4.954-0—Introduction.
(a) Effective date.
(1)
The provisions of §§ 4.954-1 and 4.954-2 apply to taxable years of a controlled foreign corporation beginning after December 31, 1986. Consequently, any gain or loss (including foreign currency gain or loss as defined in section 988(b)) recognized during such taxable years of a controlled foreign corporation is subject to these provisions. For further guidance, see § 1.954-0(a) of this chapter.
(2)
The provisions of §§ 1.954A-1 and 1.954A-2 apply to taxable years of a controlled foreign corporation beginning before January 1, 1987. All references therein to sections of the Code are to the Internal Revenue Code of 1954 prior to the amendments made by the Tax Reform Act of 1986.
(I) § 4.954-0 Introduction.
(a) Effective dates.
(b) Outline.
(II) § 4.954-1 Foreign base company income.
(a) In general.
(1) Purpose and scope.
(2) Definition of gross foreign base company income.
(3) Definition of adjusted gross foreign base company income.
(4) Definition of net foreign base company income.
(5) Definition of adjusted net foreign base company income.
(6) Insurance income definitions.
(7) Additional items of adjusted net foreign base company income or adjusted net insurance income by reason of section 952(c).
(8) Illustration.
(b) Computation of adjusted gross foreign base company income and adjusted gross insurance income.
(1) De minimus rule and full inclusion rule.
(i) In general.
(ii) Five percent de minimus test.
(iii) Seventy percent full inclusion test.
(2) Character of items of adjusted gross foreign base company income.
(3) Coordination with section 952(c).
(4) Anti-abuse rule.
(i) In general.
(ii) Presumption.
(iii) Definition of related person.
(iv) Illustration.
(5) Illustration.
(c) Computation of net foreign base company income.
(d) Computation of adjusted net foreign base company income or adjusted net insurance income.
(1) Application of high tax exception.
(2) Effective rate at which taxes are imposed.
(3) Taxes paid or accrued with respect to an item of income.
(i) Income other than foreign personal holding company income.
(ii) Foreign personal holding company income.
(4) Definition of an item of income.
(i) Income other than foreign personal holding company income.
(ii) Foreign personal holding company income.
(A) In general.
(B) Consistency rule.
(5) Procedure.
(6) Illustrations.
(e) Character of an item of income.
(1) Substance of the transaction.
(2) Separable character.
(3) Predominant character.
(4) Coordination of categories of gross foreign base company income or gross insurance income.
(III) § 4.954-2 Foreign Personal Holding Company Income.
(a) Computation of foreign personal holding company income.
(1) In general.
(2) Coordination of overlapping definitions.
(3) Changes in use or purpose with which property is held.
(i) In general.
(ii) Illustrations.
(4) Definitions.
(i) Interest.
(ii) Inventory and similar property.
(iii) Regular dealer.
(iv) Dealer property.
(v) Debt instrument.
(b) Dividends, etc.
(1) In general.
(2) Exclusion of certain export financing.
(i) In general.
(ii) Conduct of a banking business.
(iii) Illustration.
(3) Exclusion of dividends and interest from related persons.
(i) Excluded dividends and interest.
(ii) Interest paid out of adjusted foreign base company income or insurance income.
(iii) Dividends paid out of prior years' earnings.
(iv) Fifty percent substantial assets test.
(v) Value of assets.
(vi) Location of tangible property used in a trade or business.
(A) In general.
(B) Exception.
(vii) Location of intangible property used in a trade or business.
(A) In general.
(B) Property located in part in the payor's country of incorporation and in part in other countries.
(viii) Location of property held for sale to customers.
(A) In general.
(B) Inventory located in part in the payor's country of incorporation and in part in other countries.
(ix) Location of debt instruments.
(x) Treatment of certain stock interests.
(xi) Determination of period during which property is used in a trade or business.
(xii) Treatment of banks and insurance companies [Reserved]
(4) Exclusion of rents and royalties derived from related persons.
(i) In general.
(ii) Rents or royalties paid out of adjusted foreign base company income or insurance income.
(5) Exclusion of rents and royalties derived in the active conduct of a trade or business.
(6) Treatment of tax exempt interest.
(c) Excluded rents.
(1) Trade or business cases.
(2) Special rules.
(i) Adding substantial value.
(ii) Substantiality of foreign organization.
(iii) Definition of active leasing expense.
(iv) Adjusted leasing profits.
(3) Illustrations.
(d) Excluded royalties.
(1) Trade or business cases.
(2) Special rules.
(i) Adding substantial value.
(ii) Substantiality of foreign organization.
(iii) Definition of active licensing expense.
(iv) Definition of adjusted licensing profit.
(3) Illustrations.
(e) Certain property transactions.
(1) In general.
(i) Inclusion of FPHC income.
(ii) Dual character property.
(2) Property that gives rise to certain income.
(i) In general.
(ii) Exception.
(3) Property that does not give rise to income.
(4) Classification of gain or loss from the disposition of a debt instrument or on a deferred payment sale.
(i) Gain.
(ii) Loss.
(5) Classification of options and other rights to acquire or transfer property.
(6) Classification of certain interests in pass-through entities.
[Reserved]
(f) Commodities transactions.
(1) In general.
(2) Definitions.
(i) Commodity.
(ii) Commodities transaction.
(3) Definition of the term “qualified active sales”.
(i) In general.
(ii) Sale of commodities.
(iii) Active conduct of a commodities business.
(iv) Definition of the term “substantially all.”
(4) Definition of the term “qualified hedging transaction”.
(g) Foreign currency gain.
(1) In general.
(2) Exceptions.
(i) Qualified business units using the dollar approximate separate transactions method.
(ii) Tracing to exclude foreign currency gain or loss from qualified business and hedging transactions.
(iii) Election out of tracing.
(3) Definition of the term “qualified business transaction”.
(i) In general.
(ii) Specific section 988 transactions attributable to the sale of goods or services.
(A) Acquisition of debt instruments.
(B) Becoming the obligor under debt instruments.
(C) Accrual of any item of gross income.
(D) Accrual of any item of expense.
(E) Entering into forward contracts, futures contracts, options, and similar instruments.
(F) Disposition of nonfunctional currency.
(4) Definition of the term “qualified hedging transaction”.
(i) In general.
(ii) Change in purpose of hedging transaction.
(5) Election out of tracing.
(i) In general.
(ii) Exception.
(iii) Procedure.
(A) In general.
(B) Time and manner.
(C) Termination.
(h) Income equivalent to interest.
(1) In general.
(2) Illustrations.
(3) Income equivalent to interest from factoring.
(i) General rule.
(ii) Exceptions.
(iii) Factored receivable.
(iv) Illustrations.
(4) Determination of sales income.
(5) Receivables arising from performance of services.