Reg. § 1.960-3 Foreign income taxes deemed paid under section 960(b).
(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, or by a controlled foreign corporation, under section . of this section provides rules for the establishment and maintenance of PTEP groups within an annual PTEP account. of this section defines the term PTEP group taxes. of this section provides examples illustrating the application of this section.
(b) Foreign income taxes deemed paid under section 960(b)
(1) Foreign income taxes deemed paid by a domestic corporation with respect to a section 959(a) distribution If a controlled foreign corporation makes a distribution to a domestic corporation that is a United States shareholder with respect to the controlled foreign corporation and that distribution is, in whole or in part, a section distribution with respect to a PTEP group within a section category, the domestic corporation is deemed to have paid the amount of the foreign corporation's foreign income taxes that are properly attributable to the section distribution with respect to the PTEP group and that have not been deemed to have been paid by a domestic corporation under section for the current taxable year or any prior taxable year. See for rules disallowing credits in relation to a distribution of certain previously taxed earnings and profits resulting from the application of section . 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 section distributions with respect to all PTEP groups within the section category. See for rules on assigning the foreign income tax to a section category.
(2) Foreign income taxes deemed paid by a controlled foreign corporation with respect to a section 959(b) distribution If a controlled foreign corporation (distributing controlled foreign corporation) makes a distribution to another controlled foreign corporation (recipient controlled foreign corporation) and the distribution is, in whole or in part, a section distribution from a PTEP group within a section category, the recipient controlled foreign corporation is deemed to have paid the amount of the distributing controlled foreign corporation's foreign income taxes that are properly attributable to the section distribution from the PTEP group and that have not been deemed to have been paid by a domestic corporation under section for the current taxable year or any prior taxable year. See for rules on assigning the foreign income tax to a section category.
(3) Properly attributable The amount of foreign income taxes that are properly attributable to a section distribution from a PTEP group within a section category equals the domestic corporation's or recipient controlled foreign corporation's proportionate share of the PTEP group taxes with respect to the PTEP group within the section category. No other foreign income taxes are considered properly attributable to a section distribution.
(4) Proportionate share A domestic corporation's or recipient controlled foreign corporation's proportionate share of the PTEP group taxes with respect to a PTEP group within a section category is equal to the total amount of the PTEP group taxes with respect to the PTEP group multiplied by a fraction (not to exceed one), the numerator of which is the amount of the section distribution from the PTEP group, and the denominator of which is the total amount of previously taxed earnings and profits in the PTEP 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 PTEP group taxes with respect to the PTEP group is zero.
(5) 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 a U.S. shareholder partnership's section distribution from the partnership CFC is treated as a section distribution received by the U.S. shareholder partner from the partnership CFC.
(c) Accounting for previously taxed earnings and profits
(1) Establishment of annual PTEP account A separate, annual account (annual PTEP account) must be established for the previously taxed earnings and profits of the controlled foreign corporation to which inclusions under section and GILTI inclusion amounts of United States shareholders of the CFC are attributable. Each account must correspond to the inclusion year of the previously taxed earnings and profits and to the section category to which the inclusions under section or GILTI inclusion amounts were assigned at the level of the United States shareholders. Accordingly, a controlled foreign corporation may have an annual PTEP account in the section category or a treaty category (as defined in ), even though income of the controlled foreign corporation that gave rise to the previously taxed earnings and profits cannot initially be assigned to the section category or a treaty category.
