Instructions For Form 1118 - 2016 (Page 2 of 12) in pdf

income (as defined in section 932(b),

page 1 and identify the applicable country

attributable to the U.S.-owned foreign

before its repeal).

in the space provided. See sections

corporation's U.S. source income;

865(h), 904(d)(6), and 904(h)(10) and the

Interest that is properly allocable to the

Section 901(j) Income

regulations under those sections

U.S.-owned foreign corporation's U.S.

No credit is allowed for foreign taxes

(including Regulations section 1.904-5(m)

source income; and

imposed by and paid or accrued to certain

(7)) for any grouping rules and exceptions.

Dividends equal to the U.S. source ratio

sanctioned countries. However, income

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

General Category Income

derived from each such country is subject

The rules regarding interest and

to a separate foreign tax credit limitation.

This category includes all income not

dividends described above do not apply to

Therefore, the corporation must use a

described above. This includes high-taxed

a U.S.-owned foreign corporation if less

separate Form 1118 for income derived

income that would otherwise be passive

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

from each such country. On each Form

category income. Usually, income is

U.S. sources.

1118, check the box for section 901(j)

high-taxed if the total foreign income taxes

Amounts That Do Not

income at the top of page 1 and identify

paid, accrued, or deemed paid by the

the applicable country in the space

corporation for that income exceed the

Constitute Income Under

provided.

highest rate of tax specified in section 11

U.S. Tax Principles

(and with reference to section 15, if

Sanctioned countries are those

For tax years beginning after December

applicable), multiplied by the amount of

designated by the Secretary of State as

31, 2006, creditable foreign taxes that are

such income (including the amount treated

countries that repeatedly provide support

imposed on amounts that do not constitute

as a dividend under section 78). For more

for acts of international terrorism,

income under U.S. tax principles are

information, see Regulations section

countries with which the United States

treated as imposed on general category

1.904-4(c). Also see the instructions for

does not have diplomatic relations, or

income. See section 904(d)(2)(H).

Schedule A, later, for additional reporting

countries whose governments are not

requirements.

Look-Through Rules

recognized by the United States. As of the

date these instructions were revised,

This category also includes financial

CFCs. Generally, dividends, interest,

section 901(j) applied to income derived

services income (defined below) if the

rents, and royalties received or accrued by

from Iran, North Korea, Sudan, and Syria.

corporation is a member of a financial

the taxpayer are passive category income.

For more information, see section 901(j).

services group (as defined in section

However, if these items are received or

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

accrued by a 10% U.S. shareholder from a

Note. Effective December 22, 2015,

engaged in the active conduct of a

CFC, they may be assigned to other

Cuba is no longer a sanctioned country.

banking, insurance, financing, or similar

separate categories under the

business.

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

Note. The President of the United States

This includes:

has the authority to waive the application

Financial services income. Financial

Interest, rents, and royalties based on

of section 901(j) with respect to a foreign

services income is income received or

the amount allocable to E&P of the CFC in

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

accrued by a member of a financial

a separate category and

the United States and will expand trade

services group or any corporation

Dividends paid out of the E&P of a CFC

and investment opportunities for U.S.

predominantly engaged in the active

in proportion to the ratio of the CFC's E&P

companies in such foreign country and (b)

conduct of a banking, insurance,

in a separate category to its total E&P.

the President reports to the Congress, not

financing, or similar business, if the

Dividends include any amount included in

less than 30 days before the waiver is

income is:

gross income under section 951(a)(1)(B).

granted, the intention to grant such a

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

waiver and the reason for such waiver.

Look-through rules also apply to

Passive income (determined without

subpart F inclusions under section 951(a)

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

Note. Effective December 10, 2004, the

Incidental income described in

(1)(A) to the extent attributable to E&P of

President waived the application of

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

the CFC in a separate category.

section 901(j) with respect to Libya.

For more information and examples,

Special Rules

If the corporation paid taxes to a

see section 904(d)(3) and Regulations

country that ceased to be a sanctioned

section 1.904-5.

Source Rules for Income

country during the tax year, see Rev. Rul.

10/50 corporations. Generally,

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

Determine income or (loss) for each

dividends received or accrued by the

to figure the foreign tax credit for the

separate category on Schedule A using

taxpayer are passive category income.

period that begins after the end of the

the general source rules of sections 861

However, dividends received or accrued

sanctioned period.

through 865 and related regulations; the

from a 10/50 corporation may be assigned

special source rules of section 904(h)

Income Re-sourced by Treaty

to other separate categories under the

described below; and any applicable

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

If a sourcing rule in an applicable income

source rules contained in any applicable

10/50 corporation is any foreign

tax treaty treats any U.S. source income

tax treaties.

corporation in which the taxpayer

as foreign source, and the corporation

Special source rules of section 904(h).

(domestic corporation) meets the stock

elects to apply the treaty, the income will

Usually, the following income from a

ownership requirements of section 902.

be treated as foreign source.

U.S.-owned foreign corporation, otherwise

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

treated as foreign source income, must be

Important. The corporation must

Certain amounts paid by a U.S. corpo-

treated as U.S. source income under

compute a separate foreign tax credit

ration to a related corporation.

section 904(h):

limitation for any such income for which it

Look-through rules also apply to foreign

Any subpart F income, foreign personal

claims benefits under a treaty, using a

source interest, rents, and royalties paid

holding company income, or income from

separate Form 1118 for each amount of

by a U.S. corporation to a related

a qualified electing fund that a U.S.

re-sourced income from a treaty country.

corporation. See Regulations section

shareholder is required to include in its

On each Form 1118, check the box for

1.904-5(g).

gross income, if such amount is

income re-sourced by treaty at the top of

Instructions for Form 1118 (2017)

-2-

Instructions For Form 1118 - 2016 Page 2

Related Articles

Related forms

Related Categories