Cases: Taiyo Hawaii Co. v. Commissioner, 108 T.C. 590 (1997); Good Fortune Shipping SA v. Commissioner, 897 F.3d 256 (D.C. Cir. 2018)
Forms: Form 8848; Form 1120F; Form 1120-F
Final rules 6
(a) Imposition of tax In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.
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(b) Dividend equivalent amount For purposes of subsection (a), the term “dividend equivalent amount” means the foreign corporation’s effectively connected earnings and profits for the taxable year adjusted as provided in this subsection:
(1) Reduction for increase in U.S. net equity If—
(A) the U.S. net equity of the foreign corporation as of the close of the taxable year, exceeds
(B) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year,
the effectively connected earnings and profits for the taxable year shall be reduced (but not below zero) by the amount of such excess.
(2) Increase for decrease in net equity
(A) In general If—
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(i) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, exceeds
(ii) the U.S. net equity of the foreign corporation as of the close of the taxable year,
the effectively connected earnings and profits for the taxable year shall be increased by the amount of such excess.
(B) Limitation
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(1)(A), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “The increase under subparagraph (A) for any taxable year shall not exceed the aggregate reductions under paragraph (1) for prior taxable years to the extent not previously taken into account under subparagraph (A).”
(i) In general The increase under subparagraph (A) for any taxable year shall not exceed the accumulated effectively connected earnings and profits as of the close of the preceding taxable year.
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(ii) Accumulated effectively connected earnings and profits For purposes of clause (i), the term “accumulated effectively connected earnings and profits” means the excess of—
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(I) the aggregate effectively connected earnings and profits for preceding taxable years beginning after December 31, 1986, over
(II) the aggregate dividend equivalent amounts determined for such preceding taxable years.
(c) U.S. net equity For purposes of this section—
(1) In general The term “U.S. net equity” means—
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(A) U.S. assets, reduced (including below zero) by
(2) U.S. assets and U.S. liabilities For purposes of paragraph (1)—
(A) U.S. assets The term “U.S. assets” means the money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. For purposes of the preceding sentence, the adjusted basis of any property shall be its adjusted basis for purposes of computing earnings and profits.
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(B) U.S. liabilities The term “U.S. liabilities” means the liabilities of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary.
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(C) Regulations to be consistent with allocation of deductions The regulations prescribed under subparagraphs (A) and (B) shall be consistent with the allocation of deductions under section 882(c)(1).
(d) Effectively connected earnings and profits For purposes of this section—
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(1) In general The term “effectively connected earnings and profits” means earnings and profits (without diminution by reason of any distributions made during the taxable year) which are attributable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States.
(2) Exception for certain income The term “effectively connected earnings and profits” shall not include any earnings and profits attributable to—
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(A) income not includible in gross income under paragraph (1) or (2) of section 883(a),
(B) income treated as effectively connected with the conduct of a trade or business within the United States under section 921(d) or 926(b) (as in effect before their repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000),
Amended 2007
- 2007 Pub. L. 110-172 Pub. L. 110–172 inserted “(as in effect before their repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000)” before comma at end.
(C) gain on the disposition of a United States real property interest described in section 897(c)(1)(A)(ii),
(D) income treated as effectively connected with the conduct of a trade or business within the United States under section 953(c)(3)(C), or
(E) income treated as effectively connected with the conduct of a trade or business within the United States under section 882(e).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 6133(b), added subpar. (E).
Property and liabilities of the foreign corporation treated as connected with such income under regulations prescribed by the Secretary shall not be taken into account in determining the U.S. assets or U.S. liabilities of the foreign corporation.
(e) Coordination with income tax treaties; etc.
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(1) Limitation on treaty exemption No treaty between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a) (or reduce the amount thereof) unless—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(2)(A), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “No income tax treaty between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a) (or reduce the amount thereof) unless—
“(A) such foreign corporation is a qualified resident of such foreign country, or
“(B) such foreign corporation is not a qualified resident of such foreign country but such income tax treaty permits a withholding tax on dividends described in section 861(a)(2)(B) which are paid by such foreign corporation.”
(A) such treaty is an income tax treaty, and
(B) such foreign corporation is a qualified resident of such foreign country.
(2) Treaty modifications If a foreign corporation is a qualified resident of a foreign country with which the United States has an income tax treaty—
(A) the rate of tax under subsection (a) shall be the rate of tax specified in such treaty—
(i) on branch profits if so specified, or
(ii) if not so specified, on dividends paid by a domestic corporation to a corporation resident in such country which wholly owns such domestic corporation, and
(B) any other limitations under such treaty on the tax imposed by subsection (a) shall apply.
(3) Coordination with withholding tax
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(2)(B), substituted “withholding tax” for “2nd tier withholding tax” in heading and amended text generally. Prior to amendment, text read as follows:
- 1988 “(A) In general.—If a foreign corporation is not exempt for any taxable year from the tax imposed by subsection (a) by reason of a treaty, no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation during the taxable year.
