Par. 7. Section 1.960-3 is amended by: 1. Revising the section heading; 2. Revising the first sentence of paragraph (a); 3. Revising the heading of paragraph (b) and the second sentence of paragraph (b)(1); 4. Adding paragraph (b)(6); 5. In paragraph (c)(2)(iii)(B), removing the language “paragraphs (c)(2)(vi) through (ix)” and adding “paragraphs (c)(2)(vii) through (xi)” in its place; 6. Revising paragraph (c)(2)(iv); 7. Redesignating paragraphs (c)(2)(v), (c)(2)(vi), (c)(2)(vii), (c)(2)(viii), (c)(2)(ix), and (c)(2)(x) as paragraphs (c)(2)(vi), (c)(2)(vii), (c)(2)(viii), (c)(2)(ix), (c)(2)(xi), and (c)(2)(xii), respectively, and adding new paragraph (c)(2)(v); 8. In newly redesignated paragraph (c)(2)(vi), removing the language “paragraphs (c)(2)(v)(A)” and adding “paragraphs (c)(2)(vi)(A)” in its place; 9. Revising newly redesignated paragraph (c)(2)(ix); 10. Adding new paragraph (c)(2)(x); 11. In newly redesignated paragraph (c)(2)(xi), removing the language “paragraphs (c)(2)(ix)(A)” and adding “paragraphs (c)(2)(xi)(A)” in its place; 12. In newly redesignated paragraph (c)(2)(xii), removing the language “paragraph (c)(2)(vi) through (ix)” and adding “paragraph (c)(2)(vii) through (xi)” in its place; 13. In paragraph (e)(2), removing the language “section 951A PTEP” wherever it appears and adding “pre-06/29/25 section 951A PTEP” in its place; and 14. Adding paragraphs (e)(3) and (4). The revisions and additions read as follows:
(a) * * * Paragraph (b) of this section provides rules for computing the amount of foreign income taxes deemed paid by a domestic corporation that is a United States shareholder of a controlled foreign corporation, or by a controlled foreign corporation, under section 960(b), and for determining the foreign income taxes subject to the credit disallowance under section 960(d)(4). * * *
(b) Foreign income taxes deemed paid under section 960(b) and foreign tax credits disallowed under section 960(d)(4) —(1) * * * See paragraph (b)(6) of this section for rules disallowing credits in relation to a distribution of certain previously taxed earnings and profits resulting from the application of section 960(d)(4), and § 1.965-5(c)(1)(iii) for rules disallowing credits in relation to a distribution of certain previously taxed earnings and profits resulting from the application of section 965. * * *
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(6) Foreign tax credits disallowed under section 960(d)(4) —(i) In general. No credit under section 901 is allowed for 10 percent of—
(A) Foreign income taxes attributable to a section 959(a) distribution of post-06/28/25 section 951A PTEP (as defined in paragraph (c)(2)(ix) of this section) or reclassified post-06/28/25 section 951A PTEP (as defined in paragraph (c)(2)(iv) of this section); and
(B) Foreign income taxes deemed paid under paragraph (b)(1) of this section with respect to a section 959(a) distribution of post-06/28/25 section 951A PTEP (as defined in paragraph (c)(2)(ix) of this section) or reclassified post-06/28/25 section 951A PTEP (as defined in paragraph (c)(2)(iv) of this section).
(ii) Attribution of foreign income taxes. For purposes of paragraph (b)(6)(i)(A) of this section, foreign income taxes are attributable to a section 959(a) distribution of post-06/28/25 section 951A PTEP or reclassified post-06/28/25 section 951A PTEP if those taxes would be allocated and apportioned to a distribution of those previously taxed earnings and profits under the rules of § 1.861-20, applied by treating the portion of the distribution that is attributable to post-06/28/25 section 951A PTEP and reclassified post-06/28/25 section 951A PTEP as the statutory groupings, and the portion of the distribution that is attributable to other earnings and profits as the residual grouping.
(c) * * *
(2) * * *
(iv) Earnings and profits described in section 959(c)(1)(A) that were initially described in paragraph (c)(2)(ix) of this section (“reclassified post-06/28/25 section 951A PTEP”);
(v) Earnings and profits described in section 959(c)(1)(A) that were initially described in paragraph (c)(2)(x) of this section (“reclassified pre-06/29/25 section 951A PTEP”);
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(ix) Earnings and profits described in section 959(c)(2) by reason of section 951A, to the extent that the inclusion under section 951A occurs in a taxable year of a United States shareholder ending after June 28, 2025 (“post-06/28/25 section 951A PTEP”);
(x) Earnings and profits described in section 959(c)(2) by reason of section 951A, to the extent not described in paragraph (c)(2)(ix) of this section (“pre-06/29/25 section 951A PTEP”);
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(e) * * *
(3) Example 3: Foreign tax credits disallowed under section 960(d)(4) —(i) Facts. USP, a domestic corporation, owns all of the stock of a single foreign corporation (FC1). FC1, a Country X entity that is a controlled foreign corporation, has the U.S. dollar as its functional currency. Both FC1 and USP use the calendar year as their taxable year. FC1 does not have any accumulated earnings and profits as of the beginning of its 2024 taxable year. FC1 earns tested income of $100x for each of its 2024 and 2025 taxable years, and USP has an inclusion under section 951A (section 951A inclusion) of $100x in each of its 2024 and 2025 taxable years. FC1 has no items of income, gain, deduction, or loss in any of its subsequent taxable years. On January 1, 2026, FC1 distributes $150x to USP, which is a section 959(a) distribution and is treated as a distribution of property for both Country X law and Federal income tax purposes. Country X imposes a withholding tax (as defined in section 901(k)(1)(B)) of $30x with respect to the section 959(a) distribution. For its 2026 taxable year, USP claims the foreign tax credit under section 901.
