Reg. § 1.965-1 Overview, general rules, and definitions.
(a) Overview
(1) In general This section provides general rules and definitions under section . provides rules relating to adjustments to earnings and profits and basis to determine and account for the application of section and a rule that limits the amount of gain recognized under section by reason of distributions attributable to section previously taxed earnings and profits (as defined in ) in the inclusion year. provides rules regarding the determination of section deductions. sets forth rules that disregard certain transactions for purposes of section . Sections and 1.965-6 provide rules with respect to foreign tax credits. provides rules regarding elections and payments. provides rules regarding affiliated groups, including consolidated groups. provides dates of applicability. See also and (providing rules regarding the application of section ) and 1.986(c)-1 (providing rules regarding the application of section ).
(2) Scope of this section provides the general rules concerning section inclusion amounts. of this section provides the general rule concerning section deduction amounts. of this section provides a rule for specified foreign corporations that are not controlled foreign corporations. of this section treats certain controlled domestic partnerships as foreign partnerships for purposes of section . of this section provides definitions applicable for the section regulations and , , and . of this section contains examples illustrating the general rules and definitions set forth in this section.
(b) Section 965(a) inclusion amounts
(1) Inclusion of the pro rata share of the section 965(a) earnings amount For an inclusion year of a deferred foreign income corporation, the subpart F income of the deferred foreign income corporation (as otherwise determined for the inclusion year under section and ) is increased by the section earnings amount of the deferred foreign income corporation. See section . Accordingly, a section U.S. shareholder with respect to a deferred foreign income corporation generally includes in gross income under section for the section U.S. shareholder inclusion year its pro rata share of the section earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, and subject to reduction under section , of this section, and . The amount of the section U.S. shareholder's inclusion with respect to a deferred foreign income corporation as a result of section and this , as reduced under section , of this section, and , as applicable, is referred to as the section inclusion amount. Neither the section earnings amount nor the section inclusion amount is subject to the rules or limitations in section or limited by the accumulated earnings and profits of the deferred foreign income corporation on the date of the inclusion.
(2) Reduction by the allocable share of the aggregate foreign E&P deficit For purposes of determining a section U.S. shareholder's section inclusion amount with respect to a deferred foreign income corporation, the U.S. dollar amount of the section U.S. shareholder's pro rata share of the section earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, is reduced by the deferred foreign income corporation's allocable share of the section U.S. shareholder's aggregate foreign E&P deficit. See section . If the section U.S. shareholder is a member of a consolidated group, under , all section U.S. shareholders that are members of the consolidated group are treated as a single section U.S. shareholder for purposes of this .
(c) Section 965(c) deduction amounts For a section U.S. shareholder inclusion year, a section U.S. shareholder is generally allowed a deduction in an amount equal to the section deduction amount.
(d) Treatment of specified foreign corporation as a controlled foreign corporation A specified foreign corporation described in section and of this section that is not otherwise a controlled foreign corporation is treated as a controlled foreign corporation solely for purposes of of this section and sections , , and . See 965(e)(2).
(e) Special rule for certain controlled domestic partnerships
(1) In general For purposes of the section regulations, a controlled domestic partnership is treated as a foreign partnership for purposes of determining the section U.S. shareholder of a specified foreign corporation and the section stock of the specified foreign corporation owned by the section U.S. shareholder if the following conditions are satisfied—
(i) Without regard to this , the controlled domestic partnership is a section U.S. shareholder of the specified foreign corporation and thus owns section stock of the specified foreign corporation (tested section stock);
(ii) If the controlled domestic partnership (and all other controlled domestic partnerships in the chain of ownership of the specified foreign corporation) were treated as foreign—
(A) The specified foreign corporation would continue to be a specified foreign corporation; and
(B) At least one United States shareholder of the specified foreign corporation—
(1) Would be treated as a section U.S. shareholder of the specified foreign corporation; and
(2) Would be treated as owning (within the meaning of section ) tested section stock of the specified foreign corporation through another foreign corporation that is a direct or indirect partner in the controlled domestic partnership.
(2) Definition of a controlled domestic partnership For purposes of of this section, the term controlled domestic partnership means a domestic partnership that is controlled by a United States shareholder described in of this section and persons related to the United States shareholder. For purposes of this , control is determined based on all the facts and circumstances, except that a partnership will be deemed to be controlled by a United States shareholder and related persons if those persons, in the aggregate, own (directly or indirectly through one or more partnerships) more than 50 percent of the interests in the partnership capital or profits. For purposes of this , a related person is, with respect to a United States shareholder, a person that is related (within the meaning of section or ) to the United States shareholder.
(f) Definitions This provides definitions that apply for purposes of the section regulations and , , and . Unless otherwise indicated, all amounts are expressed as positive numbers.
(1) 8 percent rate amount The term 8 percent rate amount means, with respect to a section U.S. shareholder and a section U.S. shareholder inclusion year, the excess, if any, of the section U.S. shareholder's aggregate section inclusion amount for the section U.S. shareholder inclusion year over the amount of the section U.S. shareholder's aggregate foreign cash position for the section U.S. shareholder inclusion year as determined under .
