Instructions For Form 1118 (Rev. December 2015) (Page 2 of 12) in pdf

Amounts That Do Not

1118, check the box for section 901(j)

paid, accrued, or deemed paid by the

income at the top of page 1 and identify

corporation for that income exceed the

Constitute Income Under

the applicable country in the space

highest rate of tax specified in section 11

U.S. Tax Principles

provided.

(and with reference to section 15, if

applicable), multiplied by the amount of

For tax years beginning after December

Sanctioned countries are those

such income (including the amount treated

31, 2006, creditable foreign taxes that are

designated by the Secretary of State as

as a dividend under section 78). For more

imposed on amounts that do not constitute

countries that repeatedly provide support

information, see Regulations section

income under U.S. tax principles are

for acts of international terrorism,

1.904-4(c). Also see the instructions for

treated as imposed on general category

countries with which the United States

Schedule A, later, for additional reporting

income. See section 904(d)(2)(H).

does not have diplomatic relations, or

requirements.

Look-Through Rules

countries whose governments are not

This category also includes financial

recognized by the United States. As of the

CFCs. Generally, dividends, interest,

services income (defined below) if the

date these instructions were revised,

rents, and royalties received or accrued by

corporation is a member of a financial

section 901(j) applied to income derived

the taxpayer are passive category income.

services group (as defined in section

from Cuba, Iran, North Korea, Sudan, and

However, if these items are received or

904(d)(2)(C)(ii)) or is predominantly

Syria. For more information, see section

accrued by a 10% U.S. shareholder from a

engaged in the active conduct of a

901(j).

CFC, they may be assigned to other

banking, insurance, financing, or similar

separate categories under the

business.

Note. The President of the United States

look-through rules of section 904(d)(3).

has the authority to waive the application

Financial services income. Financial

This includes:

of section 901(j) with respect to a foreign

services income is income received or

Interest, rents, and royalties based on

country if it is (a) in the national interest of

accrued by a member of a financial

the amount allocable to E&P of the CFC in

the United States and will expand trade

services group or any corporation

a separate category and

and investment opportunities for U.S.

predominantly engaged in the active

Dividends paid out of the E&P of a CFC

companies in such foreign country and (b)

conduct of a banking, insurance,

in proportion to the ratio of the CFC's E&P

the President reports to the Congress, not

financing, or similar business, if the

in a separate category to its total E&P.

less than 30 days before the waiver is

income is:

Dividends include any amount included in

granted, the intention to grant such a

Described in section 904(d)(2)(D)(ii),

gross income under section 951(a)(1)(B).

waiver and the reason for such waiver.

Passive income (determined without

Look-through rules also apply to

regard to section 904(d)(2)(B)(iii)(II)), or

Note. Effective December 10, 2004, the

subpart F inclusions under section 951(a)

Incidental income described in

President waived the application of

(1)(A) to the extent attributable to E&P of

Regulations section 1.904-4(e)(4).

section 901(j) with respect to Libya.

the CFC in a separate category.

Special Rules

For more information and examples,

If the corporation paid taxes to a

see section 904(d)(3) and Regulations

country that ceased to be a sanctioned

Source Rules for Income

section 1.904-5.

country during the tax year, see Rev. Rul.

92-62, 1992-2 C.B. 193, for details on how

Determine income or (loss) for each

10/50 corporations. Generally,

to figure the foreign tax credit for the

separate category on Schedule A using

dividends received or accrued by the

period that begins after the end of the

the general source rules of sections 861

taxpayer are passive category income.

sanctioned period.

through 865 and related regulations; the

However, dividends received or accrued

special source rules of section 904(h)

from a 10/50 corporation may be assigned

Income Re-sourced by Treaty

described below; and any applicable

to other separate categories under the

If a sourcing rule in an applicable income

source rules contained in any applicable

look-through rules of section 904(d)(4). A

tax treaty treats any U.S. source income

tax treaties.

10/50 corporation is any foreign

as foreign source, and the corporation

corporation in which the taxpayer

Special source rules of section 904(h).

elects to apply the treaty, the income will

(domestic corporation) meets the stock

Usually, the following income from a

be treated as foreign source.

ownership requirements of section 902.

U.S.-owned foreign corporation, otherwise

See Regulations section 1.904-5(c)(4)(iii).

treated as foreign source income, must be

Important. The corporation must

treated as U.S. source income under

Certain amounts paid by a U.S. corpo-

compute a separate foreign tax credit

section 904(h):

ration to a related corporation.

limitation for any such income for which it

Look-through rules also apply to foreign

Any subpart F income, foreign personal

claims benefits under a treaty, using a

source interest, rents, and royalties paid

holding company income, or income from

separate Form 1118 for each amount of

a qualified electing fund that a U.S.

by a U.S. corporation to a related

re-sourced income from a treaty country.

shareholder is required to include in its

corporation. See Regulations section

On each Form 1118, check the box for

1.904-5(g).

gross income, if such amount is

income re-sourced by treaty at the top of

attributable to the U.S.-owned foreign

page 1 and identify the applicable country

Other Rules

corporation's U.S. source income;

in the space provided. See sections

Interest that is properly allocable to the

Certain transfers of intangible proper-

865(h), 904(d)(6), and 904(h)(10) and the

U.S.-owned foreign corporation's U.S.

ty. See section 367(d)(2)(C) for a rule that

regulations under those sections

source income; and

clarifies the treatment of certain transfers

(including Regulations section 1.904-5(m)

Dividends equal to the U.S. source ratio

of intangible property.

(7)) for any grouping rules and exceptions.

(defined in section 904(h)(4)(B)).

Reporting Foreign Tax

General Category Income

The rules regarding interest and

Information From Partnerships

This category includes all income not

dividends described above do not apply to

described above. This includes high-taxed

If you received a Schedule K-1 from a

a U.S.-owned foreign corporation if less

income that would otherwise be passive

partnership that includes foreign tax

than 10% of its E&P for the tax year is from

category income. Usually, income is

U.S. sources.

high-taxed if the total foreign income taxes

Instructions for Form 1118 (2015)

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Instructions For Form 1118 (Rev. December 2015) Page 2

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