[Federal Register Volume 75, Number 180 (Friday, September 17, 2010)]
[Rules and Regulations]
[Pages 56858-56866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23185]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9502]
RIN 1545-BF90


Exclusions From Gross Income of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 883(a) 
and (c) of the Internal Revenue Code (Code), concerning the exclusion 
from gross income of income derived by certain foreign corporations 
from the international operation of ships or aircraft. The final 
regulations adopt the proposed regulations issued on June 25, 2007, 
(REG-138707-06) with certain modifications in response to comments

[[Page 56859]]

received, and remove the temporary regulations published on the same 
date (TD 9332).

DATES: Effective Date: These regulations are effective September 17, 
2010.
    Applicability Date: For dates of applicability, see Sec.  1.883-
5(d).

FOR FURTHER INFORMATION CONTACT: Patricia A. Bray, at (202) 622-3880 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(d)), 
under control number 1545-1677.
    The collections of information in these final regulations are in 
Sec. Sec.  1.883-2(f), 1.883-3(c) and (d), and 1.883-4(e). This 
information is required to enable a foreign corporation to determine if 
it is eligible to exclude its income from the international operation 
of ships or aircraft from gross income on its U.S. Federal income tax 
return. This information will also enable the IRS to monitor compliance 
with the regulations with respect to the stock ownership requirements 
of Sec.  1.883-1(c)(2), and to make a preliminary determination of 
whether the foreign corporation is eligible to claim such an exemption 
and is accurately reporting income.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    Books and records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On June 25, 2007, temporary regulations (TD 9332) (2007 temporary 
regulations) under section 883(a) and (c) were published in the Federal 
Register (72 FR 34600) revising final regulations issued on August 26, 
2003 in TD 9087 (68 FR 51394) (2003 final regulations) as amended by TD 
9218 (70 FR 45529). A notice of proposed rulemaking (REG-138707-06) 
cross-referencing the temporary regulations was published in the 
Federal Register on the same date (72 FR 34650) (proposed regulations).
    The 2007 temporary regulations revised the 2003 final regulations 
in several respects. First, the 2007 temporary regulations provide 
guidance concerning the eligibility of certain controlled foreign 
corporations to exclude from gross income certain income from the 
international operation of ships or aircraft (section 883 income) under 
section 883 (section 883 exclusion). Second, the 2007 temporary 
regulations revised the provisions of the 2003 final regulations 
concerning the eligibility for the section 883 exclusion of certain 
foreign corporations organized in countries that provide an exemption 
from taxation for income from the international operation of ships or 
aircraft through an income tax convention. Third, the 2007 temporary 
regulations identified certain ground services as incidental to the 
international operation of ships or aircraft for purposes of the 
section 883 exclusion. Finally, the 2007 temporary regulations revised 
the provisions of the 2003 final regulations concerning the reporting 
requirements related to the qualified shareholder stock ownership test. 
No public hearing on the proposed regulations was requested or held, 
however comments were received on certain provisions of the proposed 
regulations. After consideration of all the comments, the proposed 
regulations under section 883 are adopted as revised by this Treasury 
decision, and the corresponding temporary regulations are removed.

Summary of Comments and Explanation of Final Regulations

    The comments received with respect to the 2007 temporary 
regulations focused on three areas: (1) The scope of activities 
considered incidental to the international operation of a ship or 
aircraft (incidental activities); (2) the treatment of bearer shares 
for purposes of the stock ownership tests; and (3) the reporting 
requirements of foreign corporations claiming the section 883 
exclusion.

A. Incidental Activities

1. Treatment of ``Other Services''
    The 2003 final regulations provide that certain activities of a 
foreign corporation engaged in the international operation of ships or 
aircraft are so closely related to such operation that those activities 
are incidental to such operation, and therefore the income derived by 
the foreign corporation from such incidental activities is deemed to be 
derived from the international operation of ships or aircraft. The 2003 
final regulations include a non-exclusive list of incidental activities 
eligible for the section 883 exclusion. See Sec.  1.883-1(g)(1). The 
2003 final regulations, however, reserved on whether certain ground, 
maintenance or catering services (collectively, ground services) 
constitute incidental activities, and on whether other services might 
also constitute incidental activities. See Sec.  1.883-1(g)(3). After 
considering comments received, the 2007 temporary regulations removed 
the reservation with respect to ground services and identified three 
additional categories of incidental activities. See Sec.  1.883-
1T(g)(ix) through (xi). The 2007 temporary regulations continue to 
reserve on whether ``other services'' may constitute incidental 
activities for this purpose.
    Two commentators have recommended that final regulations adopt a 
standard for determining whether ``other services'' are incidental 
activities based on the principles articulated in paragraph 4.2 of the 
Commentary to paragraph 1 of Article 8 of the Organization for Economic 
Co-operation and Development Model Tax Convention on Income and Capital 
(OECD Model Convention). Article 8 of the OECD Model Convention covers 
profits directly connected with the operation of an enterprise's ships 
or aircraft in international traffic and profits from activities 
``ancillary'' to such operation. Paragraph 4.2 of the commentary to 
Article 8 of the OECD Model Convention defines ancillary activities as 
those activities that an enterprise ``does not need to carry on for the 
purposes of its own operation of ships or aircraft in international 
traffic, but which make a minor contribution relative to such operation 
and are so closely related to such operation that they should not be 
regarded as a separate business or source of income of the 
enterprise.''
    The Treasury Department and the IRS considered but declined to 
adopt in the 2007 temporary regulations the standard articulated in 
paragraph 4.2 of the commentary to Article 8 of the OECD Model 
Convention out of concern that the standard could be interpreted in an 
inappropriately expansive manner. The Treasury Department and the IRS 
remain concerned and therefore the final regulations included in this 
document do not modify the scope of incidental activities. As noted, 
however, the list of incidental activities included in the regulations 
is non-exclusive, and therefore other activities not specifically 
identified may be incidental to the international operation of ships or 
aircraft, depending on the relevant facts and circumstances.

