# Prop. Treas. Reg. § 1.960-1: Overview, definitions, and computational rules for determining foreign income taxes deemed paid under section 960(a), (b), and (d). Proposed regulation, not in force. REG-105479-18, 89 FR 95362, published 2024-12-02 . Interprets 26 U.S.C. § 960. Par. 23. Section 1.960-1 is amended by: 1. Revising paragraph (a)(1); 2. Revising paragraphs (b)(1) and (b)(3); 3. Removing paragraph (b)(12); 4. Redesignating paragraphs (b)(13) through (b)(16) as paragraphs (b)(12) through (b)(15), respectively; 5. Revising newly redesignated paragraph (b)(15); 6. Redesignating paragraph (b)(17) as paragraph (b)(16), and revising newly redesignated paragraph (b)(16); 7. Adding a new paragraph (b)(17); 8. Removing paragraphs (b)(18) through (b)(21); 9. Redesignating paragraphs (b)(22) through (b)(24) as paragraphs (b)(18) through (b)(20), respectively; 10. Removing paragraph (b)(25); 11. Redesignating paragraphs (b)(26) and (b)(27) as paragraphs (b)(21) and (b)(22), respectively, and revising newly redesignated paragraphs (b)(21) and (b)(22); 12. Removing paragraph (b)(28); 13. Redesignating paragraphs (b)(29) through (b)(38) as paragraphs (b)(23) through (b)(32), respectively; 14. Revising paragraphs (c)(1)(i) through (iii); 15. In paragraph (c)(1)(iv), removing the language “§ 1.960-3(b)” and adding the language “§ 1.960-3” in its place; 16. Removing paragraph (c)(1)(v); 17. Redesignating paragraphs (c)(1)(vi) and (vii) as paragraphs (c)(1)(v) and (c)(1)(vi), respectively; 18. Revising newly redesignated paragraphs (c)(1)(v) and (vi); 19. Revising paragraph (c)(2); 20. Revising paragraph (d)(1); 21. Revising paragraphs (d)(2)(i) and (d)(2)(ii)(A) and (D); 22. Revising the heading of paragraph (d)(3) and the introductory text of paragraph (d)(3)(i); 23. Revising the last sentence of paragraph (d)(3)(i)(A) and the last two sentences of paragraph (d)(3)(ii)(A); 24. Revising paragraph (d)(3)(ii)(B); and 25. Revising paragraphs (e) and (f). The additions and revisions read as follows: (a) Overview —(1) Scope of §§ 1.960-1 through 1.960-3. This section and § 1.960-2 provide rules for attributing foreign income taxes paid or accrued by a controlled foreign corporation to its income that a corporate United States shareholder of the controlled foreign corporation takes into account in determining its subpart F inclusion or GILTI inclusion amount. This section provides definitions, identifies the statutory and residual groupings for purposes of section 960(a) and (d), and sets forth computational rules for determining the amount of income and taxes assigned to each grouping. Section 1.960-2 provides rules for computing the amount of foreign income taxes deemed paid by a corporate United States shareholder of a controlled foreign corporation under section 960(a) and (d). Section 1.960-3 provides rules for determining the foreign income taxes that are deemed paid by a corporate United States shareholder in a controlled foreign corporation, or by a controlled foreign corporation that is a shareholder in another controlled foreign corporation, under section 960(b). This section, § 1.960-2, and § 1.960-3 provide the exclusive rules for determining the foreign income taxes deemed paid by a domestic corporation or controlled foreign corporation under section 960. Only foreign income taxes paid or accrued by a controlled foreign corporation that are properly attributable under these rules to an item of income that a corporate United States shareholder of the controlled foreign corporation includes as a subpart F inclusion or GILTI inclusion amount may be deemed paid by the domestic corporation under section 960(a) or (d). Only foreign income taxes that are properly attributable under § 1.960-3 to previously taxed earnings and profits that are distributed by a controlled foreign corporation may be deemed paid by a domestic corporation or a controlled foreign corporation under section 960(b). This section, § 1.960-2, and § 1.960-3 also apply for purposes of any provision that treats a taxpayer as a domestic corporation that is deemed to pay foreign income taxes or treats a foreign corporation as a controlled foreign corporation for purposes of section 960. See, for example, sections 962(a)(2) and 1293(f). * * * * * (b) * * * (1) Annual PTEP account. The term annual PTEP account has the meaning provided in § 1.959-1(b). * * * * * (3) Current taxable year. The term current taxable year means the U.S. taxable year of a controlled foreign corporation which ends with or within the U.S. taxable year of a United States shareholder of the controlled foreign corporation. * * * * * (15) Previously taxed earnings and profits. The term previously taxed earnings and profits has the meaning provided in § 1.959-1(b). (16) PTEP group. The term PTEP group has the meaning provided in § 1.959-1(b). (17) PTEP realization event. The term PTEP realization event has the meaning