- 1988 “(B) Limitation on certain treaty benefits.—No foreign corporation which is not a qualified resident of a foreign country shall be entitled to claim benefits under any income tax treaty between the United States and such foreign country with respect to dividends—
“(i) which are paid by such foreign corporation and with respect to which such foreign corporation is otherwise required to deduct and withhold tax under section 1441 or 1442, or
“(ii) which are received by such foreign corporation and are described in section 861(a)(2)(B).”
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(A) In general If a foreign corporation is subject to the tax imposed by subsection (a) for any taxable year (determined after the application of any treaty), no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation out of its earnings and profits for such taxable year.
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(B) Limitation on certain treaty benefits If—
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(i) any dividend described in section 861(a)(2)(B) is received by a foreign corporation, and
(ii) subparagraph (A) does not apply to such dividend,
rules similar to the rules of subparagraphs (A) and (B) of subsection (f)(3) shall apply to such dividend.
(4) Qualified resident For purposes of this subsection—
(A) In general Except as otherwise provided in this paragraph, the term “qualified resident” means, with respect to any foreign country, any foreign corporation which is a resident of such foreign country unless—
(i) 50 percent or more (by value) of the stock of such foreign corporation is owned (within the meaning of section 883(c)(4)) by individuals who are not residents of such foreign country and who are not United States citizens or resident aliens, or
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(5), substituted “50 percent or more” for “more than 50 percent” in cl. (i) and “citizens or residents of the United States” for “the United States” in cl. (ii).
(ii) 50 percent or more of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of such foreign country or citizens or residents of the United States.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(5), substituted “50 percent or more” for “more than 50 percent” in cl. (i) and “citizens or residents of the United States” for “the United States” in cl. (ii).
(B) Special rule for publicly traded corporations A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
(i) the stock of such corporation is primarily and regularly traded on an established securities market in such foreign country, or
(ii) such corporation is wholly owned (either directly or indirectly) by another foreign corporation which is organized in such foreign country and the stock of which is so traded.
(C) Corporations owned by publicly traded domestic corporations A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(4), added subpar. (C) and redesignated former subpar. (C) as (D).
(i) such corporation is wholly owned (directly or indirectly) by a domestic corporation, and
(ii) the stock of such domestic corporation is primarily and regularly traded on an established securities market in the United States.
(D) Secretarial authority The Secretary may, in his sole discretion, treat a foreign corporation as being a qualified resident of a foreign country if such corporation establishes to the satisfaction of the Secretary that such corporation meets such requirements as the Secretary may establish to ensure that individuals who are not residents of such foreign country do not use the treaty between such foreign country and the United States in a manner inconsistent with the purposes of this subsection.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(4), added subpar. (C) and redesignated former subpar. (C) as (D).
(5) Exception for international organizations This section shall not apply to an international organization (as defined in section 7701(a)(18)).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(6), added par. (5).
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(f) Treatment of interest allocable to effectively connected income
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(1) In general In the case of a foreign corporation engaged in a trade or business in the United States (or having gross income treated as effectively connected with the conduct of a trade or business in the United States), for purposes of this subtitle—
Amended 1988, 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(f)(3)(A)(ii), substituted “reasonably expected to be allocable interest” for “reasonably expected to be deductible under section 882 in computing the effectively connected taxable income of such foreign corporation” in closing provisions.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(f)(3)(A), (14), substituted “this subtitle” for “sections 871, 881, 1441, and 1442” and inserted “(or having gross income treated as effectively connected with the conduct of a trade or business in the United States)” after “United States”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(2)(C)(i), (3)(B), inserted sentence at end and struck out former last sentence which read as follows: “Rules similar to the rules of subsection (e)(3)(B) shall apply to interest described in the preceding sentence.”
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(A) any interest paid by such trade or business in the United States shall be treated as if it were paid by a domestic corporation, and
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(B) to the extent that the allocable interest exceeds the interest described in subparagraph (A), such foreign corporation shall be liable for tax under section 881(a) in the same manner as if such excess were interest paid to such foreign corporation by a wholly owned domestic corporation on the last day of such foreign corporation’s taxable year.
Amended 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(f)(3)(A)(i), substituted “to the extent that the allocable interest exceeds the interest described in subparagraph (A)” for “to the extent the amount of interest allowable as a deduction under section 882 in computing the effectively connected taxable income of such foreign corporation exceeds the interest described in subparagraph (A)”.
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To the extent provided in regulations, subparagraph (A) shall not apply to interest in excess of the amounts reasonably expected to be allocable interest.
(2) Allocable interest For purposes of this subsection, the term “allocable interest” means any interest which is allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
Amended 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(f)(3)(A)(iii), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “Effectively connected taxable income.—For purposes of this subsection, the term ‘effectively connected taxable income’ means taxable income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States.”
(3) Coordination with treaties
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(2)(C)(ii), added par. (3).
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(A) Payor must be qualified resident In the case of any interest described in paragraph (1) which is paid or accrued by a foreign corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
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(i) such treaty is an income tax treaty, and
(ii) such foreign corporation is a qualified resident of such foreign country.
(B) Recipient must be qualified resident In the case of any interest described in paragraph (1) which is received or accrued by any corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
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(g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders or transfer to a controlled corporation of the taxpayer’s U.S. assets and other adjustments in such determination as are necessary or appropriate to carry out the purposes of this section.