26 U.S.C. § 904: Limitation on credit

(a) Limitation The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.

Amended 1960, 1976, 1977, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 104(b)(13), struck out last sentence “For purposes of the preceding sentence, in the case of an individual the entire taxable income shall be reduced by an amount equal to the zero bracket amount.”
1977 Pub. L. 95-30 Pub. L. 95–30 provided that, for purposes of determining the maximum total amount of the credit taken under section 901(a), in the case of an individual, the entire taxable income shall be reduced by an amount equal to the zero bracket amount.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1031(a), struck out provisions allowing the per-country limitation, made the overall limitation applicable to all taxpayers to determine their foreign tax credit limitation, and inserted reference to section 901(a).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(a), designated existing provisions as par. (1), inserted introductory clause “In the case of any taxpayer who elects the limitation provided by this paragraph” and inserted “foreign”, “or possession of the United States” and “or possession” therein and added par. (2).

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(b) Taxable income for purpose of computing limitation

§ 1.904(b)-0 Outline of regulation provisions.§ 1.904(b)-1 Special rules for capital gains and losses.§ 1.904(b)-2 Special rules for application of section 904(b) to alternative minimum tax foreign tax credit.Prop. § 1.904(b)-3 Proposed 2026 · Prop. § 1.904(b)-4 Proposed 2026 · Deductions treated as allocable to foreign source section 951A category income.

Amended 1960, 1976

1976 Pub. L. 94-455 Pub. L. 94–455, §§ 1031(a), 1034(a), 1051(e), redesignated subsec. (c) as (b)(1), inserted provisions that the net United States capital losses would offset net foreign capital gains and, in the case of corporations, that only 30⁄48 of the net foreign source gain would be included in the foreign tax credit limitation, and that the gain from the sale or exchange of personal property outside the United States would be considered United States source income unless one of three exceptions applied, and added par. (4).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(a), added subsec. (b). Former subsec. (b) redesignated (c).

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(1) Personal exemptions For purposes of subsection (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduction for personal exemptions under section 151 or 642(b).

Amended 1969

1969 Pub. L. 91-172 Pub. L. 91–172, § 506(b)(1), substituted “(A) with the consent of the Secretary or his delegate with respect to any taxable year or (B) for the taxpayer’s first taxable year beginning after December 31, 1969” for “with the consent of the Secretary or his delegate with respect to any taxable year”.

(2) Capital gains For purposes of this section—

Amended 1969, 1978, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1003(b)(2)(A), amended par. (2) generally, substituting general provisions and provisions setting special rules where there is a capital gain rate differential for provisions for corporations and for other taxpayers.
1978 Pub. L. 95-600 Pub. L. 95–600, §§ 403(c)(4)(A), 701(u)(2)(A), (3)(A), in subpar. (A) substituted “this section” for “subsection (a)”, “the rate differential portion” for “three eighths” wherever appearing, and “for purposes of determining taxable income from sources without the United States, any net capital loss (and any amount which is a short term capital loss under section 1212(a))” for “any net capital loss”.
1969 Pub. L. 91-172 Pub. L. 91–172, § 506(b)(2), substituted “Except in a case to which paragraph (1)(B) applies, if the taxpayer” for “If a taxpayer”.

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(A) In general Taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.

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(B) Special rules where capital gain rate differential In the case of any taxable year for which there is a capital gain rate differential—

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(i) in lieu of applying subparagraph (A), the taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by the rate differential portion of foreign source net capital gain,

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(ii) the entire taxable income shall include gain from the sale or exchange of capital assets only in an amount equal to capital gain net income reduced by the rate differential portion of net capital gain, and

(iii) for purposes of determining taxable income from sources outside the United States, any net capital loss (and any amount which is a short-term capital loss under section 1212(a)) from sources outside the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to the rate differential portion of the excess of net capital gain from sources within the United States over net capital gain.

(C) Coordination with capital gains rates The Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) and the computation of net capital gain.

Amended 1997, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13001(b)(2)(M)(i), struck out “or 1201(a)” after “under section 1(h)”.
1997 Pub. L. 105-34 Pub. L. 105–34, § 311(c)(3), added subpar. (C).

(3) Definitions For purposes of this subsection—

Amended 1978, 1980, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1211(b)(3), redesignated former subpars. (E) and (F) as (C) and (D), respectively.
1980 Pub. L. 96-222 Pub. L. 96–222, § 104(a)(3)(D)(i), redesignated subpar. (E) “Rate differential portion”, added by Pub. L. 95–600, as (F).
1978 Pub. L. 95-600 Pub. L. 95–600, §§ 403(c)(4)(B), 701(u)(2)(B), (C), as amended by Pub. L. 96–222, § 104(a)(3)(D)(ii), substituted “There” for “For purposes of this paragraph, there”, added subpar. (D), redesignated former subpar. (D), relating to section 1231 gains, as subpar. (E), and added another subpar. (E), relating to rate differential portion. See 1980 Amendment note above.

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(A) Foreign source capital gain net income The term “foreign source capital gain net income” means the lesser of—

(i) capital gain net income from sources without the United States, or

(ii) capital gain net income.

(B) Foreign source net capital gain The term “foreign source net capital gain” means the lesser of—

(i) net capital gain from sources without the United States, or

(ii) net capital gain.

(C) Section 1231 gains The term “gain from the sale or exchange of capital assets” includes any gain so treated under section 1231.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1211(b)(3), redesignated subpar. (E) as (C) and struck out former subpar. (C), exception for gain from the sale of certain personal property, which read as follows: “There shall be included as gain from sources within the United States any gain from sources without the United States from the sale or exchange of a capital asset which is personal property which—
“(i) in the case of an individual, is sold or exchanged outside of the country (or possession) of the individual’s residence,
“(ii) in the case of a corporation, is stock in a second corporation sold or exchanged other than in a country (or possession) in which such second corporation derived more than 50 percent of its gross income for the 3-year period ending with the close of such second corporation’s taxable year immediately preceding the year during which the sale or exchange occurred, or
“(iii) in the case of any taxpayer, is personal property (other than stock in a corporation) sold or exchanged other than in a country (or possession) in which such property is used in a trade or business of the taxpayer or in which such taxpayer derived more than 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year during which the sale or exchange occurred,
unless such gain is subject to an income, war profits, or excess profits tax of a foreign country or possession of the United States, and the rate of tax applicable to such gain is 10 percent or more of the gain from the sale or exchange (computed under this chapter).”

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(D) Capital gain rate differential There is a capital gain rate differential for any year if subsection (h) of section 1 applies to such taxable year.

Amended 1986, 1988, 1990, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13001(b)(2)(M)(ii), added subpar. (D) and struck out former subpar. (D). Prior to amendment, text read as follows: “There is a capital gain rate differential for any taxable year if—
“(i) in the case of a taxpayer other than a corporation, subsection (h) of section 1 applies to such taxable year, or
“(ii) in the case of a corporation, any rate of tax imposed by section 11, 511, or 831(a) or (b) (whichever applies) exceeds the alternative rate of tax under section 1201(a) (determined without regard to the last sentence of section 11(b)(1)).”
1990 Pub. L. 101-508 Pub. L. 101–508, § 11101(d)(5)(A), substituted “subsection (h)” for “subsection (j)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1003(b)(2)(B), added subpar. (D) and struck out former subpar. (D), Rate differential portion, which read as follows: “The ‘rate differential portion’ of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as the excess of the highest rate of tax specified in section 11(b) over the alternative rate of tax under section 1201(a) bears to the highest rate of tax specified in section 11(b).”
1988 Pub. L. 100-647 Pub. L. 100–647, § 2004(l), substituted “section 11(b)(1)” for “section 11(b)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1211(b)(3), redesignated subpar. (F) as (D) and struck out former subpar. (D), gain from liquidation of certain foreign corporations, which read as follows: “Subparagraph (C) shall not apply with respect to a distribution in liquidation of a foreign corporation to which part II of subchapter C applies if such corporation derived less than 50 percent of its gross income from sources within the United States for the 3-year period ending with the close of such corporation’s taxable year immediately preceding the year during which the distribution occurred.”

