26 U.S.C. § 250 — Foreign-derived deduction eligible income and net CFC tested income

(a) Allowance of deduction: (1) In general: For any tax year, a domestic corporation gets a deduction equal to the sum of two amounts. (A) The first amount is 33.34% of the corporation's "foreign-derived deduction eligible income" for that year. (B) The second amount is 40% of two things added together: (i) the "net CFC tested income" the corporation must include in its gross income under section 951A (this is income tied to its controlled foreign corporations), and (ii) the amount treated as a dividend under section 78 that's attributable to that net CFC tested income. (2) Limitation based on taxable income: (A) In general: Add up the corporation's foreign-derived deduction eligible income and its net CFC tested income amount from paragraph (1). If that sum is more than the corporation's taxable income (figured without this section), then both amounts must be reduced, following the steps in (B). (B) Reduction: First, find the excess — how much the combined amount goes over taxable income. (i) Reduce the foreign-derived deduction eligible income by a share of that excess. That share equals the foreign-derived deduction eligible income's portion of the combined total. (ii) Reduce the net CFC tested income amount by whatever excess is left over after step (i). (b) Foreign-derived deduction eligible income: (1) Definition: "Foreign-derived deduction eligible income" means income (of the "deduction eligible income" type defined in paragraph (3)) that comes from either: (A) selling property to someone who isn't a U.S. person, where the corporation shows to the Secretary's satisfaction that the property is put to "foreign use"; or (B) providing services that the corporation shows are provided to someone, or with respect to property, located outside the United States. (2) Rules relating to foreign use property or services: (A) Foreign use: "Foreign use" means any use, consumption, or disposal that happens outside the United States. (B) Property or services provided to domestic intermediaries: (i) If a corporation sells property to someone else (not a related party) for further manufacturing or modification inside the U.S., that sale doesn't count as a foreign use — even if that buyer later sends the finished product abroad. (ii) Likewise, if a corporation provides services to someone (not a related party) located in the U.S., that doesn't count as a qualifying foreign service — even if that buyer later uses the service while providing its own foreign services. (C) Special rules for related-party transactions: (i) If property is sold to a related party who isn't a U.S. person, the sale counts as a foreign use only if: (I) the related party later resells the property, or uses it in another sale or service, to an unrelated person who also isn't a U.S. person, and (II) the corporation shows the Secretary that the property is truly for foreign use. A sale of property is treated as a sale of each of its parts for this rule. (ii) If a service is provided to a related party located outside the U.S., it doesn't qualify unless the corporation shows the Secretary that the service isn't substantially similar to services the related party provides to people inside the U.S. (D) Related party: For this paragraph, "related party" means a member of an affiliated group under section 1504(a) — but using "more than 50 percent" ownership instead of "at least 80 percent," and ignoring two exceptions in section 1504(b). A non-corporate person also counts as a group member if group members control them (or they control a group member), based on the control test in section 954(d)(3). (E) "Sold": Except for one part of the deduction-eligible-income definition below, "sold," "sells," and "sale" also include leasing, licensing, exchanging, or otherwise disposing of property. (3) Deduction eligible income: (A) In general: For a domestic corporation, "deduction eligible income" starts with its gross income, but leaves out: (I) amounts included under section 951(a)(1) (certain subpart F income); (II) net CFC tested income included under section 951A; (III) financial services income as defined in section 904(d)(2)(D); (IV) dividends received from a controlled foreign corporation; (V) domestic oil and gas extraction income (defined in (B) below); (VI) foreign branch income as defined in section 904(d)(2)(J); and (VII) except as the Secretary otherwise provides, income or gain from selling or disposing of intangible property (as defined in section 367(d)(4)) or other property subject to depreciation, amortization, or depletion. From that starting gross income, subtract the expenses and deductions (including taxes) — other than interest expense and research or experimental costs — that are properly tied to that income. The result is "deduction eligible income." (B) Domestic oil and gas extraction income: This means the kind of income described in section 907(c)(1), but figured as if it were earned inside the United States instead of outside it. (c) Regulations: The Secretary may issue regulations or other guidance needed to carry out this section.