26 U.S.C. § 954: Foreign base company income

(a) Foreign base company income For purposes of section 952(a)(2), the term “foreign base company income” means for any taxable year the sum of—

Amended 1975, 1982, 1986, 2004, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(a), struck out par. (5) which read as follows: “the foreign base company oil related income for the taxable year (determined under subsection (g) and reduced as provided in subsection (b)(5)).”
2004 Pub. L. 108-357 Pub. L. 108–357, § 415(a)(1), struck out par. (4) which read as follows: “the foreign base company shipping income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)), and”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(c)(3)(A)(ii), substituted “determined under subsection (g)” for “determined under subsection (h)”.
1982 Pub. L. 97-248 Pub. L. 97–248, § 212(a), (e), added par. (5).
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(d)(1)(A), added par. (4).

Cited by 9

(1) the foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)),

Cited by 1

(2) the foreign base company sales income for the taxable year (determined under subsection (d) and reduced as provided in subsection (b)(5)), and

Cited by 2

(3) the foreign base company services income for the taxable year (determined under subsection (e) and reduced as provided in subsection (b)(5)).

Cited by 2

(b) Exclusion and special rules

Amended 1975, 1976, 1982, 1988, 1993, 2004, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(b)(2)(C), struck out par. (6). Text read as follows: “Income of a corporation which is foreign base company oil related income shall not be considered foreign base company income of such corporation under paragraph (2), or (3) of subsection (a).”
2004 Pub. L. 108-357 Pub. L. 108–357, § 415(c)(2)(B), (C), redesignated par. (8) as (6) and struck out former pars. (6) and (7) which set forth special rules and special exclusion for foreign base company shipping income.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13235(a)(3)(B), struck out “(1),” after “such corporation under paragraph”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(12), struck out “(determined without regard to the exclusion under paragraph (2) of this subsection)” after “paragraph (4) of subsection (a)”.
1982 Pub. L. 97-248 Pub. L. 97–248, § 212(b)(2), added par. (8).
1976 Pub. L. 94-455 Pub. L. 94–455, § 1024(a), added par. (7).
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(d)(1)(F), added par. (6).

Cited by 6

[(1) Repealed. Pub. L. 94–12, title VI, § 602(c)(1), Mar. 29, 1975, 89 Stat. 58]

Amended 1975

1975 Pub. L. 94-12 Pub. L. 94–12, § 602(c)(1), struck out subsec. (b)(1) which related to the exclusion of certain dividends, interest, and gains from qualified investments in less developed countries.

Cited by 12

[(2) Repealed. Pub. L. 99–514, title XII, § 1221(c)(1), Oct. 22, 1986, 100 Stat. 2553]

Amended 1975, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(c)(1), struck out par. (2), exclusion for reinvested shipping income, which read as follows: “For purposes of subsection (a), foreign base company income does not include foreign base company shipping income to the extent that the amount of such income does not exceed the increase for the taxable year in qualified investments in foreign base company shipping operations of the controlled foreign corporation (as determined under subsection (g)).”
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(d)(1)(B), substituted “foreign base company shipping income to the extent that the amount of such income does not exceed the increase for the taxable year in qualified investments in foreign base company shipping operations of the controlled foreign corporation (as determined under subsection (g))” for “income derived from, or in connection with, the use (or hiring or leasing for use) of any aircraft or vessel in foreign commerce, or the performance of services directly related to the use of any such aircraft or vessel” in text and “Exclusion for reinvested shipping income” for “Exclusion of certain shipping income” in heading.

Cited by 14

(3) De minimis, etc., rules For purposes of subsection (a) and section 953—

Amended 1975, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1223(a), amended par. (3) generally. Prior to amendment, par. (3), special rule where foreign base company income is less than 10 percent or more than 70 percent of gross income, read as follows: “For purposes of subsection (a)—
“(A) If the foreign base company income (determined without regard to paragraphs (2) and (5)) is less than 10 percent of gross income, no part of the gross income of the taxable year shall be treated as foreign base company income.
“(B) If the foreign base company income (determined without regard to paragraphs (2) and (5)) exceeds 70 percent of gross income, the entire gross income of the taxable year shall, subject to the provisions of paragraphs (2), (4), and (5), be treated as foreign base company income.”
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(d)(1)(C), (D), (e), substituted “10 percent” for “30 percent” in heading, substituted “paragraphs (2) and (5)” for “paragraphs (1) and (5)” and “10 percent” for “30 percent” in subpar. (A), and substituted “paragraphs (2) and (5)” for “paragraphs (1) and (5)” and “paragraphs (2), (4), and (5)” for “paragraphs (1), (2), (4), and (5)” in subpar. (B).

Cited by 5

(A) De minimis rule If the sum of foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year is less than the lesser of—

Cited by 16

(i) 5 percent of gross income, or

(ii) $1,000,000,

no part of the gross income for the taxable year shall be treated as foreign base company income or insurance income.

(B) Foreign base company income and insurance income in excess of 70 percent of gross income If the sum of the foreign base company income (determined without regard to paragraph (5)) and the gross insurance income for the taxable year exceeds 70 percent of gross income, the entire gross income for the taxable year shall, subject to the provisions of paragraphs (4) and (5), be treated as foreign base company income or insurance income (whichever is appropriate).

Cited by 8

(C) Gross insurance income For purposes of subparagraphs (A) and (B), the term “gross insurance income” means any item of gross income taken into account in determining insurance income under section 953.

Cited by 1

(4) Exception for certain income subject to high foreign taxes For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11.