(2) 8 percent rate equivalent percentage The term 8 percent rate equivalent percentage means, with respect to a section U.S. shareholder and a section U.S. shareholder inclusion year, the percentage that would result in the 8 percent rate amount being subject to an 8 percent rate of tax determined by only taking into account a deduction equal to such percentage of such amount and the highest rate of tax specified in section for the section U.S. shareholder inclusion year. In the case of a section U.S. shareholder inclusion year of a section U.S. shareholder to which section applies, the highest rate of tax under section before the effective date of the change in rates and the highest rate of tax under section after the effective date of such change will each be taken into account under the preceding sentence in the same proportions as the portion of the section U.S. shareholder inclusion year that is before and after such effective date, respectively.
(3) 15.5 percent rate amount The term 15.5 percent rate amount means, with respect to a section U.S. shareholder and a section U.S. shareholder inclusion year, the amount of the section U.S. shareholder's aggregate foreign cash position for the section U.S. shareholder inclusion year as determined under to the extent it does not exceed the section U.S. shareholder's aggregate section inclusion amount for the section U.S. shareholder inclusion year.
(4) 15.5 percent rate equivalent percentage The term 15.5 percent rate equivalent percentage, with respect to a section U.S. shareholder and a section U.S. shareholder inclusion year, has the meaning provided for the term “8 percent rate equivalent percentage” applied by substituting “15.5 percent rate amount” for “8 percent rate amount” and “15.5 percent rate of tax” for “8 percent rate of tax.”
(5) Accounts payable The term accounts payable means payables arising from the purchase of property described in section or section or the receipt of services from vendors or suppliers, provided the payables have a term upon issuance of less than one year.
(6) Accounts receivable The term accounts receivable means receivables described in section that have a term upon issuance of less than one year.
(7) Accumulated post-1986 deferred foreign income
(i) In general The term accumulated post-1986 deferred foreign income means, with respect to a specified foreign corporation, the post-1986 earnings and profits of the specified foreign corporation except to the extent such earnings and profits—
(A) Are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1;
(B) If distributed, would, in the case of a controlled foreign corporation, be excluded from the gross income of a United States shareholder under section ; or
(C) If distributed, would, in the case of a controlled foreign corporation that has shareholders that are not United States shareholders on an E&P measurement date, be excluded from the gross income of such shareholders under section if such shareholders were United States shareholders, determined by applying the principles of Revenue Ruling 82-16, 1982-1 C.B. 106.
(ii) Earnings and profits attributable to subpart F income in the same taxable year as an E&P measurement date For purposes of determining the accumulated post-1986 deferred foreign income of a specified foreign corporation as of an E&P measurement date, earnings and profits of the specified foreign corporation that are or would be, applying the principles of Revenue Ruling 82-16, 1982-1 C.B. 106, described in section by reason of subpart F income (as defined in section without regard to section ) are described in section and or of this section only to the extent that such income has been accrued by the specified foreign corporation as of the E&P measurement date. For rules regarding the interaction of sections , , , and generally, see .
(8) Aggregate foreign cash position
(i) In general The term aggregate foreign cash position means, with respect to a section U.S. shareholder that is not a member of a consolidated group, the greater of—
(A) The aggregate of the section U.S. shareholder's pro rata share of the cash position of each specified foreign corporation determined as of the final cash measurement date of the specified foreign corporation; or
(B) One half of the sum of—
(1) The aggregate described in of this section determined as of the second cash measurement date of each specified foreign corporation, plus
(2) The aggregate described in of this section determined as of the first cash measurement date of each specified foreign corporation.
(ii) Other rules For rules for determining the aggregate foreign cash position for a section U.S. shareholder inclusion year of the section U.S. shareholder, see . For the rule for determining the aggregate foreign cash position of a section U.S. shareholder that is a member of a consolidated group, see . For rules disregarding certain assets for purposes of determining the aggregate foreign cash position of a section U.S. shareholder, see .
(9) Aggregate foreign E&P deficit The term aggregate foreign E&P deficit means, with respect to a section U.S. shareholder, the lesser of—
(i) The aggregate of the section U.S. shareholder's pro rata share of the specified E&P deficit of each E&P deficit foreign corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, or
(ii) The aggregate of the section U.S. shareholder's pro rata share of the section earnings amount of each deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017.
(10) Aggregate section 965(a) inclusion amount The term aggregate section inclusion amount means, with respect to a section U.S. shareholder, the sum of all of the section U.S. shareholder's section inclusion amounts.
(11) Allocable share The term allocable share means, with respect to a deferred foreign income corporation and an aggregate foreign E&P deficit of a section U.S. shareholder, the product of the aggregate foreign E&P deficit and the ratio determined by dividing—
(i) The section U.S. shareholder's pro rata share of the section earnings amount of the deferred foreign income corporation, translated (if necessary) into U.S. dollars using the spot rate on December 31, 2017, by
(ii) The amount described in of this section with respect to the section U.S. shareholder.
