[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: 26CFR1.960-4] [Page 417-420] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.960-4 Additional foreign tax credit in year of receipt of previously taxed earnings and profits. (a) Increase in section 904(a) limitation for the taxable year of exclusion--(1) In general. The applicable limitation under section 904(a) for a taxpayer's taxable year (hereinafter in this section referred to as the ``taxable year of exclusion'') in which he receives an amount which is excluded from gross income under section 959(a)(1) and which is attributable to a controlled foreign corporation's earnings and profits in respect of which an amount was required to be included in the gross income of such taxpayer under section 951(a) for a taxable year (hereinafter in this section referred to as the ``taxable year of inclusion'') previous to the taxable year of exclusion shall be increased under section 960(b)(1) by the amount described in paragraph (b) of this section if the conditions described in subparagraph (2) of this paragraph are satisfied. (2) Conditions under which increase in limitation is allowed for the taxable year of exclusion. The increase in limitation described in subparagraph (1) of this paragraph for the taxable year of exclusion shall be made only if the taxpayer-- (i) For the taxable year of inclusion either chose to claim a foreign tax credit as provided in section 901 or did not pay or accrue any foreign income taxes, (ii) Chooses to claim a foreign tax credit as provided in section 901 for the taxable year of exclusion, and (iii) For the taxable year of exclusion pays, accrues, or is deemed to have paid foreign income taxes with respect to the amount, described in subparagraph (1) of this paragraph, which is excluded from his gross income for such year under section 959(a)(1). (b) Amount of increase in limitation for the taxable year of exclusion. The amount of increase under section 960 (b)(1) in the applicable limitation under section 904(a) for the taxable year of exclusion shall be-- (1) The amount by which the applicable section 904(a) limitation for the taxable year of inclusion was increased, determined as provided in paragraph (c) of this section, by reason of the inclusion of the amount in the taxpayer's income for such year under section 951(a), reduced by (2) The amount of foreign income taxes allowed as a credit under section 901 for such taxable year of inclusion and which were allowable to such taxpayer solely by reason of the inclusion of such amount in his gross income under section 951(a), as determined under paragraph (d) of this section, and then by (3) The additional reduction for such taxable year of inclusion arising by reason of increases in limitation under section 960(b)(1) for taxable years intervening between such taxable year of inclusion and such taxable year of exclusion, as determined under paragraph (e) of this section in respect of such inclusion under section 951(a), except that the amount of increase determined under this paragraph for the taxable year of exclusion shall in no case exceed the amount of foreign income taxes paid, accrued, or deemed to be paid by such taxpayer for such taxable year of exclusion with respect to the amount, described in paragraph (a)(1) of this section, which is excluded from gross income for such year under section 959(a)(1). (c) Determination of increase in limitation for the taxable year of inclusion. The amount of the increase in the applicable limitation under section 904(a) for [[Page 418]] the taxable year of inclusion which arises by reason of the inclusion of the amount in gross income under section 951(a) shall be the amount of the applicable limitation under section 904(a) for such year reduced by the amount which would have been the applicable limitation under section 904(a) for such year if the amount had not been included in gross income for such year under section 951(a). (d) Determination of foreign income taxes allowed for taxable year of inclusion by reason of section 951(a) amount. The amount of foreign income taxes allowed as a credit under section 901 for the taxable year of inclusion which were allowable solely by reason of the inclusion of the amount in gross income for such year under section 951(a) shall be the amount of foreign income taxes allowed as a credit under section 901 for such year reduced by the amount of foreign income taxes which would have been allowed as a credit under section 901 for such year if the amount had not been included in gross income for such year under section 951(a). For purposes of this paragraph, the term ``foreign income taxes'' includes foreign income taxes paid or accrued, and foreign income taxes deemed paid under section 902, section 904(d), and section 960(a), for the taxable year of inclusion. (e) Additional reduction for the taxable year of inclusion arising by reason of increases in limitation for intervening years. The amount of increase in the applicable limitation under section 904(a) for the taxable year of inclusion shall also be reduced, after first deducting the foreign income taxes described in paragraph (b)(2) of this section, by any increases in limitation which arise under section 960(b)(1)--by reason of any earlier exclusions under section 959(a)(1) in respect of the same inclusion under section 951(a) for such taxable year of inclusion--for the first, second, third, fourth, etc., succeeding taxable years of exclusion, in that order, which follow such taxable year of inclusion and precede the taxable