Amended 1969, 1976, 1982, 1986, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(b)(2)(A), struck out at end “The preceding sentence shall not apply to foreign base company oil-related income described in subsection (a)(5).”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(d), amended par. (4) generally. Prior to amendment, par. (4), exception for foreign corporations not availed of to reduce taxes, read as follows: “For purposes of subsection (a), foreign base company income does not include any item of income received by a controlled foreign corporation if it is established to the satisfaction of the Secretary that neither—
“(A) the creation or organization of such controlled foreign corporation under the laws of the foreign country in which it is incorporated (or, in the case of a controlled foreign corporation which is an acquired corporation, the acquisition of such corporation created or organized under the laws of the foreign country in which it is incorporated), nor
“(B) the effecting of the transaction giving rise to such income through the controlled foreign corporation,
has as one of its significant purposes a substantial reduction of income, war profits, or excess profits or similar taxes. The preceding sentence shall not apply to foreign base company oil related income described in subsection (a)(5).”
1982 Pub. L. 97-248 Pub. L. 97–248, § 212(d), inserted at end “The preceding sentence shall not apply to foreign base company oil related income described in subsection (a)(5).”
1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
1969 Pub. L. 91-172 Pub. L. 91–172 inserted reference to a foreign corporation which is an acquired corporation, and made the effecting of a transaction giving rise to foreign base income through the controlled foreign corporation subject to the Secretary’s power to disallow inclusion of any item of such income where such inclusion will have one of the effects prescribed by this section.

Cited by 46

(5) Deductions to be taken into account For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, and the foreign base company services income shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income. Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons.

Amended 1975, 1976, 1982, 1986, 2004, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(b)(2)(B), which directed substitution of “and the foreign base company services income” for “the foreign base company services income, and the foreign base company oil related income”, was executed by making the substitution for “the foreign base company services income,, and the foreign base company oil related income” to reflect the probable intent of Congress.
2004 Pub. L. 108-357 Pub. L. 108–357, § 415(c)(2)(A), struck out “the foreign base company shipping income,” after “the foreign base company services income,,”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1201(c), inserted at end “Except to the extent provided in regulations prescribed by the Secretary, any interest which is paid or accrued by the controlled foreign corporation to any United States shareholder in such corporation (or any controlled foreign corporation related to such a shareholder) shall be allocated first to foreign personal holding company income which is passive income (within the meaning of section 904(d)(2)) of such corporation to the extent thereof. The Secretary may, by regulations, provide that the preceding sentence shall apply also to interest paid or accrued to other persons.”
1982 Pub. L. 97-248 Pub. L. 97–248, § 212(b)(1), substituted “, the foreign base company shipping income, and the foreign base company oil related income” for “and the foreign base company shipping income”.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(d)(1)(E), substituted “the foreign base company services income, and the foreign base company shipping income” for “and the foreign base company services income”.

Cited by 31

(c) Foreign personal holding company income

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(a)(1), amended subsec. (c) generally, substituting pars. (1) to (3) for former provisions which had provided: in par. (1), a reference to definition of “foreign personal holding company income” contained in section 553; in par. (2), that all rents would be included in “foreign personal holding company income” without regard to whether or not such rents constituted 50 percent or more of gross income; in par. (3), for exclusion of certain income derived in active conduct of a trade or business; and in par. (4), exclusion of certain income received from related persons from being included in “foreign personal holding company income”. See subsec. (c)(3).

Cited by 26

(1) In general For purposes of subsection (a)(1), the term “foreign personal holding company income” means the portion of the gross income which consists of:

Amended 2004, 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(20), redesignated subpar. (I) as (H).
2004 Pub. L. 108-357 Pub. L. 108–357, § 413(b)(2), added subpar. (I).

Cited by 12

(A) Dividends, etc. Dividends, interest, royalties, rents, and annuities.

Cited by 14

(B) Certain property transactions The excess of gains over losses from the sale or exchange of property—

Amended 1988, 1997, 1999, 2002

2002 Pub. L. 107-147 Pub. L. 107–147, § 417(24)(B)(ii), which directed the amendment of Pub. L. 106–170, § 532(c)(2)(Q), was executed to that section as if the amendment were retroactive to the effective date of the amendment by Pub. L. 106–170 to reflect the probable intent of Congress. See 1999 Amendment note below.
1999 Pub. L. 106-170 Pub. L. 106–170, § 532(c)(2)(Q), as amended by Pub. L. 107–147, § 417(24)(B)(ii), substituted “section 1221(a)(1)” for “section 1221(1)” in concluding provisions.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1051(a)(2), in concluding provisions, struck out “In the case of any regular dealer in property, gains and losses from the sale or exchange of any such property or arising out of bona fide hedging transactions reasonably necessary to the conduct of the business of being a dealer in such property shall not be taken into account under this subparagraph.” before “Gains and losses” and “also” after “section 1221(1)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(18), (20), added cl. (ii), redesignated former cl. (ii) as (iii), added closing provisions, and struck out former closing provisions which read as follows: “This subparagraph shall not apply to gain from the sale or exchange of any property which, in the hands of the taxpayer, is property described in section 1221(1) or to gain from the sale or exchange of any property by a regular dealer in such property.”

Cited by 6

(i) which gives rise to income described in subparagraph (A) (after application of paragraph (2)(A)) other than property which gives rise to income not treated as foreign personal holding company income by reason of subsection (h) or (i) for the taxable year,

Amended 1998

1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(e), inserted “other than property which gives rise to income not treated as foreign personal holding company income by reason of subsection (h) or (i) for the taxable year” before comma at end.

