Cases: Sayre & Co. v. Riddell, 395 F.2d 407 (9th Cir. 1968); Teong-Chan Gaw v. Commissioner, T.C. Memo. 1995-531
Final rules 9
(a) Imposition of tax Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—
Amended 1966, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 127(b)(2), substituted “Except as provided in subsection (c), there” for “There” in introductory provision.
- 1966 Pub. L. 89-809 Pub. L. 89–809 substantially revised the income tax treatment of foreign corporations, substituted the concept of amounts received from sources within the United States by foreign corporations but not effectively connected with the conduct of a trade or business within the United States for the concept of amounts received from sources within the United States by foreign corporations not engaged in trade or business within the United States as the amount upon which the existing 30 percent levy should be imposed, and added contingent income received from the sale of patents and other intangibles and amounts of original issue discount which are treated as ordinary income received on retirement or sale or exchange of bonds or other evidences of indebtedness issued after Sept. 28, 1965, to the specified types of fixed or determinable income.
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(1) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
Amended 1971, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 42(a)(10), substituted “section 1273” for “section 1232(b)”.
- 1971 Pub. L. 92-178 Pub. L. 92–178, § 313(a), inserted “(other than original issue discount as defined in section 1232(b))” after “interest”.
Cases: Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656 (1994)
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(2) gains described in section 631(b) or (c),
(3) in the case of—
Amended 1971, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 128(b)(1), amended par. (3) generally, substituting in subpar. (A), “a sale or exchange of an original issue discount obligation, the amount of any gain not in excess of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and” for “bonds or other evidences of indebtedness issued after September 28, 1965, and before April 1, 1972, amounts which under section 1232(a)(2)(B) are considered as ordinary income, and, in the case of corporate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact the obligations were issued after May 27, 1969,”, substituting in subpar. (B), “the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of interest thereon (except that such original issue discount shall be taken into account under this subparagraph only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by paragraph (1) thereon), and” for “bonds or other evidences of indebtedness issued after March 31, 1972, and payable more than 6 months from the date of original issue (without regard to the period held by the taxpayer), amounts which under section 1232(a)(2)(B) would be considered as ordinary income but for the fact such obligations were issued after May 27, 1969, and”, and striking out subpar. (C) which required that in the case of the payment of interest on an obligation described in subpar. (B), an amount equal to the original issue discount, but not in excess of such interest less the tax imposed by par. (1) thereon, accrued on such obligation since the last payment of interest thereon, be included for purpose of the 30 percent tax.
- 1971 Pub. L. 92-178 Pub. L. 92–178, § 313(c), designated existing provisions as subpar. (A), inserted “and before April 1, 1972,” after “September 28, 1965,”, substituted “section 1232(a)(2)(B)” for “section 1232”, and inserted “, in the case of corporate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact that the obligations were issued after May 27, 1969,”, and added subpars. (B) and (C).
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(A) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and
Amended 1976, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(e)(2)(B), amended subpar. (A) generally, striking out “any gain not in excess of” before “the original issue discount”.
- 1976 Pub. L. 94-455 Pub. L. 94–455 substituted “ordinary income” for “gain from the sale or exchange of property which is not a capital asset”.
(B) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and
Amended 1976, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(e)(2)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of interest thereon (except that such original issue discount shall be taken into account under this subparagraph only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by paragraph (1) thereon), and”.
- 1976 Pub. L. 94-455 Pub. L. 94–455 substituted “ordinary income” for “gain from the sale or exchange of property which is not a capital asset”.
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(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1211(b)(6), struck out “or from payments which are treated as being so contingent under section 871(e),” after “sold or exchanged,”.
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but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(b) Exception for certain possessions
Amended 1972, 1984, 1986, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 420(c)(1), substituted “possessions” for “Guam and Virgin Islands corporations” in heading.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1273(b)(2)(A), redesignated par. (3) as (2) and struck out par. (4) which provided a cross reference to sections 934 and 934A.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 130(a), amended subsec. (b) generally, substituting provision establishing an exception for certain Guam and Virgin Islands corporations for provision establishing an exception for Guam corporations.
- 1972 Pub. L. 92-606 Pub. L. 92–606 added subsec. (b) and redesignated former subsec. (b) as (c).
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(1) Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if—
Amended 1986, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 420(c)(2), substituted “Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands” for “In general” in heading.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1273(b)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “For purposes of this section, a corporation created or organized in Guam or the Virgin Islands or under the law of Guam or the Virgin Islands shall not be treated as a foreign corporation for any taxable year if—
“(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is owned (directly or indirectly) by foreign persons, and
“(B) at least 20 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to have been derived from sources within Guam or the Virgin Islands (as the case may be) for the 3-year period ending with the close of the preceding taxable year of such corporation (or for such part of such period as the corporation has been in existence).”
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(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,
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(B) at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and
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(C) no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.
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(2) Commonwealth of Puerto Rico
Amended 1986, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 420(a), added par. (2) and redesignated former par. (2) as (3).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1273(b)(1), (2)(A), redesignated par. (3) as (2) and struck out former par. (2) which provided that par. (1) of this subsection not apply with respect to income tax liability incurred to Guam.
(A) In general If dividends are received during a taxable year by a corporation—
(i) created or organized in, or under the law of, the Commonwealth of Puerto Rico, and
(ii) with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,
subsection (a) shall be applied for such taxable year by substituting “10 percent” for “30 percent”.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(22), substituted “paragraph” for “Paragraph”.