(ii) Analysis —(A) PTEP groups. FC1 has earnings and profits of $100x within the annual PTEP account in the section 951A category for its 2024 taxable year. Under paragraph (c)(2)(x) of this section, the $100x of previously taxed earnings and profits, which results from a section 951A inclusion of USP in a taxable year of USP ending on or before June 28, 2025, constitutes pre-06/29/25 section 951A PTEP. FC1 also has earnings and profits of $100x within the annual PTEP account in the section 951A category for its 2025 taxable year. Under paragraph (c)(2)(ix) of this section, the $100x of previously taxed earnings and profits, which results from a section 951A inclusion of USP in a taxable year of USP ending after June 28, 2025, constitutes post-06/28/25 section 951A PTEP.
(B) Attribution of foreign income taxes. Under section 959(c) and § 1.959-3(b), FC1's $150x distribution on January 1, 2026, constitutes a distribution of $100x of FC's previously taxed earnings and profits for its 2025 taxable year and $50x of FC's previously taxed earnings and profits for its 2024 taxable year. Under paragraph (b)(6)(ii) of this section and § 1.861-20(d)(3)(i)(B), $100x of the foreign gross income related to the $150x distribution is assigned to the statutory grouping for the portion of the distribution attributable to post-06/28/25 section 951A PTEP, and $50x is assigned to the residual grouping for the portion of the distribution attributable to other earnings and profits. Under paragraph (b)(6)(ii) of this section and § 1.861-20(f), $20x of the $30x of Country X withholding tax ($30x × $100x/$150x) is allocated and apportioned to the statutory grouping, and the remaining $10x ($30x × $50x/$150x) is allocated and apportioned to the residual grouping.
(C) Disallowance of foreign tax credits. Under section 960(d)(4) and paragraph (b)(6)(i)(A) of this section, $2x (that is, 10 percent) of the $20x of foreign tax credits otherwise allowable to USP under section 901 with respect to the $20x of Country X withholding tax allocated and apportioned to the statutory grouping is disallowed.
(iii) Alternative facts — Distribution before June 28, 2025. The facts are the same as in paragraph (e)(3)(i) of this section, except that the $150x distribution occurs on February 1, 2025. The result is the same as in paragraph (e)(3)(ii) of this section.
(4) Example 4: Foreign tax credit disallowance under section 960(d)(4) for foreign income taxes deemed paid under section 960(b) —(i) Facts. The facts are the same as in paragraph (e)(3)(i) of this section ( Example 3 ), except as follows. FC1 owns all the stock of FC2, a Country Y entity that is a controlled foreign corporation and uses the U.S. dollar as its functional currency. FC2 uses the calendar year as its taxable year. As of January 1, 2027, FC1 does not have any accumulated earnings and profits and FC2's accumulated earnings and profits are entirely comprised of $100x of post-06/28/25 section 951A PTEP within the annual PTEP account in the section 951A category for its 2026 taxable year. On January 1, 2027, FC2 distributes $100x to FC1 (distribution 1), which is treated as a distribution of property for both Country Y law and Federal income tax purposes. Country Y imposes a withholding tax (as defined in section 901(k)(1)(B)) of $20x with respect to distribution 1. FC1 subsequently distributes $80x to USP (distribution 2), which is a section 959(a) distribution. Country X does not impose any withholding tax with respect to distribution 2. Neither FC1 nor FC2 has items of income, gain, deduction, or loss for its 2027 taxable year. For its 2027 taxable year, USP claims the foreign tax credit under section 901.
(ii) Analysis —(A) Distribution 1. Under section 959(c) and § 1.959-3(b), distribution 1 constitutes a distribution of $100x of FC2's previously taxed earnings and profits. Under paragraph (c)(3) of this section, FC1's post-06/28/25 section 951A PTEP within the annual PTEP account in the section 951A category for its 2026 taxable year is increased by $100x but reduced by the $20x of Country Y withholding tax that is allocated and apportioned to the post-06/28/25 section 951A PTEP under § 1.960-1(d)(3)(ii). FC1's PTEP group taxes with respect to its post-06/28/25 section 951A PTEP within the annual PTEP account in the section 951A category for its 2026 taxable year are increased by $20x under paragraph (d) of this section.
(B) Distribution 2. Under section 959(c) and § 1.959-3(b), distribution 2 constitutes a distribution of $80x of FC1's previously taxed earnings and profits. Under paragraph (b)(4) of this section, USP's proportionate share of FC1's PTEP group taxes is $20x. Under section 960(d)(4) and paragraph (b)(6)(i)(B) of this section, $2x (that is, 10 percent) of the $20x of foreign tax credits otherwise allowable to USP under section 901 with respect to FC1's $20x of PTEP group taxes deemed paid by USP under section 960(b)(1) is disallowed.