Internal Revenue Service, Treasury § 1.903–1

Portion of dividend attributable to gains and § 1.903–1 Taxes in lieu of income taxes. profits of A Corp. from business operations. ($1,200/$1,500×$1,050) ...... 840 (a) In general. Section 903 provides Portion of dividends attributable to gains on that the term ‘‘income, war profits, profits of A Corp. from dividend from B and excess profits taxes’’ shall include Corp. ($300/$1,500×$1,050) ...... 210 a tax paid in lieu of a tax on income, (a) Amount of foreign taxes of A Corp. deemed war profits, or excess profits (‘‘income paid by M Corp. on A Corp.’s gains and profits tax’’) otherwise generally imposed by for 1976 from business operations. any foreign country. For purposes of Gains, profits, and income of A Corp. from busi- this section and §§ 1.901–2 and 1.901–2A, ness operations ...... $1,200 Foreign income taxes imposed on or with respect such a tax is referred to as a ‘‘tax in to gains, profits, and income ...... 360 lieu of an income tax’’; and the terms Accumulated profits ...... 1,200 ‘‘paid’’ and ‘‘foreign country’’ are de- Foreign income taxes paid by A Corp. on or with fined in § 1.901–2(g). A foreign levy respect to its accumulated profits (total foreign income taxes) ...... 360 (within the meaning of § 1.901–2(g)(3)) is Accumulated profits in excess of foreign income a tax in lieu of an income tax if and taxes ...... 840 only if— Dividend to M Corp ...... 840 (1) It is a tax within the meaning of Foreign taxes of A Corp. deemed paid by M Corp. ($360×$840/$840) ...... 360 § 1.901–2(a)(2); and Foreign taxes included in gross income of M Corp. (2) It meets the substitution require- under section 78 as a dividend ...... 360 ment as set forth in paragraph (b) of (b) Amount of foreign taxes of A Corp. deemed this section. paid by M Corp. on portion of the dividend at- The foreign country’s purpose in im- tributable to B Corp.’s accumulated profits for posing the foreign tax (e.g., whether it 1975. imposes the foreign tax because of ad- B Corp. (second-tier corporation): ministrative difficulty in determining Gains, profits, and income for calendar year 1975 ...... $1,000 the base of the income tax otherwise Foreign income taxes imposed on or with re- generally imposed) is immaterial. It is spect to gains, profits, and income ...... 400 also immaterial whether the base of Accumulated profits (under section the foreign tax bears any relation to 902(c)(1)(B) as in effect prior to amendment by the Tax Reform Act of 1976) ...... 600 realized net income. The base of the Foreign income taxes paid by B Corp. on or tax may, for example, be gross income, with respect to its accumulated profits gross receipts or sales, or the number ($400×$600/$1,000) ...... 240 of units produced or exported. Deter- Dividend to A Corp. in 1976 ...... 300 Foreign taxes of B Corp. for 1975 deemed minations of the amount of a tax in paid by A Corp. (under section 902(b)(1)(B) lieu of an income tax that is paid by a as in effect prior to amendment by the Tax person and determinations of the per- × Reform Act of 1976) ($240 $300/$600) ...... 120 son by whom such tax is paid are made A Corp. (first-tier corporation): Gains, profits, and income for 1976 attrib- under § 1.901–2 (e) and (f), respectively, utable to dividend from B Corp.’s accumu- substituting the phrase ‘‘tax in lieu of lated profits for 1975 ...... 300 an income tax’’ for the phrase ‘‘income Foreign income taxes imposed on or with re- spect to such gains, profits, and income ...... 90 tax’’ wherever the latter appears in Accumulated profits (under section those sections. Section 1.901–2A con- 902(c)(1)(B) as in effect prior to amendment tains additional rules applicable to by the Tax Reform Act of 1976) ...... 210 dual capacity taxpayers (as defined in Foreign taxes paid by A Corp. on or with re- spect to such accumulated profits § 1.901–2(a)(2)(ii) (A)). The rules of this ($90×$210/$300) ...... 63 section are applied independently to Foreign income taxes paid and deemed to be each separate levy (within the meaning paid by A Corp. for 1976 on or with respect of §§ 1.901–2(d) and 1.901–2A (a)) imposed to such accumulated profits ($120 + $63) .... 183 Dividend paid to M Corp. attributable to divi- by the foreign country. Except as oth- dend from B Corp. out of accumulated prof- erwise provided in paragraph (b)(2) of its for 1975) ...... 210 this section, a foreign tax either is or Foreign taxes of A Corp. deemed paid by M is not a tax in lieu of an income tax in Corp. (under section 902(a)(2) as in effect prior to amendment by the Tax Reform Act its entirety for all persons subject to of 1976) ($183×$210/$210) ...... 183 the tax. Amount included in gross income of M Corp. (b) Substitution—(1) In general. A for- under section 78 ...... 0 eign tax satisfies the substitution re- [T.D. 7649, 44 FR 60087, Oct. 18, 1979. Redesig- quirement if the tax in fact operates as nated and amended by T.D. 8708, 62 FR 927, a tax imposed in substitution for, and 940, Jan. 7, 1997] not in addition to, an income tax or a 717