[[Page 56860]]

2. Relevance of Definitions Included in the Regulations to Treaty 
Interpretation
    Several commentators have suggested that the scope of incidental 
activities under the regulations should be consistent with the scope of 
``ancillary'' services for tax treaty purposes because the regulations 
could be used to determine the meaning of the treaty provisions. The 
Treasury Department and the IRS believe this concern is sufficiently 
addressed by Sec.  1.883-1(h)(3)(iv), which provides that any 
definitions provided in Sec. Sec.  1.883-1 through 1.883-5 shall not 
give meaning to similar terms used in any income tax convention, or 
provide guidance regarding the scope of any exemption provided by such 
convention, unless the income tax convention entered into force after 
August 26, 2003, and it, or its legislative history, explicitly refers 
to section 883 and guidance promulgated under that section for its 
meaning.
3. Provision of Equipment Used in Connection With Lighter Vessels
    Another commentator questioned whether the use of equipment to 
transfer crude oil from a host vessel to a lighter vessel beyond the 
territorial waters of the United States would constitute an incidental 
activity for purposes of the section 883 exclusion. As described above, 
the list of incidental activities in the regulations is not exclusive, 
and therefore activities not specifically identified may be incidental 
to the international operation of ships or aircraft, depending on the 
relevant facts and circumstances. Thus, for example, the use of 
equipment to transfer crude oil from a large oil tanker to a lighter 
vessel beyond the territorial waters of the United States would 
generally be considered incidental to the international operation of 
the lighter vessel for purposes of the section 883 exclusion.

B. Reliance on Bearer Shares To Satisfy Ownership Tests

    To qualify for the section 883 exclusion a foreign corporation must 
satisfy one of three stock ownership tests. Under existing regulations, 
the foreign corporation cannot rely on bearer shares issued at any 
level in the ownership chain to satisfy any of the three stock 
ownership tests. See, for example, Sec.  1.883-4(b)(1)(ii). Several 
commentators have suggested that a foreign corporation should be 
permitted to consider bearer shares in determining whether an ownership 
test is satisfied to the extent the foreign corporation can 
substantiate the ownership of the bearer shares by qualified 
shareholders.
    It has generally been difficult to reliably prove ownership of 
bearer shares, particularly in prior periods. However, the Treasury 
Department and the IRS understand that it has become increasingly 
common for corporations (both publicly traded and privately held) to 
use a dematerialized or immobilized book-entry system for maintaining 
their registered and bearer shares. The Treasury Department and the IRS 
understand that under a dematerialized book-entry system shares are 
represented only by book entries, and no physical certificates are 
issued or transferred, and that in an immobilized book-entry system the 
shareholder does not receive a physical certificate upon the purchase 
of shares but instead evidence of ownership is maintained on the books 
and records of a broker/financial institution or corporate issuer. 
Because these systems provide the ability to reliably identify the 
beneficial owner of bearer shares, the Treasury Department and the IRS 
have determined that a foreign corporation that uses a dematerialized 
or immobilized book-entry system to maintain its bearer shares should 
be permitted to take into account the ownership of bearer shares by 
qualified shareholders for determining whether a stock ownership test 
is satisfied. Accordingly, the final regulations permit a foreign 
corporation to take into account ownership of bearer shares for 
purposes of satisfying a stock ownership test, when the bearer shares 
are maintained in a dematerialized or immobilized book-entry system. 
All other bearer shares issued by the foreign corporation or any 
intermediary corporation in the chain of ownership may not be relied on 
for purposes of satisfying a stock ownership test.
    Current Sec.  1.883-4(d)(2)(ii) provides that a qualified 
shareholder ownership statement remains valid until the earlier of the 
last day of the third calendar year following the year in which the 
ownership statement is signed, or the day that a change in 
circumstances occurs that makes any information on the ownership 
statement incorrect. For this purpose, a change in circumstances that 
makes information on an ownership statement incorrect includes bearer 
shares ceasing to be maintained in a dematerialized or immobilized 
book-entry system.

C. Other Comments Received

    One commentator requested that the Treasury Department and the IRS 
clarify the filing requirements under section 6038A for a foreign 
corporation that has a permanent establishment in the United States but 
that claims a U.S. tax exemption under the shipping and air transport 
article of an income tax treaty. Another commentator requested that 
Form W-8BEN, ``Certificate of Foreign Status of Beneficial Owner for 
United States Tax Withholding,'' and Form W-8ECI, ``Certificate of 
Foreign Person's Claim That Income Is Effectively Connected with the 
Conduct of a Trade or Business in the United States,'' be modified to 
apply to income that qualifies for the section 883 exclusion. Finally, 
another commentator recommended that the final regulations under 
section 1446 be modified to clarify that a foreign corporation's 
allocable share of the effectively connected taxable income of a 
partnership does not include income that is eligible for the section 
883 exclusion by reason of an equivalent exemption referred to in Sec.  
1.883-1(h)(1). Each of these comments is beyond the scope of the final 
regulations included in this document, but is being considered as part 
of separate guidance projects.

