[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.407-1]

[Page 476-479]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.407-1  Treatment of certain employees of domestic subsidiaries 

engaged in business outside the United States as employees of the 
domestic parent corporation.

    (a) Scope--(1) General rule. For purposes of applying the rules in 
part 1 of subchapter D of chapter 1 of subtitle A of the Code and the 
regulations thereunder with respect to a pension, profit-sharing, or 
stock bonus plan described in section 401(a), an annuity plan described 
in section 403(a), or a bond purchase plan described in section 405(a), 
of a domestic parent corporation (as defined in paragraph (b)(3)(ii) of 
this section), an individual who is a citizen of the United States and 
who is an employee of a domestic subsidiary (as defined in paragraph 
(b)(3)(i) of this section) of such domestic parent corporation shall be 
treated as an employee of such domestic parent corporation if the 
requirements of paragraph (b) of this section are satisfied.
    (2) Cross-references. For rules relating to nondiscrimination 
requirements and the determination of compensation, see paragraph (c) of 
this section. For rules under which termination of the status of an 
individual as an employee of the domestic parent corporation in certain 
instances will not be considered as separation from service for certain 
purposes, see paragraph (d) of this section. For rules regarding 
deductibility of contributions, see paragraph (e) of this section. For 
rules regarding treatment of such individual as an employee of the 
domestic parent corporation under related provisions, see paragraph (f) 
of this section.
    (b) Application of this section--(1) Requirements. This section 
shall apply and the employee of the domestic subsidiary shall be treated 
as an employee of the domestic parent corporation for the purposes set 
forth in paragraph (a)(1) of this section only if each of the following 
requirements is satisfied:
    (i) The plan, referred to in paragraph (a)(1) of this section, must 
expressly provide for contributions of benefits for individuals who are 
citizens of the United States and who are employees of one or more of 
the domestic subsidiaries of the domestic parent corporation. The plan 
must apply to every domestic subsidiary.
    (ii) Contributions under a funded plan of deferred compensation 
(whether or not a plan described in section 401(a), 403(a), or 405(a)) 
must not be provided by any other person with respect to the 
remuneration paid to such individual by the domestic subsidiary.
    (2) Supplementary rules. Subparagraph (1)(i) of this paragraph does 
not modify the requirements for qualification of a plan described in 
section 401(a), 403(a), or 405(a) and the regulations thereunder. It is 
not necessary that the plan provide benefits or contributions for all 
United States citizens who are employees of such domestic subsidiaries. 
It the plan is amended to cover individuals who are employees by reason 
of paragraph (a)(1) of this section, the plan will not qualify unless it 
meets the coverage requirements of section 410(b)(1) (section 401(a)(3), 
as in effect on September 1, 1974, for plan years to which section 410 
does not apply; see Sec. 1.410 (a)-2 for the effective dates of section 
401) and the nondiscrimination requirements of section 410(a)(4). The 
administrative rules contained in Sec. 1.401 (a)-3(e) (relating to the 
determination of the contributions or benefits provided by the employer 
under the

[[Page 477]]

Social Security Act) will also apply for purposes of determining whether 
the plan meets the requirements of section 401. For purposes of 
subparagraph (1)(ii) of this paragraph, contributions will not be 
considered as provided under a funded plan merely because the domestic 
subsidiary employer pays the tax imposed by section 3111 (relating to 
tax on employers under the Federal Insurance Contributions Act) with 
respect to such employee or is required under the laws of a foreign 
jurisdiction to pay social insurance taxes or to make similar payments 
with respect to the wages paid to the employee.
    (3) Definitions--(i) Domestic subsidiary. For purposes of this 
section, a corporation shall be treated as a domestic subsidiary for any 
taxable year only if each of the following requirements is satisfied:
    (A) It is a domestic corporation 80 percent or more of the 
outstanding voting stock of which is owned by another domestic 
corporation;
    (B) 95 percent of more of its gross income for the three-year period 
immediately preceding the close of its taxable year which ends on or 
before the close of the taxable year of such other domestic corporation 
(or for such part of such period during which it was in existence) was 
derived from sources without the United States, determined pursuant to 
sections 861 through 864 and the regulations thereunder; and
    (C) 90 percent or more of its gross income for such period (or such 
part) was derived from the active conduct of a trade or business.

If for the period (or part thereof) referred to in (B) and (C) of this 
subdivision such corporation has no gross income, the provisions of (B) 
and (C) shall be treated as satisfied if it is reasonable to anticipate 
that, with respect to the first taxable year thereafter for which such 
corporation has gross income, such provisions will be satisfied.
    (ii) Domestic parent corporation. The domestic parent corporation of 
any domestic subsidiary is the domestic corporation which owns 80 
percent or more of the outstanding voting stock of such domestic 
subsidiary.
    (c) Special rules--(1) Nondiscrimination requirements. For purposes 
of applying sections 401(a)(4) and 410(b)(1)(B) (section 401(a)(3)(B), 
as in effect on Septemeber 1, 1974, for plan years to which section 410 
does not apply) and the regulation thereunder (relating to 
nondiscrimination concerning benefits and contributions and coverage of 
employees) with respect to an employee of the domestic subsidiary who is 
treated as an employee of the domestic parent corporation under 
paragraph (a)(1) of this section--
    (i) If the employee is an officer, shareholder, or (with respect to 
plan years to which section 410 does not apply) a person whose principal 
duties consist in supervising the work of other employees of the 
domestic subsidiary of the domestic parent corporation, he shall be 
treated as having such capacity with respect to the domestic parent 
corporation; and
    (ii) The determination as to whether the employee is a highly 
compensated employee shall be made by comparing his total compensation 
determined under subparagraph (2) of this paragraph with the 
compensation of all the employees of the domestic parent corporation 
(including individuals treated as employees of the domestic parent 
corporation pursuant to section 407 and this section).
    (2) Determination of compensation. For purposes of applying section 
401(a) (5) and the regulations thereunder, relating to classifications 
that will not be considered discriminatory, with respect to an employee 
of the domestic subsidiary who is treated as an employee of the domestic 
parent corporation under paragraph (a)(1) of this section--
    (i) The total compensation of the employee shall be the remuneration 
of the employee from the domestic subsidiary (including any allowances 
that are paid to the employee because of his employment in a foreign 
country) which would constitute his total compensation if his services 
had been performed for such domestic parent corporation; and
    (ii) The basic or regular rate of compensation of the employee shall 
be determined for the employee in the same manner as it is determined 
under section 401 for other employees of the domestic parent 
corporation.
    (d) Termination of status as deemed employee not to be treated as 
separation

