[Federal Register Volume 80, Number 27 (Tuesday, February 10, 2015)]
[Rules and Regulations]
[Pages 7323-7336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02614]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9710]
RIN 1545-BK50
Foreign Tax Credit Splitting Events
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final Income Tax Regulations with
respect to a provision of the Internal Revenue Code (Code) that
addresses situations in which foreign income taxes have been separated
from the related income. These regulations are necessary to provide
guidance on applying the statutory provision, which was enacted as part
of legislation commonly referred to as the Education Jobs and Medicaid
Assistance Act (EJMAA) on August 10, 2010. These regulations affect
taxpayers claiming foreign tax credits or deducting foreign income
taxes.
DATES: Effective date: These regulations are effective on February 10,
2015.
Applicability dates: For dates of applicability, see Sec. Sec.
1.704-1(b)(1)(ii)(b)(3), 1.909-1(e), 1.909-2(c), 1.909-3(c), 1.909-
4(b), 1.909-5(c), and 1.909-6(h).
FOR FURTHER INFORMATION CONTACT: Suzanne M. Walsh, (202) 317-6936 (not
a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
On February 14, 2012, a notice of proposed rulemaking by cross-
reference to temporary regulations (REG-132736-11) under sections 909
and 704 of the Code and temporary regulations (TD 9577) (2012 temporary
regulations) were published in the Federal Register at [77 FR 8184] and
[77 FR 8127], respectively.
Section 1.909-6T of the 2012 temporary regulations set forth an
exclusive list of splitter arrangements that applied to foreign income
taxes paid or accrued by a section 902 corporation in a taxable year
beginning on or before December 31, 2010, comprised of reverse hybrid
structure splitter arrangements, foreign consolidated group splitter
arrangements, group relief or other loss sharing regime splitter
arrangements, and hybrid instrument splitter arrangements (pre-2011
splitter arrangements).
For foreign income taxes paid or accrued by any person in a taxable
year beginning on or after January 1, 2011, Sec. 1.909-5T of the 2012
temporary regulations adopted the same list of splitter arrangements as
Sec. 1.909-6T, but added partnership inter-branch payment splitter
arrangements to the list.
For foreign income taxes paid or accrued by any person in a taxable
year beginning on or after January 1, 2012, Sec. 1.909-2T adopted the
list of splitter arrangements applicable to prior taxable years with
certain changes. Because regulations under section 901 were modified
for taxable years beginning after February 14, 2012, to address the
application of the legal liability rule to combined income regimes,
consolidated group splitter arrangements were removed from the list
(although Sec. 1.909-5T applied the consolidated group splitter
arrangement rules to foreign income taxes paid or accrued by any person
in a taxable year beginning on or after January 1, 2012, and on or
before February 14, 2012). In addition, the definitions of hybrid
instrument splitter arrangements and loss-sharing splitter arrangements
were expanded.
Sections 1.909-3T and 1.909-6T provided interim mechanical rules
for tracking taxes paid or accrued with respect to a splitter
arrangement (split taxes) as well as the related income with respect to
such taxes.
The 2012 temporary regulations also removed the special rule for
inter-branch payments previously set forth in Sec. 1.704-
1(b)(4)(viii)(d)(3).
A public hearing was not requested and none was held. However, the
IRS and the Treasury Department received written comments in response
to the notice of proposed rulemaking. After consideration of all the
comments, the proposed regulations under section 909 are adopted as
amended by this Treasury decision. The revisions are discussed in this
preamble. This Treasury decision also adopts the proposed regulations
under section 704 without amendment.
Explanation of Revisions and Summary of Comments
I. Splitter Arrangements--In General
This Treasury decision makes clarifying changes to certain of the
definitions of splitter arrangements in Sec. 1.909-2T. It also makes a
clarifying change to the interim mechanical rules for tracking split
taxes and related income. Apart from this clarifying change, this
Treasury decision does not address mechanical issues, which are still
under consideration and will be addressed in future guidance.
[[Page 7324]]
II. Reverse Hybrid Splitter Arrangements
Section 1.909-2T(b)(1) provides that a splitter arrangement exists
with respect to a reverse hybrid entity when a payor pays or accrues
foreign income taxes with respect to the income of the reverse hybrid.
The split taxes are the taxes paid or accrued with respect to income of
the reverse hybrid. The related income with respect to such split taxes
is the earnings and profits of the reverse hybrid attributable to the
activities of the reverse hybrid that gave rise to the foreign taxable
income with respect to which the split taxes were paid or accrued.
A comment indicated that there is confusion regarding the amount of
the related income with respect to a reverse hybrid splitter
arrangement in the case in which the reverse hybrid subsequently incurs
a loss, causing its earnings and profits to fluctuate over multiple
taxable years. The final regulations include two new examples at Sec.
1.909-2(b)(1)(v) that clarify how to determine the related income
amount with respect to split taxes from a reverse hybrid splitter
arrangement.
III. Loss-Sharing Splitter Arrangements
Section 1.909-2T(b)(2) provides that a splitter arrangement exists
to the extent that the ``usable shared loss'' of a ``U.S. combined
income group,'' which is an individual or corporation and all the
entities with which it combines items of income and expense under U.S.
federal income tax law, is used to offset foreign taxable income of
another U.S. combined income group. A usable shared loss is defined as
a shared loss of a U.S. combined income group that could be used under
foreign law to offset the group's own income.
A comment requested that the definition of a usable shared loss be
clarified to exclude any shared loss that could not be used within the
U.S. combined income group in a current foreign taxable year but that
could be used within a group by carrying the loss either forward or
back to a different foreign taxable year. The Treasury Department and
the IRS agree that the usable shared loss definition should not require
a U.S. combined income group to carry forward losses because it will
not necessarily be foreseeable whether the group will have sufficient
foreign taxable income in a future taxable year to use a loss that
cannot be used currently or carried back within the group. It would be
too unpredictable to adopt a ``wait and see'' rule that required a
taxpayer to forego the opportunity to use a loss to reduce an
affiliate's foreign tax liability in a current (or prior) foreign
taxable year based on the speculation that it may be able to use the
loss itself in a future foreign taxable year.
It is appropriate, however, that the usable shared loss definition
include a shared loss that could be used to offset foreign taxable
income of the group in a previous taxable year. Because taxpayers can
know in a current foreign taxable year whether a loss can be carried
back for foreign law purposes within the U.S. combined income group,
they should not be permitted to share such a loss in a way that
inappropriately separates foreign income taxes from the related income.
Although this may require taxpayers to treat taxes previously paid or
accrued as split taxes, this is an acceptable outcome in light of the
policy concerns that the loss-sharing splitter rules are intended to
address. Furthermore, taxpayers can avoid having to treat taxes as
split taxes on a retroactive basis by carrying back the loss.
Accordingly, the regulations modify the definition to clarify that a
usable shared loss is a shared loss that could be used under foreign
tax law to offset income of the U.S. combined income group in a current
or previous foreign taxable year.
Another comment recommended that sharing a usable shared loss
outside of a U.S. combined income group should give rise to a splitter
arrangement only to the extent that the gross amount of such a usable
shared loss shared away from the U.S. combined income group exceeds the
gross amount of shared losses from other U.S. combined income groups
that are received by the group. The Treasury Department and the IRS
have determined that it is too burdensome to administer such a netting
rule, particularly in light of the fact that the comment did not
provide a reason why a U.S. combined income group would seek to use
shared losses from another U.S. combined income group while sharing its
own usable shared loss outside the group, rather than using its usable
shared loss within the group. Therefore, the comment is not adopted.
A further comment recommended that a U.S. combined income group
with split taxes resulting from sharing a usable shared loss away from
the group in a prior year be treated as receiving a distribution of
related income to the extent of any shared loss received by it from a
different U.S. combined income group. The Treasury Department and the
IRS have determined that it is too burdensome to administer such a
rule, which would entail reconciling actual related income accounts
with deemed distributions of related income resulting from the receipt
of a shared loss from another U.S. combined income group. Therefore,
the comment is not adopted.
A question has arisen about when references to ``income'' in Sec.
1.909-2T(b)(2) are intended to refer to income for purposes of U.S.
federal income tax law or to income for purposes of foreign tax law.
The regulations clarify that the reference to the term ``income'' of
that U.S. combined income group in Sec. 1.909-2(b)(2)(v) refers to
income for purposes of foreign tax law.
IV. Hybrid Instrument Splitter Arrangements
Section 1.909-2T(b)(3)(i) provides that there is a U.S. equity
hybrid instrument splitter arrangement if payments or accruals with
respect to a U.S. equity hybrid instrument (i) give rise to foreign
income taxes paid or accrued by the owner of such instrument, (ii) are
deductible by the issuer under the laws of its foreign jurisdiction,
and (iii) do not give rise to income for U.S. federal income tax
purposes.
A question has arisen as to whether there is a splitter arrangement
if an accrual for foreign law purposes with respect to a U.S. equity
hybrid instrument does not give rise to income under U.S. law but a
separate payment of the accrued amount is made that gives rise to
income under U.S. law equal to all or a portion of the amount of the
accrual. The reference to ``payments or accruals'' created confusion
regarding the effect of a payment. The final regulations are clarified
to provide that if an accrual under foreign law with respect to a U.S.
equity hybrid instrument gives rise to a foreign-law deduction by the
issuer, then regardless of whether a payment is made on the instrument,
a splitter arrangement exists whenever an accrual gives rise to the
imposition of foreign income taxes on the instrument owner without
giving rise to income under U.S. federal income tax law. Any actual
payment of the accrued amount, whether or not it is made periodically
under the terms of the instrument, does not prevent the hybrid
instrument from being a splitter arrangement. The payments, however,
may be treated as a distribution of related income to the extent
provided by Sec. 1.909-3 and Sec. 1.909-6(d). An example is added at
Sec. 1.909-2(b)(3)(i)(E) to illustrate the application of the rule.
V. Mechanical Rules for Tracking Related Income and Split Taxes
A comment recommended that the regulations should generally provide
additional mechanical rules for tracking
[[Page 7325]]
related income. The Treasury Department and the IRS recognize that
there are a number of mechanical issues related to tracking related
income and split taxes that are not fully addressed in Sec. 1.909-6T.
Other mechanical issues are under consideration and will be addressed
in future guidance.
One comment recommended revising Sec. 1.909-6T(e)(3) to provide
for the carryover of split taxes in the circumstance in which a payor
of split taxes that is a section 902 corporation combines with a
section 902 shareholder in a transaction that is described in section
381. Section 1.909-6T(e)(3) provides that split taxes that carry over
to a foreign corporation under section 381, Sec. 1.367(b)-7, or
similar rules retain their character as split taxes and, consequently,
the transferee corporation is treated as the payor of the split taxes.
