Example.
Example. As of December 31, 1991, and since its incorporation, foreign corporation A has owned 100 percent of the stock of foreign corporation B. Corporation B is not a controlled foreign corporation. Corporation B uses the calendar year as its taxable year, and its functional currency is the u. Assume 1u equals $1 at all relevant times. On April 1, 1992, Corporation B pays a 200u dividend to Corporation A and the ownership requirements of section 902(c)(3)(B) and paragraphs (a)(1) through (4) of this section are not met at that time. On July 1, 1992, domestic corporation M purchases 10 percent of the Corporation B stock from Corporation A and, for the first time, Corporation B meets the ownership requirements of section 902(c)(3)(B) and paragraph (a)(2) of this section. Corporation M uses the calendar year as its taxable year. Corporation B does not distribute any dividends to Corporation M during 1992. For its taxable year ending December 31, 1992, Corporation B has 500u of earnings and profits (after foreign taxes but before taking into account the 200u distribution to Corporation A) and pays 100u of foreign income taxes that is equal to $100. Pursuant to paragraph (a)(13)(i) of this section, Corporation B's post-1986 undistributed earnings and post-1986 foreign income taxes will include earnings and profits and foreign income taxes attributable to Corporation B's entire 1992 taxable year and all taxable years thereafter. Thus, the April 1, 1992, dividend to Corporation A will reduce post-1986 undistributed earnings to 300u (500u-200u) under paragraph (a)(9)(i) of this section. The foreign income taxes attributable to the amount distributed as a dividend to Corporation A will not be creditable because Corporation A is not a domestic shareholder. Post-1986 foreign income taxes, however, will be reduced by the amount of foreign taxes attributable to the dividend. Thus, as of the beginning of 1993, Corporation B has $60 ($100-[$100 * 40% (200u/500u)]) of post-1986 foreign income taxes. See paragraphs (a)(8)(i) and (b)(1) of this section.
Example. P, a domestic corporation, owns 40 percent of the voting stock of foreign corporation S. S owns 30 percent of the voting stock of foreign corporation T, and 30 percent of the voting stock of foreign corporation U. Neither S, T, nor U is a controlled foreign corporation. P, S, T and U all use the calendar year as their taxable year. In 1993, T and U both pay dividends to S and S pays a dividend to P. To compute foreign taxes deemed paid, paragraph (c)(1) of this section requires P to start with the lowest tier corporations and to compute foreign taxes deemed paid separately for dividends from each first-tier and lower-tier corporation. Thus, S first will compute foreign taxes deemed paid separately on its dividends from T and U. The deemed paid taxes will be added to S's post-1986 foreign income taxes, and the dividends will be added to S's post-1986 undistributed earnings. Next, P will compute foreign taxes deemed paid with respect to the dividend from S. This computation will take into account the taxes paid by T and U and deemed paid by S.
Example. P, a domestic corporation, owns 100 percent of the voting stock of controlled foreign corporation S. Corporations P and S use the calendar year as their taxable year, and S uses the u as its functional currency. Assume that 1u equals $1 at all relevant times. As of January 1, 1992, S has -0- post-1986 undistributed earnings and -0- post-1986 foreign income taxes. In 1992, S earns 150u of non-subpart F general limitation income net of foreign taxes and pays 60u of foreign income taxes. As of the end of 1992, but before dividend payments, S has 150u of post-1986 undistributed earnings and $60 of post-1986 foreign income taxes. Assume that 50u of S's earnings for 1992 are from United States sources. S pays P a dividend of 75u which P receives in 1992. Under § 1.904-5(m)(4) , one-third of the dividend, or 25u (75u * 50u/150u), is United States source income to P. P computes foreign taxes deemed paid on the dividend under paragraph (b)(1) of this section of $30 ($60 * 50%[75u/150u]) and includes that amount in gross income under section 78 as a dividend. Because 25u of the 75u dividend is United States source income to P, $10 ($30 * 33.33%[25u/75u]) of the section 78 dividend will be treated as United States source income to P under this paragraph (c)(2).
