[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.924(c)-1]

[Page 60-63]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.924(c)-1  Requirement that a FSC be managed outside the United States.

    (a) In general. Section 924(b)(1)(A) provides that a FSC shall be 
treated as having foreign trading gross receipts for the taxable year 
only if the management of the FSC during the year takes place outside 
the United States, as provided in section 924(c). Section 924(c) and 
this section set forth the management activities that must take place 
outside the United States in order to satisfy the requirement of section 
924(b)(1)(A). Paragraph (b) of this section provides rules for 
determining whether the requirements of section 924(c)(1) have been met. 
Section 924(c)(1) requires that all meetings of the board of directors 
of the FSC during the taxable year and all meetings of the shareholders 
of the FSC during the taxable year take place outside the United States. 
Paragraph (c) of this section provides rules for maintaining the FSC's 
principal bank account outside the United States as provided in section 
924(c)(2). Paragraph (d) of this section provides rules for 
disbursements required by section 924(c)(3) to be made from bank 
accounts of the FSC maintained outside the United States.
    (b) Meetings of board of directors and meetings of shareholders must 
be outside the United States. All meetings of the board of directors of 
the FSC and all meetings of the shareholders of the FSC that take place 
during a taxable year must take place outside the United States to meet 
the requirements of section 924(c)(1). Only meetings that are formally 
convened as meetings of the board of directors or as shareholder 
meetings will be taken into account in determining whether those 
requirements have been met. In addition, all such meetings must comply 
with the local laws of the foreign country or possession of the United 
States in which the FSC was created or organized. The local laws 
determine whether a meeting must be held, when and where it must be held 
(if it is held at all), who must be present, quorum requirements, use of 
proxies, and so on. Where the local law permits action by the board of 
directors or shareholders to be taken by written consent without a 
meeting, use of such procedure will not constitute a meeting for 
purposes of section 924(c)(1). Section 924(c)(1) and this section impose 
no other requirements except the requirement that meetings that are 
actually held take place outside the United States. If the participants 
in a meeting are not

[[Page 61]]

all physically present in the same location, the location of the meeting 
is determined by the location of the persons exercising a majority of 
the voting power (including proxies) participating in the meeting. For 
example, a FSC has five directors, and is organized in country A. 
Country A's law requires that a majority of the directors of a 
corporation must participate in a meeting to constitute a quorum (and, 
thus, a meeting), but there is no requirement that the meeting be held 
in country A or that the directors must be physically present to 
participate. One director is in country A, another director is in 
country B, and a third director is in the United States.
    These three directors convene a meeting by telephone that 
constitutes a meeting under the law of country A. The meeting occurs 
outside the United States because the persons exercising a majority of 
the voting power participating in the meeting are located outside the 
United States.
    (c) Maintenance of the principal bank account outside the United 
States--(1) In general. For purposes of section 924(c), the bank account 
that shall be regarded as the principal bank account of a FSC is the 
bank account from which the disbursements described in paragraph (d) of 
this section are made. A FSC may have more than one principal bank 
account. The bank account that is regarded as the principal bank account 
must be maintained in a foreign country which meets the requirements of 
section 927(e)(3), or in any possession of the United States (as defined 
in section 927(d)(5)), and it must be so maintained at all times during 
the taxable year. For taxable years beginning on or after February 19, 
1987, a principal bank account or accounts must be designated on the 
annual return of the FSC by providing the bank name(s) and account 
number(s).
    (2) Maintenance of the account in a bank. The bank account that is 
regarded as the principal bank account must be maintained in an 
institution that is engaged in the conduct of a banking, financing, or 
similar business, as defined in Sec. 1.954-2(d)(2)(ii) (without regard 
to whether it is a controlled foreign corporation). The institution may 
be a U.S. bank, provided that the account is maintained in a branch 
outside the United States.
    (3) Maintenance of an account outside the United States. Maintenance 
of the principal bank account outside the United States means that the 
account regarded as the principal bank account must be an account 
maintained on the books of the banking institution at an office outside 
the United States, but does not require that access to the account may 
be made only outside the United States. Instructions providing for 
deposits into or disbursements from the account may originate in the 
United States without affecting the status of maintenance of the account 
outside the United States.
    (4) Maintenance of the account at all times during the taxable year. 
The term ``at all times during the taxable year'' generally means for 
each day of the taxable year. In the case of a newly created or 
organized corporation, thirty days may elapse between the effective date 
of the corporation's election to be treated as a FSC and the date a bank 
account is opened without causing the FSC to fail the requirement that 
it maintain its principal bank account outside the United States at all 
times during the taxable year. For example, if a corporation is created 
or organized prior to January 1, 1985, and makes an election to be 
treated as a FSC within the first 90 days of 1985, the election is 
effective as of January 1, 1985. Thus, the FSC must open a bank account 
within 30 days of January 1, or as of January 31, 1985, to satisfy this 
requirement. Also, a FSC shall be treated as satisfying this requirement 
if the account that is regarded as its principal bank account is 
terminated during the taxable year, provided that (i) such termination 
is the result of circumstances beyond the FSC's control, and (ii) the 
FSC establishes a new principal bank account within thirty days after 
such termination. A FSC may close its principal bank account and replace 
it with another account that qualifies under this paragraph (c) as a 
principal bank account at any time provided that no lapse of time occurs 
between the closing of the principal bank account and the opening of the 
replacement account.

