§ 954. Foreign base company income
(a)
Foreign base company income
For purposes of section
952
(a)(2), the term “foreign base company income” means for any taxable year the sum of—
(1)
the foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)),
(2)
the foreign base company sales income for the taxable year (determined under subsection (d) and reduced as provided in subsection (b)(5)),
(b)
Exclusion and special rules
(3)
De minimis, etc., rules
For purposes of subsection (a) and section
953—
(A)
De minimis rule
If the sum of foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year is less than the lesser of—
no part of the gross income for the taxable year shall be treated as foreign base company income or insurance income.
(B)
Foreign base company income and insurance income in excess of 70 percent of gross income
If the sum of the foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year exceeds 70 percent of gross income, the entire gross income for the taxable year shall, subject to the provisions of paragraphs (4) and (5), be treated as foreign base company income or insurance income (whichever is appropriate).
(C)
Gross insurance income
For purposes of subparagraphs (A) and (B), the term “gross insurance income” means any item of gross income taken into account in determining insurance income under section
953.
(4)
Exception for certain income subject to high foreign taxes
For purposes of subsection (a) and section
953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section
11. The preceding sentence shall not apply to foreign base company oil-related income described in subsection (a)(5).
(5)
Deductions to be taken into account
For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, the foreign base company services income,,[1] and the foreign base company oil related income shall be reduced, under regulations prescribed by the Secretary so as to take into account deductions (including taxes) properly allocable to such income. Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons.
(6)
Foreign base company oil related income not treated as another kind of base company income
Income of a corporation which is foreign base company oil related income shall not be considered foreign base company income of such corporation under paragraph (2),[2] or (3) of subsection (a).
(c)
Foreign personal holding company income
(1)
In general
For purposes of subsection (a)(1), the term “foreign personal holding company income” means the portion of the gross income which consists of:
(B)
Certain property transactions
The excess of gains over losses from the sale or exchange of property—
(C)
Commodities transactions
The excess of gains over losses from transactions (including futures, forward, and similar transactions) in any commodities. This subparagraph shall not apply to gains or losses which—
(E)
Income equivalent to interest
Any income equivalent to interest, including income from commitment fees (or similar amounts) for loans actually made.
(F)
Income from notional principal contracts
(ii)
Coordination with other categories of foreign personal holding company income
Any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall not be taken into account for purposes of this subparagraph but shall be taken into account under such other subparagraph.
(G)
Payments in lieu of dividends
Payments in lieu of dividends which are made pursuant to an agreement to which section
1058 applies.
(H)
Personal service contracts
This subparagraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.
(2)
Exception for certain amounts
(A)
Rents and royalties derived in active business
Foreign personal holding company income shall not include rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)). For purposes of the preceding sentence, rents derived from leasing an aircraft or vessel in foreign commerce shall not fail to be treated as derived in the active conduct of a trade or business if, as determined under regulations prescribed by the Secretary, the active leasing expenses are not less than 10 percent of the profit on the lease.
(C)
Exception for dealers
Except as provided by regulations, in the case of a regular dealer in property which is property described in paragraph (1)(B), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding company income—
(i)
any item of income, gain, deduction, or loss (other than any item described in subparagraph (A), (E), or (G) of paragraph (1)) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer’s trade or business as such a dealer, and
(ii)
if such dealer is a dealer in securities (within the meaning of section
475), any interest or dividend or equivalent amount described in subparagraph (E) or (G) of paragraph (1) from any transaction (including any hedging transaction or transaction described in section
956
(c)(2)(I)) entered into in the ordinary course of such dealer’s trade or business as such a dealer in securities, but only if the income from the transaction is attributable to activities of the dealer in the country under the laws of which the dealer is created or organized (or in the case of a qualified business unit described in section
989
(a), is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity).
(3)
Certain income received from related persons
(A)
In general
Except as provided in subparagraph (B), the term “foreign personal holding company income” does not include—
(i)
dividends and interest received from a related person which
(I)
is a corporation created or organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is created or organized, and
(II)
has a substantial part of its assets used in its trade or business located in such same foreign country, and
(ii)
rents and royalties received from a corporation which is a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized.
To the extent provided in regulations, payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership.
(B)
Exception not to apply to items which reduce subpart F income
Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty reduces the payor’s subpart F income or creates (or increases) a deficit which under section
952
(c) may reduce the subpart F income of the payor or another controlled foreign corporation.
(C)
Exception for certain dividends
Subparagraph (A)(i) shall not apply to any dividend with respect to any stock which is attributable to earnings and profits of the distributing corporation accumulated during any period during which the person receiving such dividend did not hold such stock either directly, or indirectly through a chain of one or more subsidiaries each of which meets the requirements of subparagraph (A)(i).