[[Page 478]]

from service for purposes of captial gain provisions and limitation of 
tax. For purposes of applying the rules, relating to treatment of 
certain distributions which are made after an employee's separation from 
service, set forth in section 72(n) as in effect on September 1, 1974 
(with respect to taxable years ending after December 31, 1969, and to 
which section 402(e) does not apply), and in sections 402 (a)(2) and (e) 
and 403(a)(2) (with respect to distributions or payments made after 
December 31, 1973, and in taxable years beginning after December 31, 
1973) with respect to an employee of a domestic subsidiary who is 
treated as an employee of a domestic parent corporation under paragraph 
(a)(1) of this section, the employee shall not be considered as 
separated from the service of the domestic parent corporation solely by 
reason of the occurrence of any one or more of the following events:
    (1) The fact that the corporation of which such individual is an 
employee ceases, for any taxable year, to be a domestic subsidiary 
within the mean of paragraph (b)(3)(i) of this section;
    (2) The employee' ceasing to be an employee of the domestic 
subsidiary of such domestic parent corporation, if he becomes an 
employee of another corporation controlled by such domestic parent 
corporation; or
    (3) The termination of the provision of the plan described in 
paragraph (b)(1)(i) of this section, requiring coverage of the United 
States citizens who are employees of domestic subsidiaries of the 
domestic parent corporation.

For purposes of subparagraph (2) of this paragraph, a corporation is 
considered to be controlled by a domestic parent corporation if the 
domestic parent corporation owns directly or indirectly more than 50 
percent of the voting stock of the corporation.
    (e) Deductibility of contributions--(1) In general. For purposes of 
applying sections 404 and 405(c) with respect to the deduction for 
contributions made to or under a pension, profit-sharing, or stock bonus 
plan described in section 401(a), and annuity plan described in section 
403(a), or a bond purchase plan described in section 405(a), by a 
domestic parent corporation, or by another corporation which is entitled 
to deduct its contributions under section 404(a)(3)(B), on behalf of an 
employee of a domestic subsidiary treated as an employee of the domestic 
parent corporation under paragraph (a)(1) of this section--
    (i) Except as provided in subdivision (ii) of this subparagraph, no 
deduction shall be allowed to the domestic parent corporation which 
would otherwise be entitled to deduct its contributions on behalf of 
such employee under one of such sections;
    (ii) There shall be allowed as a deduction to the domestic 
subsidiary of which such individual is an employee an amount equal to 
the amount which (but for subdivision (i) of this subparagraph) would be 
deductible under section 404 or section 405(c) by the domestic parent 
corporation if the individual were an employee of the domestic parent 
corporation and if his compensation were paid by the domestic 
corporation; and
    (iii) Any reference to compensation shall be considered to be a 
reference to the total compensation of such individual determined by 
applying paragraph (c)(2) of this section).
    (2) Year of deduction. Any amount deductible by the domestic 
subsidiary under section 407(d) and this paragraph shall be deductible 
for its taxable year with or within which ends the taxable year of the 
domestic parent corporation for which the contribution was made.
    (3) Special rules. Whether contributions to a plan on behalf of an 
employee of the domestic subsidiary who is treated as an employee of the 
domestic parent corporation under paragraph (a)(1) of this section, or 
whether forfeitures with regard to such employee, will require an 
inclusion in the income of the domestic parent corporation or an 
adjustment in the basis of its stock in the domestic subsidiary, shall 
be determined in accordance with the rules of general application of 
subtitle A of chapter 1 of the Code (relating to income taxes). For an 
example, and unreimbursed contribution by the domestic parent 
corporation to a plan which meets the requirements of section 401(a) 
will be treated, to the extent

[[Page 479]]

each employee's rights to the contribution are nonforfeitable, as a 
contribution of capital to the domestic subsidiary to the extent that 
such contributions are made on behalf of the employees of such 
subsidiary.
    (f) Treatment as an employee of the domestic parent corporation 
under related provisions. An individual who is treated as an employee of 
a domestic parent corporation under paragraph (a)(1) of this section 
shall also be treated as an employee of such domestic corporation, with 
respect to the plan having the provision described in paragraph 
(b)(1)(i) of this section, for purposes of applying section 72(d) 
(relating to special rules for computing employees' contributions), 
section 72(f) (relating to special rules for computing employees' 
contributions), section 101(b) (relating to employees' section 101(b) 
(relating to employees' death benefits), section 2039 (relating to 
annuities), and section 2517 (relating to certain annuities under 
qualified plans) and the regulations thereunder.
    (g) Nonexempt trust. If the plan of the domestic parent corporation 
is a qualified plan described under section 401(a), the fact that a 
trust which forms a part of such plan is not exempt from tax under 
section 501(a) shall not affect the treatment of an employee of a 
domestic subsidiary as an employee of a domestic parent corporation 
under section 407(a) and paragraph (a)(1) of this section.

(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42323, Aug. 23, 1977]