provided in § 1.959-1(b). * * * * * (21) Specified section 959(a) distribution. The term specified section 959(a) distribution means a distribution of previously taxed earnings and profits, as determined under § 1.959-4, that a domestic corporation that is a United States shareholder in a controlled foreign corporation receives (or is treated as receiving pursuant to § 1.959-4(c)(3)) from the controlled foreign corporation and that is excluded from the income of the recipient domestic corporation under § 1.959-4(b)(1). (22) Section 959(b) distribution. The term section 959(b) distribution means a distribution of previously taxed earnings and profits, as determined under § 1.959-4, that a controlled foreign corporation receives from another controlled foreign corporation and that is excluded from the income of the recipient controlled foreign corporation for purposes of determining the recipient controlled foreign corporation's subpart F income and tested income or tested loss under § 1.959-4(b)(2). * * * * * (c) * * * (1) * * * (i) First, items of gross income of a controlled foreign corporation for the current taxable year are assigned to section 904 categories and included in income groups within those section 904 categories under the rules in paragraph (d)(2) of this section. See section 959 and the regulations thereunder for rules regarding the receipt of a section 959(b) distribution by a controlled foreign corporation. (ii) Second, deductions (other than for current year taxes) of a controlled foreign corporation for the current taxable year are allocated and apportioned to reduce gross income in the section 904 categories and the income groups within a section 904 category. See paragraph (d)(3)(i) of this section. Additionally, the functional currency amounts of current year taxes are allocated and apportioned to reduce gross income in the section 904 categories and the income groups within a section 904 category. See paragraph (d)(3)(ii) of this section. For rules regarding the allocation and apportionment of foreign income taxes paid or accrued by a foreign corporation to previously taxed earnings and profits, see § 1.959-6. (iii) Third, for purposes of computing foreign income taxes deemed paid under section 960(a) and (d), eligible current year taxes that were allocated and apportioned to income groups in the section 904 categories are translated into U.S. dollars in accordance with section 986(a) and § 1.986(a)-1. * * * * * (v) Fifth, paragraphs (c)(1)(i) through (iv) of this section are repeated for each next higher-tier controlled foreign corporation in the chain. (vi) Sixth, with respect to the highest-tier controlled foreign corporation in a chain that is owned directly (or indirectly through one or more partnerships) by the domestic corporation, foreign income taxes that are deemed paid under section 960(b)(1) in connection with the receipt of a specified section 959(a) distribution by the domestic corporation are computed under the rules of § 1.960-3. (2) Current taxable year items. For a current taxable year, the items of income and deductions (including for taxes), and the U.S. dollar amounts of current year taxes, that are included in the computations described in this section are the items that a controlled foreign corporation accrues and takes into account during the current taxable year. An item of income with respect to a current taxable year does not include an amount included as subpart F income of a controlled foreign corporation by reason of the recharacterization of a recapture account established in a prior U.S. taxable year (and the corresponding earnings and profits) of the controlled foreign corporation under section 952(c)(2) and § 1.952-1(f). * * * * * (d) * * * (1) Scope. This paragraph (d) provides rules for assigning gross income (including gains) of a controlled foreign corporation for the current taxable year to a section 904 category and income group within a section 904 category, and for allocating and apportioning deductions (including losses and current year taxes) and the U.S. dollar amount of eligible current year taxes of the controlled foreign corporation for the current taxable year among the section 904 categories and income groups within a section 904 category. See § 1.959-6 for rules for allocating and apportioning foreign income taxes paid or accrued by a foreign corporation to previously taxed earnings and profits. (2) * * * (i) Assigning items of gross income to section 904 categorie s. Items of gross income of a controlled foreign corporation for the current taxable year are first assigned to a section 904 category of the controlled foreign corporation under §§ 1.904-4 and 1.904-5. Income of a controlled foreign corporation cannot be assigned to the section 951A category. See § 1.904-4(g). But see § 1.959-2(b)(2)(i) for rules relating to the assignment of previously taxed earnings and