corporation, $0. Corporation B pays foreign income tax of $30 and during the year distributes $70. On such $70, A Corporation pays foreign income tax of $14. By applying paragraph (d)(1)(iii) of § 1.963-2 , the consolidated foreign income taxes of the chain for 1966 are $44 ($30 $14) and the consolidated earnings and profits of the chain are $56 ($70−$14); in such case, the effective foreign tax rate of the chain for 1966 is 44 percent ($44/[$56 $44]) and thus in excess of the highest effective foreign tax rate requiring a distribution for such year under section 963(b). Since M Corporation may thus take A Corporation's tax of $14 into account, the statutory percentage under section 963(b) for 1966 is zero percent and the amount of the minimum distribution required to be made by the chain is $0.
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(c) Special foreign tax credit rules— (1) In general. In determining the minimum overall tax burden under paragraph (a)(1)(ii) of this section, the foreign tax credit of the United States shareholder with respect to a minimum distribution received for the taxable year from the chain or group shall be determined under the provisions of sections 901 through 905 as modified by § 1.963-3 except that—
(i) Under subparagraph (2) of this paragraph—
(a) Taxes of a second-tier corporation making a distribution through a first-tier corporation shall not be averaged with taxes of such first-tier corporation,
(b) Taxes of a first-tier corporation or a second-tier corporation on a distribution made through such corporation shall not be averaged with such corporation's taxes on its other income; and
(c) Taxes of a first-tier corporation or a second-tier corporation shall not be deemed paid with respect to distributions from the earnings and profits of such corporation which are offset by a deficit allocated under paragraph (b)(2) of this section to the United States shareholder's proportionate share of the earnings and profits of such corporation; and
(ii) The foreign tax credit may be reduced and the reduction deferred under subparagraph (3) of this paragraph to another taxable year of the United States shareholder.
(2) Nonaveraging of tax— (i) Year of minimum distribution—(a) Taxes deemed paid by a first-tier corporation and taxes actually paid by such corporation. If, by successive distributions through a chain or group, a United States shareholder receives for a taxable year a distribution of the earnings and profits for such year of any corporation in such chain or group, and if both section 902(a) and section 902(b) apply with respect to such distribution, all the taxes deemed paid under section 902(b) by the first-tier corporation described in section 902(a) with respect to such distribution of such earnings and profits shall be deemed paid by the United States shareholder for such taxable year under section 902(a) with respect to the earnings and profits so distributed and, notwithstanding the rules otherwise applicable under section 902, no part of the taxes so deemed paid by such first-tier corporation shall be attributed to other earnings and profits of such first-tier corporation for such year and no part of the taxes paid or accrued with respect to such other earnings and profits shall be attributed to the earnings and profits so received as a distribution.
(b) Taxes of a foreign corporation paid on intercorporate distributions and on other income. If, by successive distributions through a chain or group, a United States shareholder receives for a taxable year a distribution of the earnings and profits for such year of any corporation in such chain or group, then in applying section 902(a) with respect to such distribution through a first-tier corporation described in section 902(a), or in applying section 902(b) with respect to such distribution through a second-tier corporation described in section 902(b), as the case may be, the taxes of such corporation which shall be taken into account in determining taxes deemed paid under such section shall be the foreign income tax actually paid or accrued for the taxable year by such first-tier or second-tier corporation, as the case may be, with respect to such distribution; and, notwithstanding the rules otherwise applicable under section 902, no part of the taxes so paid by such first-tier or second-tier corporation shall be attributed to other earnings and profits of such corporation for such year and no part of the taxes paid or accrued with respect to such other earnings and profits shall be attributed to the earnings and profits so received as a distribution.
(c) Corporation with earnings and profits reduced by allocated deficits. In the application of section 902, a United States shareholder's proportionate share of the earnings and profits for the taxable year of a foreign corporation to which the chain or group election applies shall reflect the reduction of such earnings and profits by deficits allocated thereto under paragraph (b)(2) of this section. No taxes paid or accrued by such corporation shall be deemed paid under section 902 with respect to a distribution to such shareholder from the earnings and profits of such corporation for such year to the extent that such distribution exceeds the shareholder's proportionate share as so reduced.
(ii) Year of distribution of remaining earnings and profits. If for a taxable year in respect of which a United States shareholder receives a minimum distribution pursuant to an election under section 963 and in respect of which the provisions of this subparagraph are applied—
(a) The foreign income tax which is paid or accrued by a foreign corporation for such year, by reason of the receipt and payment of earnings and profits counting toward such minimum distribution, is deemed paid under subdivision (i) (a) or (b) of this subparagraph,
(b) The pretax and predistribution earnings and profits for such year of a foreign corporation in a chain or group with respect to stock on which such minimum distribution is received are reduced by reason of the deduction under paragraph (d)(1)(i) of § 1.963-2 of distributions received from other corporations in such chain or group, or
(c) Such shareholder's proportionate share of the earnings and profits for such year of a foreign corporation in a chain or group making a distribution counting toward such minimum distribution is reduced by the allocation thereto under paragraph (b)(2) of this section of a portion of the deficits of foreign branches or other foreign corporations in such chain or group,