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(E) Rate differential portion The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as—

Amended 1986, 1988, 1990, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13001(b)(2)(M)(iii), added subpar. (E) and struck out former subpar. (E) which related to rate differential portion for corporations and taxpayers other than corporations.
1990 Pub. L. 101-508 Pub. L. 101–508, § 11101(d)(5)(B), substituted “section 1(h)” for “section 1(j)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1003(b)(2)(B), added subpar. (E).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1211(b)(3), redesignated former subpars. (E) and (F) as (C) and (D), respectively.

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(i) the excess of—

(I) the highest rate of tax set forth in subsection (a), (b), (c), (d), or (e) of section 1 (whichever applies), over

(II) the alternative rate of tax determined under section 1(h), bears to

(ii) that rate referred to in subclause (I).

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(4) Treatment of dividends for which deduction is allowed under section 245A For purposes of subsection (a), in the case of a domestic corporation which is a United States shareholder with respect to a specified 10-percent owned foreign corporation, such shareholder’s taxable income from sources without the United States (and entire taxable income) shall be determined without regard to—

§ 1.904(b)-3 Disregard of certain dividends and deductions under section 904(b)(4).

Amended 1993, 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(1)(D)(xiii), redesignated par. (5) as (4) and struck out former par. (4). Prior to amendment, text of par. (4) read as follows: “For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into account for purposes of the credit (if any) allowed by section 936 (without regard to subsections (a)(4) and (i) thereof).”
1993 Pub. L. 103-66 Pub. L. 103–66, § 13227(d), inserted before period at end “(without regard to subsections (a)(4) and (i) thereof)”.

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(A) the foreign-source portion of any dividend received from such foreign corporation, and

(B) any deductions properly allocable or apportioned to—

(i) income (other than amounts includible under section 951(a)(1) or 951A(a)) with respect to stock of such specified 10-percent owned foreign corporation, or

(ii) such stock to the extent income with respect to such stock is other than amounts includible under section 951(a)(1) or 951A(a).

Any term which is used in section 245A and in this paragraph shall have the same meaning for purposes of this paragraph as when used in such section.

(5) Deductions treated as allocable to foreign source net CFC tested income Solely for purposes of the application of subsection (a) with respect to amounts described in subsection (d)(1)(A), the taxpayer’s taxable income from sources without the United States shall be determined by allocating and apportioning—

Amended 2017, 2018, 2025

2025 Pub. L. 119-21 Pub. L. 119–21, § 70311(a), added par. (5).
2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(1)(D)(xiii), redesignated par. (5) as (4) and struck out former par. (4). Prior to amendment, text of par. (4) read as follows: “For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into account for purposes of the credit (if any) allowed by section 936 (without regard to subsections (a)(4) and (i) thereof).”
2017 Pub. L. 115-97 Pub. L. 115–97, § 14101(d), added par. (5).

(A) any deduction allowed under section 250(a)(1)(B) (and any deduction allowed under section 164(a)(3) for taxes imposed on amounts described in section 250(a)(1)(B)) to such income,

(B) no amount of interest expense or research and experimental expenditures to such income, and

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(C) any other deduction to such income only if such deduction is directly allocable to such income.

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Any amount or deduction which would (but for subparagraphs (B) and (C)) have been allocated or apportioned to such income shall only be allocated or apportioned to income which is from sources within the United States.

(6) Source rules for certain inventory produced in the United States and sold through foreign branches For purposes of this section, if a United States person maintains an office or other fixed place of business in a foreign country (determined under rules similar to the rules of section 864(c)(5)), the portion of income which—

Amended 2025

2025 Pub. L. 119-21 Pub. L. 119–21, § 70313(a), added par. (6).

(A) is from the sale or exchange outside the United States of inventory property (within the meaning of section 865(i)(1))—

(i) which is produced in the United States,

(ii) which is for use outside the United States, and

(iii) to which the third sentence of section 863(b) applies, and

(B) is attributable (determined under rules similar to the rules of section 864(c)(5)) to such office or other fixed place of business,

shall be treated as from sources without the United States, except that the amount so treated shall not exceed 50 percent of the income from the sale or exchange of such inventory property.

(c) Carryback and carryover of excess tax paid Any amount by which all taxes paid or accrued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under subsection (a) shall be deemed taxes paid or accrued to foreign countries or possessions of the United States in the first preceding taxable year and in any of the first 10 succeeding taxable years, in that order and to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preceding or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign countries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States. This subsection shall not apply to taxes paid or accrued with respect to amounts described in subsection (d)(1)(A).

Amended 1958, 1960, 1976, 2004, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14201(b)(2)(C), inserted at end “This subsection shall not apply to taxes paid or accrued with respect to amounts described in subsection (d)(1)(A).”
2004 Pub. L. 108-357 Pub. L. 108–357, § 417(a), struck out “in the second preceding taxable year,” before “in the first preceding taxable year” and substituted “and in any of the first 10” for “, and in the first, second, third, fourth, or fifth”.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1031(a), redesignated subsec. (d) as (c), and amended the redesignated subsec. (c) generally to conform to the elimination of the per-country limitation in subsec. (a). Former subsec. (c) redesignated (b)(1).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(b), redesignated former subsec. (b) as (c) and inserted “applicable” before “limitation” therein. Former subsec. (c) redesignated (d).
1958 Pub. L. 85-866 Pub. L. 85–866 added subsec. (c).

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(d) Separate application of section with respect to certain categories of income

Amended 1960, 1976, 1984, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(d)(1), substituted “certain categories of income” for “certain interest income and income from DISC, former DISC, FSC, or former FSC” in heading.
1984 Pub. L. 98-369 Pub. L. 98–369, § 801(d)(2)(C), which directed amendment of par. (1) heading by substituting “Separate application of section with respect to certain interest income and income from DISC, former DISC, FSC, or former FSC” for “Application of section in case of certain interest income and dividends from a DISC or former DISC” was executed to subsec. (d) heading to reflect the probable intent of Congress.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1031(a), redesignated subsec. (f)(1), (2), as (d). Former subsec. (d) redesignated (c).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(c), redesignated former subsec. (c) as (d) and inserted “applicable” before “limitation” in two places.