(2) PTEP groups within an annual PTEP account The amount in an annual PTEP account is further assigned to one or more of the following groups of previously taxed earnings and profits (each, a PTEP group) within the account:
(i) Earnings and profits described in section that were initially described in section by reason of section (“reclassified section PTEP”);
(ii) Earnings and profits described in section that were initially described in section by reason of section (“reclassified section PTEP”);
(iii) Earnings and profits described in through of this section (which are aggregated into a single PTEP group, “general section PTEP”):
(A) Earnings and profits described in section by reason of section and not by reason of section ;
(B) Earnings and profits described in section that were initially described in section by reason of section (other than earnings that were initially described in through of this section); and
(C) Earnings and profits described in section , including by reason of section (before its repeal);
(iv) Earnings and profits described in section that were initially described in section by reason of section (“reclassified section PTEP”);
(v) Earnings and profits described in through of this section (which are aggregated into a single PTEP group, “reclassified section PTEP”):
(A) Earnings and profits described in section that were initially described in section by reason of section ;
(B) Earnings and profits described in section that were initially described in section by reason of section ; and
(C) Earnings and profits described in section that were initially described in section by reason of section ;
(vi) Earnings and profits described in section by reason of section (“section PTEP”);
(vii) Earnings and profits described in section by reason of section (“section PTEP”);
(viii) Earnings and profits described in section by reason of section (“section PTEP”);
(ix) Earnings and profits described in through of this section (which are aggregated into a single PTEP group, “section PTEP”):
(A) Earnings and profits described in section by reason of section ;
(B) Earnings and profits described in section by reason of section ; and
(C) Earnings and profits described in section by reason of section ; and
(x) Earnings and profits described in section by reason of section not otherwise described in through of this section (“section PTEP”).
(3) Accounting for distributions of previously taxed earnings and profits With respect to a recipient controlled foreign corporation that receives a section distribution, such distribution amount is added to the annual PTEP account, and PTEP group within the annual PTEP account, that corresponds to the inclusion year and section category of the annual PTEP account, and PTEP group within the annual PTEP account, from which the distributing controlled foreign corporation is treated as making the distribution under section . Similarly, with respect to a controlled foreign corporation that makes a section distribution, such distribution amount reduces the annual PTEP account, and PTEP group within the annual PTEP account, that corresponds to the inclusion year and section category of the annual PTEP account, and PTEP group within the annual PTEP account, from which the controlled foreign corporation is treated as making the distribution under section . Earnings and profits in a PTEP group are reduced by the amount of current year taxes that are allocated and apportioned to the PTEP group under , and the U.S. dollar amount of the taxes are added to an account of PTEP group taxes under the rules in of this section.
(4) Accounting for reclassifications of earnings and profits described in section 959(c)(2) to earnings and profits described in section 959(c)(1) If an amount of previously taxed earnings and profits that is in a PTEP group described in through of this section (each, a section PTEP group) is reclassified as previously taxed earnings and profits described in section (reclassified previously taxed earnings and profits), the section PTEP group is reduced by the functional currency amount of the reclassified previously taxed earnings and profits. This amount is added to the corresponding PTEP group described in paragraph (c)(2)(i), (ii), (iii) (by reason of of this section), (iv) or (v) of this section (each, a reclassified PTEP group) in the same section category and same annual PTEP account as the reduced section PTEP group.
(d) PTEP group taxes
(1) In general The term PTEP group taxes means the U.S. dollar amount of foreign income taxes (translated in accordance with section ) that are paid, accrued, or deemed paid with respect to an amount in each PTEP group within an annual PTEP account. The foreign income taxes that are paid, accrued, or deemed paid with respect to a PTEP group within an annual PTEP account of a controlled foreign corporation are—
(i) The sum of—
(A) The current year taxes paid or accrued by the controlled foreign corporation that are allocated and apportioned to the PTEP group under ;
(B) Foreign income taxes that are deemed paid under section and of this section by the controlled foreign corporation with respect to a section distribution received by the controlled foreign corporation, the amount of which is added to the PTEP group under of this section; and
(C) In the case of a reclassified PTEP group of the controlled foreign corporation, reclassified PTEP group taxes that are attributable to the section PTEP group that corresponds to the reclassified PTEP group.
(ii) Reduced by—
(A) Foreign income taxes that were deemed paid under section and of this section by another controlled foreign corporation that received a section distribution from the controlled foreign corporation, the amount of which is subtracted from the controlled foreign corporation's PTEP group under of this section;
(B) Foreign income taxes that were deemed paid under section and of this section by a domestic corporation that is a United States shareholder of the controlled foreign corporation that received a section distribution from the controlled foreign corporation, the amount of which is subtracted from the controlled foreign corporation's PTEP group under of this section; and
(C) In the case of a section PTEP group of the controlled foreign corporation, reclassified PTEP group taxes.