profits to PTEP groups within an annual PTEP account, which may assign previously taxed earnings and profits to the section 951A PTEP group. (ii) * * * (A) In general. Gross income within a section 904 category is assigned to a subpart F income group, tested income group, or residual income group under the rules of this paragraph (d)(2)(ii). See § 1.959-2(d) for rules regarding the accounting of previously taxed earnings and profits by a foreign corporation. * * * * * (D) Residual income group. The term residual income group means the income group within a section 904 category that is not in a subpart F income group or tested income group. For purposes of this paragraph (d)(2)(ii)(D), treat items of gross income that give rise to previously taxed earnings and profits described in § 1.959-6(b) as gross income in a residual income group. See paragraph (d)(3)(ii)(B) of this section for rules regarding the assignment of foreign gross income to the statutory and residual groupings of income of a controlled foreign corporation when the controlled foreign corporation pays or accrues current year taxes with respect to a PTEP realization event that occurs in a different taxable year. * * * * * (3) Allocation and apportionment of deductions among section 904 categories and income groups within a section 904 category —(i) In general. Gross income of a controlled foreign corporation in each income group within each section 904 category is reduced by deductions (including losses and current year taxes) of the controlled foreign corporation for the current taxable year under the rules in this paragraph (d)(3)(i). For purposes of this paragraph (d)(3), allocate and apportion current year taxes arising by reason of a PTEP realization event that occurs in the same taxable year to the residual income group within a section 904 category under § 1.959-6(c). For additional rules regarding the allocation and apportionment of deductions (including foreign income taxes) paid or accrued by a foreign corporation to previously taxed earnings and profits, see § 1.959-6. (A) * * * See paragraph (d)(3)(ii) of this section for special rules for allocating and apportioning current year taxes to section 904 categories and income groups. * * * * * (ii) * * * (A) * * * For special rules regarding current year taxes paid or accrued with respect to a PTEP realization event that occurs in a different taxable year, see paragraph (d)(3)(ii)(B) of this section. For purposes of determining foreign income taxes deemed paid under section 960(a) and (d) and § 1.960-2, the U.S. dollar amount of eligible current year taxes is assigned to the section 904 categories and income groups to which the eligible current year taxes are allocated and apportioned. (B) Current year taxes that a controlled foreign corporation pays or accrues that relate to a PTEP realization event that occurs in a different U.S. taxable year. If a current year tax is allocated and apportioned by reference to foreign gross income that includes previously taxed earnings and profits with respect to a PTEP realization event that occurs in a different taxable year, the foreign gross income is assigned to the subpart F income group, tested income group, or residual income group to which the income that gave rise to the previously taxed earning and profits would be assigned if that income were recognized by that controlled foreign corporation under Federal income tax principles in the current taxable year. For example, a net basis tax paid or accrued with respect to a section 959(b) distribution that occurred in the preceding taxable year would be assigned to a section 904 category and to a subpart F income group, tested income group, or residual income group by reference to the income that gave rise to the previously taxed earnings and profits. (e) Current year taxes related to a residual income group are not deemed paid. Current year taxes paid or accrued by a controlled foreign corporation that are allocated and apportioned under paragraph (d)(3)(ii) of this section to a residual income group cannot be deemed paid under section 960 for any taxable year, except to the extent such taxes are allocated and apportioned to previously taxed earnings and profits under § 1.959-6 and deemed paid by a domestic corporation under § 1.960-3. (f) Example. The following example illustrates the application of this section and § 1.960-3. (1) Facts —(i) CFC1 and CFC2. CFC1, a controlled foreign corporation, conducts business in Country X. CFC1 uses the “u” as its functional currency. At all relevant times, 1u = $1. CFC1 owns all the stock of CFC2, a controlled foreign corporation. All the stock of CFC1 and CFC2 is owned (within the meaning of section 958(a)) by corporate United States shareholders that use the calendar year as their U.S. taxable year. CFC1 and CFC2 both use the calendar year as their U.S. and foreign taxable years. (ii) Income of