Cited by 4

(ii) which is an interest in a trust, partnership, or REMIC, or

(iii) which does not give rise to any income.

Gains and losses from the sale or exchange of any property which, in the hands of the controlled foreign corporation, is property described in section 1221(a)(1) shall not be taken into account under this subparagraph.

(C) Commodities transactions The excess of gains over losses from transactions (including futures, forward, and similar transactions) in any commodities. This subparagraph shall not apply to gains or losses which—

Cited by 4

(i) arise out of commodity hedging transactions (as defined in paragraph (5)(A)),

Amended 2004, 2005

2005 Pub. L. 109-135 Pub. L. 109–135, § 412(ll), substituted “paragraph (5)(A)” for “paragraph (4)(A)”.
2004 Pub. L. 108-357 Pub. L. 108–357, § 414(a), amended cls. (i) and (ii) generally. Prior to amendment, cls. (i) and (ii) read as follows:
2004 “(i) arise out of bona fide hedging transactions reasonably necessary to the conduct of any business by a producer, processor, merchant, or handler of a commodity in the manner in which such business is customarily and usually conducted by others,
2004 “(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation’s business is as an active producer, processor, merchant, or handler of commodities, or”.

Cited by 1

(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a), or

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 414(a), amended cls. (i) and (ii) generally. Prior to amendment, cls. (i) and (ii) read as follows:
2004 “(i) arise out of bona fide hedging transactions reasonably necessary to the conduct of any business by a producer, processor, merchant, or handler of a commodity in the manner in which such business is customarily and usually conducted by others,
2004 “(ii) are active business gains or losses from the sale of commodities, but only if substantially all of the controlled foreign corporation’s business is as an active producer, processor, merchant, or handler of commodities, or”.

Cited by 1

(iii) are foreign currency gains or losses (as defined in section 988(b)) attributable to any section 988 transactions.

(D) Foreign currency gains The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transactions. This subparagraph shall not apply in the case of any transaction directly related to the business needs of the controlled foreign corporation.

Cited by 8

(E) Income equivalent to interest Any income equivalent to interest, including income from commitment fees (or similar amounts) for loans actually made.

Cited by 3

(F) Income from notional principal contracts

Amended 1997, 2005, 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(19), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall not be taken into account for purposes of this subparagraph but shall be taken into account under such other subparagraph.”
2005 Pub. L. 109-135 Pub. L. 109–135, § 412(mm), struck out “Net income from notional principal contracts.” before “Any item of income”.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1051(a)(1), added subpars. (F) and (G).

Cited by 3

(i) In general Net income from notional principal contracts.

(ii) Coordination with other categories of foreign personal holding company income Any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall not be taken into account for purposes of this subparagraph but shall be taken into account under such other subparagraph.

Cited by 2

(G) Payments in lieu of dividends Payments in lieu of dividends which are made pursuant to an agreement to which section 1058 applies.

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1051(a)(1), added subpars. (F) and (G).

Cited by 4

(H) Personal service contracts

Amended 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(20), redesignated subpar. (I) as (H).

Cited by 1

(i) Amounts received under a contract under which the corporation is to furnish personal services if—

(I) some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or

(II) the individual who is to perform the services is designated (by name or by description) in the contract, and

(ii) amounts received from the sale or other disposition of such a contract.

This subparagraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.

(2) Exception for certain amounts

Cited by 3

(A) Rents and royalties derived in active business Foreign personal holding company income shall not include rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)). For purposes of the preceding sentence, rents derived from leasing an aircraft or vessel in foreign commerce shall not fail to be treated as derived in the active conduct of a trade or business if, as determined under regulations prescribed by the Secretary, the active leasing expenses are not less than 10 percent of the profit on the lease.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 415(b), inserted at end “For purposes of the preceding sentence, rents derived from leasing an aircraft or vessel in foreign commerce shall not fail to be treated as derived in the active conduct of a trade or business if, as determined under regulations prescribed by the Secretary, the active leasing expenses are not less than 10 percent of the profit on the lease.”

Cited by 18

(B) Certain export financing Foreign personal holding company income shall not include any interest which is derived in the conduct of a banking business and which is export financing interest (as defined in section 904(d)(2)(G)).

Cited by 4

(C) Exception for dealers Except as provided by regulations, in the case of a regular dealer in property which is property described in paragraph (1)(B), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding company income—

Amended 1997, 1998

1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(c), amended heading and text of subpar. (C), generally. Prior to amendment, text read as follows: “Except as provided in subparagraph (A), (E), or (G) of paragraph (1) or by regulations, in the case of a regular dealer in property (within the meaning of paragraph (1)(B)), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding income any item of income, gain, deduction, or loss from any transaction (including hedging transactions) entered into in the ordinary course of such dealer’s trade or business as such a dealer.”
1997 Pub. L. 105-34 Pub. L. 105–34, § 1051(b), added subpar. (C).

Cited by 2

(i) any item of income, gain, deduction, or loss (other than any item described in subparagraph (A), (E), or (G) of paragraph (1)) from any transaction (including hedging transactions and transactions involving physical settlement) entered into in the ordinary course of such dealer’s trade or business as such a dealer, and

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 414(c), inserted “and transactions involving physical settlement” after “(including hedging transactions”.

