Reg. § 1.965-5 Allowance of credit or deduction for foreign income taxes.
(a) Scope This section provides rules for the allowance of a credit or deduction for foreign income taxes in connection with the application of section . of this section provides rules under section for the allowance of a credit or deduction for foreign income taxes paid or accrued. of this section provides rules for the allowance of a credit or deduction for foreign income taxes treated as paid or accrued in connection with the application of section . of this section defines the term applicable percentage.
(b) Rules for foreign income taxes paid or accrued
(1) In general Neither a deduction (including under section ) nor a credit under section is allowed for the applicable percentage of any foreign income taxes paid or accrued with respect to any amount for which a section deduction is allowed for a section U.S. shareholder inclusion year. Neither a deduction (including under section ) nor a credit under section is allowed for the applicable percentage of any foreign income taxes attributable to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits. Accordingly, for example, no deduction or credit is allowed for the applicable percentage of any withholding taxes imposed on a United States shareholder by the jurisdiction of residence of the distributing foreign corporation with respect to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits. Similarly, for example, no deduction or credit is allowed for the applicable percentage of foreign income taxes imposed on a United States citizen by the citizen's jurisdiction of residence upon receipt of a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits.
(2) Attributing taxes to section 959(a) distributions of section 965 previously taxed earnings and profits For purposes of of this section, foreign income taxes are attributable to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits if such taxes would be allocated and apportioned to a distribution of such previously taxed earnings and profits under the principles of , regardless of whether an actual distribution is made or recognized for Federal income tax purposes. Therefore, for example, a credit or deduction for the applicable percentage of foreign income taxes imposed on a United States shareholder that pays foreign tax on a distribution that is not recognized for Federal income tax purposes (for example, in the case of a consent dividend or stock dividend upon which a withholding tax is imposed) is not allowed under of this section to the extent it is attributable to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits under the principles of . For taxable years of foreign corporations beginning after December 31, 2019, in lieu of applying the principles of under this , the rules in apply by treating the portion of a distribution attributable to section previously taxed earnings and profits and the portion of a distribution attributable to section previously taxed earnings and profits each as a statutory grouping, and the portion of the distribution that is attributable to other earnings and profits as the residual grouping. See (Example 6).
(c) Rules for foreign income taxes treated as paid or accrued
(1) Disallowed credit
(i) In general A credit under section is not allowed for the applicable percentage of any foreign income taxes treated as paid or accrued with respect to any amount for which a section deduction is allowed for a section U.S. shareholder inclusion year. For purposes of the preceding sentence, taxes treated as paid or accrued include foreign income taxes deemed paid under section with respect to a section inclusion, foreign income taxes deemed paid under section (as in effect on December 21, 2017) or section (as applicable to taxable years of controlled foreign corporations beginning after December 31, 2017) with respect to distributions of section previously taxed earnings and profits or section previously taxed earnings and profits, foreign income taxes allocated to an entity under , and a distributive share of foreign income taxes paid or accrued by a partnership.
(ii) Foreign income taxes deemed paid under section 960(a)(3) (as in effect on December 21, 2017) Foreign income taxes deemed paid by a domestic corporation under section with respect to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits include only the foreign income taxes paid or accrued by an upper-tier foreign corporation with respect to a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits from a lower-tier foreign corporation. No credit is allowed under section or any other section for foreign income taxes that would have been deemed paid under section with respect to the portion of a section earnings amount that is reduced under or .
(iii) Foreign income taxes deemed paid under section 960(b) (as applicable to taxable years of controlled foreign corporations beginning after December 31, 2017, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end) of this section applies to foreign income taxes deemed paid under section (as in effect for a taxable year of a controlled foreign corporation beginning after December 31, 2017, and a taxable year of a United States person in which or with which such controlled foreign corporation's taxable year ends) only if such taxes are deemed paid under with respect to distributions to a domestic corporation of section previously taxed earnings and profits or section previously taxed earnings and profits. See also , , , or . Foreign income taxes that would have been deemed paid under section (as in effect on December 21, 2017) with respect to the portion of a section earnings amount that was reduced under or are not eligible to be deemed paid under section and or any other section of the Code.
(2) Disallowed deduction No deduction (including under section ) is allowed for the applicable percentage of any foreign income taxes treated as paid or accrued with respect to any amount for which a section deduction is allowed. Such taxes include foreign income taxes allocated to an entity under and a distributive share of foreign income taxes paid or accrued by a partnership.
(3) Coordination with section 78
(i) In general With respect to foreign income taxes deemed paid by a domestic corporation with respect to its section inclusion amount for a section U.S. shareholder inclusion year, section applies only to so much of such taxes as bears the same proportion to the amount of such taxes as—
(A) The excess of—
(1) The section inclusion amount for a section U.S. shareholder inclusion year, over
(2) The section deduction amount allowable with respect to such section inclusion amount, bears to
(B) Such section inclusion amount.
(ii) Domestic corporation that is a domestic pass-through owner With respect to foreign income taxes deemed paid by a domestic corporation attributable to such corporation's domestic pass-through owner share of a section inclusion amount of a domestic pass-through entity, section applies only to so much of such taxes as bears the same proportion to the amount of such taxes as the proportion determined under of this section as applied to the domestic pass-through entity's section inclusion amount for a section U.S. shareholder inclusion year.
(d) Applicable percentage
(1) In general For purposes of this section, except as provided in and of this section, the term applicable percentage means, with respect to a section U.S. shareholder and a section U.S. shareholder inclusion year, the amount (expressed as a percentage) equal to the sum of—
(i) 0.771 multiplied by the ratio of—
(A) The section U.S. shareholder's 8 percent rate amount for the section U.S. shareholder inclusion year, divided by
(B) The sum of the section U.S. shareholder's 8 percent rate amount for the section U.S. shareholder inclusion year plus the section U.S. shareholder's 15.5 percent rate amount for the section U.S. shareholder inclusion year; plus
(ii) 0.557 multiplied by the ratio of—
(A) The section U.S. shareholder's 15.5 percent rate amount for the section U.S. shareholder inclusion year, divided by
(B) The amount described in of this section.
(2) No section 965(a) inclusion amount If a section U.S. shareholder does not have an aggregate section inclusion amount, the section U.S. shareholder's applicable percentage is 55.7 percent.
(3) Applicable percentage for domestic pass-through owners In the case of a domestic pass-through owner with respect to a domestic pass-through entity, the domestic pass-through owner's applicable percentage that is applied to foreign income taxes attributable to the domestic pass-through owner share of the section inclusion amount or of distributions of section previously taxed earnings and profits or section previously taxed earnings and profits is equal to the applicable percentage determined under or of this section, as applicable, with respect to the domestic pass-through entity.
(4) Applicable percentage with respect to certain distributions of previously taxed earnings and profits In the case of a distribution of section previously taxed earnings and profits or section previously taxed earnings and profits (other than with respect to a section U.S. shareholder described in of this section), the applicable percentage that is applied to foreign income taxes attributable to the distribution is the applicable percentage that applied with respect to the section U.S. shareholder and the section U.S. inclusion year in which, or with which, the inclusion year of the relevant deferred foreign income corporation ends. For this purpose, the relevant deferred foreign income corporation is the deferred foreign income corporation with respect to which the section U.S. shareholder had the section inclusion as a result of which the section previously taxed earnings and profits first arose (as described in ) or the section previously taxed earnings and profits first arose (as described in ).
[T.D. 9846, 84 FR 1875, Feb. 5, 2019, as amended by T.D. 9882, 84 FR 69120, Dec. 17, 2019; T.D. 9922, 85 FR 72072, Nov. 12, 2020]