Instructions For Form 1120-Fsc - 2016 (Page 3 of 14) in pdf

2. Negotiation is any communication by

costs are determined separately for each

Foreign Management Rules

the FSC to a customer or potential customer

paragraph of section 924(e).

A FSC (other than a small FSC) is treated as

aimed at an agreement on one or more of the

Foreign direct costs means the portion

having foreign trading gross receipts for the

terms of a transaction, including, but not

of the total direct costs of any transaction

tax year only if the management of the FSC

limited to, price, credit terms, quantity, or

attributable to activities performed outside

during the year takes place outside the

time or manner of delivery.

the United States. For purposes of the 50%

United States. These management activities

3. Making a contract refers to

test, foreign direct costs are based on the

include:

performance by the FSC of any of the

direct costs of all activities described in all

Meetings of the board of directors and

elements necessary to complete a sale, such

paragraphs of section 924(e). For purposes

meetings of the shareholders.

as making or accepting an offer.

of the 85% test, however, foreign direct costs

Disbursing cash, dividends, legal and

are determined separately for each

accounting fees, salaries of officers, and

Grouping transactions. Generally, the

paragraph of section 924(e).

salaries or fees of directors from the principal

sales activities described above are to be

bank account (see below).

For more details, see Regulations section

applied on a transaction-by-transaction

1.924(d)-1(d).

Maintaining the principal bank account at

basis. However, a FSC may make an annual

all times during the tax year.

election to apply any of the sales activities on

Check the applicable box(es) on line 10b,

the basis of a group. To make the election,

Additional Information, on page 2 of the form,

Meetings of directors and meetings of

check the applicable box on line 10a,

to indicate how the FSC met the foreign

the shareholders. All meetings of the

Additional Information, on page 2 of Form

direct costs requirement.

board of directors of the FSC and all

1120-FSC. See Regulations section

meetings of the shareholders of the FSC that

Grouping transactions. Generally, the

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

take place during the tax year must take

foreign direct cost tests under Regulations

place outside the United States.

Satisfaction of either the 50% or 85% for-

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

In addition, all such meetings must

eign direct cost test. To qualify as foreign

transaction-by-transaction basis. However,

comply with the local laws of the foreign

trading gross receipts, the foreign direct

the FSC may make an annual election (on

costs incurred by the FSC attributable to the

country or U.S. possession in which the FSC

line 10d, Additional Information, on page 2 of

was created or organized. The local laws

transaction must equal or exceed 50% of the

the form) to apply the foreign direct cost tests

total direct costs incurred by the FSC

determine whether a meeting must be held,

on a customer, contract, or product or

attributable to the transaction.

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

product line grouping basis. Any grouping

at all), who must be present, quorum

used must be supported by adequate

Instead of satisfying the 50% foreign

requirements, use of proxies, etc.

documentation of performance of activities

direct cost test, the FSC may incur foreign

and costs of activities relating to the grouping

direct costs attributable to activities

Principal bank accounts. See Regulations

used. See Regulations section 1.924(d)-1(e)

described in each of two of the section

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

for details.

924(e) categories. The costs must equal or

regarding principal bank accounts.

exceed 85% of the total direct costs incurred

Exception for foreign military property.

by the FSC attributable to the activity

The economic process rules do not apply to

Foreign Economic Process Rules

described in each of the two categories. If no

any activities performed in connection with

direct costs are incurred by the FSC in a

A FSC (other than a small FSC) has foreign

foreign military sales except those activities

particular category, that category is not taken

trading gross receipts from any transaction

described in section 924(e). See Regulations

into account for purposes of determining

only if certain economic processes for the

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

whether the FSC has met either the 50% or

transaction take place outside the United

Section 925(c) Rule

85% foreign direct cost test.

States. Section 924(d) and Regulations

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

To use the administrative pricing rules to

Direct costs are costs that:

determining whether a sufficient amount of

Are incident to and necessary for the

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

the economic processes of a transaction

performance of any activity described in

on a transaction or group of transactions, the

takes place outside the United States.

section 924(e);

FSC must perform (or contract with another

Include the cost of materials consumed in

person to perform) all of the economic

Generally, a transaction will qualify if the

process activities relating to the transaction

the performance of the activity and the cost

FSC satisfies two requirements:

of labor that can be identified or associated

or group of transactions. All of the direct and

Participation outside the United States in

directly with the performance of the activity

indirect expenses relating to the

the sales portion of the transaction and

performance of those activities must be

(but only to the extent of wages, salaries,

Satisfaction of either the 50% or the 85%

fees for professional services, and other

reflected on the books of the FSC and on

foreign direct cost test.

amounts paid for services actually rendered,

Form 1120-FSC.

such as bonuses or compensation paid for

Under Temporary Regulations section

The activities comprising these economic

services on the basis of a percentage of

1.925(a)-1T(b)(2)(ii), an election may be

processes may be performed by the FSC or

profits); and

made to include on the FSC's books all

by any other person acting under contract

Include the allowable depreciation

expenses, other than cost of goods sold, that

with the FSC.

deduction for equipment or facilities (or the

are necessary to figure combined taxable

rental cost for its use) that can be specifically

Participation outside the United States in

income for the transaction or group of

identified or associated with the activity, as

the sales portion of the transaction.

transactions. The expenses must be

well as the contract price of an activity

Generally, the requirement of section 924(d)

identified on Schedule G on the applicable

performed on behalf of the FSC by a

(1)(A) is met for the gross receipts of a FSC

line.

contractor.

derived from any transaction if the FSC has

Total direct costs means all of the direct

participated outside the United States in the

Who Must File

following sales activities relating to the

costs of any transaction attributable to

File Form 1120-FSC if the corporation

activities described in any paragraph of

transaction: (1) solicitation (other than

elected to be treated as a FSC or small FSC,

advertising), (2) negotiation, and (3) making

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

and the election is still in effect.

a contract.

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

based on the direct costs of all activities

1. Solicitation (other than advertising) is

Note. A FSC that elects to be treated as a

described in all paragraphs of section

any communication (including, but not

domestic corporation under section 943(e)

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

limited to, telephone, telegraph, mail, or in

(1) does not file Form 1120-FSC. Instead, it

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

person) by the FSC, to a specific, targeted

files Form 1120.

customer or potential customer.

Instructions for Form 1120-FSC (Rev. 12-2016)

-3-

Instructions For Form 1120-Fsc - 2016 Page 3

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