Instructions For Form 1118 - 2016 (Page 3 of 12) in pdf

Other Rules

section 904(b)(3)(D)) for any tax year. At

Definition of foreign corporation for

the time these instructions went to print,

purposes of the deemed paid credit. In

Certain transfers of intangible proper-

there was no capital gain rate differential

computing the deemed paid credit on

ty. See section 367(d)(2)(C) for a rule that

for corporations.

Schedules C, D, and E, the term “foreign

clarifies the treatment of certain transfers

corporation” includes:

Credit Limitations

of intangible property.

A DISC or former DISC, but only for

dividends from the DISC or former DISC

Reporting Foreign Tax

Taxes Eligible for a Credit

that are treated as income from sources

Information From Partnerships

outside the United States and

Domestic corporations. Generally, a

If you received a Schedule K-1 from a

A contiguous country life insurance

domestic corporation may claim a foreign

partnership that includes foreign tax

branch that has made an election to be

tax credit (subject to the limitation of

information, use the rules below to report

treated as a foreign corporation under

section 904) for the following taxes:

that information on Form 1118.

section 814(g).

Income, war profits, and excess profits

Credit or Deduction

Gross income sourced at partner level.

taxes (defined in Regulations section

This includes income from the sale of

1.901-2(a)) paid or accrued during the tax

A corporation may choose to take either a

most personal property other than

year to any foreign country or U.S.

credit or a deduction for eligible foreign

inventory, depreciable property, and

possession;

taxes paid or accrued. The choice is made

certain intangible property sourced under

Taxes deemed paid under sections 902

annually. Generally, if a corporation elects

section 865. This gross income will

and 960; and

the benefits of the foreign tax credit for any

generally be U.S.-source and therefore

Taxes paid in lieu of income taxes as

tax year, no portion of the foreign taxes

will not be reported on Form 1118.

described in section 903 and Regulations

will be allowed as a deduction in that year

section 1.903-1.

The remaining lines of the foreign tax

or any subsequent tax year.

section of the Schedule K-1 are reported

Some foreign taxes that are otherwise

Exceptions. However, a corporation that

on Form 1118 as follows:

eligible for the foreign tax credit must be

elects the credit for eligible foreign taxes

reduced. These reductions are reported

Foreign gross income sourced at part-

may be allowed a deduction for certain

on Schedule G.

nership level. Report on Schedule A.

taxes for which a credit was not allowed.

These include:

Note. A corporation may not claim a

Deductions allocated and apportioned

Taxes for which the credit was denied

foreign tax credit for foreign taxes paid to a

at partner level and partnership level.

because of the boycott provisions of

foreign country that the corporation does

Report on Schedule A or Schedule H.

section 908.

not legally owe, including amounts eligible

Total foreign taxes paid or accrued.

Certain taxes on the purchase or sale of

for refund by the foreign country. If the

Report on Schedule B.

oil or gas (section 901(f)).

corporation does not exercise its available

Certain taxes used to provide subsidies

remedies to reduce the amount of foreign

Reduction in taxes available for credit.

(section 901(i)).

tax to what it legally owes, a credit is not

Report on Schedule G.

Taxes paid to certain foreign countries

allowed for the excess amount.

Capital Gains

for which a credit was denied under

Foreign corporations. Foreign

section 901(j).

Foreign source taxable income or (loss)

corporations are allowed (under section

Certain taxes paid on dividends if the

before adjustments in all separate

906) a foreign tax credit for income, war

minimum holding period is not met with

categories in the aggregate should include

profits, and excess profits taxes paid or

respect to the underlying stock, or if the

gain from the sale or exchange of capital

accrued (or deemed paid under section

corporation is obligated to make related

assets only up to the amount of foreign

902) to any foreign country or U.S.

payments with respect to positions in

source capital gain net income (which is

possession for income effectively

similar or related property (section 901(k)).

the smaller of capital gain net income from

connected with the conduct of a trade or

Certain taxes paid on gain and income

sources outside the United States or

business within the United States. The

other than dividends if the minimum

capital gain net income). Therefore, if the

credit is not applicable, however, if a

holding period is not met with respect to

corporation has capital gain net income

foreign country or U.S. possession

the underlying property, or if the

from sources outside the United States in

imposes the tax on income from U.S.

corporation is obligated to make related

excess of the capital gain net income

sources solely because the foreign

payments with respect to positions in

reported on its tax return, enter a pro rata

corporation was created or organized

similar or related property (see section

portion of the net U.S. source capital loss

under the law of the foreign country or

901(l)).

as a negative number on Schedule A,

U.S. possession or is domiciled there for

In the case of a covered asset

column 9(d) for each separate category

tax purposes.

acquisition (as defined in section 901(m)

with capital gain net income from sources

(2)), the disqualified portion of any tax

The credit may not be taken against

outside the United States. To figure the

determined with respect to the income or

any tax imposed on income not effectively

pro rata portion of the net U.S. source

connected with a U.S. business.

gain attributable to the relevant foreign

capital loss attributable to a separate

assets (section 901(m)). Note. This rule

category, multiply the net U.S. source

In computing the foreign tax credit

generally applies to covered asset

capital loss by the amount of capital gain

limitation, the foreign corporation's taxable

acquisitions after December 31, 2010.

net income from sources outside the

income includes only the taxable income

See temporary and proposed Regulations

United States in the separate category

that is effectively connected with the

sections 1.901(m)-1 through 1.901(m)-8

divided by the aggregate amount of capital

conduct of a trade or business within the

for additional information. Note that the

gain net income from sources outside the

United States.

rules contained in these regulations have

United States in all separate categories

A foreign corporation claiming a foreign

later effective dates.

with capital gain net income from sources

tax credit will be treated as a domestic

outside the United States.

No Credit or Deduction

corporation in computing tax deemed paid

(section 902(a)) and dividend gross-up

See section 904(b)(2)(B) for special

No foreign tax credit (or deduction) is

(section 78).

rules regarding adjustments to account for

allowed for certain taxes including:

capital gain rate differentials (as defined in

Instructions for Form 1118 (2017)

-3-

Instructions For Form 1118 - 2016 Page 3

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