That provision does not, however, provide that split taxes carry over
to a domestic corporation in the case of a foreign-to-U.S. liquidation
or other inbound transaction described in section 381.
The Treasury Department and the IRS have determined that it is not
appropriate to expand the scope of Sec. 1.909-6T(e)(3) as recommended
by the comment. A carryover rule for inbound section 381 transactions
would create preferential treatment, in certain fact patterns, of split
foreign income taxes that are maintained by a section 902 corporation
in suspension accounts rather than included in post-1986 foreign income
tax pools, such as when the section 902 corporation has a deficit in
post-1986 undistributed earnings and profits. In addition, if suspended
foreign income taxes are carried over to a domestic section 902
shareholder, currency exchange rate fluctuations could cause a
disparity between the dollar amount of income included by the domestic
section 902 shareholder in respect of the functional currency amount of
earnings and profits used to make the suspended tax payment and the
creditable dollar amount of the foreign income taxes that are
unsuspended. This disparity is inconsistent with the inclusion that
results from unsuspending split taxes at the level of the payor section
902 corporation, deeming such taxes to be paid by the section 902
shareholder, and including the dollar amount of taxes in the
shareholder's income under the section 78 gross-up. Moreover, taxpayers
could choose to avoid permanent suspension of split taxes in an inbound
transaction by, for example, causing a distribution of the related
income to the payor of the split taxes before the payor of the split
taxes is liquidated or otherwise combined with a domestic person. For
these reasons, the final regulations do not modify Sec. 1.909-6T(e)(3)
to treat split taxes as a carryover attribute in inbound section 381
transactions.
Another comment addressed the fact pattern in which a covered
person with the related income ceases to be a covered person with
respect to the payor of split taxes and the payor does not take the
related income into account before, or in connection with, the
termination of the covered person relationship, resulting in the
permanent suspension of split taxes. The comment recommended that, in
this case, if the covered person is a direct or indirect subsidiary of
the payor of the split taxes, the payor should be treated as having
paid the split taxes on behalf of the covered person and as having made
a capital contribution in the amount of the split taxes to the covered
person directly or indirectly through a chain of subsidiaries, thereby
stepping up basis in the covered person's stock. The comment also
recommended reducing the earnings and profits of the covered person by
the amount of the split taxes as though the covered person had paid the
split taxes. Stepping up the basis of the stock of the covered person
by the amount of the permanently suspended split taxes and reducing its
earnings and profits by the same amount would ensure that any inclusion
attributable to the earnings and profits or appreciated assets of the
departing or liquidating covered person is reduced by the amount of the
split taxes, effectively converting the permanently suspended split
taxes into a deduction for the payor of the split taxes.
Section 909 contemplates that split taxes may remain permanently
suspended as a result of a disposition or liquidation of the covered
person. Section 909 provides that split taxes are suspended until the
related income is taken into account generally by the payor of the
split tax or relevant section 902 shareholder, and does not provide for
a deduction of split taxes in lieu of a credit. If the covered person
does not distribute the full amount of related income prior to the
liquidation or disposition of the covered person, and such liquidation
or disposition does not result in the reflection of the related income
in the earnings and profits of the payor of the split tax (or the
relevant section 902 shareholder), then the related income is not taken
into account as prescribed by section 909. The Treasury Department and
the IRS, therefore, have concluded that it is appropriate for split
taxes to remain suspended until and unless the related income is taken
into account. Accordingly, the comment is not adopted.
VI. Taking Related Income Into Account as a Result of a Transaction
Under Section 381
A comment incorrectly interpreted Sec. 1.909-6T(d)(8)(ii) as
providing that when a payor section 902 corporation with suspended
split taxes combines with the covered person with the related income in
a transaction described in section 381, all related income is treated
as taken into account even if the full amount of related income is not
reflected in the earnings and profits of the payor section 902
corporation (or surviving corporation) as a result of the transaction.
The Treasury Department and the IRS did not intend for a
transaction described under section 381 to result in the unsuspension
of split taxes if the transaction does not cause the payor of the split
taxes to take into account earnings and profits of the covered person
equal to the amount of related income specified in the relevant
splitter arrangement definition. Accordingly, the final regulations
clarify that split taxes are unsuspended only when the appropriate
amount of related income is taken into account by the payor section 902
corporation either as a result of a distribution or inclusion out of
the earnings and profits of the covered person or as a result of the
combination of the payor section 902 corporation and the covered person
in a transaction described in section 381.
VII. Additional Splitter Arrangement Fact Patterns
A comment recommended that the U.S. debt hybrid instrument splitter
arrangement definition be expanded to include certain fact patterns in
which the instrument owner is not related to the issuer of the
instrument. The Treasury Department and the IRS have concluded that it
is not appropriate at this time to extend the existing splitter
arrangement list to include transactions between unrelated persons and
do not adopt the comment. The Treasury Department and the IRS continue,
however, to consider other arrangements that inappropriately separate
foreign income taxes from the related income, and the circumstances
under which a splitter arrangement described in regulations or other
guidance under section 909 should be applied to arrangements between
unrelated persons.
[[Page 7326]]
Special Analyses
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 also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Pursuant to
section 7805(f) of the Internal Revenue Code, the NPRM preceding this
regulation was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small businesses.
Drafting Information
The principal author of these regulations is Suzanne M. Walsh of
the Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.909-1 through 1.906-6 also issued under 26 U.S.C. 909(e).
* * *
0
Par. 2. Section 1.704-1 is amended as follows:
0
a. Paragraph (b)(0) is amended by adding entries for Sec. 1.704-
1(b)(1)(ii)(b)(3) and Sec. 1.704-1(b)(4)(viii)(d)(3).
0
b. Paragraph (b)(1)(ii)(b)(3) is revised.
0
c. Paragraph (b)(4)(viii)(d)(3) is revised.
0
c. Paragraph (b)(5), Example 24, is revised.
The revisions read as follows:
Sec. 1.704-1. Partner's distributive share.
* * * * *
(b) Determination of partner's distributive share -(0) Cross-
references.
------------------------------------------------------------------------
Heading Section
------------------------------------------------------------------------
* * * * * * *
Special rules for certain interbranch 1.704-1(b)(1)(ii)(b)(3)
payments.................................
* * * * * * *
Special rules for certain interbranch 1.704-1(b)(4)(viii)(d)(3)
payments.................................
* * * * * * *
------------------------------------------------------------------------
(1) * * *
(ii) * * *
(b) * * *
(3) Special rules for certain inter-branch payments--(A) In
general. The provisions of Sec. 1.704-1(b)(4)(viii)(d)(3) apply for
partnership taxable years ending after February 9, 2015. See 26 CFR
1.704-1T(b)(4)(viii)(d)(3) (revised as of April 1, 2014) for rules
applicable to taxable years beginning on or after January 1, 2012, and
ending on or before February 9, 2015.
(B) Transition rule. Transition relief is provided herein to
partnerships whose agreements were entered into prior to February 14,
2012. In such cases, if there has been no material modification to the
partnership agreement on or after February 14, 2012, then the
partnership may apply the provisions of Sec. 1.704-
1(b)(4)(viii)(c)(3)(ii) and Sec. 1.704-1(b)(4)(viii)(d)(3) (revised as
of April 1, 2011). For purposes of this paragraph (b)(1)(ii)(b)(3), any
change in ownership constitutes a material modification to the
partnership agreement. This transition rule does not apply to any
taxable year in which persons bearing a relationship to each other that
is specified in section 267(b) or section 707(b) collectively have the
power to amend the partnership agreement without the consent of any
unrelated party (and all subsequent taxable years).
* * * * *
(4) * * *
(vii) * * *
(d) * * *
(3) Special rules for inter-branch payments. For rules relating to
foreign tax paid or accrued in partnership taxable years beginning
before January 1, 2012, in respect of certain inter-branch payments,
see 26 CFR 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011).
* * * * *
(b)
(5) * * *
Example 24. (i) The facts are the same as in Example 21, except
that businesses M and N are conducted by entities (DE1 and DE2,
respectively) that are corporations for country X and Y tax purposes
and disregarded entities for U.S. Federal income tax purposes. Also,
assume that DE1 makes payments of $75,000 during 2012 to DE2 that
are deductible by DE1 for country X tax purposes and includible in
income of DE2 for country Y tax purposes. As a result of such
payments, DE1 has taxable income of $25,000 for country X purposes
on which $10,000 of taxes are imposed and DE2 has taxable income of
$125,000 for country Y purposes on which $25,000 of taxes are
imposed. For U.S. Federal income tax purposes, $100,000 of AB's
income is attributable to the activities of DE1 and $50,000 of AB's
income is attributable to the activities of DE2. Pursuant to the
partnership agreement, all partnership items from business M,
excluding CFTEs paid or accrued by business M, are allocated 75% to
A and 25% to B, and all partnership items from business N, excluding
CFTEs paid or accrued by business N, are split evenly between A and
B (50% each). Accordingly, A is allocated 75% of the income from
business M ($75,000), and 50% of the income from business N
($25,000). B is allocated 25% of the income from business M
($25,000), and 50% of the income from business N ($25,000).
(ii) Because the partnership agreement provides for different
allocations of the net income attributable to businesses M and N,
the net income attributable to each of business M and business N is
income in separate CFTE categories. See paragraph (b)(4)(viii)(c)(2)
of this section. Under paragraph (b)(4)(viii)(c)(3) of this section,
the $100,000 of net income attributable to business M is in the
business M CFTE category and the $50,000 of net income attributable
to business N is in the business N CFTE category. Under paragraph
(b)(4)(viii)(d)(1) of this section, the $10,000 of country X taxes
is allocated to the business M CFTE category and $10,000 of the
country Y taxes is allocated to the business N CFTE category. The
additional $15,000 of country Y tax imposed with respect to the
inter-branch payment is assigned to the business M CFTE category
because for U.S. Federal income tax purposes, the related $75,000 of
income that country Y is taxing is in the business M CFTE category.
Therefore, $25,000 of taxes ($10,000 of country X taxes and $15,000
of the country Y taxes) is related to the $100,000 of net income in
the business M CFTE category and the other $10,000 of country Y
taxes is related to the $50,000 of net income in the business N CFTE
category. See paragraph (b)(4)(viii)(c)(1) of this section.
[[Page 7327]]
The allocations of country X taxes will be in proportion to the
distributive shares of income to which they relate and will be
deemed to be in accordance with the partners' interests in the
partnership if such taxes are allocated 75% to A and 25% to B. The
allocations of country Y taxes will be in proportion to the
distributive shares of income to which they relate and will be
deemed to be in accordance with the partners' interests in the
partnership if $15,000 of such taxes is allocated 75% to A and 25%
to B and the other $10,000 of such taxes is allocated 50% to A and
50% to B. No inference is intended with respect to the application
of other provisions to arrangements that involve disregarded
payments.
