26 U.S.C. § 952 — Subpart F income defined

(a) In general. For a controlled foreign corporation^*, “subpart F income” means the total of (1) insurance income defined in section 953; (2) foreign base company income determined under section 954; (3) the corporation’s other income, excluding income already included in a United States person’s gross income under section 951 for a reason other than this paragraph and income described in subsection (b), multiplied by the “international boycott factor” determined under section 999; (4) illegal bribes, kickbacks, and other section 162(c) payments made by or for the corporation^* during its tax year, directly or indirectly, to a government official, employee^*, or agent; and (5) income from a foreign country while section 901(j) applies to that country. Paragraph (4) payments are those that would violate the Foreign Corrupt Practices Act of 1977 if the payer were a United States person^*. For paragraph (5), the Secretary’s regulations must reduce the income for properly allocable deductions, including taxes. (b) United States income excluded. Subpart F income does not include United States-source income effectively connected with the controlled foreign corporation’s United States trade or business^*, unless a United States treaty exempts it or gives it a lower tax rate. An exemption or reduction involving section 884 is ignored. (c) Limits. (1)(A) For a tax year, subpart F income cannot exceed the corporation’s earnings and profits for that year. (B)(i) A United States shareholder’s section 951(a)(1)(A) gross-income inclusion attributable to a qualified activity is reduced by the shareholder’s pro rata share of a qualified deficit. (ii) “Qualified deficit” means an earlier-year earnings-and-profits deficit after December 31, 1986, for a year in which the corporation was controlled foreign corporation, to the extent it comes from the same qualified activity and has not already been used. For activities in clauses (iii)(II) and (III), unused deficits from years after 1962 and before 1987 also count; for the activity in clause (iii)(I), “1982” replaces “1962.” (iii) A qualified activity is activity producing (I) foreign base company sales income, (II) foreign base company services income, (III) for a qualified insurance company, insurance income or foreign personal holding company income, or (IV) for a qualified financial institution, foreign personal holding company income. (iv) The shareholder’s share of an earlier deficit is determined under rules like section 951(a)(2), using whichever date gives the smaller share: the end of the current tax year or the end of the year when the deficit arose. (v) A qualified insurance company is a controlled foreign corporation mainly conducting an insurance business in the current and relevant earlier years. (vi) A qualified financial institution is a controlled foreign corporation mainly conducting banking, financing, or similar business in the current and relevant earlier year. (vii)(I) An election may make section 953(a) apply without its same-country exception. It may be revoked only with the Secretary’s consent. (II) In an affiliated group, using section 1504’s definition without section 1504(b)(3) and using “more than 50 percent” instead of “at least 80 percent,” the election must be made for every group controlled foreign corporation created or organized in the same country. For clause (v), all those corporations are treated as one. (C)(i) A controlled foreign corporation may elect to reduce activity-related subpart F income by an activity-related earnings-and-profits deficit of a qualified chain member for a year ending with or within its tax year. A deficit used here cannot also be used under (B). (ii) A qualified chain member is another corporation organized in the same foreign country, if either all its stock^*, other than directors’ qualifying shares^*, was owned throughout the deficit year by the controlled foreign corporation, or all the controlled foreign corporation’s such stock was owned throughout that year by the other corporation; ownership may be direct or through corporations other than the common parent. (iii) Apply this subparagraph after (A) and (B). (2) If paragraph (1)(A) reduced subpart F income for a year, later-year earnings and profits exceeding later-year subpart F income are recharacterized as subpart F income under rules like section 904(f)(5). (3) Earnings and profits are determined without section 312(n)(4), (5), and (6), but regulations must prevent that rule from increasing earnings and profits by a distribution already made. (d) Foreign-country income. The Secretary^* must issue regulations needed to carry out subsection (a)(5), including rules treating income paid through one or more entities as derived from a section 901(j) country when it would have come from that country without those entities.