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the pretax and predistribution earnings and profits of such foreign corporation for such year to which such minimum distribution is attributable and the foreign income tax which is taken into account in determining tax deemed paid under section 902 on such pretax and predistribution earnings and profits shall not be taken into account in the application of section 902 when other earnings and profits of such foreign corporation for such year are distributed in a subsequent taxable year of such foreign corporation to such shareholder. For the purpose of applying the preceding sentence to a case in which (c) of this subdivision applies, the pretax and predistribution earnings and profits of the foreign corporation for such year to which the minimum distributed is attributable shall be the amount of such corporation's earnings and profits which are distributed and count toward the minimum distribution plus the foreign income tax of such foreign corporation allocated thereto in determining the taxes deemed paid under section 902 for the taxable year of the minimum distribution.
(iii) Illustrations. The application of this subparagraph may be illustrated by the following examples:

Code of Federal Regulations

Example 1. Domestic corporation M makes a chain election for 1966 with respect to controlled foreign corporation A, which is wholly owned directly by M Corporation, and controlled foreign corporation B, which is wholly owned directly by A Corporation. Each corporation uses the calendar year as the taxable year. In 1966, corporations A and B are subject to foreign income tax at the rates of 20 percent and 30 percent, respectively, with no deduction being allowed for dividends received or paid; each such corporation has pretax and predistribution earnings and profits of $100. Corporation M receives from the chain a pro rata minimum distribution for such year and applies thereto the special rules of this paragraph and paragraph (b) of this section. Corporation A is not a less developed country corporation under section 902(d). The 1966 foreign income tax of corporations A and B which is deemed paid by M Corporation under section 902(a) for 1966, and the remaining tax which is allocated to earnings and profits to be distributed to M Corporation in future years, are determined as follows:
A B Total
Pretax and predistribution earnings and profits $100.00 $100.00 $200.00
Foreign income tax 20.00 30.00 50.00
Consolidated earnings and profits 80.00 70.00 150.00
Effective foreign tax rate ($50/[$150 $50]) 25%
Statutory percentage under section 963(b) 76%
Amount distributed as pro rata minimum distribution for 1966:
(0.76×$80) 60.80
(0.76×$70) 53.20 114.00
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Amount received by M Corporation as pro rata minimum distribution:
A Corporation's distribution $60.80
B Corporation's distribution ($53.20 − [0.20 × $53.20]), or ($53.20 − $10.64) $42.56 $103.36
Amount of tax counted toward minimum distribution 10.64
Tax deemed paid by M Corporation for 1966 for purposes of gross-up under section 78 and foreign tax credit:
($60.80/$80×$20) 15.20
([$42.56/$42.56×$10.64] [$53.20/$70×$30]) or ($10.64 $22.80) 33.44 48.64
Remaining 1966 earnings and profits for future distribution to M Corporation:
($80−$60.80) 19.20
($70−$53.20) 16.80 36.00
Foreign income tax attributable to 1966 earnings and profits remaining for future distribution to M Corporation:
($19.20/$80×$20) 4.80
($16.80/$70×$30) 7.20 12.00