(12) Bona fide hedging transaction The term bona fide hedging transaction means a hedging transaction that meets (or that would meet if the specified foreign corporation were a controlled foreign corporation) the requirements of a bona fide hedging transaction described in , except that in the case of a specified foreign corporation that is not a controlled foreign corporation, the identification requirements of do not apply.
(13) Cash-equivalent asset
(i) In general The term cash-equivalent asset means any of the following assets—
(A) Personal property which is of a type that is actively traded and for which there is an established financial market, other than a specified commodity;
(B) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government;
(C) Any foreign currency;
(D) A short-term obligation; or
(E) Derivative financial instruments, other than bona fide hedging transactions.
(ii) Specified commodity The term specified commodity means a commodity held, or, for purposes of of this section, to be held, by a specified foreign corporation that, in the hands of the specified foreign corporation, is property described in section or . This does not apply with respect to commodities held by a specified foreign corporation in its capacity as a dealer or trader in commodities.
(14) Cash-equivalent asset hedging transaction
(i) In general The term cash-equivalent asset hedging transaction means a bona fide hedging transaction identified on a specified foreign corporation's books and records as hedging a cash-equivalent asset.
(ii) Aggregate hedging transactions For purposes of of this section, the amount of a bona fide hedging transaction described in (an aggregate hedging transaction) that is treated as a cash-equivalent asset hedging transaction is the amount that bears the same proportion to the fair market value of the aggregate hedging transaction as the value of the cash-equivalent assets being hedged by the aggregate hedging transaction bears to the value of all assets being hedged by the aggregate hedging transaction.
(15) Cash measurement dates The term cash measurement dates means, with respect to a specified foreign corporation, the first cash measurement date, the second cash measurement date, and the final cash measurement date, collectively, and each a cash measurement date.
(16) Cash position
(i) General rule The term cash position means, with respect to a specified foreign corporation, the sum of—
(A) Cash held by the corporation;
(B) The net accounts receivable of the corporation; and
(C) The fair market value of the cash-equivalent assets held by the corporation.
(ii) Fair market value of cash-equivalent assets For purposes of determining the fair market value of a cash-equivalent asset of a specified foreign corporation, the value of the cash-equivalent asset must be adjusted by the fair market value of any cash- equivalent asset hedging transaction with respect to the cash-equivalent asset, but only to the extent that the cash-equivalent asset hedging transaction does not reduce the fair market value of the cash-equivalent asset below zero.
(iii) Measurement of derivative financial instruments The amount of derivative financial instruments taken into account in determining the cash position of a specified foreign corporation is the aggregate fair market value of its derivative financial instruments that constitute cash-equivalent assets, provided such amount is not less than zero.
(iv) Translation of cash position amounts The cash position of a specified foreign corporation with respect to a cash measurement date must be expressed in U.S. dollars. For this purpose, the amounts described in of this section must be translated (if necessary) into U.S. dollars using the spot rate on the relevant cash measurement date.
(17) Deferred foreign income corporation
(i) In general The term deferred foreign income corporation means a specified foreign corporation that has accumulated post-1986 deferred foreign income greater than zero as of an E&P measurement date.
(ii) Priority rule If a specified foreign corporation satisfies the definition of a deferred foreign income corporation under section and of this section, it is classified solely as a deferred foreign income corporation and not also as an E&P deficit foreign corporation even if it otherwise satisfies the requirements of section and of this section.
(18) Derivative financial instrument The term derivative financial instrument includes a financial instrument that is one of the following—
(i) A notional principal contract,
(ii) An option contract,
(iii) A forward contract, other than a forward contract with respect to a specified commodity (as defined in of this section), but solely to the extent that the specified foreign corporation identified, or could have identified, the forward contract as a hedging transaction (within the meaning of ) with respect to one or more specified commodities held by the specified foreign corporation,
(iv) A futures contract,
(v) A short position in securities or commodities, other than a forward contract with respect to a specified commodity, but solely to the extent that the specified foreign corporation identified, or could have identified, the forward contract as a hedging transaction (within the meaning of ) with respect to one or more specified commodities held by the specified foreign corporation, or
(vi) Any financial instrument similar to one described in through of this section.
(19) Domestic pass-through entity The term domestic pass-through entity means a pass-through entity that is a United States person (as defined in section ).
(20) Domestic pass-through owner The term domestic pass-through owner means, with respect to a domestic pass-through entity, a United States person (as defined in section ) that is a partner, shareholder, beneficiary, grantor, or owner, as the case may be, in the domestic pass-through entity. Notwithstanding the preceding sentence, the term does not include a partner, shareholder, beneficiary, grantor, or owner of the domestic pass-through entity that is itself a domestic pass-through entity but does include any other United States person that is an indirect partner, shareholder, beneficiary, grantor, or owner of the domestic pass-through entity through one or more other pass-through entities.
(21) Domestic pass-through owner share The term domestic pass-through owner share means, with respect to a domestic pass-through owner and a domestic pass-through entity, the domestic pass-through owner's share of the aggregate section inclusion amount and the section deduction amount, as applicable, of the domestic pass-through entity, including the domestic pass-through owner's share of the aggregate section inclusion amount and section deduction amount, as applicable, of a domestic pass-through entity owned indirectly by the domestic pass-through owner through one or more other pass-through entities.