(4)
Look-thru rule for certain partnership sales
(A)
In general
In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of the assets of the partnership attributable to such interest. The Secretary shall prescribe such regulations as may be appropriate to prevent abuse of the purposes of this paragraph, including regulations providing for coordination of this paragraph with the provisions of subchapter K.
(B)
25-percent owner
For purposes of this paragraph, the term “25-percent owner” means a controlled foreign corporation which owns directly 25 percent or more of the capital or profits interest in a partnership. For purposes of the preceding sentence, if a controlled foreign corporation is a shareholder or partner of a corporation or partnership, the controlled foreign corporation shall be treated as owning directly its proportionate share of any such capital or profits interest held directly or indirectly by such corporation or partnership. If a controlled foreign corporation is treated as owning a capital or profits interest in a partnership under constructive ownership rules similar to the rules of section
958
(b), the controlled foreign corporation shall be treated as owning such interest directly for purposes of this subparagraph.
(5)
Definition and special rules relating to commodity transactions
(A)
Commodity hedging transactions
For purposes of paragraph (1)(C)(i), the term “commodity hedging transaction” means any transaction with respect to a commodity if such transaction—
(B)
Treatment of dealer activities under paragraph (1)(C)
Commodities with respect to which gains and losses are not taken into account under paragraph (2)(C) in computing a controlled foreign corporation’s foreign personal holding company income shall not be taken into account in applying the substantially all test under paragraph (1)(C)(ii) to such corporation.
(6)
Look-thru rule for related controlled foreign corporations
(A)
In general
For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section
904
(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. For purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to interest for purposes of paragraph (1)(E). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including such regulations as may be necessary or appropriate to prevent the abuse of the purposes of this paragraph.
(d)
Foreign base company sales income
(1)
In general
For purposes of subsection (a)(2), the term “foreign base company sales income” means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where—
(A)
the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and
(B)
the property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country.
For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.
(2)
Certain branch income
For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation.
(3)
Related person defined
For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—
(A)
such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or
(B)
such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.
For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section
958 shall apply.
(4)
Special rule for certain timber products
For purposes of subsection (a)(2), the term “foreign base company sales income” includes any income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with—
Subpart G shall not apply to any amount treated as subpart F income by reason of this paragraph.
(e)
Foreign base company services income
(1)
In general
For purposes of subsection (a)(3), the term “foreign base company services income” means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which—
(2)
Exception
Paragraph (1) shall not apply to income derived in connection with the performance of services which are directly related to—
(g)
Foreign base company oil related income
For purposes of this section—
(1)
In general
Except as otherwise provided in this subsection, the term “foreign base company oil related income” means foreign oil related income (within the meaning of paragraphs (2) and (3) of section
907
(c)) other than income derived from a source within a foreign country in connection with—
(B)
oil, gas, or a primary product of oil or gas which is sold by the foreign corporation or a related person for use or consumption within such country or is loaded in such country on a vessel or aircraft as fuel for such vessel or aircraft.
Such term shall not include any foreign personal holding company income (as defined in subsection (c)).
(2)
Paragraph (1) applies only where corporation has produced 1,000 barrels per day or more
(A)
In general
The term “foreign base company oil related income” shall not include any income of a foreign corporation if such corporation is not a large oil producer for the taxable year.
(B)
Large oil producer
For purposes of subparagraph (A), the term “large oil producer” means any corporation if, for the taxable year or for the preceding taxable year, the average daily production of foreign crude oil and natural gas of the related group which includes such corporation equaled or exceeded 1,000 barrels.
(C)
Related group
The term “related group” means a group consisting of the foreign corporation and any other person who is a related person with respect to such corporation.
(D)
Average daily production of foreign crude oil and natural gas
For purposes of this paragraph, the average daily production of foreign crude oil or natural gas of any related group for any taxable year (and the conversion of cubic feet of natural gas into barrels) shall be determined under rules similar to the rules of section
613A except that only crude oil or natural gas from a well located outside the United States shall be taken into account.
(h)
Special rule for income derived in the active conduct of banking, financing, or similar businesses
(1)
In general
For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified banking or financing income of an eligible controlled foreign corporation.
(2)
Eligible controlled foreign corporation
For purposes of this subsection—
(A)
In general
The term “eligible controlled foreign corporation” means a controlled foreign corporation which—
(B)
Predominantly engaged
A controlled foreign corporation shall be treated as predominantly engaged in the active conduct of a banking, financing, or similar business if—
(i)
more than 70 percent of the gross income of the controlled foreign corporation is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons,
(ii)
it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the United States (or is any other corporation not so licensed which is specified by the Secretary in regulations), or
(iii)
it is engaged in the active conduct of a securities business and is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934 or is registered as a Government securities broker or dealer under section 15C(a) of such Act (or is any other corporation not so registered which is specified by the Secretary in regulations).
