26 U.S.C. § 407 — Certain employees of domestic subsidiaries engaged in business outside the United States

This section lets certain overseas workers be treated as employees of a U.S. parent company for retirement-plan purposes. (a) Treatment as employees of domestic parent corporation. If a U.S. citizen or resident works for a "domestic subsidiary" of a U.S. parent company, that worker can be treated as an employee of the parent company itself, for purposes of a pension, profit-sharing, stock bonus, or annuity plan under section 401(a) or 403(a). This applies only if: (A) the parent company's plan expressly covers U.S. citizens or residents who work for its domestic subsidiaries, and (B) no one else already provides the worker with a funded deferred-compensation plan based on the pay the subsidiary gives them. The section then defines two terms. A "domestic subsidiary" is a U.S. corporation that is (i) 80% or more owned by another U.S. corporation, (ii) earns 95% or more of its income from outside the United States over a three-year period, and (iii) earns 90% or more of that income from actively running a trade or business. If the corporation has no income in that period, these income tests are treated as met if it's reasonable to expect the corporation will meet them once it does earn income. A "domestic parent corporation" is the U.S. corporation that owns 80% or more of the subsidiary's voting stock. (b) Special rules for application of section 401(a). For nondiscrimination testing under sections 401(a)(4) and 410(b): if the worker counts as "highly compensated" under section 414(q), they keep that status when viewed as an employee of the parent company. To decide whether the worker is highly compensated, the law counts their total compensation from the subsidiary — figured using the rule in paragraph (2) — as if the parent company paid it. For applying section 401(a)(5)'s compensation rules, the worker's total compensation is what they would have earned if the parent company, not the subsidiary, had paid them for the same work; the Secretary sets regulations for figuring the basic or regular rate. (c) Repealed. This subsection was repealed by a 1996 law (Pub. L. 104–188), so it no longer has any effect. (d) Deductibility of contributions. When a parent company, or another company entitled to a deduction under section 404(a)(3)(B), contributes to a plan on behalf of a worker treated as its employee under subsection (a): (1) normally, no deduction is allowed to the parent company or that other company; (2) instead, the domestic subsidiary that actually employs the worker gets a deduction — equal to what the parent company could have deducted under section 404 if the worker had been its own employee; and (3) "compensation" in this calculation means the worker's total compensation as figured under subsection (b)(2). The subsidiary's deduction applies to its tax year that includes the end of the parent company's tax year. (e) Treatment as employee under related provisions. A worker treated as the parent company's employee under subsection (a) is also treated that way for two other provisions: (1) section 72(f), about special rules for figuring employee contributions, and (2) section 2039, about annuities.