CFC1 and CFC2. In Year 3, CFC1 earns 2,000,000u of gross income that is foreign base company sales income, and 1,000,000u of interest income from unrelated persons, for both U.S. and Country X tax law purposes. Under Country X tax law, CFC1's interest income is exempt from tax. In Year 3, CFC1 also receives a section 959(b) distribution from CFC2 of 4,000,000u of previously taxed earnings and profits, in the general category and relating to a single PTEP group and taxable year. There are no foreign income taxes associated with the previously taxed earnings and profits distributed by CFC2 at the level of CFC2 under § 1.959-4. The section 959(b) distribution is treated as a dividend taxable to CFC1 under Country X tax law. In Year 3, CFC2 earns no gross income and receives no distributions. (iii) Deductions of CFC1 and CFC2 other than taxes. For both U.S. and Country X tax purposes, in Year 3, CFC1 incurs 1,500,000u of deductible expenses other than current year taxes that are allocable to all gross income. For U.S. tax purposes, under §§ 1.861-8 through 1.861-14T, 1,000,000u of the deductions are apportioned to CFC1's foreign base company sales income and 500,000u of the deductions are apportioned to CFC1's interest income. Under Country X tax law, 1,000,000u of deductions are apportioned to the 4,000,000u treated as a dividend, and 500,000u of deductions are apportioned to the 2,000,000u of foreign base company sales income. Under Country X tax law, no deductions are apportioned to the interest income. Under Country X tax law, CFC1 pays eligible current year taxes of 900,000u on a base of 4,500,000u (7,000,000u gross income − 1,000,000u exemption and 1,500,000u deductions) consisting of 3,000,000u (4,000,000u − 1,000,000u) of previously taxed earnings and profits, 1,000,000u of interest income (exempt from tax under Country X law), and 1,500,000u (2,000,000u − 500,000u) of foreign base company sales income. In Year 3, CFC2 has no expenses (including current year taxes). (2) Analysis —(i) CFC2. Under paragraph (c)(1) of this section, the computational rules of paragraph (c)(1) of this section are applied beginning with CFC2. However, CFC2 has no gross income or expenses in Year 3. Accordingly, the computational rules in paragraphs (c)(1)(i) through (iv) of this section are not relevant with respect to CFC2. Under paragraph (c)(1)(v) of this section, the rules in paragraph (c)(1)(i) through (iv) of this section are then applied to CFC1. (ii) CFC1 —(A) Step 1. Under paragraph (c)(1)(i) of this section, CFC1's items of gross income for the current taxable year are assigned to section 904 categories and included in income groups within those section 904 categories. Under paragraph (d)(2)(i) of this section and § 1.904-4, the interest income is passive category income and the foreign base company sales income is general category income. Under paragraph (d)(2)(ii) of this section, the 1,000,000u of interest income is assigned to a subpart F income group (the “FPHCI income group”) within the passive category because it is foreign personal holding company income described in § 1.954-1(c)(1)(iii)(A)( 1 )( i ) that falls within a single group of income under § 1.904-4(c)(3)(iii) for passive income that is subject to no withholding tax or other foreign tax. The 2,000,000u of foreign base company sales income is assigned to a subpart F income group within the general category (the “FBCSI income group”), because it is foreign base company income described in § 1.954-1(c)(1)(iii)(A)( 2 )( i ). Under paragraph (d)(2) of this section, the 4,000,000u of previously taxed earnings and profits is treated as a U.S. dividend amount (as defined in § 1.861-20(b)(21)) and is assigned to the residual income group within the general category for purposes of applying section 960(a) and (d) and §§ 1.960-1 and 1.960-2. (B) Step 2 —( 1 ) Allocation and apportionment of deductions other than taxes. Under paragraph (c)(1)(ii) of this section, CFC1's deductions for the current taxable year are allocated and apportioned among the section 904 categories and income groups within a section 904 category that were increased as provided in paragraph (c)(1)(i) of this section. Under paragraph (d)(3)(i) of this section and §§ 1.861-8 through 1.861-14T, 1,000,000u of deductions are allocated and apportioned to the FBCSI income group within the general category, and 500,000u of deductions are allocated and apportioned to the FPHCI income group within the passive category. Therefore, CFC1 has 1,000,000u (2,000,000u − 1,000,000u) of pre-tax income attributable to the FBCSI income group within the general category and 500,000u (1,000,000u − 500,000u) of pre-tax income attributable to the FPHCI income group within the passive category. For U.S. tax purposes, no deductions other than eligible current year taxes are allocated and apportioned to the 4,000,000u of previously taxed earnings and