Reg. § 1.960-2 Foreign income taxes deemed paid under sections 960(a) and (d).
(a) Scope 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 under section . 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 under section .
(b) Foreign income taxes deemed paid under section 960(a)
(1) In general If a domestic corporation that is a United States shareholder of a controlled foreign corporation includes in gross income under section its pro rata share of the subpart F income of the controlled foreign corporation (a subpart F inclusion), the domestic corporation is deemed to have paid the amount of the controlled foreign corporation's foreign income taxes that are properly attributable to the items of income in a subpart F income group of the controlled foreign corporation that give rise to the subpart F inclusion of the domestic corporation that is attributable to the subpart F income group. For each section category, the domestic corporation is deemed to have paid foreign income taxes equal to the sum of the controlled foreign corporation's foreign income taxes that are properly attributable to the items of income in the subpart F income groups to which the subpart F inclusion is attributable. See for rules on assigning the foreign income tax to a section category. No foreign income taxes are deemed paid under section with respect to an inclusion under section .
(2) Properly attributable The amount of the controlled foreign corporation's foreign income taxes that are properly attributable to the items of income in the subpart F income group of the controlled foreign corporation to which a subpart F inclusion is attributable equals the domestic corporation's proportionate share of the eligible current year taxes of the controlled foreign corporation that are allocated and apportioned under to the subpart F income group. No other foreign income taxes are considered properly attributable to an item of income of the controlled foreign corporation.
(3) Proportionate share
(i) In general A domestic corporation's proportionate share of the eligible current year taxes of a controlled foreign corporation that are allocated and apportioned under to a subpart F income group within a section category of the controlled foreign corporation is equal to the total U.S. dollar amount of eligible current year taxes that are allocated and apportioned under to the subpart F income group multiplied by a fraction (not to exceed one), the numerator of which is the portion of the domestic corporation's subpart F inclusion that is attributable to the subpart F income group and the denominator of which is the total net income in the subpart F income group, both determined in the functional currency of the controlled foreign corporation. If the numerator or denominator of the fraction is zero or less than zero, then the proportionate share of the eligible current year taxes that are allocated and apportioned under to the subpart F income group is zero.
(ii) Effect of qualified deficits Neither an accumulated deficit nor any prior year deficit in the earnings and profits of a controlled foreign corporation reduces its net income in a subpart F income group. Accordingly, any such deficit does not affect the denominator of the fraction described in of this section. However, the first sentence of this does not affect the application of section for purposes of determining the domestic corporation's subpart F inclusion. Any reduction to the domestic corporation's subpart F inclusion under section is reflected in the numerator of the fraction described in of this section.
(iii) Effect of current year E&P limitation or chain deficit To the extent that an amount of income in a subpart F income group is excluded from the subpart F income of the controlled foreign corporation under section or (C), the net income in the subpart F income group that is the denominator of the fraction described in of this section is reduced (but not below zero) by the amount excluded. The domestic corporation's subpart F inclusion that is the numerator of the fraction described in of this section is based on the controlled foreign corporation's subpart F income computed with the application of section and (C). See for a rule regarding the treatment of an increase in the subpart F income of a controlled foreign corporation by reason of the recharacterization of a recapture account and the corresponding accumulated earnings and profits under section and .
(4) Domestic partnerships For purposes of applying this , in the case of a domestic partnership that is a U.S. shareholder partnership with respect to a partnership CFC, the distributive share of a U.S. shareholder partner of the U.S. shareholder partnership's subpart F inclusion with respect to the partnership CFC is treated as a subpart F inclusion of the U.S. shareholder partner with respect to the partnership CFC.
(5) Example The following example illustrates the application of this .
(i) Facts USP, a domestic corporation, owns 80% of the stock of CFC, a controlled foreign corporation. The remaining portion of the stock of CFC is owned by an unrelated person. USP and CFC both use the calendar year as their U.S. taxable year, and CFC also uses the calendar year as its foreign taxable year. CFC uses the “u” as its functional currency. At all relevant times, 1u=$1x. For its U.S. taxable year ending December 31, 2018, after the application of the rules in the income of CFC after foreign taxes is assigned to the following income groups: 1,000,000u of dividend income in a subpart F income group within the passive category (“subpart F income group 1”); 2,400,000u of gain from commodities transactions in a subpart F income group within the passive category (“subpart F income group 2”); and 1,800,000u of foreign base company services income in a subpart F income group within the general category (“subpart F income group 3”). CFC has current year taxes, all of which are eligible current year taxes, translated into U.S. dollars, of $740,000x that are allocated and apportioned as follows: $50,000x to subpart F income group 1; $240,000x to subpart F income group 2; and $450,000x to subpart F income group 3.USP has a subpart F inclusion with respect to CFC of 4,160,000u = $4,160,000x, of which 800,000u is attributable to subpart F income group 1, 1,920,000u to subpart F income group 2, and 1,440,000u to subpart F income group 3.