year of exclusion in respect of which the increase in limitation under section 960(b)(1) and paragraph (b) of this section is being determined. The amount of any increase in limitation which arises under section 960(b)(1) for any such succeeding taxable year of exclusion shall be the amount of foreign income taxes allowed as a credit under section 901 for each such taxable year reduced by the amount of foreign income taxes which would have been allowed as a credit under section 901 for each such year if the limitation for each such year were not increased under section 960(b)(1). For any such succeeding taxable year of exclusion for which the taxpayer does not choose to claim a foreign tax credit as provided in section 901, the same increase in limitation under section 960(b)(1) shall be treated as having been made, for purposes of this paragraph, which would have been made for such taxable year if the taxpayer had chosen to claim the foreign tax credit for such year. (f) Illustrations. The application of this section may be illustrated by the following examples: Example 1. Domestic corporation N owns all of the one class of stock of controlled foreign corporation A. Corporation A, after paying foreign income taxes of $30, has earnings and profits for 1978 of $70, all of which are attributable to an amount required under section 951(a) to be included in N Corporation's gross income for 1978. Both corporations use the calendar year as the taxable year. For 1979 and 1980, A Corporation has no earnings and profits attributable to an amount required to be included in N Corporation's gross income under section 951(a); for each such year it makes a distribution of $35 (from its earnings and profits for 1978) from which a foreign income tax of $6 is withheld. For each of 1978, 1979, and 1980, N Corporation derives taxable income of $50 from sources within the United States and claims a foreign tax credit under section 901, determined by applying the overall limitation under section 904(a)(2). The United States tax payable by N Corporation is determined as follows, assuming a corporate tax rate of 48 percent: 1978 Taxable income of N Corporation: U.S. sources............................................... $50.00 Sources without the U.S.: Amount required to be included in N $70.00 ......... Corporation's gross income under section 951(a)....................................... [[Page 419]] Foreign income taxes deemed paid by N 30.00 100.00 Corporation under section 960(a)(1) and included in N Corporation's gross income under section 78 ($30x$70/$70)............... ------------ Total taxable income.......................... ......... 150.00 ========== U.S. tax payable for 1978: U.S. tax before credit ($150x0.48)......................... 72.00 Credit: Foreign income taxes of $30, but not to exceed 30.00 overall limitation of $48 for 1978 ($100/$150x$72)........ ------------ U.S. tax payable........................................... 42.00 ============ 1979 Taxable income of N Corporation, consisting of income from $50.00 U.S. sources................................................ U.S. tax before credit ($50x0.48)............................ 24.00 Section 904(a)(2) overall limitation for 1979: Limitation for 1979 before increase under section 960(b)(1) 0 ($24x$0/$50).............................................. Plus: Increase in overall limitation for 1979 under section 960(b)(1): Amount by which 1978 overall limitation was $48.00 ......... increased by reason of inclusion in N Corporation's gross income under section 951(a) for 1978 ($48-[($50x0.48)x$0/$50]).... Less: Foreign income taxes allowed as a credit 30.00 ......... for 1978 which were allowable solely by reason of such section 951(a) inclusion ($30- $0).......................................... ----------- Balance....................................... 18.00 ......... But: Such balance not to exceed foreign income 6.00 6.00 taxes paid by N Corporation for 1979 with respect to $35 distribution excluded under section 959(a)(1) ($6 tax withheld).......... ------------ Overall limitation for 1979................................ 6.00 ============ U.S. tax payable for 1979: U.S. tax before credit ($50x0.48).......................... 24.00 Credit: Foreign income taxes of $6, but not to exceed 6.00 overall limitation of $6 for 1966......................... ------------ U.S. tax payable........................................... 18.00 ============ 1980 Taxable income of N Corporation, consisting of income from U.S. $50.00 sources....................................................... U.S. tax before credit ($50x0.48).............................. 24.00 ========== Section 904(a)(2) overall limitation for 1980: Limitation for 1980 before increase under section 960(b)(1) 0 ($24x$0/$50)................................................ Plus: Increase in overall limitation for 1980 under section 960(b)(1): Amount by which 1978 overall limitation was $48.00 ....... increased by reason of inclusion in N Corporation's gross income under section 951(a) for 1978 ($48-[($50x0.48)x$0/$50])............... Less: Foreign income taxes allowed as a credit for 30.00 ....... 1978 which were allowable solely by reason of such section 951(a) inclusion ($30-$0)........... --------- Tentative balance................................. 18.00 ....... Less: Increase in overall limitation under section $6.00 ....... 960(b)(1) for 1979 by reason of such section 951(a) inclusion................................. --------- Balance........................................... 