(22) E&P deficit foreign corporation
(i) In general The term E&P deficit foreign corporation means, with respect to a section U.S. shareholder, a specified foreign corporation, other than a deferred foreign income corporation, if, as of November 2, 2017—
(A) The specified foreign corporation had a deficit in post-1986 earnings and profits,
(B) The corporation was a specified foreign corporation, and
(C) The shareholder was a United States shareholder of the corporation.
(ii) Determination of deficit in post-1986 earnings and profits In the case of a specified foreign corporation that has post-1986 earnings and profits that include earnings and profits described in section or (or both) and a deficit in earnings and profits (including hovering deficits, as defined in ), the specified foreign corporation has a deficit in post-1986 earnings and profits described in of this section only to the extent the deficit in post-1986 earnings and profits exceeds the aggregate of its post-1986 earnings and profits described in section and .
(23) E&P measurement dates The term E&P measurement dates means November 2, 2017, and December 31, 2017, collectively, and each an E&P measurement date.
(24) Final cash measurement date The term final cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that begins before January 1, 2018, and ends on or after November 2, 2017, if any.
(25) First cash measurement date The term first cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that ends after November 1, 2015, and before November 2, 2016, if any.
(26) Inclusion year The term inclusion year means, with respect to a deferred foreign income corporation, the last taxable year of the deferred foreign income corporation that begins before January 1, 2018.
(27) Net accounts receivable The term net accounts receivable means, with respect to a specified foreign corporation, the excess (if any) of—
(i) The corporation's accounts receivable, over
(ii) The corporation's accounts payable (determined consistent with the rules of section ).
(28) Pass-through entity The term pass-through entity means a partnership, S corporation, or any other person (whether domestic or foreign) other than a corporation to the extent that the income or deductions of the person are included in the income of one or more direct or indirect owners or beneficiaries of the person. For example, if a domestic trust is subject to federal income tax on a portion of its section inclusion amount and its domestic pass-through owners are subject to tax on the remaining portion, the domestic trust is treated as a domestic pass-through entity with respect to such remaining portion.
(29) Post-1986 earnings and profits
(i) General rule The term post-1986 earnings and profits means, with respect to a specified foreign corporation and an E&P measurement date, the earnings and profits (including earnings and profits described in section and ) of the specified foreign corporation (computed in accordance with sections and , subject to , and by taking into account only periods when the foreign corporation was a specified foreign corporation) accumulated in taxable years beginning after December 31, 1986, and determined—
(A) As of the E&P measurement date, except as provided in of this section, and
(B) Without diminution by reason of dividends distributed during the last taxable year of the foreign corporation that begins before January 1, 2018, other than dividends distributed to another specified foreign corporation to the extent the dividends increase the post-1986 earnings and profits of the distributee specified foreign corporation.
(ii) Foreign income taxes For purposes of determining a specified foreign corporation's post-1986 earnings and profits as of the E&P measurement date on November 2, 2017, in the case in which foreign income taxes (as defined in section ) of the specified foreign corporation accrue after November 2, 2017, but on or before December 31, 2017, and during the specified foreign corporation's U.S. taxable year that includes November 2, 2017, the specified foreign corporation's post-1986 earnings and profits as of November 2, 2017, are reduced by the applicable portion of such foreign income taxes. For purposes of the preceding sentence, the applicable portion of the foreign income taxes is the amount of the taxes that are attributable to the portion of the taxable income (as determined under foreign law) that accrues on or before November 2, 2017.
(iii) Deficits in earnings and profits Any deficit related to post-1986 earnings and profits, including a hovering deficit (as defined in ), of a specified foreign corporation is taken into account for purposes of determining the post-1986 earnings and profits (including a deficit) of the specified foreign corporation.
(30) Pro rata share The term pro rata share means, with respect to a section U.S. shareholder of a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable—
(i) With respect to the section earnings amount of a deferred foreign income corporation, the portion of the section earnings amount that would be treated as distributed to the section U.S. shareholder under , determined as of the last day of the inclusion year of the deferred foreign income corporation on which it is a specified foreign corporation;
(ii) With respect to the specified E&P deficit of an E&P deficit foreign corporation, the portion of the specified E&P deficit allocated to the section U.S. shareholder, determined by allocating the specified E&P deficit among the shareholders of the corporation's common stock in proportion to the liquidation value of the common stock held by the shareholders, determined as of the last day of the last taxable year of the E&P deficit foreign corporation that begins before January 1, 2018, provided that—
(A) If the corporation's common stock has a liquidation value of zero and there is at least one other class of equity with a liquidation preference relative to the common stock, then the specified E&P deficit is allocated as if it were distributed in a hypothetical distribution described in with respect to the most junior class of equity with a positive liquidation value to the extent of such liquidation value, and then to the next most junior class of equity to the extent of its liquidation value, and so on, applying by substituting “specified E&P deficit” for “subpart F income” each place it appears and treating the amount of current earnings and profits of the corporation for the year as being equal to the specified E&P deficit of the corporation for the year; and
(B) If the corporation's common stock has a liquidation value of zero and there is no other class of equity with a liquidation preference relative to the common stock, the specified E&P deficit is allocated among the common stock using any reasonable method consistently applied; and
(iii) With respect to the cash position of a specified foreign corporation on a cash measurement date, the portion of the cash position that would be treated as distributed to the section U.S. shareholder under if the cash position were subpart F income, determined as of the close of the cash measurement date and without regard to whether the section U.S. shareholder is a section U.S. shareholder of the specified foreign corporation as of any other cash measurement date of the specified foreign corporation, including the final cash measurement date of the specified foreign corporation.