(3)
Qualified banking or financing income
For purposes of this subsection—
(A)
In general
The term “qualified banking or financing income” means income of an eligible controlled foreign corporation which—
(B)
Limitation on nonbanking and nonsecurities businesses
No income of an eligible controlled foreign corporation not described in clause (ii) or (iii) of paragraph (2)(B) (or of a qualified business unit of such corporation) shall be treated as qualified banking or financing income unless more than 30 percent of such corporation’s or unit’s gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons and which are located within such corporation’s or unit’s home country.
(C)
Substantial activity requirement for cross border income
The term “qualified banking or financing income” shall not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible controlled foreign corporation or a qualified business unit of such corporation unless such corporation or unit conducts substantial activity with respect to a banking, financing, or similar business in its home country.
(D)
Determinations made separately
For purposes of this paragraph, the qualified banking or financing income of an eligible controlled foreign corporation and each qualified business unit of such corporation shall be determined separately for such corporation and each such unit by taking into account—
(E)
Direct conduct of activities
For purposes of subparagraph (A)(ii)(II), an activity shall be treated as conducted directly by an eligible controlled foreign corporation or qualified business unit in its home country if the activity is performed by employees of a related person and—
(4)
Lending or finance business
For purposes of this subsection, the term “lending or finance business” means the business of—
(C)
engaging in leasing (including entering into leases and purchasing, servicing, and disposing of leases and leased assets),
(5)
Other definitions
For purposes of this subsection—
(A)
Customer
The term “customer” means, with respect to any controlled foreign corporation or qualified business unit, any person which has a customer relationship with such corporation or unit and which is acting in its capacity as such.
(B)
Home country
Except as provided in regulations—
(C)
Located
The determination of where a customer is located shall be made under rules prescribed by the Secretary.
(6)
Coordination with exception for dealers
Paragraph (1) shall not apply to income described in subsection (c)(2)(C)(ii) of a dealer in securities (within the meaning of section
475) which is an eligible controlled foreign corporation described in paragraph (2)(B)(iii).
(7)
Anti-abuse rules
For purposes of applying this subsection and subsection (c)(2)(C)(ii)—
(A)
there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions one of the principal purposes of which is qualifying income or gain for the exclusion under this section, including any transaction or series of transactions a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of such exclusion through the application of this subsection,
(B)
there shall be disregarded any item of income, gain, loss, or deduction of an entity which is not engaged in regular and continuous transactions with customers which are not related persons,
(C)
there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions utilizing, or doing business with—
(ii)
a special purpose entity or arrangement, including a securitization, financing, or similar entity or arrangement,
if one of the principal purposes of such transaction or series of transactions is qualifying income or gain for the exclusion under this subsection, and
(D)
a related person, an officer, a director, or an employee with respect to any controlled foreign corporation (or qualified business unit) which would otherwise be treated as a customer of such corporation or unit with respect to any transaction shall not be so treated if a principal purpose of such transaction is to satisfy any requirement of this subsection.
(8)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2).
(9)
Application
This subsection, subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2) shall apply only to taxable years of a foreign corporation beginning after December 31, 1998, and before January 1, 2012, and to taxable years of United States shareholders with or within which any such taxable year of such foreign corporation ends.
(i)
Special rule for income derived in the active conduct of insurance business
(1)
In general
For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified insurance income of a qualifying insurance company.
(2)
Qualified insurance income
The term “qualified insurance income” means income of a qualifying insurance company which is—
(A)
received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company or a qualifying insurance company branch of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as both are determined in the manner prescribed under paragraph (4)), or
(B)
received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company or a qualifying insurance company branch of an amount of its assets allocable to exempt contracts equal to—
(3)
Principles for determining insurance income
Except as provided by the Secretary, for purposes of subparagraphs (A) and (B) of paragraph (2)—
(A)
in the case of any contract which is a separate account-type contract (including any variable contract not meeting the requirements of section
817), income credited under such contract shall be allocable only to such contract, and
(4)
Methods for determining unearned premiums and reserves
For purposes of paragraph (2)(A)—
(A)
Property and casualty contracts
The unearned premiums and reserves of a qualifying insurance company or a qualifying insurance company branch with respect to property, casualty, or health insurance contracts shall be determined using the same methods and interest rates which would be used if such company or branch were subject to tax under subchapter L, except that—
(B)
Life insurance and annuity contracts
(i)
In general
Except as provided in clause (ii), the amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of—
(ii)
Ruling request, etc.
The amount of the reserve under clause (i) shall be the foreign statement reserve for the contract (less any catastrophe, deficiency, equalization, or similar reserves), if, pursuant to a ruling request submitted by the taxpayer or as provided in published guidance, the Secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income.