Example. P, a domestic corporation, has owned 100 percent of the voting stock of foreign corporation S at all times since January 1, 1987. Until June 30, 2002, S owned 100 percent of the voting stock of foreign corporation T, T owned 100 percent of the voting stock of foreign corporation U, and U owned 100 percent of the voting stock of foreign corporation V. P, S, T, U, and V each use the calendar year as their U.S. taxable year. Thus, beginning in 1998 V was a fourth-tier controlled foreign corporation, and its foreign taxes paid or accrued in 1998 and later taxable years were eligible to be deemed paid. On June 30, 2002, T was liquidated, causing S to acquire 100 percent of the stock of U. As a result, V became a third-tier controlled foreign corporation. In 2003, V paid a dividend to U. Under paragraph (c)(8) of this section, foreign taxes paid by V in taxable years beginning before 1998 are not taken into account in computing the foreign taxes deemed paid with respect to the dividend paid by V to U.
1. Assumed post-1986 undistributed earnings of Corporation A at start of 1992 | 25u |
2. Assumed post-1986 foreign income taxes of Corporation A at start of 1992 | $25 |
3. Assumed pre-tax earnings and profits of Corporation A for 1992 | 50u |
4. Assumed foreign income taxes paid or accrued by Corporation A in 1992 | 15u |
5. Post-1986 undistributed earnings in Corporation A for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 60u |
6. Post-1986 foreign income taxes in Corporation A for 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates) | $40 |
7. Dividends paid out of post-1986 undistributed earnings of Corporation A to Corporation M in 1992 | 3u |
8. Percentage of Corporation A's post-1986 undistributed earnings paid to Corporation M (Line 7 divided by Line 5) | 5% |
9. Foreign income taxes of Corporation A deemed paid by Corporation M under section 902(a) (Line 6 multiplied by Line 8) | $2 |
10. Total dividends paid out of post-1986 undistributed earnings of Corporation A to all shareholders in 1992 | 30u |
11. Percentage of Corporation A's post-1986 undistributed earnings paid to all shareholders in 1992 (Line 10 divided by Line 5) | 50% |
12. Post-1986 foreign income taxes paid with respect to post-1986 undistributed earnings distributed to all shareholders in 1992 (Line 6 multiplied by Line 11) | $20 |
13. Corporation A's post-1986 undistributed earnings at the start of 1993 (Line 5 minus Line 10) | 30u |
14. Corporation A's post-1986 foreign income taxes at the start of 1993 (Line 6 minus Line 12) | $20 |
1. Assumed post-1986 undistributed earnings of Corporation B at start of 1992 | (100u) |
2. Assumed post-1986 foreign income taxes of Corporation B at start of 1992 | $0 |
3. Assumed pre-tax earnings and profits of Corporation B for 1992 (including 50u of high withholding tax interest on which 5u of tax is withheld) | 302.50u |
4. Assumed foreign income taxes paid or accrued by Corporation B in 1992 | 102.50u |
5. Post-1986 undistributed earnings in Corporation B for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 100u |
6. Amount of foreign income tax of Corporation B imposed on high withholding tax interest in excess of 5% (5u withholding tax-[5% * 50u high withholding tax interest]) | 2.50u |
7. Post-1986 foreign income taxes in Corporation B for 1992 (pre-dividend) (Line 2 plus [Line 4 minus Line 6 translated at the appropriate exchange rate]) | $100 |
8. Dividends paid out of post-1986 undistributed earnings to Corporation M in 1992 | 5u |
9. Percentage of Corporation B's post-1986 undistributed earnings paid to Corporation M (Line 8 divided by Line 5) | 5% |
10. Foreign income taxes of Corporation B deemed paid by Corporation M under section 902(a) (Line 7 multiplied by Line 9) | $5 |
11. Total dividends paid out of post-1986 undistributed earnings of Corporation B to all shareholders in 1992 | 50u |
12. Percentage of Corporation B's post-1986 undistributed earnings paid to all shareholders in 1992 (Line 11 divided by Line 5) | 50% |
13. Post-1986 foreign income taxes of Corporation B paid on or with respect to post-1986 undistributed earnings distributed to all shareholders in 1992 (Line 7 multiplied by Line 12) | $50 |
14. Corporation B's post-1986 undistributed earnings at start of 1993 (Line 5 minus Line 11) | 50u |