Special Analysis

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of 
United States small business entities. This certification is based upon 
the fact that these regulations apply to foreign corporations and 
impose only a limited collection of information burden on certain 
shareholders of such corporations. United States small business 
entities may be shareholders of foreign corporations to which the 
regulations applies, however, the Treasury Department and the IRS do 
not anticipate the number of affected small business entities to be 
substantial. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. It 
also has been determined that section 553(b), (c) and (d) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these 
regulations.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

[[Page 56861]]

Drafting Information

    The principal author of these regulations is Patricia A. Bray of 
the Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in the 
development of these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.883-0 is amended by:
0
1. Adding the entries for Sec.  1.883-1(c)(3)(ii)(A) and (B).
0
2. Revising the entries for Sec.  1.883-1(g)(3) and (h)(3).
0
3. Revising the entry for Sec.  1.883-2(e)(2).
0
4. Revising the entries for Sec.  1.883-3.
0
5. Revising the entry for Sec.  1.883-5(d).
0
6. Removing the entry for Sec.  1.883-5(e).
    The revisions and additions read as follows:


Sec.  1.883-0  Outline of major topics.

* * * * *


Sec.  1.883-1  Exclusion of income from the international operation of 
ships or aircraft.

* * * * *
    (c) * * *
    (3) * * *
    (ii) * * *
    (A) General rule.
    (B) Names and permanent addresses of certain shareholders.
* * * * *
    (g) * * *
    (3) Other Services. [Reserved].
* * * * *
    (h) * * *
    (3) Special rules with respect to income tax conventions.
    (i) Countries with only an income tax convention.
    (ii) Countries with both an income tax convention and an equivalent 
exemption.
    (A) General rule.
    (B) Special rule for claiming simultaneous benefits under section 
883 and an income tax convention.
    (iii) Participation in certain joint ventures.
    (iv) Independent interpretation of income tax conventions.
* * * * *


Sec.  1.883-2  Treatment of publicly-traded corporations.

* * * * *
    (e) * * *
    (2) Availability and retention of documents for inspection.
* * * * *


Sec.  1.883-3  Treatment of controlled foreign corporations.

    (a) General rule.
    (b) Qualified U.S. person ownership test.
    (1) General rule.
    (2) Qualified U.S. person.
    (3) Treatment of bearer shares.
    (4) Ownership attribution through certain domestic entities.
    (5) Examples.
    (c) Substantiation of CFC stock ownership.
    (1) In general.
    (2) Ownership statements from qualified U.S. persons.
    (3) Ownership statements from intermediaries.
    (4) Three-year period of validity.
    (5) Availability and retention of documents for inspection.
    (d) Reporting requirements.
* * * * *


Sec.  1.883-5  Effective/applicability dates.

* * * * *
    (d) Effective/applicability dates.


Sec.  1.883-0T  [Removed]

0
Par. 3. Section 1.883-0T is removed.

0
Par. 4. Section 1.883-1 is amended by revising paragraphs (c)(3)(i)(D), 
(c)(3)(i)(G), (c)(3)(i)(H), (c)(3)(i)(I), (c)(3)(ii), (g)(1)(ix), 
(g)(1)(x), (g)(1)(xi), (g)(3), (h)(1)(ii), and (h)(3) to read as 
follows:


Sec.  1.883-1  Exclusion of income from the international operation of 
ships or aircraft.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (D) The applicable authority for an equivalent exemption, for 
example, the citation of a statute in the country where the corporation 
is organized, a diplomatic note between the United States and such 
country, or an income tax convention between the United States and such 
country in the case of a corporation described in paragraphs (h)(3)(i), 
(ii) and (iii) of this section;
* * * * *
    (G) A statement as to whether any shares of the foreign corporation 
or of any intermediary corporation that are relied on to satisfy any 
stock ownership test described in paragraph (c)(2) of this section are 
issued in bearer form and whether the bearer shares are maintained in a 
dematerialized book-entry system in which the bearer shares are 
represented only by book entries and no physical certificates are 
issued or transferred, or in an immobilized book-entry system in which 
evidence of ownership is maintained on the books and records of the 
corporate issuer or by a broker or financial institution;
    (H) Any other information required under Sec.  1.883-2(f), Sec.  
1.883-3(d), or Sec.  1.883-4(e), as applicable; and
    (I) Any other relevant information specified in Form 1120-F, ``U.S. 
Income Tax Return of a Foreign Corporation,'' and its accompanying 
instructions.
    (ii) Further documentation--(A) General rule. Except as provided in 
paragraph (c)(3)(ii)(B) of this section, if the Commissioner requests 
in writing that the foreign corporation provide documentation or 
substantiate any representations made under paragraph (c)(3)(i) of this 
section, or under Sec.  1.883-2(f), Sec.  1.883-3(d), or Sec.  1.883-
4(e), as applicable, the foreign corporation must provide the requested 
documentation or substantiation within 60 days of receiving the written 
request. If the foreign corporation does not provide the requested 
documentation or substantiation within the 60-day period, but 
demonstrates that the failure was due to reasonable cause and not 
willful neglect, the Commissioner may grant the foreign corporation a 
30-day extension to provide the requested documentation or 
substantiation. Whether a failure to provide the documentation or 
substantiation in a timely manner was due to reasonable cause and not 
willful neglect shall be determined by the Commissioner based on all 
the facts and circumstances.
    (B) Names and permanent addresses of certain shareholders. If the 
Commissioner requests the names and permanent addresses of individual 
qualified shareholders of a foreign corporation, as represented on each 
individual's ownership statement, to substantiate the requirements of 
the exception to the closely-held test in the publicly-traded test in 
Sec.  1.883-2(e), the qualified shareholder stock ownership test in 
Sec.  1.883-4(a), or the qualified U.S. person ownership test in Sec.  
1.883-3(b), the foreign corporation must provide the