(iii) Assume that the facts are the same as in paragraph (i) of
this Example 24, except that in order to reflect the $75,000 payment
from DE1 to DE2, the partnership agreement allocates $75,000 of the
income attributable to business M equally between A and B (50%
each). In order to prevent separating the CFTEs from the related
foreign income, the $75,000 payment is treated as a divisible part
of the business M activity and, therefore, a separate activity. See
paragraph (b)(4)(viii)(c)(2)(iii) of this section. Because items
from the disregarded payment and business N are both shared equally
between A and B, the disregarded payment activity and the business N
activity are treated as a single CFTE category. See paragraph
(b)(4)(viii)(c)(2)(i) of this section. Accordingly, $25,000 of net
income attributable to business M is in the business M CFTE category
and $75,000 of income of business M attributable to the disregarded
payment and the $50,000 of net income attributable to business N are
in the business N CFTE category. Under paragraph (b)(4)(viii)(d)(1)
of this section, the $10,000 of country X taxes is allocated to the
business M CFTE category and all $25,000 of the country Y taxes is
allocated to the business N CFTE category. The allocations of
country X taxes will be in proportion to the distributive shares of
income to which they relate and will be deemed to be in accordance
with the partners' interests in the partnership if such taxes are
allocated 75% to A and 25% to B. The allocations of country Y taxes
will be in proportion to the distributive shares of income to which
they relate and will be deemed to be in accordance with the
partners' interests in the partnership if such taxes are allocated
50% to A and 50% to B.
* * * * *
Sec. 1.704-1T [Removed]
0
Par. 3. Section 1.704-1T is removed.
0
Par. 4. Section 1.909-0 is added to read as follows:
Sec. 1.909-0 Outline of regulation provisions for section 909.
This section lists the headings for Sec. Sec. 1.909-1 through
1.909-6.
Sec. 1.909-1 Definitions and special rules.
(a) Definitions.
(b) Taxes paid or accrued by a partnership, S corporation or trust.
(c) Related income of a partnership, S corporation or trust.
(d) Application of section 909 to pre-1987 accumulated profits and
pre-1987 foreign income taxes.
(e) Effective/applicability date.
Sec. 1.909-2 Splitter arrangements.
(a) Foreign tax credit splitting event.
(1) In general.
(2) Split taxes not taken into account.
(b) Splitter arrangements.
(1) Reverse hybrid splitter arrangements.
(i) In general.
(ii) Split taxes from a reverse hybrid splitter arrangement.
(iii) Related income from a reverse hybrid splitter arrangement.
(iv) Reverse hybrid.
(v) Examples.
(2) Loss-sharing splitter arrangements.
(i) In general.
(ii) U.S. combined income group.
(iii) Income and shared loss of a U.S. combined income group.
(iv) Split taxes from a loss-sharing splitter arrangement.
(v) Related income from a loss-sharing splitter arrangement.
(vi) Foreign group relief or other loss-sharing regime.
(vii) Examples.
(3) Hybrid instrument splitter arrangements.
(i) U.S. equity hybrid instrument splitter arrangement.
(ii) U.S. debt hybrid instrument splitter arrangement.
(4) Partnership inter-branch payment splitter arrangements.
(i) In general.
(ii) Split taxes from a partnership inter-branch payment splitter
arrangement.
(iii) Related income from a partnership inter-branch payment
splitter arrangement.
(c) Effective/applicability date.
Sec. 1.909-3 Rules regarding related income and split taxes.
(a) Interim rules for identifying related income and split taxes.
(b) Split taxes on deductible disregarded payments.
(c) Effective/applicability date.
Sec. 1.909-4 Coordination rules.
(a) Interim rules.
(b) Effective/applicability date.
Sec. 1.909-5 2011 and 2012 splitter arrangements.
(a) Taxes paid or accrued in taxable years beginning in 2011.
(b) Taxes paid or accrued in certain taxable years beginning in
2012 with respect to a foreign consolidated group splitter arrangement.
(c) Effective/applicability date.
Sec. 1.909-6 Pre-2011 foreign tax credit splitting events.
(a) Foreign tax credit splitting event.
(1) In general.
(2) Taxes not subject to suspension under section 909.
(3) Taxes subject to suspension under section 909.
(b) Pre-2011 splitter arrangements.
(1) Reverse hybrid structure splitter arrangements.
(2) Foreign consolidated group splitter arrangements.
(3) Group relief or other loss-sharing regime splitter
arrangements.
(i) In general.
(ii) Split taxes and related income.
(4) Hybrid instrument splitter arrangements.
(i) In general.
(ii) U.S. equity hybrid instrument splitter arrangement.
(iii) U.S. debt hybrid instrument splitter arrangement.
(c) General rules for applying section 909 to pre-2011 split taxes
and related income.
(1) Annual determination.
(2) Separate categories.
(d) Special rules regarding related income.
(1) Annual adjustments.
(2) Effect of separate limitation losses and deficits.
(3) Pro rata method for distributions out of earnings and profits
that include both related income and other income.
(4) Alternative method for distributions out of earnings and
profits that include both related income and other income.
(5) Distributions, deemed distributions, and inclusions out of
related income.
(6) Carryover of related income.
(7) Related income taken into account by a section 902 shareholder.
(8) Related income taken into account by a payor section 902
corporation.
(9) Related income taken into account by an affiliated group of
corporations that includes a section 902 shareholder.
(10) Distributions of previously-taxed earnings and profits.
(e) Special rules regarding pre-2011 split taxes.
(1) Taxes deemed paid pro rata out of pre-2011 split taxes and
other taxes.
(2) Pre-2011 split taxes deemed paid in pre-2011 taxable years.
(3) Carryover of pre-2011 split taxes.
(4) Determining when pre-2011 split taxes are no longer treated as
pre-2011 split taxes.
(f) Rules relating to partnerships and trusts.
(1) Taxes paid or accrued by partnerships.
[[Page 7328]]
(2) Section 704(b) allocations.
(3) Trusts.
(g) Interaction between section 909 and other Code provisions.
(1) Section 904(c).
(2) Section 905(a).
(3) Section 905(c).
(4) Other foreign tax credit provisions.
(h) Effective/applicability date.
Sec. 1.909-0T [Removed]
0
Par. 5. Section 1.909-0T is removed.
0
Par. 6. Sections 1.909-1 is added to read as follows:
Sec. 1.909-1 Definitions and special rules.
(a) Definitions. For purposes of section 909, this section, and
Sec. Sec. 1.909-2 through 1.909-5, the following definitions apply:
(1) The term section 902 corporation means any foreign corporation
with respect to which one or more domestic corporations meet the
ownership requirements of section 902(a) or (b).
(2) The term section 902 shareholder means any domestic corporation
that meets the ownership requirements of section 902(a) or (b) with
respect to a section 902 corporation.
(3) The term payor means a person that pays or accrues a foreign
income tax within the meaning of Sec. 1.901-2(f), and also includes a
person that takes foreign income taxes paid or accrued by a
partnership, S corporation, estate or trust into account pursuant to
section 702(a)(6), section 901(b)(5) or section 1373(a).
(4) The term covered person means, with respect to a payor--
(i) Any entity in which the payor holds, directly or indirectly, at
least a 10 percent ownership interest (determined by vote or value);
(ii) Any person that holds, directly or indirectly, at least a 10
percent ownership interest (determined by vote or value) in the payor;
or
(iii) Any person that bears a relationship that is described in
section 267(b) or 707(b) to the payor.
(5) The term foreign income tax means any income, war profits, or
excess profits tax paid or accrued to any foreign country or to any
possession of the United States. A foreign income tax includes any tax
paid or accrued in lieu of such a tax within the meaning of section
903.
(6) The term post-1986 foreign income taxes has the meaning
provided in Sec. 1.902-1(a)(8).
(7) The term post-1986 undistributed earnings has the meaning
provided in Sec. 1.902-1(a)(9).
(8) The term disregarded entity means an entity that is disregarded
as an entity separate from its owner, as provided in Sec. 301.7701-
2(c)(2)(i) of this chapter.
(9) The term hybrid partnership means a partnership that is subject
to income tax in a foreign country as a corporation (or otherwise at
the entity level) on the basis of residence, place of incorporation,
place of management or similar criteria.
(b) Taxes paid or accrued by a partnership, S corporation or trust.
Under section 909(c)(1), section 909 applies at the partner level, and
similar rules apply in the case of an S corporation or trust.
Accordingly, in the case of foreign income taxes paid or accrued by a
partnership, S corporation or trust, taxes allocated to one or more
partners, shareholders or beneficiaries (as the case may be) will be
treated as split taxes to the extent such taxes would be split taxes if
the partner, shareholder or beneficiary had paid or accrued the taxes
directly on the date such taxes are taken into account by the partner
under sections 702 and 706(a), by the shareholder under section
1373(a), or by the beneficiary under section 901(b)(5). Any such split
taxes will be suspended in the hands of the partner, shareholder or
beneficiary.
(c) Related income of a partnership, S corporation or trust. For
purposes of determining whether related income is taken into account by
a covered person, related income of a partnership, S corporation or
trust is considered to be taken into account by the partner,
shareholder or beneficiary to whom the related income is allocated.
(d) Application of section 909 to pre-1987 accumulated profits and
pre-1987 foreign income taxes. Section 909 and Sec. Sec. 1.909-1
through 1.909-5 will apply to pre-1987 accumulated profits (as defined
in Sec. 1.902-1(a)(10)(i)) and pre-1987 foreign income taxes (as
defined in Sec. 1.902-1(a)(10)(iii)) of a section 902 corporation
attributable to taxable years beginning on or after January 1, 2012.
(e) Effective/applicability date. This section applies to taxable
years ending after February 9, 2015. See 26 CFR 1.909-1T (revised as of
April 1, 2014) for rules applicable to taxable years beginning on or
after January 1, 2011, and ending on or before February 9, 2015.
Sec. 1.909-1T [Removed]
0
Par. 7. Section 1.909-1T is removed.
0
Par. 8. Section 1.909-2 is added to read as follows:
Sec. 1.909-2 Splitter arrangements.
(a) Foreign tax credit splitting event--(1) In general. There is a
foreign tax credit splitting event with respect to foreign income taxes
paid or accrued if and only if, in connection with an arrangement
described in paragraph (b) of this section (a splitter arrangement) the
related income was, is or will be taken into account for U.S. Federal
income tax purposes by a person that is a covered person with respect
to the payor of the tax. Foreign income taxes that are paid or accrued
in connection with a splitter arrangement are split taxes to the extent
provided in paragraph (b) of this section. Income (or, as appropriate,
earnings and profits) that was, is or will be taken into account by a
covered person in connection with a splitter arrangement is related
income to the extent provided in paragraph (b) of this section.
