Instructions For Form 8873 - Extraterritorial Income Exclusion

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Department of the Treasury

Internal Revenue Service

Instructions for Form 8873

Extraterritorial Income Exclusion

Section references are to the Internal Revenue Code unless otherwise noted.

income that is qualifying foreign trade

Excluded receipts. Foreign trading

General Instructions

gross receipts do not include the receipts

income.

of a taxpayer from a transaction if:

•

Purpose of Form

The qualifying foreign trade property or

Qualifying Foreign

services are for ultimate use in the United

Use this form to figure the amount of

Trade Income

States,

extraterritorial income (defined below)

•

The qualifying foreign trade property or

excluded from gross income for the tax

Generally, qualifying foreign trade income

services are for use by the United States

year. Attach the form to your income tax

is the amount of gross income that, if

or any instrumentality of the United States

return.

excluded, would result in a reduction of

and such use is required by law or

Note: The amount figured on the form is

taxable income by the greatest of:

regulation,

•

net of the disallowed deductions.

•

15% of foreign trade income,

Such transaction is accomplished by a

•

1.2% of foreign trading gross receipts,

subsidy granted by the government (or

Who Qualifies for

any instrumentality) of the country or

•

possession in which the property is

the Exclusion

30% of foreign sale and leasing

manufactured, produced, grown, or

income.

extracted, or

Eligible Taxpayers

See definitions below and on page 2.

•

The taxpayer has elected to exclude

Individuals, corporations (including S

the receipts under section 942(a)(3). See

corporations), partnerships, and other

Foreign Trading

the instructions for line 1 for more details.

pass-through entities are entitled to the

Gross Receipts

exclusion if they have extraterritorial

Foreign Economic

income.

A taxpayer is treated as having foreign

Process Requirements

Special rule for DISCs. The

trading gross receipts derived from

You are generally treated as having

extraterritorial income exclusion does not

certain activities in connection with

foreign trading gross receipts from a

apply to any taxpayer for any tax year if,

qualifying foreign trade property (defined

transaction only if certain economic

at any time during the tax year, the

on page 2) only if it meets the foreign

processes take place outside the United

taxpayer is a member of a controlled

economic process requirements

States with respect to that transaction.

group of corporations (as defined in

(described below). Foreign trading gross

However, see $5 million gross receipts

section 927(d)(4), as in effect before its

receipts are the taxpayer’s gross receipts

exception on page 2.

repeal) of which a DISC is a member.

that are:

Generally, a transaction will qualify if

1. From the sale, exchange, or other

Eligible Transactions

two requirements are met:

•

disposition of qualifying foreign trade

Participation outside the United States

Generally, the extraterritorial income

property,

in the sales portion of the transaction and

exclusion applies to taxpayers with

•

2. From the lease or rental of

Satisfaction of either the 50% or the

respect to transactions after September

qualifying foreign trade property for use

85% foreign direct cost test.

30, 2000. However, the exclusion does

by the lessee outside the United States,

For purposes of determining whether

not apply to any transaction in the

3. For services that are related and

your gross receipts qualify as foreign

ordinary course of a trade or business

subsidiary to (a) any sale, exchange, or

trading gross receipts, the foreign

involving a FSC that is pursuant to a

economic process requirements are

other disposition of qualifying foreign

binding contract that is in effect on

treated as satisfied if any related person

trade property by such taxpayer or (b)

September 30, 2000, and thereafter, and

has met the economic process

that is between the FSC (or a person

any lease or rental of qualifying foreign

requirements with respect to the same

related to the FSC) and a person other

trade property for use by the lessee

qualifying foreign trade property.

than a related person.

outside the United States,

4. For engineering or architectural

Line 2 election. The taxpayer may elect

Participation outside the United States

services for construction projects located

to apply the exclusion rules for the

in the sales portion of the transaction.

(or proposed for location) outside the

Generally, the foreign economic process

transactions described above involving a

United States, or

FSC. To make the election, check the box

requirements are met for your gross

on line 2. See the instructions for line 2

receipts derived from any transaction if

5. For the performance of managerial

for more details.

you have (or any person acting under a

services for a person other than a related

contract with you has) participated

person connected with the production of

Extraterritorial Income

outside the United States in the

foreign trading gross receipts described in

solicitation (other than advertising),

items 1, 2, or 3 above. Item 5 does not

Extraterritorial income is the gross income

negotiation, or the making of the contract

apply to a taxpayer for any tax year

of the taxpayer attributable to foreign

relating to the transaction.

unless at least 50% of its foreign trading

trading gross receipts (defined below).

gross receipts (determined without regard

The taxpayer reports all of its

50% foreign direct cost test. You meet

to this sentence) for such tax year are

extraterritorial income on its tax return. It

this test if the foreign direct costs you

then uses Form 8873 to calculate its

derived from the activities described in

incurred that are attributable to the

items 1, 2, or 3 above.

exclusion from income for extraterritorial

transaction equal or exceed 50% of the

Cat. No. 31661R

Instructions For Form 8873 - Extraterritorial Income Exclusion - 2003

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