12.00 But: Such balance not to exceed foreign income taxes 6.00 $6.00 paid by N Corporation for 1980 with respect to $35 distribution excluded under section 959(a)(1) ($6 tax withheld)...................................... ---------- Overall limitation for 1980.................................. 6.00 ========== U.S. tax payable for 1980: U.S. tax before credit ($50x0.48)............................ 24.00 Credit: Foreign income taxes of $6, but not to exceed overall 6.00 limitation of $6 for 1967................................... ---------- U.S. tax payable............................................. 18.00 Example 2. The facts for 1978, 1979, and 1980, are the same as in example 1, except that in 1977, to which the section 904(a)(2) overall limitation applies, N Corporation pays $18 of foreign income taxes in excess of the overall limitation and that such excess is not absorbed as a carryback to 1975 or 1976 under section 904(c). Therefore, there is no increase under section 960(b)(1) in the overall limitation for 1979 or 1980 since the amount ($48) by which the 1978 overall limitation was increased by reason of the inclusion in N Corporation's gross income for 1978 under section 951(a), less the foreign income taxes ($48) allowed as a credit which were allowable solely by reason of such inclusion, is zero. The foreign income taxes so allowed as a credit for 1978 which were allowable solely by reason of such section 951(a) inclusion consist of the $30 of foreign income taxes deemed paid for 1978 under section 960(a)(1) and the $18 of foreign income taxes for 1977 carried over and deemed paid for 1978 under section 904(c). Example 3. (a) Domestic corporation N owns all the one class of stock of controlled foreign corporation A, which in turn owns all the one class of stock of controlled foreign corporation B. All corporations use the calendar years as the taxable year. Corporation B, after paying foreign income taxes of $30, has earnings and profits for 1978 of $70, all of which is attributable to an amount required under section 951(a) to be included in N Corporation's gross income for 1978, and $35 of [[Page 420]] which it distributes in such year to A Corporation. For 1978, A Corporation, after paying foreign income taxes of $5 on such dividend from B Corporation, has total earnings and profits of $30, all of which it distributes in such year to N Corporation, a foreign income tax of $3 being withheld therefrom. (b) For 1979, B Corporation has no earnings and profits, but distributes in such year to A Corporation the $35 remaining of its earnings and profits for 1965. For 1979, A Corporation, after paying foreign income taxes of $5 on such dividend from B Corporation, has total earnings and profits of $30, all of which it distributes to N Corporation, a foreign income tax of $3 being withheld therefrom. (c) For each of 1978 and 1979, N Corporation has taxable income of $100 from United States sources and claims a foreign tax credit under section 901, determined by applying the overall limitation under section 904(a)(2). The United States tax payable by N Corporation is determined as follows, assuming a corporate tax rate of 48 percent: 1978 Taxable income of N Corporation: U.S. sources.................................................. $100 Sources without the U.S.: Amount required to be included in N Corporation's $70 ...... gross income under section 951(a) with respect to B Corporation......................................... Foreign income taxes deemed paid by N Corporation 30 100 under section 960(a)(1) and included in N Corporation's gross income under section 78 ($30x$70/ $70)................................................ -------- Total taxable income................................... ..... 200 ======= U.S. tax payable for 1978: U.S. tax before credit ($200x0.48)............................ 96 Credit: Foreign income taxes of $38 ([$30x$70/$70]+$3), but 38 not to exceed overall limitation of $48 ($96x$100/$200)...... -------- U.S. tax payable.............................................. 58 ======== 1979 Taxable income of N Corporation, consisting of income from U.S. $100 sources....................................................... U.S. tax before credit ($100x0.48)............................. 48 Section 904(a)(2) overall limitation for 1979: Limitation for 1979 before increase under section 960(b)(1) 0 ($48x$0/$100)............................................... Plus: Increase in overall limitation for 1979 under section 960(b)(1): Amount by which 1978 overall limitation was $48 ....... increased by reason of inclusion in N Corporation's gross income under section 951(a) for 1978 ($48-[($100x0.48)x$0/$100]).............. Less: Foreign income taxes allowed as a credit for 38 ....... 1978 which were allowable solely by reason of such section 951(a) inclusion ($38-$0)................. -------- Balance........................................... 10 ....... But: Such balance not to exceed foreign income 8 8 taxes paid and deemed paid by N Corporation for 1979 with respect to $30 distribution excluded under section 959(a)(1) ([$5x$30/$30]+$3)......... --------- Overall limitation for 1979.......................... ...... 8 ======== U.S. tax payable for 1979: U.S. tax before credit ($100x0.48)........................... 48 Credit: Foreign income taxes of $8 ($3+$5), but not to exceed 8 overall limitation of $8 for 1979........................... --------- U.S. tax payable............................................. 40 [T.D. 7120, 36 FR 10859, June 4, 1971, as amended by T.D. 7649, 44 FR 60089, Oct. 18, 1979]