(2) Split taxes not taken into account. Split taxes will not be
taken into account for U.S. Federal income tax purposes before the
taxable year in which the related income is taken into account by the
payor or, in the case of split taxes paid or accrued by a section 902
corporation, by a section 902 shareholder of such section 902
corporation. Therefore, in the case of split taxes paid or accrued by a
section 902 corporation, split taxes will not be taken into account for
purposes of sections 902 or 960, or for purposes of determining
earnings and profits under section 964(a), before the taxable year in
which the related income is taken into account by the payor section 902
corporation, a section 902 shareholder of the section 902 corporation,
or a member of the section 902 shareholder's consolidated group. See
Sec. 1.909-3(a) for rules relating to when split taxes and related
income are taken into account.
(b) Splitter arrangements. The arrangements set forth in this
paragraph (b) are splitter arrangements.
(1) Reverse hybrid splitter arrangements--(i) In general. A reverse
hybrid is a splitter arrangement when a payor pays or accrues foreign
income taxes with respect to income of a reverse hybrid. A reverse
hybrid splitter arrangement exists even if the reverse hybrid has a
loss or a deficit in earnings and profits for a particular year for
U.S. Federal income tax purposes (for example, due to a timing
difference).
(ii) Split taxes from a reverse hybrid splitter arrangement. The
foreign income taxes paid or accrued with respect to income of the
reverse hybrid are split taxes.
(iii) Related income from a reverse hybrid splitter arrangement.
The related income with respect to split taxes from a reverse hybrid
splitter arrangement is the earnings and profits (computed for U.S.
Federal income tax purposes) of the reverse hybrid attributable to the
activities of the reverse hybrid that gave rise to income included in
the payor's foreign tax base with respect to which
[[Page 7329]]
the split taxes were paid or accrued. Accordingly, related income of
the reverse hybrid includes items of income or expense attributable to
a disregarded entity owned by the reverse hybrid only to the extent
that the income attributable to the activities of the disregarded
entity is included in the payor's foreign tax base.
(iv) Reverse hybrid. The term reverse hybrid means an entity that
is a corporation for U.S. Federal income tax purposes but is a fiscally
transparent entity (under the principles of Sec. 1.894-1(d)(3)) or a
branch under the laws of a foreign country imposing tax on the income
of the entity.
(v) Examples. The following examples illustrate the rules of
paragraph (b)(1) of this section.
Example 1. (i) Facts. USP, a domestic corporation, wholly owns
DE, a disregarded entity for U.S. federal income tax purposes that
is organized in country A and treated as a corporation for country A
tax purposes. DE wholly owns RH, a corporation for U.S. Federal
income tax purposes that is organized in country A and treated as a
fiscally transparent entity for country A tax purposes. Country A
imposes an income tax at the rate of 30% on DE with respect to the
items of income earned by RH. Prior to year 1, RH had no income for
country A purposes and had no post-1986 earnings and profits for
U.S. Federal income tax purposes. In year 1, RH earns 200u of income
on which DE pays 60u of country A tax. Pursuant to Sec. 1.901-
2(f)(4)(ii), USP is treated as legally liable for the 60u of country
A taxes paid by DE. DE has no other income. In year 2, RH earns no
income and incurs no losses or expenses. At the end of year 2, RH
distributes 100u to DE.
(ii) Result. (A) Split taxes and related income. Pursuant to
Sec. 1.909-2(b)(1)(iv), RH is a reverse hybrid because it is a
corporation for U.S. Federal income tax purposes and a fiscally
transparent entity for country A purposes. Pursuant to Sec. 1.909-
2(b)(1), RH is a covered person with respect to USP because USP
wholly owns RH for U.S. Federal income tax purposes. Pursuant to
Sec. 1.909-2(b)(1)(i), there is a splitter arrangement with respect
to RH because USP paid country A tax with respect to the income of
RH. All 60u of taxes paid by USP in year 1 with respect to the
income of RH are split taxes pursuant to Sec. 1.909-2(b)(1)(ii).
The post-1986 earnings and profits of RH are 200u as of the end of
year 1. Pursuant to Sec. 1.909-2(b)(1)(iii), the related income in
year 1 is the 200u of RH's earnings and profits that are
attributable to the activities that gave rise to the split taxes. No
additional split taxes or related income arise in year 2.
(B) Distribution. Because DE is a disregarded entity, the 100u
distribution by RH at the end of year 2 is treated as a dividend to
USP. Pursuant to Sec. 1.909-6(d)(7) and Sec. 1.909-3(a), 100u of
the 200u of related income of RH, or 50%, is taken into account by
USP by reason of the 100u dividend. Accordingly, pursuant to Sec.
1.909-6(e)(4) and Sec. 1.909-3(a), a ratable portion of the split
taxes, or 30u of taxes (50% of 60u), is no longer treated as split
taxes and is taken into account by USP for U.S. Federal income tax
purposes.
Example 2. (i) Facts. The facts are the same as in Example 1,
except that in year 2, RH has a 100u loss for U.S. Federal income
tax purposes as well as for country A tax purposes. For country A
tax purposes, DE takes the 100u loss into account in year 2 and may
not carry back the 100u loss to offset its country A taxable income
for year 1. At the end of year 2, RH distributes 100u to DE.
(ii) Result. (A) Split taxes and related income. The split taxes
and related income for year 1 are the same as in Example 1. Pursuant
to Sec. 1.909-2(b)(1)(iii), Sec. 1.909-6(d)(1) and Sec. 1.909-
3(a), the total related income of RH is reduced to 100u (200u -
100u) in year 2 because RH incurred a 100u loss in year 2
attributable to the activities that are included in DE's country A
tax base.
(B) Distribution. Because DE is a disregarded entity, the 100u
distribution by RH at the end of year 2 is treated as a dividend to
USP. Pursuant to Sec. 1.909-6(d)(7) and Sec. 1.909-3(a), 100u of
the 100u of related income of RH, or 100%, is taken into account by
USP by reason of the 100u dividend. Accordingly, pursuant to Sec.
1.909-6(e)(4) and Sec. 1.909-3(a), a ratable portion of the split
taxes, or 60u of taxes (100% of 60u), is no longer treated as split
taxes and is taken into account by USP for U.S. Federal income tax
purposes.
(2) Loss-sharing splitter arrangements--(i) In general. A foreign
group relief or other loss-sharing regime is a loss-sharing splitter
arrangement to the extent that a shared loss of a U.S. combined income
group could have been used to offset income of that group in the
current or in a prior foreign taxable year (usable shared loss) but is
used instead to offset income of another U.S. combined income group.
(ii) U.S. combined income group. The term U.S. combined income
group means an individual or a corporation and all entities (including
entities that are fiscally transparent for U.S. Federal income tax
purposes under the principles of Sec. 1.894-1(d)(3)) that for U.S.
Federal income tax purposes combine any of their respective items of
income, deduction, gain or loss with the income, deduction, gain or
loss of such individual or corporation. A U.S. combined income group
can arise, for example, as a result of an entity being disregarded or,
in the case of a partnership or hybrid partnership and a partner, as a
result of the allocation of income or any other item of the partnership
to the partner. For purposes of this paragraph (b)(2)(ii), a branch is
treated as an entity, all members of a U.S. affiliated group of
corporations (as defined in section 1504) that file a consolidated
return are treated as a single corporation, and two or more individuals
that file a joint return are treated as a single individual. A U.S.
combined income group may consist of a single individual or corporation
and no other entities, but cannot include more than one individual or
corporation. In addition, an entity may belong to more than one U.S.
combined income group. For example, a hybrid partnership with two
corporate partners that do not combine any of their items of income,
deduction, gain or loss for U.S. Federal income tax purposes is in a
separate U.S. combined income group with each of its partners.
(iii) Income and shared loss of a U.S. combined income group--(A)
Income. Except as otherwise provided in this paragraph (b)(2)(iii)(A),
the income of a U.S. combined income group is the aggregate amount of
taxable income recognized or taken into account for foreign tax
purposes by those members that have positive taxable income for foreign
tax purposes. In the case of an entity that is fiscally transparent
(under the principles of Sec. 1.894-1(d)(3)) for foreign tax purposes
and that is a member of more than one U.S. combined income group, the
foreign taxable income of the entity is allocated between or among the
groups under foreign tax law. In the case of an entity that is not
fiscally transparent for foreign tax purposes and that is a member of
more than one U.S. combined income group, the foreign taxable income of
the entity is allocated between or among those groups based on U.S.
Federal income tax principles. For example, in the case of a hybrid
partnership, the foreign taxable income of the partnership is allocated
between or among the groups in the manner the partnership allocates the
income under section 704(b). To the extent the foreign taxable income
would be income under U.S. Federal income tax principles in another
year, the income is allocated between or among the groups based on how
the hybrid partnership would allocate the income if the income were
recognized for U.S. Federal income tax purposes in the year in which
the income is recognized for foreign tax purposes. To the extent the
foreign taxable income would not constitute income under U.S. Federal
income tax principles in any year, the income is allocated between or
among the groups in the same manner as the partnership items
attributable to the activity giving rise to the foreign taxable income.
(B) Shared loss. The term shared loss means a loss of one entity
for foreign tax purposes that, in connection with a foreign group
relief or other loss-sharing regime, is taken into account by one or
more other entities. Except as otherwise provided in this paragraph
(b)(2)(iii)(B), the amount of shared loss of a U.S.
[[Page 7330]]
combined income group is the sum of the shared losses of all members of
the U.S. combined income group. In the case of an entity that is
fiscally transparent (under the principles of Sec. 1.894-1(d)(3)) for
foreign tax purposes and that is a member of more than one U.S.
combined income group, the shared loss of the entity is allocated
between or among the groups under foreign tax law. In the case of an
entity that is not fiscally transparent for foreign tax purposes and
that is a member of more than one U.S. combined income group, the
shared loss of the entity will be allocated between or among those
groups based on U.S. Federal income tax principles. For example, in the
case of a hybrid partnership, the shared loss of the partnership will
be allocated between or among the groups in the manner the partnership
allocates the loss under section 704(b). To the extent the shared loss
would be a loss under U.S. Federal income tax principles in another
year, the loss is allocated between or among the groups based on how
the partnership would allocate the loss if the loss were recognized for
U.S. Federal income tax purposes in the year in which the loss is
recognized for foreign tax purposes. To the extent the shared loss
would not constitute a loss under U.S. Federal income tax principles in
any year, the loss is allocated between or among the groups in the same
manner as the partnership items attributable to the activity giving
rise to the shared loss.
(iv) Split taxes from a loss-sharing splitter arrangement. Split
taxes from a loss-sharing splitter arrangement are foreign income taxes
paid or accrued by a member of the U.S. combined income group with
respect to income from the current foreign taxable year, or, in the
case of a foregone carryback loss, from the prior foreign taxable year,
equal to the amount of the usable shared loss of that group that
offsets income of another U.S. combined income group.