(ii) Analysis
(A) Passive category Under and of this section, the amount of CFC's foreign income taxes that are properly attributable to items of income in subpart F income group 1 to which a subpart F inclusion is attributable equals USP's proportionate share of the eligible current year taxes that are allocated and apportioned under to subpart F income group 1, which is $40,000x ($50,000x × 800,000u/1,000,000u). Under and of this section, the amount of CFC's foreign income taxes that are properly attributable to items of income in subpart F income group 2 to which a subpart F inclusion is attributable equals USP's proportionate share of the eligible current year taxes that are allocated and apportioned under to subpart F income group 2, which is $192,000x ($240,000x × 1,920,000u/2,400,000u). Accordingly, under of this section, USP is deemed to have paid $232,000x ($40,000x + $192,000x) of passive category foreign income taxes of CFC with respect to its $2,720,000x subpart F inclusion in the passive category.
(B) General category Under and of this section, the amount of CFC's foreign income taxes that are properly attributable to items of income in subpart F income group 3 to which a subpart F inclusion is attributable equals USP's proportionate share of the eligible current year taxes that are allocated and apportioned under to subpart F income group 3, which is $360,000x ($450,000x × 1,440,000u/1,800,000u). CFC has no other subpart F income groups within the general category. Accordingly, under of this section, USP is deemed to have paid $360,000x of general category foreign income taxes of CFC with respect to its $1,440,000x subpart F inclusion in the general category.
(c) Foreign income taxes deemed paid under section 960(d)
(1) In general If a domestic corporation that is a United States shareholder of one or more controlled foreign corporations includes an amount in gross income under section and , the domestic corporation is deemed to have paid an amount of foreign income taxes equal to 80 percent of the product of its inclusion percentage multiplied by the sum of all tested foreign income taxes in the tested income group within each section category of the controlled foreign corporation or corporations.
(2) Inclusion percentage The term inclusion percentage means, with respect to a domestic corporation that is a United States shareholder of one or more controlled foreign corporations, the domestic corporation's GILTI inclusion amount divided by the aggregate amount described in section and with respect to the United States shareholder.
(3) Tested foreign income taxes The term tested foreign income taxes means, with respect to a domestic corporation that is a United States shareholder of a controlled foreign corporation, the amount of the controlled foreign corporation's foreign income taxes that are properly attributable to tested income taken into account by the domestic corporation under section and .
(4) Properly attributable The amount of the controlled foreign corporation's foreign income taxes that are properly attributable to tested income taken into account by the domestic corporation under section and equals the domestic corporation's proportionate share of the eligible current year taxes of the controlled foreign corporation that are allocated and apportioned under to the tested income group within each section category of the controlled foreign corporation. No other foreign income taxes are considered properly attributable to tested income.
(5) Proportionate share A domestic corporation's proportionate share of eligible current year taxes of a controlled foreign corporation that are allocated and apportioned under to a tested income group within a section category of the controlled foreign corporation is the U.S. dollar amount of eligible current year taxes that are allocated and apportioned under to a tested income group within a section category of the controlled foreign corporation multiplied by a fraction (not to exceed one), the numerator of which is the portion of the tested income of the controlled foreign corporation in the tested income group within the section category that is included in computing the domestic corporation's aggregate amount described in section and , and the denominator of which is the income in the tested income group within the section category, both determined in the functional currency of the controlled foreign corporation. If the numerator or denominator of the fraction is zero or less than zero, the domestic corporation's proportionate share of the eligible current year taxes allocated and apportioned under to the tested income group is zero.
(6) Domestic partnerships See for rules regarding the determination of the GILTI inclusion amount of a U.S. shareholder partner.
(7) Examples The following examples illustrate the application of this .
(i) Example 1: Directly owned controlled foreign corporation
(A) Facts USP, a domestic corporation, owns 100% of the stock of a number of controlled foreign corporations, including CFC1. USP and CFC1 each use the calendar year as their U.S. taxable year. CFC1 uses the “u” as its functional currency. At all relevant times, 1u = $1x. For its U.S. taxable year ending December 31, 2018, after application of the rules in , the income of CFC1 is assigned to a single income group: 2,000u of income from the sale of goods in a tested income group within the general category (“tested income group”). CFC1 has current year taxes, all of which are eligible current year taxes, translated into U.S. dollars, of $400x that are all allocated and apportioned to the tested income group. For its U.S. taxable year ending December 31, 2018, USP has a GILTI inclusion amount determined by reference to all of its controlled foreign corporations, including CFC1, of $6,000x, and an aggregate amount described in section and of $10,000x. All of the income in CFC1's tested income group is included in computing USP's aggregate amount described in section and .
