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for Schedule P (Form 1120-FSC)) and

Foreign Economic Process Rules

Are incident to and necessary for the

income determined without regard to the

performance of any activity described in

A FSC (other than a small FSC) has foreign

administrative pricing rules. These

section 924(e);

trading gross receipts from any transaction

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percentages are computed on Schedule E,

Include the cost of materials consumed in

only if certain economic processes for the

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

the performance of the activity and the cost

transaction take place outside the United

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

of labor that can be identified or associated

States. Section 924(d) and Regulations

Form 1120-FSC, to figure taxable income or

directly with the performance of the activity

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

(loss).

(but only to the extent of wages, salaries,

determining whether a sufficient amount of

fees for professional services, and other

the economic processes of a transaction

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

amounts paid for personal services actually

takes place outside the United States.

for foreign trade income allocable to a

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.

FSC satisfies two requirements:

percentage of profits); and

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Participation outside the United States in

Include the allowable depreciation

Tax treaty benefits. A FSC may not claim

the sales portion of the transaction and

deduction for equipment or facilities (or the

any benefits under any income tax treaty

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Satisfaction of either the 50% or the 85%

rental cost for its use) that can be

between the United States and any foreign

foreign direct cost test.

specifically identified or associated with the

country.

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.

by any other person acting under contract

A FSC is treated as having foreign trading

with the FSC.

Total direct costs means all of the direct

gross receipts (defined in section 924) only

Participation outside the United States in

costs of any transaction attributable to

if it has met certain foreign management

the sales portion of the transaction.

activities described in any paragraph of

and foreign economic process requirements.

Generally, the requirement of section

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

Foreign trading gross receipts do not

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

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

include:

a FSC derived from any transaction if the

based on the direct costs of all activities

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Certain excluded receipts (defined in

FSC has participated outside the United

described in all paragraphs of section

section 924(f)).

States in the following sales activities

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

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Receipts attributable to property excluded

relating to the transaction: (1) solicitation

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

from export property under section

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

costs are determined separately for each

927(a)(2).

(3) making a contract.

paragraph of section 924(e).

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Investment income (defined in section

1. Solicitation (other than advertising) is

Foreign direct costs means the portion

927(c)).

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any communication (including, but not

of the total direct costs of any transaction

Carrying charges (defined in section

limited to, telephone, telegraph, mail, or in

attributable to activities performed outside

927(d)(1)).

person) by the FSC, to a specific, targeted

the United States. For purposes of the 50%

Note. Computer software licensed for

customer or potential customer.

test, foreign direct costs are based on the

reproduction abroad is not excluded from

2. Negotiation is any communication by

direct costs of all activities described in all

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

the FSC to a customer or potential customer

paragraphs of section 924(e). For purposes

Therefore, receipts attributable to the sale,

aimed at an agreement on one or more of

of the 85% test, however, foreign direct

lease, or rental of computer software and

the terms of a transaction, including, but not

costs are determined separately for each

services related and subsidiary to such

limited to, price, credit terms, quantity, or

paragraph of section 924(e).

transactions qualify as foreign trading gross

time or manner of delivery.

For more details, see Regulations

receipts.

3. Making a contract refers to

section 1.924(d)-1(d).

performance by the FSC of any of the

elements necessary to complete a sale,

Check the applicable box(es) on line 11b,

Foreign Management Rules

such as making or accepting an offer.

Additional Information, on page 2 of the

form, to indicate how the FSC met the

A FSC (other than a small FSC) is treated

Grouping transactions. Generally, the

foreign direct costs requirement.

as having foreign trading gross receipts for

sales activities described above are to be

the tax year only if the management of the

Grouping transactions. Generally, the

applied on a transaction-by-transaction

FSC during the year takes place outside the

foreign direct cost tests under Regulations

basis. However, a FSC may make an

United States. These management activities

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

annual election to apply any of the sales

include:

transaction-by-transaction basis. However,

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activities on the basis of a group. To make

Meetings of the board of directors and

the FSC may make an annual election (on

the election, check the applicable box on

meetings of the shareholders.

line 11d, Additional Information, on page 2

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line 11a, Additional Information, on page 2

Disbursing cash, dividends, legal and

of the form) to apply the foreign direct cost

of Form 1120-FSC. See Regulations section

accounting fees, salaries of officers, and

tests on a customer, contract, or product or

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

salaries or fees of directors from the

product line grouping basis. Any grouping

Satisfaction of either the 50% or 85%

principal bank account (see below).

used must be supported by adequate

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foreign direct cost test. To qualify as

Maintaining the principal bank account at

documentation of performance of activities

foreign trading gross receipts, the foreign

all times during the tax year.

and costs of activities relating to the

direct costs incurred by the FSC attributable

grouping used. See Regulations section

Meetings of directors and meetings of

to the transaction must equal or exceed

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

the shareholders. All meetings of the

50% of the total direct costs incurred by the

Exception for foreign military property.

board of directors of the FSC and all

FSC attributable to the transaction.

The economic process rules do not apply to

meetings of the shareholders of the FSC

Instead of satisfying the 50% foreign

any activities performed in connection with

that take place during the tax year must take

direct cost test, the FSC may incur foreign

place outside the United States.

foreign military sales except those activities

direct costs attributable to activities

described in section 924(e). See

In addition, all such meetings must

described in each of two of the section

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

comply with the local laws of the foreign

924(e) categories. The costs must equal or

country or U.S. possession in which the

Section 925(c) Rule

exceed 85% of the total direct costs incurred

FSC was created or organized. The local

by the FSC attributable to the activity

To use the administrative pricing rules to

laws determine whether a meeting must be

described in each of the two categories. If

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

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

no direct costs are incurred by the FSC in a

on a transaction or group of transactions,

held at all), who must be present, quorum

particular category, that category is not

the FSC must perform (or contract with

requirements, use of proxies, etc.

taken into account for purposes of

another person to perform) all of the

determining whether the FSC has met either

Principal bank accounts. See Regulations

economic process activities relating to the

the 50% or 85% foreign direct cost test.

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

transaction or group of transactions. All of

regarding principal bank accounts.

Direct costs are costs that:

the direct and indirect expenses relating to

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Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2004 Page 3

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