Instructions For Form 1118 - Foreign Tax Credit-Corporations (Page 2 of 13) in pdf

Section 901(j) Income

page 1 and identify the applicable country

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

in the space provided.

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

No credit is allowed for foreign taxes

from U.S. sources.

imposed by and paid or accrued to certain

General Category Income

sanctioned countries. However, income

Amounts That Do Not

This category includes all income not

derived from each such country is subject

Constitute Income Under U.S.

described above. This includes

to a separate foreign tax credit limitation.

Tax Principles

high-taxed income that would otherwise

Therefore, the corporation must use a

be passive category income. Usually,

For tax years beginning after December

separate Form 1118 for income derived

income is high-taxed if the total foreign

31, 2006, creditable foreign taxes that are

from each such country. On each Form

income taxes paid, accrued, or deemed

imposed on amounts that do not

1118, check the box for section 901(j)

paid by the corporation for that income

constitute income under U.S. tax

income at the top of page 1 and identify

exceed the highest rate of tax specified in

principles are treated as imposed on

the applicable country in the space

section 11 (and with reference to section

general category income. See section

provided.

15, if applicable), multiplied by the

904(d)(2)(H).

Sanctioned countries are those

amount of such income (including the

Look-Through Rules

designated by the Secretary of State as

amount treated as a dividend under

countries that repeatedly provide support

section 78). For more information, see

CFCs. Generally, dividends, interest,

for acts of international terrorism,

Regulations section 1.904-4(c). Also see

rents, and royalties received or accrued

countries with which the United States

the instructions for Schedule A on page 5

by the taxpayer are passive category

does not have diplomatic relations, or

for additional reporting requirements.

income. However, if these items are

countries whose governments are not

received or accrued by a 10% U.S.

This category also includes financial

recognized by the United States. As of

shareholder from a CFC, they may be

services income (defined below) if the

the date these instructions were revised,

assigned to other separate categories

corporation is a member of a financial

section 901(j) applied to income derived

under the look-through rules of section

services group (as defined in section

from Cuba, Iran, North Korea, Sudan, and

904(d)(3). This includes:

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

Syria. For more information, see section

•

Interest, rents, and royalties based on

engaged in the active conduct of a

901(j).

the amount allocable to E&P of the CFC

banking, insurance, financing, or similar

Note. The President of the United States

in a separate category and

business.

has the authority to waive the application

•

Dividends paid out of the E&P of a CFC

Financial services income. Financial

of section 901(j) with respect to a foreign

in proportion to the ratio of the CFC’s

services income is income received or

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

E&P in a separate category to its total

accrued by a member of a financial

the United States and will expand trade

E&P. Dividends include any amount

services group or any corporation

and investment opportunities for U.S.

included in gross income under section

predominantly engaged in the active

companies in such foreign country and (b)

951(a)(1)(B).

conduct of a banking, insurance,

the President reports to the Congress, not

Look-through rules also apply to

financing, or similar business, if the

less than 30 days before the waiver is

subpart F inclusions under section

income is:

granted, the intention to grant such a

•

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

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

waiver and the reason for such waiver.

•

E&P of the CFC in a separate category.

Passive income (determined without

Note. Effective December 10, 2004, the

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

For more information and examples,

President waived the application of

•

Incidental income described in

see section 904(d)(3) and Regulations

section 901(j) with respect to Libya.

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

section 1.904-5.

If the corporation paid taxes to a

10/50 corporations. Generally,

Special Rules

country that ceased to be a sanctioned

dividends received or accrued by the

country during the tax year, see Rev. Rul.

taxpayer are passive category income.

Source Rules for Income

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

However, dividends received or accrued

how to figure the foreign tax credit for the

Determine income or (loss) for each

from a 10/50 corporation may be

period that begins after the end of the

separate category on Schedule A using

assigned to other separate categories

sanctioned period.

the general source rules of sections 861

under the look-through rules of section

through 865 and related regulations; the

Income Re-sourced by Treaty

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

special source rules of section 904(h)

foreign corporation in which the taxpayer

If a sourcing rule in an applicable income

described below; and any applicable

(domestic corporation) meets the stock

tax treaty treats any of the income

source rules contained in any applicable

ownership requirements of section 902.

described below as foreign source, and

tax treaties.

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

the corporation elects to apply the treaty,

Special source rules of section 904(h).

the income will be treated as foreign

Certain amounts paid by a U.S.

Usually, the following income from a

source.

corporation to a related corporation.

•

U.S.-owned foreign corporation,

Dividends eligible for the dividends

Look-through rules also apply to foreign

otherwise treated as foreign source

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

source interest, rents, and royalties paid

•

income, must be treated as U.S. source

Certain gains (section 865(h)).

by a U.S. corporation to a related

•

income under section 904(h):

Certain income from a U.S.-owned

corporation. See Regulations section

•

Any subpart F income, foreign personal

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

1.904-5(g).

holding company income, or income from

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

Other Rules

a qualified electing fund that a U.S.

an example.

•

shareholder is required to include in its

For tax years beginning after August

Certain transfers of intangible

gross income, if such amount is

10, 2010, any item of income described in

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

attributable to the U.S.-owned foreign

section 904(d)(6).

rule that clarifies the treatment of certain

corporation’s U.S. source income;

transfers of intangible property.

Important. The corporation must

•

Interest that is properly allocable to the

compute a separate foreign tax credit

Reporting Foreign Tax

U.S.-owned foreign corporation’s U.S.

limitation for any such income for which it

Information From Partnerships

source income; and

claims benefits under a treaty, using a

•

Dividends equal to the U.S. source

separate Form 1118 for each amount of

If you received a Schedule K-1 from a

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

re-sourced income from a treaty country.

partnership that includes foreign tax

On each Form 1118, check the box for

The rules regarding interest and

information, use the rules below to report

income re-sourced by treaty at the top of

dividends described above do not apply

that information on Form 1118.

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Instructions For Form 1118 - Foreign Tax Credit-Corporations Page 2

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