Reg. § 1.965-6 Computation of foreign income taxes deemed paid and allocation and apportionment of deductions.
(a) Scope This section provides rules for the computation of foreign income taxes deemed paid and the allocation and apportionment of deductions. of this section provides the general rules for the computation of foreign income taxes deemed paid under sections and . of this section provides rules for allocation and apportionment of expenses. of this section provides rules for foreign income taxes associated with hovering deficits.
(b) Computation of foreign incomes taxes deemed paid
(1) In general For purposes of determining foreign income taxes deemed paid under section with respect to a section inclusion attributable to a deferred foreign income corporation that is a member of a qualified group (as defined in section ), section applies as if the section inclusion, translated (if necessary) into the functional currency of the deferred foreign income corporation using the spot rate on December 31, 2017, were a dividend paid by the deferred foreign income corporation. For purposes of computing the amount of foreign income taxes deemed paid under section , , -5, sections and , the regulations under those sections, and this section apply.
(2) Dividend or inclusion in excess of post-1986 undistributed earnings When the denominator of the section fraction is positive but less than the numerator of such fraction, the section fraction is one. When the denominator of the section fraction is zero or less than zero, the section fraction is zero, and no foreign taxes are deemed paid.
(3) Treatment of adjustment under section 965(b)(4)(B) For purposes of section , the post-1986 undistributed earnings of an E&P deficit foreign corporation are increased under section and as of the first day of the foreign corporation's first taxable year following the E&P deficit foreign corporation's last taxable year that begins before January 1, 2018.
(4) Section 902 fraction The term section fraction means, with respect to either a deferred foreign income corporation or an E&P deficit foreign corporation, the fraction that is—
(i) The dividends paid by, or the inclusion under section (including a section inclusion) with respect to, the foreign corporation, as applicable (the numerator), divided by
(ii) The foreign corporation's post-1986 undistributed earnings or pre-1987 accumulated profits, as applicable (the denominator).
(c) Allocation and apportionment of deductions For purposes of allocating and apportioning expenses, a section deduction does not result in any gross income, including a section inclusion, being treated as exempt, excluded, or eliminated income within the meaning of section or . Similarly, a section deduction does not result in the treatment of stock as an exempt asset within the meaning of section or . In addition, consistent with the general inapplicability of to earnings and profits described in section or , neither section previously taxed earnings and profits nor section previously taxed earnings and profits are treated as giving rise to gross income that is exempt, excluded, or eliminated income. Similarly, the asset that gives rise to a section inclusion, section previously taxed earnings and profits, or section previously taxed earnings and profits is not treated as a tax-exempt asset.
(d) Hovering deficits In the last taxable year that begins before January 1, 2018, of a deferred foreign income corporation that is also a foreign surviving corporation, as defined in , solely for purposes of determining the amount of related taxes that are included in post-1986 foreign income taxes under —
(1) The post-transaction earnings described in that can be offset by a hovering deficit include any post-transaction earnings earned in that year that were not considered accumulated because they were included in income under section and by a section U.S. shareholder; and
(2) Any offset for purposes of is treated as occurring on the last day of the foreign surviving corporation's inclusion year.
[T.D. 9846, 84 FR 1875, Feb. 5, 2019]