(B) Applicability If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico’s withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase.
(3) Definitions
Amended 1986, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 420(a), added par. (2) and redesignated former par. (2) as (3).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1273(b)(2)(A), redesignated par. (3) as (2) and struck out par. (4) which provided a cross reference to sections 934 and 934A.
(A) Foreign person For purposes of paragraph (1), the term “foreign person” means any person other than—
(i) a United States person, or
(ii) a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.
(B) Indirect ownership rules For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that “5 percent” shall be substituted for “50 percent” in subparagraph (C) thereof.
(c) Repeal of tax on interest of foreign corporations received from certain portfolio debt investments
Amended 1972, 1984, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(68), made clarifying amendment to directory language of Pub. L. 98–369, § 127(b)(1). See 1984 Amendment note below.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 127(b)(1), as amended by Pub. L. 99–514, § 1899A(68), added subsec. (c). Former subsec. (c) redesignated (d).
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 128(b)(2), amended subsec. (c) generally, substituting in heading “Cross reference” for “Doubling of tax” and inserting provision directing that for special rules for original issue discount, see section 871(g).
- 1972 Pub. L. 92-606 Pub. L. 92–606 added subsec. (b) and redesignated former subsec. (b) as (c).
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(1) In general In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a).
(2) Portfolio interest For purposes of this subsection, the term “portfolio interest” means any interest (including original issue discount) which—
(A) would be subject to tax under subsection (a) but for this subsection, and
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(B) is paid on an obligation—
(i) which is in registered form, and
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(ii) with respect to which—
Amended 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13237(c)(2), substituted “section 871(h)(5)” for “section 871(h)(4)”.
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(I) the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or
(II) the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
Amended 1986, 2010
- 2010 Pub. L. 111-147 Pub. L. 111–147 amended par. (2) generally. Prior to amendment, par. (2) defined portfolio interest to also include interest on certain obligations not in registered form.
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(d)(1)(B), (3)(C), inserted “which would be subject to tax under subsection (a) but for this subsection and” in introductory provisions and substituted “receives a statement” for “has received a statement” in subpar. (B)(ii).
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(3) Portfolio interest shall not include interest received by certain persons For purposes of this subsection, the term “portfolio interest” shall not include any portfolio interest which—
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(A) except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,
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(B) is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or
(C) is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(23), inserted a closing parenthesis following “section 864(d)(4)”.
(4) Portfolio interest not to include certain contingent interest For purposes of this subsection, the term “portfolio interest” shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).
Amended 1986, 1988, 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13237(a)(2), added par. (4) and redesignated former par. (4) as (5). Former par. (5) redesignated (6).
- 1988 Pub. L. 100-647 Pub. L. 100–647 added cls. (ii) and (iii) and struck out former cls. (ii) to (v), which read as follows:
- 1988 “(ii) Paragraph (4) of section 954(b) (relating to corporations not formed or availed of to avoid tax).
- 1988 “(iii) Subparagraph (B) of section 954(c)(3) (relating to certain income derived in active conduct of trade or business).
- 1988 “(iv) Subparagraph (C) of section 954(c)(3) (relating to certain income derived by an insurance company).
- 1988 “(v) Subparagraphs (A) and (B) of section 954(c)(4) (relating to exception for certain income received from related persons).”
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1223(b)(2), substituted “less than 5 percent or $1,000,000” for “less than 10 percent”.
(5) Special rules for controlled foreign corporations
Amended 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13237(a)(2), added par. (4) and redesignated former par. (4) as (5). Former par. (5) redesignated (6).
(A) In general In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:
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(i) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(ii) Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).
(iii) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(B) Controlled foreign corporation For purposes of this subsection, the term “controlled foreign corporation” has the meaning given to such term by section 957(a).
(6) Secretary may cease application of this subsection Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6).
Amended 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13237(a)(2), (c)(3), redesignated par. (5) as (6) and substituted “section 871(h)(6)” for “section 871(h)(5)” in two places. Former par. (6) redesignated (7).
(7) Registered form For purposes of this subsection, the term “registered form” has the meaning given such term by section 163(f).
Amended 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13237(a)(2), redesignated par. (6) as (7).
(d) Tax not to apply to certain interest and dividends No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).
Amended 1984, 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1214(c)(2), added subsec. (d) and redesignated former subsec. (d) as (e).
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 127(b)(1), as amended by Pub. L. 99–514, § 1899A(68), redesignated subsec. (c) as (d).
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(e) Tax not to apply to certain dividends of regulated investment companies
Amended 1986, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 411(a)(2), added subsec. (e) and redesignated former subsec. (e) as (f).
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1214(c)(2), added subsec. (d) and redesignated former subsec. (d) as (e).
(1) Interest-related dividends
(A) In general Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.
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(B) Exception Subparagraph (A) shall not apply—
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(i) to any dividend referred to in section 871(k)(1)(B), and
(ii) to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.
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(C) Treatment of dividends received by controlled foreign corporations The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).
Amended 2005
- 2005 Pub. L. 109-135 Pub. L. 109–135 inserted “interest-related dividend received by a controlled foreign corporation” after “shall apply to any”.
(2) Short-term capital gain dividends No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.
(f) Cross reference For doubling of tax on corporations of certain foreign countries, see section 891.
For special rules for original issue discount, see section 871(g).
Amended 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 411(a)(2), added subsec. (e) and redesignated former subsec. (e) as (f).