(B) Analysis Under of this section, USP's proportionate share of the eligible current year taxes that are allocated and apportioned under to CFC1's tested income group is $400x ($400x × 2,000u/2,000u). Therefore, under of this section, the amount of foreign income taxes that are properly attributable to tested income taken into account by USP under section and is $400x. Under of this section, USP's tested foreign income taxes with respect to CFC1 are $400x. Under of this section, USP's inclusion percentage is 60% ($6,000x/$10,000x). Accordingly, under of this section, USP is deemed to have paid $192 of the foreign income taxes of CFC1 (80% × 60% × $400x).
(ii) Example 2: Controlled foreign corporation owned through domestic partnership
(A) Facts
(1) US1, a domestic corporation, owns 95% of PRS, a domestic partnership. The remaining 5% of PRS is owned by US2, a domestic corporation that is unrelated to US1. PRS owns all of the stock of CFC1, a controlled foreign corporation. In addition, US1 owns all of the stock of CFC2, a controlled foreign corporation. US1, US2, PRS, CFC1, and CFC2 all use the calendar year as their taxable year. CFC1 and CFC2 both use the “u” as their functional currency. At all relevant times, 1u=$1x. For its U.S. taxable year ending December 31, 2018, after application of the rules in , the income of CFC1 is assigned to a single income group: 300u of income from the sale of goods in a tested income group within the general category (“CFC1's tested income group”). CFC1 has current year taxes, all of which are eligible current year taxes, translated into U.S. dollars, of $100x that are all allocated and apportioned to CFC1's tested income group. The income of CFC2 is also assigned to a single income group: 200u of income from the sale of goods in a tested income group within the general category (“CFC2's tested income group”). CFC2 has current year taxes, all of which are eligible current year taxes, translated into U.S. dollars, of $20x that are allocated and apportioned to CFC2's tested income group.
(2) Under , for purposes of determining the GILTI inclusion amount of US1 and US2, PRS is not treated as owning (within the meaning of section ) the stock of CFC1; instead, PRS is treated in the same manner as a foreign partnership for purposes of determining the stock of CFC1 owned by US1 and US2 under section . Therefore, only US1 is a United States shareholder of CFC1. Taking into account both CFC1 and CFC2, US1 has a GILTI inclusion amount in the general category of $485x, and an aggregate amount described in section and within the general category of $485x. 285u (95% × 300u) of the income in CFC1's tested income group and 200u of the income in CFC2's tested income group is included in computing US1's aggregate amount described in section and within the general category. Because US2 is not a U.S. shareholder with respect to CFC1, US2 does not take into account CFC1's tested income in determining its GILTI inclusion amount.
(B) Analysis
(1) US1
(i) CFC1 Under and of this section, US1's proportionate share of the eligible current year taxes that are allocated and apportioned under to CFC1's tested income group is $95x ($100x × 285u/300u). Therefore, under of this section, the amount of the foreign income taxes that are properly attributable to tested income taken into account by US1 under section and is $95x. Under of this section, US1's tested foreign income taxes with respect to CFC1 are $95x. Under of this section, US1's inclusion percentage is 100% ($485x/$485x). Accordingly, under of this section, US1 is deemed to have paid $76x of the foreign income taxes of CFC1 (80% × 100% × $95x).
(ii) CFC2 Under of this section, US1's proportionate share of the eligible current year taxes that are allocated and apportioned under to CFC2's tested income group is $20x ($20x × 200u/200u). Therefore, under of this section, the amount of foreign income taxes properly attributable to tested income taken into account by US1 under section and is $20x. Under of this section, US1's tested foreign income taxes with respect to CFC2 are $20. Under of this section, US1's inclusion percentage is 100% ($485x/$485x). Accordingly, under of this section, US1 is deemed to have paid $16 of the foreign income taxes of CFC2 (80% × 100% × $20x).
(2) US2 US2 is not a United States shareholder of CFC1 or CFC2. Accordingly, under of this section, US2 is not deemed to have paid any of the foreign income taxes of CFC1 or CFC2.
[T.D. 9882, 84 FR 69112, Dec. 17, 2019, as amended by T.D. 9922, 85 FR 72071, Nov. 12, 2020; T.D. 9959, 87 FR 375, Jan. 4, 2022; 87 FR 45020, July 27, 2022]