[[Page 56862]]

requested information within 30 days of receiving the written request. 
If the foreign corporation does not provide the requested information 
within the 30-day period, but demonstrates that the failure was due to 
reasonable cause and not willful neglect, the Commissioner may grant 
the foreign corporation a 30-day extension to provide the requested 
information. Whether a failure to provide the requested information was 
due to reasonable cause and not willful neglect shall be determined by 
the Commissioner based on all the facts and circumstances.
* * * * *
    (g) * * *
    (1) * * *
    (ix) Arranging by means of a space or slot charter for the carriage 
of cargo listed on a bill of lading or airway bill or similar document 
issued by the foreign corporation on the ship or aircraft of another 
corporation engaged in the international operation of ships or 
aircraft;
    (x) The provision of containers and related equipment by the 
foreign corporation in connection with the international carriage of 
cargo for use by its customers, including short-term use within the 
United States immediately preceding or following the international 
carriage of cargo (for this purpose, a period of five days or less 
shall be presumed to be short-term); and
    (xi) The provision of goods and services by engineers, ground and 
equipment maintenance staff, cargo handlers, catering staff, and 
customer services personnel, and the provision of facilities such as 
passenger lounges, counter space, ground handling equipment, and 
hangars.
* * * * *
    (3) Other services. [Reserved].
* * * * *
    (h) * * *
    (1) * * *
    (ii) Provides an exemption from tax for income derived from the 
international operation of ships or aircraft, either by statute, 
decree, income tax convention, or otherwise; or
* * * * *
    (3) Special rules with respect to income tax conventions--(i) 
Countries with only an income tax convention. If a foreign country 
grants an exemption from tax for profits from the international 
operation of ships or aircraft only under an income tax convention with 
the United States, that exemption shall constitute an equivalent 
exemption with respect to a foreign corporation organized in that 
country only if--
    (A) The foreign corporation satisfies the conditions for claiming 
benefits with respect to such profits under the income tax convention; 
and
    (B) The profits that are exempt from tax pursuant to the shipping 
and air transport or gains article of the income tax convention and are 
described within a category of income included in paragraphs (h)(2)(i) 
through (viii) of this section.
    (ii) Countries with both an income tax convention and an equivalent 
exemption--(A) General rule. If a foreign country grants an exemption 
from tax for profits from the international operation of ships or 
aircraft under the shipping and air transport or gains article of an 
income tax convention with the United States and also by some other 
means (for example, by diplomatic note or domestic law of the foreign 
country), a foreign corporation may elect annually whether to claim an 
exemption from tax under section 883 or the income tax convention. 
Except as provided in paragraph (h)(3)(ii)(B) of this section, the 
foreign corporation must apply the elected exemption (section 883 or 
the income tax convention) to all categories of income described in 
paragraph (h)(2) of this section. If the foreign corporation elects to 
claim the exemption under section 883, it must satisfy all of the 
requirements for claiming the exemption under section 883. If the 
foreign corporation elects to claim the exemption under the income tax 
convention, it must satisfy all of the requirements and conditions for 
claiming benefits under the income tax convention. See Sec.  1.883-
4(b)(3) for rules concerning relying on shareholders resident in a 
foreign country that grants an equivalent exemption under an income tax 
convention to satisfy the stock ownership test of paragraph (c)(2) of 
this section.
    (B) Special rule for claiming simultaneous benefits under section 
883 and an income tax convention. If a foreign corporation that is 
organized in a country that grants an exemption from tax under an 
income tax convention and also by some other means (such as by 
diplomatic note or domestic law of the foreign country) with respect to 
a specific category of income described in paragraph (h)(2) of this 
section, and the foreign corporation elects to claim the exemption 
under the income tax convention, the foreign corporation may 
nonetheless simultaneously claim an exemption under section 883 with 
respect to a category of income exempt from tax by such other means if 
the foreign corporation--
    (1) Satisfies the requirements of paragraphs (h)(3)(i)(A) and (B) 
of this section for each category of income;
    (2) Satisfies one of the stock ownership tests of paragraph (c)(2) 
of this section; and
    (3) Complies with the substantiation and reporting requirements in 
paragraph (c)(3) of this section.
    (iii) Participation in certain joint ventures. If a foreign country 
grants an exemption for a category of income only through an income tax 
convention, a foreign corporation that is organized in that country and 
that derives income, directly or indirectly, through a participation in 
a pool, partnership, strategic alliance, joint operating agreement, 
code-sharing arrangement, or other joint venture described in paragraph 
(e)(2) of this section, may treat that exemption as an equivalent 
exemption even if the foreign corporation would not be eligible to 
claim benefits under the income tax convention for that category of 
income solely because the joint venture was not fiscally transparent, 
within the meaning of Sec.  1.894-1(d)(3)(iii)(A), with respect to that 
category of income under the income tax laws of the foreign 
corporation's country of residence.
    (iv) Independent interpretation of income tax conventions. Nothing 
in this section nor Sec. Sec.  1.883-2 through 1.883-5 affects the 
rights or obligations under any income tax convention between the 
United States and a foreign country. The definitions provided in this 
section and Sec. Sec.  1.883-2 through 1.883-5 shall not give meaning 
to similar or identical terms used in an income tax convention, or 
provide guidance regarding the scope of any exemption provided by such 
convention, unless the income tax convention entered into force after 
August 26, 2003, and it, or its legislative history, explicitly refers 
to section 883 and guidance promulgated under that section for its 
meaning.
* * * * *


Sec.  1.883-1T  [Removed]

0
Par. 5. Section 1.883-1T is removed.

0
Par. 6. Section 1.883-2 is amended by revising paragraphs (d)(3)(ii), 
(e)(2), (f)(3), and (f)(4)(ii) to read as follows:


Sec.  1.883-2  Treatment of publicly-traded corporations.