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(1) In general The provisions of subsections (a), (b), and (c) and sections 902, [OLRC note: See References in Text note below.] 907, and 960 shall be applied separately with respect to—

Amended 1984, 1986, 1988, 1989, 1997, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 404(a), reenacted heading without change and amended text of par. (1) generally, substituting provisions relating to applicability of subsecs. (a), (b), and (c) and sections 902, 907, and 960 to passive category income and general category income, for provisions relating to applicability of subsecs. (a), (b), and (c) and sections 902, 907, and 960 to passive income, high withholding tax interest, financial services income, shipping income, certain dividends from a DISC or former DISC, taxable income attributable to foreign trade income, certain distributions from a FSC or a former FSC, and income other than income previously described.
2004 Pub. L. 108-357 Pub. L. 108–357, § 403(b)(1), struck out subpar. (E) which read as follows: “in the case of a corporation, dividends from noncontrolled section 902 corporations out of earnings and profits accumulated in taxable years beginning before January 1, 2003,”.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1105(a)(1), amended subpar. (E) generally. Prior to amendment, subpar. (E) read as follows: “in the case of a corporation, dividends from each noncontrolled section 902 corporation,”.
1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(i)(1), substituted “interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in foreign trade income (as defined in section 923(b))” for “qualified interest and carrying charges (as defined in section 245(c))”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(a)(11), inserted “in the case of a corporation,” before “dividends”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(a), (d)(2), (3), inserted “and sections 902, 907, and 960” in introductory provisions, added subpars. (A) to (E), struck out former subpar. (A) which read “the interest income described in paragraph (2)”, redesignated former subpars. (B), (C), (D), and (E) as (F), (G), (H), and (I), respectively, and in subpar. (I), substituted “in any of the preceding subparagraphs” for “in subparagraph (A), (B), (C), or (D)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1899A(24), made technical correction clarifying heading. See 1984 Amendment note below.
1984 Pub. L. 98-369 Pub. L. 98–369, § 801(d)(2)(A), (B), struck out “and” after “United States,” at end of subpar. (B), substituted “taxable income attributable to foreign trade income (within the meaning of section 923(b)),” for “income other than the interest income described in paragraph (2) and dividends described in subparagraph (B),” in subpar. (C), and added subpars. (D) and (E).

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(A) any amount includible in gross income under section 951A (other than passive category income),

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14201(b)(2)(A), added subpar. (A). Former subpar. (A) redesignated (B), then (C).

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(B) foreign branch income,

Amended 1984, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14302(a), added subpar. (B). Former subpar. (B) redesignated (C), then (D).
2017 Pub. L. 115-97 Pub. L. 115–97, § 14201(b)(2)(A), redesignated subpar. (A) as (B). Former subpar. (B) redesignated (C).
1984 Pub. L. 98-369 Pub. L. 98–369, § 801(d)(2)(A), (B), struck out “and” after “United States,” at end of subpar. (B), substituted “taxable income attributable to foreign trade income (within the meaning of section 923(b)),” for “income other than the interest income described in paragraph (2) and dividends described in subparagraph (B),” in subpar. (C), and added subpars. (D) and (E).

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(C) passive category income, and

Amended 1984, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14302(a), redesignated subpar. (B) as (C). Former subpar. (C) redesignated (D).
2017 Pub. L. 115-97 Pub. L. 115–97, § 14201(b)(2)(A), redesignated subpar. (B) as (C).
1984 Pub. L. 98-369 Pub. L. 98–369, § 801(d)(2)(A), (B), struck out “and” after “United States,” at end of subpar. (B), substituted “taxable income attributable to foreign trade income (within the meaning of section 923(b)),” for “income other than the interest income described in paragraph (2) and dividends described in subparagraph (B),” in subpar. (C), and added subpars. (D) and (E).

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(D) general category income.

Amended 1984, 1986, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14302(a), redesignated subpar. (C) as (D).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1876(d)(2), amended subpar. (D) generally. Prior to amendment, subpar. (D) read as follows: “distributions from a FSC (or former FSC) out of earnings and profits attributable to foreign trade income (within the meaning of section 923(b)), and”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 801(d)(2)(A), (B), struck out “and” after “United States,” at end of subpar. (B), substituted “taxable income attributable to foreign trade income (within the meaning of section 923(b)),” for “income other than the interest income described in paragraph (2) and dividends described in subparagraph (B),” in subpar. (C), and added subpars. (D) and (E).

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(3) Look-thru in case of controlled foreign corporations

Amended 1984, 1986, 1988, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 404(f)(4), reenacted heading without change and amended text of par. (3) generally, substituting provisions consisting of subpars. (A) to (H) for former subpars. (A) to (I) which contained similar provisions.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(11), added subpar. (I).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(b), added par. (3) and struck out former par. (3) treating as interest certain amounts attributable to United States-owned foreign corporations, etc., subpars. thereof relating to following subject matter: (A) general provisions, (B) separate limitation interest, (C) exception where designated corporation has small amount of separate limitation interest, (D) treatment of certain interest, (E) designated payor corporation, (F) determination of year to which amount is attributable, (G) ordering rules, (H) dividend, (I) interest and dividends from members of same affiliated group, and (J) distributions through other entities.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(b)(2), redesignated subpar. (I) as (J) and added a new subpar. (I), interest and dividends from members of same affiliated group, which read as follows: “For purposes of this paragraph, dividends and interest received or accrued by the designated payor corporation from another member of the same affiliated group (determined under section 1504 without regard to subsection (b)(3) thereof) shall be treated as separate limitation interest if (and only if) such amounts are attributable (directly or indirectly) to separate limitation interest of any other member of such group.”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(b)(2), redesignated subpar. (I) as (J) and struck out former subpar. (J), interest from members of same affiliated group, which read as follows: “For purposes of this paragraph, interest received or accrued by the designated payor corporation from another member of the same affiliated group (determined under section 1504 without regard to subsection (b)(3) thereof) shall not be treated as separate limitation interest, unless such interest is attributable directly or indirectly to separate limitation interest of such other member.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 122(a), added par. (3).

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(A) In general Except as otherwise provided in this paragraph, dividends, interest, rents, and royalties received or accrued by the taxpayer from a controlled foreign corporation in which the taxpayer is a United States shareholder shall not be treated as passive category income.

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(B) Subpart F inclusions Any amount included in gross income under section 951(a)(1)(A) shall be treated as passive category income to the extent the amount so included is attributable to passive category income.

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(C) Interest, rents, and royalties Any interest, rent, or royalty which is received or accrued from a controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income to the extent it is properly allocable (under regulations prescribed by the Secretary) to passive category income of the controlled foreign corporation.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(b)(1), inserted at end “The preceding sentence shall not apply to any amount includible in gross income under section 551 or 951.”

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(D) Dividends Any dividend paid out of the earnings and profits of any controlled foreign corporation in which the taxpayer is a United States shareholder shall be treated as passive category income in proportion to the ratio of—

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(i) the portion of the earnings and profits attributable to passive category income, to

(ii) the total amount of earnings and profits.

(E) Look-thru applies only where subpart F applies If a controlled foreign corporation meets the requirements of section 954(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its foreign base company income (as defined in section 954(a) without regard to section 954(b)(5)) and none of its gross insurance income (as defined in section 954(b)(3)(C)) for such taxable year shall be treated as passive category income, except that this sentence shall not apply to any income which (without regard to this sentence) would be treated as financial services income. Solely for purposes of applying subparagraph (D), passive income of a controlled foreign corporation shall not be treated as passive category income if the requirements of section 954(b)(4) are met with respect to such income.

Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(a)(4), inserted first sentence, struck out former first sentence which read “If a controlled foreign corporation meets the requirements of section 954(b)(3)(A) (relating to de minimis rule) for any taxable year, for purposes of this paragraph, none of its income for such taxable year shall be treated as income in a separate category.”, and in second sentence substituted “passive income” for “income (other than high withholding tax interest and dividends from a noncontrolled section 902 corporation)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(b)(4)(A), inserted at end:
“(iv) any other corporation formed or availed of for purposes of avoiding the provisions of this paragraph.
For purposes of this paragraph, the rules of paragraph (9) of subsection (g) shall apply.”

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(F) Coordination with high-taxed income provisions

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(a)(7), amended subpar. (F) generally. Prior to amendment, subpar. (F) read as follows: “For purposes of this paragraph, the term ‘separate category’ means any category of income described in subparagraph (A), (B), (C), (D), or (E) of paragraph (1).”

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(i) In determining whether any income of a controlled foreign corporation is passive category income, subclause (II) of paragraph (2)(B)(iii) shall not apply.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 403(b)(5), substituted “or (D)” for “(D), or (E)”.

(ii) Any income of the taxpayer which is treated as passive category income under this paragraph shall be so treated notwithstanding any provision of paragraph (2); except that the determination of whether any amount is high-taxed income shall be made after the application of this paragraph.

(G) Dividend For purposes of this paragraph, the term “dividend” includes any amount included in gross income in section 951(a)(1)(B). Any amount included in gross income under section 78 to the extent attributable to amounts included in gross income in section 951(a)(1)(A) shall not be treated as a dividend but shall be treated as included in gross income under section 951(a)(1)(A).

Amended 1996

1996 Pub. L. 104-188 Pub. L. 104–188, § 1501(b)(1), (12), amended subpar. (G) identically, substituting “section 951(a)(1)(B)” for “subparagraph (B) or (C) of section 951(a)(1)”.
1996 Pub. L. 104-188 Pub. L. 104–188, § 1703(i)(1), substituted “subparagraph (B) or (C) of section 951(a)(1)” for “section 951(a)(1)(B)”.

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(H) Look-thru applies to passive foreign investment company inclusion If—

“to the extent such amount is attributable to income in such category.” Closing words

Textual readingALL OF= pfic inclusion treated under look-thru

(i) a passive foreign investment company is a controlled foreign corporation, and

(ii) the taxpayer is a United States shareholder in such controlled foreign corporation,

any amount included in gross income under section 1293 shall be treated as income in a separate category to the extent such amount is attributable to income in such category.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(a)(3), added subpar. (H).

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(4) Look-thru applies to dividends from noncontrolled 10-percent owned foreign corporations

Amended 1986, 1997, 2004, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14301(c)(16), substituted “noncontrolled 10-percent owned foreign corporations” for “noncontrolled section 902 corporations” in heading and “noncontrolled 10-percent owned foreign corporation” for “noncontrolled section 902 corporation” wherever appearing in text.
2004 Pub. L. 108-357 Pub. L. 108–357, § 403(a), reenacted heading without change and amended text of par. (4) generally, substituting provisions relating to dividends from noncontrolled section 902 corporations, earnings and profits of controlled foreign corporations, and setting forth special rules, for provisions relating to treatment of applicable dividends, defining the term “applicable dividend”, and setting forth special rules.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1105(b), added par. (4) and redesignated former pars. (4) and (5) as (5) and (6), respectively.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(b), added pars. (4) and (5).

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(A) In general For purposes of this subsection, any dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of—

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(i) the portion of earnings and profits attributable to income described in such subparagraph, to

(ii) the total amount of earnings and profits.

(B) Earnings and profits of controlled foreign corporations In the case of any distribution from a controlled foreign corporation to a United States shareholder, rules similar to the rules of subparagraph (A) shall apply in determining the extent to which earnings and profits of the controlled foreign corporation which are attributable to dividends received from a noncontrolled 10-percent owned foreign corporation may be treated as income in a separate category.

(C) Special rules For purposes of this paragraph—

(i) Earnings and profits

(I) In general The rules of section 316 shall apply.

(II) Regulations The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer’s acquisition of the stock to which the distributions relate.

(ii) Inadequate substantiation If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(C).

Amended 2025

2025 Pub. L. 119-21 Pub. L. 119–21, § 70311(b)(2), substituted “paragraph (1)(C)” for “paragraph (1)(A)”.

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(iii) Coordination with high-taxed income provisions Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph.

(iv) Look-thru with respect to carryover of credit Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled 10-percent owned foreign corporation from a taxable year beginning on or after January 1, 2003, to a taxable year beginning before such date for purposes of allocating such dividend among the separate categories in effect for the taxable year to which carried.

(5) Controlled foreign corporation; United States shareholder For purposes of this subsection—

Amended 1986, 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1105(b), added par. (4) and redesignated former pars. (4) and (5) as (5) and (6), respectively.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(b), added pars. (4) and (5).

(A) Controlled foreign corporation The term “controlled foreign corporation” has the meaning given such term by section 957 (taking into account section 953(c)).

(B) United States shareholder The term “United States shareholder” has the meaning given such term by section 951(b) (taking into account section 953(c)).

(6) Separate application to items resourced under treaties

Amended 1997, 2010

2010 Pub. L. 111-226 Pub. L. 111–226, § 213(a), added par. (6) and redesignated former par. (6) as (7).
1997 Pub. L. 105-34 Pub. L. 105–34, § 1105(b), added par. (4) and redesignated former pars. (4) and (5) as (5) and (6), respectively.

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(A) In general If—

Textual readingALL OF= separate application to each resourced item

(i) without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,

(ii) under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and

(iii) the taxpayer chooses the benefits of such treaty obligation,

subsections (a), (b), and (c) of this section and sections 907 and 960 shall be applied separately with respect to each such item.

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14301(c)(17), substituted “907” for “902, 907,” in concluding provisions.

(B) Coordination with other provisions This paragraph shall not apply to any item of income to which subsection (h)(10) or section 865(h) applies.

(C) Regulations The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance which provides that related items of income may be aggregated for purposes of this paragraph.

(7) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate for the purposes of this subsection, including regulations—

Amended 2010

2010 Pub. L. 111-226 Pub. L. 111–226, § 213(a), added par. (6) and redesignated former par. (6) as (7).

(A) for the application of paragraph (3) and subsection (f)(5) in the case of income paid (or loans made) through 1 or more entities or between 2 or more chains of entities,

(B) preventing the manipulation of the character of income the effect of which is to avoid the purposes of this subsection, and

(C) providing that rules similar to the rules of paragraph (3)(C) shall apply to interest, rents, and royalties received or accrued from entities which would be controlled foreign corporations if they were foreign corporations.

[(e) Repealed. Pub. L. 101–508, title XI, § 11801(a)(31), Nov. 5, 1990, 104 Stat. 1388–521]

Amended 1960, 1976, 1990

1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(a)(31), struck out subsec. (e) which related to transitional rules for carrybacks and carryovers for taxpayers on the per-country limitation.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1031(a), added subsec. (e). Former subsec. (e) was eliminated in view of the amendment of subsec. (a).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(d), added subsecs. (e) and (f).