(31) Second cash measurement date The term second cash measurement date means, with respect to a specified foreign corporation, the close of the last taxable year of the specified foreign corporation that ends after November 1, 2016, and before November 2, 2017, if any.
(32) Section 958(a) stock The term section stock means, with respect to a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable, stock of the corporation owned (directly or indirectly) by a United States shareholder within the meaning of section .
(33) Section 958(a) U.S. shareholder The term section U.S. shareholder means, with respect to a specified foreign corporation, a deferred foreign income corporation, or an E&P deficit foreign corporation, as applicable, a United States shareholder of such corporation that owns section stock of the corporation.
(34) Section 958(a) U.S. shareholder inclusion year The term section U.S. shareholder inclusion year means the taxable year of a section U.S. shareholder in which or with which the last day of the inclusion year of a deferred foreign income corporation on which it is a specified foreign corporation occurs.
(35) Section 965 regulations The term section regulations means the regulations under through , collectively.
(36) Section 965(a) earnings amount The term section earnings amount means, with respect to a deferred foreign income corporation, the greater of the accumulated post-1986 deferred foreign income of the deferred foreign income corporation as of the E&P measurement date on November 2, 2017, or the accumulated post-1986 deferred foreign income of the deferred foreign income corporation as of the E&P measurement date on December 31, 2017, determined in each case in the functional currency of the specified foreign corporation. If the functional currency of a specified foreign corporation changes between the two E&P measurement dates, the comparison must be made in the functional currency of the specified foreign corporation as of December 31, 2017, by translating the specified foreign corporation's accumulated post-1986 deferred foreign income as of November 2, 2017, into the new functional currency using the spot rate on November 2, 2017.
(37) Section 965(a) inclusion The term section inclusion means, with respect to a person and a deferred foreign income corporation, an amount included in income by the person by reason of section with respect to the deferred foreign income corporation, whether because the person is a section U.S. shareholder of the deferred foreign income corporation with a section inclusion amount with respect to the deferred foreign income corporation or because the person is a domestic pass-through owner with respect to a domestic pass-through entity that is a section U.S. shareholder of the deferred foreign income corporation and the person includes in income its domestic pass-through owner share of the section inclusion amount of the domestic pass-through entity with respect to the deferred foreign income corporation.
(38) Section 965(a) inclusion amount The term section inclusion amount has the meaning provided in of this section.
(39) Section 965(a) previously taxed earnings and profits The term section previously taxed earnings and profits has the meaning provided in .
(40) Section 965(b) previously taxed earnings and profits The term section previously taxed earnings and profits has the meaning provided in .
(41) Section 965(c) deduction The term section deduction means, with respect to a person, an amount allowed as a deduction to the person by reason of section , whether because the person is a section U.S. shareholder with a section deduction amount or because the person is a domestic pass-through owner with respect to a domestic pass-through entity that is a section U.S. shareholder and the person takes into account its domestic pass-through owner share of the section deduction amount of the domestic pass-through entity.
(42) Section 965(c) deduction amount The term section deduction amount means an amount equal to the sum of—
(i) A section U.S. shareholder's 8 percent rate equivalent percentage of the section U.S. shareholder's 8 percent rate amount for the section U.S. shareholder inclusion year, plus
(ii) The section U.S. shareholder's 15.5 percent rate equivalent percentage of the section U.S. shareholder's 15.5 percent rate amount for the section U.S. shareholder inclusion year.
(43) Short-term obligation The term short-term obligation means any obligation with a term upon issuance that is less than one year and any loan that must be repaid at the demand of the lender (or that must be repaid within one year of such demand), but does not include any accounts receivable.
(44) Specified E&P deficit The term specified E&P deficit means, with respect to an E&P deficit foreign corporation, the amount of the deficit described in of this section.
(45) Specified foreign corporation
(i) General rule Except as provided in of this section, the term specified foreign corporation means—
(A) A controlled foreign corporation, or
(B) A foreign corporation of which one or more domestic corporations is a United States shareholder.
(ii) Special attribution rule
(A) In general Solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of section and of this section, stock owned, directly or indirectly, by or for—
(1) A partner (tested partner) will not be considered as being owned by a partnership under sections and and if the tested partner owns less than ten percent of the interests in the partnership's capital and profits; and
(2) A beneficiary (tested beneficiary) will not be considered as being owned by a trust under sections and and if the value of the interest of the tested beneficiary, computed actuarially, whether vested or contingent, current or remainder, is less than ten percent of the value of the trust property, assuming the maximum exercise of discretion in favor of the beneficiary.