(v) Related income from a loss-sharing splitter arrangement. The
related income with respect to split taxes from a loss-sharing splitter
arrangement is an amount of income of the individual or corporate
member of the U.S. combined income group equal to the amount of income
under foreign tax law of that U.S. combined income group that is offset
by the usable shared loss of another U.S. combined income group.
(vi) Foreign group relief or other loss-sharing regime. A foreign
group relief or other loss-sharing regime exists when an entity may
surrender its loss to offset the income of one or more other entities.
A foreign group relief or other loss-sharing regime does not include an
allocation of loss of an entity that is a partnership or other fiscally
transparent entity (under the principles of Sec. 1.894-1(d)(3)) for
foreign tax purposes or regimes in which foreign tax is imposed on
combined income (such as a foreign consolidated regime), as described
in Sec. 1.901-2(f)(3).
(vii) Examples. The following examples illustrate the rules of
paragraph (b)(2) of this section.
Example 1. (i) Facts. USP, a domestic corporation, wholly owns
CFC1, a corporation organized in country A. CFC1 wholly owns CFC2
and CFC3, both corporations organized in country A. CFC2 wholly owns
DE, an entity organized in country A. DE is a corporation for
country A tax purposes and a disregarded entity for U.S. Federal
income tax purposes. Country A has a loss-sharing regime under which
a loss of CFC1, CFC2, CFC3 or DE may be used to offset the income of
one or more of the others. Country A imposes an income tax at the
rate of 30% on the taxable income of corporations organized in
country A. In year 1, before any loss sharing, CFC1 has no income,
CFC2 has income of 50u, CFC3 has income of 200u, and DE has a loss
of 100u. Under the provisions of country A's loss-sharing regime,
the group decides to use DE's 100u loss to offset 100u of CFC3's
income. After the loss is shared, for country A's tax purposes, CFC2
still has 50u of income on which it pays 15u of country A tax. CFC3
has income of 100u (200u less the 100u shared loss) on which it pays
30u of country A tax. For U.S. Federal income tax purposes, the loss
sharing with CFC3 is not taken into account. Because DE is a
disregarded entity, its 100u loss is taken into account by CFC2 and
reduces its earnings and profits for U.S. Federal income tax
purposes. Accordingly, before application of section 909, CFC2 has a
loss for earnings and profits purposes of 65u (50u income less 15u
taxes paid to country A less 100u loss of DE). CFC2 also has the
U.S. dollar equivalent of 15u of foreign income taxes to add to its
post-1986 foreign income taxes pool. CFC3 has earnings and profits
of 170u (200u income less 30u of taxes) and the dollar equivalent of
30u of foreign income taxes to add to its post-1986 foreign income
taxes pool.
(ii) Result. Pursuant to Sec. 1.909-2(b)(2)(ii), CFC2 and DE
constitute one U.S. combined income group, while CFC1 and CFC3 each
constitute separate U.S. combined income groups. Pursuant to Sec.
1.909-2(b)(2)(iii)(A), the income of the CFC2 U.S. combined income
group is 50u (CFC2's country A taxable income of 50u). The income of
the CFC3 U.S. combined income group is 200u (CFC3's country A
taxable income of 200u). Pursuant to Sec. 1.909-2(b)(2)(iii)(B),
the shared loss of the CFC2 U.S. combined income group includes the
100u of shared loss incurred by DE. The usable shared loss of the
CFC2 U.S. combined income group is 50u, the amount of the group's
shared loss that could have otherwise offset CFC2's 50u of country A
taxable income that is included in the income of the CFC2 U.S.
combined income group. There is a splitter arrangement because the
50u usable shared loss of the CFC2 U.S. combined income group was
used instead to offset income of CFC3, which is included in the CFC3
U.S. combined income group. Pursuant to Sec. 1.909-2(b)(2)(iv), the
split taxes are the 15u of country A income taxes paid by CFC2 on
50u of income, an amount of income of the CFC2 U.S. combined income
group equal to the amount of usable shared loss of that group that
was used to offset income of the CFC3 U.S. combined income group.
Pursuant to Sec. 1.909-2(b)(2)(v), the related income is the 50u of
CFC3's income that equals the amount of income of the CFC3 U.S.
combined income group that was offset by the usable shared loss of
the CFC2 U.S. combined income group.
Example 2. (i) Facts. USP, a domestic corporation, wholly owns
CFC1, a corporation organized in country B. CFC1 wholly owns CFC2
and CFC3, both corporations organized in country B. CFC2 wholly owns
DE, an entity organized in country B. DE is a corporation for
country B tax purposes and a disregarded entity for U.S. Federal
income tax purposes. CFC2 and CFC3 each own 50% of HP1, an entity
organized in country B. HP1 is a corporation for country B tax
purposes and a partnership for U.S. Federal income tax purposes. All
items of income and loss of HP1 are allocated for U.S. Federal
income tax purposes equally between CFC2 and CFC3, and all entities
use the country B currency ``u'' as their functional currency.
Country B has a loss-sharing regime under which a loss of any of
CFC1, CFC2, CFC3, DE, and HP1 may be used to offset the income of
one or more of the others. Country B imposes an income tax at the
rate of 30% on the taxable income of corporations organized in
country B. In year 1, before any loss sharing, CFC2 has income of
100u, CFC1 and CFC3 have no income, DE has a loss of 100u, and HP1
has income of 200u. Under the provisions of country B's loss-sharing
regime, the group decides to use DE's 100u loss to offset 100u of
HP1's income. After the loss is shared, for country B tax purposes,
CFC2 has 100u of income on which it pays 30u of country B income
tax, and HP1 has 100u of income (200u less the 100u shared loss) on
which it pays 30u of country B income tax. For U.S. Federal income
tax purposes, the loss sharing with HP1 is not taken into account,
and, because DE is a disregarded entity, its 100u loss is taken into
account by CFC2 and reduces CFC2's earnings and profits for U.S.
Federal income tax purposes. The 200u income of HP1 is allocated 50/
50 to CFC2 and CFC3, as is the 30u of country B income tax paid by
HP1. Accordingly, before application of section 909, for U.S.
Federal income tax purposes, CFC2 has earnings and profits of 55u
(100u income plus 100u share of HP1's income less 100u loss of DE
less 30u country B income tax paid by CFC2 less 15u share of HP1's
country B income tax) and the dollar equivalent of 45u of country B
income tax to add to its post-1986 foreign income taxes pool. CFC3
has earnings and profits of 85u (100u share of HP1's income less 15u
share of HP1's country B income taxes) and the
[[Page 7331]]
dollar equivalent of 15u of country B income tax to add to its post-
1986 foreign income taxes pool.
(ii) U.S. combined income groups. Pursuant to Sec. 1.909-
2(b)(2)(ii), because the income and loss of HP1 are combined in part
with the income and loss of both CFC2 and CFC3, it belongs to both
of the separate CFC2 and CFC3 U.S. combined income groups. DE is a
member of the CFC2 U.S. combined income group.
(iii) Income of the U.S. combined income groups. Pursuant to
Sec. 1.909-2(b)(2)(iii)(A), the income of the CFC2 U.S. combined
income group is the 200u country B taxable income of the members of
the group with positive taxable incomes (CFC2's country B taxable
income of 100u plus 50% of HP1's country B taxable income of 200u,
or 100u). Because DE does not have positive taxable income for
country B tax purposes, its 100u loss is not included in the income
of the CFC2 U.S. combined income group. The income of the CFC3 U.S.
combined income group is 100u (50% of HP1's country B taxable income
of 200u, or 100u).
(iv) Shared loss of the U.S. combined income groups. Pursuant to
Sec. 1.909-2(b)(2)(iii)(B), the shared loss of the CFC2 U.S.
combined income group is the 100u loss incurred by DE that is used
to offset 100u of HP1's income. The CFC3 U.S. combined income group
has no shared loss. Pursuant to Sec. 1.909-2(b)(2)(i), the usable
shared loss of the CFC2 U.S. combined income group is 100u, the full
amount of the group's 100u shared loss that could have been used to
offset income of the CFC2 U.S. combined income group had the loss
been used to offset 100u of CFC2's country B taxable income.
(v) Income offset by shared loss. The shared loss of the CFC2
combined income group is used to offset 100u country B taxable
income of HP1. Because the taxable income of HP1 is allocated 50/50
between the CFC2 and CFC3 U.S. combined income groups, the shared
loss is treated as offsetting 50u of the CFC2 U.S. combined income
group's income and 50u of the CFC3 U.S. combined income group's
income.
(vi) Splitter arrangement. There is a splitter arrangement
because 50u of the 100u usable shared loss of the CFC2 U.S. combined
income group was used to offset income of the CFC3 U.S. combined
income group. Pursuant to Sec. 1.909-2(b)(2)(iv), the split taxes
are the 15u of country B income tax paid by CFC2 on 50u of its
income, which is equal to the amount of the CFC2 U.S. combined
income group's usable shared loss that was used to offset income of
another U.S. combined income group. Pursuant to Sec. 1.909-
2(b)(2)(v), the related income is the 50u of CFC3's income that was
offset by the usable shared loss of the CFC2 U.S. combined income
group.
(3) Hybrid instrument splitter arrangements--(i) U.S. equity hybrid
instrument splitter arrangement--(A) In general. A U.S. equity hybrid
instrument is a splitter arrangement if:
(1) Under the laws of a foreign jurisdiction in which the
instrument owner is subject to tax, the instrument gives rise to income
includible in the instrument owner's income and such inclusion results
in foreign income taxes paid or accrued by the instrument owner;
(2) Under the laws of a foreign jurisdiction in which the issuer is
subject to tax, the instrument gives rise to deductions that are
incurred or otherwise taken into account by the issuer; and
(3) The events that give rise to income includible in the
instrument owner's income for foreign tax purposes as described in
paragraph (b)(3)(i)(A)(1) of this section, and to deductions for the
issuer for foreign tax purposes as described in paragraph
(b)(3)(i)(A)(2) of this section, do not result in an inclusion of
income for the instrument owner for U.S. federal income tax purposes.
(B) Split taxes from a U.S. equity hybrid instrument splitter
arrangement. Split taxes from a U.S. equity hybrid instrument splitter
arrangement equal the total amount of foreign income taxes paid or
accrued by the owner of the hybrid instrument less the amount of
foreign income taxes that would have been paid or accrued had the owner
of the U.S. equity hybrid instrument not been subject to foreign tax on
income from the instrument with respect to the events described in
Sec. 1.909-2(b)(3)(i)(A).