(f) Recapture of overall foreign loss

§ 1.904(f)-0 Outline of regulation provisions.§ 1.904(f)-1 Overall foreign loss and the overall foreign loss account.§ 1.904(f)-2 Recapture of overall foreign losses.§ 1.904(f)-3 Allocation of net operating losses and net capital losses.§ 1.904(f)-4 Recapture of foreign losses out of accumulation distributions from a foreign trust.§ 1.904(f)-5 Special rules for recapture of overall foreign losses of a domestic trust.§ 1.904(f)-6 Transitional rule for recapture of FORI and general limitation overall foreign losses incurred in taxable years beginning before January 1, 1983, from foreign source taxable income subject to the general limitation in taxable years beginning after December 31, 1982.§ 1.904(f)-7 Separate limitation loss and the separate limitation loss account.§ 1.904(f)-8 Recapture of separate limitation loss accounts.§ 1.904(f)-9 - 1.904(f)-11 §§ 1.904(f)-9-1.904(f)-11 [Reserved]§ 1.904(f)-12 Transition rules.

Amended 1960, 1962, 1971, 1976, 1982

1982 Pub. L. 97-248 Pub. L. 97–248 struck out par. (4) which provided for the determination of foreign oil related loss where section 907 was applicable, redesignated par. (5) as (4), and purported to redesignate par. (6) as (5). However, subsec. (f) did not contain a par. (6).
1976 Pub. L. 94-455 Pub. L. 94–455, §§ 1031(a), 1032(a), 1901(b)(10)(B), added subsec. (f), and substituted “section 172(h)” for “section 172(k)(1)” in pars. (2)(B)(i) and (4)(B)(i). Former subsec. (f)(1), (2), was redesignated (d). Former subsecs. (f)(3), (4), (5) were omitted.
1971 Pub. L. 92-178 Pub. L. 92–178, § 502(b)(2), inserted “and dividends from a DISC or former DISC” after “interest income” in the heading.
1962 Pub. L. 87-834 Pub. L. 87–834, § 10(a), added subsec. (f). Former subsec. (f) redesignated (g).
1960 Pub. L. 86-780 Pub. L. 86–780, § 1(d), added subsecs. (e) and (f).

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(1) General rule For purposes of this subpart, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer’s taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of—

Amended 1971, 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(1)(D)(xiv), struck out “and section 936” after “subpart” in introductory provisions.
1971 Pub. L. 92-178 Pub. L. 92–178, § 502(b)(2), inserted “each of the following items of income” in introductory text, added subpar. (B), and redesignated former subpar. (B) as (C), inserting therein provisions respecting dividends described in subparagraph (B).

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(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or

(B) 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer’s taxable income from sources without the United States for such succeeding taxable year,

shall be treated as income from sources within the United States (and not as income from sources without the United States).

(2) Overall foreign loss defined For purposes of this subsection, the term “overall foreign loss” means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account—

Amended 1966

1966 Pub. L. 89-809 Pub. L. 89–809 inserted reference to includible corporations in an affiliated group, as defined in section 1504, of which the taxpayer is a member and inserted reference to both direct and indirect ownership in subpar. (C) and inserted provision that, for purposes of subpar. (C), stock owned directly or indirectly by or for a foreign corporation shall be considered as being proportionately owned by its shareholders.

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(A) any net operating loss deduction allowable for such year under section 172(a), and

Amended 1978

1978 Pub. L. 95-600 Pub. L. 95–600, § 701(u)(4)(A), struck out provision relating to capital loss carrybacks and carryovers.

(B) any—

(i) foreign expropriation loss for such year, as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), or

Amended 1996

1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(t)(36), inserted “(as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990)” after “section 172(h)”.

(ii) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft,

to the extent such loss is not compensated for by insurance or otherwise.

(3) Dispositions

Amended 1971

1971 Pub. L. 92-178 Pub. L. 92–178, § 502(b)(3), provided that the limitation provided by subsec. (a)(2) shall not apply to dividends described in paragraph (1)(B) and substituted “limitation provided by subsection (a)(2) applies with respect to income described in paragraph (1)(B) and (C)” for “limitation provided by subsection (a)(2) applies with respect to income other than the interest income described in paragraph (2)”.

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(A) In general For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year—

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(i) the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer’s adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and

(ii) paragraph (1) shall be applied with respect to such income by substituting “100 percent” for “50 percent”.

In determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business).

(B) Disposition defined and special rules

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(i) For purposes of this subsection, the term “disposition” includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer.

(ii) Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have had if the taxpayer had sold or exchanged the property.

(iii) The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recognized solely by reason of subparagraph (A).

(C) Exceptions Notwithstanding subparagraph (B), the term “disposition” does not include—

(i) a disposition of property which is not a material factor in the realization of income by the taxpayer, or

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(ii) a disposition of property to a domestic corporation in a distribution or transfer described in section 381(a).

(D) Application to certain dispositions of stock in controlled foreign corporation

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 895(a), added subpar. (D).

(i) In general This paragraph shall apply to an applicable disposition in the same manner as if it were a disposition of property described in subparagraph (A), except that the exception contained in subparagraph (C)(i) shall not apply.

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(ii) Applicable disposition For purposes of clause (i), the term “applicable disposition” means any disposition of any share of stock in a controlled foreign corporation in a transaction or series of transactions if, immediately before such transaction or series of transactions, the taxpayer owned more than 50 percent (by vote or value) of the stock of the controlled foreign corporation. Such term shall not include a disposition described in clause (iii) or (iv), except that clause (i) shall apply to any gain recognized on any such disposition.

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(iii) Exception for certain exchanges where ownership percentage retained A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions—

“if it is part of a transaction or series of transactions—” Opening words

Textual readingALL OF= not an applicable disposition

(I) to which section 351 or 721 applies, or under which the transferor receives stock in a foreign corporation in exchange for the stock in the controlled foreign corporation and the stock received is exchanged basis property (as defined in section 7701(a)(44)), and

(II) immediately after which, the transferor owns (by vote or value) at least the same percentage of stock in the controlled foreign corporation (or, if the controlled foreign corporation is not in existence after such transaction or series of transactions, in another foreign corporation stock in [OLRC note: So in original.] which was received by the transferor in exchange for stock in the controlled foreign corporation) as the percentage of stock in the controlled foreign corporation which the taxpayer owned immediately before such transaction or series of transactions.

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(iv) Exception for certain asset acquisitions A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section 1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation in exchange for the shares of the controlled foreign corporation in a liquidation described in section 332 or a reorganization described in section 368(a)(1).

“A disposition” Opening words

Textual readingALL OF= not an applicable disposition

“it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section 1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation”

“in exchange for the shares of the controlled foreign corporation”

“in a liquidation described in section 332 or a reorganization described in section 368(a)(1)”

Amended 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(f)(3), substituted “an affiliated group” for “a controlled group”.

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(v) Controlled foreign corporation For purposes of this subparagraph, the term “controlled foreign corporation” has the meaning given such term by section 957.

(vi) Stock ownership For purposes of this subparagraph, ownership of stock shall be determined under the rules of subsections (a) and (b) of section 958.

(4) Accumulation distributions of foreign trust For purposes of this chapter, in the case of amounts of income from sources without the United States which are treated under section 666 (without regard to subsections (b) and (c) thereof if the taxpayer chose to take a deduction with respect to the amounts described in such subsections under section 667(d)(1)(B)) as having been distributed by a foreign trust in a preceding taxable year, that portion of such amounts equal to the amount of any overall foreign loss sustained by the beneficiary in a year prior to the taxable year of the beneficiary in which such distribution is received from the trust shall be treated as income from sources within the United States (and not income from sources without the United States) to the extent that such loss was not used under this subsection in prior taxable years, or in the current taxable year, against other income of the beneficiary.

