Instructions For Form 1118 - (Rev. December 2009) (Page 2 of 13) in pdf

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Syria. For more information, see section

Financial services income. Financial

Dividends paid out of the E&P of a CFC

901(j).

services income is income received or

in proportion to the ratio of the CFC’s

accrued by a member of a financial

E&P in a separate category to its total

Note. The President of the United States

services group or any corporation

E&P. Dividends include any amount

has the authority to waive the application

predominantly engaged in the active

included in gross income under section

of section 901(j) with respect to a foreign

conduct of a banking, insurance,

951(a)(1)(B).

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

financing, or similar business, if the

the United States and will expand trade

Look-through rules also apply to

income is:

and investment opportunities for U.S.

subpart F inclusions under section

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

companies in such foreign country and (b)

951(a)(1)(A) to the extent attributable to

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Passive income (determined without

the President reports to the Congress, not

E&P of the CFC in a separate category.

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

less than 30 days before the waiver is

For more information and examples,

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Incidental income described in

granted, the intention to grant such a

see section 904(d)(3) and Regulations

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

waiver and the reason for such waiver.

section 1.904-5.

Note. Effective December 10, 2004, the

10/50 corporations. Generally,

Special Rules

President waived the application of

dividends received or accrued by the

section 901(j) with respect to Libya.

taxpayer are passive category income.

Source Rules for Income

However, dividends received or accrued

If the corporation paid taxes to a

Determine income or (loss) for each

from a 10/50 corporation may be

country that ceased to be a sanctioned

separate category on Schedule A using

assigned to other separate categories

country during the tax year, see Rev. Rul.

the general source rules of sections 861

under the look-through rules of section

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

through 865 and related regulations; the

904(d)(4). A 10/50 corporation is any

how to figure the foreign tax credit for the

special source rules of section 904(h)

foreign corporation in which the taxpayer

period that begins after the end of the

described below; and any applicable

(domestic corporation) meets the stock

sanctioned period.

source rules contained in any applicable

ownership requirements of section 902.

Income Re-sourced by Treaty

tax treaties.

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

If a sourcing rule in an applicable income

Special source rules of section 904(h).

Certain amounts paid by a U.S.

tax treaty treats any of the income

Usually, the following income from a

corporation to a related corporation.

described below as foreign source, and

U.S.-owned foreign corporation,

Look-through rules also apply to foreign

the corporation elects to apply the treaty,

otherwise treated as foreign source

source interest, rents, and royalties paid

the income will be treated as foreign

income, must be treated as U.S. source

by a U.S. corporation to a related

source.

income under section 904(h):

corporation. See Regulations section

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Dividends eligible for the dividends

Any subpart F income, foreign personal

1.904-5(g).

received deduction (section 245(a)(10)).

holding company income, or income from

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Other Rules

Certain gains (section 865(h)).

a qualified electing fund that a U.S.

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Certain income from a U.S.-owned

shareholder is required to include in its

Certain transfers of intangible

foreign corporation (section 904(h)(10)).

gross income, if such amount is

property. See section 367(d)(2)(C) for a

See Regulations section 1.904-5(m)(7) for

attributable to the U.S.-owned foreign

rule that clarifies the treatment of certain

an example.

corporation’s U.S. source income;

transfers of intangible property.

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Important. The corporation must

Interest that is properly allocable to the

Reporting Foreign Tax

U.S.-owned foreign corporation’s U.S.

compute a separate foreign tax credit

Information From Partnerships

limitation for any such income for which it

source income; and

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claims benefits under a treaty, using a

Dividends equal to the U.S. source

If you received a Schedule K-1 from a

separate Form 1118 for each amount of

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

partnership that includes foreign tax

re-sourced income from a treaty country.

information, use the rules below to report

The rules regarding interest and

On each Form 1118, check the box for

that information on Form 1118.

dividends described above do not apply

income re-sourced by treaty at the top of

Gross income sourced at partner level.

to a U.S.-owned foreign corporation if less

page 1 and identify the applicable country

This includes income from the sale of

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

in the space provided.

most personal property other than

from U.S. sources.

inventory, depreciable property, and

General Category Income

Amounts That Do Not

certain intangible property sourced under

This category includes all income not

section 865. This gross income will

Constitute Income Under U.S.

described above. This includes

generally be U.S.-source and therefore

Tax Principles

high-taxed income that would otherwise

will not be reported on Form 1118.

For tax years beginning after December

be passive category income. Usually,

The remaining lines of the foreign tax

31, 2006, creditable foreign taxes that are

income is high-taxed if the total foreign

section of the Schedule K-1 are reported

income taxes paid, accrued, or deemed

imposed on amounts that do not

on Form 1118 as follows:

constitute income under U.S. tax

paid by the corporation for that income

Foreign gross income sourced at

principles are treated as imposed on

exceed the highest rate of tax specified in

partnership level. Report on Schedule

section 11 (and with reference to section

general category income. See section

904(d)(2)(H).

15, if applicable), multiplied by the

amount of such income (including the

Deductions allocated and apportioned

Look-Through Rules

amount treated as a dividend under

at partner level and partnership level.

section 78). For more information, see

Report on Schedule A or Schedule H.

CFCs. Generally, dividends, interest,

Regulations section 1.904-4(c). Also see

Total foreign taxes paid or accrued.

rents, and royalties received or accrued

the instructions for Schedule A on page 5

by the taxpayer are passive category

Report on Schedule B.

for additional reporting requirements.

income. However, if these items are

Reduction in taxes available for credit.

This category also includes financial

received or accrued by a 10% U.S.

Report on Schedule G.

services income (defined below) if the

shareholder from a CFC, they may be

Capital Gains

corporation is a member of a financial

assigned to other separate categories

services group (as defined in section

under the look-through rules of section

Foreign source taxable income or (loss)

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

904(d)(3). This includes:

before adjustments in all separate

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engaged in the active conduct of a

Interest, rents, and royalties based on

categories in the aggregate should

banking, insurance, financing, or similar

the amount allocable to E&P of the CFC

include gain from the sale or exchange of

business.

in a separate category and

capital assets only up to the amount of

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Instructions For Form 1118 - (Rev. December 2009) Page 2

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