(C) Related income from a U.S. equity hybrid instrument splitter
arrangement. The related income with respect to split taxes from a U.S.
equity hybrid instrument splitter arrangement is income of the issuer
of the U.S. equity hybrid instrument in an amount equal to the amounts
giving rise to the split taxes that are deductible by the issuer for
foreign tax purposes, determined without regard to the actual amount of
the issuer's income or earnings and profits for U.S. Federal income tax
purposes.
(D) U.S. equity hybrid instrument. The term U.S. equity hybrid
instrument means an instrument that is treated as equity for U.S.
Federal income tax purposes but for foreign income tax purposes either
is treated as indebtedness or otherwise entitles the issuer to a
deduction with respect to such instrument.
(E) Example. (i) Facts. USP, a domestic corporation, wholly owns
CFC1, which wholly owns CFC2. Both CFC1 and CFC2 are corporations
organized in country A. CFC2 issues an instrument to CFC1 that is
treated as indebtedness for country A tax purposes but equity for
U.S. Federal income tax purposes. Under country A's income tax laws,
the instrument accrues interest at the end of each month, which
results in a deduction for CFC2 and an income inclusion and tax
liability for CFC1 in country A. The accrual of interest does not
result in an inclusion of income for CFC1 for U.S. Federal income
tax purposes. Pursuant to the terms of the instrument, CFC2 makes a
distribution at the end of the year equal to the amounts of interest
that have accrued during the year, and such payment is treated as a
dividend that is included in the income of CFC1 for U.S. Federal
income tax purposes.
(ii) Result. Pursuant to Sec. 1.909-2(b)(3)(i)(D), because the
instrument is treated as equity for U.S. Federal income tax purposes
but is treated as indebtedness for country A tax purposes, it is a
U.S. equity hybrid instrument. Pursuant to Sec. 1.909-
2(b)(3)(i)(A)(3), because the accrual of interest under foreign law
does not result in an inclusion of income of CFC1 for U.S. Federal
income tax purposes, there is a splitter arrangement. The fact that
the payment of the accrued amount at the end of the year pursuant to
the terms of the instrument gives rise to a dividend that is
included in income of CFC1 for U.S. Federal income tax purposes does
not change the result because it is the accrual of interest and not
the payment that gives rise to income or deductions under foreign
law. The payments will be treated as a distribution of related
income to the extent provided by Sec. 1.909-3 and Sec. 1.909-6(d).
(ii) U.S. debt hybrid instrument splitter arrangement--(A) In
general. A U.S. debt hybrid instrument is a splitter arrangement if
foreign income taxes are paid or accrued by the issuer of a U.S. debt
hybrid instrument with respect to income in an amount equal to the
interest (including original issue discount) paid or accrued on the
instrument that is deductible for U.S. Federal income tax purposes but
that does not give rise to a deduction under the laws of a foreign
jurisdiction in which the issuer is subject to tax.
(B) Split taxes from a U.S. debt hybrid instrument splitter
arrangement. Split taxes from a U.S. debt hybrid instrument splitter
arrangement are the foreign income taxes paid or accrued by the issuer
on the income that would have been offset by the interest paid or
accrued on the U.S. debt hybrid instrument had such interest been
deductible for foreign tax purposes.
(C) Related income from a U.S. debt hybrid instrument splitter
arrangement. The related income from a U.S. debt hybrid instrument
splitter arrangement is the gross amount of the interest income
recognized for U.S. Federal income tax purposes by the owner of the
U.S. debt hybrid instrument, determined without regard to the actual
amount of the owner's income or earnings and profits for U.S. Federal
income tax purposes.
(D) U.S. debt hybrid instrument. The term U.S. debt hybrid
instrument means an instrument that is treated as equity for foreign
tax purposes but as
[[Page 7332]]
indebtedness for U.S. Federal income tax purposes.
(4) Partnership inter-branch payment splitter arrangements--(i) In
general. An allocation of foreign income tax paid or accrued by a
partnership with respect to an inter-branch payment as described in
Sec. 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011) (the
inter-branch payment tax) is a splitter arrangement to the extent the
inter-branch payment tax is not allocated to the partners in the same
proportion as the distributive shares of income in the CFTE category to
which the inter-branch payment tax is or would be assigned under Sec.
1.704-1(b)(4)(viii)(d) without regard to Sec. 1.704-
1(b)(4)(viii)(d)(3).
(ii) Split taxes from a partnership inter-branch payment splitter
arrangement. The split taxes from a partnership inter-branch splitter
arrangement equal the excess of the amount of the inter-branch payment
tax allocated to a partner under the partnership agreement over the
amount of the inter-branch payment tax that would have been allocated
to the partner if the inter-branch payment tax had been allocated to
the partners in the same proportion as the distributive shares of
income in the CFTE category referred to in paragraph (b)(4)(i) of this
section.
(iii) Related income from a partnership inter-branch payment
splitter arrangement. The related income from a partnership inter-
branch payment splitter arrangement equals the amount of income
allocated to a partner that exceeds the amount of income that would
have been allocated to the partner if income in the CFTE category
referred to in paragraph (b)(4)(i) of this section in the amount of the
inter-branch payment had been allocated to the partners in the same
proportion as the inter-branch payment tax was allocated under the
partnership agreement.
(c) Effective/applicability date. This section applies to foreign
income taxes paid or accrued in taxable years ending after February 9,
2015. However, a taxpayer may choose to apply the provisions of Sec.
1.909-2T (as contained in 26 CFR part 1, revised as of April 1, 2014)
in lieu of this section to foreign income taxes paid or accrued in its
first taxable year ending after February 9, 2015, and in taxable years
of foreign corporations with respect to which the taxpayer is a
domestic shareholder (as defined in Sec. 1.902-1(a)) that end with or
within that first taxable year. See 26 CFR 1.909-2T (revised as of
April 1, 2014) for rules applicable to foreign income taxes paid or
accrued in taxable years beginning on or after January 1, 2012, and
ending on or before February 9, 2015.
Sec. 1.909-2T [Removed]
0
Par. 9. Section 1.909-2T is removed.
0
Par.10. Section 1.909-3 is added to read as follows:
Sec. 1.909-3 Rules regarding related income and split taxes.
(a) Interim rules for identifying related income and split taxes.
The principles of paragraphs (d) through (f) of Sec. 1.909-6 apply to
related income and split taxes in taxable years beginning on or after
January 1, 2011, except that the alternative method for identifying
distributions of related income described in Sec. 1.909-6(d)(4)
applies only to identify the amount of pre-2011 split taxes of a
section 902 corporation that are suspended as of the first day of the
section 902 corporation's first taxable year beginning on or after
January 1, 2011.
(b) Split taxes on deductible disregarded payments. Split taxes
include taxes paid or accrued in taxable years beginning on or after
January 1, 2011, with respect to the amount of a disregarded payment
that is deductible by the payor of the disregarded payment under the
laws of a foreign jurisdiction in which the payor of the disregarded
payment is subject to tax on related income from a splitter
arrangement. The amount of the deductible disregarded payment to which
this paragraph (b) applies is limited to the amount of related income
from such splitter arrangement.
(c) Effective/applicability date. This section applies to taxable
years ending after February 9, 2015. See 26 CFR 1.909-3T (revised as of
April 1, 2014) for rules applicable to taxable years beginning on or
after January 1, 2011, and ending on or before February 9, 2015.
Sec. 1.909-3T [Removed]
0
Par. 11. Section 1.909-3T is removed.
0
Par. 12. Section 1.909-4 is added to read as follows:
Sec. 1.909-4 Coordination rules.
(a) Interim rules. The principles of paragraph (g) of Sec. 1.909-6
apply to taxable years beginning on or after January 1, 2011.
(b) Effective/applicability date. This section applies to taxable
years ending after February 9, 2015. See 26 CFR 1.909-4T (revised as of
April 1, 2014) for rules applicable to taxable years beginning on or
after January 1, 2011, and ending on or before February 9, 2015.
Sec. 1.909-4T [Removed]
0
Par. 13. Section 1.909-4T is removed.
0
Par. 14. Section 1.909-5 is added to read as follows:
Sec. 1.909-5 2011 and 2012 splitter arrangements.
(a) Taxes paid or accrued in taxable years beginning in 2011. (1)
Foreign income taxes paid or accrued by any person in a taxable year
beginning on or after January 1, 2011, and before January 1, 2012, in
connection with a pre-2011 splitter arrangement (as defined in Sec.
1.909-6(b)), are split taxes to the same extent that such taxes would
have been treated as pre-2011 split taxes if such taxes were paid or
accrued by a section 902 corporation in a taxable year beginning on or
before December 31, 2010. The related income with respect to split
taxes from such an arrangement is the related income described in Sec.
1.909-6(b), determined as if the payor were a section 902 corporation.
(2) Foreign income taxes paid or accrued by any person in a taxable
year beginning on or after January 1, 2011, and before January 1, 2012,
in connection with a partnership inter-branch payment splitter
arrangement described in Sec. 1.909-2(b)(4) are split taxes to the
extent that such taxes are identified as split taxes in Sec. 1.909-
2(b)(4)(ii). The related income with respect to the split taxes is the
related income described in Sec. 1.909-2(b)(4)(iii).
(b) Taxes paid or accrued in certain taxable years beginning in
2012 with respect to a foreign consolidated group splitter arrangement.
Foreign income taxes paid or accrued by any person in a taxable year
beginning on or after January 1, 2012, and on or before February 14,
2012, in connection with a foreign consolidated group splitter
arrangement described in Sec. 1.909-6(b)(2) are split taxes to the
same extent that such taxes would have been treated as pre-2011 split
taxes if such taxes were paid or accrued by a section 902 corporation
in a taxable year beginning on or before December 31, 2010. The related
income with respect to split taxes from such an arrangement is the
related income described in Sec. 1.909-6(b)(2), determined as if the
payor were a section 902 corporation.
(c) Effective/applicability date. The rules of this section apply
to foreign income taxes paid or accrued in taxable years beginning on
or after January 1, 2011, and on or before February 14, 2012.
Sec. 1.909-5T [Removed]
0
Par. 15. Section 1.909-5T is removed.
0
Par. 16. Sections 1.909-6 is added to read as follows:
[[Page 7333]]
Sec. 1.909-6 Pre-2011 foreign tax credit splitting events.
(a) Foreign tax credit splitting event--(1) In general. This
section provides rules for determining whether foreign income taxes
paid or accrued by a section 902 corporation (as defined in section
909(d)(5)) in taxable years beginning on or before December 31, 2010
(pre-2011 taxable years and pre-2011 taxes) are suspended under section
909 in taxable years beginning after December 31, 2010, (post-2010
taxable years) of a section 902 corporation. Paragraph (b) of this
section identifies an exclusive list of arrangements that will be
treated as giving rise to foreign tax credit splitting events in pre-
2011 taxable years (pre- 2011 splitter arrangements). Paragraphs (c),
(d), and (e) of this section provide rules for determining the related
income and pre-2011 split taxes paid or accrued with respect to pre-
2011 splitter arrangements. Paragraph (f) of this section provides
rules concerning the application of section 909 to partnerships and
trusts. Paragraph (g) of this section provides rules concerning the
interaction between section 909 and other Internal Revenue Code (Code)
provisions.