profits in CFC1's residual income group within the general category because no deductions of CFC1 other than deductions for current year taxes are allocated and apportioned to previously taxed earnings and profits under section 861. See paragraph (d)(3)(i) of this section and § 1.959-6(d)(1). ( 2 ) Allocation and apportionment of current year taxes. Under paragraph (c)(1)(ii) of this section, CFC1's current year taxes are allocated and apportioned among the section 904 categories and income groups within a section 904 category that were increased as provided in paragraph (c)(1)(i) of this section. Under paragraphs (d)(3)(i) and (ii) of this section, for purposes of allocating and apportioning taxes to reduce the income in a section 904 category or an income group, § 1.861-20 (as modified by § 1.904-6(c)) is applied to determine the amount of foreign taxable income, computed under Country X tax law but characterized under Federal income tax law, in each section 904 category and income group that is included in the Country X tax base. For Country X tax purposes, 1,000,000u of deductions are allocated and apportioned to CFC1's 4,000,000u of previously taxed earnings and profits, which is assigned to the residual income grouping within the general category, 500,000u of deductions are allocated and apportioned to the FBCSI income group within the general category, and no deductions are allocated and apportioned to the FPHCI income group in the passive category. Therefore, for Country X tax purposes, CFC1 has 3,000,000u of foreign taxable income assigned to the residual income group within the general category, 1,500,000u of foreign taxable income assigned to the FBCSI income group within the general category, and no taxable income assigned to the FPHCI income group within the passive category. Under paragraphs (d)(3)(i) and (ii) of this section and § 1.959-6, 600,000u (3,000,000u/4,500,000u × 900,000u) of the 900,000u eligible current year taxes paid by CFC1 are related to the residual income group within the general category, and 300,000u (1,500,000u/4,500,000u × 900,000u) are related to the FBCSI income group within the general category. No current year taxes are allocated or apportioned to the FPHCI income group within the passive category because the interest expense is exempt from Country X tax. See § 1.959-6 for rules allocating and apportioning the 600,000u of current year taxes among the corporate PTEP accounts, section 904 categories, and PTEP groups. Thus, for U.S. tax purposes, CFC1 has 3,400,000u of previously taxed earnings and profits (4,000,000u − 600,000u) in the residual income group within the general category ( see §§ 1.959-2 and 1.959-3 for rules relating to accounting for previously taxed earnings and profits), 500,000u of income in the FPHCI income group within the passive category, and 700,000u of income (1,000,000u − 300,000u) in the FBCSI income group within the general category. (C) Step 3. Under paragraph (c)(1)(iii) of this section, for purposes of computing foreign income taxes deemed paid under section 960(a), CFC1 has $300,000 of current year taxes in the FBCSI income group within the general category. Under paragraph (e) of this section, the United States shareholders of CFC1 cannot claim a credit with respect to the $600,000 of taxes on CFC1's income in the residual income group under section 960, except to the extent the taxes are allocated and apportioned to previously taxed earnings and profits under § 1.959-6 and deemed paid by a domestic corporation under section 960(b) and § 1.960-3. (D) Step 4. Under paragraph (c)(1)(iv) of this section, the United States shareholders of CFC1 compute current year taxes deemed paid under section 960(a) and (d) and the rules of § 1.960-2. None of the Country X tax is allocated to CFC1's FPHCI income group. Therefore, there are no current year taxes deemed paid by CFC1's United States shareholders with respect to their passive category subpart F inclusions. Country X tax equal to $300,000 is allocated and apportioned to CFC1's FBCSI income group. Therefore, $300,000 of the current year taxes are deemed paid by CFC1's United States shareholders with respect to their general category subpart F inclusions. See § 1.960-2(b)(5) and (c)(7) for examples of the application of section 960(a) and (d) and the rules in § 1.960-2. The remaining $600,000 of Country X tax is allocated and apportioned to the residual income group within the general category with respect to the previously taxed earnings and profits and will generally be allocated and apportioned to previously taxed earnings and profits under the rules in § 1.959-6. (E) Step 5. Paragraph (c)(1)(v) of this section does not apply because CFC1 is the highest-tier controlled foreign corporation in the chain. (F) Step 6. Paragraph (c)(1)(vi) of this section does not apply because CFC1 did not make a specified section 959(a) distribution.