(ii) if such dealer is a dealer in securities (within the meaning of section 475), any interest or dividend or equivalent amount described in subparagraph (E) or (G) of paragraph (1) from any transaction (including any hedging transaction or transaction described in section 956(c)(2)(I)) entered into in the ordinary course of such dealer’s trade or business as such a dealer in securities, but only if the income from the transaction is attributable to activities of the dealer in the country under the laws of which the dealer is created or organized (or in the case of a qualified business unit described in section 989(a), is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity).

Amended 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(g)(15)(B), substituted “section 956(c)(2)(I)” for “section 956(c)(2)(J)”.

Cited by 5

(3) Certain income received from related persons

Cited by 14

(A) In general Except as provided in subparagraph (B), the term “foreign personal holding company income” does not include—

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(i)(3)(C), inserted at end “To the extent provided in regulations, payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership.”

Cited by 8

(i) dividends and interest received from a related person which (I) is a corporation created or organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is created or organized, and (II) has a substantial part of its assets used in its trade or business located in such same foreign country, and

Amended 1989, 1996

1996 Pub. L. 104-188 Pub. L. 104–188 amended directory language of Pub. L. 101–239, § 7811(i)(3)(A). See 1989 Amendment note below.
1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(i)(3)(A), as amended by Pub. L. 104–188, substituted “is a corporation created” for “is created” after “person which (I)”.

Cited by 10

(ii) rents and royalties received from a corporation which is a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized.

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(i)(3)(B), substituted “from a corporation which is a related person” for “from a related person”.

To the extent provided in regulations, payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership.

(B) Exception not to apply to items which reduce subpart F income Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty reduces the payor’s subpart F income or creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(25)(B), inserted before period at end “or creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation”.

Cited by 9

(C) Exception for certain dividends Subparagraph (A)(i) shall not apply to any dividend with respect to any stock which is attributable to earnings and profits of the distributing corporation accumulated during any period during which the person receiving such dividend did not hold such stock either directly, or indirectly through a chain of one or more subsidiaries each of which meets the requirements of subparagraph (A)(i).

Amended 1976, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13233(a)(1), added subpar. (C).
1976 Pub. L. 94-455 Pub. L. 94–455, § 1023(a), added subpar. (C).

(4) Look-thru rule for certain partnership sales

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 412(a), added par. (4).

Cited by 5

(A) In general In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of the assets of the partnership attributable to such interest. The Secretary shall prescribe such regulations as may be appropriate to prevent abuse of the purposes of this paragraph, including regulations providing for coordination of this paragraph with the provisions of subchapter K.

Cited by 1

(B) 25-percent owner For purposes of this paragraph, the term “25-percent owner” means a controlled foreign corporation which owns directly 25 percent or more of the capital or profits interest in a partnership. For purposes of the preceding sentence, if a controlled foreign corporation is a shareholder or partner of a corporation or partnership, the controlled foreign corporation shall be treated as owning directly its proportionate share of any such capital or profits interest held directly or indirectly by such corporation or partnership. If a controlled foreign corporation is treated as owning a capital or profits interest in a partnership under constructive ownership rules similar to the rules of section 958(b), the controlled foreign corporation shall be treated as owning such interest directly for purposes of this subparagraph.

Amended 2005

2005 Pub. L. 109-135 Pub. L. 109–135, § 403(m), inserted at end “If a controlled foreign corporation is treated as owning a capital or profits interest in a partnership under constructive ownership rules similar to the rules of section 958(b), the controlled foreign corporation shall be treated as owning such interest directly for purposes of this subparagraph.”

Cited by 2

(5) Definition and special rules relating to commodity transactions

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 414(b), added par. (5).

(A) Commodity hedging transactions For purposes of paragraph (1)(C)(i), the term “commodity hedging transaction” means any transaction with respect to a commodity if such transaction—

“any transaction with respect to a commodity” Opening words

Textual readingALL OF= a commodity hedging transaction

(i) is a hedging transaction as defined in section 1221(b)(2), determined—

(I) without regard to subparagraph (A)(ii) thereof,

(II) by applying subparagraph (A)(i) thereof by substituting “ordinary property or property described in section 1231(b)” for “ordinary property”, and

(III) by substituting “controlled foreign corporation” for “taxpayer” each place it appears, and

(ii) is clearly identified as such in accordance with section 1221(a)(7).

Cited by 3

(B) Treatment of dealer activities under paragraph (1)(C) Commodities with respect to which gains and losses are not taken into account under paragraph (2)(C) in computing a controlled foreign corporation’s foreign personal holding company income shall not be taken into account in applying the substantially all test under paragraph (1)(C)(ii) to such corporation.

(C) Regulations The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (1)(C) in the case of transactions involving related parties.

(6) Look-thru rule for related controlled foreign corporations

§ 1.954(c)(6)-1 Certain cases in which section 954(c)(6) exception not available.Prop. § 1.954(c)(6)-2 Proposed 2020 · Definition of controlled foreign corporation for purposes of section 954(c)(6).

Amended 2006

2006 Pub. L. 109-222 Pub. L. 109–222, § 103(b)(1), added par.(6).

Cited by 38

(A) In general For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. For purposes of this subparagraph, interest shall include factoring income which is treated as income equivalent to interest for purposes of paragraph (1)(E). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including such regulations as may be necessary or appropriate to prevent the abuse of the purposes of this paragraph.

Amended 2006

2006 Pub. L. 109-432 Pub. L. 109–432, in first sentence, substituted “which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States” for “which is not subpart F income” and, in last sentence, substituted “The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including such regulations as may be necessary or appropriate to prevent the abuse of the purposes of this paragraph” for “The Secretary shall prescribe such regulations as may be appropriate to prevent the abuse of the purposes of this paragraph”.