(B) Attribution for purposes of the ten percent standard For purposes of of this section, an interest in a partnership or trust owned by a partner or beneficiary other than the tested partner or tested beneficiary will be considered as being owned by the tested partner or tested beneficiary under the principles of sections and , as modified by this , as if interests in a partnership or trust were stock.
(iii) Passive foreign investment companies A foreign corporation that is a passive foreign investment company (as defined in section ) with respect to a United States shareholder and that is not a controlled foreign corporation is not a specified foreign corporation of the United States shareholder.
(46) Spot rate The term spot rate has the meaning provided in .
(47) United States shareholder The term United States shareholder has the meaning provided in section .
(g) Examples The following examples illustrate the definitions and general rules set forth in this section.
(1) Example 1. Definition of specified foreign corporation
(i) Facts A, an individual, owns 1% of the interests in a partnership, PS, and 10% by vote and value of the stock of a foreign corporation, FC. PS owns 100% of the stock of a domestic corporation, DC. A United States citizen, USI, owns an additional 10% by vote and value of the stock of FC. The remaining 80% by vote and value of the stock of FC is owned by non-United States persons that are unrelated to A, USI, DC, and PS.
(ii) Analysis
(A) Absent the application of sections , , and , and and , FC would not be a specified foreign corporation because FC is not a controlled foreign corporation and there would be no domestic corporation that is a United States shareholder of FC. However, under sections and and , absent the special attribution rule in of this section, PS would be treated as owning 10% of the stock of FC. As a result, under sections , , and , and and , DC would be treated as owning the stock of FC treated as owned by PS, and thus DC would be a United States shareholder with respect to FC, causing FC to be a specified foreign corporation within the meaning of section and of this section. The results would be the same whether A or PS or both are domestic or foreign persons.
(B) Under the special attribution rule in of this section, solely for purposes of determining whether a foreign corporation is a specified foreign corporation within the meaning of section and of this section, the stock of FC owned by A is not considered as being owned by PS under sections and and because A owns less than 10% of the interests in PS's capital and profits. Accordingly, FC is not a specified foreign corporation within the meaning of section and of this section.
(2) Example 2. Definition of specified foreign corporation
(i) Facts The facts are the same as in of this section (the facts in Example 1), except that A is a foreign corporation wholly owned by B, a foreign corporation, and B directly owns 9% of the interests in PS.
(ii) Analysis Applying the principles of sections and , as modified by of this section, as if the interest in PS were stock, A is treated as owning the interests in PS owned by B (in addition to the 1% interest in PS that A owns directly), and thus A is not treated as owning less than 10% of the interests in PS's capital and profits. Accordingly, the special attribution rule in of this section does not apply, and PS is treated as owning A's stock of FC for purposes of determining whether FC is a specified foreign corporation within the meaning of section and of this section. Accordingly, under the analysis described in paragraph (ii)(A) of Example 1 of of this section, FC is a specified foreign corporation within the meaning of section and of this section.
(3) Example 3. Determination of accumulated post-1986 deferred foreign income
(i) Facts USP, a domestic corporation, and FP, a foreign corporation unrelated to USP, have owned 70% and 30% respectively, by vote and value, of the only class of stock of FS, a foreign corporation, from January 1, 2016, until December 31, 2017. USP and FS both have a calendar year taxable year. FS had no income until its taxable year ending December 31, 2016, in which it had 100u of income, all of which constituted subpart F income, and USP included 70u in income with respect to FS under section for such year. FS earned no income in 2017. Therefore, FS's post-1986 earnings and profits are 100u as of both E&P measurement dates.
(ii) Analysis Because USP included 70u in income with respect to FS under section , 70u of such post-1986 earnings and profits would, if distributed, be excluded from the gross income of USP under section . Thus, FS's accumulated post-1986 deferred foreign income would be reduced by 70u pursuant to section and of this section. Furthermore, under of this section, the accumulated post-1986 deferred foreign income of FS is reduced by amounts that would be excluded from the gross income of FP if FP were a United States shareholder, consistent with the principles of Revenue Ruling 82-16. Accordingly, FS's accumulated post-1986 deferred foreign income is reduced by the remaining 30u of the 100u of post-1986 earnings and profits to which USP's 70u of section income inclusions were attributable. As a result, FS's accumulated post-1986 deferred foreign income is 0u (100u minus 70u minus 30u).
(4) Example 4. Determination of status as a deferred foreign income corporation or an E&P deficit foreign corporation; specified foreign corporation is solely a deferred foreign income corporation
(i) Facts USP, a domestic corporation, owns all of the stock of FS, a foreign corporation. As of November 2, 2017, FS has a deficit in post-1986 earnings and profits of 150u. As of December 31, 2017, FS has 200u of post-1986 earnings and profits. FS does not have earnings and profits that are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under section or from the gross income of another shareholder if such shareholder were a United States shareholder.