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Example 2. The facts are the same as in example 1 except that A Corporation pays foreign income tax at the rate of 30 percent and B Corporation, at the rate of 20 percent; and A Corporation is allowed a deduction, in computing its income subject to tax, for the full amount of dividends received. The determination of tax deemed paid for 1966 is as follows:
A B Total
Pretax and predistribution earnings and profits $100.00 $100.00 $200.00
Foreign income tax 30.00 20.00 50.00
Consolidated earnings and profits 70.00 80.00 50.00
Effective foreign tax rate ($50/[$150 $50]) 25%
Statutory percentage under section 963(b) 76%
Amount distributed by foreign corporations as a pro rata minimum distribution for 1966 and amount received by M Corporation:
(0.76×$70) $53.20
(0.76×$80) $60.80 $114.00
Tax deemed paid by M Corporation for 1966 for purposes of gross-up under section 78 and foreign tax credit:
($53.20/$70×$30) 22.80
($60.80/$80×$20) 15.20 38.00
Remaining 1966 earnings and profits for future distribution to M Corporation:
($70−$53.20) 16.80
($80−$60.80) 19.20 36.00
Foreign income tax attributable to 1966 earnings and profits remaining for future distribution to M Corporation:
($16.80/$70×$30) 7.20
($19.20/$80×$20) 4.80 12.00

Code of Federal Regulations

Example 3. For 1966, domestic corporation M makes a group election with respect to controlled foreign corporations A and B, both of which are wholly owned directly by M Corporation, and foreign branch C of M Corporation. All such corporations use the calendar year as the taxable year. Corporation M receives a pro rata minimum distribution from the group for 1966 and applies thereto the special rules of this paragraph and paragraph (b) of this section. Neither foreign corporation is a less developed country corporation under section 902(d). Corporations A and B pay foreign income tax at a flat rate of 20 percent and 30 percent, respectively. The 1966 foreign income tax of corporations A and B which is deemed paid by M Corporation under section 902(a) for 1966, and the remaining tax which is allocated to earnings and profits to be distributed to M Corporation in future years, are determined as follows:
A B Branch C Total
Pretax and predistribution earnings and profits (and deficit) of the group $60.00 $60.00 ($20) $100.00
Foreign income tax 12.00 18.00 30.00
Earnings and profits (and deficit) 48.00 42.00 (20) 70.00
Allocation of deficit of Branch C:
($48/[$48 $42]×$20) (10.67)
($42/[$48 $42]×$20) (9.33)
Consolidated earnings and profits of the group 37.33 32.67 70.00
Effective foreign tax rate ($30/$100) 30%
Statutory percentage under section 963(b) 69%
Amount received by M Corporation as pro rata minimum distribution for 1966:
(0.69×$37.33) 25.76
(0.69×$32.67) 22.54 $48.30
Tax deemed paid by M Corporation for 1966 for purposes of gross-up under section 78 and foreign tax credit:
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($25.76/$37.33×$12) 8.28
($22.54/$32.67×$18) 12.42 20.70
Remaining 1966 earnings and profits for future distribution to M Corporation:
($48−$25.76) 22.24
($42−$22.54) 19.46 41.70
Foreign income tax attributable to 1966 earnings and profits remaining for future distribution to M Corporation:
($12−$8.28) 3.72
($18−$12.42) 5.58 9.30