Cited by 5

(B) Exception Subparagraph (A) shall not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty creates (or increases) a deficit which under section 952(c) may reduce the subpart F income of the payor or another controlled foreign corporation.

Amended 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 4(a), added subpar. (B) and redesignated former subpar. (B) as (C).

(C) Application Subparagraph (A) shall apply to taxable years of foreign corporations beginning after December 31, 2005, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

Amended 2007, 2008, 2010, 2013, 2014, 2015, 2019, 2020, 2025

2025 Pub. L. 119-21 Pub. L. 119–21 struck out “and before January 1, 2026,” after “after December 31, 2005,”.
2020 Pub. L. 116-260 Pub. L. 116–260 substituted “January 1, 2026” for “January 1, 2021”.
2019 Pub. L. 116-94 Pub. L. 116–94 substituted “January 1, 2021” for “January 1, 2020”.
2015 Pub. L. 114-113 Pub. L. 114–113, § 144(a), substituted “January 1, 2020” for “January 1, 2015”.
2014 Pub. L. 113-295 Pub. L. 113–295, § 135(a), substituted “January 1, 2015” for “January 1, 2014”.
2013 Pub. L. 112-240 Pub. L. 112–240, § 323(a), substituted “January 1, 2014” for “January 1, 2012”.
2010 Pub. L. 111-312 Pub. L. 111–312, § 751(a), substituted “January 1, 2012” for “January 1, 2010”.
2008 Pub. L. 110-343 Pub. L. 110–343, § 304(a), substituted “January 1, 2010” for “January 1, 2009”.
2007 Pub. L. 110-172 Pub. L. 110–172, § 4(a), added subpar. (B) and redesignated former subpar. (B) as (C).

(d) Foreign base company sales income

Cases: Elec. Arts, Inc. v. Commissioner, 118 T.C. 226 (2002)

Cited by 13

(1) In general For purposes of subsection (a)(2), the term “foreign base company sales income” means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where—

Amended 1975

1975 Pub. L. 94-12 Pub. L. 94–12, § 602(b), provided that for purposes of subsec. (d) personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.

Cited by 6

(A) the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and

Cited by 12

(B) the property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country.

Cited by 1

For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.

(2) Certain branch income For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation.

Cited by 7

(3) Related person defined For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—

Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(i)(14)(A), substituted “more than 50 percent” for “50 percent or more” in last two sentences.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(e), added subpars. (A) and (B) and concluding provisions and struck out former subpars. (A) to (C) and concluding provisions which read as follows:
“(A) such person is an individual, partnership, trust, or estate which controls the controlled foreign corporation;
“(B) such person is a corporation which controls, or is controlled by, the controlled foreign corporation; or
“(C) such person is a corporation which is controlled by the same person or persons which control the controlled foreign corporation.
For purposes of the preceding sentence, control means the ownership, directly or indirectly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this paragraph, the rules for determining ownership of stock prescribed by section 958 shall apply.”

Cited by 103

(A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or

(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.

For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply.

(4) Special rule for certain timber products For purposes of subsection (a)(2), the term “foreign base company sales income” includes any income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with—

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13239(d), added par. (4).

(A) the sale of any unprocessed timber referred to in section 865(b), or

(B) the milling of any such timber outside the United States.

Subpart G shall not apply to any amount treated as subpart F income by reason of this paragraph.

(e) Foreign base company services income

Amended 1984, 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(u)(38), related to execution of amendment by Pub. L. 99–514, § 1221(b)(3)(B), see 1986 Amendment note below.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(k), in amending subsec. (e) generally, designated existing provisions as par. (1), added par. heading, and substituted subpar. (A) and (B) designations for prior par. (1) and (2) designations, struck out provisions relating to nonapplicability of preceding sentence to services performed in connection with manufactured or grown or extracted property, and provisions determining the place of performance of services for purposes of paragraph (2) with respect to any policy of insurance and reinsurance, and added pars. (2) and (3).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(b)(3)(B), and Pub. L. 100–647, § 1018(u)(38), struck out par. (3) as enacted by section 1810(k) of Pub. L. 99–514, which read as follows: “For purposes of paragraph (1), in the case of any services performed with respect to any policy of insurance or reinsurance with respect to which the primary insured is a related person (within the meaning of section 864(d)(4))—
“(A) such primary insured shall be treated as a related person for purposes of paragraph (1)(A) (whether or not the requirements of subsection (d)(3) are met),
“(B) such services shall be treated as performed in the country within which the insured hazards, risks, losses, or liabilities occur, and
“(C) except as otherwise provided in regulations by the Secretary, rules similar to the rules of section 953(b) shall be applied in determining the income from such services.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 137(a), inserted provision that for purposes of par. (2) services performed with respect to any insurance or reinsurance policy be treated as performed in the country of risk.

Cited by 8

(1) In general For purposes of subsection (a)(3), the term “foreign base company services income” means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which—

“income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services” Opening words

Textual readingALL OF= foreign base company services income

(A) are performed for or on behalf of any related person (within the meaning of subsection (d)(3)), and

Cited by 1

(B) are performed outside the country under the laws of which the controlled foreign corporation is created or organized.