(ii) Analysis FS's accumulated post-1986 deferred foreign income is equal to its post-1986 earnings and profits because no adjustment to post-1986 earnings and profits is made under section or . Under of this section, FS is a deferred foreign income corporation because FS has accumulated post-1986 deferred foreign income greater than zero as of the E&P measurement date on December 31, 2017. In addition, under of this section, because FS is a deferred foreign income corporation, FS is not also an E&P deficit foreign corporation, notwithstanding that FS has a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017.
(5) Example 5. Determination of status as a deferred foreign income corporation or an E&P deficit foreign corporation; specified foreign corporation is neither a deferred foreign income corporation nor an E&P deficit foreign corporation
(i) Facts USP, a domestic corporation, owns all of the stock of FS, a foreign corporation. As of both November 2, 2017, and December 31, 2017, FS has 100u of earnings and profits described in section and a deficit of 90u in earnings and profits described in section , all of which were accumulated in taxable years beginning after December 31, 1986, while FS was a specified foreign corporation. Accordingly, as of both November 2, 2017, and December 31, 2017, FS has 10u of post-1986 earnings and profits.
(ii) Analysis
(A) Determination of status as a deferred foreign income corporation Under of this section, for purposes of determining whether FS is a deferred foreign income corporation, a determination must be made whether FS has accumulated post-1986 deferred foreign income greater than zero as of either the E&P measurement date on November 2, 2017, or the E&P measurement date on December 31, 2017. Under section and of this section, FS's accumulated post-1986 deferred foreign income is its post-1986 earnings and profits, except to the extent such earnings and profits are attributable to income of the specified foreign corporation that is effectively connected with the conduct of a trade or business within the United States and subject to tax under chapter 1, or that, if distributed, would be excluded from the gross income of a United States shareholder under section or from the gross income of another shareholder if such shareholder were a United States shareholder. Disregarding FS's 100u of post-1986 earnings and profits described in of this section, FS has a 90u deficit in accumulated post-1986 deferred foreign income as of both E&P measurement dates. Accordingly, FS does not have accumulated post-1986 deferred foreign income greater than zero as of either E&P measurement date, and, therefore, FS is not a deferred foreign income corporation.
(B) Determination of status as an E&P deficit foreign corporation Under of this section, for purposes of determining whether FS is an E&P deficit foreign corporation, a determination must be made whether FS has a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017. Under of this section, because the deficit in the earnings and profits of FS described in section of 90u does not exceed the earnings and profits of FS described in section of 100u, FS does not have a deficit in post-1986 earnings and profits as of the E&P measurement date on November 2, 2017, and, therefore, FS is not an E&P deficit foreign corporation. Accordingly, FS is neither a deferred foreign income corporation nor an E&P deficit foreign corporation.
(6) Example 6. Application of currency translation rules
(i) Facts As of November 2, 2017, and December 31, 2017, USP, a domestic corporation, owns all of the stock of CFC1, an E&P deficit foreign corporation with the “u” as its functional currency; CFC2, an E&P deficit foreign corporation with the “v” as its functional currency; CFC3, a deferred foreign income corporation with the “y” as its functional currency; and CFC4, a deferred foreign income corporation with the “z” as its functional currency. USP, CFC1, CFC2, CFC3, and CFC4 each have a calendar year taxable year. As of December 31, 2017, 1u=$1, .75v=$1, .50y=$1, and .25z=$1. CFC1 has a specified E&P deficit of 100u, CFC2 has a specified E&P deficit of 120v, CFC3 has a section earnings amount of 50y, and CFC4 has a section earnings amount of 75z.
(ii) Analysis
(A) Under of this section, for purposes of determining USP's section inclusion amounts with respect to CFC3 and CFC4, the section earnings amount of each of CFC3 and CFC4 is translated into U.S. dollars at the spot rate on December 31, 2017, which equals $100 (50y at .50y=$1) and $300 (75z at .25z=$1), respectively. Furthermore, USP's pro rata share of the section earnings amounts, as translated, is $100 and $300, respectively, or 100% of each section earnings amount.
(B) Under of this section, for purposes of determining USP's aggregate foreign E&P deficit, the specified E&P deficit of each of CFC1 and CFC2 is translated into U.S. dollars at the spot rate on December 31, 2017, which equals $100 (100u at 1u=$1) and $160 (120v at .75v=$1), respectively. Furthermore USP's pro rata share of each specified E&P deficit, as translated, is $100 and $160, respectively, or 100% of each specified E&P deficit. Therefore, USP's aggregate foreign E&P deficit is $260.