* * * * *
    (d) * * *
    (3) * * *
    (ii) Exception. Paragraph (d)(3)(i) of this section shall not apply 
to a class of stock if the foreign corporation can establish that 
qualified shareholders, as defined in Sec.  1.883-4(b), applying the 
attribution rules of Sec.  1.883-4(c), own

[[Page 56863]]

sufficient shares in the closely-held block of stock to preclude 
nonqualified shareholders in the closely-held block of stock from 
owning 50 percent or more of the total value of the class of stock of 
which the closely-held block is a part for more than half the number of 
days during the taxable year. Any shares that are owned, after 
application of the attribution rules in Sec.  1.883-4(c), by a 
qualified shareholder shall not also be treated as owned by a 
nonqualified shareholder in the chain of ownership for purposes of the 
preceding sentence. A foreign corporation must obtain the documentation 
described in Sec.  1.883-4(d) from the qualified shareholders relied 
upon to satisfy this exception. However, no person otherwise treated as 
a qualified shareholder under Sec.  1.883-4(b) may be treated for 
purposes of this paragraph (d)(3) as a qualified shareholder if such 
person's interest in the foreign corporation, or in any intermediary 
corporation, is held through bearer shares that are not maintained 
during the relevant period in a dematerialized or immobilized book-
entry system, as described in Sec.  1.883-1(c)(3)(i)(G).
    (e) * * *
    (2) Availability and retention of documents for inspection. A 
foreign corporation seeking qualified foreign corporation status must 
retain the documentation described in paragraph (e)(1) of this section 
until the expiration of the statute of limitations for its taxable year 
to which the documentation relates. The foreign corporation must make 
such documentation available for inspection at such time and such place 
as the Commissioner requests in writing under Sec.  1.883-
1(c)(3)(ii)(A) or (B).
    (f) * * *
    (3) A description of each class of stock relied upon to meet the 
requirements of paragraph (d) of this section, including whether the 
class is issued in registered or bearer form and whether any such 
bearer shares are maintained in a dematerialized or immobilized book-
entry system, as described in Sec.  1.883-1(c)(3)(i)(G), the number of 
shares issued and outstanding in that class as of the close of the 
taxable year, and the relative value of each class in relation to the 
total value of all shares of stock of the corporation that are 
outstanding as of the close of the taxable year;
    (4) * * *
    (ii) With respect to all qualified shareholders that own directly, 
or by application of the attribution rules in Sec.  1.883-4(c), shares 
of the closely-held block of stock and that the foreign corporation 
relies on to satisfy the exception provided by paragraph (d)(3)(ii) of 
this section--
    (A) The number of such qualified shareholders;
    (B) The total percentage of the value of the shares owned, directly 
or indirectly, by such qualified shareholders by country of residence, 
determined under Sec.  1.883-4(b)(2) (residence of individual 
shareholders) or Sec.  1.883-4(d)(3) (special rules for residence of 
certain shareholders); and
    (C) The number days during the taxable year of the foreign 
corporation that such qualified shareholders owned, directly or 
indirectly, their shares in the closely held block of stock.
* * * * *


Sec.  1.883-2T  [Removed]

0
Par. 7 Section 1.883-2T is removed.

0
Par. 8. Section 1.883-3 is revised to read as follows:


Sec.  1.883-3  Treatment of controlled foreign corporations.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec.  1.883-1(c)(2) if it satisfies the qualified 
U.S. person ownership test in paragraph (b) of this section and the 
substantiation and reporting requirements of paragraphs (c) and (d) of 
this section, respectively. A foreign corporation that fails the 
qualified U.S. person ownership test of paragraph (b) of this section 
can satisfy the stock ownership test of Sec.  1.883-1(c)(2) if it meets 
either the publicly-traded test of Sec.  1.883-2(a) or the qualified 
shareholder stock ownership test of Sec.  1.883-4(a).
    (b) Qualified U.S. person ownership test--(1) General rule. A 
foreign corporation satisfies the qualified U.S. person ownership test 
only if the following two conditions are satisfied concurrently during 
more than half the days in its taxable year:
    (i) The foreign corporation is a controlled foreign corporation 
(within the meaning of section 957(a)).
    (ii) One or more qualified U.S. persons own more than 50 percent of 
the total value of all the outstanding stock of the foreign corporation 
(within the meaning of section 958(a) and paragraph (b)(4) of this 
section).
    (2) Qualified U.S. person. For purposes of this section, a 
qualified U.S. person is a United States citizen or resident alien, a 
domestic corporation, or a domestic trust described in section 501(a), 
but only if the person provides the controlled foreign corporation an 
ownership statement described in paragraph (c)(2) of this section, and 
the controlled foreign corporation meets the reporting requirements of 
paragraph (d) of this section with respect to that person.
    (3) Treatment of bearer shares. For purposes of paragraph 
(b)(1)(ii) of this section, any shares of the foreign corporation or of 
any intermediary corporation that are issued in bearer form, shall be 
treated as not owned by qualified U.S. persons if the bearer shares are 
not maintained in a dematerialized or immobilized book-entry system, as 
described in Sec.  1.883-1(c)(3)(i)(G).
    (4) Ownership attribution through certain domestic entities. For 
purposes of paragraph (b)(1)(ii) of this section, stock owned, directly 
or indirectly, by or for a domestic partnership, a domestic trust not 
described in section 501(a), or a domestic estate, shall be treated as 
owned proportionately by the partners, beneficiaries, grantors, or 
other interest holders, respectively, under the rules of section 
958(a), which shall be applied by treating each domestic entity as a 
foreign entity. Stock that is considered owned by a person under this 
paragraph (b)(4) shall, for purposes of applying this paragraph (b)(4) 
to such person, be treated as actually owned by such person.
    (5) Examples. The following examples illustrate the qualified U.S. 
person ownership test of paragraph (b)(1) of this section:

    Example 1. Ship Co is a controlled foreign corporation (within 
the meaning of section 957(a)) for more than half the days of its 
taxable year and is organized in a qualified foreign country. A 
domestic partnership owns all of the outstanding stock of Ship Co 
for the entire taxable year. All of the partners in the domestic 
partnership are residents of foreign countries and not citizens of 
the United States. Ship Co does not satisfy the qualified U.S. 
person ownership test of paragraph (b)(1) of this section because 
qualified U.S. persons do not own shares of Ship Co stock with a 
value that is greater than 50 percent of the total value of the 
outstanding stock of the corporation for at least half the days of 
Ship Co's taxable year. Therefore, to satisfy the stock ownership 
test of Sec.  1.883-1(c)(2) and constitute a qualified foreign 
corporation, Ship Co must meet the qualified shareholder stock 
ownership test of Sec.  1.883-4(a).
    Example 2. Ship Co is a controlled foreign corporation (within 
the meaning of section 957(a)) for more than half the days of its 
taxable year and is organized in a qualified foreign country. Ship 
Co has a single class of stock outstanding. For Ship Co's entire 
taxable year, a foreign corporation (Corp A), that is wholly owned 
by a resident of a foreign country who is not a U.S. citizen, owns 
40 percent of the outstanding Ship Co stock. During that same 
period, a domestic partnership owns the remaining 60 percent of the 
outstanding Ship Co stock. The domestic partnership is wholly owned 
by 20 United States citizens, each of whom owns a 5-

[[Page 56864]]

percent partnership interest for Ship Co's entire taxable year. Ship 
Co meets the qualified U.S. person ownership test of paragraph 
(b)(1) of this section because during more than half the days in its 
taxable year it was a controlled foreign corporation within the 
meaning of section 957(a), and, applying the ownership attribution 
rules of paragraph (b)(4) of this section, qualified U.S. persons 
(the partners in the domestic partnership) owned Ship Co stock with 
a value that is greater than 50 percent of the total value of all 
the outstanding Ship Co shares. Therefore, Ship Co will meet the 
stock ownership test of Sec.  1.883-1(c)(2) if it satisfies the 
substantiation and reporting requirements of paragraphs (c) and (d) 
of this section with respect to the partners in the domestic 
partnership. Alternatively, if four or more partners in the domestic 
partnership were not qualified U.S. persons, Ship Co would not meet 
the qualified U.S. person ownership test of paragraph (b)(1) of this 
section because, even though during more than half the days in its 
taxable year it would have been a controlled foreign corporation 
within the meaning of section 957(a), qualified U.S. persons would 
not have owned Ship Co stock with a value that is greater than 50 
percent of the total value of all the outstanding Ship Co shares 
during that period.
    Example 3. Ship Co is a controlled foreign corporation (within 
the meaning of section 957(a)) and is organized in a qualified 
foreign country. Ship Co has two classes of stock outstanding, Class 
A representing 60 percent of the vote and value and Class B 
representing the remaining 40 percent of the vote and value of all 
the shares outstanding of Ship Co. The Class A stock is issued in 
bearer form and is maintained in a dematerialized book-entry system, 
as described in Sec.  1.883-1(c)(3)(i)(G). The Class B stock is also 
issued in bearer form, but is not maintained in a dematerialized or 
immobilized book-entry system. For Ship Co's entire taxable year, a 
United States citizen A holds all the Class A stock and nonresident 
alien individual B owns all the Class B stock. Although the Class A 
stock is issued in bearer form, Ship Co will satisfy the qualified 
U.S. person ownership test of paragraph (b)(1) of this section 
because the Class A stock is maintained in a dematerialized book-
entry system on behalf of A. The Class B stock is not owned by a 
qualified U.S. person but is taken into account in determining the 
total value of Ship Co's outstanding stock. Alternatively, if the 
Class B stock were owned by a qualified U.S. person, the results 
would be similar. Class B stock would not be taken into account in 
determining if the qualified U.S. person ownership test were 
satisfied, but would be taken into account in determining the total 
value of Ship Co's outstanding stock.