[[Page 62]]

    (5) Other accounts. The FSC may maintain other bank accounts in 
addition to its principal bank account. Such other accounts may be 
located anywhere, without limitation. The mere existence of such other 
accounts will not cause the FSC to fail to satisfy the requirements of 
section 924(c).
    (d) Disbursement of dividends, legal and accounting fees, and 
salaries of officers and directors out of the principal bank account of 
the FSC--(1) In general. All dividends, legal fees, accounting fees, 
salaries of officers of the FSC, and salaries or fees paid to members of 
the board of directors of the FSC that are disbursed during the taxable 
year must be disbursed out of bank account(s) of the FSC maintained 
outside the United States. Such an account is treated as the principal 
bank account of the FSC for purposes of section 924(c). Dividends, 
however, may be netted against amounts owed to the FSC (e.g., 
commissions) by a related supplier through book entries. If the FSC 
regularly disburses its legal or accounting fees, salaries of officers, 
and salaries or fees of directors out of its principal bank account, the 
occasional, inadvertent payment by mistake of fact or law of such 
amounts out of another bank account will not be considered a 
disbursement by the FSC if, upon determination that such payment was 
made from another account, reimbursement to such other account is made 
from the principal bank account of the FSC within a reasonable period 
from the date of the determination. Disbursement out of the principal 
bank account of the FSC may be made by transferring funds from the 
principal bank account to a U.S. account of the FSC provided that (i) 
the payment of the dividends, salaries or fees to the recipients is made 
within 12 months of the transfer, (ii) the purpose of the expenditures 
is designated and, (iii) the payment of the dividends, salaries or fees 
is actually made out of the same U.S. account that received the 
disbursement from the principal bank account.
    (2) Reimbursement. Legal or accounting fees, salaries of officers, 
and salaries or fees of directors that are paid by a related person 
wholly or partially on behalf of a FSC must be reimbursed by the FSC. 
The amounts paid by the related person are not considered disbursed by 
the FSC until the related person is reimbursed by the FSC. The related 
person must be reimbursed no later than the last date prescribed for 
filing the FSC's tax return (including extensions) for the taxable year 
to which the reimbursement relates. Any reimbursement for amounts paid 
on behalf of the FSC must be disbursed out of the FSC's principal bank 
account (and not netted against any obligation owed by the related 
person to the FSC), as set forth in paragraph (c) of this section. To 
determine the amounts paid on behalf of the FSC, the FSC may rely upon a 
written statement or invoice furnished to it by the related person which 
shows the following:
    (i) The actual fees charged for performing the legal or accounting 
services for the FSC or, if such fees cannot be ascertained by the 
related person, a good faith estimate thereof, and the actual salaries 
or fees paid for services as officers and directors of the FSC, and
    (ii) The person who performed or provided the services.
    (3) Good faith exception. If, after the FSC has filed its tax 
return, a determination is made by the Commissioner that all or a part 
of the legal or accounting fees, salaries of officers, and salaries or 
fees of directors of the FSC were paid by a related person without 
receiving reimbursement, the FSC may, nonetheless, satisfy the 
requirements of section 924(c)(3) if the fees and salaries were paid by 
the related person in good faith, and the FSC reimburses the related 
person for the fees and salaries paid within 90 days after the 
determination. The reimbursement shall be treated as made as of the end 
of the taxable year of the FSC for which the reimbursement is made.
    (4) Dividends--(i) Definition. For purposes of section 924(c) and 
this section only, the term ``dividends'' refers solely to cash 
dividends (including a dividend paid in a foreign functional currency) 
actually paid pursuant to a declaration or authorization by the FSC. 
Accordingly, a ``dividend'' will not include a constructive dividend 
that is deemed to be paid (regardless of the source of such constructive 
dividend) or a distribution of property that is a dividend under section 
316 other than a

[[Page 63]]

distribution of U.S. dollars or a foreign functional currency.
    (ii) Offset accounting entries. Payment of dividends by the FSC to 
its related supplier may be in the form of an accounting entry 
offsetting an amount payable to the related supplier for the dividend 
against an existing debt owed to the FSC. The offset accounting entries 
must be clearly identified in the books of account of both the related 
supplier and the FSC.
    (5) Legal and accounting fees. For purposes of this section, legal 
and accounting fees do not include salaries paid to legal and accounting 
employees of the FSC (or a related person). Legal and accounting fees 
are limited to fees paid to independent persons performing legal or 
accounting services for or with respect to the FSC.
    (6) Salaries of officers and directors. For purposes of this 
section, salaries of officers and salaries or fees of directors are only 
those salaries or fees paid for services as officers or directors of the 
FSC. Salaries do not include reimbursed travel and entertainment 
expenses. If an individual officer, director, or employee of a related 
person is also an officer or director of a FSC and receives additional 
compensation for services performed for the FSC, the portion of the 
compensation paid to the individual which is for services performed for 
the FSC is required to be disbursed out of the FSC's principal bank 
account. For purposes of this section, the term ``compensation'' is 
defined as set forth in paragraphs (d)(1) and (2) of Sec. 1.415-2.

[T.D. 8125, 52 FR 5089, Feb. 19, 1987]