(C) Under section and of this section, for purposes of determining USP's section inclusion amount with respect to each of CFC3 and CFC4, the U.S. dollar amount of USP's pro rata share of the section earnings amount of each of CFC3 and CFC4 is reduced by each of CFC3 and CFC4's allocable share of USP's aggregate foreign E&P deficit. Under section and of this section, CFC3's allocable share of USP's aggregate foreign E&P deficit of $260 is $65 ($260 × ($100/$400)) and CFC4's allocable share of USP's aggregate foreign E&P deficit is $195 ($260 × ($300/400)). After reduction under section and of this section, the section inclusion amount of USP with respect to CFC3 is $35 ($100−$65) and the section inclusion amount of USP with respect to CFC4 is $105 ($300−$195). Under , the section previously taxed earnings and profits of each of CFC3 and CFC4, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, are 17.5y ($35 at .50y=$1) and 26.25z ($105 at .25z=$1), respectively. Under , for purposes of applying section , the amounts treated as a dividend paid by each of CFC3 and CFC4, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, are 17.5y ($35 at .50y=$1) and 26.25z ($105 at .25z=$1).
(D) For purposes of determining the section previously taxed earnings and profits of each of CFC3 and CFC4 under section and as a result of the reduction to USP's section inclusion amounts with respect to CFC3 and CFC4, the amount of the aggregate foreign E&P deficit of USP allocated to each of CFC3 and CFC4 under section and of this section, translated into the respective functional currencies of CFC3 and CFC4 at the spot rate on December 31, 2017, is 32.5y ($65 at .50y=$1) and 48.75z ($195 at .25z=$1), respectively.
(7) Example 7. Determination of cash measurement dates and pro rata shares of cash positions
(i) Facts Except as otherwise provided, for all relevant periods, USP, a domestic corporation, has owned directly at least 10% of the stock of CFC1, CFC2, CFC3, and CFC4, each a foreign corporation. CFC1 and CFC2 have calendar year taxable years. CFC3 and CFC4 have taxable years that end on November 30. No entity has a short taxable year, except as a result of the transactions described below.
(A) USP transferred all of its stock of CFC2 to an unrelated person on June 30, 2016, at which point USP ceased to be a United States shareholder with respect to CFC2.
(B) CFC4 dissolved on December 30, 2010, and, as a result, its final taxable year ended on December 30, 2010.
(ii) Analysis Each of CFC1, CFC2, CFC3, and CFC4 is a specified foreign corporation of USP, subject to the sale of CFC2 on June 30, 2016, and the dissolution of CFC4 on December 30, 2010. Under the definition of aggregate foreign cash position in of this section, the definition of pro rata share of a cash position in of this section, and the definitions of the final cash measurement date, second cash measurement date, and first cash measurement date in , , and of this section, the cash measurement dates of the specified foreign corporations to be taken into account by USP in determining its aggregate foreign cash position are summarized in the following table:
| Final | Second | First | |
|---|---|---|---|
| CFC1 | December 31, 2017 | December 31, 2016 | December 31, 2015. |
| CFC2 | N/A | N/A | December 31, 2015. |
| CFC3 | November 30, 2018 | November 30, 2016 | November 30, 2015. |
| CFC4 | N/A | N/A | N/A. |
(8) Example 8. Determination of section 958(a) U.S. shareholder in case of a controlled domestic partnership
(i) Facts USP, a domestic corporation, owns all of the stock of CFC1 and CFC2. CFC1 and CFC2 own 60% and 40%, respectively, of the interests in the capital and profits of DPS, a domestic partnership. DPS owns all of the stock of CFC3 and CFC4. This ownership structure has existed since the date of formation of CFC1, CFC2, CFC3, and CFC4. CFC1, CFC2, CFC3, and CFC4 are each a foreign corporation. USP, DPS, CFC1, CFC2, CFC3, and CFC4 have calendar year taxable years. On both E&P measurement dates, CFC3 has 50u of accumulated post-1986 deferred foreign income. On both E&P measurement dates, CFC4 has a deficit in post-1986 earnings and profits of 30u. On all cash measurement dates, CFC1, CFC2, and CFC3 each have a cash position of 0u, and CFC4 has a cash position of 200u.
(ii) Analysis DPS is a controlled domestic partnership with respect to USP within the meaning of of this section because more than 50% of the interests in its capital and profits are owned by persons related to USP within the meaning of section , CFC1 and CFC2, and thus DPS is controlled by USP and related persons. Without regard to of this section, DPS is a section U.S. shareholder of CFC3 and CFC4, each of which is a controlled foreign corporation. If DPS were treated as foreign, CFC3 and CFC4 would each continue to be a controlled foreign corporation, and USP would be treated as a section U.S. shareholder of each of CFC3 and CFC4, and would be treated as owning (within the meaning of section ) tested section stock of each of CFC3 and CFC4 through CFC1 and CFC2, which are both partners in DPS. Thus, under of this section, DPS is treated as a foreign partnership for purposes of determining the section U.S. shareholder of both CFC3 and CFC4 and the section stock of both CFC3 and CFC4 owned by the section U.S. shareholder. Thus, USP's pro rata share of CFC3's section earnings amount is 50u, and its pro rata share of CFC4's specified E&P deficit is 30u. USP's aggregate foreign cash position is 200u. DPS is not a section U.S. shareholder with respect to either CFC3 or CFC4.
[T.D. 9846, 84 FR 1875, Feb. 5, 2019, as amended by T.D. 9846, 84 FR 14260, Apr. 10, 2019]