15. Corporation B's post-1986 foreign income taxes at start of 1993 (Line 7 minus Line 13) | $50 |
A. Corporation C (third-tier corporation): | |
1. Assumed post-1986 undistributed earnings in Corporation C at start of 1992 | 1300u |
2. Assumed post-1986 foreign income taxes in Corporation C at start of 1992 | $500 |
3. Assumed pre-tax earnings and profits of Corporation C for 1992 | 500u |
4. Assumed foreign income taxes paid or accrued in 1992 | 300u |
5. Post-1986 undistributed earnings in Corporation C for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 1500u |
6. Post-1986 foreign income taxes in Corporation C for 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates) | $800 |
7. Dividends paid out of post-1986 undistributed earnings of Corporation C to Corporation B in 1992 | 150u |
8. Percentage of Corporation C's post-1986 undistributed earnings paid to Corporation B (Line 7 divided by Line 5) | 10% |
9. Foreign income taxes of Corporation C deemed paid by Corporation B under section 902(b)(2) (Line 6 multiplied by Line 8) | $80 |
10. Total dividends paid out of post-1986 undistributed earnings of Corporation C to all shareholders in 1992 | 500u |
11. Percentage of Corporation C's post-1986 undistributed earnings paid to all shareholders in 1992 (Line 10 divided by Line 5) | 33.33% |
12. Post-1986 foreign income taxes paid with respect to post-1986 undistributed earnings distributed to all shareholders in 1992 (Line 6 multiplied by Line 11) | $266.66 |
13. Post-1986 undistributed earnings in Corporation C at start of 1993 (Line 5 minus Line 10) | 1000u |
14. Post-1986 foreign income taxes in Corporation C at start of 1993 (Line 6 minus Line 12) | $533.34 |
B. Corporation B (second-tier corporation): | |
1. Assumed post-1986 undistributed earnings in Corporation B as of July 1, 1991 | 0 |
2. Assumed post-1986 foreign income taxes in Corporation B as of July 1, 1991 | 0 |
3. Assumed pre-tax earnings and profits of Corporation B for fiscal year ended June 30, 1992, (including 150u dividend from Corporation B) | 1000u |
4. Assumed foreign income taxes paid or accrued by Corporation B in fiscal year ended June 30, 1992 | 200u |
5. Foreign income taxes of Corporation C deemed paid by Corporation B in its fiscal year ended June 30, 1992 (Part A, Line 9 of paragraph (i) of this Example 3) | $80 |
6. Post-1986 undistributed earnings in Corporation B for fiscal year ended June 30, 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 800u |
7. Post-1986 foreign income taxes in Corporation B for fiscal year ended June 30, 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates plus Line 5) | $280 |
8. Dividends paid out of post-1986 undistributed earnings of Corporation B to Corporation A on February 15, 1992 | 120u |
9. Percentage of Corporation B's post-1986 undistributed earnings for fiscal year ended June 30, 1992, paid to Corporation A (Line 8 divided by Line 6) | 15% |
10. Foreign income taxes paid and deemed paid by Corporation B as of June 30, 1992, deemed paid by Corporation A under section 902(b)(1) (Line 7 multiplied by Line 9) | $42 |
11. Total dividends paid out of post-1986 undistributed earnings of Corporation B for fiscal year ended June 30, 1992 | 300u |
12. Percentage of Corporation B's post-1986 undistributed earnings for fiscal year ended June 30, 1992, paid to all shareholders (Line 11 divided by Line 6) | 37.5% |
13. Post-1986 foreign income taxes paid and deemed paid with respect to post-1986 undistributed earnings distributed to all shareholders during Corporation B's fiscal year ended June 30, 1992 (Line 7 multiplied by Line 12) | $105 |
14. Post-1986 undistributed earnings in Corporation B as of July 1, 1992 (Line 6 minus Line 11) | 500u |
15. Post-1986 foreign income taxes in Corporation B as of July 1, 1992 (Line 7 minus Line 13) | $175 |
C. Corporation A (first-tier corporation): | |
1. Assumed post-1986 undistributed earnings in Corporation A at start of 1992 | 250u |
2. Assumed post-1986 foreign income taxes in Corporation A at start of 1992 | $100 |
3. Assumed pre-tax earnings and profits of Corporation A for 1992 (including 120u dividend from Corporation B) | 250u |
4. Assumed foreign income taxes paid or accrued by Corporation A in 1992 | 100u |
