Instructions For Form 1120-Fsc - 2007 (Page 3 of 13) in pdf

attributable to foreign trading gross receipts

held at all), who must be present, quorum

no direct costs are incurred by the FSC in a

(defined below).

requirements, use of proxies, etc.

particular category, that category is not

taken into account for purposes of

Principal bank accounts. See

The percentage of foreign trade income

determining whether the FSC has met either

Regulations section 1.924(c)-1(c) for

exempt from tax is figured differently for

the 50% or 85% foreign direct cost test.

information regarding principal bank

income determined under the administrative

accounts.

Direct costs are costs that:

pricing rules (for details, see the Instructions

•

Are incident to and necessary for the

for Schedule P (Form 1120-FSC)) and

Foreign Economic Process Rules

performance of any activity described in

income determined without regard to the

A FSC (other than a small FSC) has foreign

section 924(e);

administrative pricing rules. These

•

trading gross receipts from any transaction

Include the cost of materials consumed in

percentages are computed on Schedule E,

only if certain economic processes for the

the performance of the activity and the cost

page 4, Form 1120-FSC, and carried over to

transaction take place outside the United

of labor that can be identified or associated

lines 9a and 9b of Schedule B, page 3,

States. Section 924(d) and Regulations

directly with the performance of the activity

Form 1120-FSC, to figure taxable income or

section 1.924(d)-1 set forth the rules for

(but only to the extent of wages, salaries,

(loss).

determining whether a sufficient amount of

fees for professional services, and other

See section 923(a)(4) for a special rule

the economic processes of a transaction

amounts paid for personal services actually

for foreign trade income allocable to a

takes place outside the United States.

rendered, such as bonuses or compensation

cooperative. See section 923(a)(5) for a

Generally, a transaction will qualify if the

paid for services on the basis of a

special rule for military property.

percentage of profits); and

FSC satisfies two requirements:

•

Tax treaty benefits. A FSC may not claim

Participation outside the United States in

Include the allowable depreciation

any benefits under any income tax treaty

the sales portion of the transaction and

deduction for equipment or facilities (or the

•

between the United States and any foreign

Satisfaction of either the 50% or the 85%

rental cost for its use) that can be

country.

foreign direct cost test.

specifically identified or associated with the

activity, as well as the contract price of an

The activities comprising these economic

Foreign Trading Gross Receipts

activity performed on behalf of the FSC by a

processes may be performed by the FSC or

contractor.

A FSC is treated as having foreign trading

by any other person acting under contract

gross receipts (defined in section 924) only

with the FSC.

Total direct costs means all of the direct

if it has met certain foreign management

costs of any transaction attributable to

Participation outside the United States in

and foreign economic process requirements.

activities described in any paragraph of

the sales portion of the transaction.

section 924(e). For purposes of the 50% test

Generally, the requirement of section

Foreign trading gross receipts do not

of section 924(d)(1)(B), total direct costs are

924(d)(1)(A) is met for the gross receipts of

include:

•

based on the direct costs of all activities

a FSC derived from any transaction if the

Certain excluded receipts (defined in

described in all paragraphs of section

FSC has participated outside the United

section 924(f)).

•

924(e). For purposes of the 85% test of

States in the following sales activities

Receipts attributable to property excluded

section 924(d)(2), however, the total direct

relating to the transaction: (1) solicitation

from export property under section

costs are determined separately for each

(other than advertising), (2) negotiation, and

927(a)(2).

•

paragraph of section 924(e).

(3) making a contract.

Investment income (defined in section

927(c)).

Foreign direct costs means the portion

1. Solicitation (other than advertising) is

•

Carrying charges (defined in section

of the total direct costs of any transaction

any communication (including, but not

927(d)(1)).

attributable to activities performed outside

limited to, telephone, telegraph, mail, or in

the United States. For purposes of the 50%

person) by the FSC, to a specific, targeted

Note. Computer software licensed for

test, foreign direct costs are based on the

customer or potential customer.

reproduction abroad is not excluded from

direct costs of all activities described in all

2. Negotiation is any communication by

export property under section 927(a)(2).

paragraphs of section 924(e). For purposes

the FSC to a customer or potential customer

Therefore, receipts attributable to the sale,

of the 85% test, however, foreign direct

aimed at an agreement on one or more of

lease, or rental of computer software and

costs are determined separately for each

the terms of a transaction, including, but not

services related and subsidiary to such

paragraph of section 924(e).

limited to, price, credit terms, quantity, or

transactions qualify as foreign trading gross

time or manner of delivery.

receipts.

For more details, see Regulations

3. Making a contract refers to

section 1.924(d)-1(d).

performance by the FSC of any of the

Check the applicable box(es) on line 10b,

Foreign Management Rules

elements necessary to complete a sale,

Additional Information, on page 2 of the

such as making or accepting an offer.

A FSC (other than a small FSC) is treated

form, to indicate how the FSC met the

as having foreign trading gross receipts for

foreign direct costs requirement.

Grouping transactions. Generally, the

the tax year only if the management of the

sales activities described above are to be

Grouping transactions. Generally, the

FSC during the year takes place outside the

applied on a transaction-by-transaction

foreign direct cost tests under Regulations

United States. These management activities

basis. However, a FSC may make an

section 1.924(d)-1(d) are applied on a

include:

annual election to apply any of the sales

transaction-by-transaction basis. However,

•

Meetings of the board of directors and

activities on the basis of a group. To make

the FSC may make an annual election (on

meetings of the shareholders.

the election, check the applicable box on

line 10d, Additional Information, on page 2

•

Disbursing cash, dividends, legal and

line 10a, Additional Information, on page 2

of the form) to apply the foreign direct cost

accounting fees, salaries of officers, and

of Form 1120-FSC. See Regulations section

tests on a customer, contract, or product or

salaries or fees of directors from the

1.924(d)-1(c)(5) for details.

product line grouping basis. Any grouping

principal bank account (see below).

used must be supported by adequate

•

Satisfaction of either the 50% or 85%

Maintaining the principal bank account at

documentation of performance of activities

foreign direct cost test. To qualify as

all times during the tax year.

and costs of activities relating to the

foreign trading gross receipts, the foreign

Meetings of directors and meetings of

grouping used. See Regulations section

direct costs incurred by the FSC attributable

the shareholders. All meetings of the

1.924(d)-1(e) for details.

to the transaction must equal or exceed

board of directors of the FSC and all

50% of the total direct costs incurred by the

Exception for foreign military property.

meetings of the shareholders of the FSC

FSC attributable to the transaction.

The economic process rules do not apply to

that take place during the tax year must take

any activities performed in connection with

Instead of satisfying the 50% foreign

place outside the United States.

foreign military sales except those activities

direct cost test, the FSC may incur foreign

described in section 924(e). See

In addition, all such meetings must

direct costs attributable to activities

Regulations section 1.924(d)-1(f) for details.

comply with the local laws of the foreign

described in each of two of the section

country or U.S. possession in which the

924(e) categories. The costs must equal or

Section 925(c) Rule

FSC was created or organized. The local

exceed 85% of the total direct costs incurred

laws determine whether a meeting must be

by the FSC attributable to the activity

To use the administrative pricing rules to

held, when and where it must be held (if it is

described in each of the two categories. If

determine the FSC’s (or small FSC’s) profit

-3-

Instructions For Form 1120-Fsc - 2007 Page 3

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