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Instructions for Form FTB 2416

Retained Earnings of Controlled Foreign Corporations

General Information

California S Corporation Franchise or

Income Tax Booklet. The new PBA codes

A Purpose

are 6 digits not 4 digits.

Column (e) – Subpart F income

R&TC Section 25110(a)(6) provides that

the income and apportionment factors of

In determining whether a bank or corpora-

any controlled foreign corporation (CFC)

tion has Subpart F income, defined By IRC

(as defined in IRC Section 957) that has

Section 952, for purposes of R&TC

Subpart F income (defined in IRC Sec-

Section 25110(a)(6) and the Regulations

tion 952) are to be included in the com-

thereunder, the limitation and exclusions

bined report of a taxpayer making a

provided for in IRC Section 954(b) shall

water’s-edge election.

apply. However, IRC Section 952(c) shall

not apply.

Use form FTB 2416 to compute the net

income and apportionment factors required

For these purposes, Subpart F income

to be included in the water’s-edge com-

does not include income defined in IRC

bined report.

Sections 955, 956 or 956A.

Include both business and nonbusiness

B Controlled Foreign Corporation

income as defined under R&TC Sec-

In general, a foreign corporation is a corpo-

tion 25120 for the current year.

ration that is not created or organized in

If there is no Subpart F income for Califor-

the U.S. or under the laws of the U.S. or

nia purposes, STOP. None of the income

any state.

or factors of this corporation will be

A CFC is any foreign corporation that is

included in the water’s-edge combined

more than 50% owned or considered to be

report.

owned (per IRC Section 958(b)) by U.S.

Column (f) – Current year earnings and

shareholders.

profits (E&P)

E&P, as defined in IRC Section 964,

C Apportionment

includes both business and nonbusiness

For each CFC, the amounts included in

income for the current year. In most cases,

income and the apportionment factors are

this figure can be taken from federal

determined by multiplying the total income

Form 5471, Information Return of U.S. Per-

and each component of the apportionment

sons with Respect to Certain Foreign Cor-

factors by a fraction. The numerator of the

porations, Schedule H, line 5d.

fraction is the current year total Subpart F

If there is no current E&P, STOP. None of

income defined in IRC Section 952 and the

the income or factors of this corporation will

denominator is the current year E&P as

be included in the water’s-edge combined

defined in IRC Section 964.

report.

See R&TC Section 25110(a)(6) and the

Column (g) – Percentage

regulations thereunder for more

The percentage may not exceed one hun-

information.

dred or be less than zero.

Column (h) –- Net income

Specific Instructions

Report the total net income as reflected on

Column (b) – Country of incorporation

the corporation’s books and records,

adjusted to conform to California tax law.

Enter the country of incorporation in col-

umn (b). Use the list of country codes on

Columns (j), (l), (n) and (p) – Apportion-

page 20.

ment factors

Column (c) – Country of primary busi-

Determine the apportionment factors for the

ness activity

CFC to be included in the water’s-edge

combined report including total average

Enter the country in which the CFC con-

property everywhere, rent expense every-

ducts its primary trade or business in col-

where, payroll everywhere and sales every-

umn (c). Use the country codes listed on

where based on the apportionment factor

page 20. This country may be different

rules set forth in R&TC Sections 25129

from the country of incorporation.

through 25137. See Schedule R, Appor-

Column (d) – Principal business activity

tionment and Allocation of Income, for

(PBA) code

more information.

Enter the principal business activity code of

the CFC. The PBA codes are listed on

page 14 through page 16 of the 1998 Form

100, California Corporation Franchise or

Income Tax Booklet and on page 21

through page 23 of the 1998 Form 100S,

Page 18 Form 100-WE Booklet 1998

Instructions For Form Ftb 2416 - Retained Earnings Of Controlled Foreign Corporations

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