Amended 1978, 1982

1982 Pub. L. 97-248 Pub. L. 97–248 struck out par. (4) which provided for the determination of foreign oil related loss where section 907 was applicable, redesignated par. (5) as (4), and purported to redesignate par. (6) as (5). However, subsec. (f) did not contain a par. (6).
1978 Pub. L. 95-600 Pub. L. 95–600, § 701(u)(4)(B), (8)(C), substituted in introductory provisions “In making the separate computation under this subsection with respect to foreign oil related income which is required by section 907(b)” for “In the case of a corporation to which section 907(b)(1) applies” and in subpar. (A) struck out provision relating to capital loss carrybacks and carryovers.

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(5) Treatment of separate limitation losses

Amended 1971, 1978, 1982, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1203(a), added par. (5).
1982 Pub. L. 97-248 Pub. L. 97–248 struck out par. (4) which provided for the determination of foreign oil related loss where section 907 was applicable, redesignated par. (5) as (4), and purported to redesignate par. (6) as (5). However, subsec. (f) did not contain a par. (6).
1978 Pub. L. 95-600 Pub. L. 95–600, § 701(q)(2), added par. (5).
1971 Pub. L. 92-178 Pub. L. 92–178, § 502(b)(4), added par. (5).

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(A) In general The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such taxable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year.

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(B) Allocation of losses The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis.

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(C) Recharacterization of subsequent income If—

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(i) a separate limitation loss from any income category (hereinafter in this subparagraph referred to as “the loss category”) was allocated to income from any other category under subparagraph (B), and

(ii) the loss category has income for a subsequent taxable year,

such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax.

(D) Special rules for losses from sources in the United States Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B).

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(E) Definitions For purposes of this paragraph—

(i) Income category The term “income category” means each separate category of income described in subsection (d)(1).

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(ii) Separate limitation income The term “separate limitation income” means, with respect to any income category, the taxable income from sources outside the United States, separately computed for such category.

(iii) Separate limitation loss The term “separate limitation loss” means, with respect to any income category, the loss from such category determined under the principles of section 907(c)(4)(B).

(F) Dispositions If any separate limitation loss for any taxable year is allocated against any separate limitation income for such taxable year, except to the extent provided in regulations, rules similar to the rules of paragraph (3) shall apply to any disposition of property if gain from such disposition would be in the income category with respect to which there was such separate limitation loss.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(c), added subpar. (F).

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(g) Recharacterization of overall domestic loss

§ 1.904(g)-0 Outline of regulation provisions.§ 1.904(g)-1 Overall domestic loss and the overall domestic loss account.§ 1.904(g)-2 Recapture of overall domestic losses.§ 1.904(g)-3 Ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for the recapture of separate limitation losses, overall foreign losses, and overall domestic losses.Prop. § 1.904(g)-0 Proposed 2007 · Outline of regulation provisions.Prop. § 1.904(g)-3 Proposed 2026 ·

Amended 1962, 1976, 1983, 1984, 1986, 1988, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 402(a), added subsec. (g). Former subsec. (g) redesignated (h).
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(q)(12), substituted “861(a)(1)(A)” for “861(a)(1)(B)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(bb)(4)(A), added par. (10) and redesignated former par. (10) as (11).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(a)(1)(A), added par. (9) and redesignated former par. (9) as (10).
1984 Pub. L. 98-369 Pub. L. 98–369, § 121(a), added subsec. (g). Former subsec. (g) redesignated (h).
1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(21), amended subsec. (g) generally, substituting “Coordination with nonrefundable personal credits” for “Coordination with credit for the elderly” in heading and in text substituting “reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter” for “reduced by the amount of the credit (if any) for the taxable year allowable under section 37 (relating to credit for the elderly and the permanently and totally disabled)”.
1983 Pub. L. 98-21 Pub. L. 98–21 substituted “relating to credit for the elderly and the permanently and totally disabled” for “relating to credit for the elderly”.
1976 Pub. L. 94-455 Pub. L. 94–455, §§ 1032(a), 503(b)(1), added subsec. (g). Former subsec. (f) redesignated (g), and further redesignated (h).
1962 Pub. L. 87-834 Pub. L. 87–834, §§ 10(a), 12(b)(2), redesignated former subsec. (f) as (g), designated existing provisions as par. (2), and added par. (1).

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(1) General rule For purposes of this subpart and section 936,1 in the case of any taxpayer who sustains an overall domestic loss for any taxable year beginning after December 31, 2006, that portion of the taxpayer’s taxable income from sources within the United States for each succeeding taxable year which is equal to the lesser of—

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(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1235(f)(4)(A), added cl. (iii).

(B) 50 percent of the taxpayer’s taxable income from sources within the United States for such succeeding taxable year,

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shall be treated as income from sources without the United States (and not as income from sources within the United States).

(2) Overall domestic loss For purposes of this subsection—

Amended 1964, 1986, 2005

2005 Pub. L. 109-135 Pub. L. 109–135, § 403(k), amended heading and text of par. (2) generally. Prior to amendment, text read as follows: “For purposes of this subsection—
“(A) In general.—The term ‘overall domestic loss’ means any domestic loss to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding taxable year by reason of a carryback. For purposes of the preceding sentence, the term ‘domestic loss’ means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year).
“(B) Taxpayer must have elected foreign tax credit for year of loss.—The term ‘overall domestic loss’ shall not include any loss for any taxable year unless the taxpayer chose the benefits of this subpart for such taxable year.”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1235(f)(4)(B), substituted “holding or passive foreign investment company” for “holding company” in heading.
1964 Pub. L. 88-272 Pub. L. 88–272 substituted “section 1503(b)” for “section 1503(d)”.

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(A) In general The term “overall domestic loss” means—

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(i) with respect to any qualified taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for the taxable year or for any preceding qualified taxable year by reason of a carryback, and

(ii) with respect to any other taxable year, the domestic loss for such taxable year to the extent such loss offsets taxable income from sources without the United States for any preceding qualified taxable year by reason of a carryback.

(B) Domestic loss For purposes of subparagraph (A), the term “domestic loss” means the amount by which the gross income for the taxable year from sources within the United States is exceeded by the sum of the deductions properly apportioned or allocated thereto (determined without regard to any carryback from a subsequent taxable year).

(C) Qualified taxable year For purposes of subparagraph (A), the term “qualified taxable year” means any taxable year for which the taxpayer chose the benefits of this subpart.

(3) Characterization of subsequent income

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(A) In general Any income from sources within the United States that is treated as income from sources without the United States under paragraph (1) shall be allocated among and increase the income categories in proportion to the loss from sources within the United States previously allocated to those income categories.

(B) Income category For purposes of this paragraph, the term “income category” has the meaning given such term by subsection (f)(5)(E)(i).

(4) Coordination with subsection (f) The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this subsection with the provisions of subsection (f).

(5) Election to increase percentage of taxable income treated as foreign source

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14304(a), added par. (5).

(A) In general If any pre-2018 unused overall domestic loss is taken into account under paragraph (1) for any applicable taxable year, the taxpayer may elect to have such paragraph applied to such loss by substituting a percentage greater than 50 percent (but not greater than 100 percent) for 50 percent in subparagraph (B) thereof.