Cited by 1

(2) Exception Paragraph (1) shall not apply to income derived in connection with the performance of services which are directly related to—

“to income derived in connection with the performance of services which are directly related to—” Opening words

Textual readingANY OF= paragraph (1) does not apply to sales-related services income

(A) the sale or exchange by the controlled foreign corporation of property manufactured, produced, grown, or extracted by it and which are performed before the time of the sale or exchange, or

(B) an offer or effort to sell or exchange such property.

Paragraph (1) shall also not apply to income which is exempt insurance income (as defined in section 953(e)) or which is not treated as foreign personal holding income by reason of subsection (c)(2)(C)(ii), (h), or (i).

Amended 1997, 1998

1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(d), inserted “or” at end of subpar. (A), substituted a period for “, or” at end of subpar. (B), and inserted concluding provisions.
1998 Pub. L. 105-277 Pub. L. 105–277, § 4003(j), substituted “(h)(9)” for “(h)(8)”.
1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(d), struck out subpar. (C) which read as follows: “in the case of taxable years described in subsection (h)(9), the active conduct by a controlled foreign corporation of a banking, financing, insurance, or similar business, but only if the corporation is predominantly engaged in the active conduct of such business (within the meaning of subsection (h)(3)) or is a qualifying insurance company.”
1997 Pub. L. 105-34 Pub. L. 105–34, § 1175(b), added subpar. (C).

Cited by 1

[(f) Repealed. Pub. L. 108–357, title IV, § 415(a)(2), Oct. 22, 2004, 118 Stat. 1511]

Amended 1975, 1986, 1993, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 415(a)(2), struck out subsec. (f) which defined “foreign base company shipping income” for purposes of subsec. (a)(4).
1993 Pub. L. 103-66 Pub. L. 103–66, § 13235(b), inserted at end of concluding provisions “Except as provided in paragraph (1), such term shall not include any dividend or interest income which is foreign personal holding company income (as defined in subsection (c)).”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(c)(2), inserted last sentence.
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(c)(2), (d)(1)(G), added subsecs. (f) and (g).

Cited by 7

[(g) Repealed. Pub. L. 115–97, title I, § 14211(b)(3), Dec. 22, 2017, 131 Stat. 2217]

Amended 1975, 1986, 1993, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14211(b)(3), struck out subsec. (g) which related to foreign base company oil related income.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13235(a)(3)(A), inserted at end “Such term shall not include any foreign personal holding company income (as defined in subsection (c)).”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(c)(3)(A)(i), redesignated subsec. (h) as (g) and struck out former subsec. (g), increase in qualified investments in foreign base company shipping operations, which read as follows: “For purposes of subsection (b)(2), the increase for any taxable year in qualified investments in foreign base company shipping operations of any controlled foreign corporation is the amount by which—
“(1) the qualified investments in foreign base company shipping operations (as defined in section 955(b)) of the controlled foreign corporation at the close of the taxable year, exceed
“(2) the qualified investments in foreign base company shipping operations (as so defined) of the controlled foreign corporation at the close of the preceding taxable year.”
1975 Pub. L. 94-12 Pub. L. 94–12, § 602(c)(2), (d)(1)(G), added subsecs. (f) and (g).

Cited by 16

(h) Special rule for income derived in the active conduct of banking, financing, or similar businesses

Amended 1982, 1986, 1997, 1998, 1999, 2002, 2006, 2008, 2010, 2013, 2014, 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 128(b), struck out par. (9). Text read as follows: “This subsection, subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2) shall apply only to taxable years of a foreign corporation beginning after December 31, 1998, and before January 1, 2015, and to taxable years of United States shareholders with or within which any such taxable year of such foreign corporation ends.”
2014 Pub. L. 113-295 Pub. L. 113–295, § 134(b), substituted “January 1, 2015” for “January 1, 2014”.
2013 Pub. L. 112-240 Pub. L. 112–240, § 322(b), substituted “January 1, 2014” for “January 1, 2012”.
2010 Pub. L. 111-312 Pub. L. 111–312, § 750(a), substituted “January 1, 2012” for “January 1, 2010”.
2008 Pub. L. 110-343 Pub. L. 110–343, § 303(b), substituted “January 1, 2010” for “January 1, 2009”.
2006 Pub. L. 109-222 Pub. L. 109–222, § 103(a)(2), substituted “January 1, 2009” for “January 1, 2007”.
2002 Pub. L. 107-147 Pub. L. 107–147, § 614(a)(2), substituted “January 1, 2007” for “January 1, 2002”.
1999 Pub. L. 106-170 Pub. L. 106–170, § 503(a), substituted “taxable years” for “the first taxable year”, “January 1, 2002” for “January 1, 2000”, and “within which any such” for “within which such”.
1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(a), amended heading and text of subsec. (h) generally. Prior to amendment, text consisted of pars. (1) to (9) relating to special rule for income derived in active conduct of banking, financing, or similar businesses, principles for determining applicable income, meaning of “predominantly engaged” for purposes of the special rule, methods of determining unearned premiums and reserves, definitions of certain terms for purposes of subsec. (h), anti-abuse rules, coordination with section 953 of this title, and taxable year applicability of subsec. (h).
1997 Pub. L. 105-34 Pub. L. 105–34, § 1175(a), added subsec. (h).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1221(c)(3)(A)(i), redesignated subsec. (h) as (g) and struck out former subsec. (g), increase in qualified investments in foreign base company shipping operations, which read as follows: “For purposes of subsection (b)(2), the increase for any taxable year in qualified investments in foreign base company shipping operations of any controlled foreign corporation is the amount by which—
“(1) the qualified investments in foreign base company shipping operations (as defined in section 955(b)) of the controlled foreign corporation at the close of the taxable year, exceed
“(2) the qualified investments in foreign base company shipping operations (as so defined) of the controlled foreign corporation at the close of the preceding taxable year.”
1982 Pub. L. 97-248 Pub. L. 97–248, § 212(c), added subsec. (h).