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series of income taxes otherwise gen- tax. Nonresidents are subject to a gross in- erally imposed. However, not all in- come tax on income from country X that is come derived by persons subject to the not attributable to a trade or business car- foreign tax need be exempt from the in- ried on in country X. The gross income tax imposed on nonresidents satisfies the substi- come tax. If, for example, a taxpayer is tution requirement set forth in this para- subject to a generally imposed income graph (b). See also examples 1 and 2 of § 1.901– tax except that, pursuant to an agree- 2(b)(4)(iv). ment with the foreign country, the tax- Example 2. The facts are the same as in ex- payer’s income from insurance is sub- ample 1, with the additional fact that payors ject to a gross receipts tax and not to located in country X are required by country the income tax, then the gross receipts X law to withhold the gross income tax from payments they make to nonresidents, and to tax meets the substitution requirement remit such withheld tax to the government notwithstanding the fact that the tax- of country X. The result is the same as in ex- payer’s income from other activities, ample 1. such as the operation of a hotel, is sub- Example 3. The facts are the same as in ex- ject to the generally imposed income ample 2, with the additional fact that the tax. A comparison between the tax bur- gross income tax on nonresidents applies to den of this insurance gross receipts tax payments for technical services performed and the tax burden that would have ob- by them outside of country X. The result is the same as in example 2. tained under the generally imposed in- Example 4. Country X has a tax that is gen- come tax is irrelevant to this deter- erally imposed on the realized net income of mination. nonresident corporations that is attributable (2) Soak-up taxes. A foreign tax satis- to a trade or business carried on in country fies the substitution requirement only X. The tax applies to all nonresident cor- to the extent that liability for the for- porations that engage in business in country eign tax is not dependent (by its terms X except for such corporations that engage in contracting activities, each of which is in- or otherwise) on the availability of a stead subject to two different taxes. The credit for the foreign tax against in- taxes applicable to nonresident corporations come tax liability to another country. that engage in contracting activities satisfy If, without regard to this paragraph the substitution requirement set forth in (b)(2), a foreign tax satisfies the re- this paragraph (b). quirement of paragraph (b)(1) of this Example 5. Country X imposes both an ex- section (including for this purpose any cise tax and an income tax. The excise tax, which is payable independently of the in- foreign tax that both satisfies such re- come tax,is allowed as a credit against the quirement and also is an income tax income tax. For 1984 A has a tentative in- within the meaning of § 1.901–2(a)(1)), li- come tax liability of 100u (units of country X ability for the foreign tax is dependent currency) but is allowed a credit for 30u of on the availability of a credit for the excise tax that it has paid. Pursuant to para- foreign tax against income tax liability graph (e)(4)(i) of § 1.901–2, the amount of ex- to another country only to the extent cise tax A has paid to country X is 30u and the amount of income tax A has paid to of the lesser of— country X is 70u. The excise tax paid by A (i) The amount of foreign tax that does not satisfy the substitution require- would not be imposed on the taxpayer ment set forth in this paragraph (b) because but for the availability of such a credit the excise tax is imposed on A in addition to, to the taxpayer (within the meaning of and not in substitution for, the generally im- § 1.901–2(c)), or posed income tax. (ii) The amount, if any, by which the Example 6. Pursuant to a contract with foreign tax paid by the taxpayer ex- country X, A, a domestic corporation en- gaged in manufacturing activities in country ceeds the amount of foreign income tax X, must pay tax to country X equal to the that would have been paid by the tax- greater of (i) 5u (units of country X cur- payer if it had instead been subject to rency) per item produced, or (ii) the max- the generally imposed income tax of imum amount creditable by A against its the foreign country. U.S. income tax liability for that year with (3) Examples. The provisions of this respect to income from its country X oper- paragraph (b) may be illustrated by the ations. Also pursuant to the contract, A is following examples: exempted from country X’s otherwise gen- erally imposed income tax. A produces 16 Example 1. Country X has a tax on realized items in 1984 and the maximum amount cred- net income that is generally imposed except itable by A against its U.S. income tax li- that nonresidents are not subject to that ability for 1984 is 125u. If A had been subject