(B) Pre-2018 unused overall domestic loss For purposes of this paragraph, the term “pre-2018 unused overall domestic loss” means any overall domestic loss which—

“any overall domestic loss” Opening words

Textual readingALL OF= a pre-2018 unused overall domestic loss

(i) arises in a qualified taxable year beginning before January 1, 2018, and

(ii) has not been used under paragraph (1) for any taxable year beginning before such date.

(C) Applicable taxable year For purposes of this paragraph, the term “applicable taxable year” means any taxable year of the taxpayer beginning after December 31, 2017, and before January 1, 2028.

Textual readingALL OF= an applicable taxable year

“any taxable year of the taxpayer beginning after December 31, 2017”

“before January 1, 2028”

(h) Source rules in case of United States-owned foreign corporations

Amended 1976, 1978, 1984, 1999, 2001, 2002, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 402(a), redesignated subsec. (g) as (h). Former subsec. (h) redesignated (i).
2004 Pub. L. 108-311 Pub. L. 108–311 substituted “2003, 2004, or 2005” for “or 2003”.
2002 Pub. L. 107-147 Pub. L. 107–147, § 601(b)(1), substituted “during 2000, 2001, 2002, or 2003” for “during 2000 or 2001”.
2002 Pub. L. 107-147 Pub. L. 107–147, § 417(23)(B), amended directory language of Pub. L. 107–16, § 618(b)(2)(D). See 2001 Amendment note below.
2001 Pub. L. 107-16 Pub. L. 107–16, § 618(b)(2)(D), as amended by Pub. L. 107–147, § 417(23)(B), substituted “, 24, and 25B” for “and 24”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 202(f)(2)(C), substituted “sections 23 and 24” for “section 24”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 201(b)(2)(G), inserted “(other than section 24)” after “chapter”.
1999 Pub. L. 106-170 Pub. L. 106–170 inserted at end “This subsection shall not apply to taxable years beginning during 2000 or 2001.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 121(a), redesignated former subsecs. (g) and (h) as (h) and (i), respectively.
1978 Pub. L. 95-600 Pub. L. 95–600, § 421(e)(6), designated existing provisions as par. (1) and added par. (2).
1976 Pub. L. 94-455 Pub. L. 94–455, § 503(b)(1), redesignated former subsec. (g) as (h).

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(1) In general The following amounts which are derived from a United States-owned foreign corporation and which would be treated as derived from sources outside the United States without regard to this subsection shall, for purposes of this section, be treated as derived from sources within the United States to the extent provided in this subsection:

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(A) Any amount included in gross income under—

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 413(c)(15)(A), inserted “or” at end of cl. (i), redesignated cl. (iii) as (ii), and struck out former cl. (ii) which read as follows: “section 551 (relating to foreign personal holding company income taxed to United States shareholders), or”.

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(i) section 951(a) (relating to amounts included in gross income of United States shareholders), or

(ii) section 1293 (relating to current taxation of income from qualified funds).

(B) Interest.

(C) Dividends.

(2) Subpart F and passive foreign investment company inclusions Any amount described in subparagraph (A) of paragraph (1) shall be treated as derived from sources within the United States to the extent such amount is attributable to income of the United States-owned foreign corporation from sources within the United States.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 413(c)(15)(B), struck out “foreign personal holding or” before “passive foreign investment” in heading.

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(3) Certain interest allocable to United States source income Any interest which—

Textual readingALL OF= interest treated as united states source

(A) is paid or accrued by a United States-owned foreign corporation during any taxable year,

(B) is paid or accrued to a United States shareholder (as defined in section 951(b)) or a related person (within the meaning of section 267(b)) to such a shareholder, and

(C) is properly allocable (under regulations prescribed by the Secretary) to income of such foreign corporation for the taxable year from sources within the United States,

“Regulations prescribed by the Secretary” leaves this to Treasury. No regulation cites this provision (eCFR, Oct 19, 2026)

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shall be treated as derived from sources within the United States.

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(4) Dividends

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(A) In general The United States source ratio of any dividend paid or accrued by a United States-owned foreign corporation shall be treated as derived from sources within the United States.

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(B) United States source ratio For purposes of subparagraph (A), the term “United States source ratio” means, with respect to any dividend paid out of the earnings and profits for any taxable year, a fraction—

(i) the numerator of which is the portion of the earnings and profits for such taxable year from sources within the United States, and

(ii) the denominator of which is the total amount of earnings and profits for such taxable year.

(5) Exception where United States-owned foreign corporation has small amount of United States source income Paragraph (3) shall not apply to interest paid or accrued during any taxable year (and paragraph (4) shall not apply to any dividends paid out of the earnings and profits for such taxable year) if—

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(A) the United States-owned foreign corporation has earnings and profits for such taxable year, and

(B) less than 10 percent of such earnings and profits is attributable to sources within the United States.

For purposes of the preceding sentence, earnings and profits shall be determined without any reduction for interest described in paragraph (3) (determined without regard to subparagraph (C) thereof).

(6) United States-owned foreign corporation For purposes of this subsection, the term “United States-owned foreign corporation” means any foreign corporation if 50 percent or more of—

“any foreign corporation” Opening words

“if 50 percent or more of—” Opening words

“is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).” Closing words

Textual readingANY OF= a United States-owned foreign corporation

(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or

(B) the total value of the stock of such corporation,

is held directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) by United States persons (as defined in section 7701(a)(30)).

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(7) Dividend For purposes of this subsection, the term “dividend” includes any gain treated as a dividend under section 1248.

Amended 2014

2014 Pub. L. 113-295 Pub. L. 113–295, § 219(c), struck out “as ordinary income under section 1246 or” after “gain treated”.

(8) Coordination with subsection (f) This subsection shall be applied before subsection (f).

(9) Treatment of certain domestic corporations In the case of any dividend treated as not from sources within the United States under section 861(a)(2)(A), the corporation paying such dividend shall be treated for purposes of this subsection as a United States-owned foreign corporation.

Amended 2010

2010 Pub. L. 111-226 Pub. L. 111–226, § 217(c)(2), amended par. (9) generally. Prior to amendment, text read as follows: “For purposes of this subsection—
“(A) in the case of interest treated as not from sources within the United States under section 861(a)(1)(A), the corporation paying such interest shall be treated as a United States-owned foreign corporation, and
“(B) in the case of any dividend treated as not from sources within the United States under section 861(a)(2)(A), the corporation paying such dividend shall be treated as a United States-owned foreign corporation.”

(10) Coordination with treaties

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(A) In general If—

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14301(c)(18), substituted “sections 907 and 960” for “sections 902, 907, and 960” in concluding provisions.

(i) any amount derived from a United States-owned foreign corporation would be treated as derived from sources within the United States under this subsection by reason of an item of income of such United States-owned foreign corporation,

(ii) under a treaty obligation of the United States (applied without regard to this subsection and by treating any amount included in gross income under section 951(a)(1) as a dividend), such amount would be treated as arising from sources outside the United States, and

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(iii) the taxpayer chooses the benefits of this paragraph,

this subsection shall not apply to such amount to the extent attributable to such item of income (but subsections (a), (b), and (c) of this section and sections 907 and 960 shall be applied separately with respect to such amount to the extent so attributable).