Code of Federal Regulations

Example 4. The facts are the same as in example 3 except that the group does not make a pro rata minimum distribution but distributes $48.30, consisting of $40 distributed by A Corporation and $8.30 distributed by B Corporation. Corporation M complies with the special rules of this paragraph and paragraph (b) of this section. The 1966 foreign income tax of corporations A and B which is deemed paid by M Corporation under section 902(a) for 1966, and the remaining tax which is allocated to earnings and profits to be distributed to M Corporation in future years, are determined as follows, the minimum overall tax burden for 1966 being such as to satisfy the requirement of paragraph (a)(1)(ii)(b) of this section:
A B Branch C Total
Amount received by M Corporation $40.00 $8.30 $48.30
Tax deemed paid by M Corporation for 1966 for purposes of gross-up under section 78 and foreign tax credit:
($37.33/$37.33×$12) 12.00
($8.30/$32.67×$18) 4.57 16.57
Remaining 1966 earnings and profits for future distribution to M Corporation:
($48−$40) 8.00
($42−$8.30) 33.70 41.70
A B Branch C Total
Foreign income tax attributable to 1966 earnings and profits remaining for future distribution to M Corporation:
($12−$12) 0
($18−$4.57) 13.43 13.43
(3) Reduction and deferral of the foreign tax credit— (i) In general. To the extent specified in paragraph (a)(1)(ii)(b) of this section a reduction shall be made in the foreign tax credit allowable under section 901 for the taxable year with respect to distributions counting toward a minimum distribution for such year from the chain or group; and such reduction in credit shall be allocated, as provided in subdivision (ii) of this subparagraph, to foreign corporations in such chain or group and deferred, as provided in subdivision (iii) of this subparagraph, to subsequent taxable years of the United States shareholder.
(ii) Allocation of reduction in foreign tax credit. The amount of any reduction in foreign tax credit for the taxable year which is made under subdivision (i) of this subparagraph with respect to a minimum distribution for any taxable year from the chain or group shall be allocated among any first-tier and second-tier corporations described in section 902 (a) and (b), respectively, which are in such chain or group. The amount of any such reduction in foreign tax credit shall be allocated among such first-tier and second-tier corporations in the ratio which the United States shareholder's proportionate share of undistributed earnings and profits of each such corporation for the taxable year bears to the total of such shareholder's proportionate shares of the undistributed earnings and profits of all such corporations for such year. None of such reduction shall be allocated to any other corporations in the chain or group or to any foreign branches included under paragraph (f)(4) of § 1.963-1 in the group as wholly owned foreign subsidiary corporations.
(iii) Deferral of allocated credit— (a) Allowance of credit in subsequent years. The reduction in foreign tax credit allocated to a first-tier or second-tier corporation in the chain or group for a taxable year under subdivision (ii) of this subparagraph shall be deemed paid under the principles of section 902 (applicable to foreign corporations which are not less developed country corporations) with respect to distributions, to the extent made by such corporation to the United States shareholder referred to in subdivision (ii) of this subparagraph, in a subsequent taxable year from the undistributed earnings and profits of such corporation for such year of allocation. Thus, for example, in the case of a distribution in the subsequent year from such earnings and profits by a first-tier corporation, the tax deemed paid shall be an amount which bears to the total of such reduction in foreign tax credit the same ratio that the distribution to the shareholder in the subsequent year bears to such shareholder's proportionate share of such undistributed earnings and profits for the year of allocation.
(b) Limitations on use of deferred credit. The deferred tax so deemed paid shall be deemed paid for such subsequent taxable year and shall be allowed under section 901 (without regard to the limitations under section 904) as a credit against the income tax imposed for such year by chapter 1 of the Code, but the amount of such credit shall not exceed the excess of the tax so imposed for such year over the credit (determined without regard to this subdivision (iii) allowed under sections 901 through 905 for such year. Any amount by which the deferred tax so deemed paid in such subsequent taxable year exceeds the limitation under the preceding sentence shall not be carried back or carried over under section 904(d) to another taxable year of the United States shareholder. No credit shall be allowed under this subdivision for the subsequent taxable year to the extent that the credit would reduce the tax of the United States shareholder under chapter 1 of the Code on any minimum distribution for such year to which section 963 applies.
(c) Gross-up not applicable. Any amount allowed as a credit for a subsequent taxable year under this subdivision shall not be included in the gross income of the United States shareholder for such year under section 78.
(d) Illustrations. The application of this section may be illustrated by the following examples, in which the surtax exemption provided by section 11(c) is disregarded:

Code of Federal Regulations

Example 1. (a) For 1966, domestic corporation M makes a chain election with respect to controlled foreign corporation A, which it wholly owns directly, and controlled foreign