(2) Taxes not subject to suspension under section 909. Pre-2011
taxes that will not be suspended under section 909 or paragraph (a) of
this section are:
(i) Any pre-2011 taxes that were not paid or accrued in connection
with a pre-2011 splitter arrangement identified in paragraph (b) of
this section;
(ii) Any pre-2011 taxes that were paid or accrued in connection
with a pre-2011 splitter arrangement identified in paragraph (b) of
this section (pre-2011 split taxes) but that were deemed paid under
section 902(a) or 960 on or before the last day of the section 902
corporation's last pre-2011 taxable year;
(iii) Any pre-2011 split taxes if either the payor section 902
corporation took the related income into account in a pre-2011 taxable
year or a section 902 shareholder (as defined in Sec. 1.909-1(a)(2))
of the relevant section 902 corporation took the related income into
account on or before the last day of the section 902 corporation's last
pre-2011 taxable year; and
(iv) Any pre-2011 split taxes paid or accrued by a section 902
corporation in taxable years of such section 902 corporation beginning
before January 1, 1997.
(3) Taxes subject to suspension under section 909. To the extent
that the section 902 corporation paid or accrued pre-2011 split taxes
that are not described in paragraph (a)(2) of this section, section 909
and the regulations under that section will apply to such pre-2011
split taxes for purposes of applying sections 902 and 960 in post-2010
taxable years of the section 902 corporation. Accordingly, these taxes
will be removed from the section 902 corporation's pools of post-1986
foreign income taxes and suspended under section 909 as of the first
day of the section 902 corporation's first post-2010 taxable year.
There is no increase to a section 902 corporation's earnings and
profits for the amount of any pre-2011 taxes to which section 909
applies that were previously deducted in computing earnings and profits
in a pre-2011 taxable year.
(b) Pre-2011 splitter arrangements. The arrangements set forth in
this paragraph (b) are pre-2011 splitter arrangements.
(1) Reverse hybrid structure splitter arrangements. A reverse
hybrid structure exists when a section 902 corporation owns an interest
in a reverse hybrid. A reverse hybrid is an entity that is a
corporation for U.S. Federal income tax purposes but is a pass-through
entity or a branch under the laws of a foreign country imposing tax on
the income of the entity. As a result, the owner of the reverse hybrid
is subject to tax on the income of the entity under foreign law. A pre-
2011 splitter arrangement involving a reverse hybrid structure exists
when pre-2011 taxes are paid or accrued by a section 902 corporation
with respect to income of a reverse hybrid that is a covered person
with respect to the section 902 corporation. A pre-2011 splitter
arrangement involving a reverse hybrid structure may exist even if the
reverse hybrid has a deficit in earnings and profits for a particular
year (for example, due to a timing difference). Such taxes paid or
accrued by the section 902 corporation are pre-2011 split taxes. The
related income is the earnings and profits (computed for U.S. Federal
income tax purposes) of the reverse hybrid attributable to the
activities of the reverse hybrid that gave rise to income included in
the foreign tax base with respect to which the pre-2011 split taxes
were paid or accrued. Accordingly, related income of the reverse hybrid
would not include any item of income or expense attributable to a
disregarded entity (as defined in Sec. 301.7701-2(c)(2)(i) of this
chapter) owned by the reverse hybrid if income attributable to the
activities of the disregarded entity is not included in the foreign tax
base.
(2) Foreign consolidated group splitter arrangements. A foreign
consolidated group exists when a foreign country imposes tax on the
combined income of two or more entities. Tax is considered imposed on
the combined income of two or more entities even if the combined income
is computed under foreign law by attributing to one such entity the
income of one or more entities. A foreign consolidated group is a pre-
2011 splitter arrangement to the extent that the taxpayer did not
allocate the foreign consolidated tax liability among the members of
the foreign consolidated group based on each member's share of the
consolidated taxable income included in the foreign tax base under the
principles of Sec. 1.901-2(f)(3) (revised as of April 1, 2011). A pre-
2011 splitter arrangement involving a foreign consolidated group may
exist even if one or more members has a deficit in earnings and profits
for a particular year (for example, due to a timing difference). Pre-
2011 taxes paid or accrued with respect to the income of a foreign
consolidated group are pre-2011 split taxes to the extent that taxes
paid or accrued by one member of the foreign consolidated group are
imposed on a covered person's share of the consolidated taxable income
included in the foreign tax base. The related income is the earnings
and profits (computed for U.S. Federal income tax purposes) of such
other member attributable to the activities of that other member that
gave rise to income included in the foreign tax base with respect to
which the pre-2011 split taxes were paid or accrued. No inference
should be drawn from the treatment of foreign consolidated groups under
section 909 as to the determination of the person who paid the foreign
income tax for U.S. Federal income tax purposes.
(3) Group relief or other loss-sharing regime splitter
arrangements--(i) In general. A foreign group relief or other loss-
sharing regime exists when one entity with a loss permits the loss to
be used to offset the income of one or more entities (shared loss). A
pre-2011 splitter arrangement involving a shared loss exists when the
following three conditions are met:
(A) There is an instrument that is treated as indebtedness under
the laws of the jurisdiction in which the issuer is subject to tax and
that is disregarded for U.S. Federal income tax purposes (disregarded
debt instrument). Examples of a disregarded debt instrument include a
debt obligation between two disregarded entities that are owned by the
same section 902 corporation, two disregarded entities that are owned
by a partnership with one or more partners that are section 902
corporations, a section 902 corporation and a disregarded entity that
is owned by that
[[Page 7334]]
section 902 corporation, or a partnership in which the section 902
corporation is a partner and a disregarded entity that is owned by such
partnership.
(B) The owner of the disregarded debt instrument pays a foreign
income tax attributable to a payment or accrual on the instrument.
(C) The payment or accrual on the disregarded debt instrument gives
rise to a deduction for foreign tax purposes and the issuer of the
instrument incurs a shared loss that is taken into account under
foreign law by one or more entities that are covered persons with
respect to the owner of the instrument.
(ii) Split taxes and related income. In situations described in
paragraph (b)(3)(i) of this section, pre-2011 taxes paid or accrued by
the owner of the disregarded debt instrument with respect to amounts
paid or accrued on the instrument (up to the amount of the shared loss)
are pre-2011 split taxes. The related income of a covered person is an
amount equal to the shared loss, determined without regard to the
actual amount of the covered person's earnings and profits.
(4) Hybrid instrument splitter arrangements--(i) In general. A
hybrid instrument for purposes of this paragraph (b)(4) is an
instrument that either is treated as equity for U.S. Federal income tax
purposes but is treated as indebtedness for foreign tax purposes (U.S.
equity hybrid instrument), or is treated as indebtedness for U.S.
Federal income tax purposes but is treated as equity for foreign tax
purposes (U.S. debt hybrid instrument).
(ii) U.S. equity hybrid instrument splitter arrangement. If the
issuer of a U.S. equity hybrid instrument is a covered person with
respect to a section 902 corporation that is the owner of the U.S.
equity hybrid instrument, there is a pre-2011 splitter arrangement with
respect to the portion of the pre-2011 taxes paid or accrued by the
owner section 902 corporation with respect to the amounts on the
instrument that are deductible by the issuer as interest under the laws
of a foreign jurisdiction in which the issuer is subject to tax but
that do not give rise to income for U.S. Federal income tax purposes.
Pre-2011 split taxes paid or accrued by the section 902 corporation
equal the total amount of pre-2011 taxes paid or accrued by the section
902 corporation less the amount of pre-2011 taxes that would have been
paid or accrued had the section 902 corporation not been subject to tax
on income from the U.S. equity hybrid instrument. The related income of
the issuer of the U.S. equity hybrid instrument is an amount equal to
the amounts that are deductible by the issuer for foreign tax purposes,
determined without regard to the actual amount of the issuer's earnings
and profits.
(iii) U.S. debt hybrid instrument splitter arrangement. If the
owner of a U.S. debt hybrid instrument is a covered person with respect
to a section 902 corporation that is the issuer of the U.S. debt hybrid
instrument, there is a pre-2011 splitter arrangement with respect to
the portion of the pre-2011 taxes paid or accrued by the section 902
corporation on income in an amount equal to the interest (including
original issue discount) paid or accrued on the instrument that is
deductible for U.S. Federal income tax purposes but that does not give
rise to a deduction under the laws of a foreign jurisdiction in which
the issuer is subject to tax. Pre-2011 split taxes are the pre-2011
taxes paid or accrued by the section 902 corporation on the income that
would have been offset by the interest paid or accrued on the U.S. debt
hybrid instrument had such interest been deductible for foreign tax
purposes. The related income with respect to a U.S. debt hybrid
instrument is the gross amount of the interest income recognized for
U.S. Federal income tax purposes by the owner of the U.S. debt hybrid
instrument, determined without regard to the actual amount of the
owner's earnings and profits.
(c) General rules for applying section 909 to pre-2011 split taxes
and related income--(1) Annual determination. The determination of
related income, other income, pre-2011 split taxes, and other taxes,
and the portion of these amounts that were distributed, deemed paid or
otherwise transferred or eliminated must be made on an annual basis
beginning with the first taxable year of the section 902 corporation
beginning after December 31, 1996 (post-1996 taxable year) in which the
section 902 corporation paid or accrued a pre-2011 tax with respect to
a pre-2011 splitter arrangement and ending with the section 902
corporation's last pre-2011 taxable year. Annual amounts of related
income and pre-2011 split taxes are aggregated for each separate pre-
2011 splitter arrangement.
(2) Separate categories. The determination of annual and aggregate
amounts of related income and pre-2011 split taxes with respect to each
pre-2011 splitter arrangement must be made for each separate category
as defined in Sec. 1.904-4(m) of the section 902 corporation, each
covered person, and any other person that succeeds to the related
income and pre-2011 split taxes. In the case of a pre-2011 splitter
arrangement involving a shared loss (as described in paragraph (b)(3)
of this section), the amount of the related income in each separate
category of the covered person is equal to the amount of income in that
separate category that was offset by the shared loss for foreign tax
purposes. In the case of a pre-2011 splitter arrangement involving a
U.S. equity hybrid instrument (as described in paragraph (b)(4)(ii) of
this section), the related income is assigned to the issuer's separate
categories in the same proportions as the pre-2011 split taxes.