(B) Special rule Amounts included in gross income under section 951(a)(1) shall be treated as a dividend under subparagraph (A)(ii) only if dividends paid by each corporation (the stock in which is taken into account in determining whether the shareholder is a United States shareholder in the United States-owned foreign corporation), if paid to the United States shareholder, would be treated under a treaty obligation of the United States as arising from sources outside the United States (applied without regard to this subsection).

(11) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate for purposes of this subsection, including—

(A) regulations for the application of this subsection in the case of interest or dividend payments through 1 or more entities, and

(B) regulations providing that this subsection shall apply to interest paid or accrued to any person (whether or not a United States shareholder).

(i) Limitation on use of deconsolidation to avoid foreign tax credit limitations If 2 or more domestic corporations would be members of the same affiliated group if—

§ 1.904(i)-0 Outline of regulation provisions.§ 1.904(i)-1 Limitation on use of deconsolidation to avoid foreign tax credit limitations.

Amended 1984, 1989, 2004, 2005, 2009, 2010, 2013

2013 Pub. L. 112-240 Pub. L. 112–240 redesignated subsecs. (j) to (l) as (i) to (k), respectively, and struck out former subsec. (i). Text read as follows: “In the case of any taxable year of an individual to which section 26(a)(2) does not apply, for purposes of subsection (a), the tax against which the credit is taken is such tax reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter (other than sections 23, 24, 25A(i), 25B, 30 30B,, and 30D).”
2010 Pub. L. 111-148 Pub. L. 111–148, § 10909(b)(2)(K), (c), as amended by Pub. L. 111–312, temporarily struck out “23,” after “than sections”. See Effective and Termination Dates of 2010 Amendment note below.
2009 Pub. L. 111-5 Pub. L. 111–5, § 1144(b)(1)(E), inserted “30B,” after “30”.
2009 Pub. L. 111-5 Pub. L. 111–5, § 1142(b)(1)(E), substituted “25B, 30, and 30D” for “and 25B”.
2009 Pub. L. 111-5 Pub. L. 111–5, § 1004(b)(5), inserted “25A(i),” after “24,”.
2005 Pub. L. 109-135 Pub. L. 109–135, § 402(i)(3)(G), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “In the case of an individual, for purposes of subsection (a), the tax against which the credit is taken is such tax reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter (other than sections 23, 24, and 25B). This subsection shall not apply to taxable years beginning during 2000, 2001, 2002, 2003, 2004, or 2005.”
2004 Pub. L. 108-357 Pub. L. 108–357, § 402(a), redesignated subsecs. (h) and (i) as (i) and (j), respectively. Former subsec. (j) redesignated (k).
1989 Pub. L. 101-239 Pub. L. 101–239, § 7402(a), added subsec. (i) and redesignated former subsec. (i) as (j).
1984 Pub. L. 98-369 Pub. L. 98–369, § 121(a), redesignated former subsecs. (g) and (h) as (h) and (i), respectively.

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(1) section 1504(b) were applied without regard to the exceptions contained therein, and

(2) the constructive ownership rules of section 1563(e) applied for purposes of section 1504(a),

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 701(e)(4)(H), struck out “by an individual” after “can be taken” and substituted “section 59(a)” for “section 55(c)”.

the Secretary may by regulations provide for resourcing the income of any of such corporations or for modifications to the consolidated return regulations to the extent that such resourcing or modifications are necessary to prevent the avoidance of the provisions of this subpart.

(j) Certain individuals exempt

§ 1.904(j)-0 Outline of regulation provisions.§ 1.904(j)-1 Certain individuals exempt from foreign tax credit limitation.

Amended 1989, 1997, 2004, 2013

2013 Pub. L. 112-240 Pub. L. 112–240 redesignated subsecs. (j) to (l) as (i) to (k), respectively, and struck out former subsec. (i). Text read as follows: “In the case of any taxable year of an individual to which section 26(a)(2) does not apply, for purposes of subsection (a), the tax against which the credit is taken is such tax reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter (other than sections 23, 24, 25A(i), 25B, 30 30B,, and 30D).”
2004 Pub. L. 108-357 Pub. L. 108–357, § 402(a), redesignated subsecs. (h) and (i) as (i) and (j), respectively. Former subsec. (j) redesignated (k).
1997 Pub. L. 105-34 Pub. L. 105–34, § 1101(a), added subsec. (j) and redesignated former subsec. (j) as (k).
1989 Pub. L. 101-239 Pub. L. 101–239, § 7402(a), added subsec. (i) and redesignated former subsec. (i) as (j).

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(1) In general In the case of an individual to whom this subsection applies for any taxable year—

(A) the limitation of subsection (a) shall not apply,

(B) no taxes paid or accrued by the individual during such taxable year may be deemed paid or accrued under subsection (c) in any other taxable year, and

(C) no taxes paid or accrued by the individual during any other taxable year may be deemed paid or accrued under subsection (c) in such taxable year.

(2) Individuals to whom subsection applies This subsection shall apply to an individual for any taxable year if—

(A) the entire amount of such individual’s gross income for the taxable year from sources without the United States consists of qualified passive income,

(B) the amount of the creditable foreign taxes paid or accrued by the individual during the taxable year does not exceed $300 ($600 in the case of a joint return), and

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(C) such individual elects to have this subsection apply for the taxable year.

(3) Definitions For purposes of this subsection—

(A) Qualified passive income The term “qualified passive income” means any item of gross income if—

“any item of gross income” Opening words

Textual readingALL OF= qualified passive income

(i) such item of income is passive income (as defined in subsection (d)(2)(B) without regard to clause (iii) thereof), and

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(ii) such item of income is shown on a payee statement furnished to the individual.

(B) Creditable foreign taxes The term “creditable foreign taxes” means any taxes for which a credit is allowable under section 901; except that such term shall not include any tax unless such tax is shown on a payee statement furnished to such individual.

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(C) Payee statement The term “payee statement” has the meaning given to such term by section 6724(d)(2).

(D) Estates and trusts not eligible This subsection shall not apply to any estate or trust.

(k) Cross references For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(c).

Amended 1997, 2004, 2013, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14301(c)(19), amended subsec. (k) generally. Prior to amendment, text read as follows:
2017 “(1) For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b).
2017 “(2) For modification of limitation under subsection (a) for purposes of determining the amount of credit which can be taken against the alternative minimum tax, see section 59(a).”
2013 Pub. L. 112-240 Pub. L. 112–240 redesignated subsecs. (j) to (l) as (i) to (k), respectively, and struck out former subsec. (i). Text read as follows: “In the case of any taxable year of an individual to which section 26(a)(2) does not apply, for purposes of subsection (a), the tax against which the credit is taken is such tax reduced by the sum of the credits allowable under subpart A of part IV of subchapter A of this chapter (other than sections 23, 24, 25A(i), 25B, 30 30B,, and 30D).”
2004 Pub. L. 108-357 Pub. L. 108–357, § 402(a), redesignated subsec. (j) as (k). Former subsec. (k) redesignated (l).
2004 Pub. L. 108-357 Pub. L. 108–357, § 404(f)(6), which directed amendment of subsec. (j)(3)(A)(i) by substituting “subsection (d)(2)(B)” for “subsection (d)(2)(A)”, was executed to subsec. (k)(3)(A)(i) to reflect the probable intent of Congress and the amendment by Pub. L. 108–357, § 402(a). See above.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1101(a), added subsec. (j) and redesignated former subsec. (j) as (k).