5. Foreign income taxes paid or deemed paid by Corporation B as of June 30, 1992, that are deemed paid by Corporation A in 1992 (Part B, Line 10 of paragraph (i) of this Example 3) | $42 |
6. Post-1986 undistributed earnings in Corporation A for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 400u |
7. Post-1986 foreign income taxes in Corporation A for 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates plus Line 5) | $242 |
8. Dividends paid out of post-1986 undistributed earnings of Corporation A to Corporation M on August 15, 1992 | 100u |
9. Percentage of Corporation A's post-1986 undistributed earnings paid to Corporation M in 1992 (Line 8 divided by Line 6) | 25% |
10. Foreign income taxes paid and deemed paid by Corporation A in 1992 that are deemed paid by Corporation M under section 902(a) (Line 7 multiplied by Line 9) | $60.50 |
11. Total dividends paid out of post-1986 undistributed earnings of Corporation A to all shareholders in 1992 | 200u |
12. Percentage of Corporation A's post-1986 undistributed earnings paid to all shareholders in 1992 (Line 11 divided by Line 6) | 50% |
13. Post-1986 foreign income taxes paid and deemed paid by Corporation A with respect to post-1986 undistributed earnings distributed to all shareholders in 1992 (Line 7 multiplied by Line 12) | $121 |
14. Post-1986 undistributed earnings in Corporation A at start of 1993 (Line 6 minus Line 11) | 200u |
15. Post-1986 foreign income taxes in Corporation A at start of 1993 (Line 7 minus Line 13) | $121 |
A. Corporation B (second-tier corporation): | |
1. Assumed post-1986 undistributed earnings in Corporation B at start of 1992 | 200u |
2. Assumed post-1986 foreign income taxes in Corporation B at start of 1992 | $50 |
3. Assumed pre-tax earnings and profits of Corporation B for 1992 | 150u |
4. Assumed foreign income taxes paid or accrued in 1992 | 50u |
5. Post-1986 undistributed earnings in Corporation B for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 300u |
6. Post-1986 foreign income taxes in Corporation B for 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates) | $100 |
7. Dividends paid out of post-1986 undistributed earnings of Corporation B to Corporation A in 1992 | 150u |
8. Percentage of Corporation B's post-1986 undistributed earnings paid to Corporation A (Line 7 divided by Line 5) | 50% |
9. Foreign income taxes of Corporation B deemed paid by Corporation A under section 902(b)(1) (Line 6 multiplied by Line 8) | $50 |
10. Post-1986 undistributed earnings in Corporation B at start of 1993 (Line 5 minus Line 7) | 150u |
11. Post-1986 foreign income taxes in Corporation B at start of 1993 (Line 6 minus Line 9) | $50 |
B. Corporation A (first-tier corporation): | |
1. Assumed post-1986 undistributed earnings in Corporation A at start of 1992 | (200u) |
2. Assumed post-1986 foreign income taxes in Corporation A at start of 1992 | 0 |
3. Assumed pre-tax earnings and profits of Corporation A for 1992 (including 150u dividend from Corporation B) | 200u |
4. Assumed foreign income taxes paid or accrued by Corporation A in 1992 | 40u |
5. Foreign income taxes paid by Corporation B in 1992 that are deemed paid by Corporation A (Part A, Line 9 of paragraph (i) of this Example 4) | $50 |
6. Post-1986 undistributed earnings in Corporation A for 1992 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | (40u) |
7. Post-1986 foreign income taxes in Corporation A for 1992 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates plus Line 5) | $90 |
8. Dividends paid out of current earnings and profits of Corporation A for 1992 | 100u |
9. Percentage of post-1986 undistributed earnings of Corporation A paid to Corporation M in 1992 (Line 8 divided by the greater of Line 6 or zero) | 0 |
10. Foreign income taxes paid and deemed paid by Corporation A in 1992 that are deemed paid by Corporation M under section 902(a) (Line 7 multiplied by Line 9) | 0 |
11. Post-1986 undistributed earnings in Corporation A at start of 1993 (line 6 minus line 8) | (140u) |
12. Post-1986 foreign income taxes in Corporation A at start of 1993 (Line 7 minus Line 10) | $90 |
1. Post-1986 undistributed earnings in Corporation A at start of 1993 | (140u) |
2. Post-1986 foreign income taxes in Corporation A at start of 1993 | $90 |
