Instructions For Form 1118 - 2004 (Page 2 of 12) in pdf

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High withholding tax interest, or

does not have diplomatic relations, or

Special Rules

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Foreign trade income.

countries whose governments are not

recognized by the United States. As of

Source Rules for Income

Dividends From 10/50

the date these instructions were revised,

Corporations

Determine income or (loss) for each

sanctioned countries include Cuba, Iran,

separate category on Schedule A using

The American Jobs Creation Act of 2004

Libya, North Korea, Sudan, and Syria. For

the general source rules of sections 861

eliminated the separate categories of

more information, see section 901(j).

through 865 and related regulations; the

income for dividends received from

special source rules of section 904(g)

Note. The President of the United States

noncontrolled section 902 corporations

described below; and any applicable

(10/50 corporations). The change is

has the authority to waive the application

source rules contained in any applicable

effective for tax years beginning after

of section 901(j) with respect to a foreign

tax treaties.

December 31, 2002. Dividends paid by

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

10/50 corporations in post-2002 tax years

the United States and will expand trade

Special source rules of section 904(g).

Usually, the following income from a

are generally eligible for look-through

and investment opportunities for U.S.

treatment (see Look-Through Rules

companies in such foreign country and (b)

U.S.-owned foreign corporation,

below). Corporations that filed a tax return

otherwise treated as foreign source

the President reports to the Congress, not

income, must be treated as U.S. source

in which they claimed a foreign tax credit

less than 30 days before the waiver is

with respect to dividends paid by 10/50

income under section 904(g):

granted, the intention to grant such a

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corporations in post-2002 tax years that

Any subpart F income, foreign personal

waiver and the reason for such waiver.

were reported in the following separate

holding company income, or income from

Note. Effective December 10, 2004, the

categories of income should file an

a qualified electing fund that a U.S.

President waived the application of

shareholder is required to include in its

amended return and revised Form(s)

section 901(j) with respect to Libya.

1118:

gross income, if such amount is

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If the corporation paid taxes to a

Certain dividends from 10/50

attributable to the U.S.-owned foreign

country that ceased to be a sanctioned

corporation’s U.S. source income;

corporations.

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country during the tax year, see Rev. Rul.

Certain dividends from each 10/50

Interest that is properly allocable to the

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

U.S.-owned foreign corporation’s U.S.

PFIC.

how to figure the foreign tax credit for the

source income; and

Dividends From a DISC or

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period that begins after the end of the

Dividends equal to the U.S. source

Former DISC

sanctioned period.

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

This category includes dividends from a

The rules regarding interest and

Note. Iraq ceased to be a sanctioned

DISC or former DISC (as defined in

dividends described above do not apply

country on June 27, 2004.

section 992(a)) that are treated as income

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

from sources outside the United States.

Income Re-sourced by Treaty

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

from U.S. sources.

Taxable Income Attributable to

If a sourcing rule in an applicable income

tax treaty treats any of the income

Foreign Trade Income

Look-Through Rules

described below as foreign source, and

No credit is allowed for foreign taxes paid

CFCs. Generally, dividends, interest,

the corporation elects to apply the treaty,

or accrued by a FSC on its taxable

rents, and royalties received or accrued

the income will be treated as foreign

income attributable to foreign trade

by the taxpayer are passive income.

source.

income within the meaning of section

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However, if these items are received or

Dividends eligible for the dividends

923(b), as in effect before its repeal.

accrued by a 10% U.S. shareholder from

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

However, this type of income is subject to

a CFC, they may be assigned to other

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Certain gains (section 865(h)).

a separate foreign tax credit limitation.

separate categories under the

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See section 906(b)(5) and Temporary

Certain income from a U.S.-owned

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

Regulations section 1.921-3T(d)(3).

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

This includes:

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

Interest, rents, and royalties based on

Certain Distributions From a

an example.

the amount allocable to E&P of the CFC

FSC or Former FSC

in a separate category and

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This category includes:

Important: The corporation must

Dividends paid out of the E&P of a CFC

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Distributions from a FSC (or former

compute a separate foreign tax credit

in proportion to the ratio of the CFC’s

FSC) out of E&P attributable to foreign

limitation for any such income for which it

E&P in a separate category to its total

trade income and

claims benefits under a treaty, using a

E&P. Dividends include any amount

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Interest or carrying charges from a

separate Form 1118 for each amount of

included in gross income under section

transaction that results in foreign trade

re-sourced income from a treaty country.

951(a)(1)(B).

income.

On each Form 1118, check the box for

Look-through rules also apply to

income re-sourced by treaty at the top of

Section 901(j) Income

subpart F inclusions under section

page 1 and identify the applicable country

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

No credit is allowed for foreign taxes

in the space provided.

E&P of the CFC in a separate category.

imposed by and paid or accrued to certain

General Limitation Income

sanctioned countries. However, income

For more information and examples

derived from each such country is subject

see section 904(d)(3), Regulations

This category includes all income not

to a separate foreign tax credit limitation.

section 1.904-4(g)(3), and Regulations

described above. This includes

Therefore, the corporation must use a

section 1.904-5.

high-taxed income that would otherwise

separate Form 1118 for income derived

be passive income. Usually, income is

10/50 corporations. Generally,

from each such country. On each Form

high-taxed if the total foreign income

dividends received or accrued by the

1118, check the box for section 901(j)

taxes paid, accrued, or deemed paid by

taxpayer are passive income. However,

income at the top of page 1 and identify

the corporation for that income exceed

dividends received or accrued from a

the applicable country in the space

the highest rate of tax specified in section

10/50 corporation may be assigned to

provided.

11 (and with reference to section 15, if

other separate categories under the

applicable), multiplied by the amount of

Sanctioned countries are those

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

such income (including the amount

designated by the Secretary of State as

10/50 corporation is any foreign

treated as a dividend under section 78).

countries that repeatedly provide support

corporation in which the taxpayer

For more information, see Regulations

for acts of international terrorism,

(domestic corporation) meets the stock

countries with which the United States

section 1.904-4(c).

ownership requirements of section 902.

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Instructions For Form 1118 - 2004 Page 2

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