(2) Reclassified PTEP group taxes Reclassified PTEP group taxes are foreign income taxes that are initially included in PTEP group taxes with respect to a section PTEP group under or of this section multiplied by a fraction, the numerator of which is the portion of the previously taxed earnings and profits in the section PTEP group that become reclassified previously taxed earnings and profits, and the denominator of which is the total previously taxed earnings and profits in the section PTEP group.
(3) Foreign income taxes deemed paid with respect to PTEP groups established for pre-2018 inclusion years In the case of foreign income taxes paid or accrued in a taxable year of the controlled foreign corporation that began before January 1, 2018, with respect to an annual PTEP account, and a PTEP group within such account, that was established for an inclusion year that begins before January 1, 2018, the foreign income taxes are treated as PTEP group taxes of a controlled foreign corporation for purposes of this section only if those foreign income taxes were—
(i) Not included in a controlled foreign corporation's post-1986 foreign income taxes (as defined in section as in effect on December 21, 2017) used to compute foreign taxes deemed paid under section (as in effect on December 21, 2017) in any taxable year that began before January 1, 2018; and
(ii) Not treated as deemed paid under section (as in effect on December 21, 2017) by a domestic corporation that was a United States shareholder of the controlled foreign corporation.
(e) Examples The following examples illustrate the application of this section.
(1) Example 1: Establishment of PTEP groups and PTEP accounts
(i) Facts USP, a domestic corporation, owns all of the stock of CFC1, a controlled foreign corporation. CFC1 owns all of the stock of CFC2, a controlled foreign corporation. USP, CFC1, and CFC2 each use the calendar year as their U.S. taxable year. CFC1 and CFC2 use the “u” as their functional currency. At all relevant times, 1u = $1x. With respect to CFC2, USP includes in gross income a subpart F inclusion of 1,000,000u = $1,000,000x for the taxable year ending December 31, 2018. The inclusion is with respect to passive category income. In its U.S. taxable year ending December 31, 2019, CFC2 distributes 1,000,000u to CFC1. CFC2 has no earnings and profits except for the 1,000,000u of previously taxed earnings and profits resulting from USP's 2018 taxable year subpart F inclusion. CFC2's country of organization, Country X, imposes a withholding tax on CFC1 of 300,000u on CFC2's distribution to CFC1. Under , CFC1's 300,000u of current year taxes are allocated and apportioned to the PTEP group within the annual PTEP account within the section category to which the 1,000,000u of previously taxed earnings and profits are assigned.
(ii) Analysis
(A) Under of this section, a separate annual PTEP account in the passive category for the 2018 taxable year is established for CFC2 as a result of USP's subpart F inclusion. Under of this section, this account contains one PTEP group, section PTEP.
(B) Under of this section, in the 2019 taxable year, the 1,000,000u related to the section distribution from CFC2 is added to CFC1's annual PTEP account for the 2018 taxable year in the passive category and to the section PTEP within such account. Similarly, CFC2's 2018 taxable year annual PTEP account within the passive category, and the section PTEP within such account, is reduced by the amount of the 1,000,000u section distribution to CFC1. Additionally, CFC1's annual PTEP account for the 2018 taxable year in the passive category, and the section PTEP within such account, is reduced by the 300,000u of withholding tax imposed on CFC1 by Country X. Therefore, CFC1's annual PTEP account for the 2018 taxable year within the passive category and the section PTEP within such account is 700,000u.
(C) Under of this section, the 300,000u of withholding tax is translated into U.S. dollars and $300,000x is added to the PTEP group taxes with respect to CFC1's section PTEP within the annual PTEP account for the 2018 taxable year within the passive category.