3. Pre-tax earnings and profits of Corporation A for 1993 | 500u |
4. Foreign income taxes paid or accrued by Corporation A in 1993 | 160u |
5. Post-1986 undistributed earnings in Corporation A for 1993 (pre-dividend) (Line 1 plus Line 3 minus Line 4) | 200u |
6. Post-1986 foreign income taxes in Corporation A for 1993 (pre-dividend) (Line 2 plus Line 4 translated at the appropriate exchange rates) | $250 |
7. Dividends paid out of post-1986 undistributed earnings of Corporation A to Corporation M in 1993 | 100u |
8. Percentage of post-1986 undistributed earnings of Corporation A paid to Corporation M in 1993 (Line 7 divided by Line 5) | 50% |
9. Foreign income taxes paid and deemed paid by Corporation A that are deemed paid by Corporation M in 1993 (Line 6 multiplied by Line 8) | $125 |
10. Post-1986 undistributed earnings in Corporation A at start of 1994 (Line 5 minus Line 7) | 100u |
11. Post-1986 foreign income taxes in Corporation A at start of 1994 (Line 6 minus Line 9) | $125 |
1. Assumed post-1986 undistributed earnings in Corporation A at start of 1992 attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest | 20u |
(b) Section 904(d)(1)(I) general limitation income | 55u |
2. Assumed post-1986 foreign income taxes in Corporation A at start of 1992 attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest | $5 |
(b) Section 904(d)(1)(I) general limitation income | $20 |
3. Assumed pre-tax earnings and profits of Corporation A for 1992 attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest | 20u |
(b) Section 904(d)(1)(I) general limitation income | 20u |
4. Assumed foreign income taxes paid or accrued in 1992 on or with respect to: | |
(a) Section 904(d)(1)(B) high withholding tax interest | 10u |
(b) Section 904(d)(1)(I) general limitation income | 5u |
5. Post-1986 undistributed earnings in Corporation A for 1992 (pre-dividend) attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest (Line 1(a) + Line 3(a) minus Line 4(a)) | 30u |
(b) Section 904(d)(1)(I) general limitation income (Line 1(b) + Line 3(b) minus Line 4(b)) | 70u |
(c) Total | 100u |
6. Post-1986 foreign income taxes in Corporation A for 1992 (pre-dividend) attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest (Line 2(a) + Line 4(a) translated at the appropriate exchange rates) | $15 |
(b) Section 904(d)(1)(I) general limitation income (Line 2(b) + Line 4(b) translated at the appropriate exchange rates) | $25 |
7. Dividends paid to Corporation M in 1992 | 60u |
8. Dividends paid to Corporation M in 1992 attributable to section 904(d) separate categories pursuant to § 1.904-5(d) : | |
(a) Dividends paid to Corporation M in 1992 attributable to section 904(d)(1)(B) high withholding tax interest (Line 7 multiplied by Line 5(a) divided by Line 5(c)) | 18u |
(b) Dividends paid to Corporation M in 1992 attributable to section 904(d)(1)(I) general limitation income (Line 7 multiplied by Line 5(b) divided by Line 5(c)) | 42u |
9. Percentage of Corporation A's post-1986 undistributed earnings for 1992 paid to Corporation M attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest (Line 8(a) divided by Line 5(a)) | 60% |
(b) Section 904(d)(1)(I) general limitation income (Line 8(b) divided by Line 5(b)) | 60% |
10. Foreign income taxes of Corporation A deemed paid by Corporation M under section 902(a) attributable to: | |
(a) Foreign income taxes of Corporation A deemed paid by Corporation M under section 902(a) with respect to section 904(d)(1)(B) high withholding tax interest (Line 6(a) multiplied by Line 9(a)) | $9 |
(b) Foreign income taxes of Corporation A deemed paid by Corporation M under section 902(a) with respect to section 904(d)(1)(I) general limitation income (Line 6(b) multiplied by Line 9(b)) | $15 |
11. Post-1986 undistributed earnings in Corporation A at start of 1993 attributable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest (Line 5(a) minus Line 8(a)) | 12u |
(b) Section 904(d)(1)(I) general limitation income (Line 5(b) minus Line 8(b)) | 28u |
12. Post-1986 foreign income taxes in Corporation A at start of 1989 allocable to: | |
(a) Section 904(d)(1)(B) high withholding tax interest (Line 6(a) minus Line 10(a)) | $6 |
(b) Section 904(d)(1)(I) general limitation income (Line 6(b) minus Line 10(b)) | $10 |
26 C.F.R. §1.902-1