    (c) Substantiation of CFC stock ownership--(1) In general. A 
controlled foreign corporation must establish all of the facts 
necessary to demonstrate to the Commissioner that it satisfies the 
qualified U.S. person ownership test of paragraph (b)(1) of this 
section by obtaining a written ownership statement (described in 
paragraph (c)(2) or (3) of this section, as applicable), signed under 
penalties of perjury by an individual authorized to sign that person's 
Federal tax or information return, from--
    (i) Each qualified U.S. person whose ownership of stock of the 
controlled foreign corporation is taken into account for purposes of 
meeting the qualified U.S. person ownership test; and
    (ii) Each domestic intermediary described in paragraph (b)(4) of 
this section, each foreign intermediary (including a foreign 
corporation, partnership, trust, or estate), and mere legal owners or 
record holders acting as nominees in the chain of ownership between 
each such qualified U.S. person and the controlled foreign corporation, 
if any.
    (2) Ownership statements from qualified U.S. persons. An ownership 
statement from a qualified U.S. person must include--
    (i) The qualified U.S. person's name, permanent address, and 
taxpayer identification number;
    (ii) If the qualified U.S. person directly owns shares in the 
controlled foreign corporation, the number of shares of each class of 
stock of the controlled foreign corporation owned by the qualified U.S. 
person, whether any shares are issued in bearer form, whether any 
bearer shares are maintained in a dematerialized or immobilized book-
entry system, as described in Sec.  1.883-1(c)(3)(i)(G), and the period 
(or periods) in the taxable year of the controlled foreign corporation 
during which the qualified U.S. person owned the shares;
    (iii) If the qualified U.S. person indirectly owns shares in the 
controlled foreign corporation through a foreign or domestic 
intermediary described in paragraph (c)(1)(ii) of this section, the 
name of each intermediary, the amount and nature of the qualified U.S. 
person's interest in each intermediary, the period (or periods) in the 
taxable year of the controlled foreign corporation during which the 
qualified U.S. person held such interest, and, with respect to any 
intermediary foreign corporation, whether any shares are issued in 
bearer form and whether any such bearer shares are maintained in a 
dematerialized or immobilized book-entry system, as described in Sec.  
1.883-1(c)(3)(i)(G); and
    (iv) Any other information specified in published guidance by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (3) Ownership statements from intermediaries. An ownership 
statement from a domestic or foreign intermediary must include:
    (i) The intermediary's name, permanent address, and taxpayer 
identification number, if any.
    (ii) If the intermediary directly owns stock in the controlled 
foreign corporation, the number of shares of each class of stock of the 
controlled foreign corporation owned by the intermediary, whether such 
shares are issued in bearer form and maintained in a dematerialized or 
immobilized book-entry system, as described in Sec.  1.883-
1(c)(3)(i)(G), and the period (or periods) in the taxable year of the 
controlled foreign corporation during which the intermediary owned the 
shares.
    (iii) If the intermediary indirectly owns the stock of the 
controlled foreign corporation, the name and address of each 
intermediary in the chain of ownership between it and the controlled 
foreign corporation, the period (or periods) in the taxable year of the 
controlled foreign corporation during which the intermediary owned the 
shares, the percentage of its indirect ownership interest in the 
controlled foreign corporation, and, if any intermediary in the chain 
of ownership is a foreign corporation, whether any shares of such 
intermediary are issued in bearer form and if any such bearer shares 
are maintained in a dematerialized or immobilized book- entry system, 
as described in Sec.  1.883-1(c)(3)(i)(G).
    (iv) Any other information specified in published guidance by the 
Internal Revenue Service (see Sec.  601.601(d)(2) of this chapter).
    (4) Three-year period of validity. The rules of Sec.  1.883-
4(d)(2)(ii) shall apply for determining the validity of the ownership 
statements required under paragraph (c)(2) of this section.
    (5) Availability and retention of documents for inspection. The 
foreign corporation seeking qualified foreign corporation status must 
retain the ownership statements described in this paragraph (c) until 
the expiration of the statute of limitations for its taxable year to 
which the ownership statements relate. The ownership statements must be 
made available for inspection at such time and place as the 
Commissioner may request in writing in accordance with Sec.  1.883-
1(c)(3)(ii).
    (d) Reporting requirements. A controlled foreign corporation that 
relies on this section to satisfy the stock ownership test of Sec.  
1.883-1(c)(2) must include the following information (in addition to 
the information required by Sec.  1.883-1(c)(3)) with its Form 1120-F, 
``U.S. Income Tax Return of a Foreign Corporation'', filed for its 
taxable year.

[[Page 56865]]

This information must be consistent with the ownership statements 
obtained by the controlled foreign corporation pursuant to paragraph 
(c) of this section and must be current as of the end of the 
corporation's taxable year--
    (1) The relative value of the shares of the controlled foreign 
corporation that are owned (directly, and indirectly applying the rules 
of paragraph (b)(4) of this section) by all qualified U.S. persons 
identified in paragraph (c)(2) of this section as compared to the value 
of all outstanding shares of the corporation;
    (2) The period (or periods) in the taxable year during which such 
qualified U.S. persons held such shares;
    (3) The period (or periods) in the taxable year during which the 
foreign corporation was a controlled foreign corporation;
    (4) A statement as to whether the controlled foreign corporation or 
any intermediary corporation had bearer shares outstanding during the 
taxable year, and whether any such bearer shares taken into account for 
purposes of satisfying the qualified U.S. person ownership test are 
maintained in a dematerialized or immobilized book-entry system, as 
described in Sec.  1.883-1(c)(3)(i)(G); and
    (5) Any other information specified by Form 1120-F, and its 
accompanying instructions, or in published guidance by the Internal 
Revenue Service (see Sec.  601.601(d)(2) of this chapter).