Cited by 12

(1) In general For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified banking or financing income of an eligible controlled foreign corporation.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 712(f), substituted “paragraphs (2) and (3) of section 907(c)” for “section 907(c)(2)”.

Cited by 1

(2) Eligible controlled foreign corporation For purposes of this subsection—

Cited by 3

(A) In general The term “eligible controlled foreign corporation” means a controlled foreign corporation which—

“a controlled foreign corporation” Opening words

Textual readingALL OF= an eligible controlled foreign corporation

(i) is predominantly engaged in the active conduct of a banking, financing, or similar business, and

Cited by 1

(ii) conducts substantial activity with respect to such business.

“Substantial” implies facts and circumstances. Cited by Reg. § 1.901-2(e)(5)(vii)(C)(5)(i), Reg. § 1.954-2(a)(5)(iii)

Cited by 2

(B) Predominantly engaged A controlled foreign corporation shall be treated as predominantly engaged in the active conduct of a banking, financing, or similar business if—

Cited by 1

(i) more than 70 percent of the gross income of the controlled foreign corporation is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons,

(ii) it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the United States (or is any other corporation not so licensed which is specified by the Secretary in regulations), or

Cited by 1

(iii) it is engaged in the active conduct of a securities business and is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934 or is registered as a Government securities broker or dealer under section 15C(a) of such Act (or is any other corporation not so registered which is specified by the Secretary in regulations).

Cited by 2

(3) Qualified banking or financing income For purposes of this subsection—

Cited by 2

(A) In general The term “qualified banking or financing income” means income of an eligible controlled foreign corporation which—

“income of an eligible controlled foreign corporation” Opening words

Textual readingALL OF= qualified banking or financing income

(i) is derived in the active conduct of a banking, financing, or similar business by—

(I) such eligible controlled foreign corporation, or

(II) a qualified business unit of such eligible controlled foreign corporation,

(ii) is derived from one or more transactions—

(I) with customers located in a country other than the United States, and

Cited by 1

(II) substantially all of the activities in connection with which are conducted directly by the corporation or unit in its home country, and

Cited by 2

(iii) is treated as earned by such corporation or unit in its home country for purposes of such country’s tax laws.

Cited by 1

(B) Limitation on nonbanking and nonsecurities businesses No income of an eligible controlled foreign corporation not described in clause (ii) or (iii) of paragraph (2)(B) (or of a qualified business unit of such corporation) shall be treated as qualified banking or financing income unless more than 30 percent of such corporation’s or unit’s gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons and which are located within such corporation’s or unit’s home country.

(C) Substantial activity requirement for cross border income The term “qualified banking or financing income” shall not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible controlled foreign corporation or a qualified business unit of such corporation unless such corporation or unit conducts substantial activity with respect to a banking, financing, or similar business in its home country.

(D) Determinations made separately For purposes of this paragraph, the qualified banking or financing income of an eligible controlled foreign corporation and each qualified business unit of such corporation shall be determined separately for such corporation and each such unit by taking into account—

(i) in the case of the eligible controlled foreign corporation, only items of income, deduction, gain, or loss and activities of such corporation not properly allocable or attributable to any qualified business unit of such corporation, and

(ii) in the case of a qualified business unit, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such unit.

(E) Direct conduct of activities For purposes of subparagraph (A)(ii)(II), an activity shall be treated as conducted directly by an eligible controlled foreign corporation or qualified business unit in its home country if the activity is performed by employees of a related person and—

“if the activity is performed by employees of a related person and—” Opening words

Textual readingALL OF= activity treated as conducted directly

(i) the related person is an eligible controlled foreign corporation the home country of which is the same as the home country of the corporation or unit to which subparagraph (A)(ii)(II) is being applied,

(ii) the activity is performed in the home country of the related person, and

(iii) the related person is compensated on an arm’s-length basis for the performance of the activity by its employees and such compensation is treated as earned by such person in its home country for purposes of the home country’s tax laws.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 416(a), added subpar. (E).

Cited by 1

(4) Lending or finance business For purposes of this subsection, the term “lending or finance business” means the business of—

Cited by 2

(A) making loans,

Cited by 1

(B) purchasing or discounting accounts receivable, notes, or installment obligations,

(C) engaging in leasing (including entering into leases and purchasing, servicing, and disposing of leases and leased assets),

(D) issuing letters of credit or providing guarantees,

(E) providing charge and credit card services, or

Cited by 1

(F) rendering services or making facilities available in connection with activities described in subparagraphs (A) through (E) carried on by—

(i) the corporation (or qualified business unit) rendering services or making facilities available, or

(ii) another corporation (or qualified business unit of a corporation) which is a member of the same affiliated group (as defined in section 1504, but determined without regard to section 1504(b)(3)).

(5) Other definitions For purposes of this subsection—

(A) Customer The term “customer” means, with respect to any controlled foreign corporation or qualified business unit, any person which has a customer relationship with such corporation or unit and which is acting in its capacity as such.

(B) Home country Except as provided in regulations—

(i) Controlled foreign corporation The term “home country” means, with respect to any controlled foreign corporation, the country under the laws of which the corporation was created or organized.