(2) Example 2: Foreign income taxes deemed paid under section 960(b)
(i) Facts USP, a domestic corporation, owns 100% of the stock of CFC1, which in turn owns 60% of the stock of CFC2, which in turn owns 100% of the stock of CFC3. USP, CFC1, CFC2, and CFC3 all use the calendar year as their U.S. taxable year. CFC1, CFC2, and CFC3 all use the “u” as their functional currency. At all relevant times, 1u = $1x. On July 1, 2020, CFC2 distributes 600u to CFC1 and the entire distribution is a section distribution (“distribution 1”). On October 1, 2020, CFC1 distributes 800u to USP and the entire distribution is a section distribution (“distribution 2”). CFC1 and CFC2 make no other distributions in the year ending December 31, 2020, earn no other income, and incur no taxes on distribution 1 or distribution 2. Before taking into account distribution 1, CFC2 has 1,000u of section PTEP within an annual PTEP account for the 2016 taxable year within the general category. The previously taxed earnings and profits in CFC2's PTEP group relate to subpart F income of CFC3 that was included by USP in 2016. CFC3 distributed the earnings and profits to CFC2 before the 2020 taxable year and, solely as a result of the distribution of the previously taxed earnings and profits, CFC2 incurred withholding and net basis tax, resulting in $150 of PTEP group taxes with respect to section PTEP. Before taking into account distribution 1 and distribution 2, CFC1 has 200u in section PTEP within an annual PTEP account for the 2018 taxable year within the section category. The previously taxed earnings and profits in CFC1's PTEP group relate to the portion of a GILTI inclusion amount that was included by USP in 2018 and allocated to CFC2 under section and . CFC2 distributed the earnings and profits to CFC1 before the 2020 taxable year and, solely as a result of the distribution of the previously taxed earnings and profits, CFC1 incurred withholding and net basis tax, resulting in $25x of PTEP group taxes with respect to section PTEP.
(ii) Analysis
(A) Foreign income taxes deemed paid by CFC1 With respect to distribution 1 from CFC2 to CFC1, under of this section CFC1's proportionate share of PTEP group taxes with respect to CFC2's section PTEP within an annual PTEP account for the 2016 taxable year within the general category is $90x ($150x × 600u/1,000u). Under of this section, the amount of foreign income taxes that are properly attributable to distribution 1 is $90x. Accordingly, under of this section, CFC1 is deemed to have paid $90x of general category foreign income taxes of CFC2 with respect to its 600u section distribution in the general category.
(B) Adjustments to PTEP accounts of CFC1 and CFC2 Under of this section, the 600u related to distribution 1 is added to CFC1's section PTEP within an annual PTEP account for the 2016 taxable year within the general category. Similarly, CFC2's section PTEP within an annual PTEP account for the 2016 taxable year within the general category is reduced by 600u, the amount of the section distribution to CFC1. Additionally, under of this section, CFC1's PTEP group taxes with respect to its section PTEP within an annual PTEP account for the 2016 taxable year within the general category are increased by $90 and CFC2's PTEP group taxes with respect to section PTEP within an annual PTEP account for the 2016 taxable year within the general category are reduced by $90x.
(C) Foreign income taxes deemed paid by USP With respect to distribution 2 from CFC1 to USP, because CFC1 has PTEP groups in more than one section category, this section is applied separately to each section category (that is, distribution 2 of 800u is applied separately to the 200u of CFC1's section PTEP and 600u of CFC1's section PTEP).
(1) Section 951A category Under of this section, USP's proportionate share of PTEP group taxes with respect to CFC1's section PTEP within an annual PTEP account for the 2018 taxable year within the section category is $25x ($25x × 200u/200u). Under of this section, the amount of foreign income taxes within the section category that are properly attributable to distribution 2 is $25x. Accordingly, under of this section USP is deemed to have paid $25x of section category foreign income taxes of CFC1 with respect to its 200u section distribution in the section category.
(2) General category Under of this section, USP's proportionate share of PTEP group taxes with respect to CFC1's section PTEP within an annual PTEP account for the 2016 taxable year within the general category is $90x ($90x × 600u/600u). Under of this section, the amount of foreign income taxes that are properly attributable to distribution 2 is $90x. Accordingly, under paragraph (b)(1), USP is deemed to have paid $90x of general category foreign income taxes of CFC1 with respect to its 600u section distribution in the general category.
[T.D. 9882, 84 FR 69114, Dec. 17, 2019, as amended by T.D. 9922, 85 FR 72071, Nov. 12, 2020]