Sec.  1.883-3T  [Removed]

0
Par. 9. Section 1.883-3T is removed.

0
Par. 10. Section 1.883-4 is amended by revising paragraphs (b)(1)(ii), 
(c)(1), (d)(1), (d)(4)(i)(C), (d)(4)(i)(D), (e)(2), and (e)(3) to read 
as follows:


Sec.  1.883-4  Qualified shareholder stock ownership test.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Does not own its interest in the foreign corporation through 
bearer shares, either directly or by applying the attribution rules of 
paragraph (c) of this section, unless such bearer shares are maintained 
in a dematerialized or immobilized book-entry system, as described in 
Sec.  1.883-1(c)(3)(i)(G); and
* * * * *
    (c) * * *
    (1) General rules for attribution. For purposes of applying 
paragraph (a) of this section and the exception to the closely-held 
test in Sec.  1.883-1(d)(3)(ii), stock owned by or for a corporation, 
partnership, trust, estate, or mutual insurance company or similar 
entity shall be treated as owned proportionately by its shareholders, 
partners, beneficiaries, grantors, or other interest holders, as 
provided in paragraphs (c)(2) through (7) of this section. The 
proportionate interest rules of this paragraph (c) shall apply 
successively upward through the chain of ownership, and a person's 
proportionate interest shall be computed for the relevant days or 
period taken into account in determining whether a foreign corporation 
satisfies the requirements of paragraph (a) of this section. Stock 
treated as owned by a person by reason of this paragraph (c) shall be 
treated as actually owned by such person for purposes of this section. 
An owner of an interest in an association taxable as a corporation 
shall be treated as a shareholder of such association for purposes of 
this paragraph (c). Stock issued in bearer form will not be treated as 
owned proportionately by its shareholders unless the shares are 
maintained in a dematerialized or immobilized book-entry system, as 
described in Sec.  1.883-1(c)(3)(i)(G).
* * * * *
    (d) * * *
    (1) General rule. A foreign corporation that relies on this section 
to satisfy the stock ownership test of Sec.  1.883-1(c)(2), must 
establish all the facts necessary to satisfy the Commissioner that more 
than 50 percent of the value of its shares is owned, or treated as 
owned applying paragraph (c) of this section, by qualified shareholders 
for the relevant period. If a foreign corporation relies upon bearer 
shares in the chain of ownership to satisfy one of the stock ownership 
tests, the foreign corporation must also establish all of the facts 
necessary to satisfy the Commissioner that such shares are maintained 
in a dematerialized book-entry system, as described in Sec.  1.883-
1(c)(3)(i)(G), for the benefit of the relevant shareholder.
* * * * *
    (4) * * *
    (i) * * *
    (C) If the individual directly owns shares of stock in the 
corporation seeking qualified foreign corporation status, the name of 
the corporation, the number of shares in each class of stock of the 
corporation owned by the individual, whether any such shares are issued 
in bearer form and maintained in a dematerialized or immobilized book-
entry system, as described in Sec.  1.883-1(c)(3)(i)(G), and the period 
(or periods) in the taxable year of the foreign corporation during 
which the individual owned the shares;
    (D) If the individual directly owns an interest in a corporation, 
partnership, trust, estate, or other intermediary that directly or 
indirectly owns stock in the corporation seeking qualified foreign 
corporation status, the name of the intermediary, the number and class 
of shares or the amount and nature of the interest that the individual 
holds in such intermediary, and, if the intermediary is a corporation, 
whether any such shares are issued in bearer form and maintained in a 
dematerialized or immobilized book-entry system, as described in Sec.  
1.883-1(c)(3)(i)(G), and the period (or periods) in the taxable year of 
the foreign corporation seeking qualified foreign corporation status 
during which the individual held such interest;
* * * * *
    (e) * * *
    (2) With respect to all qualified shareholders relied upon to 
satisfy the 50 percent ownership test of paragraph (a) of this section, 
the total number of such qualified shareholders as defined in paragraph 
(b)(1) of this section; the total percentage of the value of the 
outstanding shares owned, applying the attribution rules of paragraph 
(c) of this section, by such qualified shareholders by country of 
residence or organization, whichever is applicable; and the period 
during the taxable year of the foreign corporation that such stock was 
held by qualified shareholders; and
    (3) Any other relevant information specified by the Form 1120-F, 
``U.S. Income Tax Return of a Foreign Corporation,'' and its 
accompanying instructions, or in published guidance by the Internal 
Revenue Service (see Sec.  601.601(d)(2) of this chapter).

Sec.  1.883-4T  [Removed]

0
Par. 11. Section 1.883-4T is removed.

0
Par. 12. Section 1.883-5 is amended by revising paragraph (d) and 
removing paragraph (e) to read as follows:


Sec.  1.883-5  Effective/applicability dates.

* * * * *
    (d) Effective/applicability date. Except as otherwise provided in 
this paragraph (d), Sec. Sec.  1.883-1, 1.883-2, 1.883-3, and 1.883-4 
apply to taxable years of the foreign corporation beginning after June 
25, 2007, and may be applied to any open taxable years of the foreign 
corporation beginning on or after December 31, 2004. The portion of any 
provision concerning bearer shares maintained in a dematerialized or 
immobilized book-entry system, as described in Sec.  1.883-
1(c)(3)(i)(G), applies to taxable years of a foreign corporation 
beginning on or after September 17, 2010.


[[Page 56866]]




Sec.  1.883-5T  [Removed]

0
Par. 13. Section 1.883-5T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 14. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.


0
Par. 15. In Sec.  602.101, paragraph (b) is amended by removing the 
entries for Sec. Sec.  1.883-1T, 1.883-2T, 1.883-3T, 1.883-4T, and 
1.883-5T from the table and adding an entry for Sec.  1.883-0 to the 
table in numerical order to read as follows:


Sec.  602.101  OMB Control Numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
Sec.   1.883-0..........................................       1545-1677
 
                                * * * * *
------------------------------------------------------------------------


Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: September 3, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-23185 Filed 9-16-10; 8:45 am]
BILLING CODE 4830-01-P