[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.882-0]

[Page 395-396]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.882-0  Table of contents.

    This section lists captions contained in Sec. Sec. 1.882-1, 1.882-
2, 1.882-3, 1.882-4 and 1.882-5.

Sec. 1.882-1 Taxation of foreign corporations engaged in U.S. business 
   or of foreign corporations treated as having effectively connected 
                                 income.

(a) Segregation of income.
(b) Imposition of tax.
(1) Income not effectively connected with the conduct of a trade or 
          business in the United States.
(2) Income effectively connected with the conduct of a trade or business 
          in the United States.
(i) In general.
(ii) Determination of taxable income.
(iii) Cross references.
(c) Change in trade or business status.
(d) Credits against tax.
(e) Payment of estimated tax.
(f) Effective date.

   Sec. 1.882-2 Income of foreign corporation treated as effectively 
                      connected with U.S. business.

(a) Election as to real property income.
(b) Interest on U.S. obligations received by banks organized in 
          possessions.
(c) Treatment of income.
(d) Effective date.

          Sec. 1.882-3 Gross income of a foreign corporation.

(a) In general.
(1) Inclusions.
(2) Exchange transactions.
(3) Exclusions.
(b) Foreign corporations not engaged in U.S. business.
(c) Foreign corporations engaged in U.S. business.
(d) Effective date.

      Sec. 1.882-4 Allowance of deductions and credits to foreign 
                              corporations.

(a) Foreign corporations.
(1) In general.
(2) Return necessary.
(3) Filing deadline for return.
(4) Return by Internal Revenue Service.
(b) Allowed deductions and credits.
(1) In general.
(2) Verification.

           Sec. 1.882-5 Determination of interest deduction.

(a) Rules of general application.
(1) Overview.
(i) In general.
(ii) Direct allocations.
(A) In general.
(B) Partnership interest.
(2) Coordination with tax treaties.
(3) Limitation on interest expense.
(4) Translation convention for foreign currency.
(5) Coordination with other sections.
(6) Special rule for foreign governments.
(7) Elections under Sec. 1.882-5.
(i) In general.
(ii) Failure to make the proper election.
(8) Examples.
(b) Step 1: Determination of total value of U.S. assets for the taxable 
          year.
(1) Classification of an asset as a U.S. asset.
(i) General rule.
(ii) Items excluded from the definition of U.S. asset.
(iii) Items included in the definition of U.S. asset.
(iv) Interbranch transactions.
(v) Assets acquired to increase U.S. assets artificially.
(2) Determination of the value of a U.S. asset.
(i) General rule.
(ii) Fair-market value election.
(A) In general.
(B) Adjustment to partnership basis.
(iii) Reduction of total value of U.S. assets by amount of bad debt 
          reserves under section 585.
(A) In general.
(B) Example.
(iv) Adjustment to basis of financial instruments.

[[Page 396]]

(3) Computation of total value of U.S. assets.
(c) Step 2: Determination of total amount of U.S.-connected liabilities 
          for the taxable year.
(1) General rule.
(2) Computation of the actual ratio.
(i) In general.
(ii) Classification of items.
(iii) Determination of amount of worldwide liabilities.
(iv) Determination of value of worldwide assets.
(v) Hedging transactions.
(vi) Treatment of partnership interests and liabilities.
(vii) Computation of actual ratio of insurance companies.
(viii) Interbranch transactions.
(ix) Amounts must be expressed in a single currency.
(3) Adjustments.
(4) Elective fixed ratio method of determining U.S. liabilities.
(5) Examples.
(d) Step 3: Determination of amount of interest expense allocable to ECI 
          under the adjusted U.S. booked liabilities method.
(1) General rule.
(2) U.S. booked liabilities.
(i) In general.
(ii) Properly reflected on the books of the U.S. trade or business of a 
          foreign corporation that is not a bank.
(A) In general.
(B) Identified liabilities not properly reflected.
(iii) Properly reflected on the books of the U.S. trade or business of a 
          foreign corporation that is a bank.
(A) In general.
(B) Inadvertent error.
(iv) Liabilities of insurance companies.
(v) Liabilities used to increase artificially interest expense on U.S. 
          booked liabilities.
(vi) Hedging transactions.
(vii) Amount of U.S. booked liabilities of a partner.
(viii) Interbranch transactions.
(3) Average total amount of U.S. booked liabilities.
(4) Interest expense where U.S. booked liabilities equal or exceed U.S. 
          liabilities.
(i) In general.
(ii) Scaling ratio.
(iii) Special rules for insurance companies.
(5) U.S.-connected interest rate where U.S. booked liabilities are less 
          than U.S.-connected liabilities.
(i) In general.
(ii) Interest rate on excess U.S.-connected liabilities.
(6) Examples.
(e) Separate currency pools method.
(1) General rule.
(i) Determine the value of U.S. assets in each currency pool.
(ii) Determine the U.S.-connected liabilities in each currency pool.
(iii) Determine the interest expense attributable to each currency pool.
(2) Prescribed interest rate.
(3) Hedging transactions.
(4) Election not available if excessive hyperinflationary assets.
(5) Examples.
(f) Effective date.
(1) General rule.
(2) Special rules for financial products.

[T.D. 8658, 61 FR 9329, Mar. 8, 1996; 61 FR 15891, Apr. 10, 1996]