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to country X’s otherwise generally imposed (3) Taxable years beginning before January income tax it would have paid a tax of 150u. 1, 1958. Pursuant to paragraph (b)(2) of this section, (c) Tax deemed paid or accrued. the amount of tax paid by A that is depend- (1) Unused foreign tax for per-country limi- ent on the availability of a credit against in- tation year. come tax of another country is 0 (lesser of (i) (2) Unused foreign tax for overall limita- 45u, the amount that would not be imposed tion year. but for the availability of a credit (125u–80u), (3) Unused foreign tax with respect to for- or (ii) 0, the amount by which the contrac- eign mineral income. tual tax (125u) exceeds the generally imposed (d) Determination of excess limitation for income tax (150u)). certain years. Example 7. The facts are the same as in ex- (e) Periods of less than 12 months. ample 6 except that, of the 150u A would have (f) Statement with tax return. paid if it had been subject to the otherwise (g) Illustration of carrybacks and generally imposed income tax, 60u is depend- carryovers. ent on the availability of a credit against in- (h) Transition rules for carryovers and come tax of another country. The amount of carrybacks of pre-2003 and post-2002 unused tax actually paid by A (i.e., 125u) that is de- foreign tax paid or accrued with respect to pendent on the availability of a credit dividends from noncontrolled section 902 cor- against income tax of another country is 35u porations. (lesser of (i) 45u, computed as in example , (1) Carryover of unused foreign tax. § 6, or (ii) 35u, the amount by which the con- (2) Carryback of unused foreign tax. tractual tax (125u) exceeds the amount A (i) Transition rules for carryovers and would have paid as income tax if it had been carrybacks of pre-2007 and post-2006 unused subject to the otherwise generally imposed foreign tax. income tax (90u, i.e., 150u–60u). (1) Carryover of unused foreign tax. (i) General rule. (c) Effective date. The effective date of (ii) Safe harbor. this section is as provided in § 1.901– (2) Carryback of unused foreign tax. 2(h). (i) General rule. (ii) Safe harbor. [T.D. 7918, 48 FR 46295, Oct. 12, 1983; 48 FR (3) Effective/applicability date. 52033, Nov. 16, 1983] § 1.904–3 Carryback and carryover of unused § 1.904–0 Outline of regulation provi- foreign tax by husband and wife. sions for section 904. (a) In general. This section lists the headings for (b) Joint unused foreign tax and joint ex- §§ 1.904–1 through 1.904–7. cess limitation. (c) Continuous use of joint return. § 1.904–1 Limitation on credit for foreign taxes. (d) From separate to joint return. (a) Per-country limitation. (e) Amounts carried from or through a (1) General. joint return year to or through a separate re- (2) Illustration of principles. turn year. (b) Overall limitation. (f) Allocation of unused foreign tax and ex- (1) General. cess limitation. (2) Illustration of principles. (1) Limitation. (c) Special computation of taxable income. (i) Per-country limitation. (d) Election of overall limitation. (ii) Overall limitation. (1) In general. (2) Unused foreign tax. (i) Manner of making election. (i) Per-country limitation. (ii) Revocation for first taxable year begin- (ii) Overall limitation. ning after December 31, 1969. (3) Excess limitation. (2) Method of making the initial election. (i) Per-country limitation taxpayer. (3) Method of revoking an election and (ii) Overall limitation. making a new election. (4) Excess limitation to be applied. (e) Joint return. (5) Reduction of excess limitation. (1) General. (6) Spouses using different limitations. (2) Electing the overall limitation. (g) Illustrations.

§ 1.904–2 Carryback and carryover of unused § 1.904–4 Separate application of section 904 foreign tax. with respect to certain categories of income. (a) Credit for foreign tax carryback or car- (a) In general. ryover. (b) Passive category income. (b) Years to which carried. (1) In general. (1) General. (2) Passive income. (2) Definitions. (i) In general.

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