Earnings and profits, including related income, are assigned to
separate categories under the rules of Sec. Sec. 1.904-4, 1.904-5, and
1.904-7. Foreign income taxes, including pre-2011 split taxes, are
assigned to separate categories under the rules of Sec. 1.904-6. A
section 902 shareholder must consistently apply methodologies for
determining pre-2011 split taxes and related income with respect to all
pre-2011 splitter arrangements.
(d) Special rules regarding related income--(1) Annual adjustments.
In the case of each pre-2011 splitter arrangement involving a reverse
hybrid or a foreign consolidated group (as described in paragraphs
(b)(1) and (2) of this section, respectively), a covered person's
aggregate amount of related income must be adjusted each year by the
net amount of income and expense attributable to the activities of the
covered person that give rise to income included in the foreign tax
base, even if the net amount is negative and regardless of whether the
section 902 corporation paid or accrued any pre-2011 split taxes in
such year.
(2) Effect of separate limitation losses and deficits. Related
income is determined without regard to the application of Sec. 1.960-
1(i)(4) (relating to the effect of separate limitation losses on
earnings and profits in another separate category) or section 952(c)(1)
(relating to certain earnings and profits deficits).
(3) Pro rata method for distributions out of earnings and profits
that include both related income and other income. If the earnings and
profits of a covered person include amounts attributable to both
related income and other income, including earnings and profits
attributable to taxable years beginning before January 1, 1997, then
distributions, deemed distributions, and inclusions out of earnings and
profits (for example, under sections 301, 304, 367(b), 951(a), 964(e),
1248, or 1293) of the covered person are considered made out of related
income and other income on a pro rata basis. Any reduction of a
[[Page 7335]]
covered person's earnings and profits that results from a payment on
stock that is not treated as a dividend for U.S. Federal income tax
purposes (for example, pursuant to section 312(n)(7)) will also reduce
related income and other income on a pro rata basis.
(4) Alternative method for distributions out of earnings and
profits that include both related income and other income. Solely for
purposes of identifying the amount of pre-2011 split taxes of a section
902 corporation that are suspended as of the first day of the section
902 corporation's first post-2010 taxable year, in lieu of the rule set
forth in paragraph (d)(3) of this section, a section 902 shareholder
may choose to treat all distributions, deemed distributions, and
inclusions out of earnings and profits of a covered person as
attributable first to related income. A section 902 shareholder may
choose to use this alternative method on a timely filed original income
tax return for the first post-2010 taxable year in which the
shareholder computes an amount of foreign income taxes deemed paid with
respect to a section 902 corporation that paid or accrued pre-2011
split taxes. Such choice by a section 902 shareholder is evidenced by
employing the method on its income tax return; the section 902
shareholder need not file a separate statement. A section 902
shareholder that chooses this alternative method must consistently
apply it with respect to all pre-2011 splitter arrangements.
(5) Distributions, deemed distributions, and inclusions of related
income. Distributions, deemed distributions, and inclusions of related
income (including indirectly through a partnership) to persons other
than the payor section 902 corporation retain their character as
related income with respect to the associated pre-2011 split taxes.
(6) Carryover of related income. Related income carries over to
other corporations in the same manner as earnings and profits carry
over under section 381, Sec. 1.367(b)-7, or similar rules, and retains
its character as related income with respect to the associated pre-2011
split taxes.
(7) Related income taken into account by a section 902 shareholder.
Related income will be considered taken into account by a section 902
shareholder to the extent that the related income is recognized as
gross income by the section 902 shareholder, or by an affiliated
corporation described in paragraph (d)(9) of this section, upon a
distribution, deemed distribution, or inclusion (such as under section
951(a)) out of the earnings and profits of the covered person
attributable to such related income.
(8) Related income taken into account by a payor section 902
corporation. Related income will be considered taken into account by a
payor section 902 corporation to the extent that:
(i) The related income is reflected in the earnings and profits of
such section 902 corporation for U.S. Federal income tax purposes by
reason of a distribution, deemed distribution, or inclusion out of the
earnings and profits of the covered person attributable to such related
income; or
(ii) The related income is reflected as a positive adjustment to
the earnings and profits of such section 902 corporation for U.S.
Federal income tax purposes by reason of the section 902 corporation
and the covered person combining in a transaction described in section
381(a)(1) or (a)(2).
(9) Related income taken into account by an affiliated group of
corporations that includes a section 902 shareholder. A section 902
shareholder will be considered to have taken related income into
account if one or more members of an affiliated group of corporations
(as defined in section 1504) that files a consolidated Federal income
tax return that includes the section 902 shareholder takes the related
income into account.
(10) Distributions of previously-taxed earnings and profits.
Distributions and deemed distributions described in paragraph (d) of
this section (including in the case of a section 902 shareholder that
has chosen the alternative method described in paragraph (d)(4) of this
section) do not include distributions of amounts described in section
959(c)(1) or (c)(2), which are distributed before amounts described in
section 959(c)(3).
(e) Special rules regarding pre-2011 split taxes--(1) Taxes deemed
paid pro-rata out of pre-2011 split taxes and other taxes. If the pre-
2011 taxes of a section 902 corporation include both pre-2011 split
taxes and other taxes, then foreign income taxes deemed paid under
section 902 or 960 or otherwise removed from post-1986 foreign income
taxes in pre-2011 taxable years will be treated as attributable to pre-
2011 split taxes and other taxes on a pro-rata basis.
(2) Pre-2011 split taxes deemed paid in pre-2011 taxable years.
Pre-2011 split taxes deemed paid in pre-2011 taxable years in
connection with a dividend paid to a shareholder described in section
902(b) retain their character as pre-2011 split taxes. The section
902(b) shareholder will be treated as the payor section 902 corporation
with respect to those pre-2011 split taxes.
(3) Carryover of pre-2011 split taxes. Pre-2011 split taxes that
carry over to another foreign corporation, including under section 381,
Sec. 1.367(b)-7 or similar rules, retain their character as pre-2011
split taxes. The transferee foreign corporation will be treated as the
payor section 902 corporation with respect to those pre-2011 split
taxes.
(4) Determining when pre-2011 split taxes are no longer treated as
pre-2011 split taxes. For each pre-2011 splitter arrangement, as
related income is taken into account by the payor section 902
corporation or a section 902 shareholder as provided in paragraph (d)
of this section, a ratable portion of the associated pre-2011 split
taxes will no longer be treated as pre-2011 split taxes. In the case of
a pre-2011 splitter arrangement involving a reverse hybrid or a foreign
consolidated group (as described in paragraphs (b)(1) and (2) of this
section, respectively), if aggregate related income is reduced to zero
(other than as a result of a distribution, deemed distribution, or
inclusion described in paragraph (d) of this section) or less than
zero, pre-2011 split taxes will retain their character as pre-2011
split taxes until the amount of aggregate related income is positive
and the related income is taken into account by the payor section 902
corporation or a section 902 shareholder as provided in paragraph (d)
of this section.
(f) Rules relating to partnerships and trusts--(1) Taxes paid or
accrued by partnerships. In the case of foreign income taxes paid or
accrued by a partnership, the taxes will be treated as pre-2011 split
taxes to the extent such taxes are allocated to one or more section 902
corporations and would be pre-2011 split taxes if the partner section
902 corporation had paid or accrued the taxes directly on the date such
taxes are included by the section 902 corporation under sections 702
and 706(a). Further, any foreign income taxes subject to section 909
will be suspended in the hands of the partner section 902 corporation.
(2) Section 704(b) allocations. Partnership allocations that
satisfy the requirements of section 704(b) and the regulations
thereunder will not constitute pre-2011 splitter arrangements except to
the extent the arrangement is otherwise described in paragraph (b) of
this section (for example, a payment or accrual on a disregarded debt
instrument that gives rise to a shared loss).
(3) Trusts. Rules similar to the rules of paragraph (f)(1) of this
section will apply in the case of any trust with one or more
beneficiaries that is a section 902 corporation.
[[Page 7336]]
(g) Interaction between section 909 and other Code provisions--(1)
Section 904(c). Section 909 does not apply to excess foreign income
taxes that were paid or accrued in pre-2011 taxable years and carried
forward and deemed paid or accrued under section 904(c) in a post-2010
taxable year.
(2) Section 905(a). For purposes of determining in post-2010
taxable years the allowable deduction for foreign income taxes paid or
accrued under section 164(a), the carryover of excess foreign income
taxes under section 904(c), and the extended period for claiming a
credit or refund under section 6511(d)(3)(A), foreign income taxes to
which section 909 applies are first taken into account and treated as
paid or accrued in the year in which the related income is taken into
account, and not in the earlier year to which the tax relates
(determined without regard to section 909).
(3) Section 905(c). If a redetermination of foreign income taxes
claimed as a direct credit under section 901 occurs in a post-2010
taxable year and the foreign tax redetermination relates to a pre-2011
taxable year, to the extent such foreign tax redetermination increased
the amount of foreign income taxes paid or accrued with respect to the
pre-2011 taxable year (for example, due to an additional assessment of
foreign tax or a payment of a previously accrued tax not paid within
two years), section 909 will not apply to such taxes. If a
redetermination of foreign tax paid or accrued by a section 902
corporation occurs in a post-2010 taxable year and increases the amount
of foreign income taxes paid or accrued by the section 902 corporation
with respect to a pre-2011 taxable year (for example, due to an
additional assessment of foreign tax or a payment of a previously
accrued tax not paid within two years), such taxes will be treated as
pre-2011 taxes. Section 909 will apply to such taxes if they are pre-
2011 split taxes and the taxes will be suspended in the post-2010
taxable year in which they would otherwise be taken into account as a
prospective adjustment to the section 902 corporation's pools of post-
1986 foreign income taxes.
(4) Other foreign tax credit provisions. Section 909 does not
affect the applicability of other restrictions or limitations on the
foreign tax credit under existing law, including, for example, the
substantiation requirements of section 905(b).
(h) Effective/applicability date. This section applies to foreign
income taxes paid or accrued by section 902 corporations in pre-2011
taxable years for purposes of computing foreign income taxes deemed
paid with respect to distributions or inclusions out of earnings and
profits of section 902 corporations in taxable years of the section 902
corporation ending after February 9, 2015. See 26 CFR 1.909-6T (revised
as of April 1, 2014) for rules applicable to foreign income taxes paid
or accrued by section 902 corporations in pre-2011 taxable years for
purposes of computing foreign income taxes deemed paid with respect to
distributions or inclusions out of earnings and profits of section 902
corporations in taxable years of the section 902 corporation beginning
after December 31, 2010, and ending on or before February 9, 2015.
Sec. 1.909-6T [Removed]
0
Par. 17. Section 1.909-6T is removed.
Rosemary Sereti,
Acting Deputy Commissioner for Services and Enforcement.
Approved: February 4, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-02614 Filed 2-9-15; 8:45 am]
BILLING CODE 4830-01-P