(ii) Qualified business unit The term “home country” means, with respect to any qualified business unit, the country in which such unit maintains its principal office.

(C) Located The determination of where a customer is located shall be made under rules prescribed by the Secretary.

(D) Qualified business unit The term “qualified business unit” has the meaning given such term by section 989(a).

(E) Related person The term “related person” has the meaning given such term by subsection (d)(3).

(6) Coordination with exception for dealers Paragraph (1) shall not apply to income described in subsection (c)(2)(C)(ii) of a dealer in securities (within the meaning of section 475) which is an eligible controlled foreign corporation described in paragraph (2)(B)(iii).

(7) Anti-abuse rules For purposes of applying this subsection and subsection (c)(2)(C)(ii)—

Cited by 1

(A) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions one of the principal purposes of which is qualifying income or gain for the exclusion under this section, including any transaction or series of transactions a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of such exclusion through the application of this subsection,

(B) there shall be disregarded any item of income, gain, loss, or deduction of an entity which is not engaged in regular and continuous transactions with customers which are not related persons,

Cited by 1

(C) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions utilizing, or doing business with—

(i) one or more entities in order to satisfy any home country requirement under this subsection, or

(ii) a special purpose entity or arrangement, including a securitization, financing, or similar entity or arrangement,

if one of the principal purposes of such transaction or series of transactions is qualifying income or gain for the exclusion under this subsection, and

(D) a related person, an officer, a director, or an employee with respect to any controlled foreign corporation (or qualified business unit) which would otherwise be treated as a customer of such corporation or unit with respect to any transaction shall not be so treated if a principal purpose of such transaction is to satisfy any requirement of this subsection.

(8) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2).

(i) Special rule for income derived in the active conduct of insurance business

Amended 1998

1998 Pub. L. 105-277 Pub. L. 105–277, § 1005(b)(2), added subsec. (i).

Cited by 13

(1) In general For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified insurance income of a qualifying insurance company.

(2) Qualified insurance income The term “qualified insurance income” means income of a qualifying insurance company which is—

“income of a qualifying insurance company” Opening words

Textual readingANY OF= qualified insurance income

(A) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company or a qualifying insurance company branch of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as both are determined in the manner prescribed under paragraph (4)), or

Cited by 4

(B) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company or a qualifying insurance company branch of an amount of its assets allocable to exempt contracts equal to—

Cited by 1

(i) in the case of property, casualty, or health insurance contracts, one-third of its premiums earned on such insurance contracts during the taxable year (as defined in section 832(b)(4)), and

(ii) in the case of life insurance or annuity contracts, 10 percent of the reserves described in subparagraph (A) for such contracts.

Cited by 1

Cited by 3

(3) Principles for determining insurance income Except as provided by the Secretary, for purposes of subparagraphs (A) and (B) of paragraph (2)—

(A) in the case of any contract which is a separate account-type contract (including any variable contract not meeting the requirements of section 817), income credited under such contract shall be allocable only to such contract, and

Cited by 1

(B) income not allocable under subparagraph (A) shall be allocated ratably among contracts not described in subparagraph (A).

(4) Methods for determining unearned premiums and reserves For purposes of paragraph (2)(A)—

Cited by 1

(A) Property and casualty contracts The unearned premiums and reserves of a qualifying insurance company or a qualifying insurance company branch with respect to property, casualty, or health insurance contracts shall be determined using the same methods and interest rates which would be used if such company or branch were subject to tax under subchapter L, except that—

(i) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, and

(ii) such company or branch shall use the appropriate foreign loss payment pattern.

(B) Life insurance and annuity contracts

Amended 2002

2002 Pub. L. 107-147 Pub. L. 107–147, § 614(b)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of—
“(i) the net surrender value of such contract (as defined in section 807(e)(1)(A)), or
“(ii) the reserve determined under paragraph (5).”

(i) In general Except as provided in clause (ii), the amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of—

Cited by 1

(I) the net surrender value of such contract (as defined in section 807(e)(1)(A)), or

(II) the reserve determined under paragraph (5).

(ii) Ruling request, etc. The amount of the reserve under clause (i) shall be the foreign statement reserve for the contract (less any catastrophe, deficiency, equalization, or similar reserves), if, pursuant to a ruling request submitted by the taxpayer or as provided in published guidance, the Secretary determines that the factors taken into account in determining the foreign statement reserve provide an appropriate means of measuring income.

Cited by 1

(C) Limitation on reserves In no event shall the reserve determined under this paragraph for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining foreign statement reserves (less any catastrophe, deficiency, equalization, or similar reserves).

(5) Amount of reserve The amount of the reserve determined under this paragraph with respect to any contract shall be determined in the same manner as it would be determined if the qualifying insurance company or qualifying insurance company branch were subject to tax under subchapter L, except that in applying such subchapter—

Cited by 1

(A) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate,

(B) the highest assumed interest rate permitted to be used in determining foreign statement reserves shall apply, and

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13517(b)(5), substituted “shall apply,” for “shall be substituted for the prevailing State assumed interest rate,”.

(C) tables for mortality and morbidity which reasonably reflect the current mortality and morbidity risks in the company’s or branch’s home country shall be substituted for the mortality and morbidity tables otherwise used for such subchapter.

The Secretary may provide that the interest rate and mortality and morbidity tables of a qualifying insurance company may be used for 1 or more of its qualifying insurance company branches when appropriate.

(6) Definitions For purposes of this subsection, any term used in this subsection which is also used in section 953(e) shall have the meaning given such term by section 953.